SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-25478
FIRST SOUTHERN BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 63-1133624
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
102 South Court Street, Florence, Alabama 35630
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Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (205) 764-7131
--------------------------
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation SB contained herein, and no disclosure will be contained, to the
best of the issuer's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. X
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The aggregate market value of the outstanding voting stock held by
nonaffiliates of the Registrant, based on the closing sales price of the
registrant's Common Stock as quoted on The Nasdaq National Market under the
symbol "FSTH" on March 18, 1998, was $22,376,643 (1,431,647 shares at $15.63
per share). It is assumed for purposes of this calculation that the issuer's
executive officers, directors and 5% stockholders are affiliates.
The issuer's revenues for the fiscal year ended December 31, 1997 were
$16,212,000.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997 ("Annual Report). (Parts I and II)
2. Portions of Proxy Statement for the Annual Meeting of Stockholders ("Proxy
Statement"). (Parts III and IV)
Transitional Small Business Disclosure Format Yes No X
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PART I
Item 1. Description of Business
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General
First Southern Bancshares, Inc. ("Company"), a Delaware corporation, was
organized on November 22, 1994 for the purpose of becoming the holding company
for First Federal Savings and Loan Association of Florence ("Association")
upon the Association's conversion from a federally chartered mutual savings
and loan association to a federally chartered capital stock savings and loan
association ("Stock Conversion") and then to an Alabama chartered commercial
bank ("Bank Conversion"). The Stock Conversion was consummated on April 13,
1995 through the issuance and sale by the Company of 2,049,875 shares of
common stock, $0.01 par value, at $10.00 per share to depositors of the
Association and the Association's employee stock ownership plan. The Bank
Conversion was consummated on June 10, 1995, with the Association changing its
name to "First Southern Bank" ("Bank"). At December 31, 1997, the Company had
total assets of $183.7 million, total deposits of $143.7 million and
stockholders' equity of $20.9 million. The Company has not engaged in any
significant activity other than holding all of the outstanding capital stock
of the Bank. Accordingly, the information set forth in this report, including
financial statements and related data, relates primarily to the Bank.
The Company is a registered bank holding company regulated by the Federal
Reserve Board ("FRB"). The Bank's primary regulator is the Superintendent of
Banks of the State of Alabama ("Superintendent"). The Bank's deposits are
insured up to applicable limits under the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Company ("FDIC"). The Bank is a
member of the Federal Home Loan Bank ("FHLB") System. The executive offices
of the Company and the Bank are located at 102 South Court Street, Florence,
Alabama 35630 and their telephone number is (205) 764-7131.
The Bank conducts its business through five office facilities located in
Lauderdale and Colbert Counties in northwestern Alabama, which the Bank
considers as its primary market area. See "-- Properties." The two largest
industries in this area are Reynolds Aluminum Co. and the Tennessee Valley
Authority. The University of North Alabama and the Eliza Coffee Memorial
Hospital are located in Florence, Alabama, and both have a significant
economic impact on the Bank's primary market area. The textile industry has
become an increasingly significant segment of the local economy, with many
small textile businesses located in the Bank's primary market area. The Bank
faces strong competition for the attraction of savings deposits and the
origination of loans in its primary market area. See "-- Competition."
Selected Financial Condition, Operating and Other Data and Key Operating
Ratios
This information is incorporated by reference to pages 3 and 4 of the
Annual Report.
Average Balance Sheets
This information is incorporated by reference to page 5 of the Annual
Report.
Rate/Volume Analysis
This information is incorporated by reference to page 6 of the Annual
Report.
Interest Rate Sensitivity Analysis
This information is incorporated by reference to page 7 of the Annual
Report.
Lending Activities
General. The Bank's primary lending activity is the origination of
mortgage loans for the purchase and re-finance of one- to four-family
owner-occupied residences. The Bank also actively originates commercial
loans, construction loans, consumer loans, and multi-family residential real
estate loans, principally in the Bank's primary market area, as part of its
commercial banking strategy. These other types of lending are generally
considered to involve greater credit risks than one- to four-family mortgage
lending. See "-- Lending Activities -- Multi-Family Loans," "-- Commercial
Real Estate and Commercial Business Loans."
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Loan Portfolio Analysis. The following table sets forth the composition of the Bank's loan
portfolio as of the dates indicated.
At December 31,
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1995 1996 1997
------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family residential(1) . $ 72,407 47.60% $ 66,863 41.86% $ 58,339 36.52%
Multi-family residential . . . . . . 12,036 7.91 13,045 8.17 11,020 6.90
Commercial . . . . . . . . . . . . . 28,928 19.02 33,434 20.93 37,535 23.49
Total non-construction mortgage -------- ------ -------- ------ -------- ------
loans. . . . . . . . . . . . . . . 113,371 74.53 113,342 70.96 106,894 66.91
-------- ------ -------- ------ -------- ------
Construction loans:
One- to four-family residential. . 3,820 2.51 4,970 3.12 6,624 4.14
Multi-family residential . . . . . 589 0.39 327 0.20 -- --
Commercial . . . . . . . . . . . . 1,908 1.25 -- -- 1,606 1.01
-------- ------ -------- ------ -------- ------
Total construction loans. . . . . 6,317 4.15 5,297 3.32 8,230 5.15
-------- ------ -------- ------ -------- ------
Total mortgage loans . . . . . . . . 119,688 78.68 118,639 74.28 115,124 72.06
-------- ------ -------- ------ -------- ------
Commercial business loans. . . . . . . 20,987 13.80 27,157 17.00 27,792 17.40
-------- ------ -------- ------ -------- ------
Consumer loans:
Home equity and second mortgage
loans . . . . . . . . . . . . . . . 9,188 6.04 9,023 5.65 9,999 6.26
Automobile loans . . . . . . . . . . 1,463 0.96 2,455 1.54 3,152 1.97
Savings loans. . . . . . . . . . . . 440 0.29 599 0.38 739 0.46
Other. . . . . . . . . . . . . . . . 4,395 2.89 5,624 3.52 6,088 3.81
-------- ------ -------- ------ -------- ------
Total consumer loans. . . . . . . . 15,486 10.18 17,701 11.09 19,978 12.50
-------- ------ -------- ------ -------- ------
Total loans. . . . . . . . . . . . . . 156,161 102.66 163,497 102.37 162,894 101.96
Less: -------- ------ -------- ------ -------- ------
Undisbursed loans in process. . . . . 2,271 1.49 1,928 1.21 1,404 0.88
Unamortized loan origination fees, net
of direct costs. . . . . . . . . . . 276 0.18 192 0.12 148 0.09
Allowance for possible loan losses. . 1,509 0.99 1,659 1.04 1,584 0.99
-------- ------ -------- ------ -------- ------
Net loans receivable. . . . . . . . $152,105 100.00% $159,718 100.00% $159,758 100.00%
======== ====== ======== ====== ======== ======
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(1) Includes loans held for sale.
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One- to Four-Family Residential Loans. At December 31, 1997, $58.3
million, or 36.5% of the Bank's net loans receivable consisted of loans
secured by one- to four-family residential real estate. A substantial portion
of this amount consisted of adjustable rate one- to four-family mortgage
("ARM") loans.
The Bank presently originates both fixed-rate mortgage loans and ARM
loans secured by single-family properties with terms of 15 to 30 years, with
an emphasis on ARM loans. Borrower demand for ARM loans versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectations
of changes in the level of interest rates and the difference between the
initial interest rates and fees charged for each type of loan. The relative
amount of fixed-rate mortgage loans and ARM loans that can be originated at
any time is largely determined by the demand for each in a competitive
environment.
The Bank currently offers ARM loans with initial rates determined by the
Bank based on market factors and competitive rates for loans having similar
features offered by other lenders for such initial periods. The Bank
originates ARM loans that adjust annually with a maximum upward adjustment of
2% per year and a 6% maximum adjustment over the life of the loan. Many of
the ARM loans have interest rate adjustment floors that do not permit the rate
to be adjusted below a certain rate. ARM loans are tied either to the
one-year U.S. Treasury Bill Index or the Cost of Funds Index. At December 31,
1997, the initial interest rate on the Bank's ARM loans ranged from 6.00% to
9.50% per annum. The Bank does not originate negative amortization loans.
The Bank originated $11.5 million of one- to four-family ARM loans for the
year ended December 31, 1997.
The Bank underwrites ARM loans based on the borrower's ability to repay
the loan assuming a rate of 2.0% higher than the initial rate on the ARM loans
and that such rate will remain constant during the loan term. As a result,
the potential for a substantial increase in interest payments on ARMs
decreases the likelihood of delinquencies and defaults.
While single-family residential real estate loans are normally originated
with 15- and 30-year terms and the Bank permits its ARM loans to be assumed by
qualified borrowers, such loans typically remain outstanding for substantially
shorter periods. This is because borrowers often prepay their loans in full
upon sale of the property pledged as security or upon refinancing the original
loan. In addition, substantially all mortgage loans in the Bank's loan
portfolio contain due-on-sale clauses providing that the Bank may declare the
unpaid amount due and payable upon the sale of the property securing the loan.
The Bank enforces these due-on-sale clauses to the extent permitted by law and
as business judgment dictates. Thus, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the real
estate market, prevailing interest rates and the interest rates payable on
outstanding loans.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in the interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs
due to changed rates to be paid by the customer. It is possible that, during
periods of rising interest rates, the risk of default on ARM loans may
increase as a result of repricing and the increased costs to the borrower.
Furthermore, the ARM loans originated by the Bank generally provide, as a
marketing incentive, for initial rates of interest below the rates which would
apply were the adjustment index used for pricing initially (discounting).
These loans are subject to increased risks of default or delinquency because
of this. Another consideration is that although ARM loans allow the Bank to
increase the sensitivity of its asset base to changes in the interest rates,
the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limits. Because of these considerations,
the Bank has no assurance that yields on ARM loans will be sufficient to
offset increases in the Bank's cost of funds.
The Bank also originates conventional fixed-rate mortgage loans on one-
to four-family residential properties and is a direct endorsed lender for
Federal Home Administration ("FHA") and Veterans Administration ("VA") loans.
All FHA and VA loans are currently originated through the Muscle Shoals branch
office. The Bank originated $16.2 million of fixed-rate one-to four-family
mortgage loans for the year ended December 31, 1997. Substantially all FHA
and VA loans were originated for sale. See "-- Loan Originations, Sales and
Purchases."
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The Bank requires title insurance insuring the status of its lien on all
of the real estate secured loans and also requires that the fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the outstanding loan balance.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 80% of the
lesser of the appraisal value or the purchase price, with the condition that
private mortgage insurance is required on loans with loan-to-value ratios of
greater than 80%. The maximum loan-to-value ratio for construction-permanent
loans is also 80% of the appraised value or cost, whichever is less. The Bank
requires private mortgage insurance for loan-to-value ratios in excess of 80%.
The maximum financing on refinance loans is limited to 80% of the
appraised value and such loans require private mortgage insurance above 80%
loan-to-value, or 80% loan to appraised value if a portion of the funds
advanced by the Bank will be used for purposes other than paying off the
existing mortgage debt.
Multi-Family Loans. At December 31, 1997, $11.0 million, or 6.9% of the
Bank's net loans receivable consisted of loans secured by multi-family
properties. Multi-family loans are comprised primarily of loans secured by
income producing properties such as apartments with five to 50 units.
Multi-family real estate loans are generally made in amounts between $300,000
and $700,000, are originated at 80% of the appraised value of the property or
selling price, whichever, is less, and are generally originated for ten- to
25-year terms.
Multi-family lending is generally viewed as exposing the lender to a
greater risk of loss than one- to four-family residential lending. Such loans
typically involve higher loan principal amounts and loan repayment is largely
dependent on sufficient income generated by the project to cover operating
expenses and loan repayments. Market values may vary as a result of economic
events or governmental regulations outside of the control of the borrower or
lender, such as rent control laws, which impact the future cash flows of the
affected properties. Corresponding to the greater lending risk is a generally
higher interest rate applicable to multi-family lending. The Bank generally
requires that the security property generate positive cash flow after debt
service and other expenses. The Bank's underwriting criteria includes an
evaluation of the borrower's reputation, the amount of borrower's equity in
the project, sales and leasing information, and cash flow projections. At
December 31, 1997, the Bank had no nonperforming (i.e. loans accounted for on
a nonaccrual basis and accruing loans contractually past due 90 days or more)
multi-family residential loans.
At December 31, 1997, the three largest multi-family loans were a $1.9
million loan secured by an apartment building in Sheffield, Alabama, a $1.5
million loan secured by an apartment building complex in Muscle Shoals,
Alabama, and a $1.1 million loan secured by an apartment building in Florence,
Alabama. All three loans were current at December 31, 1997.
Construction Loans. At December 31, 1997, the Bank had $8.2 million of
construction loans, or 5.1% of net loans receivable. The Bank originates
residential construction mortgage loans to residential owner-occupants (custom
construction loans) and to local contractors building residential properties
for resale, as well as construction loans for multi-family residential
properties and land development on properties located within its primary
market area. Construction loans to owner-occupants generally have a term of
six months and then are converted to permanent loans. The construction loans
to builders generally are in amounts below $200,000 and are made with a six
month term. The Bank's construction loans bear interest rates which adjust
with the U.S. Treasury Index. Approximately $5.0 million, or 14.4%, and $6.5
million, or 16.5% of the mortgage loans originated by the Bank for the years
ended December 31, 1995 and 1996, respectively, were construction loans as
compared to $8.3 million, or 15.9% for the year ended December 31, 1997.
Construction lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If
the estimate of construction cost and the marketability of the property upon
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completion of the project prove to be inaccurate, the Bank may be compelled to
advance additional funds to complete the development. If the borrower is
unable to sell the completed project in a timely manner or obtain adequate
proceeds to repay the loan, the loan may become nonperforming. Furthermore,
if the estimate of value proves to be inaccurate, the Bank may be confronted
with, at or prior to the maturity of the loan, a project with a value which is
insufficient to assure full repayment. The ability of the developer or
builder to sell developed lots or completed dwelling units will depend on,
among other things, demand, pricing and availability of comparable properties,
and economic conditions.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank considers
evidence of the availability of permanent financing for the borrower, the
reputation of the borrower, the amount of the borrower's equity in the
project, the independent appraisal and review of cost estimates, the
pre-construction sale and leasing information, and the cash flow projections
of the borrower. In addition, most of the construction loans granted by the
Bank are secured by property in the Bank's local market area.
At December 31, 1997, the largest construction loan was a $1.0 million
loan secured by commercial real estate under development. This loan was
classified as "special mention" at December 31, 1997.
Consumer Loans. Consumer loans generally have shorter terms to maturity
or repricing and higher interest rates than the long-term, fixed-rate mortgage
loans. The Bank's consumer loans consist of loans secured by automobiles,
boats and recreational vehicles, mortgages on residences and savings accounts,
and unsecured loans for any personal or household purposes. At December 31,
1997, consumer loans totalled $20.0 million, or 12.5% of net loans receivable.
The Bank has not actively marketed its consumer loans and the majority of such
loans originated by the Bank have been made to its existing customers. The
Bank, however, subject to market conditions, intends to actively market
consumer loans beyond its existing customer base to prospective borrowers
within its primary market area.
The Bank offers closed-end, fixed-rate home equity and second mortgage
loans that are made on the security of residences. Loans normally do not
exceed 89% of the appraised value of the residence, less the outstanding
principal of the first mortgage and have terms of up to 15 years requiring
monthly payments of principal and interest. At December 31, 1997, total
outstanding home equity and second mortgage loans amounted to $10.0 million,
or 6.3% of net loans receivable.
The Bank makes savings account loans for up to 97% of the depositor's
savings account balance. The interest rate is normally 2% above the rate paid
on the savings account, and the account must be pledged as collateral to
secure the loan. Savings account loans are payable in monthly payments of
principal and interest or in a single payment. At December 31, 1997, total
loans on savings accounts amounted to $739,000, or 0.5% of net loans
receivable.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Bank, and a borrower
may be able to assert against such assignee claims and defenses that it has
against the seller of the underlying collateral. At December 31, 1997,
$205,000, or 1.0% of the Bank's consumer loan portfolio was accounted for on a
nonaccrual basis or was contractually past due 90 days or more.
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Commercial Real Estate Loans. During the 1980s, the Bank expanded its
origination of loans secured by commercial real estate located primarily
within the Bank's market area, and to a lesser extent outside of Alabama.
Commercial real estate loans are generally secured by small commercial
properties such as doctor's offices and strip shopping centers. Commercial
real estate loans are written for terms of five, ten or 20 years with interest
rates tied to the comparable U.S. Treasury Constant Maturity Index or prime
rates. Since the size of commercial real estate loans creates greater
potential for loss, the Bank attempts to apply conservative underwriting
standards to this type of lending. The Bank primarily limits such lending to
properties located in its primary market area and to borrower's who are well
known to the Bank. The Bank generally requires annual financial statements
from its commercial real estate borrowers and personal guarantees if the
borrower is a corporation. Commercial real estate lending generally involves
greater risk than residential mortgage lending. The risks associated with the
commercial real estate lending as similar to those associated with
multi-family real estate lending. See "-- Multi-Family Loans."
At December 31, 1997, loans secured by commercial real estate totalled
$37.5 million, or 23.5% of net loans receivable. A substantial portion of
such commercial real estate loans are secured by properties located in the
Bank's primary market area.
At December 31, 1997, the three largest commercial real estate loans were
a $1.8 million loan secured by restaurants in Florence and Decatur, Alabama, a
$1.7 million loan secured by a country club and golf course located in Muscle
Shoals, Alabama, and a $1.5 million loan secured by five furniture stores in
Northern Alabama. All three loans were current at December 31, 1997.
At December 31, 1997, nonperforming (i.e. loans accounted for on a
nonaccrual basis and accruing loans contractually past due 90 days or more)
commercial real estate loans totalled $401,000, compared to $489,000 at
December 31, 1996. See " -- Nonperforming Assets and Delinquencies."
Commercial Business Loans. At December 31, 1997, the commercial business
loan portfolio totalled approximately $27.8 million, or 17.4% of net loans
receivable. Commercial business loans generally include equipment loans with
terms ranging up to seven years and working capital lines of credit secured by
inventory and accounts receivable. Commercial business loans are generally
made in amounts up to $100,000. Unsecured lines of credit are made for up to
$300,000. Working capital lines of credit are generally renewable and made
for a one-year term without a requirement that the borrower extinguish any
outstanding balance for a particular time period during the year. Interest
rates on commercial business loans are generally indexed to the prime rate.
As with commercial real estate loans, the Bank generally requires annual
financial statements from its commercial business borrowers and personal
guarantees if the borrower is a corporation.
At December 31, 1997, the three largest commercial business loans had
outstanding balances of $1.3 million, $798,000 and $765,000, were
collateralized by non-real estate business assets, and were all current.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending
with loan amounts based on predetermined loan to collateral values and
liquidation of the underlying real estate collateral is viewed as the primary
source of repayment in the event of borrower default. Although commercial
business loans are often collateralized by equipment, inventory, accounts
receivable or other business assets, the liquidation of collateral in the
event of a borrower default is often not a sufficient source of repayment
because accounts receivable may be uncollectible and inventories and equipment
may be obsolete or of limited use, among other things. Accordingly, the
repayment of a commercial business loan depends primarily on the
creditworthiness of the borrower (and any guarantors), while liquidation of
collateral is a secondary and often insufficient source of repayment.
At December 31, 1997, nonperforming (i.e. loans accounted for on a
nonaccrual basis and accruing loans contractually past due 90 days or more)
commercial business loans aggregated $283,000 or less than 1.0% of total
commercial business loans.
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Loan Maturity
The following table sets forth scheduled contractual amortization of
loans and mortgage-backed securities at December 31, 1997 and the dollar
amount of such securities and loans which are scheduled to mature after one
year which have fixed or adjustable interest rates. Demand loans, loans
having no stated schedule of repayments and no stated maturity and overdraft
loans are reported as due in one year. All loans held for sale are also
reported as due within one year.
At December 31, 1997
----------------------------------------------
Commercial Mortgage
Mortgage Consumer Business Total Backed
Loans Loans Loans Loans Securities
----- ----- ----- ----- ----------
(In thousands)
Amounts due:
Within one year(1). . . . . $ 24,280 $ 9,102 $17,960 $ 51,342 $ 255
After one year through
three years. . . . . . . . 15,703 5,741 4,998 26,442 312
After three years through
five years . . . . . . . . 19,238 4,386 2,702 26,326 301
After five years. . . . . . 55,903 749 2,132 58,784 564
-------- ------- ------- -------- ------
Total. . . . . . . . . . $115,124 $19,978 $27,792 $162,894 $1,432
======== ======= ======= ======== ======
Interest rate terms on
amounts due after one
year:
Fixed. . . . . . . . . . . $ 40,995 $ 9,992 $ 5,735 $ 56,682 $1,320
Adjustable . . . . . . . . $ 49,889 $ 884 $ 4,097 $ 54,870 $ 112
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(1) Includes loans held for sale.
Loan Solicitation and Processing. Loan applicants come through direct
solicitation by Bank personnel and referrals by realtors and builders. All
types of loans may be originated in the Bank's main office and in the
Rogersville and Muscle Shoals branch offices. The Killen and Mall branch
offices do not provide loan origination services. All loans are serviced from
the main office in Florence. Applications for fixed-rate and adjustable-rate
mortgages on one- to four-family properties are underwritten and closed based
on Federal Home Loan Mortgage Corporation ("FHLMC") standards, and other loan
applications are underwritten and closed based on the Bank's own guidelines.
Residential mortgage loans are required to have title insurance, as well as
fire and extended coverage insurance. All mortgage loans require fire and
extended coverage on appurtenant structures.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral is undertaken by a fee appraiser
approved by the Bank and licensed or certified by the State of Alabama.
Residential loans up to $300,000 may be approved by the President, the
Senior Lending Officer, or Senior Mortgage Lending Officer, or the Senior
Consumer Loan Officer, or the Senior Commercial Non-Real Estate Officer with
any two approving. Secured consumer and real estate commercial loans up to
$200,000 and $300,000, respectively, may also be approved by the President,
the Senior Lending Officer, or Senior Mortgage Lending Officer, or the Senior
Consumer Loan Officer, or the Senior Commercial Non-Real Estate Officer with
any two approving. Loans over $300,000 for one- to four-family residential
units; $400,000 for multi-family units; and
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$400,000 for commercial units must be approved by the Bank's Loan/Investment
Committee, which has the authority to approve loans in the amount of $600,000
or less. Loans in excess of $600,000 must be approved by the Bank's Board of
Directors.
Loan applicants are promptly notified of the decision of the Bank.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment.
Loan Originations, Sales and Purchases. The Bank originates fixed and
adjustable rate residential mortgage loans that meet or exceed the applicable
underwriting requirements of the FHLMC. The Bank generally sells all FHA and
VA loans on a servicing released basis. During the year ended December 31,
1997, the Bank sold $17.3 million of loans, including $10.6 million of loans
sold with servicing rights retained, resulting in net gains on sale of
$258,000. The total of loans serviced for others as of December 31, 1997 was
approximately $23.0 million.
During the year ended December 31, 1997, the Bank's total mortgage loan
originations was $52.2 million, of which 51% was subject to periodic interest
rate adjustments and 49% was fixed-rate loans.
The Bank purchases loan participation interests periodically. At
December 31, 1997, the outstanding balance of purchased participation
interests was approximately $4.7 million and was secured by various commercial
real estate, one- to four-family residential and multi-family properties
located in Alabama and Tennessee. Although participation interests
aggregating $687,000 were not current as of December 31, 1997 due to lag in
payment receipts, no participation interests were classified as non-preforming
at that date.
8
<PAGE>
<PAGE>
The following table sets forth total mortgage loans originated, purchased,
sold and repaid during the years indicated.
Year Ended December 31,
---------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
Total mortgage loans at beginning of
period . . . . . . . . . . . . . . . $111,296 $119,688 $118,639
-------- -------- --------
Loans originated:
Single-family residential. . . . . . 15,790 17,820 27,707
Multi-family residential and
commercial real estate. . . . . . . 14,044 14,821 16,171
Construction loans . . . . . . . . . 5,014 6,454 8,316
-------- -------- --------
Total loans originated . . . . . . 34,848 39,095 52,194
-------- -------- --------
Loans purchased:
Single-family residential. . . . . -- -- --
Other. . . . . . . . . . . . . . . -- -- --
-------- -------- --------
Total loans purchased . . . . . . -- -- --
Total loans originated and -------- -------- --------
purchased. . . . . . . . . . . 34,848 39,095 52,194
-------- -------- --------
Loans sold:
Total whole loans sold . . . . . . 6,397 16,897 17,327
Other. . . . . . . . . . . . . . . 2,204 -- --
-------- -------- --------
Total loans sold . . . . . . . . . 8,601 16,897 17,327
Mortgage loan principal repayments. . 17,729 22,319 37,593
Other (increase) decrease . . . . . . 126 928 789
-------- -------- --------
Total net loan decreases. . . . . . 26,456 40,144 55,709
-------- -------- --------
Net loan activity . . . . . . . . . . 8,392 (1,049) (3,515)
-------- -------- --------
Total gross mortgage loans at end
of period. . . . . . . . . . . . . . $119,688 $118,639 $115,124
======== ======== ========
Loan Commitments. The Bank issues commitments for fixed- and
adjustable-rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 60 days from
application. A fee of 1% is charged for each loan commitment. At December
31, 1997, the Bank had $2.2 million of outstanding net loan commitments and
$7.7 million of unused portions on lines of credit, and $316,000 of
outstanding letters of credit. See Note 17 to Notes to Consolidated Financial
Statements.
Loan Origination and Other Fees. The Bank, in most instances, receives
loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan which are charged to
the borrower for funding the loan. The amount of points charged by the Bank
varies, though the range generally is between 1 and 2 points. Current
accounting standards require fees received (net of certain loan origination
costs) for originating loans to be deferred and amortized into interest income
over the contractual life of the loan. Net deferred fees associated with
loans that are prepaid are recognized as income at the time of prepayment.
The Bank had $148,000 of net deferred mortgage loan fees at December 31, 1997.
Nonperforming Assets and Delinquencies. When a mortgage loan borrower
fails to make a required payment when due, the Bank institutes collection
procedures. The first notice is mailed to the borrower 15 days after the
payment due date with a late fee assessed the borrower and, if necessary, a
second written notice follows after
9
<PAGE>
<PAGE>
30 days. After 45 days of the payment due date, the Bank mails a letter to
the borrower. Attempts to contact the borrower by telephone generally begin
approximately 60 days after the payment due date. If a satisfactory response
is not obtained, continuous follow-up contacts are attempted until the loan
has been brought current. In most cases, delinquencies are cured promptly;
however, if by the 90th day of delinquency, or sooner if the borrower is
chronically delinquent and all reasonable means of obtaining payment on time
have been exhausted, foreclosure, according to the terms of the security
instrument and applicable law, is initiated. If management determines on the
90th day of delinquency that all remedies to cure the delinquency have been
exhausted, management classifies the loan nonaccrual and records the
impairment, if any, through the allowance for losses.
If the borrower cannot be reached and does not respond to collection
efforts, a personal collection visit or property inspection is made. The
physical condition and occupancy status of the property is determined before
recommending further servicing action. Such inspection normally takes place
before the 90th day of delinquency.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Bank institutes collection
procedures. The first notice is mailed to the borrower 30 days following the
payment due date. If necessary, a letter is mailed the following month. The
customer is contacted by telephone to ascertain the nature of the delinquency
and is then notified in writing that counseling is available for eligible
borrowers.
In most cases, delinquencies are cured promptly; however, if, by the 60th
day following the grace period of delinquency no progress has been made, a
written notice is mailed informing the borrowers of their right to cure the
delinquency within 90 days and of the Bank's intent to begin legal action if
the delinquency is not corrected. Depending on the type of property held as
collateral, the Bank either obtains a judgment in small claims court or takes
action to repossess the collateral.
The Bank's Board of Directors is informed monthly as to the status of all
mortgage and consumer loans delinquent 90 days or more, of all loans in
foreclosure and of all foreclosed and repossessed property owned by the Bank.
10
<PAGE>
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. At the dates indicated, the Bank
had no restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15. At December 31, 1997, the Bank had no
impaired loans within the meaning of SFAS No. 114.
At December 31,
----------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Real estate -
One- to four-family. . . . . . . . $ -- $ -- $ 36 $ -- $ --
Commercial . . . . . . . . . . . . -- -- 270 -- 401
Commercial business . . . . . . . . 10 -- 50 -- 135
Consumer. . . . . . . . . . . . . . 26 -- -- 18 25
----- ----- ----- ----- -----
Total . . . . . . . . . . . . . 36 -- 356 18 561
----- ----- ----- ----- -----
Accruing loans which were
contractually past due
90 days or more:
Real estate -
One- to four-family. . . . . . . . -- 258 324 508 216
Commercial . . . . . . . . . . . . -- -- 770 489 --
Construction . . . . . . . . . . . -- -- -- 327 --
Commercial business . . . . . . . . -- 19 3 39 148
Consumer. . . . . . . . . . . . . . -- 16 33 60 181
----- ------ ------ ------ ------
Total. . . . . . . . . . . . . -- 293 1,130 1,423 545
----- ------ ------ ------ ------
Total of nonaccrual and
90 days past due loans . . . . . . 36 293 1,486 1,441 1,106
Real estate owned . . . . . . . . . . 954 1,073 1,098 198 100
----- ------ ------ ------ ------
Total nonperforming assets . . . . $ 990 $1,366 $2,584 $1,639 $1,206
===== ====== ====== ====== ======
Total loans delinquent 90 days
or more to net loans. . . . . . . . 0.03% 0.22% 0.98% 0.90% 0.69%
Total loans delinquent 90 days
or more to total assets . . . . . . 0.02% 0.19% 0.82% 0.78% 0.60%
Total nonperforming assets
to total assets . . . . . . . . . . 0.68% 0.90% 1.43% 0.89% 0.66%
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate
owned (foreclosed real estate) until it is sold. When property is acquired it
is recorded at fair value at the time of foreclosure, less estimated costs of
disposal. Subsequent to foreclosure, the property is carried at the lower of
the foreclosed amount or net realizable value.
At December 31, 1997, the Bank had $100,000 of real estate owned, which
consisted of one single-family residence.
11
<PAGE>
<PAGE>
Asset Classification. In connection with examinations of insured
institutions, State of Alabama Banking Department and FDIC examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. Special mention assets, described as assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. If an asset or portion
thereof is classified loss, the insured institution records a loss for the
full amount of the portion of the asset classified loss. A portion of general
loan loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital.
The Bank's senior officers meet monthly to review all classified assets,
to approve action plans developed to resolve the problems associated with the
assets and to review recommendations for new classifications, any changes in
classifications and recommendations for reserves.
At December 31, 1997, the Bank's classified assets totalled approximately
$5.5 million, as follows:
At December 31,
1997
----
(In thousands)
Loss. . . . . . . . . . . . . . . . . . . . . $ --
Doubtful. . . . . . . . . . . . . . . . . . . 566
Substandard assets. . . . . . . . . . . . . . 473
Special mention . . . . . . . . . . . . . . . 4,461
At December 31, 1997, doubtful assets consisted primarily of non-accrual
commercial real estate and commercial business loans; substandard assets
consisted primarily of delinquent single-family mortgage loans and delinquent
consumer loans; and special mention assets consisted primarily of past due
single-family and commercial real estate loans.
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans. The allowance for loan losses is increased
by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
the estimated value of any underlying collateral, and current economic
conditions. Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued and unpaid, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses
by charging provisions for loan losses against the Bank's income.
12
<PAGE>
<PAGE>
The general valuation allowance is maintained to cover yet unidentified
losses in the loan portfolio. Management reviews the adequacy of the
allowance at least quarterly based on its knowledge of the portfolio including
current asset classifications, the Bank's write-off history, economic
conditions affecting the real estate markets and industry standards.
Specific valuation allowances are established to absorb losses on loans
for which full collectibility may not be reasonably assured. The amount of
the allowance is based on the estimated value of the collateral securing the
loan and other analyses pertinent to each situation.
A provision for losses is charged against income periodically to maintain
the allowances. The provisions for losses charged against income for the
years ended December 31, 1995, 1996 and 1997, were $565,000, $270,000 and
$242,000, respectively. At December 31, 1997, the Bank had allowances for
loan losses of $1.6 million which represented 1.00% of net loans receivable.
Management believes that the amount maintained in the allowances will be
adequate to absorb losses in the portfolio. Although management believes that
it uses the best information available to make such determinations, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be significantly and adversely affected if circumstances
differ substantially from the assumptions used in making the determinations.
Charge-offs occur when loans with specific reserves are foreclosed. The
specific reserve, along with any additional amounts necessary to reduce the
carrying value to fair market value, net of estimated selling costs, is
charged-off. The foreclosed asset is thereafter carried at the lower of the
asset's newly established net fair value or its net realizable value. When
the asset is sold, any excess/(deficiency) over the carrying value is
reflected on the books as a gain/(loss) on the sale of real estate owned.
The Bank's market area is heavily concentrated in Lauderdale and Colbert
counties. Real estate values have been stable to slightly increasing over the
past three years. There can be no assurance as to the future performance of
real estate markets, including those in which the Bank primarily operates. A
downturn in the Alabama real estate markets could have a material adverse
effect on the Bank's operations. For example, depressed real estate values
may result in increases in nonperforming assets, hamper disposition of such
nonperforming assets and result in losses upon such disposition.
While the Bank believes it has established its existing allowance for
loan losses in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing the Bank's loan portfolio,
will not request the Bank to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the
existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result
of the factors discussed above. Any material increase in the allowance for
loan losses may adversely affect the Bank's financial condition and results of
operations.
13
<PAGE>
<PAGE>
The following table sets forth an analysis of the Bank's gross allowance
for loan losses for the periods indicated. Where specific loan loss reserves
have been established, any difference between the loss reserve and the amount
of loss actually realized has been charged or credited to current income.
Year Ended December 31,
----------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period $ 800 $ 801 $1,100 $1,509 $1,659
Provision for loan losses. . . . 54 327 565 270 242
Recoveries: ----- ------ ------ ------ ------
Residential real estate . . . . -- -- -- 20 9
Commercial/consumer other . . . 25 6 41 70 21
----- ------ ------ ------ ------
Total recoveries. . . . . . . 25 6 41 90 30
----- ------ ------ ------ ------
Charge-offs:
Residential real estate . . . . (11) -- (4) (13) (43)
Commercial real estate. . . . . -- -- -- (25) (185)
Commercial/consumer other . . . (67) (34) (193) (172) (119)
----- ------ ------ ------ ------
Total charge-offs . . . . . . (78) (34) (197) (210) (347)
----- ------ ------ ------ ------
Net charge-offs . . . . . . . (53) (28) (156) (120) (317)
----- ------ ------ ------ ------
Allowance at end of period . $ 801 $1,100 $1,509 $1,659 $1,584
===== ====== ====== ====== ======
Ratio of allowance to net loans
outstanding at the end of the
period. . . . . . . . . . . . . 0.67% 0.84% 0.99% 1.04% 0.99%
Ratio of net charge-offs to
average loans outstanding
during the period . . . . . . . 0.05% 0.02% 0.11% 0.08% 0.19%
14
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the Bank's allowance for loan losses by loan category at the dates
indicated.
At December 31,
-------------------------------------------------------------------------------
- --
1993 1994 1995 1996 1997
---------------- --------------- --------------- --------------- --------------
- --
As a % As a % As a % As a % As a %
of Out- of Out- of Out- of Out- of
Out-
standing standing standing standing
standing
Loans in Loans in Loans in Loans in Loans
in
Amount Category Amount Category Amount Category Amount Category Amount
Category
------ -------- ------ -------- ------ -------- ------ -------- ------ ------
- --
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate -- mortgage:
Residential. . . . . . $204 .25% $ 299 .35% $ 331 .39% $ 261 0.33% $ 234
0.34%
Other. . . . . . . . . 163 1.11 334 1.25 441 1.25 167 0.43 210 0.46
Consumer and commercial
business. . . . . . . . 333 1.26 467 2.00 729 2.00 580 1.29 614 1.29
Unallocated. . . . . . . 101 -- -- 8 651 526
---- ---- ------ ---- ------ ---- ------ ---- ------ ----
Total allowance for
loan losses. . . . . $801 $1,100 $1,509 $1,659 $1,584
==== ====== ====== ====== ======
15
</TABLE>
<PAGE>
<PAGE>
Investment Activities
The Bank has authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies and of state and municipal governments, deposits at the FHLB of
Atlanta, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds.
The Bank is required under Alabama law to maintain at all times a reserve
(comprised of cash) based upon average daily deposits of the Bank. At
December 31, 1997, the Bank's qualifying reserves of $1.5 million exceeded to
required reserve of $221,000. The balance of the Bank's investments in
short-term securities in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of deposits
with short-term maturities. Management intends to hold securities with
short-term maturities in the Bank's investment portfolio in order to enable
the Bank to provide liquidity and to match more closely the interest-rate
sensitivities of its assets and liabilities.
The Investment/Loan Committee, comprised of the two outside directors,
determines appropriate investments in accordance with the Board of Directors'
approved investment policies and procedures. Investments are made following
certain considerations, which include the Bank's liquidity position and
anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits, anticipated loan
amortization and repayments, and amortization of mortgage-backed securities).
Further, the effect that the proposed investment would have on the Bank's
"gap" position, credit and interest rate risk, and risk-based capital is given
consideration during the evaluation. The interest rate, yield, settlement
date and maturity are also reviewed.
At December 31, 1997, the Company's investment securities portfolio
totalled approximately $8.0 million at fair value ($8.0 million at amortized
cost) and, consisted of U.S. Treasury and agency securities.
The Company also invests in mortgage-backed securities. At December 31,
1997, the mortgage-backed securities portfolio had an amortized cost of
approximately $1.4 million and as market value of $1.5 million, with
maturities ranging from six months to over ten years. See Notes 3 and 4 of
Notes to Consolidated Financial Statements.
16
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the cost and market values of the investment securities portfolio at
the dates indicated.
At December 31,
--------------------------------------------------------------------------
- --
1995 1996 1997
------------------------ ------------------------- ---------------------
- --
Percent Percent
Percent
Amor- of Amor- of Amor- of
tized Market Port- tized Market Port- tized Market Port-
Cost Value folio Cost Value folio Cost Value folio
---- ----- ----- ---- ----- ----- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit . . . $ -- $ -- --% $ 5,000 $ 5,000 45.41% $ -- $ --
- --%
U.S. Government and
agency obligations . . . . . 8,840 8,792 100.00 6,012 5,948 54.59 7,998 7,993
100.00
------ ------ ------ ------- ------- ------ ------ ------ -----
- -
Total . . . . . . . . . . . . $8,840 $8,792 100.00% $11,012 $10,948 100.00% $7,998 $7,993
100.00%
====== ====== ====== ======= ======= ======= ====== ======
======
- -----------------
(1) Percentage of portfolio value computed based upon carrying value of securities. Prior to January 1,
1994, securities were recorded at amortized cost. In 1994 the Company adopted the provisions of
SFAS No. 115 under which the Company has classified 100% of its investment securities as
"available for sale," which securities were therefore recorded at market value.
</TABLE>
<TABLE>
The following table sets forth the maturities and weighted average yields of the investment
securities portfolio at December 31, 1997.
Weighted
Carrying Average
Value Yield
----- -----
<S> <C> <C>
Certificates of deposit:
Due in one year or less. . . . . . . . . . . . . . . . . . $4,999 5.30%
U.S. Government and agency obligations:
Due in one year or less. . . . . . . . . . . . . . . . . . 2,994 5.91
------ ----
Due after one year through five years. . . . . . . . . . . $7,993 5.53%
====== ====
27
</TABLE>
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the cost and market values of the mortgage-backed securities
portfolio at the dates indicated.
At December 31,
--------------------------------------------------------------------------
- --
1995 1996 1997
------------------------ ------------------------- ---------------------
- --
Percent Percent
Percent
Amor- of Amor- of Amor- of
tized Market Port- tized Market Port- tized Market Port-
Cost Value folio Cost Value folio Cost Value folio
---- ----- ----- ---- ----- ----- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal National Mortgage
Association certificates(2) $ 662 $ 670 21.16% $ 256 $ 264 13.57% $ 185 $ 191
12.92%
Government National Mortgage
Association certificates(2) 1,033 1,097 33.03 818 855 43.35 587 613
40.99
FHLMC certificates(2). . . . 1,009 1,062 32.26 813 836 43.08 660 681
46.09
FHLMC certificate(3) . . . . 424 431 13.55 -- -- -- -- -- -
- -
------ ------ ------ ------- ------- ------ ------ ------ -----
- -
Total. . . . . . . . . . $3,128 $3,260 100.00% $1,887 $1,955 100.00% $1,432 $1,485
100.00%
====== ====== ====== ======= ======= ======= ====== ======
======
- ----------------------
(1) Percentage of portfolio value computed based upon amortized cost of mortgage-backed securities.
(2) Classified as "held to maturity" at December 31, 1995, 1996 and 1997.
(3) Classified as "available for sale" at December 31, 1995.
</TABLE>
<TABLE>
The following table sets forth the maturities and weighted average yields of the mortgage-backed
securities portfolio at December 31, 1997.
Weighted
Amortized average
Cost Yield
---- -----
<S> <C> <C>
Due in one year or less . . . . . . . . . . . . . . . . . . $ 81 8.50%
Due after one year through five years . . . . . . . . . . . 213 7.42
Due after five years through ten years. . . . . . . . . . . 630 8.28
Due after ten years . . . . . . . . . . . . . . . . . . . . 508 8.48
------ ----
$1,432 8.24%
====== ====
18
</TABLE>
<PAGE>
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer-term basis for general business
purposes.
Deposit Accounts. Deposits are attracted from within the Bank's primary
market area through the offering of a broad selection of deposit instruments,
including negotiable order of withdrawal ("NOW") accounts, money market
deposit accounts, statement savings accounts, certificates of deposit and
retirement savings plans. Deposit account terms vary, according to the
minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. In determining the terms of its
deposit accounts, the Bank considers current market interest rates,
profitability to the Bank, matching deposit and loan products and its customer
preferences and concerns. The Bank generally reviews its deposit mix and
pricing weekly.
In the unlikely event the Bank is liquidated depositors will be entitled
to full payment of their deposit accounts prior to any payment being made to
the Company, as stockholder of the Bank. Substantially all of the Bank's
depositors are residents of the State of Alabama.
19
<PAGE>
<PAGE>
The following table sets forth information concerning time deposits and
other interest-bearing and non-interest-bearing deposits at December 31, 1997.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(In thousands)
0.00% None Non-interest-bearing demand $ 100 $ 4,118 2.87%
2.50 None NOW 500 11,015 7.66
3.00 None Money market demand 500 4,310 3.00
2.75 None Passbook 100 15,918 11.07
2.875 None Statement savings 100 1,400 0.97
Certificates of deposit
-----------------------
4.12 91 days Fixed-term, fixed rate 1,000 1,117 0.78
5.15 182 days Fixed-term, fixed rate 1,000 14,864 10.34
5.28 1 year Fixed-term, fixed rate 1,000 14,260 9.92
5.37 13 months Fixed-term, fixed rate 1,000 3,095 2.15
6.49 14 months Fixed-term, fixed rate 1,000 35,219 24.50
5.25 15 months Fixed-term, fixed-rate 1,000 101 0.07
5.21 18 months Fixed-term, fixed-rate 1,000 1,420 0.99
6.03 2 years Fixed-term, fixed-rate 1,000 16,017 11.14
5.55 30 months Fixed-term, fixed-rate 1,000 3,298 2.30
5.91 3 years Fixed-term, fixed-rate 1,000 2,412 1.68
6.11 4 years Fixed-term, fixed-rate 1,000 1,619 1.13
5.75 5 years Fixed-term, fixed-rate 1,000 5,016 3.49
7.75 6 years Fixed-term, fixed-rate 1,000 96 0.07
8.00 8 years Fixed-term, fixed-rate 1,000 389 0.27
5.31 1 year Fixed-term, fixed-rate 1,000 2,014 1.40
individual retirement
account ("IRA")
5.21 18 months Fixed-term, fixed-rate -IRA 1,000 6,033 4.20
-------- ------
$143,731 100.00%
======== ======
The following table indicates the amount of certificates of deposit and
other deposits with balances of $100,000 or greater by time remaining until
maturity as of December 31, 1997. Other deposits with balances of $100,000 or
greater aggregated $4.6 million, and have been shown in the following table as
having maturities of three months or less.
Maturity Period Amount
- --------------- ------
(In thousands)
Three months or less $ 9,920
Three through twelve months 9,535
Over twelve months 3,883
-------
Total $23,338
=======
20
<PAGE>
<PAGE>
<TABLE>
Deposit Flow
The following table sets forth the balances of the various types of deposit accounts offered by the
Bank at the dates indicated.
At December 31,
-----------------------------------------------------------------------
- ---
1995 1996 1997
---------------- --------------------------- -------------------------
- ---
Percent Percent Percent
of of Increase of
Increase
Amount Total Amount Total (Decrease) Amount Total
(Decrease)
------ ----- ------ ----- ---------- ------ ----- -------
- ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-certificate of deposit
accounts(2):
Non-interest-bearing(1). . . . . $ 2,238 1.70% $ 4,189 3.15% $ 1,951 $ 4,119 2.87% $
(70)
NOW checking . . . . . . . . . . 9,738 7.38 10,744 8.09 1,006 11,015 7.66
271
Regular savings accounts . . . . 19,627 14.88 17,839 13.44 (1,788) 15,918 11.08
(1,921)
Money market deposit . . . . . . 2,988 2.27 2,908 2.19 (80) 4,310 3.00
1,402
Statement savings. . . . . . . . 785 0.60 1,486 1.12 701 1,400 0.97
(86)
Certificates of deposit(3)(4):
Variable rate certificates
which mature:
Within one year . . . . . . . . 3,514 2.66 3,693 2.78 179 -- --
(3,693)
Within three years. . . . . . . 3,273 2.48 -- 0.00 (3,273) -- --
- --
Fixed-rate certificates which
mature:
Within one year . . . . . . . . 58,994 44.74 68,504 51.58 9,510 84,922 59.08
16,418
Within three years. . . . . . . 27,854 21.12 23,351 17.58 (4,503) 20,923 14.56
(2,428)
After three years . . . . . . . 2,856 2.17 86 0.07 (2,770) 1,124 0.78
1,038
-------- ------ -------- ------ ------- -------- ------ -----
- --
Total. . . . . . . . . . . . $131,867 100.00% $132,800 100.00% $ 933 $143,731 100.00%
$10,931
======== ====== ======== ====== ======= ======== =======
=======
- ---------------------
(1) Comprised solely of demand deposit checking accounts.
(2) Includes accounts with balances of $100,000 and greater of $2.4 million, $1.4 million and $4.6
million at December 31, 1995, 1996 and 1997, respectively.
(3) Includes certificates of deposit with balances of $100,000 and greater of $12.8 million, $15.2
million and $18.7 million at December 31, 1995, 1996 and 1997, respectively.
(4) Includes IRA accounts of $8.0 million, $8.0 million and $8.0 million at December 31, 1995, 1996 and
1997, respectively.
21
</TABLE>
<PAGE>
<PAGE>
Time Deposits by Rates
The following table sets forth time deposits classified by rates as of the
dates indicated.
At December 31,
--------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
2.01 - 4.00% . . . . . . . . . . . $ 1,593 $ 774 $ 605
4.01 - 5.00% . . . . . . . . . . . 3,782 227 706
5.01 - 6.00% . . . . . . . . . . . 59,022 67,572 64,433
6.01 - 7.00% . . . . . . . . . . . 29,616 25,040 38,524
7.01 or greater. . . . . . . . . . 2,478 2,021 2,701
------- ------- --------
Total. . . . . . . . . . . . . . $96,491 $95,634 $106,969
======= ======= ========
The following table sets forth the amount and maturities of time deposits
at December 31, 1997.
Amount Due
-----------------------------------------------
Percent
of Total
Certi-
Less Than 1-2 2-3 3-4 After ficate
One Year Years Years Years 4 Years Total Accounts
-------- ----- ----- ----- ------- ----- --------
(Dollars in thousands)
2.00 - 4.00%. . . $ 605 $ -- $ -- $ -- $ -- $ 605 0.56%
4.01 - 5.00%. . . 706 -- -- -- -- 706 0.66
5.01 - 6.00%. . . 49,139 13,770 1,053 288 183 64,433 60.24
6.01 - 7.00%. . . 32,589 5,332 -- -- 603 38,524 36.01
7.01 - or greater 1,883 768 -- -- 50 2,701 2.53
------- ------- ------ ---- ---- -------- ------
Total . . . . $84,922 $19,870 $1,053 $288 $836 $106,969 100.00%
======= ======= ====== ==== ==== ======== ======
The following table sets forth the deposit activities of the Bank for the
periods indicated.
Years Ended December 31,
---------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
Beginning balance . . . . . . . . . . $120,555 $131,867 $132,800
Net increase (decrease)
before interest credited . . . . . . 6,308 (3,896) 5,798
Interest credited . . . . . . . . . . 5,004 4,829 5,133
Net increase in savings
deposits . . . . . . . . . . . . . . 11,312 933 10,931
-------- -------- --------
Ending balance. . . . . . . . . . . . $131,867 $132,800 $143,731
======== ======== ========
22
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<PAGE>
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business
purposes. The Bank may rely upon advances from the FHLB of Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta has, from time to time, served as one of
the Bank's primary borrowing sources. Advances from the FHLB of Atlanta are
typically secured by the Bank's first mortgage loans and certain investment
and mortgage-backed securities. At December 31, 1997, the Bank had $18.5
million of borrowings from the FHLB of Atlanta at a weighted average rate of
6.00%. Such borrowings have contractual maturities through 2009 and are
secured by a blanket lien on $58.1 million of one- to four-family residential
real estate loans. See Note 10 of Notes to Consolidated Financial Statements.
The FHLB of Atlanta functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Bank is required to own capital stock in the
FHLB of Atlanta and is authorized to apply for advances on the security of
such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States
government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the dates and for the periods indicated:
At December 31,
------------------
1996 1997
---- ----
Weighted average rate paid on:
FHLB advances . . . . . . . . . . . . . 6.34% 6.00%
Other borrowings(1) . . . . . . . . . . 8.25 --
Year Ended December 31,
-------------------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
Maximum amount of borrowings
outstanding at any month end:
FHLB advances . . . . . . . . . . . $21,830 $25,619 $36,043
Other borrowings(1) . . . . . . . . -- 4,000 450
Approximate average outstanding:
FHLB advances . . . . . . . . . . . 17,397 21,934 26,221
Other borrowings(1) . . . . . . . . -- 336 195
Approximate weighted average rate
paid on:
FHLB advances . . . . . . . . . . . 6.16% 5.92% 5.88%
Other borrowings(1) . . . . . . . . -- 8.07 8.51
- -----------------
(1) Credit facility from third party financial institution.
REGULATION
The Bank
General. As an Alabama-chartered, federally insured commercial bank, the
Bank is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Bank is regularly
examined by the FDIC and the
23
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<PAGE>
Superintendent and files periodic reports concerning the Bank's activities and
financial condition with its regulators. The Bank's relationship with
depositors and borrowers also is regulated to a great extent by both federal
law and the laws of the State of Alabama, especially in such matters as the
ownership of savings accounts and the form and content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal
and state bank regulatory agencies also have the general authority to limit
the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Company and the Bank have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
State Regulation and Supervision. As a Alabama-chartered commercial
bank, the Bank is subject to applicable provisions of Alabama law and the
regulations of the Superintendent adopted thereunder. Alabama law and
regulations govern the Bank's ability to take deposits and pay interest
thereon, to make loans on or invest in residential and other real estate, to
make consumer loans, to invest in securities, to offer various banking
services to its customers, and to establish branch offices. The Bank is
subject to periodic examination and reporting requirements by and of the
Superintendent.
Deposit Insurance. The FDIC insures deposits at the Bank to the maximum
extent permitted by law. The Bank currently pays deposit insurance premiums
to the FDIC based on a risk-based assessment system established by the FDIC
for all SAIF-member institutions. Under applicable regulations, institutions
are assigned to one of three capital groups which are based solely on the
level of an institution's capital --"well capitalized," "adequately
capitalized," and "undercapitalized" -- which are defined in the same manner
as the regulations establishing the prompt corrective action system under
Section 38 of the Federal Deposit Insurance Act ("FDIA"), as discussed below.
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy
to those which are considered to be of substantial supervisory concern. The
matrix so created results in nine assessment risk classifications, with rates
currently ranging from 0.23% for well capitalized, financially sound
institutions with only a few minor weaknesses to .31% for undercapitalized
institutions that pose a substantial risk of loss to the SAIF unless effective
corrective action is taken. The FDIC is authorized to raise assessment rates
in certain circumstances. The Bank's assessments expensed for the year ended
December 31, 1997, equaled $85,000.
The FDIC's current assessment schedule for SAIF deposit insurance
provides that the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured
institutions, will be required to add to their assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO"), an agency of the federal
government established to finance takeovers of insolvent thrifts. During this
period, BIF members will be assessed for FICO obligations at the rate of 1.3
basis points. After December 31, 1999, both BIF and SAIF members will be
assessed at the same rate for FICO payments.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of the Bank.
24
<PAGE>
<PAGE>
Prompt Corrective Action. Each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action.
Under the regulations, an institution shall be deemed to be: (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized;" (iii) "undercapitalized" if it has
a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that
is less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At December 31, 1997, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness. The federal banking regulatory
agencies are required, by regulation, to prescribe standards for all insured
depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies recently
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement safety and soundness
standards. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. Under the final regulations, if the FDIC
determines that the Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard. The final
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
Capital Requirements. The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of
purchased mortgage servicing rights and certain other accounting adjustments.
All other banks must have a Tier 1 leverage ratio of at least 100 to 200 basis
points above the 3% minimum. The FDIC capital regulations establish a minimum
leverage ratio of not less than 4% for banks that are not highly rated or are
anticipating or experiencing
25
<PAGE>
<PAGE>
significant growth. Based on the definitions contained in the FDIC's capital
regulations, the Bank had a Tier 1 leverage capital ratio of 11.09% as of
December 31, 1997.
The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital
be maintained. Any insured bank with a Tier 1 capital to total assets ratio
of less than 2% is deemed to be operating in an unsafe and unsound condition
unless he insured bank enters into a written agreement, to which the FDIC is a
party, o correct its capital deficiency. Insured banks operating with Tier 1
capital levels below 2% (and which have not entered into a written agreement)
are subject to an insurance removal action. Insured banks operating with lower
than the prescribed minimum capital levels generally will not receive approval
of applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC
deems necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary
capital) o risk weighted assets of 8% and Tier 1 capital to risk-weighted
assets of 4%. In determining the amount of risk-weighted assets, all assets,
plus certain off balance sheet items, are multiplied by a risk-weight of 0% to
100%, based on the risks the FDIC believes are inherent in the type of asset
or item. The components of Tier 1 capital are equivalent to those discussed
above under the 3% leverage requirement. The components of supplementary
capital currently include cumulative perpetual preferred stock,
adjustable-rate perpetual preferred stock, mandatory convertible securities,
term subordinated debt, intermediate-term preferred stock and allowance for
possible loan and lease losses. Allowance for possible loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of Tier 1 capital. Since September
1995, the FDIC includes in its evaluation of a bank's capital adequacy an
assessment of the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. However, no measurement framework
for assessing the level of a bank's interest rate risk exposure has been
codified. In the future, the FDIC will issue a proposed rule that would
establish an explicit minimum capital charge for interest rate risk, based on
the level of a bank's measured interest rate risk exposure.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial
weaknesses. The FDIC capital regulations state that, where the FDIC
determines that the financial history or condition, including off-balance
sheet risk, managerial resources and/or the future earnings prospects of a
bank are not adequate and/or a bank has a significant volume of assets
classified substandard, doubtful or loss or otherwise criticized, the FDIC may
determine that the minimum adequate amount of capital for that bank is greater
than the minimum standards established in the regulation.
Activities and Investments of Insured State-Chartered Banks. Federal law
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring
or retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv)
acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
In addition, an insured state bank (i) that is located in a state which
authorized as of September 30, 1991 investment in common or preferred stock
listed on a national securities exchange ("listed stock") or shares of a
registered investment company ("registered shares"), and (ii) which during the
period beginning September 30, 1990
26
<PAGE>
<PAGE>
through November 26, 1991 ("measurement period") made or maintained
investments in listed stocks and registered shares, may retain whatever shares
that were lawfully acquired or held prior to December 19, 1991 and continue to
acquire listed stock and registered shares, provided that the bank does not
convert its charter to another form or undergo a change in control. In order
to acquire or retain any listed stock or registered shares, however, the bank
must file a one-time notice with the FDIC which meets specified requirements
and which sets forth the bank's intention to acquire and retain stocks or
shares, and the FDIC must determine that acquiring or retaining the listed
stocks or registered shares will not pose a significant risk to the deposit
insurance fund of which the bank is a member.
FDIC regulations provide that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease
the impermissible activity.
Loans-to-One-Borrower. Under Alabama law the aggregate amount of loans
that the Bank is permitted to make to any one borrower, including related
entities, is generally 20% of the Bank's capital account (i.e., capital,
surplus and undivided profits) provided that loans in excess of 10% of the
capital account are fully secured. At December 31, 1997, the Bank's
loans-to-one borrower limit was approximately $4.1 million. At December 31,
1997, the largest aggregate amount of loans by the Bank to any one borrower
was approximately $3.8 million, which was comprised of eight loans ($690,000
in one- to four-family loans, $2.4 million in commercial real estate loans,
$316,000 outstanding under a $350,000 line of credit secured by commercial
real estate, $124,000 in commercial loans, and $209,000 outstanding under a
$224,000 line of credit secured by a single-family residence), all of which
were performing according to their terms.
Federal Reserve System. Regulation D of the FRB requires all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits
with the regional Federal Reserve Bank. NOW accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any nonpersonal time deposits at a bank. Under
Regulation D, a bank must establish reserves equal to 3% of the first $47.7
million of transaction accounts, of which the first $4.3 million is exempt,
and 10% on the remainder. The reserve requirement on nonpersonal time deposits
with original maturities of less than 1-1/2 years is 0%. As of December 31,
1997, the Bank met its reserve requirements.
Affiliate Transactions. The Company and the Bank are separate and
distinct legal entities. Various legal limitations restrict the Bank from
lending or otherwise supplying funds to the Company (an "affiliate"),
generally limiting such transactions with the affiliate to 10% of the bank's
capital and surplus and limiting all such transactions to 20% of the bank's
capital and surplus. Such transactions, including extensions of credit, sales
of securities or assets and provision of services, also must be on terms and
conditions consistent with safe and sound banking practices, including credit
standards, that are substantially the same or at least as favorable to the
bank as those prevailing at the time for transactions with unaffiliated
companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
Community Reinvestment Act. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank,
to assess the bank's record in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency's assessment of the bank's record
27
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<PAGE>
is made available to the public. Further, such assessment is required of any
bank which has applied, among other things, to establish a new branch office
that will accept deposits, relocate an existing office or merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally
regulated financial institution. The Bank received an "outstanding" CRA
rating as a result of its most recent evaluation.
Dividends. Dividends from the Bank constitute the major source of funds
for dividends which may be paid by the Company. The amount of dividends
payable by the Bank to the Company depend upon the Bank's earnings and capital
position, and is limited by federal and state laws, regulations and policies.
According to Alabama law, the Bank is required to transfer to surplus each
year at least 10% of its net earnings (and thus cannot declare or pay a
dividend in excess of 90% of net earnings) until its surplus equals at least
20% of its capital. Furthermore, the Bank must obtain the approval of the
Superintendent to declare dividends in any calendar year in excess of the
total of its net earnings of that year combined with its retained net earnings
of the preceding to years, less any required transfers to surplus.
At the time of the consummation of the Stock Conversion, OTS regulations
required the Association to establish a liquidation account for the benefit of
eligible account holders of the Association. This liquidation account was
assumed by the Bank at the time of the consummation of the Bank Conversion.
The Bank may not declare or pay a cash dividend on any of its capital stock
that would reduce the Bank's regulatory capital below the amount required for
the liquidation account. See Note 21 of the Notes to Consolidated Financial
Statements.
Federal law further provides that no insured depository institution may
make any capital distribution (which would include a cash dividend) if, after
making the distribution, the institution would be "undercapitalized," as
defined in the prompt corrective action regulations. Moreover, the federal
bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks if such payments should be deemed to
constitute an unsafe and unsound practice.
The Holding Company
General. The Company, as the sole shareholder of the Bank, is a bank
holding company registered as such with the FRB. Bank holding companies are
subject to comprehensive regulation by the FRB under the Bank Holding Company
Act of 1956, as amended ("BHCA") and the regulations of the FRB. As a bank
holding company, the Company is required to file with the FRB annual reports
and such additional information as the FRB may require and is subject to
regular examinations by the FRB. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including
its bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain FRB approval before:
(1) acquiring, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such acquisition, it
would own or control more than 5% of such shares (unless it already owns or
controls the majority of such shares); (2) acquiring all or substantially all
of the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations
of the bank holding company's banking subsidiaries are principally conducted,
may not be approved by the FRB unless the laws of the state in which the bank
to be acquired is located specifically authorize such an acquisition. Most
states have authorized interstate bank acquisitions by out-of-state bank
holding companies on either a regional or a national basis, and most such
statutes require the home state of the acquiring bank holding company to have
enacted a reciprocal statute. Alabama law permits bank holding companies
located in the states of Alabama, Arkansas, Florida, Georgia, Kentucky,
Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee,
Texas, Virginia and West Virginia and the District of Columbia to acquire
banks or bank holding companies located
28
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<PAGE>
in Alabama subject to the requirements that the laws of the state in which the
acquiring bank holding company is located permit bank holding companies
located in Alabama to acquire banks or bank holding companies in the
acquiror's state and that the Alabama bank sought to be acquired has been in
existence for at least five years. Since September 30, 1995, federal law
permits well capitalized and well managed bank holding companies to acquire
control of an existing bank in any state.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. Under the BHCA, the FRB is authorized to approve the ownership
of shares by a bank holding company in any company, the activities of which
the FRB has determined to be so closely related to the business of banking or
managing or controlling banks as to be a proper incident thereto. The list of
activities determined by regulation to be closely related to banking within
the meaning of the BHCA includes, among other things: operating a savings
institution, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders,
travelers' checks and U.S. Savings Bonds; real estate and personal property
appraising; providing tax planning and preparation services; and, subject to
certain limitations, providing securities brokerage services for customers.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a
bank holding company should pay cash dividends only to the extent that the
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the
company's capital needs, asset quality and overall financial condition. The
FRB also indicated that it would be inappropriate for a company experiencing
serious financial problems to borrow funds to pay dividends. Furthermore,
under the prompt corrective action regulations adopted by the FRB, the FRB may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized" under the prompt
corrective action regulations.
Bank holding companies, except for certain "well-capitalized" bank
holding companies, are required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of their consolidated net worth. The FRB
may disapprove such a purchase or redemption of it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, FRB order, or any condition imposed by, or written agreement
with, the FRB.
Capital Requirements. The FRB has established capital adequacy
guidelines for bank holding companies that generally parallel the capital
requirements of the FDIC for the Bank. The FRB regulations provide that
capital standards will be applied on a consolidated basis in the case of a
bank holding company with $150 million or more in total consolidated assets.
The Company's levels of consolidated regulatory capital at December 31, 1997
are as follows:
29
<PAGE>
<PAGE>
Amount Percent
------ -------
(Dollars in thousands)
Tier 1 Capital. . . . . . . . . . $20,938 11.32%
Minimum Tier 1 (leverage)
requirement . . . . . . . . . . 7,399 4.00
------- -----
Excess. . . . . . . . . . . . . . $13,539 7.32%
======= =====
Risk-based capital. . . . . . . . $22,522 15.53%
Minimum risk-based capital
requirement . . . . . . . . . . 11,603 8.00
------- -----
Excess. . . . . . . . . . . . . . $10,919 7.53%
======= =====
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting. The Company and the Bank are
subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Company and the Bank.
Bad Debt Reserve. In years prior to the consummation of the Bank
Conversion, the Association, as a qualified thrift meeting certain eligibility
criteria prescribed in the Code, was able to determine its tax basis bad debt
reserve using the percentage of taxable income method ("PTI Method") set forth
in the Code. The Association's use of the PTI Method resulted in a
significantly greater tax basis reserve for bad debts than that recognized for
financial reporting purposes.
Upon consummation of the Bank Conversion, the Bank became a "former
thrift institution" and, as such, under provisions of the Code, is no longer
eligible to maintain its tax basis bad debt reserve on the PTI Method. As a
financial institution with total assets less than $500 million, the Bank is
permitted to maintain its tax basis bad debt reserves on the experience method
("Experience Method"), which computes a tax basis bad debt reserve based upon
a six-year weighted-average calculation of actual bad debts experienced by the
Bank.
Under applicable provisions of the Code, on a ratable basis over a
six-year period commencing in 1995, the Bank must include in income the excess
of the PTI Method bad debt reserve as of December 31, 1994 over its newly
adopted Experience Method tax basis reserve determined as of December 31,
1994. See Note 11 of Notes to Consolidated Financial Statements.
In the event that the Bank's assets ever exceed the $500 million
threshold, the Bank would be required to recapture its newly adopted
Experience Method tax basis bad debt reserve in increasing increments over a
four-year period. Thereafter, the Bank would be required to use the direct or
specific charge-off method applicable to large banks in calculating the Bank's
tax bad debt deduction. Under the direct or specific charge-off method, the
Bank would be entitled to a bad debt deduction only in the taxable year in
which a specific debt become worthless or is shown to be recoverable only in
part.
The Bank Conversion occurred prior to the enactment of the Small Business
Job Protection Act of 1996 which repealed the PTI method but did not require
recapture of pre-1988 bad debt reserves.
30
<PAGE>
<PAGE>
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of
December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess
Distributions will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out
of the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserves.
The amount of additional taxable income created from and Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. See "REGULATION" for limits on the payment of dividends by the Bank.
The Bank does not intend to pay dividends that would result in a recapture of
any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. Under President Clinton's 1998 budget proposal,
the corporate environmental income tax would be reinstated for taxable years
beginning after December 31, 1996 and before January 1, 2008.
Dividends-Received Deduction and Other Matters. The Holding Company may
exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. The corporate dividends-
received deduction is generally 70% in the case of dividends received from
unaffiliated corporations with which the Holding Company and the Bank will not
file a consolidated tax return, except that if the Holding Company or the Bank
owns more than 20% of the stock of a corporation distributing a dividend, then
80% of any dividends received may be deducted.
Audits. The Company's and the Bank's federal income tax returns have
been audited through 1996.
State Taxation
Alabama Taxation. The State of Alabama imposes a 6% excise tax on the
Bank's earnings. The Alabama Department of Revenue has conducted one audit of
the Bank's financial institutions excise tax returns during the last five
years resulting in minor adjustments which increased the Bank's tax liability
by less than $8,000.
Delaware. As a Delaware holding company not earning income in Delaware,
the Company is exempt from Delaware corporate income tax, but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.
Competition
The Bank faces strong competition in the attraction of savings deposits
(its primary source of lendable funds) and in the origination of real estate
and consumer loans. Its most direct competition for savings deposits and
loans has historically come from other thrift institutions and from commercial
banks located in its primary market area in Lauderdale and Colbert counties of
the State of Alabama. The Bank competes for loans primarily through the
interest rates and loan fees it charges, and the prompt, efficient, and
quality service it provides to its borrowers, real
31
<PAGE>
<PAGE>
estate brokers, and home builders. Primary competition for loans are from
other thrift institutions, commercial banks, mortgage banking companies,
insurance companies, and credit unions.
Personnel
As of December 31, 1997, the Bank had 60 full-time and 11 part-time
employees. The employees are not represented by a collective bargaining unit.
The Bank believes its relationship with its employees is good.
Executive Officers
The executive officers of the Company, each of whom holds the same
positions with the Bank, are:
Name Position
- ---- --------
Charles L. Frederick, Jr. President, Chief Executive Officer and Director
William E. Batson Chairman of the Board
Thomas N. Ward Executive Vice President/Chief Operating Officer
and Director
The principal occupation of each executive officer of the Bank is set
forth below. Unless otherwise noted, all officers have held the position
described below for at least the past five years.
Charles L. Frederick, Jr. has been employed with the Bank since 1965 and
has served as President and Chief Executive Officer since 1988.
William E. Batson is a self-employed public accountant.
Thomas N. Ward has been employed by the Bank since 1977 serving in
various capacities and has served as Executive Vice President/Chief Operating
Officer since 1991.
Item 2. Properties
- -------------------
The following table sets forth certain information regarding the Bank's
offices as of December 31, 1997. The net book value of the Bank's investment
in office, properties and equipment totalled $3.5 million at December 31,
1997. See Note 6 of Notes to the Consolidated Financial Statements.
Build- Build-
ing Land ing
Year Owned/ Owned/ Square
Location County Opened Leased Leased Footage Deposits
- -------- ------ ------ ------ ------ ------- --------
(In thousands)
Main Office
- -----------
102 South Court Street Lauderdale 1935 Owned Owned 45,000 $94,033
Florence, Alabama 35630
Branch Offices
- --------------
U.S. Highway 72 E. Lauderdale 1977 Owned Owned 1,890 11,400
Killen, Alabama 35645
U.S. Highway 72 E. Lauderdale 1977 Owned Owned 1,890 12,480
Rogersville, Alabama 35652
32
<PAGE>
<PAGE>
Build- Build-
ing Land ing
Year Owned/ Owned/ Square
Location County Opened Leased Leased Footage Deposits
- -------- ------ ------ ------ ------ ------- --------
(In thousands)
2727 Mall Drive Lauderdale 1979 Owned Owned 1,216 19,935
Florence, Alabama 35630
1027 Avalon Avenue Colbert 1990 Owned Owned 3,500 5,883
Muscle Shoals, Alabama 35661
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Bank, mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Bank's business. The Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
The information contained in the section captioned "Market for First
Southern Bancshares, Inc.'s Common Stock and Related Stockholder Matters" in
the Annual Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operation
- --------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- -----------------------------
Independent Auditors' Report*
Consolidated Statements of Financial Condition, December 31, 1996 and
1997*
Consolidated Statements of Income For the Years Ended December 31,
1995, 1996 and 1997*
Consolidated Statements of Changes in Shareholders' Equity For the
Years Ended December 31, 1995, 1996 and 1997*
Consolidated Statements of Cash Flows For the Years Ended December 31,
1995, 1996 and 1997*
Notes to Consolidated Financial Statements*
- ---------------
* Contained in the Annual Report to Stockholders filed as an exhibit
hereto and incorporated herein by reference. All schedules have been
omitted as the required information is either inapplicable or
contained in the Consolidated Financial Statements or related Notes
contained in the Annual Report to Stockholders.
33
<PAGE>
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
No disagreement with the Company's independent accountants on accounting
and financial disclosure has occurred during the two most recent fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference. For information concerning the executive officers of the Bank, see
"Item I -- Business -- Executive Officers." The information contained under
the section captioned "Compliance With Section 16(a) of the Exchange Act" in
the Proxy Statement is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Security Ownership of Certain Beneficial Owners and Management"
of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Security Ownership of Certain Beneficial Owners and Management"
and "Proposal I -- Election of Directors" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any
pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control
of the Company.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Certain
Transactions."
34
<PAGE>
<PAGE>
PART IV
Item 13. Exhibits, List Reports on Form 8-K
- --------------------------------------------
(a) Exhibits
--------
(3a) Certificate of Incorporation of the Company*
(3b) Bylaws of the Company*
(10a) 1996 Stock Option Plan of the Company**
(10b) 1996 Management Recognition and Development Plan of the
Company**
(10c) Employment Agreement with Charles L. Frederick, Jr.***
(10d) Employment Agreement with Thomas N. Ward***
(13) Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
-----------------
* Incorporated by reference to the Company's Registration
Statement on Form S-1, as subsequently amended.
** Incorporated by reference to the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders.
*** Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended December 31,
1997.
35
<PAGE>
<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.
Date: March 24, 1998 By: /s/ Charles L. Frederick, Jr.
-----------------------------------------------
Charles L. Frederick, Jr.
President, Chief Executive Officer and Director
(Duly Authorized Representative)
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.
By: /s/ Charles L. Frederick, Jr. March 24, 1998
-------------------------------------
Charles L. Frederick, Jr.
President, Chief Executive Officer and Director
(Principal Executive Officer and Principal
Financial Officer)
By: /s/ Thomas N. Ward March 26, 1998
-------------------------------------
Thomas N. Ward
Executive Vice President and Chief Operating Officer
(Principal Accounting Officer)
By: /s/ William E. Batson March 27, 1998
-------------------------------------
William E. Batson
Chairman of the Board
By: /s/ James E. Bishop March 26, 1998
-------------------------------------
James E. Bishop
Director
By: /s/ Milka S. Duke March 25, 1998
-------------------------------------
Milka S. Duke
Director
By: /s/ Gary A. Gamble March 25, 1998
-------------------------------------
Gary A. Gamble
Director
By: /s/ J. Acker Rogers March 24, 1998
-------------------------------------
J. Acker Rogers
Director
By: /s/ Kenneth A. Williams March 26, 1998
-------------------------------------
Kenneth A. Williams
Director
<PAGE>
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
<PAGE>
FIRSTSOUTHERN
BANCSHARES, INC.
1997 ANNUAL REPORT
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
Business of the Company 1
President's message 2
Tables:
I Selected consolidated financial condition, operating and other data 3
II Key operating ratios 4
III Weighted average yields earned and rates paid 5
IV Effects of changing rates and volume on net interest income 6
V Interest rate sensitivity 7
Management's discussion and analysis of financial condition and
results of operations 8-16
Independent auditors' report on consolidated financial statements 17
Consolidated financial statements 18-22
Notes to consolidated financial statements 23-43
Common stock information 44
Directors and officers 45
Company information 46
Notice of annual meeting of stockholders 46
0-KSB information 46
- -----------------------------------------------------------------------------
BUSINESS OF THE COMPANY
First Southern Bancshares, Inc. ("Bancshares"), a Delaware corporation, is the
holding company for First Southern Bank (the "Bank"). Bancshares is a
registered bank holding company regulated by the Federal Reserve Board and is
not engaged in any other business activity other than holding all of the
issued and outstanding common stock of the Bank. Accordingly, the information
set forth in this report, including financial statements and related data,
relates primarily to the Bank. All references to the "Company" include
Bancshares and the Bank.
The Bank is regulated by the Superintendent of Banks of the State of Alabama.
Its deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a community-oriented financial institution that serves individuals
and businesses located in Lauderdale and Colbert Counties, and the surrounding
counties located in Northwest Alabama, its primary market area. The Bank's
primary business consists of attracting deposits from the general public to
originate residential mortgage loans, commercial real estate loans,
multi-family mortgage loans, and consumer loans.
<PAGE>
<PAGE>
FirstSouthern
BANCSHARES, INC.
PRESIDENT'S MESSAGE
To Our Stockholders:
On behalf of the Board of Directors, Officers and Employees of First Southern
Bancshares, Inc. and its wholly-owned subsidiary, First Southern Bank, I am
pleased to present our Annual Report for fiscal year ended December 31, 1997.
We continue our commitment to maintain sound banking strategies in our effort
in increase growth, profitability, and enhance shareholder value. As of
December 31, 1997, total stockholders equity was 11.3% of assets. Total
assets on December 31, 1997 were $183,673,000 compared to $184,484,000 on
December 31, 1996.
Consolidated net income for the year ended December 31, 1997 increased to
$1,397,000 from $538,000 in 1996. The various factors contributing to our
1997 operation are discussed in depth in other sections of this Annual Report.
We strive to be the best financial institution possible. Our on-going goal is
to serve the Northwest Alabama region and all the surrounding communities with
the best possible available financial services.
Sincerely,
/s/ Charles L. Frederick, Jr.
Charles L. Frederick, Jr.
President/CEO
--------------------------------
102 S. Court Street * P.O. Box 777 * Florence, Alabama 356-0777
(205) 764-7131
<PAGE>
<PAGE>
TABLE I - SELECTED CONSOLIDATED FINANCIAL CONDITION, OPERATING AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition, operating results and certain other related data of the
Company at the dates and for the periods indicated.
At December 31,
----------------------------------------------------
(In Thousands)
Financial condition data 1993 1994 1995 1996 1997
Total assets $144,624 $151,473 $180,855 $184,484 $183,673
Loans receivable, net 119,837 130,960 152,105 159,718 159,758
Cash and cash equivalents 4,251 2,726 8,971 4,220 6,420
Investment securities 9,197 7,199 8,792 10,948 7,993
Mortgage-backed securities 5,195 3,336 3,135 1,887 1,432
Deposits 125,225 120,555 131,867 132,800 143,731
Advances from Federal Home
Loan Bank 7,363 17,622 16,770 25,619 18,468
Other notes payable - - - 4,000 -
Total stockholders' equity 11,640 12,457 31,495 21,042 20,949
Non performing assets 990 1,366 2,584 1,639 1,206
Allowance for loan losses 801 1,100 1,509 1,659 1,584
Year Ended December 31,
----------------------------------------------------
(In thousands, except per share amounts)
Operating data 1993 1994 1995 1996 1997
Interest income $ 10,989 $ 11,045 $ 13,768 $ 15,089 $ 15,446
Interest expense 5,167 5,036 6,690 7,537 8,452
-------- -------- -------- -------- --------
Net interest income 5,822 6,009 7,078 7,552 6,994
Provision for loan losses 54 327 565 270 242
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 5,768 5,682 6,513 7,282 6,752
Noninterest income 596 388 432 426 766
Noninterest expense 3,232 3,526 3,921 7,194 5,176
-------- -------- -------- -------- --------
Income before income taxes 3,132 2,544 3,024 514 2,342
Income tax expense (benefit) 1,041 1,624 1,069 (24) 945
-------- -------- -------- -------- --------
Net income $ 2,091 $ 920 $ 1,955 $ 538 $ 1,397
======== ======== ======== ======== ========
Basic Earnings per share N/A N/A N/A $ 0.28 $ 0.74
======== ======== ======== ======== ========
Diluted Earnings per share N/A N/A N/A $ 0.28 $ 0.73
======== ======== ======== ======== ========
Cash dividends per share:
Regular dividends N/A N/A $ 0.225 $ 0.500 $ 0.500
======== ======== ======== ======== ========
Special return of
capital dividends N/A N/A $ - $5.400 $ -
======== ======== ======== ======== ========
Total cash dividends N/A N/A $ 0.225 $ 5.900 $ 0.500
======== ======== ======== ======== ========
At December 31,
----------------------------------------------------
(In Thousands)
Other data 1993 1994 1995 1996 1997
Real estate loans 2,152 2,148 2,137 1,975 2,032
Deposit accounts 12,789 12,774 12,741 12,584 12,508
Number of branch offices 5 5 5 5 5
3
<PAGE>
<PAGE>
TABLE II - KEY OPERATING RATIOS
The table below sets forth certain performance, asset quality and capital
ratios of the Company at or for the periods indicated.
Year ended December 31,
1993 1994 1995 1996 1997
Performance ratios
Return on average assets
(net income divided by
average assets) 1.48% 0.63% 1.17% 0.29% 0.75%
Return on average
stockholders' equity
(net income divided by
average equity) 19.05% 7.24% 7.42% 2.04% 6.74%
Dividend payout ratio
(dividends declared per
share divided by basic
earnings per share):
Regular dividends (1) N/A N/A N/A 178.57% 67.57%
Special dividends N/A N/A N/A 1928.57% N/A
Interest rate spread
(difference between
average yield on interest-
earning assets and average
cost of interest-bearing
liabilities) 4.24% 4.18% 3.83% 3.75% 3.52%
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 4.36% 4.37% 4.45% 4.37% 3.98%
Non-interest expense to
average assets 2.28% 2.42% 2.34% 3.94% 2.78%
Average interest-earning
assets to interest
bearing liabilities 103.40% 105.27% 114.95% 114.26% 109.69%
Asset quality ratios
Allowance for loan losses
to net loans at end of
period 0.67% 0.84% 0.99% 1.04% 0.99%
Net charge offs to average
outstanding loans during
period 0.05% 0.02% 0.11% 0.08% 0.19%
Ratio of nonperforming
assets to total assets
at end of period 0.68% 0.90% 1.43% 0.89% 0.66%
Capital ratios
Average stockholders'
equity to average assets
during period 7.74% 8.71% 15.71% 14.47% 11.12%
- -----------------
(1) The Company had no stockholders until completion of its initial public
stock offering on April 13, 1995. See, however, Note 22 to consolidated
financial statements.
4
<PAGE>
<PAGE>
TABLE III - WEIGHTED AVERAGE YIELDS EARNED AND RATES PAID
The following table sets forth, for the years and at the date indicated,
information regarding the average balances of assets, liabilities and
stockholders' equity as well as the total dollar amounts of interest income
from average interest-earning assets and interest expense on average
interest-bearing liabilities, resultant yields, interest rate spread, net
interest margin, and ratio of average interest-earning assets to average
interest-bearing liabilities. Average interest-earning assets and interest
income include Federal Home Loan Bank stock and related dividends for the
indicated periods. Average balances for each period have been computed using
average daily balances during such period.
<PAGE>
<TABLE>
At
Year ended December 31,
December
1995 1996 1997 1997
Inter- Inter- Inter-
est est est
and and and
Average divi- Yield/ Average divi- Yield/ Average divi- Yield/
Yield/
balance dends cost balance dends cost balance dends cost cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning/
dividend paying assets
Interest-earning assets
Mortgage loans
and contracts $ 95,366 $ 8,176 8.57% $ 84,020 $ 7,302 8.69% $ 75,207 $ 6,232 8.29%
8.33%
Other loans 46,609 4,442 9.53% 73,922 6,843 9.26% 87,556 8,411 9.61%
9.34%
-------- ------- -------- ------- -------- -------
Total net loans 141,975 12,618 8.89% 157,942 14,145 8.96% 162,763 14,643 9.00%
8.92%
Mortgage-backed
securities 3,359 286 8.52% 2,420 193 7.98% 1,689 137 8.11%
8.24%
Marketable securities 8,672 500 5.76% 7,170 415 5.79% 7,069 362 5.12%
5.53%
FHLB overnight account 3,519 266 7.57% 3,812 237 6.22% 1,846 144 7.75%
6.25%
Total interest- -------- ------- -------- ------- -------- -------
earning assets 157,525 13,670 8.68% 171,344 14,990 8.75% 173,367 15,286 8.82%
8.73%
Federal Home Loan
Bank stock 1,357 98 7.22% 1,369 99 7.23% 2,215 160 7.22%
7.25%
Total interest -------- ------- -------- ------- -------- -------
earning and dividend
paying assets 158,882 13,768 8.67% 172,713 15,089 8.74% 175,582 15,446 8.80%
8.71%
Non interest earning/ -------- ------- -------- ------- -------- -------
dividend paying assets
Office properties and
equipment, net 3,103 3,265 3,537
Real estate owned 1,074 769 232
Cash on hand and in
banks 2,849 3,391 4,740
Accrued interest
receivable 1,139 1,502 1,725
Other 696 863 617
Total non interest- -------- -------- --------
earning/dividend
paying assets 8,861 9,790 10,851
-------- -------- --------
Total assets $167,743 $182,503 $186,433
======== ======== ========
Interest-bearing
liabilities
Deposit accounts:
Passbook accounts $124,533 $ 662 2.70% $ 19,671 $ 542 2.76% $ 18,301 $ 505 2.76%
2.76%
NOW accounts 9,028 207 2.29% 9,900 233 2.35% 10,541 248 2.35%
2.50%
Money market accounts 2,940 85 2.89% 2,916 87 2.98% 3,337 100 3.00%
3.00% Certificates of
deposit 84,320 4,664 5.53% 96,398 5,350 5.55% 101,473 6,039 5.95%
5.76%
Total interest- -------- ------- -------- ------- -------- -------
bearing deposits 120,821 5,618 4.65% 128,885 6,212 4.82% 133,652 6,892 5.16%
5.10%
Other interest-
bearing liabilities:
Advances from Federal
Home Loan Bank of
Atlanta 17,397 1,072 6.16% 21,934 1,298 5.92% 26,221 1,543 5.88%
6.00%
Other borrowings - - 336 27 8.07% 195 17 8.51%
0.00%
-------- ------- -------- ------- -------- -------
Total borrowings 17,937 1,072 6.16% 22,270 1,325 5.95% 26,416 1,560 5.89%
6.00%
Total interest- -------- ------- -------- ------- -------- -------
bearing liabilities 138,218 6,690 4.84% 151,155 7,537 4.99% 160,068 8,452 5.28%
5.21%
Non interest-bearing -------- ------- -------- ------- -------- -------
liabilities
Non interest bearing
deposit accounts 1,758 2,828 4,433
Other liabilities 1,413 2,110 1,210
-------- -------- --------
Total liabilities 141,389 156,093 165,711
Stockholders' equity 26,354 26,410 20,722
Total liabilities and -------- -------- --------
stockholders' equity $167,743 $182,503 $186,433
======== ======== ========
Net interest income $ 7,078 $ 7,552 $ 6,994
======= ======= =======
Interest rate spread(1) 3.83% 3.75% 3.52%
3.50%
==== ==== ====
====
Net interest margin(1) 4.45% 4.37% 3.98%
==== ==== ====
Ratio of average
interest-earning assets
to average interest-
bearing liabili-
ties(1) 114.95% 114.26% 109.64%
====== ====== ======
- ----------------------
(1) Includes Federal Home Loan Bank stock and related dividends, as applicable.
5
</TABLE>
<PAGE>
<PAGE>
TABLE IV - EFFECTS OF CHANGING RATES AND VOLUME ON NET INTEREST INCOME
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); (iii)
changes in rate/volume (change in rate multiplied by change in volume); and
(iv) the net change (the sum of the prior columns).
<PAGE>
<TABLE>
1995 Compared to 1994 1996 Compared to 1995 1997 Compared to 1996
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
Rate/ Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net Rate Volume Volume Net
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
/dividend
paying assets
Mortgage loans $ 391 $ 278 $ 15 $ 684 $ 112 $ (973) $(13) $ (874) $(339) $ (766) $ 36
$(1,069)
Other loans 240 1,353 119 1,712 (127) 2,603 (75) 2,401 256 1,263 48
1,567
------ ------ --- ------ ----- ---- ---- ---- ----- ----- --- ----
- -
Total net loans 631 1,631 134 2,396 (15) 1,630 (88) 1,527 (83) 497 84
498
Mortgage-backed
securities 23 (57) (4) (38) (18) (80) 5 (93) 3 (58) (1)
(56)
Investment
securities 100 14 3 117 2 (87) - (85) (48) (6) 1
(53)
Overnight
deposits 2 221 11 234 (47) 22 (4) (29) 58 (122) (29)
(93)
------ ------ --- ------ ----- ---- ---- ---- ----- ----- --- ----
- -
Total net change
in income on interest
earning assets 756 1,809 144 2,709 (78) 1,485 (87) 1,320 (70) 311 55
296
Federal Home Loan
Bank stock 14 - - 14 - 1 - 1 (0) 61 (0)
61
------ ------ --- ------ ----- ---- ---- ---- ----- ----- --- ----
- -
Total net change
in income on interest
earning/dividend
paying assets 770 1,809 144 2,723 (78) 1,486 (87) 1,321 (70) 372 55
357
------ ------ --- ------ ----- ---- ---- ---- ----- ----- --- ----
- -
Interest-bearing
liabilities:
Deposits 1,140 52 14 1,206 205 375 14 594 221 443 16
680
Other interest-
bearing liabi-
lities 60 354 34 448 (37) 300 (10) 253 (13) 251 (3)
235
------ ------ --- ------ ----- ---- ---- ---- ----- ----- --- ----
- -
Total net change
in expense on
interest bearing
liabilities 1,200 406 48 1,654 168 675 4 847 208 694 13
915
Net change in ------ ------ --- ------ ----- ---- ---- ---- ----- ----- --- ----
- -
net interest
income $ (430) $1,403 $96 $1,069 $(246) $811 $(91) $474 $(278) $(322) $42
$(558)
====== ====== === ====== ===== ==== ==== ==== ===== ===== ===
=====
6
</TABLE>
<PAGE>
<PAGE>
TABLE V - INTEREST RATE SENSITIVITY
The table below measures interest rate risk by estimating the change in market
value of the Bank's assets, liabilities, and off balance sheet contracts in
response to an instantaneous change in the market interest rates. The data was
compiled by an independent third-party service bureau. Using the composition
of the Bank's portfolio of interest-earning assets and interest- bearing
liabilities at December 31, 1997, an estimate of the level of the Bank's
stockholders' equity (market value of assets, less market value of
liabilities, plus or minus the market value of any off-balance sheet items)
was computed under the rate environment prevailing on or about December 31,
1997. The Bank's stockholders' equity was then computed under different
interest rate scenarios. The change in stockholders' equity under the
different interest rate scenarios provides a measure of the Bank's exposure to
interest rate risk. The data presented below is as of December 31, 1997 and is
for the Bank only. Since, with minor exceptions, all of Bancshares' separate
company assets and liabilities, exclusive of its investment in the Bank, are
adjustable rate financial instruments, the fair value of such instruments
would remain substantially unchanged in the changed interest rate scenarios.
Percent
change in
Stock- Stock-
holders' holders'
Assets Liabilities equity equity
(Dollars in Thousands)
Change in level of interest rates:
Minus 400 basis points (4.00)% $191,973 $176,304 $15,669 (24.15)%
Minus 300 basis points (3.00)% 189,790 175,141 14,649 (29.09)%
Minus 200 basis points (2.00)% 187,681 171,444 16,237 (21.40)%
Minus 100 basis points (1.00)% 185,643 166,934 18,709 (9.43)%
No change 183,674 163,016 20,658 0.00%
Plus 100 basis points 1.00% 181,768 159,592 22,176 7.35%
Plus 200 basis points 2.00% 179,924 156,578 23,346 13.01%
Plus 300 basis points 3.00% 178,139 153,906 24,233 17.31%
Plus 400 basis points 4.00% 176,409 151,520 24,889 20.48%
Certain assumptions, relating to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under differing
interest rate scenarios, among others, were used in preparing the preceding
table. As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. The interest on certain types of assets and
liabilities may fluctuate in advance of changes in market rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Furthermore, in the event of a change in interest
rates, expected rates of prepayments on loans and early withdrawals from
certificates could deviate significantly from those assumed in the table.
7
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Bancshares is primarily engaged in the business of directing and planning the
activities of its wholly-owned subsidiary, the Bank. Bancshares' primary
assets are comprised of its investment in the Bank and a note receivable from
the Bank's Employee Stock Ownership Plan ("ESOP"). On April 13, 1995, the
Company completed its initial public offering of its $.01 par value common
stock wherein a total of 2,049,875 common shares were issued for net proceeds
of $19,577,000 (net of offering costs of $922,000). Approximately $9,789,000
of the net proceeds was utilized to acquire all of the capital stock issued by
the Association, approximately $1,640,000 was utilized to finance the ESOP
purchase of 163,990 common shares, and approximately $8,148,000 was retained
for general corporate purposes.
The consolidated operating results include those of the Bank and the former
Association for all periods presented and those of Bancshares for periods
since April 13, 1995, the date of completion of the Bancshares' initial public
stock offering. The operating results of the Company depend primarily on net
interest income, which is the difference between interest income on
interest-earning assets, primarily loans and investment securities, and
interest expense on interest-bearing liabilities, primarily deposits and
advances from Federal Home Loan Bank ("FHLB") and other financial
institutions. Net earnings are also effected by non-interest income and
non-interest expenses, such as compensation and benefits, building and
occupancy expense, and provisions for federal and state taxes.
The discussion and analysis included herein covers those material changes in
financial condition, liquidity and capital resources that have occurred since
December 31, 1996, as well as certain material changes in results of
operations during the years ended December 31, 1995, 1996 and 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Total assets decreased $800,000 during the twelve months of 1997, decreasing
from $184.5 million at December 31, 1996 to $183.7 million at December 31,
1997. The decrease was primarily from the growth in cash as explained below.
CASH AND CASH EQUIVALENTS
Cash and cash equivalent balances increased $2.2 million at December 31, 1997
when compared to December 31, 1996. Cash was generated from earnings,
investments and the growth in deposits and used primarily to pay dividends and
reduce borrowings.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company did not increase its investments in mortgage-backed securities
during 1997. The decrease in investment securities of $3.0 million from $11.0
million at December 31, 1996 to $8.0 million at December 31, 1997 was due to
the maturities of a certificate of deposits with the FHLB.
At December 31, 1997, the Company had less than 1.0% ($5,000) of net
unrealized losses on investment securities classified as available for sale of
the amortized cost basis ($8 million) of the related securities. These
securities were comprised primarily of U.S. Government and Agency obligations
with maturities of less than five years. If future market interest rates were
to increase, the unrealized losses on these securities would, for a period of
time, become greater. In a decreasing interest rate environment, the fair
value of the investments increases in relation to the cost of the investment,
thereby reducing the net unrealized loss and/or increasing any unrealized gain
on the related securities. However, assuming that the securities are held to
their individual dates of maturity, even in periods of changing market
interest rates, as the securities approach their dates of maturity, the
unrealized gain/loss will begin to decrease and eventually be eliminated.
8
<PAGE>
<PAGE>
LOANS
The principal investing activity of the Company is the origination of
residential mortgage loans, commercial real estate loans, multi-family
mortgage loans and consumer loans in its primary lending area of Lauderdale
and Colbert Counties, and surrounding counties located in Northwest Alabama.
During 1997, the Company originated approximately $5.2 million in loans which
was offset through loans sold and principal repayments; therefore, the balance
of net loans has remained at approximately $159.5 million at December 31, 1996
and December 31, 1997, respectively.
The loan portfolio composition is changing as the result of management's
continued efforts to expand and diversify the Company's loan portfolio into
commercial mortgage loans, commercial business loans, and consumer loans.
These types of loans are inherently riskier than residential mortgage loans. A
comparison of the Bank's loan portfolio analysis at December 31, 1996 and
December 31, 1997 follows:
December 31, 1996 December 31, 1997
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands)
Type of Loan
Mortgage loans:
Residential $ 85,205 53.3% $ 75,983 47.6%
Commercial 33,434 20.9 39,141 24.5
-------- ----- -------- -----
Total mortgage loans 118,639 74.2 115,124 72.1
Commercial business loans 27,157 17.0 27,792 17.4
Consumer loans 17,701 11.1 19,978 12.5
-------- ----- -------- -----
Total loans 163,497 102.3 162,894 102.0
Less:
Undisbursed loans 1,928 1.2 1,404 0.9
Unamortized loan fees 192 0.1 148 0.1
Allowance for possible losses 1,659 1.0 1,584 1.0
-------- ----- -------- -----
Net loans receivable $159,718 100.0% $159,758 100.0%
======== ===== ======== =====
Non performing assets (comprised solely of loans delinquent 90 days or more
and repossessed assets) were $1.2 million as of December 31, 1997, and
decreased $200,000 from $1.4 million at December 31, 1996. Non performing
assets (% of total non performing) at December 31, 1997 include real estate
owned (8.3%), residential mortgage loans (19.0%), commercial real estate loans
(33.3%), commercial business loans (23.5%), and consumer loans (15.9%).
At December 31, 1996, the allowance for loan losses was $1.7 million and
represented .99% of total net loans and 101.2% of non performing assets. At
December 31, 1997, the allowance for loan losses was $1.6 million and
represented 1% of total net loans and 131.4% of non performing assets. The
provision for loan losses was $242,000 for 1997, as compared to $270,000 in
1996. In the opinion of management at December 31, 1997, the allowance for
loan losses was adequate at that date. There can be no assurance that the
Company will not be required to increase the allowance in the future.
At December 31, 1997, the Company had no significant commitments to originate
fixed-rate loans. At December 31, 1997, the Company had commitments to
originate variable rate loans, including unused commercial business lines of
credit as follows:
Financial instruments and contract amounts
which represent credit risk:
Commitments to extend credit $ 2,240
Unused lines of credit $ 7,745
Standby letters of credit $ 316
9
<PAGE>
<PAGE>
DEPOSITS, FHLB ADVANCES AND OTHER NOTES PAYABLE
Deposit balances increased $10.9 million from $132.8 million at December 31,
1996 to $143.7 at December 31, 1997. The increase was primarily in
certificates of deposits as the Company continues to be aggressive in its
marketing for deposits through competitive rates and advertising. Growth in
deposits is desired to meet current loan demand and provide for Company
growth. The competition for deposits has caused the Company's interest rate
spread to decline from 3.75% in 1996 to 3.52% in 1997, and net interest margin
to decline from 4.37% in 1996 to 3.98% in 1997. However, although no
assurances can be given, management believes loan growth funded from growth in
deposits will increase profits through volume and increase the Company's
future profitability if short-term deposit rates decline.
At December 31, 1997, savings certificates amounted to $106.9 million, or
74.4%, of the Company's total deposits, including $84.9 million which were
scheduled to mature by December 31, 1998. Historically, the Company has been
able to retain a significant amount of its deposits as they mature. Management
of the Company believes it has adequate resources to fund all loan commitments
with savings deposits and FHLB of Atlanta advances and with proceeds from the
sale of mortgage loans and that it can adjust the offering rates of savings
certificates to retain deposits in changing interest rate environments.
Borrowings from the Federal Home Loan Bank decreased $7.1 million from $25.6
million at December 31, 1996, to $18.5 million at December 31, 1997. Funds
from sale of loans and growth in deposits were used to reduce the borrowings
from the Federal Home Loan Bank. At December 31, 1997, the Company had unused
credit availability with the FHLB of $21.5 million.
STOCKHOLDERS' EQUITY
At December 31, 1997, stockholders' equity was $20.9 million as compared $21.0
million at December 31, 1996. The increase in stockholders' equity from net
income of $1.4 million was offset by the payment of $800,000 in dividends, and
the repurchase in the open market of an aggregate of $1.1 million of the
Company's common stock and held in treasury. Other net increases of $400,000
in stockholders' equity related to the unearned employee stock benefit
compensation plans and unrealized losses on securities available for sale.
The treasury stock was acquired under the provisions of a Stock Repurchase
Program (as discussed in Note 13 of Consolidated Notes to Financial
Statements). The ongoing program has resulted in the acquisition of an
aggregate 244,236 shares of Company common stock for treasury, of which 54,906
shares were utilized in 1996 to fund the MRDP (as discussed in Note 3 of
Selected Notes to Financial Statements) and 189,330 shares remain in treasury
at December 31, 1997.
The Bank is required to maintain specific amounts of capital pursuant to FDIC
requirements and the Company is required to maintain specific amounts of
capital pursuant to the regulations of the Federal Reserve Board. As
summarized below, the Company and Bank are in compliance with all such
requirements at December 31, 1997:
PERCENTAGE OF
FIRST SOUTHERN BANCSHARES, INC. (DOLLARS IN THOUSANDS) ADJUSTED TOTAL
AMOUNT ASSETS
Primary capital ratios:
GAAP capital $ 20,949
Adjustments:
Mortgage servicing rights (13)
Net unrealized loss on securities
available for sale 2
--------
Tier 1 capital 20,938 11.32%
Minimum Tier 1 (leverage) requirement 7,399 4.00
-------- -----
Excess $ 13,539 7.32%
======== =====
Risk-based capital ratios:
Core (Tier I) capital $ 20,938 14.44%
Minimum core capital 5,801 4.00
-------- -----
Excess $ 15,137 10.44%
======== =====
Risk-based capital $ 22,522 15.53%
Minimum risk-based capital requirement 11,603 8.00
-------- -----
Excess $ 10,919 7.53%
======== =====
10
<PAGE>
<PAGE>
Under the FDICIA prompt corrective action provisions applicable to banks, the
most recent notification from the FDIC categorized the Bank as well
capitalized. To be categorized as well capitalized, the Bank must maintain a
total risk-based capital ratio as set forth in the following table and not be
subject to a capital order. There are no conditions or events since that
notification that management believes have changed the Bank's risk-based
capital category.
FIRST SOUTHERN BANK (DOLLARS IN THOUSANDS)
Total capital (to risk-weighted assets) $ 22,093 15.28%
To be well capitalized under the FDICIA
prompt corrective action provisions 14,461 10.00%
-------- ------
Excess $ 7,632 5.28%
======== ======
Tier 1 capital (to risk-weighted assets) $ 20,509 14.18%
To be well capitalized under the FDICIA
prompt corrective action provisions $ 8,676 6.0%
-------- ------
Excess $ 11,833 8.18%
======== ======
Tier 1 capital (to average assets) $ 20,509 11.09%
To be well capitalized under the FDICIA
prompt corrective action provisions $ 9,244 5.0%
-------- ------
Excess $ 11,265 6.09%
======== ======
LIQUIDITY
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. The Company's primary sources of funds are deposits
and proceeds from principal and interest payments on loans, mortgage-backed
securities and investment securities and borrowings from the FHLB and local
financial institutions. While maturities and scheduled amortization of loans
and mortgage-backed securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
As an Alabama state-chartered bank which is not a member of the Federal
Reserve System, the Bank is required by the Alabama State Banking Board to
maintain at all times a reserve (comprised of cash on hand) based upon average
daily deposits of the Bank. At December 31, 1997, the Bank's qualifying
reserves of $1.5 million significantly exceeded the required reserve of
$221,000.
Year 2000
The Company and Bank are subject to risks associated with the "Year 2000"
software problem, a term which refers to uncertainties about the ability of
various software systems to interpret dates correctly after the beginning
of the Year 2000. The Company has completed an initial study of its
computerized systems and programs including third party servicers, and
prepared a plan to address the Year 2000 problem. The expense to modify and
test its computer programs and systems are estimated to be $50,000 over the
next two years. The company's process of evaluating potential effects of Year
2000 issues on customers of the Bank is in its early stages, and it is
therefore impossible to quantify the potential adverse effects of incompatible
software systems on loan customers. The failure of a commercial bank to
prepare adequately for Year 2000 compatibility could have a significant
adverse effect on such customer's operations and profitability, in turn
inhibiting its ability to repay loans in accordance with their terms. Until
sufficient information is accumulated from customers of the banks to enable
the Company to assess the degree to which customers' operations are
susceptible to potential problems, the Company will be unable to quantify the
potential losses from loans to commercial customers.
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1997
GENERAL
Consolidated net income for 1997, increased to $1.4 million from $538,000
1996. Basic earnings per share for 1997, were $0.74 as compared to $0.29 in
1996. Diluted earnings per share for 1997 were $0.73 as compared to $0.29 in
1996. The increase in earnings between 1996 and 1997 is primarily due to the
$1.1 million expense recognized in 1996 for the one-time Savings Association
Insurance Fund ("SAIF") premium assessment.
NET INTEREST INCOME
Net interest income after provision for loan losses of $6.8 million for 1997
was $530,000 lower or 7.3% less than the $7.3 million reported for the
comparable period in 1996. Decreases in the net interest spread of 3.75% for
1996 to 3.50% for 1997, was primarily a result of the increase in interest
expense for deposits and advances from the FHLB as further discussed below.
INTEREST INCOME
Interest income for 1997 was $15.5 million compared with $15.1 million for
1996, representing an increase of $357,000 or 2.4%. The increase was primarily
attributable to an increase of $2.9 million, or 1.7% in average interest
earning assets in 1997 to $175.6 million over those in 1996 of $172.7 million
as a result of the loan growth. Also contributing to the increase in interest
income was an increase in the average yield on interest-earning assets from
8.74% for 1996 to 8.80% for 1997, as a result of the increase within the loan
portfolio to higher yielding but inherently riskier, as compared to
residential mortgage loans, commercial mortgage and commercial business loans.
Interest on loans receivable increased $500,000 to $14.6 million during 1997
as compared to in 1996 ($14.1 million). The increase was primarily
attributable to an increase in average net loans of $4.8 million in 1997
($162.8 million) from the comparable period in 1996 ($158.0 million).
Additionally, the average yield on total loans increased from 8.96% in 1996 to
9.00% during 1997, as a result of the increase within the loan portfolio of
higher yielding commercial mortgage and commercial business loans.
Interest on mortgage-related securities decreased by $56,000 from $193,000
during 1996 to $137,000 during in 1997 as a result of the average balance of
mortgage-related securities decreasing by $700,000 during 1997 ($1.7 million)
as compared to 1996 ($2.4 million). The effect of this decrease in the average
balance was partially offset by an increase in 1997 average yields from such
securities from 7.98% in 1996 to 8.11% in 1997 as a result of higher yielding
mortgage-related securities remaining in the portfolio.
Income from the investment securities portfolio decreased by $53,000 from
$415,000 during 1996 to $362,000 during the same period in 1997 as the result
of a $3.0 million decrease in the portfolio as a result of sales and
maturities from $11.0 million at December 31, 1996 to $8.0 million at December
31, 1997. Additionally, the average yield on investment securities decreased
slightly from 5.79% in 1996 to 5.12% in 1997 as a result the changes in the
investment securities portfolio.
Other interest income is comprised of earnings on the overnight account at the
FHLB of Atlanta, FHLB dividends, and earnings on money market funds. The
$32,000 decrease in other interest income in 1997 to $304,000 when compared to
1996 other interest income of $336,000 is due primarily to the decreased
interest earnings on the FHLB overnight and on money market funds due to a
decrease in average invested balances from $3.8 million in 1996 to $1.8
million in 1997. FHLB dividends were $99,000 during 1996 as compared to
$160,000 in 1997 due to increase in FHLB stock from $1.4 million in 1996 to
$2.0 million in 1997.
12
<PAGE>
<PAGE>
INTEREST EXPENSE
Interest expense for 1997 was $8.5 million compared with $7.5 million for
1996, representing an increase of $1.0 million or 12.1%.
Interest on deposits for 1997 was $6.9 million compared with $6.2 million for
1996, representing an increase of $0.7 million or 10.9%. The increase is due
to a $4.8 million increase in average deposits in 1997 ($133.7 million) as
compared to 1996 ($128.9 million). The 1997 average interest cost of 5.16% as
compared to 4.82% in 1996 as higher interest rates were offered on
certificates of deposits due primarily to the Company raising the rates paid
on its certificates in relation to local market rates being offered by other
financial institutions in order to attract additional deposits.
Other interest expense relates to FHLB of Atlanta borrowings and increased by
$235,000 to $1.6 million in 1997 when compared to 1996 total of $1.3 million
due to an increase in average borrowings of $4.3 million during 1997 ($26.2
million) from 1996 average levels of $21.9 million. The increase caused by the
higher average balance was partially offset by decreased interest costs on
borrowed funds from 5.92% in 1996 to 5.88% in 1997 as a consequence of the
adjustable rate nature of the majority of the FHLB of Atlanta borrowings and
lower interest rates.
PROVISION FOR LOAN LOSSES.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may effect the borrower's ability to repay
the estimated value of any underlying collateral, and current economic
conditions. For 1997, the Company's provision for loan losses was $242,000, as
compared to $270,000 in 1996. These provisions were made based on management's
analysis of the various factors which effect the loan portfolio and
management's desire to maintain the allowance at a level considered adequate
to provide for losses. The decrease of $28,000 in 1997 compared to 1996 is a
result of the Bank incurring fewer loan charge-offs than estimated, and
therefore, less provision was required to maintain an adequate allowance at
December 31, 1997.
NON-INTEREST INCOME.
Non-interest income increased by $340,000 in 1997 to $766,000 as compared to
$426,000 in 1996. This increase was the result of an increase in loan and
service fees of $73,000 from $395,000 in 1996 to $468,000 in 1997, and the
reduction of $277,000 in losses on real estate owned in 1997 as compared to
1996.
NON-INTEREST EXPENSE.
Non-interest expenses decreased $2.0 million or 28.1% to $5.2 million in 1997
compared to $7.2 million in 1996. This decrease resulted from a $1.2 million
decrease in insurance expense and $112,000 decrease in other expenses. The
decrease in insurance expense is due to the $1.1 million decrease in insurance
expenses relating to the one-time SAIF premium assessment recognized in the
third quarter of 1996 and the decrease in the SAIF premium rate as a result of
the SAIF special assessment paid in 1996. Decreases in other expenses were
primarily related to the decrease in real estate owned operating expenses
reflecting the decrease in the average balance of foreclosed real estate in
1997 as compared to 1996.
Compensation and employee benefits decreased $600,000 from $3.2 million in
1997 from $3.8 million 1996. The decrease reflects the decrease in ESOP
related compensation of $1.1 million from that incurred in 1996 related to the
special dividends, offset by an increase of $600,000 in pension plan expense
due to benefits being frozen with the intent to terminate the plan. In
addition, compensation and benefits related to the amortization of the
deferred MRDP expense increased $100,000 over the same period in 1996.
INCOME TAXES
Income tax expense in 1997 was $945,000 or 40.0% of income before income taxes
representing expected federal and state tax rates. The income tax benefit of
$24,000 in 1996 was primarily due to charitable contributions recognized in
relation to a lower income before income taxes.
13
<PAGE>
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1996
GENERAL
The decrease in consolidated net income for 1996 from that reported for 1995
was primarily attributable to the third quarter 1996 expense recognition of a
one-time SAIF Special Assessment (65.7 basis points applied to March 31, 1995
deposit balances) of $1.1 million (approximately $0.39 per share after income
taxes), and employee compensation and benefit charges of $1.5 million related
to the release of committed ESOP shares. ESOP committed shares are released as
its debt to the Company is paid and the ESOP utilized its dividends in 1996 to
reduce its debt. These decreases were partially offset by an increase in 1996
net interest income after provision for loan losses of $769,000.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1996 was $7.6 million,
representing a $474,000 or 6.3% increase from the year ended December 31,
1995. The increase reflects an increase in interest income of $1.3 million due
to an increase in average interest-earning assets of $13.8 million, primarily
loans receivable, offset by an increase in average interest-bearing
liabilities of $12.9 million, primarily FHLB advances. In addition increases
were partially offset by a 8 basis point reduction in the 1996 interest rate
spread (3.75%) from that obtained in 1995 (3.83%), primarily due to the
increase interest expense for interest bearing deposit accounts.
INTEREST INCOME
Interest income for the year ended December 31, 1996 was $15.1 million
compared to $13.8 million for the year ended December 31, 1995, representing
an increase of $1.3 million or 8.6%. The increase was primarily attributable
to an increase of $13.8 million, or 7.9 %, in average interest-earning assets
in 1996 to $172.7 million over those in 1995 of $158.9 million.
Interest on loans receivable increased $1.5 million to $14.1 million during
the year ended December 31,1996. The increase was primarily attributable to an
increase of $15.9 million in average loan balances in 1996 ($157.9 million)
from 1995 ($142.0 million). The increase in average loan balances was
comprised of a $27.3 million increase in the average balances of non-mortgage
loans from $46.6 million in 1995 to $73.9 million in 1996, offset by a $11.4
million decrease in average mortgage loan balances from $95.4 million in 1995
to $84 million in 1996. Additionally, the average yield on total loans
increased from 8.89% in 1995 to 8.96% during 1996.
Interest on mortgage-related securities decreased by $93,000 from $286,000
during the year ended December 31, 1995 to $193,000 during the same period in
1996. Interest income decreased due to the average balance of mortgage-related
securities decreasing by $900,000 in 1996, and the 1996 average yields from
such securities decreased from 8.52% in 1995 to 7.98% in 1996.
Income from the investment securities portfolio decreased by $85,000 from
$500,000 during the year ended December 31, 1995 to $415,000 during the same
period in 1996 as the result of a $1.5 million decrease in the average size of
the portfolio in the year ended December 31, 1996 ($7.2 million) compared to
the year ended December 31, 1995 ($8.7 million). The average yield on
investment securities remained relatively constant between the periods,
reflecting an increase from 5.76% in 1995 to 5.79% in 1996.
Other interest income is comprised of earnings on the overnight account at the
FHLB of Atlanta, FHLB dividends, and earnings on money market funds. The
$28,000 decrease in other interest income in 1996 to $336,000 when compared to
1995 other interest income of $364,000 is due primarily to a decrease in
average yields on the FHLB overnight account from 7.57% during 1995 to 6.22%
during 1996.
14
<PAGE>
<PAGE>
INTEREST EXPENSE
Interest expense for the year ended December 31, 1996 was $7.5 million
compared with $6.7 million for the year ended December 31, 1995, representing
an increase of $800,000 or 11.9%.
Interest on deposits rose $600,000 or 10.7% from $5.6 million in 1995 to $6.2
million in 1996. The increase was primarily attributable to an increase of 17
basis points or 3.7% in the interest cost on average deposit balances from
4.65% in 1995 to 4.82% in 1996 and, to a lesser extent, a $8.1 million
increase in average deposits in 1996 ($128.9 million) as compared to 1995
($120.8 million).
The 1996 increase in average interest cost was due to increases in prevailing
local market interest rates between the two periods coupled with a change in
the composition of the deposit balances. The average balance in passbook
accounts during 1995 ($24.5 million) was $4.8 million, or 19.6% greater than
the comparable 1996 period ($19.7 million) due primarily to the Company's 1995
receipt of subscriptions in connection with its initial pubic stock offering,
which subscriptions were maintained in passbook accounts. The 1996 decrease in
passbook accounts was more than offset by a $12.1 million increase in the
average balance of certificates of deposit from $84.3 million in 1995 to $96.4
million in 1996. The increase in certificate of deposit balances was due
primarily to the Company raising the rates paid on its certificates in
relation to local market rates being offered by other financial institutions
in order to attract additional deposits. This strategy may continue in order
to reduce borrowings and meet current loan demand. Certificates of deposit
carried average interest costs of 5.53% and 5.55% during 1995 and 1996,
respectively.
Other interest expense is comprised primarily of FHLB of Atlanta borrowings
which increased by $253,000 to $1.3 million when compared with the 1995 total
of $1.1 million due to an increase in average borrowings of $4.5 million
during the year ended December 31, 1996 ($21.9 million) from 1995 average
levels of $17.4 million. The increase caused by higher average advance
balances was lessened by decreased interest rates on FHLB borrowed funds from
6.16% in 1995 to 5.92% in 1996 as a consequence of the adjustable rate nature
of the majority of the FHLB of Atlanta borrowings.
PROVISION FOR LOAN LOSSES.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may effect the borrower's ability to repay
the estimated value of any underlying collateral, and current economic
conditions. For the fiscal year 1996, the Company's provision for loan losses
was $270,000, as compared to $565,000 in 1995. These provisions were made
based on management's analysis of the various factors which effect the loan
portfolio and management's desire to hold the allowance at a level considered
adequate to provide for losses.
NON-INTEREST INCOME.
Non-interest income decreased by $6,000 in 1996 to $426,000 as compared to
$432,000 in 1995. This decrease was primarily attributable to losses on real
estate owned of $275,000 in 1996, as compared to $15,000 in gains recognized
during 1995. This 1996 decrease was partially offset by net gains on sale of
loans of $268,000.
NON-INTEREST EXPENSE.
Non-interest expenses increased $3.3 million to $7.2 million for 1996 compared
to $3.9 million for 1995. This increase primarily resulted from an increase in
expenses relating to aggregate employee compensation of $1.7 million (from
$2.1 million during 1995 to $3.8 million in 1996), and an increase in
insurance expense by $1.0 million from $459,000 in 1995 to $1.5 million in
1996.
The significant increase in employee compensation in 1996 is due to the ESOP
related compensation expense ($1.5 million) for shares committed for release
as a result of the ESOP's debt reduction to Bancshares for dividends received
on such shares. Additionally, the 1996 compensation expense charges
aggregating $172,000 related to the Company's amortization of its deferred
MRDP expense was not incurred in 1995.
15
<PAGE>
<PAGE>
The increase in insurance expense is primarily related to the one-time
assessment levied on members of the Savings Association Insurance Fund
("SAIF")of which the Bank is a one. In 1996 legislation was passed in the
United States Congress that required institutions that are members of SAIF to
pay a one-time premium to recapitalize the SAIF. The third quarter 1996
expense recognition of a one-time SAIF Special Assessment (65.7 basis points
applied to March 31, 1995 deposit balances) of $1.1 million (approximately
$0.39 per share after income taxes) was recognized in the third quarter of
1996.
Other classifications of non-interest expenses increased an aggregate of
$545,000 in 1996 when compared to 1995 due primarily to certain general
overhead expenses being incurred in 1996 related to the Company's public
company status, which expenses were not incurred to the same degree in 1995,
and general cost increases incurred in 1996 over those experienced in 1995.
INCOME TAXES
Income tax expense ( benefit) for the year ended December 31, 1995 and 1996
was $1.1 million and $ (24,000), respectively. The income tax benefit in 1996
was primarily attributable to the differing income tax treatment afforded
certain of the Company's transactions with and dividend payments to its ESOP
and MRDP during 1996, which transactions and/or payments did not occur in 1995
or were far less significant. See Note 11 in the accompanying Notes to
Consolidated Financial Statements.
16
<PAGE>
<PAGE>
Fred K. Marmann, CPA
--------------------
Larry Frank McCrary, CPA
David C. Ladner, CPA
900 E. Second Street
Post Office Box 567
Sheffield, AL 35660
Marmann & Associations, P.C. Tel: (205) 381-1473
CERTIFIED PUBLIC ACCOUNTANTS Fax: (205) 381-1484
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
First Southern Bancshares, Inc. and Subsidiary
Florence, Alabama
We have audited the accompanying consolidated statements of financial
condition of First Southern Bancshares, Inc. and subsidiary (the "Company") as
of December 31, 1996 and 1997 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each year in the
three-year period ended December 31, 1997. These consolidated 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 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, Inc. and subsidiary at December 31, 1996 and 1997, and
the results of their operations and their cash flows for each year in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Marmann & Associates, P.C.
MARMANN & ASSOCIATES, P.C.
Sheffield, Alabama
March 6, 1998
17
<PAGE>
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1997 (DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------
December 31, December 31,
1996 1997
ASSETS
Cash and cash equivalents $ 4,220 $ 6,420
Investment securities available for
sale, at market 10,948 7,993
Mortgage-backed securities, held to
maturity, at cost 1,887 1,432
Loans held for sale, at cost, which
approximates market 232 223
Loans receivable, net 159,486 159,535
Foreclosed real estate 198 100
Premises and equipment, net 3,455 3,509
Federal Home Loan Bank stock, at cost 1,357 1,970
Accrued interest receivable 1,728 1,822
Deferred income taxes 93 165
Other assets 880 504
-------- --------
TOTAL ASSETS $184,484 $183,673
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $132,800 $143,731
Advances from Federal Home Loan Bank 25,619 18,468
Other notes payable 4,000 -
Income taxes currently payable 3 115
Deferred income taxes - -
Other liabilities 1,020 410
-------- --------
Total liabilities 163,442 162,724
-------- --------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
500,000 shares authorized; none
issued and outstanding - -
Common stock, $.01 par value;
4,000,000 shares authorized;
2,076,969 and shares issued 21 21
Additional paid-in capital 11,334 11,375
Retained earnings - Substantially restricted 12,672 13,199
Unearned employee compensation - ESOP (401) (280)
Unearned employee compensation - MRDP (1,119) (861)
Net unrealized loss on securities
available for sale (40) (2)
Treasury stock, at cost (1,425) (2,503)
-------- --------
Total stockholders' equity 21,042 20,949
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $184,484 $183,673
======== ========
See accompanying selected notes to consolidated financial statements.
18
<PAGE>
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
Year ended
December 31,
1995 1996 1997
INTEREST INCOME:
Loans $12,618 $14,145 $14,643
Mortgage-backed securities 286 193 137
Investment securities 500 415 362
Other 364 336 304
------- ------- -------
Total interest income 13,768 15,089 15,446
------- ------- -------
INTEREST EXPENSE:
Deposits 5,618 6,212 6,892
Advances from Federal Home Loan
Bank and other 1,072 1,325 1,560
------- ------- -------
Total interest expense 6,690 7,537 8,452
------- ------- -------
NET INTEREST INCOME 7,078 7,552 6,994
PROVISION FOR LOAN LOSSES 565 270 242
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,513 7,282 6,752
------- ------- -------
NON INTEREST INCOME:
Loan fees and service charges 288 395 468
Net gains on sale of loans 56 268 258
Gains on real estate owned 15 (275) 2
Loss on sale of other assets - (32) (2)
Other 73 70 40
------- ------- -------
Total non interest income 432 426 766
------- ------- -------
NON INTEREST EXPENSES:
Compensation and employee benefits 2,087 3,800 3,218
Building and occupancy expense 403 519 559
Data processing expense 311 466 296
Advertising 168 159 185
Insurance expense 459 1,474 242
Other 493 776 676
------- ------- -------
Total non interest expenses 3,921 7,194 5,176
------- ------- -------
INCOME BEFORE INCOME TAXES 3,024 514 2,342
INCOME TAX EXPENSE (BENEFIT) 1,069 (24) 945
------- ------- -------
NET INCOME $ 1,955 $ 538 $ 1,397
======= ======= =======
BASIC EARNINGS PER SHARE N/A $ 0.28 $ 0.74
======= ======= =======
DILUTED EARNINGS PER SHARE N/A $ 0.28 $ 0.73
======= ======= =======
DIVIDENDS PER SHARE
Regular cash dividends $ 0.225 $ 0.50 $ 0.500
Special cash dividends - return of
capital $ - $ 5.40 $ -
------- ------- -------
Total dividends per share $ 0.225 $ 5.90 $ 0.500
======= ======= =======
19
<PAGE>
<PAGE>
<TABLE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
Net
Retained unrealized
Addi- earnings Unearned loss on Total
Common stock tional Substan- employee securities
stock-
Issued In treasury paid-in tially compensation available
holders'
Shares Amount Shares Amount capital restricted ESOP MRDP for sale
equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances -
December 31,
1994 - $- - $ - $ - $12,672 $ - $ - $(215)
$12,457
Issuance of
common stock
in connection
with Initial
Public Offering:
Cash proceeds,
net of
offering
costs of
$922,000 1,885,885 19 17,918 - - -
17,937
Common stock
issued to
ESOP 163,990 1 1,639 - (1,640) - -
Net income
for the
year ended
December 31,
1995 - - - - - 1,955 - - -
1,955
Dividends - - - - - (424) - - -
(424)
Acquisition
of treasury
stock - - (49,906) (757) - - - - -
(757)
ESOP shares
committed
for release - - - - 29 - 109 - -
138
Change in
unrealized
loss on
securities
available
for sale,
net of
related
income
taxes - - - - - - - - 189
189
--------- --- -------- -------- ------- ------- ------- ------- ------ -----
- --
Balances at
December 31,
1995 2,049,875 20 49,906 (757) 19,586 14,203 (1,531) - (26)
31,495
Net income
for the
year ended
December 31,
1996 - - - - - 538 - - -
538
Cash dividends - - - - (9,056) (2,069) - - -
(11,125)
Acquisition
of treasury
stock - - (114,400) (1,501) - - - - -
(1,501)
ESOP shares
committed
for release - - - - 347 - 1,130 - -
1,477
Common stock
grants to
MRDP 27,094 1 54,906 833 457 - - (1,291) - -
Amortization
of MRDP
unearned
compensation - - - - - - - 172 -
172
Increase in
unrealized
loss on
securities
available
for sale,
net of
related
income taxes - - - - - - - - (14)
(14)
Balances at
December 31,
1996 2,076,969 $21 (109,400) $ (1,425) $11,334 $12,672 $ (401) $(1,119) $ (40)
$21,042
--------- --- -------- -------- ------- ------- ------- ------- ------ -----
- --
Net income
for the year
ended December
31, 1997 - - - - - 1,397 - - -
1,397
Cash
dividends - - - - - (870) - - -
(870)
Acquisition of
treasury stock - - (79,930) (1,078) - - - - -
(1,078)
ESOP shares
committed
for release - - - - 41 - 121 - -
162
Amortization of
MRDP unearned
compensation - - - - - - - 258 -
258
Increase in
unrealized
loss on
securities
available for
sale, net
of related
income taxes - - - - - - - - 38
38
--------- --- -------- -------- ------- ------- ------- ------- ------ -----
- --
Balances at
December 31,
1997 2,076,969 $21 (189,330) $ (2,503) $11,375 $13,199 $ (280) $ (861) $ (2)
$20,949
--------- --- -------- -------- ------- ------- ------- ------- ------ -----
- --
See accompanying selected notes to consolidated financial statements.
20
</TABLE>
<PAGE>
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
December 31,
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,955 $ 538 $ 1,397
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 178 227 272
Provision for loan losses 565 270 242
Provision for deferred income taxes (benefit) (247) (491) (72)
Amortization/accretion of premiums/discounts
on investment and mortgage-backed securities (2) 3 (33)
Amortization of deferred loan fees (299) (249) (95)
Fair market value of ESOP shares
committed for release and charged to
employee compensation 138 1,477 162
FHLB stock dividends
Amortization of unearned compensation - MRDP - 172 258
(Gains) losses on real estate owned (15) 275 2
(Gain) on sale of premises and equipment - (2)
Loss on disposal of premises and equipment - 32 -
(Increase) decrease in:
Loans held for sale (625) 393 9
Accrued interest receivable (384) (200) (94)
Other assets (244) (54) 376
Increase (decrease) in:
Income taxes currently payable 16 (89) 112
Other liabilities 5 795 (610)
--------- ------- ------
Net cash provided by operating activities 1,041 3,099 1,924
--------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in total loans (20,875) (8,974) (196)
Real estate owned 79 1,606 96
Premises and equipment - 10 -
Proceeds from maturities of:
Investment and mortgage-backed securities 3,429 4,066 3,405
Mortgage-backed securities -
Acquisition of:
Investment and mortgage-backed securities (4,520) (5,000) -
Federal Home Loan Bank stock - (613)
Premises and equipment (125) (681) (326)
Capitalized improvements to real estate owned (33) 78
--------- ------- ------
Net cash provided by (used in) investing
activities (22,012) (9,006) 2,444
--------- ------- ------
See accompanying selected notes to consolidated financial statements.
(Continued)
21
<PAGE>
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
December 31,
1995 1996 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit
accounts 11,312 $ 933 $10,931
Net proceeds from sale of stock in
Initial Public Offering 17,937 - -
Cash dividends paid (424) (11,125) (870)
Proceeds from FHLB advances 26,000 14,000 -
Proceeds from other borrowings - 4,250 -
Reductions in FHLB advances (26,852) (5,151) (7,151)
Reductions in other borrowings - (250) (4,000)
Acquisition of treasury stock (757) (1,501) (1,078)
------- -------- -------
Net cash provided by (used in)
financing activities 27,216 1,156 (2,168)
------- -------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,245 (4,751) 2,200
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 2,726 8,971 4,220
------- -------- -------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 8,971 $ 4,220 $ 6,420
======= ======== =======
SUPPLEMENTAL INFORMATION FOR CASH FLOW:
Noncash transactions:
Loans foreclosed and transferred
to real estate owned $ 89 $ 948 $ 477
======= ======== =======
Increase (decrease) in net unrealized
loss on securities available for
sale $ (189) $ 14 $ (38)
======= ======== =======
Cash paid during the period for:
Income taxes $ 1,318 $ 674 $ 815
======= ======== =======
Interest $ 6,685 $ 7,470 $ 8,531
======= ======== =======
See accompanying selected notes to consolidated financial statements.
22
<PAGE>
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Southern Bancshares, Inc. ("Bancshares") was incorporated in the State
of Delaware on November 22, 1994 and is the holding company for First Southern
Bank, Inc. (the "Bank"). The Bank is an Alabama-chartered commercial bank
which was converted from a mutual savings and loan on April 13, 1995 as
further discussed in Note 19.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
First Southern Bancshares, Inc. and its wholly-owned subsidiary, First
Southern Bank. The Company's consolidated operating results and cash flows
include those of the Bank (and those of the former Association) for each of
the three years during the three-year period ended December 31, 1996 and those
of Bancshares for the period since April 13, 1995, the date of completion of
Bancshares' initial public stock offering. All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash due from banks,
interest-bearing overnight deposits in the Federal Home Loan Bank (FHLB) of
Atlanta, and highly liquid investments with a maturity of three months or less
at purchase date.
Investments in debt and equity securities
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115 requires management to
classify its investment portfolio into three categories: (i) held to maturity,
(ii) available for sale, and (iii) trading securities, and sets forth specific
criteria for determining these classifications. SFAS No. 115 requires
unrealized holding gains and losses for trading securities to be included in
earnings while unrealized holding gains and losses for available for sale
securities are to be reported as a separate component of equity, net of
related income taxes, until realized. Held to maturity securities are to be
recorded at their amortized cost. Portfolio additions subsequent to the
adoption of the statement are classified into the appropriate category when
purchased.
Investments securities and certain mortgage-backed securities available for
sale As required by SFAS No. 115, available for sale securities have been
recorded in the accompanying consolidated statement of financial condition at
estimated fair value. The related net unrealized holding loss has been
reported as a separate component of equity, net of related income taxes. Gain
or loss on any sale of investment securities classified as available for sale
continues to be recorded based on the specific identification method.
Mortgage-backed securities held to maturity
The Company has both the intent and ability to hold its mortgage-backed
securities to maturity, and therefore, are classified in the accompanying
consolidated statements of financial condition as held to maturity. The
securities are stated at cost, as adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using the
interest method over the estimated life of the security. An allowance for loss
on mortgage-backed securities held to maturity is recorded only when the
security is deemed to be permanently impaired. Mortgage-backed securities are
accounted for on a specific identification basis.
23
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
Loans receivable
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses and net deferred loan origination fees. The allowance for loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the allowance
is based on the Company's past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability to
repay the estimated value of any underlying collateral, and current economic
conditions. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued and unpaid, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures requires that certain impaired loans be measured based on the
present value of expected future cash flows discounted at the loans' original
effective interest rate. As a practical expedient, impairment may be measured
based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance. At December 31, 1997 and 1996, the
Company had non-accrual loans aggregating $1.1 million and $1.4 million,
respectively, of which no significant loans were determined to be impaired.
Loan origination fees
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is amortized to income using a method which approximates the
interest method over the contractual lives of the loans.
Loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
income.
Real estate owned
For real estate acquired through foreclosure and in-substance foreclosed
assets, a new cost basis is established at fair value at the time of
foreclosure through a charge to the allowance for loan losses with a valuation
allowance established for estimated costs to sell. The charge to establish the
valuation allowance is reflected in other expenses. Subsequent to foreclosure,
foreclosed assets are carried at the lower of fair value, less estimated costs
to sell, or cost, with the difference recorded as a valuation allowance on an
individual asset's basis. Subsequent decreases in fair value and increases in
fair value, up to the value established at foreclosure, are recognized as
charges or credits to expense.
Premises and equipment
Office properties and equipment are carried at cost less accumulated
depreciation. Renewals and betterments are capitalized, whereas repairs and
maintenance are charged to expense as incurred. Depreciation is provided by
the straight-line method at rates intended to distribute the cost of buildings
and equipment over their estimated service lives of ten to fifty years and
three to ten years, respectively.
Income taxes
Federal and state income taxes are recognized under the asset and liability
method of accounting for income taxes prescribed by SFAS No. 109 Accounting
for Income Taxes. Balance sheet amounts of deferred income taxes are
recognized on the temporary differences between the bases of assets and
liabilities as measured by tax laws and their bases as reported in the
financial statements. Recognition of deferred tax asset balance sheet amounts
is based on management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences will be realized.
Deferred tax expense or benefit is recognized for the change in deferred tax
liabilities or assets between periods. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
24
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
Savings Association Insurance Fund
The Bank is a member of the Savings Association Insurance Fund ("SAIF"). In
1996 legislation was passed in the United States Congress that required
institutions that are members of SAIF to pay a one-time premium to
recapitalize the SAIF. In accordance with the Emerging Issues Task Force of
the Financial Accounting Standards Board, the SAIF Special Assessment premium
expense was recognized in the year the legislation was enacted. The Company
recorded the expense of the one-time SAIF Special Assessment (65.7 basis
points applied to March 31, 1995 deposit balances) of $1.1 million
(approximately $0.39 per share after income taxes) in the third quarter of
1996.
Earnings per share
SFAS No. 128 Earnings Per Share was adopted by the Company in the fourth
quarter of 1997. Under SFAS No. 128, Basic Earnings Per Share ("Basic EPS")
and Diluted Earning Per Share ("Diluted EPS") are reported in the accompanying
financial statements. Basic EPS is based on the weighted average number of
common shares outstanding to income available to common stockholders.
Outstanding common shares include shares issuable for little or no cash
consideration upon the satisfaction of certain conditions as of the date that
all necessary conditions have been satisfied. Diluted EPS is based on the
weighted average number of common shares outstanding plus any potential
dilutive shares committed to be issued upon the satisfaction of certain
conditions to income available to common stockholders. A reconciliation of the
weighted average of common shares outstanding used in the earnings per share
computation follows:
Weighted Average Common Shares Outstanding
1997 1996
---- ----
Common shares outstanding 2,076,769 2,070,046
Treasury shares ( 153,146) ( 82,352)
Unreleased ESOP shares ( 31,546) ( 91,313)
Options - uncontingent 2,525 -
---------- ---------
Basic EPS 1,894,602 1,896,381
Options - contingent 19,682 12,635
---------- ---------
Diluted EPS 1,914,284 1,909,016
---------- ---------
Mortgage Servicing Rights
Mortgage servicing rights retained on loans sold are capitalized as an asset
at estimated fair value and amortized over the estimated servicing period in
accordance with SFAS No. 125 Accounting for Transfers Servicing of Financial
Assets and Extinguishments of Liabilities which was adopted in 1997. The
adoption of SFAS No. 125 had no significant effect on the method utilized in
1996.
Use of Estimates
The preparation of financial statements 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.
Reclassifications
Certain reclassifications were made in the 1995 and 1996 financial statements
in order for them to conform with the reporting format utilized in 1997.
25
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents were comprised of the following:
December 31,
1996 1997
(In thousands)
Cash on hand $1,195 $1,678
Cash due from banks 2,989 2,857
Interest bearing deposits at FHLB of Atlanta 22 1,849
Other interest bearing accounts 14 36
------ ------
$4,220 $6,420
====== ======
Cash due from banks at December 31, 1996 and 1997 includes aggregate bank
balances of approximately $2.6 million and $4.4 million, respectively, which
are not covered by FDIC insurance.
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The Company's investment and mortgage-backed securities classified as
available for sale consisted of the following:
December 31, 1996
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
Investment securities
Maturity in less than one
year:
FHLB of Atlanta certificates
of deposit $ 5,000 $ - $ - $ 5,000
U.S. Government and agency
obligations 1,000 - (2) 998
Maturity between one and five
years:
U.S. Government and agency
obligations 5,012 - (62) 4,950
------- ----- ---- -------
$11,012 $ - $(64) $10,948
======= ===== ==== =======
December 31, 1996
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
Investment securities
Maturity in less than one
year:
U.S. Government and agency
obligations $ 5,001 $ 3 $ (5) $ 4,999
Maturity between one and five
years:
U.S. Government and agency
obligations 2,997 6 (9) 2,994
------- ----- ---- -------
$ 7,998 $ 9 $(14) $ 7,993
======= ===== ==== =======
Investment securities of $1.0 million have been pledged as collateral for
public funds on deposit.
26
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
At December 31, 1996 and 1997, the portfolio of securities classified as
available for sale have been recorded in the accompanying statement of
financial condition at their estimated market value. The difference between
amortized cost and estimated market value has been reflected as a separate
component of equity, net of related income taxes:
December 31,
1996 1997
(In thousands)
Unrealized loss on securities available for sale $(64) $ (5)
Deferred income taxes 24 3
---- ----
Net unrealized loss on securities available for
sale $(40) $ (2)
==== ====
NOTE 4 - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following summarizes the amortized cost basis, estimated market value and
unrealized holding gains and losses related to investments in mortgage-backed
securities classified as held to maturity:
December 31, 1996
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
Maturing in one to five years:
FNMA certificates $ 105 $ 2 $ - $ 107
FHLMC certificates 211 3 - 214
GNMA certificates 119 4 - 123
Maturing in five to ten years:
FHLMC certificates 28 2 - 30
GNMA certificates 505 21 (1) 525
Maturing in over ten years:
GNMA certificates 194 13 - 207
FNMA certificates 151 5 - 156
FHLMC certificates 574 20 (1) 593
------ ---- ---- -------
$1,887 $ 70 $ (2) $ 1,955
====== ==== ==== =======
December 31, 1997
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
Maturing in one to five years:
FNMA certificates $ 81 $ 2 $ - $ 83
FHLMC certificates 159 2 - 161
GNMA certificates 54 1 - 55
Maturing in five to ten years:
FHLMC certificates 240 9 - 249
GNMA certificates 390 14 (1) 403
Maturing in over ten years:
GNMA certificates 143 12 - 155
FNMA certificates 104 4 - 108
FHLMC certificates 261 10 - 271
------ ---- ---- -------
$1,432 $ 54 $ (1) $ 1,485
====== ==== ==== =======
27
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
The Company has the intent and ability to hold these mortgage-backed
securities to maturity and in accordance with the provisions of SFAS No. 115
are recorded in the accompanying statement of financial condition at amortized
cost. At December 31, 1996 and 1997, neither a disposal, nor conditions that
could lead to a decision not to hold mortgage-backed securities classified as
held to maturity, were reasonably foreseen.
NOTE 5 - LOANS RECEIVABLE
Loans receivable consisted of the following:
December 31,
1996 1997
(In thousands)
Type of loan
One-four family residential mortgage loans,
including loans held for sale $ 66,863 $ 58,339
Multi-family residential mortgage loans 13,045 11,020
Commercial mortgage and business loans 60,591 65,327
Construction loans 5,297 8,230
Consumer loans 17,701 19,978
-------- --------
Total loans 163,497 162,894
-------- --------
Less:
Loans held for sale (232) (223)
Undisbursed loans in process (1,928) (1,404)
Unamortized loan origination fees (192) (148)
Allowance for loan losses (1,659) (1,584)
-------- --------
(4,011) (3,359)
-------- --------
Total loans receivable, net $159,486 $159,535
======== ========
Loans and participations serviced on behalf of the Company by others were
approximately $5.2 million and $4.7 million at December 31, 1996 and 1997,
respectively. Loans and participations serviced by the Company on behalf of
others were approximately $17.0 million and $23.0 million at December 31, 1996
and 1997, respectively.
The weighted average yield for all loans was 8.78% and 8.92% at December 31,
1996 and 1997, respectively.
28
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
The Company originates both adjustable and fixed interest rate loans. At
December 31, 1996 and 1997, the composition of these loans was as follows:
Fixed rate loans Adjustable rate loans
Term
to December 31, December 31, Term to rate December 31, December 31,
maturity 1996 1997 adjustment 1996 1997
(In thousands) (In thousands)
1 mo - 1 yr $13,369 $18,814 1 mo - 1 yr $84,325 $87,348
1 yr - 5 yrs 29,705 28,563 1 yr - 5 yrs 2,100 492
Over 5 yrs 33,998 27,677 Over 5 yrs - -
------- ------- ------- -------
$77,072 $75,054 $86,425 $87,840
======= ======= ======= =======
The adjustable rate loans have interest rate adjustment limitations. The
majority of the adjustable rate loans are indexed to the one-year U.S.
Treasury bill rate. Future market factors may affect the correlation of the
interest rate adjustment with the rates the Company pays on the short-term
deposits that have been primarily utilized to fund these loans.
Activity in the allowance for loan losses account is summarized as follows:
Year ended December 31,
1995 1996 1997
(In thousands)
Balance - Beginning of period $1,100 $1,509 $1,659
Provision for loan losses 565 270 242
Charge-offs (197) (210) (347)
Recoveries 41 90 30
------ ------ ------
Balance - End of period $1,509 $1,659 $1,584
====== ====== ======
Loans to executive officers and directors are made in the ordinary course of
business on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated parties. The Company gives employees
who are not directors or executive officers a preferred interest rate on
adjustable-rate mortgages of up to 3/4%.
Loan activity relating to loans made to executive officers and directors and
companies in which executive officers and directors own a significant
interest is summarized as follows:
Balance Balance
Year ended Beginning End
December 31, of year Advances Repayments of year
(In thousands)
1995 $ 200 $1,463 $ 62 $1,601
1996 $1,601 $ 957 $337 $2,221
1997 $2,221 $ 642 $594 $2,269
29
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized by major classifications as follows:
December 31,
1996 1997
(In thousands)
Land $ 583 $ 583
Building and improvements 3,669 3,711
Furniture, fixtures and equipment 1,204 1,501
------ ------
5,456 5,795
Less - Accumulated depreciation (2,001) (2,286)
------ ------
$3,455 $3,509
====== ======
Depreciation expense aggregated approximately $178,000, $227,000, and $285,000
during the years ended December 31, 1995, 1996, and 1997 respectively.
NOTE 7 - INVESTMENT IN FHLB STOCK
The Bank, as a member of the FHLB System, is required to maintain an
investment in the FHLB of Atlanta. Although the stock represents a form of
equity interest in the FHLB of Atlanta, it does not meet the marketability
criteria of SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. because its ownership is restricted and it lacks a market.
As a result, the FHLB stock is classified as a restricted investment security
and is stated at cost.
NOTE 8 - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest receivable consisted of the following:
December 31,
1996 1997
(In thousands)
Interest on loans $1,525 $1,609
Interest on investment and mortgage-backed
securities 178 174
Dividends on Federal Home Loan Bank Stock 25 39
------ ------
$1,728 $1,822
====== ======
30
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
NOTE 9 - DEPOSITS
Deposits by major classification and interest rate are summarized as follows:
December 31,
Rates 1996 1997
1996 1997 Amount % Amount %
Demand accounts: (Dollars in thousands)
Non interest-bearing
accounts - - $ 4,189 3.2 $ 4,119 2.9
NOW accounts 2.50% 2.50% 10,744 8.1 11,015 7.7
Money market demand accounts 3.00% 3.00% 2,908 2.2 4,310 3.0
Passbook accounts 2.75% 2.75% 17,839 13.4 15,918 11.1
Statement savings 2.875% 2.875% 1,486 1.1 1,400 0.9
-------- ----- -------- -----
37,166 28.0 36,762 25.6
Certificate accounts: -------- ----- -------- -----
2.00% to 5.00% 1,001 0.8 1,311 0.9
5.01% to 6.00% 67,572 50.9 64,433 44.8
6.01% to 7.00% 25,040 18.9 38,524 26.8
Over 7.00% 2,021 1.4 2,701 1.9
-------- ----- -------- -----
95,634 72.0 106,969 74.4
-------- ----- -------- -----
$132,800 100.0 $143,731 100.0
======== ===== ======== =====
Weighted-average cost of interest-
bearing deposits 4.81% 5.10%
======== ========
Scheduled maturities of certificate accounts were as follows:
December 31,
1996 1997
(In thousands)
Less than one year $72,197 $ 84,922
One year to two years 18,362 19,870
Two years to three years 4,989 1,053
Three years to four years 35 288
Over four year 51 836
------- --------
$95,634 $106,969
======= ========
As of December 31, 1996 and 1997, the Company had aggregate deposit accounts
with balances greater than $100,000 of approximately $12.6 million and $14.7
million, respectively. Balances in excess of $100,000 are not covered by FDIC
insurance.
31
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
Interest expense, by deposit type, for the years ended December 31, 1994, 1995
and 1996 is summarized as follows:
Year ended December 31,
1995 1996 1997
(In thousands)
NOW accounts $ 207 $ 233 $ 248
Money market demand accounts 85 87 100
Passbook savings accounts, including
statement savings in 1995, 1996 and 1997 662 542 505
Certificate accounts 4,664 5,350 6,039
------ ------ ------
$5,618 $6,212 $6,892
====== ====== ======
NOTE 10 - BORROWED FUNDS
Borrowed funds at December 31, 1995 and 1996 are comprised of the following:
December 31,
1996 1997
(In thousands)
Advances under a $40,000,000 Credit Availability
Program(a) expiring May 14, 1998, interest rate
determined daily at FHLB determined spread over
the rate paid on FHLB overnight deposit accounts
(aggregate of 6.50% at December 31, 1997),
interest due monthly $ 9,000 $ 2,000
Advances from Community Investment Fund:
7.36% principal reducing credit advance dated
May 1, 1992, interest due monthly, principal
due in equal quarterly installments of $13,514
commencing May 1993 and continuing through May 2002 297 243
6.53% principal reducing credit advance dated
November 2, 1992, interest due monthly, principal
due in equal quarterly installments of $18,919
commencing in November 1993 and continuing through
November 2002 454 378
6.91% principal reducing credit advance dated March 4,
1994, interest due monthly, principal due in equal
quarterly installments of $33,333 commencing in March
2004 and continuing through March 2009 700 700
7.49% principal reducing credit advance dated July 8,
1994, interest due monthly, principal due in equal
quarterly installments of $5,405 commencing in July
1995 and continuing through July 2004 168 147
5.27% advance under fixed rate credit plan dated
August 25, 1993, interest due monthly, principal due
August 25, 1998 3,000 3,000
6.08% advance under fixed rate credit plan dated
August 25, 1993, interest due monthly, principal due
August 25, 2003 2,000 2,000
5.66% five year convertible advance renewed September
24, 1997, interest due quarterly, principal due
September 24, 2002 5,000 5,000
6.28% advance under fixed rate credit plan dated
October 24, 1995, interest due monthly, principal
due October 24, 2000 5,000 5,000
------- -------
Total advances from Federal Home Loan Bank 25,619 18,468
Advance under a $5,000,000 note to financial
institution dated December 3, 1996, bearing interest
at the financial institution's base rate (8.25% at
December 31, 1996), principal and interest due March
1, 1997. 4,000 -
------- -------
Total borrowings $29,619 $18,468
------- -------
32
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
(a) The Company has a "Credit Availability" agreement with the Federal Home
Loan Bank of Atlanta expiring in May 1998, which generally, limits the
Company's aggregate borrowings to the amount of credit availability ($40
million). At December 31, 1997, the Company has unused credit availability of
approximately $21.5 million.
The Company's advances from the FHLB of Atlanta are secured by a blanket
floating lien on qualifying first mortgage loans (approximately $58.1 million
at December 31, 1997). The Company incurred interest expense on FHLB advances
of approximately $1.1 million, $1.3 million and $1.5 million in 1995, 1996 and
1997, respectively.
Borrowed funds at December 31, 1997 have maturities and/or are scheduled to be
liquidated in future years as follows:
Year ending Principal
December 31, reductions
(In thousands)
1998 $ 5,151
1999 151
2000 5,151
2001 151
2002 5,151
2003 - 2007 2,413
2008 - 2009 300
-------
$18,468
=======
NOTE 11 - INCOME TAXES
Income tax expense is comprised of the following elements of current and
deferred Federal and state income taxes:
Year ended December 31,
1995 1996 1997
(In thousands)
Current income tax expense:
Federal $1,226 $464 $ 935
State 90 3 108
------ ---- ------
1,316 467 1,043
Deferred income tax expense (benefit):
Federal (252) (462) (104)
State 5 (29) 6
------ ---- ------
(247) (491) (98)
------ ---- ------
$1,069 $(24) $ 945
====== ==== ======
Bancshares and the Bank have elected to file separate Federal and state income
tax returns for 1995 and 1996. As of December 31, 1995, the Company had
prepaid Federal income taxes of approximately $164,000 and a liability for
unpaid state income taxes of approximately $92,000. At December 31, 1996, the
Company had prepaid Federal income taxes of approximately $282,000 and a
liability for unpaid state income taxes of approximately $3,000.
33
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
The provisions for income taxes are different than the amounts determined by
applying the Federal statutory rate to income before income taxes due to the
following:
Year ended December 31,
1995 1996 1997
(Dollars in thousands)
Expected income tax, at statutory rate $1,028 $175 $754
Charitable contribution of appreciated
property - (285) 90
Excess of fair value over cost of ESOP
shares committed for release - 118 14
Federal Home Loan Bank stock dividends
Dividend received deduction (23) (24) (35)
State excise taxes based on income,
net of Federal income tax expense
(benefit) 63 (17) 117
Other, net 1 9 5
------ ---- ----
Total income tax expense (benefit) $1,069 $(24) $945
====== ==== ====
Effective income tax rate 35% (5)% 39%
====== ==== ====
Deferred income tax expense (benefit) results from temporary differences in
the recognition of revenues and expenses for tax and financial statement
purposes. Deferred income taxes are also provided on certain components of
equity. The sources and tax effects of these temporary differences and the
separately stated components of equity resulting in deferred income taxes are
as follows:
<PAGE>
<TABLE>
Deferred tax (benefit) liability related to:
Accumu- Contri-
lated Pre- bution Accrued
Depre- paid carry compen-
Temporary Bad debt deduction Loan cia- Expen- for sated
reporting differences (Asset) Liability Fees tion ses ward MRDP Other absences
Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994 $(334) $1,028 $(123) $27 $ 71 $ - $ - $ - $ - $
669
1995 changes (123) (171) 22 1 24 - - - -
(247)
----- ------ ----- --- ---- ----- ----- ---- ---- ---
- --
Balance - December 31, 1995 (457) 857 (101) 28 95 - - - -
422
1996 changes (52) (172) 62 2 37 (268) (45) (31) (48)
(515)
----- ------ ----- --- ---- ----- ----- ---- ---- ---
- --
Balance - December 31, 1996 (509) 685 (39) 30 132 (268) (45) (31) (48)
(93)
1997 changes (38) (84) (20) 31 (281) 268 (8) 73 (13)
(72)
----- ------ ----- --- ---- ----- ----- ---- ---- ---
- --
Balance - December 31, 1997 $(547) $ 601 $ (59) $61 $(149) $ - $(53) $ 42 $(61)
$(165)
===== ====== ===== === ===== ===== ==== ==== ====
=====
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
NOTE 12 - PENSION PLAN
The Company froze the benefits of its defined benefit noncontributory
retirement plan ("Plan") in May 1997 with the intention of terminating the
plan and recognized an expense in 1997 of $588,000 for the unfunded projected
liability in accordance with SFAS No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits. The Plan covered substantially all of its employees.
Benefits were generally based upon the fractional rule based on service. It
was the Company's policy to make contributions to the Plan sufficient to meet
minimum funding requirements of applicable laws and regulations. Plan assets
consist principally of passbook savings, certificates of deposit and life
insurance. As of December 31, 1997, the Plan's assets after the Company's
contribution are sufficient to meet the Plan's projected liability.
34
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
NOTE 13 - STOCK OWNERSHIP AND OPTION PLANS
Employee Stock Ownership Plan
In connection with the conversion to stock form, as described in Note 19, the
Bank established an internally-leveraged Employee Stock Ownership Plan
("ESOP") for the exclusive benefit of the Bank's participating employees
meeting certain eligibility requirements. In general, participating employees
must be full-time employees (defined as an employee working 1,000 hours or
more during an employment year) with one or more years of service and must
have attained the age of 21 years.
The ESOP borrowed funds from the Company in an amount sufficient to purchase
163,990 shares (8% of the Common Stock issued in the stock conversion). The
loan is secured by the shares purchased and will be repaid by the
contributions to the ESOP by the Bank and any other earnings on ESOP assets.
The loan has an outstanding balance of $401,106 and $280,000 as of December
31, 1996 and 1997, respectively.
Accounting for the ESOP is in accordance with Statement of Position 93-6,
Employers Accounting for Employee Stock Ownership Plans issued by the American
Institute of Certified Public Accountants. Accordingly, the Company's loan to
the ESOP is reflected as a reduction of stockholders' equity as "unearned
employee compensation". The ESOP is expected to cover its debt service
requirements through discretionary contributions to the ESOP by the Bank and
through dividends paid on shares of Company common stock held by the ESOP. The
shares held by the ESOP are committed for release from collateral as principal
repayment of the loan is made. At such time, unearned employee compensation is
reduced by the cost basis of shares released and compensation is charged for
the fair value of such shares at the date of release. Any difference between
the cost basis and fair value of shares committed for release is charged or
credited to additional paid-in capital, net of related income taxes. As shares
are committed for release, they become outstanding for earnings per share
computations.
Shares committed for release are held in a suspense account for allocation
among participants. Contributions to the ESOP and shares released from the
suspense account are allocated among participants at the end of each Plan year
(December 31) in proportion to their compensation relative to total
compensation of all active participants. Benefits generally become 100% vested
after five years of credited service. Vesting is accelerated upon retirement,
death or disability. Since the Company's annual contributions are
discretionary, benefits payable under the ESOP cannot be estimated.
Dividends paid on unallocated ESOP shares are recorded as reductions of debt
and accrued interest, whereas dividends on allocated ESOP shares are recorded
as a reduction in retained earnings. The following summarizes activity
related to the ESOP for the period since April 13, 1995:
Unearned employee Additional
compensation paid-in Compensation
Shares Amount capital expense
(Dollars in thousands)
1995
Acquisition of shares
by ESOP (163,990) $(1,640)
Shares committed for
release: 10,930 109 $ 29 $ 138
------- ------- ==== ======
Balances -
December 31, 1995 (153,060) (1,531)
1996
Shares committed for
release: 112,949 1,130 $347 $1,477
------- ------- ==== ======
Balances -
December 31, 1996 (40,111) $ (401)
1997
Shares committed for
release: 12,070 121 $ 41 $ 162
------- ------- ==== ======
Balances -
December 31, 1997 (28,041) $ (280)
======= =======
35
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
Management Recognition and Development Plan
On April 17, 1996, the Company established the 1996 Management Recognition and
Development Plan (the "MRDP"). The MRDP was established in order to increase
the proprietary and vested interest of certain key Company employees and
Directors in the growth, development and financial success of the Company by
granting them awards of a maximum of 82,000 restricted shares of the Company's
common stock. Among other provisions of the MRDP, the MRDP shares are
restricted as to transferability prior to vesting, which vesting is to occur
over a five-year period at a rate of 20% per year, commencing one year after
the original date of grant.
As of December 31, 1997, the Company has awarded the 82,000 restricted shares
the Company's common stock in accordance with the terms and conditions of the
MRDP. The restricted shares were obtained from stock held in treasury (54,906
shares) and from authorized and unissued common stock (27,094 shares) and were
recorded to unearned employee compensation at the then prevailing market price
of the company's common stock ($15.75 per share). Unearned compensation
related to the MRDP is reflected as a reduction of stockholders' equity and is
being amortized to expense on a ratable basis over the five-year vesting
period. MRDP amortization expense was $258,000 in 1997.
Stock Option Plan
On April 17, 1996, the Company established the 1996 Stock Option Plan (the
"Plan"). The Plan was established in order to promote the interests of the
Company by attracting, retaining and motivating exceptional executive
personnel and other key employees and Directors of the Company. The Plan sets
an exercise price not less than 100% of the per share fair market value at the
date of grant (110% under certain circumstances), contains various
anti-dilution/enlargement provisions, and generally provides for vesting of
awards at a rate of 20% per year, commencing one year after the original date
of grant. Options are generally exercisable until the tenth anniversary date
of the grant.
The Plan provides that a maximum of 204,988 options to acquire the Company's
common stock may be granted under the Plan. Commensurate with its April 17,
1996 adoption of the Plan, the Board of Directors granted awards aggregating
102,492 share options to the Company's Directors and certain key Company
employees, at an exercise price equal to the fair market value per share at
the date of grant ($15.75 per share, which amount was subsequently adjusted in
accordance with Plan provisions to $11.75 per share so as to give appropriate
recognition to the effects of 1996 Special dividends).
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, on
January 1, 1996. SFAS No. 123 encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation cost would be shown as an expense on the
income statement. Companies may choose to continue to measure compensation for
stock-based plans using the intrinsic method of accounting prescribed by APB
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees. Entities
electing to continue the accounting prescribed in APB 25 will be required to
disclose in the notes to the financial statements what net income and earnings
per share would have been if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. Such pro forma net loss and net loss per
share amounts were not material to the Company in 1996 and 1997 (in
thousands).
1996 1997
---- ----
Net income $ 500 $1,339
Basic and Diluted EPS $0.26 $ 0.71
36
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
NOTE 14 - REGULATORY COMPLIANCE
The Bank is required to maintain specific amounts of capital pursuant to FDIC
requirements and the Company is required to maintain specific amounts of
capital pursuant to the regulations of the Federal Reserve Board. As
summarized below, the Company and Bank are in compliance with all such
requirements at December 31, 1997:
First Southern Bancshares, Inc. (dollars in thousands) Percentage of
adjusted total
Amount assets
Primary capital ratios:
GAAP capital $ 20,949
Adjustments:
Mortgage servicing rights (13)
Net unrealized loss on securities
available for sale 2
---------
Tier 1 capital 20,938 11.32%
Minimum Tier 1 (leverage) requirement 7,399 4.00
--------- ------
Excess $ 13,539 7.32%
========= ======
Risk-based capital ratios:
Core (Tier I) capital $ 20,938 14.44%
Minimum core capital 5,801 4.00
--------- ------
Excess $ 15,137 10.44%
========= ======
Risk-based capital $ 22,522 15.53%
Minimum risk-based capital requirement 11,603 8.00
--------- ------
Excess $ 10,919 7.53%
========= ======
Under the FDICIA prompt corrective action provisions applicable to banks, the
most recent notification from the FDIC categorized the Bank as well
capitalized. To be categorized as well capitalized, the Bank must maintain a
total risk-based capital ratio as set forth in the following table and not be
subject to a capital order. There are no conditions or events since that
notification that management believes have changed the Bank's risk-based
capital category.
First Southern Bank (dollars in thousands)
Total capital (to risk-weighted assets) $ 22,093 15.28%
To be well capitalized under the FDICIA
prompt corrective action provisions 14,461 10.0%
--------- ------
Excess $ 7,632 5.28%
========= ======
Tier 1 capital (to risk-weighted assets) $ 20,509 14.18%
To be well capitalized under the FDICIA
prompt corrective action provisions $ 8,676 6.0%
--------- ------
Excess $ 11,833 8.18%
========= ======
Tier 1 capital (to average assets) $ 20,509 11.09%
To be well capitalized under the FDICIA
prompt corrective action provisions $ 9,244 5.0%
--------- ------
Excess $ 11,265 6.09%
========= ======
37
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
As an Alabama state-chartered bank which is not a member of the Federal
Reserve System, the Bank is required by Alabama law to maintain at all times a
reserve (comprised of cash on hand) based upon average daily deposits of the
Bank. At December 31, 1997, the Bank's qualifying reserves of approximately
$1.5 million significantly exceeded the required reserve of $221,000.
NOTE 15 - INTEREST RATE RISK
The Company is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At December 31, 1997, the Company's
interest earning assets consisted of approximately 47% fixed interest rates
and approximately 53% adjustable interest rates (51% and 49%, respectively, at
December 31, 1996). Approximately 95% of the Company's assets at December 31,
1997 earned interest. Those assets were funded primarily with short-term
liabilities that have interest rates that vary with market rates over time.
The shorter duration of the interest-sensitive liabilities indicates that the
Company is exposed to interest rate risk because, in a rising rate
environment, liabilities will be repricing faster at higher interest rates,
thereby reducing the market value of long-term assets and net interest income.
Conversely, in a stable or decreasing rate environment, the Company's asset
value and net interest income will show improvement.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
LOAN COMMITMENTS AND OTHER MATTERS
The Company makes loan commitments and incurs contingent liabilities in the
normal course of business. The Company is, from time to time, a defendant in
legal actions arising from normal business activities. Management does not
anticipate that the ultimate liability, if any, arising from litigation
outstanding at December 31, 1997 will have a materially adverse effect on the
financial statements.
Outstanding loan commitments issued by the Company (excluding loans in
process) in the normal course of business were comprised of unused advances
under line-of-credit agreements totaling $7.7 million as of December 31, 1997.
Year 2000
The Company and Bank are subject to risks associated with the "Year 2000"
software problem, a term which refers to uncertainties about the ability of
various software systems to interpret dates correctly after the beginning
of the Year 2000. The Company has completed an initial study of its
computerized systems and programs including third party servicers, and
prepared a plan to address the Year 2000 problem. The expense to modify and
test its computer programs and systems are estimated to be $50,000 over the
next two years. The company's process of evaluating potential effects of Year
2000 issues on customers of the Bank is in its early stages, and it is
therefore impossible to quantify the potential adverse effects of incompatible
software systems on loan customers. The failure of a commercial bank to
prepare adequately for Year 2000 compatibility could have a significant
adverse effect on such customer's operations and profitability, in turn
inhibiting its ability to repay loans in accordance with their terms. Until
sufficient information is accumulated from customers of the banks to enable
the Company to assess the degree to which customers' operations are
susceptible to potential problems, the Company will be unable to quantify the
potential losses from loans to commercial customers.
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, letters of credit, interest
rate caps and floors written on variable rate loans. Those instruments
involve, to varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the statement of financial condition. The
contract or notional amounts of those instruments reflect the extent of the
Company's involvement in particular classes of financial instruments.
38
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, and
letters of credit are represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making commitments
as it does for on-balance-sheet instruments. For interest rate caps and
floors, the contract or notional amounts do not represent exposure to credit
loss.
Contract or notional amount
December 31,
1996 1997
(In thousands)
Financial instruments and contract amounts
which represent credit risk:
Commitments to extend credit $2,334 $2,240
Unused lines of credit $7,454 $7,745
Standby letters of credit $ 606 $ 316
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation of the customer. Collateral held
varies but may include accounts receivable, inventory, property, plant, and
equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities
to customers. At December 31, 1997 outstanding letters-of-credit aggregated
$316,000.
NOTE 18 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
Substantially, all of the Company's business activity is with customers
located in Lauderdale and Colbert Counties, and surrounding counties in
Northwest Alabama. As such, a significant portion of its loan portfolio is
collateralized by real estate located in the same geographic location.
NOTE 19 - CONVERSION
On September 30, 1994, and as subsequently amended, the Board of Directors of
First Federal Savings and Loan Association of Florence adopted a plan of
conversion to convert the Association from a federally chartered mutual
savings and loan association to a federally chartered stock savings and loan
association, the concurrent formation of a holding company (Bancshares) for
the Association and the subsequent conversion of the Association from a
federally chartered stock savings and loan association to an Alabama-chartered
commercial bank (the Bank). Pursuant to provisions of the plan, shares of
stock in Bancshares were offered through a Subscription Offering to the
Association's eligible account holders, a newly formed tax qualified employee
stock benefit plan and other members of the Association. As provided in the
Plan, the aggregate purchase price of the stock was determined based on an
independent appraisal of the Association, reflecting the estimated pro forma
market value of the Association as a subsidiary of Bancshares.
39
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
On April 13, 1995, Bancshares completed the initial public offering of its
$.01 par value common stock wherein a total of 2,049,875 common shares were
issued for net proceeds of $19,577,000 (net of offering costs of $922,000). Of
the net proceeds, approximately $9,789,000 was utilized to acquire all of the
capital stock issued by the Association, approximately $1,640,000 was utilized
to finance the ESOP's purchase of 163,990 common shares, and approximately
$8,148,000 was retained by Bancshares for general corporate purposes. The
Association converted to an Alabama-chartered commercial bank on June 10,
1995. The Company's acquisition of the Association was accounted for at
historical cost, in a manner similar to the "pooling-of-interest" method of
accounting for business combinations. The application of the "pooling-of-
interest" accounting method records the assets and liabilities of the merged
companies on a historical cost basis. Therefore, intangible assets, including
goodwill, were not recorded as a result of this transaction.
NOTE 20 - STOCK REPURCHASE PROGRAM
In October 1995, the Company's Board of Directors approved a Stock Repurchase
Program whereby the Company may repurchase up to 102,493 shares of its common
stock, which number of shares represents 5% of the Company's issued common
stock. In June 1996 the Company's Board of Directors approved an extension of
the Stock Repurchase Program whereby the Company, upon completion of the
repurchase original 102,493 shares of its common stock, could then repurchase
up to an additional 102,493 shares of its common stock. The ongoing program
has resulted in the 1996 and 1997 acquisition of 114,400 and 79,930 shares,
respectively, of Company common stock (aggregating 11.8% of issued shares) at
an aggregate cost of $1.5 million and $1.1 million in 1996 and 1997,
respectively. 54,906 of such shares were utilized in the funding of the MRDP
and 189,330 are held in treasury at December 31, 1997.
NOTE 21 - BANK DIVIDEND RESTRICTIONS
As required by OTS regulations, the Association established a liquidation
account at the time of the conversion. The liquidation account (which account
was assumed by the Bank) is maintained for the benefit of eligible account
holders who continue to maintain their accounts at the Bank after the
conversion. The initial balance of this liquidation account was equal to the
Association's net worth as defined by OTS regulations as of the date of the
latest statement of financial condition contained in the final offering
circular. The liquidation account will be reduced annually to the extent the
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank (and
only in such event) each eligible holder shall be entitled to receive a
liquidation distribution from this account in the amount of the then current
adjusted balance for deposits then held, before any liquidation distribution
may be made to the Bank's stockholder, Bancshares. The liquidation account
restricts the Bank's use of its net worth related to the repurchase of its
stock from or payment of dividends to Bancshares.
The Bank may not declare or pay a cash dividend on any of its capital stock if
the effect thereof would cause the Bank's regulatory capital to be reduced
below the amount required for the liquidation account, which account, was
assumed by the Bank. In addition, the Bank is subject to restrictions on
dividends under the Alabama Banking Code, which provides that an Alabama state
bank must transfer to surplus each year at least 10% of its net earnings (and
thus cannot declare or pay a dividend in excess of 90% of net earnings) until
its surplus equals at least 20% of its capital. Furthermore, the Bank must
obtain regulatory approval to declare dividends in any calendar year in excess
of the total of its net earnings of that year combined with its retained net
earnings of the preceding two years, less any required transfers to surplus.
40
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
NOTE 22 - FIRST SOUTHERN BANCSHARES, INC. PARENT COMPANY ONLY FINANCIAL
STATEMENTS
Condensed parent company only financial statements for First Southern
Bancshares, Inc. are set forth below:
CONDENSED BALANCE SHEET (In thousands)
December 31,
1996 1997
ASSETS
Cash and cash equivalents $ 666 $ 121
Notes receivable 401 280
Investment in wholly-owned subsidiary 24,032 20,520
Other assets 22 74
------- -------
TOTAL ASSETS $25,121 $20,995
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable $ 4,000 $ -
Income taxes currently payable 3 -
Other accrued liabilities 76 46
------- -------
Total liabilities 4,079 46
STOCKHOLDERS' EQUITY 21,042 20,949
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,121 $20,995
======= =======
CONDENSED STATEMENT OF INCOME (In thousands, except share amounts)
Period from
April 13, 1995
through
December 31, Year ended December 31,
1995 1996 1997
INCOME
Equity in earnings of wholly-
owned subsidiary $ 1,277 $ 510 $ 1,477
Other 487 276 18
------- ------- --------
Total income 1,764 786 1,495
EXPENSES 88 231 139
------- ------- --------
Net income before income taxes 1,676 555 1,356
Provision for income taxes 146 17 (41)
------- ------- --------
NET INCOME $ 1,530 $ 538 $ 1,397
======= ======= ========
BASIC EARNINGS PER SHARE N/A $ 0.28 $ 0.74
DILUTED EARNINGS PER SHARE N/A $ 0.28 $ 0.73
DIVIDENDS PER SHARE, REGULAR
AND SPECIAL $0.225 $ 5.90 $ 0.50
DIVIDEND PAYOUT RATIO DURING
THE PERIOD N/A 2107.14% 67.57%
41
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS (In thousands)
Period from
April 13, 1995
through
December 31, Year ended December 31,
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,530 $ 538 $ 1,397
Adjustments to reconcile net income
to net cash provided by operations:
Equity in earnings of wholly-owned
subsidiary (1,277) (510) 3,512
Amortization of premium (accretion
of discount) on investment
securities 2 (1) -
(Increase) decrease in other assets (53) 31 (52)
(Decrease) in income taxes payable - (13) (3)
Increase (decrease) in other accrued
liabilities 74 18 (30)
------- ------- --------
Cash flows from operating activities 276 63 4,824
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of 100% of First Southern
Bank common stock (9,789) - -
Acquisition of investment and
mortgage-backed securities (4,520) - -
Acquisition of note receivable
from subsidiary (4,400) - -
Maturity and sales of investment
and mortgage-backed securities 1,758 2,804 -
Principal reductions in notes
receivable 109 5,530 121
------- ------- --------
Cash flows from (used in) investing
activities (16,842) 8,334 121
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash proceeds from sale of
stock in initial public offering 17,937 - -
Proceeds from borrowings - 4,250 -
Repayments of borrowings - (250) (4,000)
Cash dividends, including dividends
on unallocated ESOP shares (461) (12,021) (870)
Acquisition of treasury stock (757) (1,501) (1,078)
ESOP shares committed for release 29 1,477 162
Amortization of MRDP shares - 172 258
Equity in reserves of wholly-
owned subsidiary - (40) 38
Cash flows from (used in) financing ------- ------- --------
activities 16,748 (7,913) (5,490)
------- ------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 182 484 (545)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD - 182 666
------- ------- --------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 182 $ 666 $ 121
------- ------- --------
42
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
NOTE 23 - CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of December
31, 1997 are summarized as follows:
Carrying Fair
amount value
(In thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 6,420 $ 6,420
Investment securities 7,993 7,993
Mortgage-backed securities 1,432 1,485
Loans receivable, net 159,535 161,463
Loans held for sale 223 223
Federal Home Loan Bank stock 1,970 1,970
Accrued dividends and interest receivable 1,822 1,822
-------- --------
$179,395 $181,376
======== ========
FINANCIAL LIABILITIES
Deposits:
Demand accounts $ 36,762 $ 36,762
Certificates of deposit 106,969 107,962
Advances from Federal Home Loan Bank 18,468 18,468
-------- --------
$162,199 $163,192
======== ========
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Certain
financial instruments and all nonfinancial instruments are excluded. The
disclosures also do not include certain intangible assets, such as customer
relationships, deposit base intangibles, and goodwill. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company. The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it was
practicable to estimate the value:
Cash and cash equivalents
Based upon the nature of the instrument, carrying value approximates fair
value.
Investment and mortgage-backed securities
Fair value was determined based upon quoted market prices and/or dealer
quotes.
Loans receivable and loans held for sale
The fair value of loans receivable was estimated (1) by market value for those
loans which have a readily available market, and (2) discounting future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and with the same remaining term to
maturity, as adjusted for an estimate of borrower prepayments and estimated
loan losses. The fair value of loans held for sale, which instruments were of
recent creation and reflect currently existing market rates and attributes,
approximates their carrying value.
Federal Home Loan Bank stock
The carrying value of the Federal Home Loan Bank stock reasonably reflects its
fair value.
43
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------------------------
Accrued dividends and interest receivable
Based upon the nature of the instrument, the carrying value approximates fair
value.
Deposits
The carrying value of demand deposits and other non fixed maturity deposit
accounts reflects the amount payable on demand and therefore, is a reasonable
approximation of fair value. The estimated fair value of certificates of
deposit were estimated by discounting future cash flows using the rates
currently being offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
The estimated fair value of Federal Home Loan Bank loan balances was
determined by discounting future cash flows using the rates currently being
offered by Federal Home Loan Bank on advances having similar characteristics.
Off-balance sheet financial commitments
The Company had $10.3 million of off-balance sheet financial commitments as of
December 31, 1997, which are commitments to originate loans and unused lines
of credit. Since these obligations are based on current market rates, the
carrying amount is considered to be a reasonable estimate of fair value.
By their nature, estimates are subjective in nature and involve uncertainties
and matters of significant judgment, and therefore, cannot be determined with
precision. Changes in any of the assumptions used in calculating fair value
could significantly affect the estimates. Further, the fair value estimates
were calculated as of December 31, 1997. Subsequent changes in market interest
rates and other conditions could significantly change the fair value.
Fair value estimates are based on existing on and off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of these estimates.
44
<PAGE>
<PAGE>
COMMON STOCK INFORMATION
The common stock of First Southern Bancshares, Inc. is quoted on The NASDAQ
National Stock Market under the symbol "FSTH." As of February 28, 1998, First
Southern Bancshares, Inc. had 678 shareholders and 1,887,639 shares of common
stock outstanding. This does not include the number of persons or entities
who hold the stock in nominee or "street name."
Bancshares' ability to pay dividend depends primarily upon the Bank's ability
to pay dividends. As discussed in Note 21 to the consolidated financial
statements, the Bank's ability to pay dividends is restricted by regulatory
capital requirements, the required maintenance of a liquidation account
established by First Federal Savings and Loan Association of Florence (which
account was assumed by the Bank), and provisions of the Alabama Banking Code.
The following table sets forth per share market prices and dividend
information for Bancshares common stock. Dividends are listed by quarter in
which declared by the Board of Directors.
1996 High Low Dividend
First quarter $16.75 $14.75 $0.125
Second quarter $18.75 $11.50 $3.525
Third quarter $12.75 $11.75 $0.125
Fourth quarter $15.25 $12.00 $2.125
1997 High Low Dividend
First quarter $13.75 $12.00 $0.125
Second quarter $13.25 $12.75 $0.125
Third quarter $15.25 $13.25 $0.125
Fourth quarter $16.25 $14.375 $0.125
45
<PAGE>
<PAGE>
DIRECTORS AND OFFICERS OF
FIRST SOUTHERN BANCSHARES, INC. AND
FIRST SOUTHERN BANK
MEMBERS OF THE BOARDS OF DIRECTORS
William E. Batson - Chairman of the Board
Self-employed accountant
Charles L. Frederick, Jr.
President and Chief Executive Officer
First Southern Bancshares, Inc. and
First Southern Bank
Thomas N. Ward
Executive Vice President and Chief Operating Officer
First Southern Bank
Milka S. Duke - Retired
Former officer of First Federal Savings and Loan
Association of Florence
Kenneth Williams - Retired
Partner of Williams & Son Oil Co.
J. Acker Rogers
Partner - Rogers, Carlton & Associates, Inc.
Gary Gamble
President, TransMart, Inc.
James E. Bishop
President and owner of Jim Bishop Chevrolet GEO
Buick Oldsmobile, Inc.
OFFICERS
Charles L. Frederick, Jr.
President/Chief Executive Officer
Thomas N. Ward
Executive Vice President and Chief Operating
Officer
Glenda Young
Senior Vice President
Marva Kaye Townsend
Assistant to the President and
Corporate Secretary
Linda Allen
Vice President
Tyler Calhoun III
Vice President
Kenneth McLain
Vice President
Brenda Tease
Vice President
Irene Woods
Vice President
Jerry Hastings
Vice President
Brent Turpen
Treasurer/Controller
Sharon Robbins
Assistant Corporate Secretary
Donna Ezekiel
Assistant Vice President
Marsha Rochester
Assistant Vice President
Farrell Southern
Vice President
Marc Tays
Assistant Vice President
Brenda Crittenden
Assistant Vice President
46
<PAGE>
<PAGE>
COMPANY INFORMATION
CORPORATE HEADQUARTERS TRANSFER AGENT
102 South Court Street Registrar and Transfer Agent
Florence, Alabama 35630 10 Commerce Drive
Cranford, New Jersey 07016
INDEPENDENT AUDITORS COMMON STOCK
Marmann & Associates, P.C. The NASDAQ National Market System
900 E. Second St. NASDAQ Symbol: FSTH
Sheffield, Alabama 35660
SPECIAL COUNSEL
Breyer & Aguggia
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
- ------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders will be held Wednesday, April 15, 1998, at
10:00 a.m., Central Time, at the main office of First Southern Bank, 102 South
Court Street, Florence, Alabama. Stockholders of record as of the close of
business on February 28, 1998 are those stockholders entitled to notice of and
to vote at the Annual Meeting.
- ------------------------------------------------------------------------------
A COPY OF THE ANNUAL REPORT ON FORM 10-KSB, INCLUDING FINANCIAL STATEMENTS, AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT
CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR VOTING AT THE ANNUAL MEETING
OF STOCKHOLDERS UPON WRITTEN REQUEST TO THE SECRETARY OF FIRST SOUTHERN
BANCSHARES, INC., 102 SOUTH COURT STREET, FLORENCE, ALABAMA 35630.
- ------------------------------------------------------------------------------
47
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
First Southern Bancshares, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
First Southern Bank 100% Alabama
- -------------------
(a) The operation of the Company's wholly owned subsidiary is included in the
Company's Financial Statements contained in the Annual Report attached
hereto as Exhibit 13.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4535
<INT-BEARING-DEPOSITS> 1885
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7993
<INVESTMENTS-CARRYING> 1432
<INVESTMENTS-MARKET> 1485
<LOANS> 159758
<ALLOWANCE> 1584
<TOTAL-ASSETS> 183673
<DEPOSITS> 143731
<SHORT-TERM> 5151
<LIABILITIES-OTHER> 525
<LONG-TERM> 13317
0
0
<COMMON> 21
<OTHER-SE> 20928
<TOTAL-LIABILITIES-AND-EQUITY> 183673
<INTEREST-LOAN> 15111
<INTEREST-INVEST> 499
<INTEREST-OTHER> 304
<INTEREST-TOTAL> 15446
<INTEREST-DEPOSIT> 6892
<INTEREST-EXPENSE> 8452
<INTEREST-INCOME-NET> 6994
<LOAN-LOSSES> 242
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5176
<INCOME-PRETAX> 2342
<INCOME-PRE-EXTRAORDINARY> 1397
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1397
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 3.52
<LOANS-NON> 561
<LOANS-PAST> 545
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1659
<CHARGE-OFFS> 347
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 1584
<ALLOWANCE-DOMESTIC> 1584
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 526
</TABLE>
