<PAGE>
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 March 31, 1999
-----------------
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: 1,644,643 shares of $.01 par
value common stock as of May 10, 1999.
i
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 1999
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 16
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 16
ITEM 5 - OTHER INFORMATION 16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
ii
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED (IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,188 $ 16,324
Investment securities available for sale, at market 2,016 2,012
Mortgage-backed securities, held to maturity, at cost 945 731
Loans held for sale, at cost, which approximates market 659 356
Loans receivable, net 152,594 150,379
Foreclosed real estate and other assets 710 1,151
Premises and equipment, net 3,852 3,787
Federal Home Loan Bank stock, at cost 1,918 1,918
Accrued interest receivable 1,758 1,568
Deferred income taxes 397 399
Other assets 338 350
---------- ----------
TOTAL ASSETS $ 178,375 $ 178,975
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 127,550 $ 128,570
Advances from Federal Home Loan Bank 31,316 31,278
Other notes payable - 300
Income taxes currently payable 356 346
Other liabilities 1,145 527
---------- ----------
Total liabilities 160,367 161,021
---------- ----------
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 11,414 11,419
Retained earnings - Substantially restricted 13,340 13,475
Unearned employee compensation - ESOP (172) (157)
Unearned employee compensation - MRDP (550) (490)
Net unrealized gain (loss) on securities available for sale 11 9
Treasury stock, at cost (6,056) (6,323)
---------- ----------
Total stockholders' equity 18,008 17,954
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,375 $ 178,975
========== ==========
</TABLE>
See accompanying selected notes to consolidated financial statements.
1
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (In thousands, except per share
amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
<S> <C> <C>
INTEREST INCOME:
Loans 3,540 3,242
Mortgage-backed securities 28 16
Investment securities 91 38
Other 121 148
---------- ----------
Total interest income 3,780 3,444
INTEREST EXPENSE:
Deposits 1,712 1,340
Advances from Federal Home Loan Bank and other 338 439
---------- ----------
Total interest expense 2,050 1,779
---------- ----------
NET INTEREST INCOME 1,730 1,665
PROVISION FOR LOAN LOSSES 60 195
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,670 1,470
---------- ----------
NON INTEREST INCOME:
Loan fees and service charges 146 157
Net gains on sale of loans 56 78
Loss on sale of other assets - -
Other 8 12
---------- ----------
Total non interest income 210 247
---------- ----------
NON INTEREST EXPENSES:
Compensation and employee benefits 736 712
Building and occupancy expense 133 140
Data processing expense 102 90
Advertising 43 38
Insurance expense 54 42
Other 160 158
---------- ----------
Total non interest expenses 1,228 1,180
---------- ----------
INCOME BEFORE INCOME TAXES 652 537
INCOME TAX EXPENSE 246 213
---------- ----------
NET INCOME $ 406 $ 324
========== ==========
BASIC EARNINGS PER SHARE $ 0.22 $ 0.20
========== ==========
DILUTED EARNINGS PER SHARE $ 0.21 $ 0.19
========== ==========
DIVIDENDS PER SHARE
Regular cash dividends $ 0.125 $ 0.125
Special cash dividends $ 0.300 $ -
---------- ----------
Total dividends per share $ 0.425 $ 0.125
========== ==========
</TABLE>
See accompanying selected notes to consolidated financial statements.
2
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED (Dollars in
thousands)
<TABLE>
<CAPTION>
Retained Unearned
Common stock Additional earnings employee
Issued In treasury paid-in Substantially compensation
Shares Amount Shares Amount capital restricted ESOP MRDP
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 2,076.969 $ 21 (189,330) $ (2.503) $ 11,375 $ 13,199 $ (280) $ (861)
Net income for the year
ended December 31, 1998 - - - - - 1,502 - -
Cash dividends - - - - - (1,361) - -
Options exercised - - 5,250 87 - - - -
Acquisition of treasury stock - - (224,182) (3,640) - - - -
ESOP shares committed
for release - - - - 39 - 108 -
Amortization of MRDP
unearned compensation - - - - - - - 311
Increase in unrealized loss on
securities available for sale,
net of related income taxes - - - - - - - -
------------------------------------------------------------------------------------------------
Net for the period - - (218,932) (3,553) 39 141 108 311
------------------------------------------------------------------------------------------------
Balances at December 30, 1998 2,076,969 $ 21 (408,262) $ (6,056) $ 11,414 $ 13,340 $ (172) $ (550)
Net income for the three months
ended March 31, 1999 - - - - - 324 - -
Cash dividends - - - - - (189) - -
Options exercised - - - - - - - -
Acquisition of treasury stock - - (20,000) (267) - - - -
ESOP shares committed
for release - - - - 5 - 15 -
Amortization of MRDP
unearned compensation - - - - - - - 60
Increase in unrealized loss on
securities available for sale,
net of related income taxes - - - - - - - -
------------------------------------------------------------------------------------------------
Net for the period - - (20,000) (267) 5 135 15 60
------------------------------------------------------------------------------------------------
Balances at March 31, 1999 2,076,969 $ 21 (428,262) $ (6,323) $ 11,419 $ 13,475 $ (157) $ (490)
================================================================================================
<CAPTION>
Net
Unrealized
loss on Total
securities stock- Compre-
available holders' hensive
for sale equity income
<S> <C> <C> <C>
Balances at December 31, 1997 $ (2) $ 20,949 1,855
---------
Net income for the year
ended December 31, 1998 - 1,502 1,502
Cash dividends - (1,361) -
Options exercised - 87 -
Acquisition of treasury stock - (3,640) -
ESOP shares committed
for release - 147 147
Amortization of MRDP
unearned compensation - 311 311
Increase in unrealized loss on
securities available for sale
net of related income taxes 13 13 13
----------------------------------
Net for the period 13 (2,941) 1,973
----------------------------------
Balances at December 30, 1998 $ 11 $18,008 $ 1,973
============
Net income for the three month
ended March 31, 1999 - 324 324
Cash dividends - (189) -
Options exercised - - -
Acquisition of treasury stock - (267) -
ESOP shares committed
for release - 20 20
Amortization of MRDP
unearned compensation - 60 60
Increase in unrealized loss on
securities available for sal
net of related income taxes (2) (2) (2)
-----------------------------------
Net for the period (2) (54) 402
-----------------------------------
Balances at March 31, 1999 $ 9 $ 17,954 $ 402
===================================
</TABLE>
See accompanying selected notes to consolidated financial statements
3
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 406 $ 324
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 72 79
Provision for loan losses 60 195
Provision for deferred income taxes (benefit) 14 (2)
Amortization/accretion of premiums/discounts on investment
and mortgage-backed securities (2) 8
Amortization of deferred loan fees (26) (26)
Fair market value of ESOP shares
committed for release and charged to
employee compensation 96 20
Amortization of unearned compensation - MRDP 65 60
(Gains) losses on real estate owned - -
(Gain) losses on sale of premises and equipment
Loss on disposal of premises and equipment
(Increase) decrease in:
Loans held for sale (115) 303
Accrued interest receivable (27) 190
Other assets 131 (12)
Increase (decrease) in:
Income taxes currently payable 28 (10)
Other liabilities 110 (618)
----------- -------------
Net cash provided by operating activities 812 512
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in:
Total loans 1,335 2,046
Real estate owned
Proceeds from maturity of:
Investment and mortgage-backed securities 98 206
Investment securities 2,482 2
Real estate owned - (441)
Proceeds from sale of:
Investment and mortgage-backed securities - -
Acquisition of:
Federal Home Loan Bank stock 547 -
Premises and equipment (100) (14)
----------- -------------
Net cash provided by (used in) investing activities 4,362 1,798
----------- -------------
</TABLE>
See accompanying selected notes to consolidated financial statements.
4
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (9,772) 1,020
Cash dividends paid (734) (189)
Proceeds from (reduction in) FHLB advances 7,962 (38)
Proceeds from other borrowings - 300
Acquisition of treasury stock, net - (267)
----------- -----------
Net cash provided by (used in) financing activities (2,544) 826
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,630 3,136
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 6,420 13,188
CASH AND CASH EQUIVALENTS -
----------- -----------
END OF PERIOD $ 9,050 $ 16,324
=========== ===========
SUPPLEMENTAL INFORMATION FOR CASH FLOW:
Noncash transactions:
Increase (decrease) in net unrealized loss on securities
available for sale $ 6 $ (2)
Loans foreclosed and transferred to real estate owned $ - $ 127
Cash paid during the period for:
Interest $ 1,981 $ 1,791
</TABLE>
See accompanying selected notes to consolidated financial statements.
5
<PAGE>
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 March 31, 1999 and for the
three 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 March 31, 1998 and 1999 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 March 31, 1998 and 1999 interim financial
statements. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the operating results for the full year. The
December 31, 1998 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, 1998. 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:
Three months ended March 31
----------------------------
1998 1999
----------- -----------
Common shares outstanding 2,076,969 2,076,969
Treasury shares (189,330) (419,929)
Unreleased ESOP shares (23,838) (17,163)
Options - uncontingent 5,234 4,537
----------- ------------
Basic EPS 1,869,035 1,644,414
Options - contingent 21,056 2,935
Unrealeased ESOP shares 23,838 17,163
---------- ------------
Diluted EPS 1,913,929 1,664,512
========== ============
NOTE 4 - SUBSEQUENT EVENT
On April 21, 1999, the Company's Board of Directors declared a cash dividend of
$.125 per share, payable May 13, 1999 to stockholders of record as of May 3,
1999.
NOTE 5 - COMMITMENTS
At March 31, 1999, the Company had $1.3 million of outstanding net loan
commitments, $12.6 million of unused portions on lines of credit, and $10,000
of outstanding letters of credit.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Southern Bancshares, Inc. ("Bancshares") s 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 consolidated operating results of the Company include those of the Bank and
Bancshares. All significant intercompany transactions and balances have been
eliminated in consolidation. 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, 1998, as well as certain material changes in results of operations
during the three months ended March 31, 1998 and 1999.
FORWARD-LOOKING STATEMENTS SAFE-HARBOR STATEMENT
This report may contain forward-looking statements that are subject to numerous
assumptions, risks and uncertainties. Statements pertaining to future periods
are subject to uncertainty because of the possibility of changes in underlying
factors and assumptions. Actual results could differ materially from those
contained in or implied by such forward-looking statements for a variety of
factors including: sharp and rapid changes in interest rates; significant
changes in the economic scenario from the current anticipated scenario which
could materially change anticipated credit quality trends and the ability to
generate loans; significant delay in or inability to execute strategic
initiatives designed to grow revenues and/or control expenses; and significant
changes in accounting, tax or regulatory practices or requirements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's primary lending area is currently experiencing a lack of growth
and increased competition among the banks. Due to the lack of economic growth,
many competitor banks have offered low rates to the Company's loan customers
that the company was unwilling to match due to the low interest yield commitment
over the long term. The same hold true for deposits as competitor banks are
offering aggressive rates that are higher than the interest cost to the Company
of borrowing from the FHLB. Therefore, management has decided to retain loans or
originate and retain new loans that have a satisfactory long term yield, and to
offer competitive rates for deposits while maintaining an acceptable interest
spread. As a result, average interest bearing assets have decreased from $175.7
million at March 31, 1998 to $166.1 million at March 31, 1999. Average interest
bearing liabilities have decreased from $165.1 million at March 31, 1998 to
$152.6 million at March 31, 1999. The interest spread between the average yield
on the average interest bearing assets and the average cost on average interest
bearing liabilities has remained constant at 3.64% in the first quarter of 1998
and 1999.
7
<PAGE>
CASH AND CASH EQUIVALENTS
As disclosed in the Company's "Consolidated Statements of Cash Flows," net cash
provided by operating activities decreased from $812,000 in the first quarter of
1998 to $512,000 in the first quarter of 1999 primarily due to the decrease in
net income in 1999. Cash from investing activities decreased from a cash source
of $4.4 million in the first quarter of 1998 to a source of cash of $1.8 million
in the first quarter of 1999, as a result of $2.6 million of maturities of
investments and mortgage backed securities in 1998. The decrease in cash from
investing activities was offset by the increase in cash provided from financing
activities. Cash provided from financing activities increased from $(2.5)
million in the first quarter 1998 to $826,000 in the first quarter 1999. The
primary sources in the first quarter 1999 were the increase in deposits of $1.0
million.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The Company did not increase its investments in mortgage-backed securities
during the first quarter 1999. The decrease in mortgage-backed securities held
to maturity of $214,000 from $945,000 at December 31, 1998 to $731,000 at March
31, 1999, was primarily due to the maturity of investments securities.
LOANS
The principle investing activity of the Company is the origination of
residential mortgage loans, commercial business and 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 first quarter 1999 the average balance and year end balance
of loans declined as a result of the change in management strategy as previously
discussed. The average balance declined $7.8 million from $160.2 million in the
first quarter 1998 to $152.4 million in the first quarter 1999.
The loan portfolio composition is changing as the result of management's
continued efforts to expand and diversify the Company's loan portfolio into
higher yielding 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, 1998 and March 31, 1999 follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
------------------ --------------
Amount Percent Amount Percent
------- ------- ------ -------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $ 69,524 47.6% $ 65,392 43.4 %
Commercial 35,566 23.2 36,196 24.0
-------- ----- -------- ------
Total mortgage loans 105,090 68.6 101,588 67.4
Commercial business loans 29,010 18.9 30,300 20.1
Consumer loans 21,766 14.2 21,191 14.1
-------- ----- -------- ------
Total loans 155,866 101.7 153,079 101.6
Less:
Undisbursed loans 1,103 0.7 886 0.6
Unamortized loan fees 69 0.1 58 0.1
Allowance for possible losses 1,441 0.9 1,400 0.9
-------- ----- -------- ------
Net loans receivable $153,253 100.0% $150,735 100.0%
======== ===== ======== ======
</TABLE>
The Company's loan portfolio continues to reflect the market served by the
Bank's primary lending area. Mortgage loans decreased in volume and percentage
of the portfolio as the Company has not been inclined to invest in low yielding
loans for the long term.
8
<PAGE>
At March 31, 1999, the allowance for loan losses was $1.4 million and
represented 0.9% of total net loans and 50.0% of non performing assets. The
provision for loan losses was $195,000 in the first quarter of 1999 as compared
to $60,000 in the first quarter of 1998. The increase in the provision was due
to loan charge-offs of $247,000 incurred in 1999, mostly in impaired commercial
loans. In the opinion of management at March 31, 1999, 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 March 31, 1999, the Company had no significant commitments to originate
fixed-rate loans. At March 31, 1999, the Company had commitments to originate
variable rate loans, including unused commercial business lines of credit, and
standby letters of credit as follows (in thousands):
<TABLE>
<S> <C>
Commitments to extend credit $ 1,271
Unused lines of credit $12,623
Standby letters of credit $ 10
</TABLE>
DEPOSITS, FHLB ADVANCES AND OTHER NOTES PAYABLE
Deposit balances increased $1.0 million from $127.6 million at December 31, 1998
to $128.6 at March 31, 1999. The increase was primarily in certificates of
deposits. The Company changed its strategy from paying aggressive market rates
to retain these certificates of deposits to borrowing from the FHLB at a lower
interest rate than the market rate for the certificates of deposits. As a
result of this strategy, interest paid on deposits decreased 21.7% or $372,000
from $1.7 million in the first quarter of 1998 to $1.3 million in the first
quarter 1999, and the interest rate paid on the average balance of deposits
decreased from 4.83% in the first quarter of 1998 to 4.42% in the first quarter
of 1999. The decrease in interest paid on deposits in the first quarter of 1999
was partially offset by the increase in interest paid on FHLB advances of
$101,000 from $338,000 in the first quarter of 1998 to $439,000 in the first
quarter of 1999; however the effective rate paid on the average outstanding
balance of FHLB advances decreased from 5.77% in the first quarter of 1998 to
5.58% in the first quarter of 1999.
At March 31, 1999, savings certificates amounted to $89.5 million, or 69.6%, of
the Company's total deposits, including $72.4 million that were scheduled to
mature by March 31, 2000. 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.
There were no additional borrowings from the Federal Home Loan Bank in the three
months ended March 31, 1999. At March 31, 1999, the Company had unused credit
availability with the FHLB of $8.7 million.
STOCKHOLDERS' EQUITY
At March 31, 1999, and December 31, 1998, aggregate stockholders' equity
remained constant at $18.0 million. The reduction in stockholders' equity from
the payment of $189,000 in dividends and the acquisition of treasury stock of
$267,000, were offset by net income of $324,000, and $78,000 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
started in 1995. During the first quarter of 1999 the Company acquired 20,000
shares at a cost of $267,000 or at an average price per share of $13.34. The
current program will continue until August 1999, at which time the Company will
decide whether to terminate or continue the program.
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.
9
<PAGE>
As summarized below, Bancshares and the Bank are in compliance with all such
requirements at March 31, 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF
ADJUSTED TOTAL
AMOUNT ASSETS
FIRST SOUTHERN BANCSHARES, INC: (DOLLARS IN THOUSANDS)
<S> <C> <C>
Primary capital ratios:
GAAP capital $ 17,954
Adjustments:
Mortgage servicing rights (7)
Net unrealized loss on securities available for sale (9)
-------------
Tier 1 capital 17,938 10.06%
Minimum Tier 1 (leverage) requirement 7,130 4.00%
------------- ------------
Excess $ 10,808 6.06%
============= ============
Risk-based capital ratios:
Core (Tier 1) Capital 17,938 12.89%
Minimum core capital 5,568 4.00%
------------- ------------
Excess $ 12,370 8.89%
============= ============
Risk-based capital $ 19,338 13.89%
Minimum risk-based capital requirement 11,136 8.00%
------------- ------------
Excess $ 8,202 5.89%
============= ============
</TABLE>
10
<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.
<TABLE>
<CAPTION>
PERCENTAGE OF
ADJUSTED TOTAL
AMOUNT ASSETS
FIRST SOUTHERN BANK: (DOLLARS IN THOUSANDS)
<S> <C> <C>
Total capital (to risk-weighted assets) $ 19,328 13.90%
To be well capitalized under the FDICIA
prompt corrective action provisions 13,908 10.00%
--------- --------
Excess $ 5,420 3.90%
========= ========
Tier 1 capital (to risk-weighted assets) $ 17,928 12.89%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,345 6.00%
--------- --------
Excess $ 9,583 6.89%
========= ========
Tier 1 capital (to average assets) $ 17,928 10.06%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,907 5.00%
--------- --------
Excess $ 9,021 5.06%
========= ========
</TABLE>
LIQUIDITY
The Bank 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
Bank'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 that 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 March 31, 1999, the Bank's qualifying reserves of $1.7 million
significantly exceeded the required reserve of $282,000.
Additionally, Bancshares requires cash for various operating needs including
dividends to shareholders and the general corporate expenses. The primary
source of liquidity for the parent holding company is dividends from the Bank.
At March 31, 1999, the Bank could have paid additional dividends for Bancshares
of $5.4 million while continuing to meet the capital requirements for "well-
capitalized" banks. Bancshares does not anticipate any liquidity requirements
in the near future that it will not be able to meet.
11
<PAGE>
Year 2000
The Company and Bank are subject to risks associated with the "Year 2000"
software problem, a term that 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.
Thomas N. Ward, Executive Vice President and Chief Operating Officer, is the
chairman of the Company's Year 2000 task force. This task force has adopted a
plan to address the Year 2000 problem and periodically reports to the Company's
audit committee on its progress. The plan is comprised of the following phases:
1. Awareness - (i) address the Year 2000 problem and gain executive level
support and sponsorship, (ii) establish Year 2000 task force and develop an
overall strategy, and (iii) ensure that everyone in the organization is fully
aware of the issue.
STATUS: This phase has been completed by the task force; however, the
awareness activity is ongoing to keep employees updated, and especially as it
relates to informing customers of the Company's Year 2000 preparedness.
2. Assessment - (i) identify core business areas and processes, inventory and
analyze systems supporting the core business areas, and prioritize their
conversion or replacement, (ii) develop contingency plans to handle data
exchange issues, lack of data, and bad data, and (iii) identify and secure the
necessary resources.
STATUS: This phase was completed as of December 31, 1998. The Company 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 expense to modify and test its computer programs and systems are estimated
to be $50,000 through 1999.
3. Renovation - (i) Convert, replace, or eliminate selected platforms,
applications, databases, and utilities, and (ii) modify interfaces.
STATUS: This phase was completed as of December 31, 1998.
4. Validation - (i) Test, verify converted or replaced platforms,
applications, databases, and utilities, (ii) test the performance,
functionality, and integration of converted or replaced platforms,
applications, databases, utilities, and interfaces in an operational
environment.
STATUS: This is an ongoing phase and is being conducted as revised or new
computerized IT systems or equipment non-IT systems are evaluated by the task
force.
5. Implementation - (i) Implement converted or replaced platforms,
applications, databases, utilities, and interfaces, and (ii) implement data
exchange contingency plans, if necessary.
STATUS: This phase is scheduled to occur throughout 1999 and includes
disaster recovery and contingency plans if failure occurs in the year 2000.
Implementation of revised or new computerized IT systems or equipment non-IT
systems is ongoing after the related validation phase is completed. The
Company's contingency plan includes the use of alternative vendors, another
bank's system or manual entry until an acceptable alternative is established.
Although the Company is addressing the Year 2000 problem, the 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. This
evaluation process is ongoing and is expected to be completed by the fourth
quarter of 1999, and includes customer awareness brochures for all customers,
and verification of compliance with commercial business customers with loan
balances over $250,000. 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.
12
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
General
Consolidated net income for the quarter ended March 31, 1999, decreased to
$324,000 from $406,000 in the comparable quarter in 1998. Basic earnings per
share for the first quarter of 1999 were $0.20 as compared to $0.22 for the
comparable period in 1998, and diluted earnings per share for the first quarter
of 1999 were $0.19 as compared to $0.21 for the comparable period in 1998.
NET INTEREST INCOME
For the three months ended March 31, 1999, net interest income after provision
for loan losses decreased 12.0% to $1.5 million from $1.7 million reported in
the three months ended March 31, 1998.
INTEREST INCOME
Interest income for the first quarter of 1999 was $3.4 million compared with
$3.8 million for the first quarter of 1998, representing a decrease of $336,000
or 8.9%. The decrease was primarily attributable to a decrease of $9.6 million,
or 5.5% in average interest earning assets in the first quarter of 1999 to
$166.1 million over those in the first quarter of 1998 of $175.7 million as a
result of reduction in loans. Also contributing to the decrease in interest
income was a decrease in the average yield on interest-earning assets from 8.61%
for the first quarter of 1998 to 8.30% for 1999, as a result of lower market
interest rates. The yield on the average balance of loans decreased from 8.84%
in the first quarter of 1998 to 8.51% in the first quarter of 1999. The annual
yield is expected to continue to decrease in 1999 as the effect of such
decreases impacts commercial loans related to the prime interest rate and
adjustable mortgages.
Interest on loans receivable decreased $298,000 to $3.2 million during the first
quarter of 1999 as compared to $3.5 million in the first quarter of 1998. The
decrease was primarily attributable to a decrease in average net loans of $7.8
million in the first quarter of 1999 ($160.2 million) from the comparable period
in 1998 ($152.4 million). Additionally, the average yield on total loans
decreased as previously mentioned.
Interest on mortgage-related securities decreased by $12,000 from $28,000 during
the first quarter of 1998 to $16,000 during in 1999 as a result of the average
balance of mortgage-related securities decreasing by $567,000 during the first
quarter of 1999 ($819,000) as compared to the first quarter of 1998 ($1.4
million). In addition, the average yields from such securities decreased from
8.11% in the first quarter of 1998 to 7.95% in the first quarter of 1999 as a
result of lower yielding mortgage-related securities remaining in the portfolio.
Income from the investment securities portfolio decreased by $53,000 from
$91,000 during the first quarter of 1998 to $38,000 in the first quarter of 1999
as the result of a decrease in the portfolio as a result of sales and maturities
from $6.4 million at March 31, 1998 to $2.0 million at March 31, 1999. The
effect of this decrease in the average balance was partially offset by an
increase in the average yield on investment securities from 5.67% in the first
quarter of 1998 to 7.63% in the first quarter of 1999 as a result of the changes
in the investment securities portfolio.
Other interest income is comprised of earnings on the overnight account and time
deposits at the FHLB of Atlanta, FHLB stock dividends, and earnings on money
market funds. The $27,000 increase in other interest income in 1999 to $148,000
when compared to the first quarter of 1998 other interest income of $121,000 is
due primarily to the increased interest earnings on the FHLB overnight and on
money market funds due to a increase in average invested balances from $6.1
million in the first quarter of 1998 to $8.9 million in the first quarter of
1999. FHLB dividends were $27,000 during the first quarter of 1998 as compared
to $35,000 in the first quarter of 1999 due to increase in average FHLB stock
from $1.5 million at March 31, 1998 to $1.9 million at March 31, 1999.
13
<PAGE>
INTEREST EXPENSE
Interest expense the first quarter of 1999 was $1.8 million compared with $2.1
million the first quarter of 1998, representing a decrease of $271,000 or 13.2%.
Interest on deposits the first quarter of 1999 was $1.3 million compared with
$1.7 million the first quarter of 1998, representing a decrease of $372,000 or
21.7%. The decrease is due to a $20.5 million decrease in average deposits in
the first quarter of 1999 ($121.2 million) as compared to the first quarter of
1998 ($141.7 million). The first quarter of 1999 average interest cost
decreased to 4.42% as compared to 4.83% in the first quarter of 1998 as lower
interest rates were offered on certificates of deposits due primarily to the
Company changing its strategy from paying aggressive market rates to retain
certificates of deposits to borrowing from the FHLB at a lower interest rate
than the market rate for the certificates of deposits.
Other interest expense primarily relates to FHLB of Atlanta borrowings and
increased by $101,000 to $439,000 in the first quarter of 1999 when compared to
the first quarter of 1998 total of $338,000 due to an increase in average
borrowings of $8.0 million during the first quarter of 1999 ($31.4 million) from
the first quarter of 1998 average levels of $23.4 million. The increase caused
by the higher average balance was partially offset by decreased interest costs
on borrowed funds from 5.77% in the first quarter of 1998 to 5.59% in the first
quarter of 1999 as a consequence of the adjustable rate nature of the majority
of the FHLB of Atlanta borrowings and lower market interest rates.
PROVISION FOR LOAN LOSSES.
The provision for loan losses is the cost of providing an allowance for
anticipated future losses on loans. The amount depends upon many factors
including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of loan portfolio quality, the
value of collateral and general economic factors. The loan portfolio is
changing as of the result of management's continued effort to expand and
diversify into commercial mortgage loans, commercial business loans, and
consumer loans. These types of loans are inherently riskier than residential
mortgage loans.
The economic outlook for the Bank's primary lending area is guardedly optimistic
as the local economy is assisted by the improvement in the overall economy.
However, there is very little growth in the Bank's primary lending area and
there is aggressive competition for existing loan and deposit customers. A
slowdown in the economy could further impact asset growth and have a negative
impact on real estate lending as well as the level of net charge-offs and
delinquencies. Since such a slowdown in the economy could have an adverse
effect on property values and for commercial development projects, cause an
increase in vacancy rates, the possibilities exist for write-downs, charge-offs
and transfer of currently performing loans to a nonaccrual status in the real
estate and commercial loan categories.
Loan reviews procedures, including such techniques as loan grading and
monitoring of financial information, are utilized by the Company in order to
identify early potential problem loans in order for management to take steps to
lessen any potential losses. Reports are prepared and used in conjunction with
identification and monitoring of such loans on a monthly basis. Management's
involvement continues throughout the process and includes participation in the
work-out process and recovery activity. These procedures are monitored by the
loan and audit committees whose work is supplemented periodically by regulatory
agencies. A determination of a potential loss will result in a charge to the
provision for loan losses, thereby increasing the allowance for loan losses.
Management monitors the entire loan portfolio in an attempt to identify problem
loans so that risks in the portfolio can be timely identified and an appropriate
allowance or charge-off recognized. 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 quarter of 1999, the provision for loan losses was $195,000 as
compared to $60,000 in the first quarter of 1998. These provisions were made
based on management's analysis of the various factors that effect the loan
portfolio and management's desire to maintain the allowance at a level
considered adequate to provide for losses. The increase in the provision was
due to loan charge offs of $247,000 incurred in 1999. The increase in the level
of net charge-off in 1998 was related primarily to loans to one customer whose
loans had been classified as impaired. Management recorded charge-offs of
$170,000 for such impaired loans in the first quarter of 1999, to reflect
management's estimate of the fair value of the underlying collateral, and
recorded the remaining balances as insubstance foreclosures in other assets and
real estate owned. No additional allowances had been specified at March 31,
1999, for the impaired loans.
14
<PAGE>
When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
non performing and past due loans, historical loan loss experience, the existing
risk of individual loans, concentrations of loans to specific borrowers or
industries and existing and prospective economic conditions. The allowance for
loan losses at December 31, 1998 and March 31, 1999, was $1.4 million, or 0.9%
of net loans.
NON PERFORMING ASSETS
Non performing assets include loans classified as nonaccrual and repossessed
assets. The Company's policy is to classify loans as nonaccrual and stop
accruing interest when a loan is 90 days delinquent as to principal or interest
unless collection of both is assured by collateral, guarantees or other
security. Non performing assets of $2.8 million as of March 31, 1999, decreased
$1.3 million from $4.1 million at December 31, 1998. Non performing assets at
March 31, 1999, include $1.2 million of real estate owned and other foreclosed
assets, and $1.6 million of loans on nonaccrual or 90 days delinquent. Non
performing loans include $842,000 of commercial business and real estate loans,
$107,000 of consumer loans, and $651,000 of residential mortgages.
NON-INTEREST INCOME.
Non-interest income increased by $37,000 in the first quarter of 1999 to
$247,000 as compared to $210,000 in the first quarter of 1998. This increase
was primarily the result of an increase in loan and service fees of $11,000 from
$146,000 in the first quarter of 1998 to $157,000 in the first quarter of 1999.
This increase is due largely to the increased activity in refinanced loans
resulting from lower mortgage rates.
NON-INTEREST EXPENSE.
Non-interest expenses was constant at $1.2 million in the first quarter of 1999
and 1998. Compensation and employee benefits expense was slightly higher in the
first quarter of 1998 as compared to the first quarter of 1999 due to the
additional ESOP expense associated with the special dividend in 1998.
INCOME TAXES
Income tax expense in the first quarter of 1999 and 1998 was $213,000 and
$246,000, respectively, or approximately 40.0% of income before income taxes
representing expected federal and state tax rates.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Neither Bancshares 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.
***** Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the period ended September 30, 1998.
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended March 31, 1999.
16
<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
thereunto duly authorized.
FIRST SOUTHERN BANCSHARES, INC.
Date May 14, 1999 /s/ Charles L. Frederick, Jr.
--------------------- -------------------------------------
Mr. Charles L. Frederick, Jr.
President and Chief Executive Officer
Date May 14, 1999 /s/ Ms. Glenda Young
--------------------- ------------------------------------
Ms. Glenda Young
Senior Vice President and Chief
Accounting Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FIRST SOUTHERN BANCSHARES, INC. AND
SUBSIDIARY FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 5,233
<INT-BEARING-DEPOSITS> 11,091
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,012
<INVESTMENTS-CARRYING> 731
<INVESTMENTS-MARKET> 770
<LOANS> 150,735
<ALLOWANCE> 1,400
<TOTAL-ASSETS> 178,975
<DEPOSITS> 128,570
<SHORT-TERM> 451
<LIABILITIES-OTHER> 873
<LONG-TERM> 31,127
0
0
<COMMON> 21
<OTHER-SE> 17,933
<TOTAL-LIABILITIES-AND-EQUITY> 178,975
<INTEREST-LOAN> 3,399
<INTEREST-INVEST> 54
<INTEREST-OTHER> 148
<INTEREST-TOTAL> 3,444
<INTEREST-DEPOSIT> 1,340
<INTEREST-EXPENSE> 1,779
<INTEREST-INCOME-NET> 1,665
<LOAN-LOSSES> 195
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,180
<INCOME-PRETAX> 536
<INCOME-PRE-EXTRAORDINARY> 324
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 3.85
<LOANS-NON> 626
<LOANS-PAST> 974
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,441
<CHARGE-OFFS> 247
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1,400
<ALLOWANCE-DOMESTIC> 1,060
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 340
</TABLE>
