<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-KSB/A(1)
(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 [No fee required]
For the transition period from ___________ to ____________
Commission file number 0-28916
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) 987-3511
------------------------------------------------
(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 1 of ______ pages Exhibit Index on Page ____
<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 Amended Annual Report to Shareholders for the fiscal
year ended December 31, 1996 are incorporated by reference into Part II.
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 6, 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.
<PAGE>
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.
<PAGE>
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,
<PAGE>
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 1
AVERAGE BALANCE SHEETS
<TABLE>
<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-bearing 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 securities:
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% -- -- --
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% -- -- --
-------------------------- -------------------------- --------------------------
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%
===== ===== =====
</TABLE>
(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.
<PAGE>
TABLE 2
VOLUME RATE ANALYSIS
The following table shows a summary of the changes in interest and income
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.
<TABLE>
<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) 6
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
===================================== -------------------------------------
</TABLE>
Rate/volume variances are allocated between rate variances and volume variances
using a weighted average allocation method.
TABLE 3
INVESTMENT PORTFOLIO
The following table presents the book value and market value of investments by
category at December 31, 1996 and 1995.
<TABLE>
<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
===========================================
WEIGHTED
U.S. U.S. AVERAGE
MATURITIES AT DECEMBER 31,1996 TREASURY AGENCIES SCM YIELDS
- ------------------------------ --------------------------------------------
Within 1 year $ 451 -- -- 5.34%
After 1 through 5 years 897 1,697 855 5.73%
After 5 through 10 years -- 4,183 1,173 6.93%
After 10 years -- -- 715 5.19%
-------------------------------------------
Totals $ 1,348 5,880 2,743 6.32%
===========================================
</TABLE>
<PAGE>
TABLE 4
LOAN PORTFOLIO
The following table presents loans by type at the end of each of the last two
years:
1996 1995
--------------------
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 3,678 2,641
--------------------
$32,692 $22,778
====================
As of December 31, 1996, maturities of loans in the indicated classifications
were as follows:
COMMERCIAL
FINANCIAL AND REAL ESTATE
MATURITY AGRICULTURAL CONSTRUCTION TOTAL
- -------- ------------- ------------ -----
Within 1 year $ 3,768 $1,556 $ 5,324
1 to 5 years 14,079 1,561 15,640
After 5 years 1,705 -- 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:
FIXED VARIABLE
INTEREST INTEREST
RATES RATES TOTAL
-------- -------- -----
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 -- -- --
------ ------ ------
120 1,441 1,561
------ ------ ------
$5,289 12,056 17,345
====== ====== ======
The following summarizes 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.
1996 1995
---- ----
Other real estate 379 --
Accruing loans 90 days or more past due -- --
Non-accrual loans 184 164
A loan is placed on non-accrual status when, in management's judgment, 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 it
is otherwise not reasonable 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.
<PAGE>
TABLE 5
ALLOWANCE FOR LOAN LOSSES
1996 1995
---------------
Balance at beginning of year $ 386 $ 400
Charge-offs:
Commercial, financial and agricultural 175 36
Real estate -- --
Installment loans to individuals 35 89
----------------
210 125
----------------
Recoveries:
Commercial, financial and agricultural 32 13
Real Estate -- --
Installment loans to individuals 17 3
----------------
49 16
----------------
Net charge-offs 161 109
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 losses is made quarterly based upon the loan ratings and the
composition and growth of the loan portfolio.
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:
<TABLE>
<CAPTION>
1996 1997
---------------------- -------------------
Amount Rate Amount Rate
---------------------- -------------------
<S> <C> <C> <C> <C>
Demand deposits: $ 8,321 - $ 7,066 -
Non-interest bearing
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
======== =======
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1996 are summarized as follows:
<TABLE>
<S> <C>
Within 3 months $ 4,610
After 3 through 6 months 793
After 6 through 12 months 502
After 12 months 4,067
-------
$ 9,972
=======
</TABLE>
TABLE 7
SELECTED RATIOS
The following table sets out certain ratios of the consolidated entity for the
years indicated:
<TABLE>
<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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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:
<PAGE>
<TABLE>
<CAPTION>
Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital 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 Capitalized 4% or more 8% or more 4% or more --
Undercapitalized less than 4% less than 8% less than 4% --
Significantly less than 3% less than 6% less than 3% --
Undercapitalized
Critically Undercapitalized 2% or less -- -- --
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
<PAGE>
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
<PAGE>
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.
<PAGE>
PART II
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 Amended
Annual Report to Shareholders under the heading, "Management's Discussion and
Analysis," and are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included in the Company's
Amended Annual Report to Shareholders 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
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
- ------ -------
13.1 The Company's Amended 1996 Annual Report to Shareholders
(incorporated by reference into Item 7 of this Annual
Report on Form 10-KSB/A). Except with respect to those
portions specifically incorporated by reference herein, the
Company's Amended 1996 Annual Report to Shareholders is not
deemed to be filed as part of this Report.
<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: October 17, 1997
----------------
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 October 17, 1997
- -----------------------
Gregory T. Baranco
/s/ Bernard H. Bronner Director October 17, 1997
- -----------------------
Bernard H. Bronner
/s/ Robert L. Brown Director October 17, 1997
- --------------------
Robert L. Brown
/s/ William H. Cleveland Director October 17, 1997
- -------------------------
William H. Cleveland
/s/ Robert McMahan Director October 17, 1997
- -------------------
Robert McMahan
<PAGE>
/s/ C. David Moody Director October 17, 1997
- -------------------
C. David Moody
/s/ Lynn Pattillo Director October 17, 1997
- ------------------
Lynn Pattillo
/s/ Thom Peters Director October 17, 1997
- ----------------
Thom Peters
/s/ Porter Sanford Director October 17, 1997
- -------------------
Porter Sanford
/s/ James E. Young Director and President October 17, 1997
- ------------------
James E. Young*
/s/ Willard C. Lewis Executive Vice President October 17, 1997
- --------------------
Willard C. Lewis**
By: /s/ Willard C. Lewis
----------------------
Willard C. Lewis
Attorney-in-fact
* Principal executive officer
** Principal Accounting and Financial Officer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit
- ------- -------
13.1 The Company's Amended 1996 Annual Report to Shareholders
(incorporated by reference into Item 7 of this Annual Report on
Form 10-KSB/A). Except with respect to those portions
specifically incorporated by reference herein, the Company's
Amended 1996 Annual Report to Shareholders is not deemed to be
filed as part of this Report.
<PAGE>
EXHIBIT 13.1
FIRST SOUTHERN BANCSHARES, INC.
AND SUBSIDIARIES
ANNUAL REPORT
1996
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 6, 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
<PAGE>
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 sufficient to meet immediate deposit
withdrawal demands at the end of December 31, 1996. Additional sources of
liquidity include cash and due from banks, federal funds line from correspondent
banks, maturing investment securities and payments on commercial and installment
loans.
At December 31,1996, the Bank's liquid assets (cash and due from 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. 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.
<PAGE>
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 42.16 percent increase in $100,000 and over time deposits. During the
period time deposits less than $100,000 increased by 6.98 percent.
STOCKHOLDER'S EQUITY
Stockholder's equity increased by 6.09 percent as a result of 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 as of December 31, 1996. This amount had a
negligible effect on total equity. Total stockholders equity as of December 31,
1996 was $5,627,789 compared to $5,304,787 at December 31, 1995. The Company
maintained total retained earnings of $357,581.
<PAGE>
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>
[LOGO OF BANKS, FINLEY, WHITE & CO. APPEARS HERE]
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.
/s/ Banks, Finley, White & Co.
February 13, 1997.
3504 EAST MAIN STREET . COLLEGE PARK, GEORGIA 30337 . (404) 763-1002
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
ASSETS
<TABLE>
<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 (Note 4) 378,690 -
Other assets 588,478 504,064
----------- -----------
TOTAL ASSETS $52,144,638 $42,230,761
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deposits
<S> <C> <C>
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 9,972,207 7,014,753
Other time 16,684,215 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,
527,503 and 521,562 shares outstanding
in 1996 and 1995, respectively 2,644,790 2,631,560
Paid in capital 2,647,268 2,631,560
Treasury stock, 1,455 shares at cost (10,913) (45,647)
Retained earnings 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
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<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
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING $ 524,069 $ 524,362 $ 526,312
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Treasury Retained on
Common 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, 1993 526,312 $2,631,560 $2,631,560 - $ - $(567,682) $ 20,197 $4,715,635
Net Income - - - - - 339,825 - 339,825
Net change in unrealized loss
on investments transferred from
available for sale to held to
maturity, net of deferred taxes - - - - - - (89,912) (89,912)
------- ---------- ---------- ------ -------- ---------- ---------- ----------
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
======= ========== ========== ====== ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<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
Gain on sale of securities (14,124) - -
Premium accretion, net of discount amortization 4,824 29,456 33,330
Provision for loan losses 140,000 95,000 113,000
Provision for losses on foreclosed real estate - 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 (68,098) 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 (1,131,450) (440,269) (447,477)
------------ ----------- -----------
Net cash used in investing activities (9,444,922) (8,619,786) (5,783,859)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 320,000 80,000 -
Sale of common stock 13,230 - -
Dividends Paid (16,919) - -
Sale of treasury stock 47,522 - -
Addition to paid in capital from sale of stock 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 9,519,022 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 $ -
============ =========== ===========
Capital Expenditures Financed by Capital Lease $ 16,555 $ - $ -
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<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 Bank 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.
6
<PAGE>
Notes to the Consolidated Financial Statements, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 FSB Mortgage'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.
Basis of Presentation: The accounting and reporting policies of the Company and
its subsidiaries 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.
7
<PAGE>
Notes to the Consolidated Financial Statements, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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.
8
<PAGE>
Notes to the Consolidated Financial Statements, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
9
<PAGE>
Notes to the Consolidated Financial Statements, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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
========== ======= ======== ==========
</TABLE>
10
<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 $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
========== ======= ========== ==========
</TABLE>
Securities Available for Sale: The amortized cost and estimated fair value of
securities available for sale 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 $3,987,178 $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
========== ========== ======== ==========
December 31, 1995
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- -------- ----------
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>
11
<PAGE>
Notes to the Consolidated Financial Statements, Continued
NOTE 2 - INVESTMENT SECURITIES, CONTINUED
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. The amortized cost and fair value of mortgage backed securities are
presented in the available-for-sale and held-to-maturity categories by
contractual maturity in the following table. 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 securities' 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 $14,124 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.
12
<PAGE>
Notes to the Consolidated Financial Statements, Continued
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 386,561 $ 400,219 $ 401,835
Provision charged to
operations 140,000 95,000 113,000
Loans charged off (210,766) (125,141) (176,684)
Recoveries 49,436 16,483 62,068
--------- --------- ---------
BALANCE, END OF YEAR $ 365,231 $ 386,561 $ 400,219
========= ========= =========
</TABLE>
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.
13
<PAGE>
Notes to the Consolidated Financial Statements, Continued
NOTE 4 - FORECLOSED REAL ESTATE
Activity in the allowance for losses for foreclosed real estate was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Balance, beginning of year $ - $11,900 $ -
Provision charged to income - 19,000 11,900
Charge-offs, net of recoveries - (30,900) -
----- ------- -------
BALANCE, END OF YEAR $ - $ - $11,900
===== ======= =======
</TABLE>
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
$3,047,624 at December 31, 1995. During 1996, $638,296 of new loans were made
and principal repayments totaled $374,970.
NOTE 6 - PREMISES AND EQUIPMENT
Major classifications of these assets are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
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
=========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995, and 1994 was
$294,229, $244,134, and $205,394, respectively.
14
<PAGE>
Notes to the Consolidated Financial Statements, Continued
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:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Currently Payable $76,703 $125,600 $6,220
Deferred - - -
------- -------- -------
$76,703 $125,600 $6,220
======= ======== =======
</TABLE>
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:
15
<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>
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:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 79,718 $ 84,790
Valuation allowance (18,097) (27,392)
-------- --------
61,621 57,398
Deferred tax liabilities:
Unrealized gain on securities (460) (2,832)
Depreciation (61,621) (57,398)
-------- --------
</TABLE>
Net deferred tax liability $ (460) $ (2,832)
========= =======
At December 31, 1995, the Company had no remaining operating loss carryforwards
available to offset future taxable income.
16
<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 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.
17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES, CONTINUED
Following is an analysis of significant off balance sheet financial instruments.
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Commitments to extend credit $14,351,489 $10,201,461
Standby letters of credit - 30,000
----------- -----------
$14,351,489 $10,231,461
=========== ===========
</TABLE>
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.
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 Company has granted 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 each
18
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT, CONTINUED
NOTE 13 - STOCK OPTIONS, CONTINUED
year, beginning July 6, 1994, the first anniversary 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, 1996, none of the options granted had been exercised. Based on the
limited trading information available to the Company, the per share fair market
value of Company stock at December 31 1996 ($10) equalled the per share exercise
price of the listed options. Fair market value is based on trades in Company
stock during 1996 and 1995. The exercise of outstanding stock options would not
have a dilative effect on earnings.
The following table contains with respect to the president of the Bank,
information concerning the number of stock options held, the number currently
exercisable and the value of the exercisable options.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Exercisable 3,000 2,000 1,000
Unexercisable 2,000 3,000 4,000
Weighted-Average grant
date fair value of options
granted during the year $ 10 $ 10 $ 10
Value of Unexercised in-the-money options:
Exercisable $ 0 $ 0 $ 0
Unexercisable $ 0 $ 0 $ 0
</TABLE>
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.
19
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
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:
<TABLE>
<CAPTION>
Regulatory
Actual Requirement
------- ------------
<S> <C> <C>
Leverage capital ratio 12% 4.00%
Risk based capital ratios:
Core capital 16% 4.00%
Total capital 17% 8.00%
</TABLE>
NOTE 16 - FIRST SOUTHERN BANCSHARES (PARENT ONLY) INFORMATION
The following are condensed statements of the parent company:
BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash on demand deposit with bank subsidiary $ 57,994 $ 3,932
Investments In:
Bank subsidiary 5,653,647 5,364,122
Mortgage services subsidiary 293,723 -
Other Assets 39,458 19,889
---------- ----------
Total Assets $6,044,822 $5,387,943
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $ 400,000 $ 80,000
Other liabilities 17,033 3,156
Stockholders' equity 5,627,789 5,304,787
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,044,822 $5,387,943
========== ==========
</TABLE>
20
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
NOTE 16 - FIRST SOUTHERN BANCSHARES (PARENT ONLY) INFORMATION, CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -----
<S> <C> <C> <C>
Interest on short-term debt $ 21,078 $ 3,156 $ -
Other expenses 26,761 10,532 -
-------- -------- -----
Total Expenses 47,839 13,688 -
-------- -------- -----
Income (Loss) before equity in
undistributed net income of
subsidiaries (47,839) (13,688) -
Equity in undistributed net
income of subsidiaries:
Bank 355,959 323,362 -
Mortgage Company (6,277) - -
-------- -------- -----
NET INCOME $301,843 $309,674 $ -
======== ======== =====
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 301,843 $ 309,674 $ -
Adjustment to Reconcile Net Income:
Amortization 5,598 1,808
Increase in Other Assets (23,908) (21,697) -
Increase in other liabilities 13,877 3,156 -
Change in Deferrals (10,419) - -
Equity in undistributed net income
of subsidiaries (349,682) (323,362) -
--------- ---------- ---
Net Cash Provided (Used) by Operating
Activities (62,691) (30,421) -
--------- ---------- ---
</TABLE>
21
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
NOTE 16 - FIRST SOUTHERN BANCSHARES (PARENT ONLY) INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- -----
<S> <C> <C> <C>
INVESTING ACTIVITIES
Investment in Subsidiary $(300,000) $ - $ -
Dividends received from 100% owed
subsidiary 50,000 - -
--------- -------- -----
Net Cash Provided (Used) by Investing
Activities (250,000) - -
--------- -------- -----
FINANCING ACTIVITIES
Proceeds from line of credit 320,000 80,000 -
Sale of treasury stock 50,000 - -
Purchase of treasury stock (12,788) (45,647) -
Sale of common stock 26,460 - -
Dividends paid (16,919) - -
--------- -------- -----
Net Cash Provided (Used) by
Financing Activities 366,753 35,353 -
--------- -------- -----
Net increase in cash for the year 54,062 3,932 -
Cash, beginning of year 3,932 - -
--------- -------- -----
CASH, END OF YEAR $ 57,994 $ 3,932 $ -
========= ======== =====
</TABLE>
22
