<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 September 30, 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: 1,335,691 shares of $.01 par
value common stock as of November 12, 1999.
i
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
FORM 10-QSB
September 30, 1999
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 17
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 17
ITEM 5 - OTHER INFORMATION 17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
ii
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED (In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,188 $ 7,678
Investment securities available for sale, at market 2,016 5,454
Mortgage-backed securities, held to maturity, at cost 945 3,579
Loans held for sale, at cost, which approximates market 659 -
Loans receivable, net 152,594 149,155
Foreclosed real estate and other assets 710 959
Premises and equipment, net 3,852 3,726
Federal Home Loan Bank stock, at cost 1,918 1,635
Accrued interest receivable 1,758 1,757
Deferred income taxes 397 453
Other assets 338 426
-------- --------
TOTAL ASSETS $178,375 $174,822
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $127,550 $123,058
Advances from Federal Home Loan Bank 31,316 32,703
Other notes payable - -
Income taxes currently payable 356 161
Other liabilities 1,145 661
-------- --------
Total liabilities 160,367 156,583
-------- --------
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 11,422
Retained earnings - Substantially restricted 13,340 13,747
Unearned employee compensation - ESOP (172) (126)
Unearned employee compensation - MRDP (550) (350)
Net unrealized gain (loss) on securities available for sale 11 (80)
Treasury stock, at cost (6,056) (6,395)
-------- --------
Total stockholders' equity 18,008 18,239
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $178,375 $174,822
======== ========
</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 Nine months ended
September 30, September 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $3,671 $3,226 $10,835 $ 9,708
Mortgage-backed securities 23 61 76 110
Investment securities 55 87 219 184
Other 164 97 386 381
------ ------ ------- -------
Total interest income 3,913 3,471 11,516 10,383
INTEREST EXPENSE:
Deposits 1,527 1,288 4,803 3,944
Federal Home Loan Bank advances and other 513 446 1,257 1,328
------ ------ ------- -------
Total interest expense 2,040 1,734 6,060 5,272
------ ------ ------- -------
NET INTEREST INCOME 1,873 1,737 5,456 5,111
PROVISION FOR LOAN LOSSES 103 49 224 392
------ ------ ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,770 1,688 5,232 4,719
------ ------ ------- -------
NON INTEREST INCOME:
Loan fees and service charges 158 195 478 503
Net gains on sale of loans 63 29 189 169
Gains(losses) on real estate owned - (81) 2 (79)
Other 9 13 24 28
------ ------ ------- -------
Total non interest income 230 156 693 621
------ ------ ------- -------
NON INTEREST EXPENSES:
Compensation and employee benefits 731 697 2,283 2,141
Building and occupancy expense 188 185 468 478
Data processing expense 95 123 304 337
Advertising 41 54 117 134
Insurance expense 47 41 159 133
Other 174 208 495 514
------ ------ ------- -------
Total non interest expenses 1,276 1,308 3,826 3,737
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 724 536 2,099 1,603
INCOME TAX EXPENSE 270 211 796 631
------ ------ ------- -------
NET INCOME $ 454 $ 325 $ 1,303 $ 972
====== ====== ======= =======
BASIC EARNINGS PER SHARE $ 0.25 $ 0.20 $ 0.70 $ 0.59
====== ====== ======= =======
DILUTED EARNINGS PER SHARE $ 0.25 $ 0.20 $ 0.69 $ 0.59
====== ====== ======= =======
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 $ 0.675 $ 0.375
====== ====== ======= =======
</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>
Common stock Additional
Issued In treasury paid-in
Shares Amount Shares Amount capital
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 2,076,969 $21 (189,330) $(2,503) $11,375
Net income for the year
ended December 31, 1998 - - - - -
Cash dividends - - - - -
Options exercised - - 5,250 87 -
Acquisition of treasury stock - - (224,182) (3,640) -
ESOP shares committed
for release - - - - 39
Amortization of MRDP
unearned compensation - - - - -
Increase in unrealized loss on
securities available for sale,
net of related income taxes - - - - -
--------- --- -------- ------- -------
Net for the period - - (218,932) (3,553) 39
--------- --- -------- ------- -------
Balances at December 31, 1998 2,076,969 $21 (408,262) $(6,056) $11,414
Net income for the nine months
ended September 30, 1999 - - - - -
Cash dividends - - - - -
Options exercised - - 936 11 -
Acquisition of treasury stock - - (26,081) (350) -
ESOP shares committed
for release - - - - 8
Amortization of MRDP
unearned compensation - - - - -
Increase in unrealized loss on
securities available for
sale, net of related income taxes - - - - -
--------- --- -------- ------- -------
Net for the period - - (25,145) (339) 8
--------- --- -------- ------- -------
Balances at September 30, 1999 2,076,969 $21 (433,407) $(6,395) $11,422
========= === ======== ======= =======
<CAPTION>
Net
unrealized
Retained Unearned loss on Total
earnings employee securities stock- Compre-
Substantially compensation available holders' hensive
restricted ESOP MRDP for sale equity income
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $13,199 $(280) $(861) $ (2) $20,949 1,855
======
Net income for the year
ended December 31, 1998 1,502 - - - 1,502 1,502
Cash dividends (1,361) - - - (1,361) -
Options exercised - - - - 87 -
Acquisition of treasury stock - - - - (3,640) -
ESOP shares committed
for release - 108 - - 147 147
Amortization of MRDP
unearned compensation - - 311 - 311 311
Increase in unrealized loss on
securities available for sale,
net of related income taxes - - - 13 13 13
--------- ----- -------- ------- ------- ------
Net for the period 141 108 311 13 (2,941) 1,973
--------- ----- -------- ------- ------- ------
Balances at December 31, 1998 $13,340 $(172) $(550) $ 11 $18,008 $1,973
======
Net income for the nine months
ended September 30, 1999 972 - - - 972 972
Cash dividends (565) - - - (565) -
Options exercised - - - - 11 -
Acquisition of treasury stock - - - - (350) -
ESOP shares committed
for release - 46 - - 54 54
Amortization of MRDP
unearned compensation - - 200 - 200 200
Increase in unrealized loss on
securities available for sale,
net of related income taxes - - - (91) (91) (91)
--------- ----- -------- ------- ------- ------
Net for the period 407 46 200 (91) 231 1,135
--------- ----- -------- ------- ------- ------
Balances at September 30, 1999 $13,747 $(126) $(350) $(80) $18,239 1,135
========= ===== ======== ======= ======= ======
</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>
Nine months ended
September 30,
1998 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,303 $ 972
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 232 248
Provision for loan losses 224 392
Provision for deferred income taxes (benefit) 30 (56)
Amortization/accretion of premiums/discounts on investment
and mortgage-backed securities (5) 3
Amortization of deferred loan fees (92) (65)
Fair market value of ESOP shares
committed for release and charged to
employee compensation 122 54
Amortization of unearned compensation - MRDP 242 200
(Gains) losses on real estate owned 2 (79)
Increase (decrease) in:
Loans held for sale (249) 659
Accrued interest receivable (79) 1
Other assets 115 (88)
Increase (decrease) in:
Income taxes currently payable 16 (195)
Other liabilities 134 (484)
------- ---------
Net cash provided by operating activities 1,995 1,562
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in:
Total loans (611) 3,112
Proceeds from maturity of:
Investment and mortgage-backed securities 385 (2,637)
Investment securities 4,985 (3,529)
Real estate owned (283) (170)
Acquisition of:
Federal Home Loan Bank stock 200 283
Premises and equipment (636) (122)
------- ---------
Net cash provided by (used in) investing activities 4,040 (3,063)
------- ---------
</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>
Nine months ended
September 30,
1998 1999
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (10,747) (4,492)
Cash dividends paid (1,166) (565)
Proceeds from (reduction in) FHLB advances 15,886 1,387
Proceeds from other borrowings 1,500 -
Acquisition of treasury stock, net (2,978) (339)
-------- -------
Net cash provided by (used in) financing activities 2,495 (4,009)
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,530 (5,510)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 6,420 13,188
CASH AND CASH EQUIVALENTS -
-------- -------
END OF PERIOD $ 14,950 $ 7,678
======== =======
SUPPLEMENTAL INFORMATION FOR CASH FLOW:
Noncash transactions:
Increase (decrease) in net unrealized loss on securities
available for sale $ 21 $ (91)
Loans foreclosed and transferred to real estate owned $ 686 $ 1,141
Cash paid during the period for:
Interest $ 5,974 $ 5,285
Income taxes $ 625 $ 776
</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 September 30, 1999 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, 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 September 30, 1998 and
1999 interim financial statements. The results of operations for the quarter
and nine months ended September 30, 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 2 - 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:
<TABLE>
<CAPTION>
Nine months ended September 30
-------------------------------
1998 1999
--------- ---------
<S> <C> <C>
Common shares outstanding 2,076,969 2,076,969
Treasury shares (216,615) (428,674)
Unreleased ESOP shares (22,432) (15,046)
Options - uncontingent 9,757 4,154
--------- ---------
Basic EPS 1,847,679 1,637,403
Options - contingent 18,996 5,662
Unreleased ESOP shares 22,432 15,046
--------- ---------
Diluted EPS 1,889,107 1,658,111
========= =========
</TABLE>
NOTE 3 - SUBSEQUENT EVENT
On October 14, 1999, the Company's Board of Directors declared a cash dividend
of $.125 per share, payable November 5, 1999 to stockholders of record as of
October 26, 1999.
On October 8, 1999, the Company completed a tender offer of its outstanding
shares. 307,871 treasury shares were acquired at $13.50 per share.
NOTE 4 - COMMITMENTS
At September 30, 1999, the Company had $1.1 million of outstanding net loan
commitments, $13.7 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") 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 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 quarter and nine months ended September 30, 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. Because of
the risks and uncertainties inherent in forward looking statements, readers are
cautioned not to place undue reliance on them, whether included in this report
or made elsewhere from time to time by the Company or on its behalf. The
company assumes no obligation to update any forward-looking statements.
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 holds 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 $175.4
million at September 30, 1998 to $164.8 million at September 30, 1999. Average
interest bearing liabilities have decreased from $164.8 million at September 30,
1998 to $152.1 million at September 30, 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 3.8% in the first
nine months of 1998 and 1999.
Cash and cash equivalents
As disclosed in the Company's "Consolidated Statements of Cash Flows," net cash
provided by operating activities decreased from $2.0 million in the first nine
months of 1998 to $1.6 million in the first nine months of 1999 due to the
decrease in net income in 1999. Cash from investing activities decreased from
a cash source of $4.0 million in the first nine months of 1998 to a use of cash
of $3.1 million in the first nine months of 1999, as a result of an increase of
$6.1 million in investments and mortgage backed securities in 1999 partially
funded through the loan repayments of $3.1 million in 1999. Cash provided from
7
<PAGE>
financing activities decreased from a source of $2.5 million in the first nine
months of 1998 to a use of $4.0 million in the first nine months of 1999. The
primary use in the first nine months of 1999 was the decrease in deposits of
$4.5 million.
Investments and mortgage-backed securities
The Company increased its investments in investment securities and mortgage-
backed securities during the first nine months of 1999. Investment securities
available for sale increased from $2.0 million at December 31, 1998 to $5.5
million at September 30, 1999. The additional investment securities were in
corporate and U.S. Government obligations and were funded from loan payoffs.
The corporate investments are fixed rate guaranteed or senior notes with a S&P A
rating. The average balance for investment securities for the nine months ended
September 30, 1999 was $3.7 million as compared to $5.1 million for the
comparable period in 1998 and the average yield was 6.61% in 1999 as compared to
5.74% in 1998.
Mortgage-backed securities increased from $1.0 million at December 31, 1998 to
$3.6 million at September 30, 1999. The additional investments were in GNMA
participations and were funded from loan payoffs. The average balance for
mortgage-backed investment securities for the nine months ended September 30,
1999 was $2.1 million as compared to $1.3 million in 1998, and the average
yield was 7.05% in 1999 as compared to 8.06% in 1998.
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 nine months of 1999 the average balance of loans
declined as a result of the change in management strategy as previously
discussed. The average balance of loans declined $10.8 million from $160.9
million in the first nine months of 1998 to $150.1 million in the first nine
months of 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 September 30, 1999 follows:
<TABLE>
<CAPTION>
December 31, 1998 September 31, 1999
----------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $ 69,524 45.4% $ 64,146 43.0%
Commercial 35,566 23.2% 32,548 21.8%
-------- ----- -------- -----
Total mortgage loans 105,090 68.6% 96,694 64.8%
Commercial business loans 29,010 18.9% 31,219 20.9%
Consumer Loans 21,766 14.2% 23,751 15.9%
-------- ----- -------- -----
Total loans 155,866 101.7% 151,664 101.7%
Less:
Undisbursed loans 1,103 0.7% 1,137 0.7%
Unamortized loan fees 69 0.1% 72 0.1%
Allowance for possible 1,441 0.9% 1,300 0.9%
losses
-------- ----- -------- -----
Net loans receivable $153,253 100.0% $149,155 100.0%
======== ===== ======== =====
</TABLE>
The Company's loan portfolio above 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.
At September 30, 1999, the allowance for loan losses was $1.3 million and
represented .9% of total net loans and 43.3% of non performing assets. The
provision for loan losses was $392,000 in the first nine months of 1999 as
compared to $224,000 in the
8
<PAGE>
first nine months of 1998. The increase in the provision was due to loan charge-
offs of $651,000 incurred in 1999, mostly in impaired loans valued at net
realizable value, and reclassified as real estate owned and other foreclosed
assets. In the opinion of management at September 30, 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 September 30, 1999, the Company had no significant commitments to originate
fixed-rate loans. At September 30, 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):
Commitments to extend credit $ 1.1 million
Unused lines of credit $ 13.7 million
Standby letters of credit $ 10,000
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
securities. Non performing assets of $3.0 million as of September 30, 1999,
decreased $1.1 million from $4.1 million at December 31, 1998. Non performing
assets at September 30, 1999, include $959,000 of real estate owned and other
foreclosed assets, and $2.0 million of loans on nonaccrual or 90 days
delinquent. At September 30, 1999, the allowance for loan losses was $1.3
million and represented 0.9% of total net loans and 43.3% of non performing
assets.
Deposits, FHLB advances and other notes payable
Deposit balances decreased $4.5 million from $127.5 million at December 31, 1998
to $123.0 at September 30, 1999. The decrease was primarily in certificates of
deposits. The Company changed its strategy from paying aggressive market
interest rates to retain these certificates of deposits to borrowing from the
FHLB at a lower interest rate compared to the market rate for the certificates
of deposits. As a result of this strategy, interest paid on deposits decreased
17.9% or $859,000 from $4.8 million in the first nine months of 1998 to $3.9
million in the first nine months of 1999, and the interest rate paid on the
average balance of deposits decreased from 4.72% in the first nine months of
1998 to 4.36% in the first nine months of 1999.
At September 30, 1999, savings certificates amounted to $84.1 million, or 68.3%,
of the Company's total deposits, including $63.3 million that were scheduled to
mature by September 30, 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 $1.5 million of additional borrowings from the FHLB in the nine
months ended September 30, 1999. At September 30, 1999, the Company had unused
credit availability with the FHLB of $7.3 million. The effective rate paid on
the average outstanding balance of FHLB advances decreased from 5.73% in the
first nine months of 1998 to 5.64% in the first nine months of 1999.
Stockholders' equity
Total stockholders' equity at September 30, 1999 is $18.2 million as compared to
$18.0 at December 31, 1998. The payment of $565,000 in dividends and the
acquisition of treasury stock of $339,000, were offset by net income of
$972,000, and $163,000 of other increases in stockholders' equity (other
comprehensive income) related primarily to the unearned employee stock benefit
compensation plans. The Company continued with its Stock Repurchase Program,
which was started in 1995. During the first nine months of 1999, the Company
acquired 26,081 shares at an average price per share of $13.45.
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,
Bancshares and the Bank are in compliance with all such requirements at
September 30, 1999:
9
<PAGE>
<TABLE>
<CAPTION>
Percentage of
adjusted total
Amount assets
First Southern Bancshares, Inc: (Dollars in thousands)
<S> <C> <C>
Primary capital ratios:
GAAP capital $18,239
Adjustments:
Mortgage servicing rights (6)
Net unrealized loss on securities available for sale 80
-------
Tier 1 capital 18,313 10.42%
Minimum Tier 1 (leverage) requirement 7,030 4.00%
------- -----
Excess $11,283 6.42%
======= =====
Risk-based capital ratios:
Core (Tier 1) Capital 18,313 13.21%
Minimum core capital 5,546 4.00%
------- -----
Excess $12,767 9.21%
======= =====
Risk-based capital $19,613 14.15%
Minimum risk-based capital requirement 11,092 8.00%
------- -----
Excess $ 8,521 6.15%
======= =====
</TABLE>
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) $15,595 11.25%
To be well capitalized under the FDICIA
prompt corrective action provisions 13,857 10.00%
------- -----
Excess $ 1,738 1.25%
======= =====
Tier 1 capital (to risk-weighted assets) $14,295 10.32%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,314 6.00%
------- -----
Excess $ 5,981 4.32%
======= =====
Tier 1 capital (to average assets) $14,295 8.14%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,783 5.00%
------- -----
Excess $ 5,512 3.14%
======= =====
</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
10
<PAGE>
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
September 30, 1999, the Bank's qualifying reserves of $2.7 million significantly
exceeded the required reserve of $274,000.
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 September 30, 1999, the Bank could have paid additional dividends for
Bancshares of $1.7 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.
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. A validation test of the manual contingency plan for tellers and
accounting personnel was performed on June 29, 1999, with satisfactory
results.
11
<PAGE>
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.
PENDING LEGISLATION
Legislation recently enacted by Congress eliminates many Federal and State law
barriers to affiliations among banks and other financial services providers. The
legislation, which takes effect 120 days after the date of enactment,
establishes a statutory framework pursuant to which full affiliations can occur
between banks and securities firms, insurance companies, and other financial
companies. The legislation provides some degree of flexibility in structuring
these new affiliations, although certain activities may only be conducted
through a holding company structure. The legislation preserves the role of the
Board of Governors of the Federal Reserve System as the umbrella supervisor for
holding companies, but incorporates a system of functional regulation pursuant
to which the various Federal and state financial supervisors will continue to
regulate the activities traditionally within their jurisdictions. The
legislation specifies that banks may not participate in the new affiliations
unless the banks are well-capitalized and well-managed or if any bank affiliate
had received a less than "satisfactory" Community Reinvestment Act of 1977
rating as of it most recent examination.
The President is expected to sign the legislation into law in the very near
future.
COMPARISON OF OPERATING RESULTS FOR THE
QUARTER ENDED SEPTEMBER 30, 1998 AND 1999
General
Consolidated net income for the quarter ended September 30, 1999, decreased to
$325,000 from $454,000 in the comparable quarter in 1998. Basic earnings per
share for the third quarter of 1999 was $0.20 as compared to $0.25 for the
comparable period in 1998, and diluted earnings per share for the second quarter
of 1999 was $0.20 as compared to $0.25 for the comparable period in 1998.
Net Interest Income
The third quarter net interest income after provision for loan losses was $1.7
million or 4.6% less than the $1.8 million reported in the comparable period in
1998, as a result of the decrease in loans and increase in the provision for
loan losses.
Interest Income
Interest income for the third quarter of 1999 was $3.5 million compared with
$3.9 million for the third quarter of 1998, representing a decrease of $442,000
or 11.3%. The decrease was primarily attributable to a decrease of $14.5
million, or 8.2%, in average interest earning assets in the third quarter of
1999 of $162.9 million from $177.4 million in the third quarter of 1998 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 8.82%
for the third quarter of 1998 to 8.51% for 1999, as a result of lower market
interest rates. The yield on the average balance of loans decreased from 9.1%
in the third quarter of 1998 to 8.7% in the third quarter of 1999. The annual
yield is expected to continue to decrease in 1999 as the effect of such rate
decreases impacts commercial loans related to the prime interest rate and
adjustable mortgages.
Interest on loans receivable decreased $445,000 to $3.2 million during the third
quarter of 1999 as compared to $3.7 million in the third quarter of 1998. The
decrease was primarily attributable to a decrease in average net loans of $14.0
million in the third quarter of 1999 ($148.0 million) from the comparable period
in 1998 ($162.0 million). Additionally, the average yield on total loans
decreased as previously mentioned.
Interest on mortgage-related securities increased by $38,000 from $23,000 during
the third quarter of 1998 to $61,000 during 1999 as a result of the average
balance of mortgage-related securities increasing by $2.5 million during the
third quarter of 1999 ($3.6 million) as compared to the third quarter of 1998
($1.1 million). The average yields from such securities decreased from 8.04% in
the third quarter of 1998 to 6.81% in the third quarter of 1999 as a result of
lower yielding mortgage-related securities in the portfolio.
12
<PAGE>
Income from the investment securities portfolio increased by $32,000 from
$55,000 during the third quarter of 1998 to $87,000 in the third quarter of 1999
as the result of the average balance of investment securities increasing by $1.7
million during the third quarter of 1999 ($5.5 million) as compared to the
third quarter of 1998 ($3.8 million). In addition, there was an increase in the
average yield on investment securities from 5.78% in the third quarter of 1998
to 6.37% in the third 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 $67,000 decrease in other interest income in 1999 to $97,000
when compared to the third quarter of 1998 other interest income of $164,000 is
due primarily to the decreased interest earnings on the FHLB overnight and on
money market funds due to a decrease in average invested balances from $8.8
million in the third quarter of 1998 to $4.3 million in the third quarter of
1999. FHLB dividends were $33,000 during the third quarter of 1998 as compared
to $30,000 in the third quarter of 1999 due to the decrease in average FHLB
stock from $1.8 million at September 30, 1998 to $1.6 million at September 30,
1999.
Interest Expense
Interest expense the third quarter of 1999 was $1.7 million compared with $2.0
million the third quarter of 1998, representing a decrease of $300,000 or 15.0%.
Interest on deposits the third quarter of 1999 was $1.3 million compared with
$1.5 million the third quarter of 1998, representing a decrease of $239,000 or
15.7%. The decrease is due to a $6.7 million decrease in average deposits in
the third quarter of 1999 ($125.0 million) as compared to the third quarter of
1998 ($131.7 million). The third quarter of 1999 average interest cost
decreased to 4.12% as compared to 4.64% in the third 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
compared to the market rate for the certificates of deposits.
Other interest expense primarily relates to FHLB of Atlanta borrowings and
decreased by $67,000 to $446,000 in the third quarter of 1999 when compared to
the third quarter of 1998 total of $513,000 due to a decrease in average
borrowings of $3.8 million during the third quarter of 1999 ($31.3 million) from
the third quarter of 1998 average levels of $35.1 million. The interest costs
on borrowed funds was 5.7% in the third quarter of 1998 and 1999.
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.
The Company utilizes loan reviews procedures, including techniques such as loan
grading and monitoring of financial information, 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,
13
<PAGE>
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 1999, the provision for loan losses was $49,000 as
compared to $103,000 in the third 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 decrease in the provision as
compared to the comparable period in 1998 was due to less loan charge offs in
1999. Loan charge-offs in the third quarter of 1998 were $99,000 compared to
$27,000 in 1999. No allowances had been specified at September 30, 1999, for
impaired loans.
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, of $1.4 million and September 30, 1999, of
$1.3 million was 0.9% of net loans.
Non-interest Income.
Non interest income for the third quarter decreased from $230,000 in 1998 to
$156,000 in 1999 due to decreases in gains on loans sold and increases in losses
on sale of real estate owned.
Non-interest Expense.
The third quarter non interest expenses for 1999 and 1998 were comparable at
$1.3 million. Increases in data processing and other expenses were offset by a
decrease in compensation and employee benefits expense.
Income Taxes
Income taxes decreased by $59,000 in 1999, as a result of the decrease in income
before income taxes. Income tax expense in the third quarter of 1999 and 1998
was $211,000 and $270,000, respectively, or approximately 40.0% of income before
income taxes representing expected federal and state tax rates.
COMPARISON OF OPERATING RESULTS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
General
Consolidated net income for the nine months ended September 30, 1999, decreased
25% to $972,000 from $1,303,000 for the comparable nine months in 1998. Basic
earnings per share for the nine months ended September 30, 1999, was $0.59 as
compared to $0.70 for the comparable period in 1998, and diluted earnings per
share for the nine months ended September 30, 1999 was $0.59 as compared to
$0.69 for the comparable period in 1998.
Net Interest Income
For the nine months ended September 30, 1999, net interest income after
provision for loan losses was $4.7 million or 9.8% less than the $5.2 million
reported for the comparable period in 1998, as a result of the decrease in loans
and increase in the provision for loan losses.
Interest Income
Interest income for the nine months ended September 30, 1999 was $10.4 million
compared with $11.5 million for the nine months ended September 30, 1998,
representing a decrease of $1.1 million or 9.8%. The decrease was primarily
attributable to a decrease of $10.6 million, or 6.0% in average interest earning
assets in the nine months ended September 30, 1999 from $175.4 million to $164.8
million in the nine months ended September 30, 1998 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 8.75% for
14
<PAGE>
the nine months ended September 30, 1998 to 8.40% for 1999, as a result of lower
market interest rates. The yield on the average balance of loans decreased from
8.98% in the nine months ended September 30, 1998 to 8.62% in the nine months
ended September 30, 1999. The annual yield is expected to continue to decrease
in 1999 as the effect of such rate decreases impacts commercial loans related to
the prime interest rate and adjustable mortgages.
Interest on loans receivable decreased $1.1 million to $9.7 million during the
nine months ended September 30, 1999 as compared to $10.8 million in the nine
months ended September 30, 1998. The decrease was primarily attributable to a
decrease in average net loans of $10.8 million in the nine months ended
September 30, 1999 ($150.1 million) from the comparable period in 1998 ($160.9
million). Additionally, the average yield on total loans decreased as
previously mentioned.
Interest on mortgage-related securities increased by $34,000 from $76,000 during
the nine months ended September 30, 1998 to $110,000 during the nine months
ended September 30, 1999 as a result of the average balance of mortgage-related
securities increasing by $824,000 during the third quarter of 1999 ($2.1
million) as compared to the third quarter of 1998 ($1.3 million). The average
yields from such securities decreased from 8.06% in the third quarter of 1998 to
7.05% in the third quarter of 1999 as a result of lower yielding mortgage-
related securities in the portfolio.
Income from the investment securities portfolio decreased by $35,000 from
$219,000 during the nine months ended September 30, 1998 to $184,000 in the nine
months ended September 30, 1999 as the result of the average balance of
investment securities decreasing by $1.4 million during the nine months ended
September 30, 1999 ($3.7 million) as compared to the nine months ended September
30, 1998 ($5.1 million). The effect of this decrease in the average balance was
partially offset by an increase in the average yield on investment securities
from 5.74% in the nine months ended September 30, 1998 to 6.61% in the nine
months ended September 30, 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 $5,000 decrease in other interest income in 1999 to $381,000
when compared to the nine months ended September 30, 1998 other interest income
of $386,000 is due primarily to the decreased in the average yield on overnight
account and time deposits at the FHLB from 6.03% in the nine months ended
September 30, 1998 to 5.18% in the nine months ended September 30, 1999. The
effect of this decrease in the average yield was partially offset by an increase
in average invested balances from $6.6 million in the nine months ended
September 30, 1998 to $7.2 million in the nine months ended September 30, 1999.
FHLB dividends were $88,000 during the nine months ended September 30, 1998 as
compared to $96,000 in the nine months ended September 30, 1999 due to increase
in average FHLB stock from $1.6 million at September 30, 1998 to $1.7 million at
September 30, 1999.
Interest Expense
Interest expense in the nine months ended September 30, 1999 was $5.3 million
compared with $6.1 million in the nine months ended September 30, 1998,
representing a decrease of $788,000 or 13.0%.
Interest on deposits in the nine months ended September 30, 1999 was $3.9
million compared with $4.8 million in the nine months ended September 30, 1998,
representing a decrease of $859,000 or 17.9%. The decrease is due to a $9.2
million decrease in average deposits in the nine months ended September 30, 1999
($126.5 million) as compared to the nine months ended September 30, 1998 ($135.7
million). The nine months ended September 30, 1999 average interest cost
decreased to 4.16% as compared to 4.72% in the nine months ended September 30,
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 $71,000 to $1.3 million in the nine months ended September 30,
1999, due to an increase in average borrowings of $2.3 million during the nine
months ended September 30, 1999 ($31.3 million) from the nine months ended
September 30, 1998 average levels of $29.0 million. The increase caused by the
higher average balance was partially offset by decreased interest costs on
borrowed funds from 5.73% in the nine months ended September 30, 1998 to 5.64%
in the nine months ended September 30, 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.
For the nine months ended September 30, 1999, the provision for loan losses was
$392,000 as compared to $224,000 in the nine months ended September 30, 1998.
These provisions were made based on management's analysis of the various factors
15
<PAGE>
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 $651,000 incurred in 1999. The
increase in the level of net charge-off in 1999 was related primarily to loans
to impaired loans written down to fair value and transferred to foreclosed real
estate and other assets. Management recorded charge-offs of $360,000 for such
loans in the nine months ended September 30, 1999, to reflect management's
estimate of the fair value of the underlying collateral. No additional
allowances had been specified at September 30, 1999, for the impaired loans.
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, of $1.4 million and September 30, 1999, of
$1.3 million was 0.9% of net loans.
See "Comparison of Operating Results for the Quarter Ended September 30, 1998
and 1999 Provision for Loan Losses" for further discussion.
Non-interest Income.
Non interest income for the nine months ended September 30, 1999 decreased from
$693,000 in 1998 to $621,000 in 1999 due to decreases in gains on loans sold and
increases in losses on sale of real estate owned.
Non-interest Expense.
For the nine months ended September 30, 1999, non interest expenses for 1999
were $3.7 million as compared to $3.8 million in 1998, primarily due to
decreases in employee compensation and benefits related to termination of the
Company's defined benefit retirement plan.
Income Taxes
Income taxes decreased by $165,000 in 1999, as a result of the decrease in
income before income taxes. Income tax expense in the nine months ended
September 30, 1999 and 1998 was $631,000 and $796,000, respectively, or
approximately 40.0% of income before income taxes representing expected federal
and state tax rates.
16
<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 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 September 30, 1999.
17
<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 12, 1999 /s/ Charles L. Frederick, Jr.
----------------- -------------------------------------
Mr. Charles L. Frederick, Jr.
President and Chief Executive Officer
Date November 12, 1999 /s/ Ms. Glenda Young
----------------- -------------------------------
Ms. Glenda Young
Senior Vice President and Chief
Accounting Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of First Southern Bancshares, Inc. and subsidiary for the
nine months ended September 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,799
<INT-BEARING-DEPOSITS> 1,879
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,454
<INVESTMENTS-CARRYING> 3,579
<INVESTMENTS-MARKET> 3,400
<LOANS> 149,155
<ALLOWANCE> 1,300
<TOTAL-ASSETS> 174,822
<DEPOSITS> 123,058
<SHORT-TERM> 0
<LIABILITIES-OTHER> 822
<LONG-TERM> 32,703
0
0
<COMMON> 21
<OTHER-SE> 18,218
<TOTAL-LIABILITIES-AND-EQUITY> 174,822
<INTEREST-LOAN> 10,211
<INTEREST-INVEST> 294
<INTEREST-OTHER> 381
<INTEREST-TOTAL> 10,383
<INTEREST-DEPOSIT> 3,944
<INTEREST-EXPENSE> 5,272
<INTEREST-INCOME-NET> 5,111
<LOAN-LOSSES> 392
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,737
<INCOME-PRETAX> 1,603
<INCOME-PRE-EXTRAORDINARY> 972
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 972
<EPS-BASIC> 0.59
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 4.13
<LOANS-NON> 13
<LOANS-PAST> 2,033
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,441
<CHARGE-OFFS> 651
<RECOVERIES> 118
<ALLOWANCE-CLOSE> 1,300
<ALLOWANCE-DOMESTIC> 1,081
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 219
</TABLE>
