UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission file number 0-25478
------------------------------
First Southern Bancshares, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1133624
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 South Court Street, Florence, Alabama 35630
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(256) 764-7131
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
1,674,707 shares of $.01 par value common stock as of November 12, 1998.
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FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
FORM 10-QSB
September 30, 1998
TABLE OF CONTENTS
- - ------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated statements of financial condition (unaudited) 1
Consolidated statements of income (unaudited) 2
Consolidated statement of stockholders' equity (unaudited) 3
Consolidated statements of cash flows (unaudited) 4
Selected notes to consolidated financial statements (unaudited) 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 14
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 14
ITEM 5 - OTHER INFORMATION 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
ii
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FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED (In thousands)
December 31, September 30,
1997 1998
ASSETS -------- --------
Cash and cash equivalents $ 6,420 $ 15,037
Investment securities available for sale, at marke 7,993 3,029
Mortgage-backed securities, held to maturity, at cost 1,432 1,052
Loans held for sale, at cost, which approximates market 223 472
Loans receivable, net 159,535 160,014
Foreclosed real estate 100 381
Premises and equipment, net 3,509 3,913
Federal Home Loan Bank stock, at cost 1,970 1,770
Accrued interest receivable 1,822 1,901
Deferred income taxes 165 135
Other assets 504 389
--------- ---------
TOTAL ASSETS $ 183,673 $ 188,093
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 143,731 $ 132,984
Advances from Federal Home Loan Bank 18,468 34,354
Other notes payable - 1,500
Income taxes currently payable 115 131
Other liabilities 410 544
--------- ---------
Total liabilities 162,724 169,513
--------- ---------
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 and
outstanding 21 21
Additional paid-in capital 11,375 11,404
Retained earnings - Substantially restricted 13,199 13,336
Unearned employee compensation - ESOP (280) (187)
Unearned employee compensation - MRDP (861) (619)
Net unrealized gain (loss) on securities available
for sale (2) 19
Treasury stock, at cost (2,503) (5,394)
--------- ---------
Total stockholders' equity 20,949 18,580
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 183,673 $ 188,093
========= =========
See accompanying selected notes to consolidated financial statements.
1
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FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (In thousands, except per share
amounts)
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
INTEREST INCOME: ------ ------ ------ ------
Loans 3,705 3,671 11,101 10,835
Mortgage-backed securities 33 23 107 76
Investment securities 104 55 244 219
Other 88 164 235 386
------ ------ ------- -------
Total interest income 3,930 3,913 11,597 11,516
INTEREST EXPENSE:
Deposits 1,801 1,527 4,932 4,803
Advances from Federal Home Loan 379 513 1,256 1,257
------ ------ ------- -------
Total interest expense 2,180 2,040 6,188 6,060
------ ------ ------- -------
NET INTEREST INCOME 1,750 1,873 5,409 5,456
PROVISION FOR LOAN LOSSES 61 103 182 224
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,689 1,770 5,227 5,232
------ ------ ------- -------
NON INTEREST INCOME:
Loan fees and service charges 113 158 354 478
Net gains on sale of loans 48 63 231 189
Gains on real estate owned - - 2 2
Loss on sale of other assets - - (2) -
Other 11 9 32 24
------ ------ ------- -------
Total non interest income 172 230 617 693
------ ------ ------- -------
NON INTEREST EXPENSES:
Compensation and employee benefits 633 731 2,610 2,283
Building and occupancy expense 162 188 408 468
Data processing expense 40 95 205 304
Advertising 47 41 126 117
Insurance expense 72 47 192 159
Other 169 174 494 495
------ ------ ------- -------
Total non interest expenses 1,123 1,276 4,035 3,826
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 738 724 1,809 2,099
INCOME TAX EXPENSE 298 270 695 796
------ ------ ------- -------
NET INCOME $ 440 $ 454 $ 1,114 $ 1,303
====== ====== ======= =======
BASIC EARNINGS PER SHARE $ 0.23 $ 0.25 $ 0.58 $ 0.70
====== ====== ======= =======
DILUTED EARNINGS PER SHARE $ 0.23 $ 0.25 $ 0.57 $ 0.69
====== ====== ======= =======
DIVIDENDS PER SHARE
Regular cash dividends $0.125 $0.125 $0.375 $0.375
====== ====== ======= =======
Special cash dividends $ - $ - $ - $0.300
------ ------ ------- -------
Total dividends per share $0.125 $0.125 $0.375 $0.675
====== ====== ======= =======
See accompanying selected notes to consolidated financial statements.
2
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<TABLE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED (Dollars in thousands)
Components of Comprehensive Income
-------------------------------------------
Net un-
Retained realized
earnings loss on
Addi- substan- Unearned avail-
Common stock tional tially employee able Compre- Total
Issued In treasury Paid-in re- compensation for hensive holders'
Shares Amount Shares Amount capital stricted ESOP MRDP sale income equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December
31, 1996 2,076,969 $ 21 (109,400) $(1, 425) $11,334 $12,672 $ (401) $(1,119) $ 40 $ 11,112 $ 21,042
Net income
for the
year ended
December
31, 1997 -- -- -- -- -- 1,397 -- -- -- 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 -- -- 162 162
Common stock
grants to MRDP -- -- -- -- -- -- -- -- -- -- --
Amortization
of MRDP
unearned
compensation -- -- -- -- -- -- -- 258 -- 258 258
Increase in
unrealized
loss on
securities
available
for sale, net
of related
income tax -- -- -- -- -- -- -- -- 38 38 38
--------------------------------------------------------------------------------------------
Net for the
period -- -- (79,930) (1,089) 41 527 121 258 38 1,855 (93)
--------------------------------------------------------------------------------------------
Balances at
December
31, 1997 2,076,969 $ 21 (189,330) $(2,503) $11,375$ 13,199 $ 280 $ (861) $ (2) $ 1,855 $20,949
Net income
for the
nine months
ended
September
30, 1998 -- -- -- -- -- 1,303 -- -- -- 1,303 1,303
Cash dividends -- -- -- -- -- (1,166) -- -- -- -- (1,166)
Options
Exercised -- -- 5,250 87 -- -- -- -- -- -- 87
Acquisition
of treasury
stock -- -- (182,682) (2,978) -- -- -- -- -- -- (2,978)
ESOP shares
committed for
release -- -- -- -- 29 -- 93 -- -- 122 122
Common stock
grants
to MRDP -- -- -- -- -- -- -- -- -- -- --
Amortization
of MRDP
unearned
compensation -- -- -- -- -- -- -- 242 -- 242 242
Increase in
unrealized
loss on
securities
available
for sale,
net of related
income taxes -- -- -- -- -- -- -- -- 21 21 21
Net for the period -- -- (177,432) (2,891) 29 13 93 242 21 1,688 (2,369)
--------------------------------------------------------------------------------------------
Balances at
September
30, 198 2,076,969 $ 21 (366,762) $(5,394) $11,404 $13,336 $187 $ (619) $ 19 $1,688 $18,580
--------------------------------------------------------------------------------------------
</TABLE>
See accompanying selected notes to consolidated financial statements
3
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FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands)
Nine months ended
September 30,
1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES: ------ ------
Net income $ 1,114 $ 1,303
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 199 232
Provision for loan losses 182 224
Provision for deferred income taxes (benefit) (194) 30
Amortization/accretion of premiums/discounts on investment
and mortgage-backed securities (31) (5)
Amortization of deferred loan fees (74) (92)
Fair market value of ESOP shares committed for release
and charged to employee compensation 140 122
Amortization of unearned compensation - MRDP 193 242
(Gains) losses on real estate owned 2 2
(Increase) decrease in:
Loans held for sale 232 (249)
Accrued interest receivable (65) (79)
Other assets 480 115
Increase (decrease) in:
Income taxes currently payable 141 16
Other liabilities (536) 134
------- -------
Net cash provided by operating activities 1,782 1,995
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in total loans (482) (611)
Proceeds from sale of:
Investment and mortgage-backed securities 344 385
Investment securities 1,992 4,985
Real estate owned 20 (283)
Proceeds from maturities of:
Investment and mortgage-backed securities - -
Acquisition of:
Federal Home Loan Bank stock (855) 200
Premises and equipment (301) (636)
------- -------
Net cash provided by (used in) investing activities 718 4,040
------- -------
See accompanying selected notes to consolidated financial statements.
4
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FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands)
Nine months ended
September 30,
1997 1998
CASH FLOWS FROM FINANCING ACTIVITIES: ------ ------
Net increase (decrease) in deposit accounts 9,815 (10,747)
Cash dividends paid (653) (1,166)
Proceeds from FHLB advances (4,115) 15,886
Reductions in other borrowings (4,000) 1,500
Acquisition of treasury stock (1,078) (2,891)
------- -------
Net cash provided by (used in) financing activities (34) 2,582
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,466 8,617
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 4,220 6,420
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,686 $ 15,037
------- -------
SUPPLEMENTAL INFORMATION FOR CASH FLOW:
Noncash transactions:
Increase (decrease) in net unrealized loss on
securities available for sale $ 25 $ 21
Loans foreclosed and transferred to real estate owned $ 294 $ 686
Cash paid during the period for:
Interest $ 6,222 $ 5,974
Income taxes $ 540 $ 625
See accompanying selected notes to consolidated financial statements.
5
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FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- - ------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated interim financial statements as of September 30, 1998 and for
the quarter and nine months then ended include the accounts of the Registrant,
First Southern Bancshares, Inc. (the "Bancshares"), and its wholly-owned
subsidiary, First Southern Bank (the "Bank"). All significant intercompany
balances and transactions have been eliminated in consolidation. Bancshares
and the Bank are collectively referred to herein as the "Company".
The September 30, 1997 and 1998 interim financial statements included in this
report have been prepared by the Company without audit. In the opinion of
management, all adjustments (consisting only of normal recurring entries)
necessary for a fair presentation are reflected in the September 30, 1997 and
1998 interim financial statements. The results of operations for the quarter
and for the nine months ended September 30, 1998 are not necessarily
indicative of the operating results for the full year. The December 31, 1997
Consolidated Statement of Financial Condition presented with the interim
financial statements is derived from the Consolidated Statement of Financial
Condition filed as part of the Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1997. Such Consolidated Statement of Financial
condition included therein was audited and received an unqualified opinion.
NOTE 3 - EARNINGS PER SHARE
Basic and diluted earnings per share are computed based upon the weighted
average common shares outstanding during the period. A reconciliation of the
weighted average of common shares outstanding used in the earnings per share
computation to total shares outstanding follows:
Nine months ended September 30,
------------------------------
1997 1998
---- ----
Common shares outstanding 2,076,969 2,076,969
Treasury shares (141,084) (216,615)
Unreleased ESOP shares (32,628) (22,432)
Options - uncontingent 2,008 9,757
--------- ---------
Basic EPS 1,905,265 1,847,679
Options - contingent 20,198 18,996
Unreleased ESOP shares 32,628 22,432
--------- ---------
Diluted EPS 1,958,091 1,889,107
========= =========
NOTE 4 - SUBSEQUENT EVENT
On October 8, 1998, the Company's Board of Directors declared a cash dividend
of $.125 per share, payable October 30, 1998 to stockholders of record as of
October 20, 1998.
NOTE 5 - COMMITMENTS
At September 30, 1998, the Company had $1.4 million of outstanding net loan
commitments, $10.0 million of unused portions on lines of credit, and $35,000
of outstanding letters of credit.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Southern Bancshares, Inc. ("Bancshares"), a Delaware corporation, was
organized on November 22, 1994. Bancshares is primarily engaged in the
business of directing and planning the activities of its wholly-owned
subsidiary, First Southern Bank (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"). Bancshares and the Bank are
collectively referred to herein as the "Company".
The discussion and analysis included herein covers those material changes in
financial condition, liquidity and capital resources that have occurred since
December 31, 1997, as well as material changes in results of operations during
the three months and nine months ended September 30, 1997 and 1998.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Total assets increased $4,420,000 from $183,673,000 at December 31, 1997, to
$188,093,000 at September 30, 1998. This increase is primarily related to the
increase in cash and cash equivalents due to the increased borrowings from the
Federal Home Loan Bank.
Investment and mortgage-backed securities
The Company did not increase its investments in mortgage-backed securities
during the nine months ended September 30, 1998. The decrease in investment
securities of $5.0 million from $8.0 million at December 31, 1997 to $3.0
million at September 30, 1998 was due to the maturities of investments in
U.S. Government and agency obligations.
Loans
The principal investing activity of the Bank 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 the nine months
ended September 30, 1998, increases from loan originations, particularly in
residential mortgages, was offset by the payoff of commercial loans primarily
associated with one borrower; therefore, the balance of net loans has
increased $700,000 from $159.8 million at December 31, 1997 to $160.5 million
at September 30, 1998.
A comparison of the Bank's loan portfolio analysis at December 31, 1997 and
September 30, 1998 follows:
12/31/97 9/30/98
--------------------- --------------------
Amount Percent Amount Percent
Mortgage loans: ------ ------- ------ -------
Residential $ 75,983 47.6% $ 75,034 46.8%
Commercial 39,141 24.5 37,534 23.4
-------- ----- -------- -----
Total mortgage loans 115,124 72.1 112,568 70.2
Commercial business loans 27,792 17.4 28,923 18.0
Consumer loans 19,978 12.5 21,452 13.4
-------- ----- -------- -----
Total loans 162,894 102.0 162,943 101.6
Less:
Undisbursed loans 1,404 0.9 772 0.5
Unamortized loan fees 148 0.1 85 0.1
Allowance for possible
losses 1,584 1.0 1,600 1.0
-------- ----- -------- -----
Net loans receivable $159,758 100.0% $160,486 100.0%
======== ===== ======== =====
7
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Non performing assets (comprised solely of loans delinquent 90 days or more
and repossessed assets) increased $800,000 from $1.8 million at June 30, 1998
to $2.6 million at September 30, 1998. Non performing assets (as a percent of
total non performing assets) at September 30, 1998 include real estate owned
(14.4%), residential mortgage loans (44.1%), commercial real estate loans
(19.1%), commercial business loans (17.5%), and consumer loans (4.9%). At
September 30, 1998, the allowance for loan losses was $1.6 million and
represented 1.0% of total net loans and 60.6% of non performing assets.
In the opinion of management, at September 30, 1998, the allowance for loan
losses was adequate at that date, however, there can be no assurance that the
Company will not be required to increase the allowance in the future.
At September 30, 1998, the Company had $1.4 million of outstanding net loan
commitments, $10.0 million of unused portions on lines of credit, and $35,000
of outstanding letters of credit.
Deposits and FHLB advances
Deposit balances decreased $10.7 million from $143.7 million at December 31,
1997 to $133.0 at September 30, 1998. The decrease was primarily in
certificates of deposits as the Company had a large block of short term
certificates that matured in the quarter ended March 31, 1998. The Company
changed it strategy from paying aggressive market rates to retain these
certificates of deposits to borrowing long term from the FHLB at a lower
interest rate than the market rate for the certificates of deposits.
At September 30, 1998, savings certificates amounted to $94.6 million, or
71.1%, of the Company's total deposits, including $75.3 million which were
scheduled to mature by September 30, 1999. 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 from savings deposits, FHLB of Atlanta advances and sale of
mortgage loans. In addition, the Company has the ability to adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.
Borrowings from the Federal Home Loan Bank increased $15.9 million from $18.5
million at December 31, 1997, to $34.4 million at September 30, 1998. The
borrowed funds were utilized to increase cash and cash equivalents and offset
the decrease in deposits of $10.7 million, due substantially to maturities of
certificates of deposits. At September 30, 1998, the Company had unused
credit availability with the FHLB of Atlanta of $5.6 million.
Stockholders' equity
At September 30, 1998, aggregate stockholders' equity was $18.6 million as
compared $20.9 million at December 31, 1997. The reduction in stockholders'
equity from the payment of $1.2 million in regular and special dividends and
the net acquisition of treasury stock of $2.9 million was offset by net income
of $1.3 million, and $385,000 of other increases in stockholders' equity
(other comprehensive income) related primarily to the unearned employee stock
benefit compensation plans.
The Company has decided to continue with its stock repurchase program which
was originated in 1995. During the quarter and nine months ended September
30, 1998, the Company acquired 180,222 and 182,682, respectively, at a cost of
$2,939,000 and $2,978,000, respectively, or at an average price per share of
$16.31 and $16.30, respectively. The current program will continue until
August 1999, at which time the Company will decide whether to terminate or
continue the program.
During the quarter ended September 30, 1998, a Company officer and director
exercised stock options granted under the Company's Stock Option Plan. A
total of 5,250 shares were purchased by the officer and director for $61,688
or $11.75 per share. The market value of the shares was $86,718.75.
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 September 30, 1998:
8
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First Southern Bancshares, Inc. (dollars in thousands)
Percentage of
adjusted total
Amount assets
Primary capital ratios:
GAAP capital $ 18,580
Adjustments:
Mortgage servicing rights (9)
Net unrealized loss on securities available
for sale (19)
--------
Tier 1 capital 18,552 9.86%
Minimum Tier 1 (leverage) requirement 7,524 4.00
-------- -----
Excess $ 11,028 5.86%
======== ====
Risk-based capital ratios:
Core (Tier I) capital $ 18,552 12.60%
Minimum core capital 5,891 4.00
-------- -----
Excess $ 12,661 8.60%
======== ====
Risk-based capital $ 20,152 13.68%
Minimum risk-based capital requirement 11,782 8.00
-------- -----
Excess $ 8,370 5.68%
======== ====
Under the FDICIA prompt corrective action provisions applicable to banks, the
most recent notification from the FDIC categorized the Bank a 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) $ 21,417 14.55%
To be well capitalized under the FDICIA
prompt corrective action provisions 14,719 10.00%
-------- -----
Excess $ 6,698 4.55%
======== =====
Tier 1 capital (to risk-weighted assets) $ 19,817 13.46%
To be well capitalized under the FDICIA
prompt corrective action provisions $ 8,832 6.00%
-------- -----
Excess $ 10,985 7.46%
======== =====
Tier 1 capital (to average assets) $ 19,817 10.50%
To be well capitalized under the FDICIA
prompt corrective action provisions $ 9,436 5.00%
-------- -----
Excess $ 10,381 5.50%
======== =====
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 of Atlanta
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. Since becoming subject to this regulation, the
Bank has complied with this requirement. At September 30, 1998, the Bank's
qualifying reserves of $1.4 million significantly exceeded the required
reserve of $272,000.
9
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Year 2000 Issue
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. Many existing computer programs (information technology "IT
systems") and embedded technology such as microcontrollers ("non-IT systems")
use only two digits to identify a year in the data field. These programs were
designed and developed without considering the impact of the upcoming change
in the century. If not corrected, computer and/or equipment applications
could fail or create erroneous results in the year 2000. The Company has
completed an initial study of its computerized IT systems, equipment non-IT
systems, 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 through 1999.
Bancshares contingency plan includes the use of alternative vendors, another
bank's system or manual entry until an acceptable alternative is established.
The Year 2000 Issue affects virtually all companies. Bancshares does not
estimate that the costs associated with the Year 2000 Issue will materially
impact future operating results. Such costs will be recognized as incurred.
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 IT and non-IT
systems on loan customers. The failure 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.
COMPARISON OF OPERATING RESULTS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
General
Consolidated net income for the quarter ended September 30, 1998, increased
3.2% to $454,000 from $440,000 in the comparable quarter in 1997. Basic
earnings per share for the third quarter of 1998 was $0.25 as compared to
$0.23 for the comparable period in 1997, and diluted earnings per share for
the third quarter of 1998 was $0.25 as compared to $0.23 for the comparable
period in 1997.
Net Interest Income
The third quarter net interest income after provision for loan losses was $1.8
million, as compared to the $1.7 million reported for the comparable period in
1997.
Interest Income
Interest income of $3.9 million for the quarter ended September 30, 1998, was
consistent with the comparable quarter in 1997. Average interest earning
assets in the third quarter of 1998 were $175.4 million as compared to $176.3
million in 1997. The average yield on interest-earning assets was 8.75% in
1998 and 8.77% in 1997.
Interest on loans for the quarter ended September 30, 1998, of $3.7 was
consistent with the comparable quarter in 1997. The third quarter average
loan balance was $162.0 million in 1998 as compared to $161.2 million in 1998,
and the average yield on total loans was 9.07% in 1998 and 9.19% in 1997.
Interest on mortgage-related securities decreased by $10,000 from $33,000
during the three months ended September 30, 1997 to $23,000 during the same
period in 1998 as a result of the average balance of mortgage-related
securities decreasing by $485,000 during the three months ended September 30,
1998 ($1.1 million) as compared to the three months ended September 30, 1997
($1.6 million).
Income from the investment securities portfolio decreased by $49,000 from
$104,000 during the three months ended September 30, 1997 to $55,000 during
the same period in 1998 as the result of the decrease in the average balance
from $7.8 in third quarter of 1997 to $3.8 in the third quarter of 1998. The
yield on investment securities was 5.35% in the third quarter of 1997 and 5.8%
in the third quarter of 1998.
10
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<PAGE>
Other interest income is comprised of earnings on the overnight account at the
FHLB of Atlanta, FHLB dividends, FHLB time deposits, and earnings on money
market funds. The $76,000 increase in other interest income in the third
quarter of 1998 to $164,000 when compared to the third quarter of 1997 other
interest income of $88,000 is due to an increase in the average balance of
FHLB deposits (time deposits and overnight accounts) by $6.6 million from $2.2
million in third quarter of 1997 to $8.8 million in the third quarter of 1998.
The increase in the average balance of FHLB deposits was due to the temporary
investment of the increased borrowings from the FHLB.
Interest Expense
Interest expense for the third quarter 1998 was $2.0 million compared with
$2.2 million for the third quarter of 1997, representing a decrease of
$140,000 or 6.4%. This decrease represents the net result of management's
decision not to pursue certificates of deposits with highly competitive rates
and to fund the reduction in deposits with borrowings from the FHLB as the
interest rates on borrowings had been reduced.
Interest on deposits decreased $274,000 or 15.2% from $1.8 million in the
third quarter 1997 to $1.5 million in the third quarter of 1998. The
decrease reflects a decrease in the average balance of deposits and interest
costs on the average deposit balance in the third quarter of 1998 as compared
to the third quarter of 1997. Average deposits in the third quarter of 1998
were $131.7 million as compared to the third quarter of 1997 of $138.7
million. The interest cost on average deposit balances was 4.64% in the third
quarter of 1998 and 5.20% in the third quarter of 1997.
Interest expense related to advances from the FHLB of Atlanta and other
borrowings increased by $134,000 to $513,000 in the third quarter of 1998 as
compared to the 1997 third quarter total of $379,000. The increase in
interest expense reflects an increase of $9.4 million in the average
borrowings from the FHLB from $25.7 million in the third quarter of 1997 to
$35.1 million in 1998. This cost of the increase in the average borrowing
from the FHLB was partially offset by a decrease in the average interest costs
on FHLB borrowings from 5.87% in the third quarter of 1997 as compared to
5.70% in 1998.
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 third quarter of 1998, the Company provided $103,000 for
its anticipated loan losses, as compared to $61,000 for the third quarter in
1997. The increase in the provision during the third quarter over the
comparable quarter of 1997, was due to loan charge offs of $99,000 incurred in
1998, mostly in consumer and commercial non-real estate loans. Additional
charge offs may be incurred and additional provisions for loan losses 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.
Non-interest Income
Non-interest income increased by $58,000 in the third quarter of 1998 to
$230,000 as compared to $172,000 reported in the comparable quarter of 1997.
This increase was principally the result of an increase in loan fees and
service charges from $113,000 in the third quarter of 1997 to $158,000 in the
third quarter of 1998. This increase is due largely to the increased activity
in refinanced loans resulting from lower mortgage rates.
Non-interest Expense
The third quarter non interest expenses for 1998 increased $153,000 or 13.6%
to $1.3 million from $1.1 million in the third quarter 1997. The overall
increase is related to the opening of an additional branch including
additional employees and occupancy expense.
11
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<PAGE>
Income Taxes
Income tax expense for the third quarter of 1997 and 1998 was $298,000 and
$270,000, respectively. Such amounts represent an estimated effective tax
rate of approximately 38% for 1998 and 40% for 1997.
COMPARISON OF OPERATING RESULTS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
General
Consolidated net income for the nine months ended September 30, 1998,
increased 17% to $1,303,000 from $1,114,000 for the comparable nine months in
1997. Basic earnings per share for the nine months ended September 30, 1998,
was $0.70 as compared to $0.58 for the comparable period in 1997, and diluted
earnings per share for the nine months ended September 30, 1998 was $0.69 as
compared to $0.57 for the comparable period in 1997.
Net Interest Income
For the nine months ending September 30, 1998, net interest income after
provision for loan losses increased to $5,232,000 from $5,227,000 reported for
the comparable period in 1997. Non interest expenses for the nine months ended
September 30, 1998 decreased $209,000 to $3,826,000 in 1998 from a comparable
1997 level of $4,035,000, primarily due to the decrease in employee
compensation and benefit expense related to the expense recognized in 1997 for
the planned termination of the Company's defined benefit retirement plan.
Interest Income
Interest income for the nine months ended September 30, 1998 was $11.5 million
compared with $11.6 million for the nine months ended September 30, 1997,
representing a decrease of $81,000 or 0.7%. The decrease was primarily
attributable to a decrease in average interest earning assets in the first
nine months of 1998 to $173.7 million as compared to $174.1 in 1997, primarily
due to a reduction in average net loans. In addition, the average yield on
interest-earning assets decreased from 8.77% for the nine months ended
September 30, 1997 to 8.75% for the nine months ended September 30, 1998, as a
result of a shift in the portfolio from loans to lower yielding FHLB time
deposits. This shift is the result of commercial loan payoffs as further
discussed below.
Interest on loans decreased $176,000 to $10.8 million during the nine months
ended September 30, 1998 as compared to the same period in 1997 ($11.0
million). The decrease was primarily attributable to a decrease of $2.9
million in average loan balances in the first nine months of 1998 ($160.9
million) from the comparable period in 1997 ($163.8 million). The decrease
was partially offset as the average yield on total loans increased from 8.96%
in the first nine months of 1997 to 8.98% during the first nine months of
1998, as a result of the increase within the loan portfolio to higher yielding
commercial mortgage and commercial business loans.
Interest on mortgage-related securities decreased by $31,000 from $107,000
during the nine months ended September 30, 1997 to $76,000 during the same
period in 1998 as a result of the average balance of mortgage-related
securities decreasing by $491,000 during the nine months ended September 30,
1998 ($1.7 million) as compared to the nine months ended September 30, 1997
($1.3 million). Additionally, the average yield from such securities
decreased from 8.13% in the first nine months of 1997 to 8.06% in the first
nine months of 1998 as a result of payoffs in the mortgage-related securities.
Income from the investment securities portfolio decreased by $25,000 from
$244,000 during the nine months ended September 30, 1997 to $219,000 during
the same period in 1998 as the result average balance of investment securities
decreasing by $1.5 million during the nine months ended September 30, 1998
($5.1 million) as compared to the nine months ended September 30, 1997 ($6.6
million). This decrease was partially offset by the increase in the average
yield on investment securities from 4.95% in the first nine months of 1997 to
5.74% in the first nine months of 1998 as a result of 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, FHLB time deposits, and earnings on money
market funds. The $151,000 increase in other interest income in the first
nine months of 1998 to $386,000 when compared to the first nine months of 1997
other interest income of $235,000 is due to the increased interest earnings on
FHLB deposits (time deposits and overnight accounts) due to a increase in
average invested balances from $2.0 million in the first nine
12
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<PAGE>
months of 1997 to $6.5 million in the comparable 1998 period. The increase
was partially offset by a decrease in FHLB dividends from $122,000 during the
first nine months of 1997 to $88,000 in the first nine months of 1998, and a
decrease in the yield on the average balance of FHLB overnight and time
deposits from 7.63% in the first nine months of 1997 to 6.03 in the comparable
period of 1998.
Interest Expense
Interest expense for the nine months ended September 30, 1998 of $6.1 million
was consistent with the comparable period in 1997. Interest on deposits for
the nine months ended September 30, 1998 was $4.8 million compared with $4.9
million for the nine months ended September 30, 1997, representing a decrease
of $129,000 or 2.6%. The decrease is due to a $708,000 million decrease in
average deposits in the first nine months of 1997 ($136.4 million) as compared
to the first nine months of 1998 ($135.7 million). In addition, the 1998
average interest cost decreased to 4.72% from 4.82% in the comparable period
of 1997.
Other interest expense primarily relates to FHLB of Atlanta borrowings and was
consistent at $1.3 million in the first nine months of 1998 and 1997. An
increase in the average borrowings to $29.0 million during the nine months
ended September 30, 1998 from $28.3 million in the nine months ended September
30, 1997 was offset by a decrease in interest costs on average FHLB advances
decreased from 5.84% in 1997 to 5.73% in 1998 as advances were refinanced at
lower fixed 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 the first nine months of 1998, the Company provided $224,000
for its anticipated loan losses, as compared to $182,000 for the first nine
months in 1997. The increase in the provision was due to loan charge offs of
$228,000 incurred in 1998, mostly in consumer and commercial non-real estate
loans. Additional charge offs may be incurred and additional provisions for
loan losses 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.
Non-interest Income.
Non-interest income increased by $76,000 in the first nine months of 1998 to
$693,000 as compared to $617,000 reported in the comparable nine months of
1997. This increase was the result of an increase in loan and service fees of
$124,000 from $354,000 in the first nine months of 1997 as compared to
$478,000 for the comparable period in 1998, and the reduction of $42,000 in
net gains on sale of loans in the first nine months of 1998 as compared to the
comparable period of 1997. The increase in loan and service fees are due
largely to processing fees on consumer and commercial loans. Gain on sale of
loans has decreased as portfolio sales of loans were curtailed as the Bank had
excess funds from the additional borrowings from the FHLB of Atlanta.
Non-interest Expense.
Non-interest expenses decreased $209,000 or 5.2% to $3.8 million for the first
nine months of 1998 compared to $4.0 million for the comparable period in
1997. The decrease is primarily related to the decrease in employee
compensation and benefit expense, as in the first nine months of 1997, the
Company recognized the expense for the planned termination of the defined
benefit retirement plan.
Income Taxes
Income tax expense for the nine months ended September 30, 1997 and 1998 was
$695,000 and $796,000, respectively. Such amounts represent an estimated
effective tax rate of approximately 38% for both 1998 and 1997.
13
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Neither the Registrant nor the Bank is a party to any material legal
proceedings at this time. From time to time, the Bank is involved in various
claims and legal actions arising in the ordinary course of business.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
(3a) Certificate of Incorporation of the Company*
(3a)(i) Certificate of Amendment of Certificate of Incorporation****
(3b) Bylaws of the Company*
(3b)(i) Amendment to Bylaws dated September 10, 1998
(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***
(27) Financial Data Schedule
---------------------
* Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended.
** Incorporated by reference to the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders.
*** Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
**** Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1997.
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended September 30, 1998.
14
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<PAGE>
SIGNATURES
Pursuant to the requirements 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 November 14, 1998 /s/ Charles L. Frederick, Jr.
-------------------------------------
Mr. Charles L. Frederick, Jr.
President and Chief Executive Officer
Date November 14, 1998 /s/ Ms. Glenda Young
-------------------------------------
Ms. Glenda Young
Senior Vice President and Chief
Accounting Officer
15
<PAGE>
<PAGE>
Exhibit (3b)(i)
FIRST SOUTHERN BANCSHARES, INC.
RESOLVED, that Article III, Section 2 of the Bylaws is hereby amended to
read as follows:
"SECTION 2. Number, Term and Election. The number of directors shall be
fixed by resolution of the board of directors adopted from time to time and
shall be divided into three classes as nearly equal in number as possible.
The members of each class shall be elected for a term of three years and until
their successors are elected or qualified. The board of directors shall be
classified in accordance with the provisions of the Corporation's Certificate
of Incorporation. The board of directors may increase the number of members
of the board of directors but in no event shall the number of directors be
increased in excess of twenty-five."
Adopted by the Board of Directors on September 10, 1998.
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5615
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