<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-25478
FIRST SOUTHERN BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 63-1133624
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
102 South Court Street, Florence, Alabama 35630
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (256) 764-7131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation SB contained herein, and no disclosure will be contained, to the best
of the issuer's knowledge, in definitive proxy or other information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. X
---
The aggregate market value of the outstanding voting stock held by nonaffiliates
of the Registrant, based on the closing sales price of the registrant's Common
Stock as quoted on The Nasdaq National Market under the symbol "FSTH" on March
19, 1999, was $15,390,698 (1,194,930 shares at $12.88 per share). It is assumed
for purposes of this calculation that the issuer's executive officers, directors
and 5% stockholders are affiliates.
The issuer's revenues for the fiscal year ended December 31, 1998 were
$16,133,000.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 ("Annual Report"). (Parts I and II)
2. Portions of Proxy Statement for the Annual Meeting of Stockholders ("Proxy
Statement"). (Parts III and IV)
Transitional Small Business Disclosure Format Yes No X
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This report contains certain "forward-looking statements" concerning the
future operations of First Southern Bancshares, Inc. and its wholly-owned
subsidiary, First Southern Bank Forward-looking statements are used to describe
future plans and strategies, including expectations of future financial results.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which First Southern Bancshares, Inc. and First Southern Bank operate, as well
as nationwide, First Southern Bancshares, Inc.'s and First Southern Bank's
abilities to control costs and expenses, competitive products and pricing, loan
delinquency rates, changes in federal and state legislation and regulation, and
the impact of Year 2000 issues. These factors should be considered in
evaluating the forward-looking statements and undue reliance should not be
placed on such statements.
PART I
Item 1. Description of Business
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General
First Southern Bancshares, Inc. ("Company"), a Delaware corporation,
was organized on November 22, 1994 for the purpose of becoming the holding
company for First Federal Savings and Loan Association of Florence
("Association") upon the Association's conversion from a federally chartered
mutual savings and loan association to a federally chartered capital stock
savings and loan association ("Stock Conversion") and then to an Alabama
chartered commercial bank ("Bank Conversion"). The Stock Conversion was
consummated on April 13, 1995 through the issuance and sale by the Company of
2,049,875 shares of common stock, $0.01 par value, at $10.00 per share to
depositors of the Association and the Association's employee stock ownership
plan. The Bank Conversion was consummated on June 10, 1995, with the
Association changing its name to "First Southern Bank" ("Bank"). At December
31, 1998, the Company had total assets of $178.4 million, total deposits of
$127.6 million and stockholders' equity of $18.0 million. The Company has not
engaged in any significant activity other than holding all of the outstanding
capital stock of the Bank. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
the Bank.
The Company is a registered bank holding company regulated by the
Federal Reserve Board ("FRB"). The Bank's primary regulator is the
Superintendent of Banks of the State of Alabama ("Superintendent"). The Bank's
deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Company ("FDIC"). The
Bank is a member of the Federal Home Loan Bank ("FHLB") System. The executive
offices of the Company and the Bank are located at 102 South Court Street,
Florence, Alabama 35630 and their telephone number is (256) 764-7131.
The Bank conducts its business through six office facilities located
in Lauderdale and Colbert Counties in northwestern Alabama, which the Bank
considers as its primary market area. See "-- Properties." The two largest
industries in this area are Reynolds Aluminum Co. and the Tennessee Valley
Authority. The University of North Alabama and the Eliza Coffee Memorial
Hospital are located in Florence, Alabama, and both have a significant economic
impact on the Bank's primary market area. The textile industry has become an
increasingly significant segment of the local economy, with many small textile
businesses located in the Bank's primary market area. The Bank faces strong
competition for the attraction of savings deposits and the origination of loans
in its primary market area. See "-- Competition."
Selected Financial Condition, Operating and Other Data and Key Operating Ratios
This information is incorporated by reference to pages 3 and 4 of
the Annual Report.
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Average Balance Sheets
This information is incorporated by reference to page 5 of the Annual
Report.
Rate/Volume Analysis
This information is incorporated by reference to page 6 of the Annual
Report.
Interest Rate Sensitivity Analysis
This information is incorporated by reference to page 7 of the Annual
Report.
Lending Activities
General. The Bank's primary lending activity is the origination of
mortgage loans for the purchase and re-finance of one- to four-family owner-
occupied residences. The Bank also actively originates commercial loans,
construction loans, consumer loans, and multi-family residential real estate
loans, principally in the Bank's primary market area, as part of its commercial
banking strategy. These other types of lending are generally considered to
involve greater credit risks than one- to four-family mortgage lending. See "--
Lending Activities -- Multi-Family Loans," "--Commercial Real Estate and
Commercial Business Loans."
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Loan Portfolio Analysis. The following table sets forth the
composition of the Bank's loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
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1996 1997 1998
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Amount Percent Amount Percent Amount Percent
--------- -------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family residential(1).. $ 66,863 41.86% $ 58,339 36.52% $ 53,019 34.60%
Multi-family residential............ 13,045 8.17 11,020 6.90 6,473 4.22
Commercial.......................... 33,434 20.93 37,535 23.49 33,516 21.87
-------- ------ ------- ------ ------- ------
Total non-construction
mortgage loans................ 113,342 70.96 106,894 66.91 93,008 60.69
-------- ------ ------- ------ ------- ------
Construction loans:
One- to four-family residential..... 4,970 3.12 6,624 4.14 10,032 6.54
Multi-family residential............ 327 0.20 -- -- -- --
Commercial.......................... -- -- 1,606 1.01 2,050 1.34
-------- ------ ------- ------ ------- ------
Total construction loans......... 5,297 3.32 8,230 5.15 12,082 7.88
-------- ------ ------- ------ ------- ------
Total mortgage loans................... 118,639 74.28 115,124 72.06 105,090 68.57
-------- ------ ------- ------ ------- ------
Commercial business loans.............. 27,157 17.00 27,792 17.40 29,010 18.93
-------- ------ ------- ------ ------- ------
Consumer loans:
Home equity and second
mortgage loans................... 9,023 5.65 9,999 6.26 10,140 6.62
Automobile loans.................... 2,455 1.54 3,152 1.97 3,953 2.58
Savings loans....................... 599 0.38 739 0.46 886 0.58
Other............................... 5,624 3.52 6,088 3.81 6,787 4.43
-------- ------ ------- ------ ------- ------
Total consumer loans............. 17,701 11.09 19,978 12.50 21,766 14.21
-------- ------ ------- ------ ------- ------
Total loans............................ 163,497 102.37 162,894 101.96 155,866 101.71
-------- ------ ------- ------ ------- ------
Less:
Undisbursed loans in process........ 1,928 1.21 1,404 0.88 1,103 0.72
Unamortized loan origination
fees, net of direct costs........ 192 0.12 148 0.09 69 0.05
Allowance for possible
loan losses...................... 1,659 1.04 1,584 0.99 1,441 0.94
-------- ------ -------- ------ -------- ------
Net loans receivable............. $159,718 100.00% $159,758 100.00% $153,253 100.00%
======== ====== ======== ====== ======== ======
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(1) Includes loans held for sale.
One- to Four-Family Residential Loans. At December 31, 1998, $53.0
million, or 34.6% of the Bank's net loans receivable (including loans held for
sale) consisted of loans secured by one- to four-family residential real estate.
A substantial portion of this amount consisted of adjustable rate one- to four-
family mortgage ("ARM") loans.
The Bank presently originates both fixed-rate mortgage loans and ARM
loans secured by single-family properties with terms of 15 to 30 years, with an
emphasis on ARM loans. Borrower demand for ARM loans versus
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fixed-rate mortgage loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.
The Bank currently offers ARM loans with initial rates determined by
the Bank based on market factors and competitive rates for loans having similar
features offered by other lenders for such initial periods. The Bank originates
ARM loans that adjust annually with a maximum upward adjustment of 2% per year
and a 6% maximum adjustment over the life of the loan. Many of the ARM loans
have interest rate adjustment floors that do not permit the rate to be adjusted
below a certain rate. ARM loans are tied either to the one-year U.S. Treasury
Bill Index or the Cost of Funds Index. At December 31, 1998, the initial
interest rate on the Bank's ARM loans was 6.00% per annum. The Bank does not
originate negative amortization loans. The Bank originated $8.8 million of one-
to four-family ARM loans for the year ended December 31, 1998.
The Bank underwrites ARM loans based on the borrower's ability to
repay the loan assuming a rate of 2.0% higher than the initial rate on the ARM
loans and that such rate will remain constant during the loan term. As a
result, the potential for a substantial increase in interest payments on ARMs
decreases the likelihood of delinquencies and defaults.
While single-family residential real estate loans are normally
originated with 15- and 30-year terms and the Bank permits its ARM loans to be
assumed by qualified borrowers, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in the Bank's
loan portfolio contain due-on-sale clauses providing that the Bank may declare
the unpaid amount due and payable upon the sale of the property securing the
loan. The Bank enforces these due-on-sale clauses to the extent permitted by
law and as business judgment dictates. Thus, average loan maturity is a
function of, among other factors, the level of purchase and sale activity in the
real estate market, prevailing interest rates and the interest rates payable on
outstanding loans.
The retention of ARM loans in the Bank's loan portfolio helps reduce
the Bank's exposure to changes in the interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during
periods of rising interest rates, the risk of default on ARM loans may increase
as a result of repricing and the increased costs to the borrower. Furthermore,
the ARM loans originated by the Bank generally provide, as a marketing
incentive, for initial rates of interest below the rates which would apply were
the adjustment index used for pricing initially (discounting). These loans are
subject to increased risks of default or delinquency because of this. Another
consideration is that although ARM loans allow the Bank to increase the
sensitivity of its asset base to changes in the interest rates, the extent of
this interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Bank has no assurance
that yields on ARM loans will be sufficient to offset increases in the Bank's
cost of funds.
The Bank also originates conventional fixed-rate mortgage loans on
one- to four-family residential properties and is a direct endorsed lender for
Federal Home Administration ("FHA") and Veterans Administration ("VA") loans.
All FHA and VA loans are currently originated through the Muscle Shoals branch
office. The Bank originated $29.4 million of fixed-rate one-to four-family
mortgage loans for the year ended December 31, 1998. Substantially all FHA and
VA loans were originated for sale. See "-- Loan Originations, Sales and
Purchases."
The Bank requires title insurance insuring the status of its lien on
all of the real estate secured loans and also requires that the fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the outstanding loan balance.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 80% of the
lesser of the appraisal value or the purchase price, with the condition that
private mortgage insurance is required on loans with loan-to-value ratios of
greater than 80%. The maximum loan-to-value
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ratio for construction-permanent loans is also 80% of the appraised value or
cost, whichever is less. The Bank requires private mortgage insurance for loan-
to-value ratios in excess of 80%.
The maximum financing on refinance loans is limited to 80% of the
appraised value and such loans require private mortgage insurance above 80%
loan-to-value, or 80% loan to appraised value if a portion of the funds advanced
by the Bank will be used for purposes other than paying off the existing
mortgage debt.
Multi-Family Loans. At December 31, 1998, $6.5 million, or 4.2% of
the Bank's net loans receivable consisted of loans secured by multi-family
properties. Multi-family loans are comprised primarily of loans secured by
income producing properties such as apartments with five to 50 units. Multi-
family real estate loans are generally made in amounts between $300,000 and
$700,000, are originated at 80% of the appraised value of the property or
selling price, whichever, is less, and are generally originated for ten- to 25-
year terms.
Multi-family lending is generally viewed as exposing the lender to a
greater risk of loss than one- to four-family residential lending. Such loans
typically involve higher loan principal amounts and loan repayment is largely
dependent on sufficient income generated by the project to cover operating
expenses and loan repayments. Market values may vary as a result of economic
events or governmental regulations outside of the control of the borrower or
lender, such as rent control laws, which impact the future cash flows of the
affected properties. Corresponding to the greater lending risk is a generally
higher interest rate applicable to multi-family lending. The Bank generally
requires that the security property generate positive cash flow after debt
service and other expenses. The Bank's underwriting criteria includes an
evaluation of the borrower's reputation, the amount of borrower's equity in the
project, sales and leasing information, and cash flow projections. At
December 31, 1998, the Bank had no nonperforming (i.e. loans accounted for on a
nonaccrual basis and accruing loans contractually past due 90 days or more)
multi-family residential loans.
At December 31, 1998, the three largest multi-family loans were a
$1.4 million loan secured by an apartment building in Muscle Shoals, Alabama,
a $1.2 million loan secured by an apartment building complex in Sheffield,
Alabama, and a $1.0 million loan secured by an apartment building in Tampa,
Florida. All three loans were current at December 31, 1998.
Construction Loans. At December 31, 1998, the Bank had $12.1 million
of construction loans, or 7.9% of net loans receivable. The Bank originates
residential construction mortgage loans to residential owner-occupants (custom
construction loans) and to local contractors building residential properties for
resale, as well as construction loans for multi-family residential properties
and land development on properties located within its primary market area.
Construction loans to owner-occupants generally have a term of six months and
then are converted to permanent loans. The construction loans to builders
generally are in amounts below $200,000 and are made with a six-month term. The
Bank's construction loans bear interest rates which adjust with the U.S.
Treasury Index. Approximately $6.5 million, or 16.5%, and $8.3 million, or
15.9% of the mortgage loans originated by the Bank for the years ended December
31, 1996 and 1997, respectively, were construction loans as compared to
$10.8 million, or 16.8% for the year ended December 31, 1998.
Construction lending is generally considered to involve a higher
degree of credit risk than long-term financing of residential properties. The
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If the
estimate of construction cost and the marketability of the property upon
completion of the project prove to be inaccurate, the Bank may be compelled to
advance additional funds to complete the development. If the borrower is unable
to sell the completed project in a timely manner or obtain adequate proceeds to
repay the loan, the loan may become nonperforming. Furthermore, if the estimate
of value proves to be inaccurate, the Bank may be confronted with, at or prior
to the maturity of the loan, a project with a value which is insufficient to
assure full repayment. The ability of the developer or builder to sell
developed lots or completed dwelling units will depend on, among other things,
demand, pricing and availability of comparable properties, and economic
conditions.
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The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank considers
evidence of the availability of permanent financing for the borrower, the
reputation of the borrower, the amount of the borrower's equity in the project,
the independent appraisal and review of cost estimates, the pre-construction
sale and leasing information, and the cash flow projections of the borrower. In
addition, most of the construction loans granted by the Bank are secured by
property in the Bank's local market area.
At December 31, 1998, the Bank had three construction loans with
committed balances of more than $1.0 million, all of which were current at that
date. The first is a 34% participation interest in a $5.0 loan commitment
secured by land and a shopping center in Killen, Alabama. The Bank's interest
amounts to $1.8 million. At December 31, 1998, there was $120,000 outstanding
under the commitment, in which the Bank had a 34% interest. The second is a
$1.2 million loan secured by an apartment building located in Greensboro,
Alabama, with an outstanding balance of $399,000 at December 31, 1998. The
third is a $1.2 million loan secured by a residential sub-division development
located in Tuscumbia, Alabama, with an outstanding balance of $973,000 at
December 31, 1998.
Consumer Loans. Consumer loans generally have shorter terms to
maturity or repricing and higher interest rates than the long-term, fixed-rate
mortgage loans. The Bank's consumer loans consist of loans secured by
automobiles, boats and recreational vehicles, mortgages on residences and
savings accounts, and unsecured loans for any personal or household purposes.
At December 31, 1998, consumer loans totaled $21.8 million, or 14.2% of net
loans receivable. The Bank has not actively marketed its consumer loans and the
majority of such loans originated by the Bank have been made to its existing
customers. The Bank, however, subject to market conditions, intends to actively
market consumer loans beyond its existing customer base to prospective borrowers
within its primary market area.
The Bank offers closed-end, fixed-rate home equity and second mortgage
loans that are made on the security of residences. Loans normally do not exceed
89% of the appraised value of the residence, less the outstanding principal of
the first mortgage and have terms of up to 15 years requiring monthly payments
of principal and interest. At December 31, 1998, total outstanding home equity
and second mortgage loans amounted to $10.1 million, or 6.6% of net loans
receivable.
The Bank offers automobile loans on both new and used vehicles.
Automobile loans are generally made at fixed interest rates, with terms up to 60
months and loan-to-value ratios up to 90%.
The Bank makes savings account loans for up to 97% of the depositor's
savings account balance. The interest rate is normally 2% above the rate paid
on the savings account, and the account must be pledged as collateral to secure
the loan. Savings account loans are payable in monthly payments of principal
and interest or in a single payment. At December 31, 1998, total loans on
savings accounts amounted to $886,000, or 0.6% of net loans receivable.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Such loans may also give rise to claims
and defenses by a consumer loan borrower against an assignee of such loans such
as the Bank, and a borrower may be able to assert against such assignee claims
and defenses that it has against the seller of the underlying collateral. At
December 31, 1998, $105,000, or 0.5% of the Bank's consumer loan portfolio was
accounted for on a nonaccrual basis or was contractually past due 90 days or
more.
Commercial Real Estate Loans. The Bank originates loans secured by
commercial real estate located primarily within the Bank's market area, and to a
lesser extent outside of Alabama. Commercial real
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estate loans are generally secured by small commercial properties such as
doctor's offices and strip shopping centers. Commercial real estate loans are
written for terms of five, ten or 20 years with interest rates tied to the
comparable U.S. Treasury Constant Maturity Index or prime rates. Since the size
of commercial real estate loans creates greater potential for loss, the Bank
attempts to apply conservative underwriting standards to this type of lending.
The Bank primarily limits such lending to properties located in its primary
market area and to borrower's who are well known to the Bank. The Bank generally
requires annual financial statements from its commercial real estate borrowers
and personal guarantees if the borrower is a corporation. Commercial real estate
lending generally involves greater risk than residential mortgage lending. The
risks associated with the commercial real estate lending as similar to those
associated with multi-family real estate lending. See "-- Multi-Family Loans."
At December 31, 1998, loans secured by commercial real estate totaled
$33.5 million, or 21.9% of net loans receivable. A substantial portion of such
commercial real estate loans are secured by properties located in the Bank's
primary market area.
At December 31, 1998, the three largest commercial real estate loans
were a $1.7 million loan secured by restaurants in Florence and Decatur,
Alabama, a $2.2 million loan secured by a country club and golf course located
in Muscle Shoals, Alabama, and a $1.4 million loan secured by five furniture
stores in Northern Alabama. All three loans were current at December 31, 1998.
At December 31, 1998, nonperforming (i.e. loans accounted for on a
nonaccrual basis and accruing loans contractually past due 90 days or more)
commercial real estate loans totaled $243,000. See " -- Nonperforming Assets
and Delinquencies."
Commercial Business Loans. At December 31, 1998, the commercial
business loan portfolio totaled approximately $29.0 million, or 18.9% of net
loans receivable. Commercial business loans generally include equipment loans
with terms ranging up to seven years and working capital lines of credit secured
by inventory and accounts receivable. Commercial business loans are generally
made in amounts up to $100,000. Unsecured lines of credit are made for up to
$300,000. Working capital lines of credit are generally renewable and made for
a one-year term without a requirement that the borrower extinguish any
outstanding balance for a particular time period during the year. Interest
rates on commercial business loans are generally indexed to the prime rate. As
with commercial real estate loans, the Bank generally requires annual financial
statements from its commercial business borrowers and personal guarantees if the
borrower is a corporation.
At December 31, 1998, the three largest commercial business loans had
outstanding balances of $1.0 million, $765,000 and $738,000 and were
collateralized by non-real estate business assets. At December 31, 1998, each
loan was performing in accordance with its terms.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and often
insufficient source of repayment.
At December 31, 1998, nonperforming (i.e. loans accounted for on a
nonaccrual basis and accruing loans contractually past due 90 days or more)
commercial business loans aggregated $1.2 million.
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Loan Maturity
The following table sets forth scheduled contractual amortization of
loans and mortgage-backed securities at December 31, 1998 and the dollar amount
of such securities and loans which are scheduled to mature after one year which
have fixed or adjustable interest rates. Demand loans, loans having no stated
schedule of repayments and no stated maturity and overdraft loans are reported
as due in one year. All loans held for sale are also reported as due within one
year.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------
Commercial Mortgage-
Mortgage Consumer Business Total Backed
Loans Loans Loans Loans Securities
---------- -------- ---------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year(1).................... $ 28,449 $ 9,725 $20,050 $ 58,224 $112
After one year through three years.... 15,719 6,083 5,290 27,092 123
After three years through five years.. 18,193 4,878 3,206 26,277 177
After five years...................... 42,729 1,080 464 44,273 533
-------- ------- ------- -------- ----
Total.............................. $105,090 $21,766 $29,010 $155,866 $945
======== ======= ======= ======== ====
Interest rate terms on amounts
due after one year:
Fixed................................. $ 35,456 $11,522 $ 6,233 $ 53,211 $764
Adjustable............................ 41,185 519 2,727 44,431 69
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</TABLE>
(1) Includes loans held for sale.
Loan Solicitation and Processing. Loan applicants come through direct
solicitation by Bank personnel and referrals by realtors and builders. All
types of loans may be originated in the Bank's main office and in the
Rogersville and Muscle Shoals branch offices. The Killen, Mall and Tuscumbia
branch offices do not provide loan origination services. All loans are serviced
from the main office in Florence. Applications for fixed-rate and adjustable-
rate mortgages on one- to four-family properties are underwritten and closed
based on Freddie Mac standards, and other loan applications are underwritten and
closed based on the Bank's own guidelines. Residential mortgage loans are
required to have title insurance, as well as fire and extended coverage
insurance. All mortgage loans require fire and extended coverage on appurtenant
structures.
Upon receipt of a loan application from a prospective borrower, a
credit report and other data are obtained to verify specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate offered as collateral is undertaken by a fee
appraiser approved by the Bank and licensed or certified by the State of
Alabama.
Residential loans up to $300,000 may be approved by the President, the
Senior Lending Officer, the Senior Consumer Loan Officer or the Senior
Commercial Non-Real Estate Officer, with any two approving. Secured consumer
and real estate commercial loans up to $200,000 and $300,000, respectively, may
also be approved by the President, the Senior Lending Officer, the Senior
Consumer Loan Officer, or the Senior Commercial Non-Real Estate Officer, with
any two approving. Loans over $300,000 for one- to four-family residential
units; $400,000 for multi-family units; and $400,000 for commercial units must
be approved by the Bank's Loan/Investment Committee, which has the authority to
approve loans in the amount of $600,000 or less. Loans in excess of $600,000
must be approved by the Bank's Board of Directors.
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Loan applicants are promptly notified of the decision of the Bank.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment.
Loan Originations, Sales and Purchases. The Bank originates fixed and
adjustable rate residential mortgage loans that meet or exceed the applicable
underwriting requirements of the FHLMC. The Bank generally sells all FHA and VA
loans on a servicing released basis. During the year ended December 31, 1998,
the Bank sold $23.3 million of loans, resulting in net gains on sale of
$263,000. The total of loans serviced for others as of December 31, 1998 was
approximately $16.2 million.
During the year ended December 31, 1998, the Bank's total mortgage
loan originations was $64.5 million, of which 24% was subject to periodic
interest rate adjustments and 76% was fixed-rate loans.
The Bank purchases loan participation interests periodically. At
December 31, 1998, the outstanding balance of purchased participation interests
was approximately $3.6 million and was secured by various commercial real
estate, one- to four-family residential and multi-family properties located in
Alabama and Tennessee. At December 31, 1998, all of these participation
interests were current.
The following table sets forth total mortgage loans originated,
purchased, sold and repaid during the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Total mortgage loans at beginning of period............. $119,688 $118,639 $115,124
-------- -------- --------
Loans originated:
Single-family residential............................ 17,820 27,707 38,175
Multi-family residential and commercial real estate.. 14,821 16,171 15,450
Construction loans................................... 6,454 8,316 10,837
-------- -------- --------
Total loans originated............................ 39,095 52,194 64,462
-------- -------- --------
Loans purchased:
Single-family residential............................ -- -- --
Other................................................ -- -- --
-------- -------- --------
Total loans purchased............................. -- -- --
-------- -------- --------
Total loans originated and purchased........... 39,095 52,194 64,462
-------- -------- --------
Loans sold:
Total whole loans sold............................... 16,897 17,327 22,608
Other................................................ -- -- 683
-------- -------- --------
Total loans sold.................................. 16,897 17,327 23,291
Mortgage loan principal repayments...................... 22,319 37,593 49,207
Other (increase) decrease).............................. 928 789 1,998
-------- -------- --------
Total net loan decreases............................. 40,144 55,709 74,496
-------- -------- --------
Net loan activity...................................... (1,049) (3,515) (10,034)
-------- -------- --------
Total gross mortgage loans at end of period............. $118,639 $115,124 $105,090
======== ======== ========
</TABLE>
9
<PAGE>
Loan Commitments. The Bank issues commitments for fixed- and adjustable-
rate single-family residential mortgage loans conditioned upon the occurrence of
certain events. Such commitments are made in writing on specified terms and
conditions and are honored for up to 60 days from application. A fee of 1% is
charged for each loan commitment. At December 31, 1998, the Bank had $1.3
million of outstanding net loan commitments and $12.3 million of unused portions
on lines of credit, and $10,000 of outstanding letters of credit. See Note 16
to Notes to Consolidated Financial Statements.
Loan Origination and Other Fees. The Bank, in most instances, receives
loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan which are charged to the
borrower for funding the loan. The amount of points charged by the Bank varies,
though the range generally is between 1 and 2 points. Current accounting
standards require fees received (net of certain loan origination costs) for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Net deferred fees associated with loans that are
prepaid are recognized as income at the time of prepayment. The Bank had
$69,000 of net deferred mortgage loan fees at December 31, 1998.
Nonperforming Assets and Delinquencies. When a mortgage loan borrower
fails to make a required payment when due, the Bank institutes collection
procedures. The first notice is mailed to the borrower 15 days after the
payment due date with a late fee assessed the borrower and, if necessary, a
second written notice follows after 30 days. After 45 days of the payment due
date, the Bank mails a letter to the borrower. Attempts to contact the borrower
by telephone generally begin approximately 60 days after the payment due date.
If a satisfactory response is not obtained, continuous follow-up contacts are
attempted until the loan has been brought current. In most cases, delinquencies
are cured promptly; however, if by the 90th day of delinquency, or sooner if the
borrower is chronically delinquent and all reasonable means of obtaining payment
on time have been exhausted, foreclosure, according to the terms of the security
instrument and applicable law, is initiated. If management determines on the
90th day of delinquency that all remedies to cure the delinquency have been
exhausted, management classifies the loan nonaccrual and records the impairment,
if any, through the allowance for losses.
If the borrower cannot be reached and does not respond to collection
efforts, a personal collection visit or property inspection is made. The
physical condition and occupancy status of the property is determined before
recommending further servicing action. Such inspection normally takes place
before the 90th day of delinquency.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Bank institutes collection
procedures. The first notice is mailed to the borrower 30 days following the
payment due date. If necessary, a letter is mailed the following month. The
customer is contacted by telephone to ascertain the nature of the delinquency
and is then notified in writing that counseling is available for eligible
borrowers.
In most cases, delinquencies are cured promptly; however, if, by the 60th
day following the grace period of delinquency no progress has been made, a
written notice is mailed informing the borrowers of their right to cure the
delinquency within 90 days and of the Bank's intent to begin legal action if the
delinquency is not corrected. Depending on the type of property held as
collateral, the Bank either obtains a judgment in small claims court or takes
action to repossess the collateral.
The Bank's Board of Directors is informed monthly as to the status of all
loans delinquent 90 days or more, of all loans in foreclosure and of all
foreclosed and repossessed property owned by the Bank.
10
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. At the dates indicated, the Bank
had no restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15. At December 31, 1998, the Bank had
$484,000 of impaired loans within the meaning of SFAS No. 114.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
One- to four-family................. $ -- $ 36 $ -- $ -- $ 132
Commercial.......................... -- 270 -- 401 --
Commercial business.................... -- 50 -- 135 782
Consumer............................... -- -- 18 25 --
------ ------ ------ ------ ------
Total............................ -- 356 18 561 914
------ ------ ------ ------ ------
Accruing loans which were contractually
past due 90 days or more:
Real estate:
One- to four-family................. 258 324 508 216 1,553
Commercial.......................... -- 770 489 -- 243
Construction........................ -- -- 327 -- 112
Commercial business.................... 19 3 39 148 432
Consumer............................... 16 33 60 181 105
------ ------ ------ ------ ------
Total............................ 239 1,130 1,423 545 2,445
------ ------ ------ ------ ------
Total of nonaccrual and 90 days
past due loans................ 293 1,486 1,441 1,106 3,359
Real estate owned......................... 1,073 1,098 198 100 710
------ ------ ------ ------ ------
Total nonperforming assets....... $1,366 $2,584 $1,639 $1,206 $4,069
====== ====== ====== ====== ======
Total loans delinquent 90 days
or more to net loans................... 0.22% 0.98% 0.90% 0.69% 2.19%
Total loans delinquent 90 days
or more to total assets................ 0.19% 0.82% 0.78% 0.60% 1.88%
Total nonperforming assets
to total assets........................ 0.90% 1.43% 0.89% 0.66% 2.28%
</TABLE>
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
(foreclosed real estate) until it is sold. When property is acquired it is
recorded at fair value at the time of foreclosure, less estimated costs of
disposal. Subsequent to foreclosure, the property is carried at the lower of
the foreclosed amount or net realizable value.
At December 31, 1998, the Bank had $710,000 of real estate owned, which
consisted of four single-family properties and one commercial property.
11
<PAGE>
Asset Classification. In connection with examinations of insured
institutions, State of Alabama Banking Department and FDIC examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. Special mention assets, described as assets which do not currently
expose an insured institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. If an asset or portion thereof is
classified loss, the insured institution records a loss for the full amount of
the portion of the asset classified loss. A portion of general loan loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital.
The Bank's senior officers meet monthly to review all classified assets, to
approve action plans developed to resolve the problems associated with the
assets and to review recommendations for new classifications, any changes in
classifications and recommendations for reserves.
The Bank's classified assets are as follows:
At December 31,
----------------
1997 1998
-------- ------
(In thousands)
Loss................ $ -- $ --
Doubtful............ 566 484
Substandard assets.. 473 2,975
Special mention..... 4,461 1,237
At December 31, 1998, doubtful assets consisted primarily of impaired and
non-accrual commercial business loans; substandard assets consisted primarily of
delinquent single-family mortgage loans and delinquent commercial business
loans; and special mention assets consisted primarily of past due single-family
and commercial real estate loans.
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans. The allowance for loan losses is increased
by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay the estimated
value of any underlying collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued and unpaid, and income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general
12
<PAGE>
economic conditions and, in the case of a secured loan, the quality of the
security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover yet unidentified
losses in the loan portfolio. Management reviews the adequacy of the allowance
at least quarterly based on its knowledge of the portfolio including current
asset classifications, the Bank's write-off history, economic conditions
affecting the real estate markets and industry standards.
Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not be reasonably assured. The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analysis pertinent to each situation.
A provision for losses is charged against income periodically to maintain
the allowances. At December 31, 1998, the Bank had allowances for loan losses
of $1.4 million which represented 0.94% of net loans receivable.
Management believes that the amount maintained in the allowances will be
adequate to absorb losses in the portfolio. Although management believes that
it uses the best information available to make such determinations, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be significantly and adversely affected if circumstances differ
substantially from the assumptions used in making the determinations.
Charge-offs occur when loans with specific reserves are impaired, in-
substance foreclosed, or foreclosed. The specific reserve, along with any
additional amounts necessary to reduce the carrying value to fair market value,
net of estimated selling costs, is charged-off. Foreclosed assets are
thereafter carried at the lower of the asset's newly established net fair value
or its net realizable value. When a foreclosed asset is sold, any
excess/(deficiency) over the carrying value is reflected on the books as a
gain/(loss) on the sale of real estate owned.
The Bank's market area is heavily concentrated in Lauderdale and Colbert
counties. Real estate values have been stable to slightly increasing over the
past three years. There can be no assurance as to the future performance of
real estate markets, including those in which the Bank primarily operates. A
downturn in the Alabama real estate markets could have a material adverse effect
on the Bank's operations. For example, depressed real estate values may result
in increases in nonperforming assets, hamper disposition of such nonperforming
assets and result in losses upon such disposition.
While the Bank believes it has established its existing allowance for loan
losses in accordance with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that substantial increases will not be necessary
should the quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect the Bank's financial condition and results of operations.
13
<PAGE>
The following table sets forth an analysis of the Bank's gross allowance
for loan losses for the periods indicated. Where specific loan loss reserves
have been established, any difference between the loss reserve and the amount
of loss actually realized has been charged or credited to current income.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period.......... $ 801 $1,100 $1,509 $1,659 $1,584
------ ------ ------ ------ ------
Provision for loan losses................. 327 565 270 242 605
------ ------ ------ ------ ------
Recoveries:
Residential real estate................ -- -- 20 9 --
Commercial business.................... -- -- 70 17 1
Consumer and other..................... 6 41 -- 4 31
------ ------ ------ ------ ------
Total recoveries.................... 6 41 90 30 32
------ ------ ------ ------ ------
Chargeoffs:
Residential real estate................ -- (4) (13) (52) (36)
Commercial real estate................. -- -- (25) (185) --
Commercial business.................... -- -- (172) (54) (496)
Consumer and other..................... (34) (193) -- (56) (248)
------ ------ ------ ------ ------
Total chargeoffs.................... (34) (197) (210) (347) (780)
------ ------ ------ ------ ------
Net chargeoffs...................... (28) (156) (120) (317) (748)
------ ------ ------ ------ ------
Balance at end of period.................. $1,100 $1,509 $1,659 $1,584 $1,441
====== ====== ====== ====== ======
Ratio of allowance to net loans
outstanding at the end of the period... 0.84% 0.99% 1.04% 0.99% 0.94%
Ratio of net chargeoffs to average loans
outstanding during the period.......... 0.02% 0.11% 0.08% 0.19% 0.49%
</TABLE>
The following table sets forth the Bank's allowance for loan losses by loan
category at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------- ------------------ ------------------ ------------------ -------------------
As a % As a % As a % As a % As a %
of Out- of Out- of Out- of Out- of Out-
standing standing standing standing standing
Loans in Loans in Loans in Loans in Loans in
Amount Category Amount Category Amount Category Amount Category Amount Category
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential............. $ 299 0.35% $ 331 0.39% $ 261 0.33% $ 234 0.34% $ 217 0.36%
Other................... 334 1.25 441 1.25 167 0.43 210 0.46 188 0.41
Consumer and commercial
business.................. 467 2.00 729 2.00 580 1.29 614 1.29 651 1.28
Unallocated................ -- 8 651 526 385
------- ------ ------ ------ ------
Total allowance for
loan losses $1,100 $1,509 $1,659 $1,584 $1,441
======= ====== ====== ====== ======
</TABLE>
14
<PAGE>
Investment Activities
The Bank has authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies and of state and municipal governments, deposits at the FHLB of
Atlanta, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds.
The Bank is required under Alabama law to maintain at all times a
reserve (comprised of cash) based upon average daily deposits of the Bank. At
December 31, 1998, the Bank's qualifying reserves of $1.7 million exceeded the
required reserve of $297,000. The balance of the Bank's investments in short-
term securities in excess of regulatory requirements reflects management's
response to the significantly increasing percentage of deposits with short-term
maturities. Management intends to hold securities with short-term maturities in
the Bank's investment portfolio in order to enable the Bank to provide liquidity
and to match more closely the interest-rate sensitivities of its assets and
liabilities.
The Investment/Loan Committee, comprised of the two outside directors,
determines appropriate investments in accordance with the Board of Directors'
approved investment policies and procedures. Investments are made following
certain considerations, which include the Bank's liquidity position and
anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits, anticipated loan
amortization and repayments, and amortization of mortgage-backed securities).
Further, the effect that the proposed investment would have on the Bank's "gap"
position, credit and interest rate risk, and risk-based capital is given
consideration during the evaluation. The interest rate, yield, settlement date
and maturity are also reviewed.
At December 31, 1998, the Company's investment securities portfolio
totaled approximately $2.0 million at fair value ($2.0 million at amortized
cost) and, consisted of U.S. Treasury and agency securities.
The Company also invests in mortgage-backed securities. At December
31, 1998, the mortgage-backed securities portfolio had an amortized cost of
approximately $945,000 and as market value of $994,000, with maturities ranging
from six months to over ten years. See Notes 3 and 4 of Notes to Consolidated
Financial Statements.
15
<PAGE>
The following table sets forth the cost and market values of the
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------- ------------------------------- ----------------------------------
Percent Percent Percent
Amortized Market of Amortized Market of Amortized Market of
Cost(1) Value Portfolio Cost(1) Value Portfolio Cost(1) Value Portfolio
--------- ------- --------- -------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit.... $ 5,000 $ 5,000 45.41% $ -- $ -- --% $ -- $ -- --%
U.S. Government and agency
obligations............. 6,012 5,948 54.59 7,998 7,993 100.00 1,998 2,016 100.00
------- ------- ------ ------- ------ ------ ------ ------ ------
Total................... $11,012 $10,948 100.00% $ 7,998 $7,993 100.00% $1,998 $2,016 100.00%
======= ======= ====== ======= ====== ====== ====== ====== ======
- -----------------------
</TABLE>
(1) Percentage of portfolio value computed based upon carrying value of
securities. Prior to January 1, 1994, securities were recorded at amortized
cost. In 1994 the Company adopted the provisions of SFAS No. 115 under
which the Company has classified 100% of its investment securities as
"available for sale," which securities were therefore recorded at market
value.
The following table sets forth the maturities and weighted average
yields of the investment securities portfolio at December 31, 1998.
<TABLE>
<CAPTION>
Weighted
Carrying Average
Value Yield
--------- --------
(Dollars in thousands)
<S> <C> <C>
U.S. government and agency obligations:
Due in one year or less................ $1,004 6.07%
Due after one year through five years.. 1,012 5.91
------ ------
$2,016 5.99%
====== ======
</TABLE>
16
<PAGE>
The following table sets forth the cost and market values of the
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------- -------------------------------- ---------------------------------
Percent Percent Percent
Amortized Market of Amortized Market of Amortized Market of
Cost Value Portfolio(1) Cost Value Portfolio(1) Cost Value Portfolio(1)
--------- ------ ------------ --------- ------ ----------- --------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA certificates(2)....... $ 256 $ 264 13.57% $ 185 $ 191 12.92% $ 69 $ 78 7.30%
GNMA certificates(2)....... 818 855 43.35 587 613 40.99 402 426 42.54
FHLMC certificates(2)...... 813 836 43.08 660 681 46.09 474 490 50.16
------ ------ ------ ------ ------ ------ ---- ---- ------
$1,887 $1,955 100.00% $1,432 $1,485 100.00% $945 $994 100.00%
====== ====== ====== ====== ====== ====== ==== ==== ======
- --------------------
</TABLE>
(1) Percentage of portfolio value computed based upon amortized cost of
mortgage-backed securities.
(2) Classified as "held to maturity" at December 31, 1996, 1997 and 1998.
The following table sets forth the maturities and weighted average yields
of the mortgage-backed securities portfolio at December 31, 1998.
<TABLE>
<CAPTION>
Weighted
Carrying Average
Value Yield
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Due in one year or less................. $ 89 7.00%
Due after one year through five years... 26 8.31
Due after five years through ten years.. 509 8.37
Due after ten years..................... 321 8.70
---- ----
$945 8.35%
==== ====
</TABLE>
17
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources.
They may also be used on a longer-term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market deposit accounts, statement savings accounts, certificates of deposit and
retirement savings plans. Deposit account terms vary, according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its deposit
accounts, the Bank considers current market interest rates, profitability to the
Bank, matching deposit and loan products and its customer preferences and
concerns. The Bank generally reviews its deposit mix and pricing weekly.
In the unlikely event the Bank is liquidated depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Company, as stockholder of the Bank. Substantially all of the
Bank's depositors are residents of the State of Alabama.
18
<PAGE>
The following table sets forth information concerning time deposits
and other interest-bearing and non-interest-bearing deposits at December 31,
1998.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Term Category Amount Balance Deposits
- ------------- -------- --------------------------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
0.00% None Non-interest bearing demand $ 100 $ 5,939 4.66%
2.00 None NOW 500 11,757 9.22
3.00 None Money market demand 500 3,421 2.68
2.75 None Passbook 100 15,415 12.09
2.875 None Statement savings 100 2,300 1.80
Certificates of Deposit
----------------------------
3.92 91 days Fixed-term, fixed rate 1,000 165 0.13
4.86 182 days Fixed-term, fixed rate 1,000 14,954 11.72
5.18 1 year Fixed-term, fixed rate 1,000 21,522 16.87
5.25 13 months Fixed-term, fixed rate 1,000 1,954 1.53
5.55 14 months Fixed-term, fixed rate 1,000 9,348 7.33
5.25 15 months Fixed-term, fixed rate 1,000 71 0.06
5.18 18 months Fixed-term, fixed rate 1,000 1,353 1.06
5.88 2 years Fixed-term, fixed rate 1,000 19,837 15.55
5.47 30 months Fixed-term, fixed rate 1,000 2,549 2.00
5.52 3 years Fixed-term, fixed rate 1,000 2,458 1.93
6.16 4 years Fixed-term, fixed rate 1,000 1,347 1.06
5.75 5 years Fixed-term, fixed rate 1,000 4,199 3.29
7.75 6 years Fixed-term, fixed rate 1,000 81 0.06
8.00 8 years Fixed-term, fixed rate 1,000 396 0.31
5.24 1 year Fixed-term, fixed rate 1,000 2,913 2.28
individual retirement
account ("traditional IRA")
4.84 1 year Fixed-term, fixed rate 1,000 32 0.03
individual retirement
account ("ROTH IRA")
5.23 18 months Fixed-term, fixed rate - IRA 1,000 5,539 4.34
-------- ------
$127,550 100.00%
======== ======
</TABLE>
The following table indicates the amount of certificates of deposit and
other deposits with balances of $100,000 or greater by time remaining until
maturity as of December 31, 1998. Other deposits with balances of $100,000 or
greater aggregated $4.4 million, and have been shown in the following table as
having maturities of three months or less.
<TABLE>
<CAPTION>
Maturity Period Amount
- ---------------- -------
(In thousands)
<S> <C>
Three months or less $ 6,846
Three through twelve months 10,229
Over twelve months 3,454
-------
Total $20,529
=======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Deposit Flow
At December 31,
--------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- ------------------------------ -----------------------------
Percent Percent Percent
of Increase of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease)
-------- ------- --------- ------- -------- ---------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noncertificate of deposit accounts(2):
Noninterest-bearing(1).. $ 4,189 3.15% $ 1,951 $ 4,119 2.87% $ (70) $ 5,939 4.65% $ 1,820
NOW checking............ 10,744 8.09 1,006 11,015 7.66 271 11,757 9.22 742
Regular savings accounts 17,839 13.44 (1,788) 15,918 11.08 (1,921) 15,415 12.09 (503)
Money market deposit.... 2,908 2.19 (80) 4,310 3.00 1,402 3,421 2.68 (889)
Statement savings....... 1,486 1.12 701 1,400 0.97 (86) 2,300 1.80 900
Certificates of deposit(3)(4):
Variable rate certificates which
mature:
Within one year....... 3,693 2.78 179 -- -- (3,693) -- -- --
Within three years.... -- -- (3,273) -- -- -- -- -- --
Fixed-rate certificates which
mature:
Within one year....... 68,504 51.58 9,510 84,922 59.08 16,418 70,086 54.95 (14,836)
Within three years.... 23,351 17.58 (4,503) 20,923 14.56 (2,428) 15,678 12.29 (5,245)
After three years..... 86 0.07 (2,770) 1,124 0.78 1,038 2,954 2.32 1,830
-------- ------ ------- -------- ------ ------- -------- -------- --------
Total................. $132,800 100.00% $ 933 $143,731 100.00% $10,931 $127,550 100.00% $(16,181)
======== ====== ======= ======== ====== ======= ======== ======== ========
- ----------------------------
</TABLE>
(1) Comprised solely of NOW checking accounts.
(2) Includes accounts with balances of $100,000 and greater of $1.4 million,
$4.6 million and $4.4 million at December 31, 1996, 1997 and 1998,
respectively.
(3) Includes certificates of deposit with balances of $100,000 and greater of
$15.2 million,$18.7 million and $16.1 million at December 31, 1996, 1997
and 1998, respectively.
(4) Includes IRA accounts of $8.0 million at December 31, 1996 and 1997, and
$8.5 million at December 31, 1998.
20
<PAGE>
Time Deposits by Rates
The following table sets forth time deposits classified by rates as of the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1996 1997 1998
--------- -------- -------
(In thousands)
<S> <C> <C> <C>
2.01 - 4.00%......................................... $ 774 $ 605 $ 200
4.01 - 5.00%......................................... 227 706 18,160
5.01 - 6.00%......................................... 67,572 64,433 62,697
6.01 - 7.00%......................................... 25,040 38,524 6,835
7.01 or greater...................................... 2,021 2,701 826
------- -------- -------
Total.............................................. $95,634 $106,969 $88,718
======= ======== =======
</TABLE>
The following table sets forth the amount and maturities of time deposits at
December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
--------- --------- -------- ------- ---------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2.00 - 4.00%.......................................... $ 200 $ -- $ -- $ -- $ -- $ 200 0.23%
4.01 - 5.00%.......................................... 16,072 1,723 266 49 50 18,160 20.47
5.01 - 6.00%.......................................... 48,360 10,513 2,065 271 1,488 62,697 70.67
6.01 - 7.00%.......................................... 5,147 1,048 -- 605 35 6,835 7.70
7.01 - or greater..................................... 307 63 -- 385 71 826 0.93
------- ------- -------- ------- --------- ------- ------
Total............................................. $70,086 $13,347 $ 2,331 $ 1,310 $ 1,644 $88,718 100.00%
======= ======= ======== ======= ========= ======= ======
</TABLE>
The following table sets forth the deposit activities of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1997 1998
--------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning balance.................... $131,867 $132,800 $143,731
-------- -------- --------
Net increase (decrease)
before interest credited............ (3,896) 5,798 (20,910)
Interest credited.................... 4,829 5,133 4,729
-------- -------- --------
Net increase (decrease)
in savings deposits................. 933 10,931 (16,181)
-------- -------- --------
Ending balance....................... $132,800 $143,731 $127,550
======== ======== ========
</TABLE>
21
<PAGE>
Management attributes the net decrease in savings accounts in 1998
primarily to the maturity of higher rate certificates of deposit. The Bank
declined to offer the same interest rates upon renewal, therefore, these
accounts were not renewed with the Bank.
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank may rely upon advances from the FHLB of Atlanta to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The FHLB
of Atlanta has, from time to time, served as one of the Bank's primary borrowing
sources. Advances from the FHLB of Atlanta are typically secured by the Bank's
first mortgage loans and certain investment and mortgage-backed securities. At
December 31, 1998, the Bank had $31.3 million of borrowings from the FHLB of
Atlanta at a weighted average rate of 5.61%. See Note 10 of Notes to
Consolidated Financial Statements.
The FHLB of Atlanta functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Bank is required to own capital stock in the
FHLB of Atlanta and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average rate paid on:
FHLB advances............................................... 6.34% 6.00% 5.61%
Other borrowings(1)......................................... 8.25 -- --
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding at any month end:
FHLB advances............................................... $25,619 $36,043 $35,392
Other borrowings(1)......................................... 4,000 450 1,600
Approximate average outstanding:
FHLB advances............................................... 21,934 26,221 30,231
Other borrowings(1)......................................... 336 195 297
Approximate weighted average rate paid on:
FHLB advances............................................... 5.92% 5.88% 5.71%
Other borrowings(1)......................................... 8.07 8.51 8.42%
</TABLE>
- -----------------------
(1) Credit facility from third party financial institution.
22
<PAGE>
REGULATION
The Bank
General. As an Alabama-chartered, federally insured commercial bank, the
Bank is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Bank is regularly examined
by the FDIC and the Superintendent and files periodic reports concerning the
Bank's activities and financial condition with its regulators. The Bank's
relationship with depositors and borrowers also is regulated to a great extent
by both federal law and the laws of the State of Alabama, especially in such
matters as the ownership of savings accounts and the form and content of
mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks and bank holding companies if such payments
should be deemed to constitute an unsafe and unsound practice. The respective
primary federal regulators of the Company and the Bank have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.
State Regulation and Supervision. As a Alabama-chartered commercial bank,
the Bank is subject to applicable provisions of Alabama law and the regulations
of the Superintendent adopted thereunder. Alabama law and regulations govern
the Bank's ability to take deposits and pay interest thereon, to make loans on
or invest in residential and other real estate, to make consumer loans, to
invest in securities, to offer various banking services to its customers, and to
establish branch offices. The Bank is subject to periodic examination and
reporting requirements by and of the Superintendent.
Deposit Insurance. The FDIC insures deposits at the Bank to the maximum
extent permitted by law. The Bank currently pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for all
SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups which are based solely on the level of
an institution's capital --"well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the Federal
Deposit Insurance Act ("FDIA"), as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates currently ranging
from 0.23% for well capitalized, financially sound institutions with only a few
minor weaknesses to 0.31% for undercapitalized institutions that pose a
substantial risk of loss to the SAIF unless effective corrective action is
taken. The FDIC is authorized to raise assessment rates in certain
circumstances. The Bank's assessments expensed for the year ended December 31,
1998, equaled $83,000.
The FDIC's current assessment schedule for SAIF deposit insurance provides
that the assessment rate for well-capitalized institutions with the highest
supervisory ratings would be reduced to zero and institutions in the lowest risk
assessment classification will be assessed at the rate of 0.27% of insured
deposits. Until December 31, 1999, however, SAIF-insured institutions, will be
required to add to their assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for FICO obligations at the rate of 1.3 basis points. After December
31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an
23
<PAGE>
agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances which could result in termination of the deposit insurance of the
Bank.
Prompt Corrective Action. Each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be: (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or
more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At December 31, 1998, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness. The federal banking regulatory
agencies are required, by regulation, to prescribe standards for all insured
depository institutions relating to: (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees
and benefits. The federal banking agencies recently adopted final regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards. The Guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The agencies also proposed asset quality and earnings
standards which, if adopted in final, would be added to the Guidelines. Under
the final regulations, if the FDIC determines that the Bank fails to meet any
standard prescribed by the Guidelines, the agency may require the Bank to submit
to the agency an acceptable plan to achieve compliance with the standard. The
final regulations establish deadlines for the submission and review of such
safety and soundness compliance plans.
Capital Requirements. The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
24
<PAGE>
mortgage servicing rights and certain other accounting adjustments. All other
banks must have a Tier 1 leverage ratio of at least 100 to 200 basis points
above the 3% minimum. The FDIC capital regulations establish a minimum leverage
ratio of not less than 4% for banks that are not highly rated or are
anticipating or experiencing significant growth. Based on the definitions
contained in the FDIC's capital regulations, the Bank had a Tier 1 leverage
capital ratio of 9.69% as of December 31, 1998.
The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital be
maintained. Any insured bank with a Tier 1 capital to total assets ratio of
less than 2% is deemed to be operating in an unsafe and unsound condition unless
the insured bank enters into a written agreement, to which the FDIC is a party,
to correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower than
the prescribed minimum capital levels generally will not receive approval of
applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC deems
necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital)
to risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for possible loan and lease
losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of capital counted toward supplementary capital cannot
exceed 100% of Tier 1 capital. Since September 1995, the FDIC includes in its
evaluation of a bank's capital adequacy an assessment of the exposure to
declines in the economic value of the bank's capital due to changes in interest
rates. However, no measurement framework for assessing the level of a bank's
interest rate risk exposure has been codified. In the future, the FDIC will
issue a proposed rule that would establish an explicit minimum capital charge
for interest rate risk, based on the level of a bank's measured interest rate
risk exposure.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial weaknesses.
The FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a bank has a significant volume of assets classified substandard, doubtful or
loss or otherwise criticized, the FDIC may determine that the minimum adequate
amount of capital for that bank is greater than the minimum standards
established in the regulation.
Activities and Investments of Insured State-Chartered Banks. Federal law
generally limits the activities and equity investments of FDIC-insured, state-
chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state
bank is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
25
<PAGE>
In addition, an insured state bank (i) that is located in a state which
authorized as of September 30, 1991 investment in common or preferred stock
listed on a national securities exchange ("listed stock") or shares of a
registered investment company ("registered shares"), and (ii) which during the
period beginning September 30, 1990 through November 26, 1991 ("measurement
period") made or maintained investments in listed stocks and registered shares,
may retain whatever shares that were lawfully acquired or held prior to December
19, 1991 and continue to acquire listed stock and registered shares, provided
that the bank does not convert its charter to another form or undergo a change
in control. In order to acquire or retain any listed stock or registered
shares, however, the bank must file a one-time notice with the FDIC which meets
specified requirements and which sets forth the bank's intention to acquire and
retain stocks or shares, and the FDIC must determine that acquiring or retaining
the listed stocks or registered shares will not pose a significant risk to the
deposit insurance fund of which the bank is a member.
FDIC regulations provide that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease the
impermissible activity.
Loans-to-One-Borrower. Under Alabama law the aggregate amount of loans
that the Bank is permitted to make to any one borrower, including related
entities, is generally 20% of the Bank's capital account (i.e., capital, surplus
and undivided profits) provided that loans in excess of 10% of the capital
account are fully secured. At December 31, 1998, the Bank's loans-to-one
borrower limit was approximately $3.5 million. At December 31, 1998, the
largest aggregate amount of loans by the Bank to any one borrower was
approximately $3.3 million, which was comprised of six loans ($419,000 in one-
to four-family loans, $2.3 million in commercial real estate loans, $279,000
outstanding under a $350,000 line of credit secured by commercial real estate,
and $205,000 outstanding under a $224,000 line of credit secured by a single-
family residence), all of which were performing according to their terms.
Federal Reserve System. Regulation D of the FRB requires all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits with
the regional Federal Reserve Bank. NOW accounts and other types of accounts
that permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to Regulation D reserve requirements, as
are any nonpersonal time deposits at a bank. Under Regulation D, a bank must
establish reserves equal to 3% of the first $43.1 million of transaction
accounts, of which the first $4.7 million is exempt, and 10% on the remainder.
The reserve requirement on nonpersonal time deposits with original maturities of
less than 1-1/2 years is 0%. As of December 31, 1998, the Bank met its reserve
requirements.
Affiliate Transactions. The Company and the Bank are separate and distinct
legal entities. Various legal limitations restrict the Bank from lending or
otherwise supplying funds to the Company (an "affiliate"), generally limiting
such transactions with the affiliate to 10% of the bank's capital and surplus
and limiting all such transactions to 20% of the bank's capital and surplus.
Such transactions, including extensions of credit, sales of securities or assets
and provision of services, also must be on terms and conditions consistent with
safe and sound banking practices, including credit standards, that are
substantially the same or at least as favorable to the bank as those prevailing
at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or other
affiliates, on investments in the stock or other securities of affiliates and on
the taking of such stock or securities as collateral from any borrower. In
addition, such banks are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit or the providing of any property or
service.
Community Reinvestment Act. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank, to
assess the bank's record in meeting the credit needs of the community serviced
by the bank, including low
26
<PAGE>
and moderate income neighborhoods. The regulatory agency's assessment of the
bank's record is made available to the public. Further, such assessment is
required of any bank which has applied, among other things, to establish a new
branch office that will accept deposits, relocate an existing office or merge or
consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. The Bank received an "outstanding"
CRA rating as a result of its most recent evaluation.
Dividends. Dividends from the Bank constitute the major source of funds
for dividends which may be paid by the Company. The amount of dividends payable
by the Bank to the Company depend upon the Bank's earnings and capital position,
and is limited by federal and state laws, regulations and policies. According
to Alabama law, the Bank is required to transfer to surplus each year at least
10% of its net earnings (and thus cannot declare or pay a dividend in excess of
90% of net earnings) until its surplus equals at least 20% of its capital.
Furthermore, the Bank must obtain the approval of the Superintendent to declare
dividends in any calendar year in excess of the total of its net earnings of
that year combined with its retained net earnings of the preceding to years,
less any required transfers to surplus.
At the time of the consummation of the Stock Conversion, OTS regulations
required the Association to establish a liquidation account for the benefit of
eligible account holders of the Association. This liquidation account was
assumed by the Bank at the time of the consummation of the Bank Conversion. The
Bank may not declare or pay a cash dividend on any of its capital stock that
would reduce the Bank's regulatory capital below the amount required for the
liquidation account. See Note 20 of the Notes to Consolidated Financial
Statements.
Federal law further provides that no insured depository institution may
make any capital distribution (which would include a cash dividend) if, after
making the distribution, the institution would be "undercapitalized," as defined
in the prompt corrective action regulations. Moreover, the federal bank
regulatory agencies also have the general authority to limit the dividends paid
by insured banks if such payments should be deemed to constitute an unsafe and
unsound practice.
The Holding Company
General. The Company, as the sole shareholder of the Bank, is a bank
holding company registered as such with the FRB. Bank holding companies are
subject to comprehensive regulation by the FRB under the Bank Holding Company
Act of 1956, as amended ("BHCA") and the regulations of the FRB. As a bank
holding company, the Company is required to file with the FRB annual reports and
such additional information as the FRB may require and is subject to regular
examinations by the FRB. The FRB also has extensive enforcement authority over
bank holding companies, including, among other things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain FRB approval before: (1)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (2) acquiring all or substantially all of the assets
of another bank or bank holding company; or (3) merging or consolidating with
another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted, may
not be approved by the FRB unless the laws of the state in which the bank to be
acquired is located specifically authorize such an acquisition. Most states
have authorized interstate bank acquisitions by out-of-state bank holding
companies on either a regional or a national basis, and most such statutes
require the home state of the acquiring bank holding company to have enacted a
reciprocal statute. Alabama law permits bank holding companies located in the
states of Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Maryland,
Mississippi, North Carolina, South Carolina, Tennessee, Texas, Virginia and West
27
<PAGE>
Virginia and the District of Columbia to acquire banks or bank holding companies
located in Alabama subject to the requirements that the laws of the state in
which the acquiring bank holding company is located permit bank holding
companies located in Alabama to acquire banks or bank holding companies in the
acquiror's state and that the Alabama bank sought to be acquired has been in
existence for at least five years. Since September 30, 1995, federal law permits
well capitalized and well managed bank holding companies to acquire control of
an existing bank in any state.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries.
Under the BHCA, the FRB is authorized to approve the ownership of shares by a
bank holding company in any company, the activities of which the FRB has
determined to be so closely related to the business of banking or managing or
controlling banks as to be a proper incident thereto. The list of activities
determined by regulation to be closely related to banking within the meaning of
the BHCA includes, among other things: operating a savings institution,
mortgage company, finance company, credit card company or factoring company;
performing certain data processing operations; providing certain investment and
financial advice; underwriting and acting as an insurance agent for certain
types of credit-related insurance; leasing property on a full-payout, non-
operating basis; selling money orders, travelers' checks and U.S. Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earning retention that is consistent with the company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized" under the prompt corrective action regulations.
Bank holding companies, except for certain "well-capitalized" bank holding
companies, are required to give the FRB prior written notice of any purchase or
redemption of its outstanding equity securities if the gross consideration for
the purchase or redemption, when combined with the net consideration paid for
all such purchases or redemptions during the preceding 12 months, is equal to
10% or more of their consolidated net worth. The FRB may disapprove such a
purchase or redemption of it determines that the proposal would constitute an
unsafe or unsound practice or would violate any law, regulation, FRB order, or
any condition imposed by, or written agreement with, the FRB.
Capital Requirements. The FRB has established capital adequacy guidelines
for bank holding companies that generally parallel the capital requirements of
the FDIC for the Bank. The FRB regulations provide that capital standards will
be applied on a consolidated basis in the case of a bank holding company with
$150 million or more in total consolidated assets. At December 31, 1998, the
Company met its minimum regulatory capital requirements. See Notes 14 to Notes
to Consolidated Financial Statements.
28
<PAGE>
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal
year basis using the accrual method of accounting. The Company and the Bank are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Company and the Bank.
Bad Debt Reserve. In years prior to the consummation of the Bank
Conversion, the Association, as a qualified thrift meeting certain eligibility
criteria prescribed in the Code, was able to determine its tax basis bad debt
reserve using the percentage of taxable income method ("PTI Method") set forth
in the Code. The Association's use of the PTI Method resulted in a
significantly greater tax basis reserve for bad debts than that recognized for
financial reporting purposes.
Upon consummation of the Bank Conversion, the Bank became a "former
thrift institution" and, as such, under provisions of the Code, is no longer
eligible to maintain its tax basis bad debt reserve on the PTI Method. As a
financial institution with total assets less than $500 million, the Bank is
permitted to maintain its tax basis bad debt reserves on the experience method
("Experience Method"), which computes a tax basis bad debt reserve based upon a
six-year weighted-average calculation of actual bad debts experienced by the
Bank.
Under applicable provisions of the Code, on a ratable basis over a
six-year period commencing in 1995, the Bank must include in income the excess
of the PTI Method bad debt reserve as of December 31, 1994 over its newly
adopted Experience Method tax basis reserve determined as of December 31, 1994.
See Note 11 of Notes to Consolidated Financial Statements.
In the event that the Bank's assets ever exceed the $500 million
threshold, the Bank would be required to recapture its newly adopted Experience
Method tax basis bad debt reserve in increasing increments over a four-year
period. Thereafter, the Bank would be required to use the direct or specific
charge-off method applicable to large banks in calculating the Bank's tax bad
debt deduction. Under the direct or specific charge-off method, the Bank would
be entitled to a bad debt deduction only in the taxable year in which a specific
debt become worthless or is shown to be recoverable only in part.
The Bank Conversion occurred prior to the enactment of the Small
Business Job Protection Act of 1996 which repealed the PTI method but did not
require recapture of pre-1988 bad debt reserves.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserves.
The amount of additional taxable income created from and Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the Excess Distribution would be includable in gross income for
federal income tax purposes, assuming a 34%
29
<PAGE>
federal corporate income tax rate. See "REGULATION" for limits on the payment
of dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased
by an amount equal to 75% of the amount by which the Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of
the excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax
("AMT") is paid. Under President Clinton's 1998 budget proposal, the corporate
environmental income tax would be reinstated for taxable years beginning after
December 31, 1996 and before January 1, 2008.
Dividends-Received Deduction and Other Matters. The Holding Company
may exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Holding Company and the Bank will not file a
consolidated tax return, except that if the Holding Company or the Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80% of
any dividends received may be deducted.
Audits. The Company's and the Bank's federal income tax returns have
been audited through 1996.
State Taxation
Alabama Taxation. The State of Alabama imposes a 6% excise tax on the
Bank's earnings. The Alabama Department of Revenue has conducted one audit of
the Bank's financial institutions excise tax returns during the last five years
resulting in minor adjustments which increased the Bank's tax liability by less
than $8,000.
Delaware. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Competition
The Bank faces strong competition in the attraction of savings
deposits (its primary source of lendable funds) and in the origination of real
estate and consumer loans. Its most direct competition for savings deposits and
loans has historically come from other thrift institutions and from commercial
banks located in its primary market area in Lauderdale and Colbert counties of
the State of Alabama. The Bank competes for loans primarily through the
interest rates and loan fees it charges, and the prompt, efficient, and quality
service it provides to its borrowers, real estate brokers, and home builders.
Primary competition for loans are from other thrift institutions, commercial
banks, mortgage banking companies, insurance companies, and credit unions.
Personnel
As of December 31, 1998, the Bank had 66 full-time and 12 part-time
employees. The employees are not represented by a collective bargaining unit.
The Bank believes its relationship with its employees is good.
Executive Officers
The executive officers of the Company, each of whom holds the same
positions with the Bank, are:
30
<PAGE>
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Charles L. Frederick, Jr. President, Chief Executive Officer and Director
William E. Batson Chairman of the Board
Thomas N. Ward Executive Vice President/Chief Operating Officer and Director
</TABLE>
The principal occupation of each executive officer of the Bank is set
forth below. Unless otherwise noted, all officers have held the position
described below for at least the past five years.
Charles L. Frederick, Jr. has been employed with the Bank since 1965
and has served as President and Chief Executive Officer since 1988.
William E. Batson is a self-employed public accountant.
Thomas N. Ward has been employed by the Bank since 1977 serving in
various capacities and has served as Executive Vice President/Chief Operating
Officer since 1991.
Item 2. Properties
- -------------------
The following table sets forth certain information regarding the
Bank's offices as of December 31, 1998. The net book value of the Bank's
investment in office, properties and equipment totaled $3.9 million at December
31, 1998.
<TABLE>
<CAPTION>
Year Building Land Building
Location County Opened Owned/Leased Owned/Leased Square Footage Deposits
- -------- ---------- -------- ------------ ------------ -------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Main Office
- -----------
102 South Court Street Lauderdale 1935 Owned Owned 45,000 $74,852
Florence, Alabama 35630
Branch Offices
- --------------
U.S. Highway 72 E. Lauderdale 1977 Owned Owned 1,890 11,533
Killen, Alabama 35645
U.S. Highway 72 E. Lauderdale 1977 Owned Owned 1,890 12,170
Rogersville, Alabama 35652
2727 Mall Drive Lauderdale 1979 Owned Owned 1,216 20,505
Florence, Alabama 35630
1027 Avalon Avenue Colbert 1990 Owned Owned 3,500 6,159
Muscle Shoals, Alabama 35661
506 N. Main Street Colbert 1998 Owned Owned 2,500 2,331
Tuscumbia, Alabama 35674
</TABLE>
31
<PAGE>
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving
the Bank, mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Bank's business. The Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------- -----------------------------------------------------------------
Matters
- -------
The information contained in the section captioned "Market for First
Southern Bancshares, Inc.'s Common Stock and Related Stockholder Matters" in the
Annual Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operation
- --------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- -----------------------------
Independent Auditors' Report*
Consolidated Statements of Financial Condition, December 31, 1997 and
1998*
Consolidated Statements of Income For the Years Ended December 31,
1996, 1997 and 1998*
Consolidated Statements of Changes in Shareholders' Equity For the
Years Ended December 31, 1996, 1997 and 1998*
Consolidated Statements of Cash Flows For the Years Ended December 31,
1996, 1997 and 1998*
Notes to Consolidated Financial Statements*
-------------
* Contained in the Annual Report to Stockholders filed as an exhibit
hereto and incorporated herein by reference. All schedules have been
omitted as the required information is either inapplicable or
contained in the Consolidated Financial Statements or related Notes
contained in the Annual Report to Stockholders.
Item 8. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
No disagreement with the Company's independent accountants on
accounting and financial disclosure has occurred during the two most recent
fiscal years.
32
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- --------------------------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference. For information concerning the executive officers of the Bank, see
"Item I -- Business -- Executive Officers." The information contained under the
section captioned "Compliance With Section 16(a) of the Exchange Act" in the
Proxy Statement is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Security
Ownership of Certain Beneficial Owners and Management" of the
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Security Ownership of Certain Beneficial Owners and Management"
and "Proposal I --Election of Directors" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge
by any person of securities of the Company, the operation of which
may at a subsequent date result in a change in control of the
Company.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Certain Transactions."
33
<PAGE>
PART IV
Item 13. Exhibits, List Reports on Form 8-K
- --------------------------------------------
(a) Exhibits
(3a) Certificate of Incorporation of the Company*
(3b) Bylaws of the Company*
(10a) 1996 Stock Option Plan of the Company**
(10b) 1996 Management Recognition and Development Plan of the
Company**
(10c) Employment Agreement with Charles L. Frederick, Jr.***
(10d) Employment Agreement with Thomas N. Ward***
(13) Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
--------------
* Incorporated by reference to the Company's Registration Statement
on Form S-1, as subsequently amended.
** Incorporated by reference to the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders.
*** Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended December 31, 1998.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST SOUTHERN BANCSHARES, INC.
Date: March 31, 1999 By: /s/Charles L. Frederick, Jr.
-----------------------------
Charles L. Frederick, Jr.
President, Chief Executive Officer and
Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Charles L. Frederick, Jr. March 31, 1999
--------------------------------------------------
Charles L. Frederick, Jr.
President, Chief Executive Officer and Director
(Principal Executive Officer and Principal
Financial Officer)
By: /s/ Thomas N. Ward March 31, 1999
---------------------------------------------------
Thomas N. Ward
Executive Vice President and Chief Operating Officer
(Principal Accounting Officer)
By: /s/ William E. Batson March 31, 1999
--------------------------
William E. Batson
Chairman of the Board
By: /s/ James E. Bishop March 31, 1999
--------------------------
James E. Bishop
Director
By: /s/ Milka S. Duke March 31, 1999
--------------------------
Milka S. Duke
Director
By: /s/ Gary A. Gamble March 31, 1999
--------------------------
Gary A. Gamble
Director
By: /s/ J. Acker Rogers March 31, 1999
--------------------------
J. Acker Rogers
Director
By: /s/ Kenneth A. Williams March 31, 1999
--------------------------
Kenneth A. Williams
Director
By: /s/ Steve McKinney March 31, 1999
--------------------------
Steve McKinney
Director
By: /s/ S. Greg Beadle March 31, 1999
--------------------------
S. Greg Beadle
Director
35
<PAGE>
Exhibit 13
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Business of the Company 1
President's message 2
Tables:
I Selected consolidated financial condition, operating and other data 3
II Key operating ratios 4
III Weighted average yields earned and rates paid 5
IV Effects of changing rates and volume on net interest income 6
V Interest rate sensitivity 7
Management's discussion and analysis of financial condition and
results of operations 8 - 19
Independent auditors' report on consolidated financial statements 20
Consolidated financial statements 21 - 25
Notes to consolidated financial statements 26 - 47
Common stock information 48
Directors and officers 49
Company information 50
Notice of annual meeting of stockholders 50
10-KSB information 50
</TABLE>
- --------------------------------------------------------------------------------
BUSINESS OF THE COMPANY
First Southern Bancshares, Inc. ("Bancshares"), a Delaware corporation, is the
holding company for First Southern Bank (the "Bank"). Bancshares is a
registered bank holding company regulated by the Federal Reserve Board and is
not engaged in any other business activity other than holding all of the issued
and outstanding common stock of the Bank. Accordingly, the information set
forth in this report, including financial statements and related data, relates
primarily to the Bank. All references to the "Company" include Bancshares and
the Bank.
The Bank is regulated by the Superintendent of Banks of the State of Alabama.
Its deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a community-oriented financial institution that serves individuals
and businesses located in Lauderdale and Colbert Counties, and the surrounding
counties located in Northwest Alabama, its primary market area. The Bank's
primary business consists of attracting deposits from the general public to
originate residential mortgage loans, commercial real estate loans, multi-family
mortgage loans, and consumer loans.
<PAGE>
First Southern Bancshares, Inc.
PRESIDENT'S MESSAGE
To Our Stockholders:
On behalf of the Board of Directors, Officers, and Employees of First Southern
Bancshares, Inc. and its wholly-owned subsidiary, First Southern Bank, I am
pleased to present our Annual Report for fiscal year ended December 31, 1998.
Our ongoing commitment to maintain a strong capital base, minimize risk, and
enhance shareholder value continues to be critical in the strategic planning of
First Southern Bancshares, Inc. Total stockholders' equity as of December 31,
1998 was 10.1% of total assets. Total assets as of December 31, 1998 were
$178,375,000, a decrease of $5,298,000 from December 31, 1997. This reduction
results primarily from payoffs of residential mortgage loans. Consolidated net
income increased to $1,502,000 in 1998 from $1,397,000 in 1997.
Many factors contributed to our 1998 results and are discussed in more detail in
other sections of this Annual Report.
Our focus continues to be directed at providing the best possible financial
services for the residents of Northwest Alabama and surrounding areas. With the
combined efforts of our Board of Directors and dedicated staff, we will remain
successful.
Sincerely,
/s/ Charles L. Frederick, Jr.
Charles L. Frederick, Jr.
President/CEO
<PAGE>
TABLE I - SELECTED CONSOLIDATED FINANCIAL CONDITION, OPERATING AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition, operating results and certain other related data of the
Company at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------
(In Thousands)
Financial condition data 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Total assets $ 151,473 $ 180,855 $ 184,484 $ 183,673 $ 178,375
Loans receivable, net 130,960 152,105 159,718 159,758 153,253
Cash and cash equivalents 2,726 8,971 4,220 6,420 13,188
Investment securities 7,199 8,792 10,948 7,993 2,016
Mortgage-backed securities 3,336 3,135 1,887 1,432 945
Deposits 120,555 131,867 132,800 143,731 127,550
Advances from Federal Home Loan Bank 17,622 16,770 25,619 18,468 31,316
Other notes payable - - 4,000 - -
Total stockholders' equity 12,457 31,495 21,042 20,949 18,008
Non performing assets 1,366 2,584 1,639 1,206 4,069
Allowance for loan losses 1,100 1,509 1,659 1,584 1,441
Year Ended December 31,
--------------------------------------------------------------------------------
(In thousands, except per share amounts)
Operating data 1994 1995 1996 1997 1998
Interest income $ 11,045 $ 13,768 $ 15,089 $ 15,446 $ 15,177
Interest expense 5,036 6,690 7,537 8,452 7,956
----------- ----------- ----------- ----------- -----------
Net interest income 6,009 7,078 7,552 6,994 7,221
Provision for loan losses 327 565 270 242 605
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 5,682 6,513 7,282 6,752 6,616
Noninterest income 388 432 426 766 956
Noninterest expense 3,526 3,921 7,194 5,176 5,060
----------- ----------- ----------- ----------- -----------
Income before income taxes 2,544 3,024 514 2,342 2,512
Income tax expense (benefit) 1,624 1,069 (24) 945 1,010
----------- ----------- ----------- ----------- -----------
Net income $ 920 $ 1,955 $ 538 $ 1,397 $ 1,502
=========== =========== =========== =========== ===========
Basic Earnings per share N/A N/A $ 0.28 $ 0.74 $ 0.83
=========== =========== =========== =========== ===========
Diluted Earnings per share N/A N/A $ 0.28 $ 0.73 $ 0.82
=========== =========== =========== =========== ===========
Cash dividends per share:
Regular dividends N/A $ 0.23 $ 0.50 $ 0.50 $ 0.50
Special cash dividends N/A $ - $ 5.40 $ - $ 0.30
----------- ----------- ----------- ----------- -----------
Total cash dividends N/A $ 0.23 $ 5.90 $ 0.50 $ 0.80
=========== =========== =========== =========== ===========
At December 31,
------------------------------------------------------------------------------
(In Thousands)
Other data 1994 1995 1996 1997 1998
Real estate loans 2,148 2,137 1,975 2,032 1,828
Deposit accounts 12,774 12,741 12,584 12,508 12,092
Number of branch offices 5 5 5 5 6
</TABLE>
3
<PAGE>
TABLE II - KEY OPERATING RATIOS
The table below sets forth certain performance, asset quality and capital ratios
of the Company at or for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Performance ratios
Return on average assets (net income
divided by average assets) 0.63% 1.17% 0.29% 0.75% 0.81%
Return on average stockholders' equity (net
income divided by average equity) 7.24% 7.42% 2.04% 6.74% 7.45%
Dividend payout ratio (dividends declared per
share divided by basic earnings per share):
Regular dividends (1) N/A N/A 178.57% 67.57% 60.24%
Special dividends N/A N/A 1928.57% N/A 36.14%
Interest rate spread (difference between
average yield on interest-earning assets and
average cost of interest-bearing liabilities) 4.18% 3.83% 3.75% 3.52% 3.72%
Net interest margin (net interest income as a
percentage of average interest-earning assets) 4.37% 4.45% 4.37% 3.98% 4.15%
Non-interest expense to average assets 2.42% 2.34% 3.94% 2.78% 2.73%
Average interest-earning assets to interest
bearing liabilities 105.27% 114.95% 114.26% 109.67% 109.61%
Asset quality ratios
Allowance for loan losses to net loans
at end of period 0.84% 0.99% 1.04% 0.99% 0.94%
Net charge offs to average outstanding
loans during period 0.02% 0.11% 0.08% 0.19% 0.49%
Ratio of nonperforming assets to total assets
at end of period 0.90% 1.43% 0.89% 0.66% 2.28%
Capital ratios
Average stockholders' equity to average assets
during period 8.71% 15.71% 14.47% 11.12% 10.89%
</TABLE>
- ----------------------------------------------
(1) The Company had no stockholders until completion of its initial public stock
offering on April 13, 1995.
4
<PAGE>
TABLE III - WEIGHTED AVERAGE YIELDS EARNED AND RATES PAID
The following table sets forth, for the years and at the date indicated,
information regarding the average balances of assets, liabilities and
stockholders' equity as well as the total dollar amounts of interest income from
average interest-earning assets and interest expense on average interest-bearing
liabilities, resultant yields, interest rate spread, net interest margin, and
ratio of average interest-earning assets to average interest-bearing
liabilities. Average interest-earning assets and interest income include Federal
Home Loan Bank stock and related dividends for the indicated periods. Average
balances for each period have been computed using average daily balances during
such period.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997
Interest Interest
Average and Yield/ Average and Yield/
balance dividends cost balance dividends cost
<S> <C> <C> <C> <C> <C> <C>
Interest-earning/dividend paying assets
Interest-earning assets
Mortgage loans and contracts $ 84,020 $ 7,302 8.69% $ 75,207 $ 6,232 8.29%
Other loans 73,922 6,843 9.26% 87,556 8,411 9.61%
-------- ------- ---------- --------
Total net loans (1) 157,942 14,145 8.96% 162,763 14,643 9.00%
Mortgage-backed securities 2,420 193 7.98% 1,689 137 8.11%
Marketable securities 7,170 415 5.79% 7,069 362 5.12%
FHLB overnight account 3,812 237 6.22% 1,846 144 7.75%
-------- ------- ---------- --------
Total interest-earning assets 171,344 14,990 8.75% 173,367 15,286 8.82%
Federal Home Loan Bank stock 1,369 99 7.23% 2,215 160 7.22%
-------- ------- ---------- --------
Total interest earning and dividend
paying assets 172,713 15,089 8.74% 175,582 15,446 8.80%
-------- ------- ---------- --------
Non interest earning/dividend paying assets
Office properties and equipment, net 3,265 3,537
Real estate owned 769 232
Cash on hand and in banks 3,391 4,740
Accrued interest receivable 1,502 1,725
Other 863 617
-------- ----------
Total non interest-earning/dividend
paying assets 9,790 10,851
-------- ----------
Total assets $182,503 $ 186,433
========= ==========
Interest-bearing liabilities
Deposit accounts:
Passbook accounts $ 19,671 $ 542 2.76% $ 18,301 $ 505 2.76%
NOW accounts 9,900 233 2.35% 10,541 248 2.35%
Money market accounts 2,916 87 2.98% 3,337 100 3.00%
Certificates of deposit 96,398 5,350 5.55% 101,473 6,039 5.95%
-------- ------- ---------- --------
Total interest-bearing deposits 128,885 6,212 4.82% 133,652 6,892 5.16%
Other interest-bearing liabilities:
Advances from Federal Home Loan Bank
of Atlanta 21,934 1,298 5.92% 26,221 1,543 5.88%
Other borrowings 336 27 8.07% 195 17 8.51%
-------- ------- ---------- --------
Total borrowings 22,270 1,325 5.95% 26,416 1,560 5.89%
-------- ------- ---------- --------
Total interest-bearing liabilities 151,155 7,537 4.99% 160,068 8,452 5.28%
-------- ------- ---------- --------
Non interest-bearing liabilities
Non interest bearing deposit accounts 2,828 4,433
Other liabilities 2,110 1,210
-------- ----------
Total liabilities 156,093 165,711
Stockholders' equity 26,410 20,722
-------- ----------
Total liabilities and stockholders' equity $182,503 $ 186,433
======== ==========
Net interest income $ 7,552 $ 6,994
======= ========
Interest rate spread (2) 3.75% 3.52%
===== =====
Net interest margin (2) 4.37% 3.98%
===== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities (2) 114.26% 109.64%
======== ==========
<CAPTION>
At
1998 December
Interest 1998
Average and Yield/ Yield/
balance dividends cost cost
<S> <C> <C> <C> <C>
Interest-earning/dividend paying assets
Interest-earning assets
Mortgage loans and contracts $ 63,187 $ 5,179 8.20% 8.22%
Other loans 97,506 9,166 9.40% 8.95%
-------- -------
Total net loans (1) 160,693 14,345 8.93% 8.70%
Mortgage-backed securities 1,199 96 8.01% 8.35%
Marketable securities 4,362 252 5.78% 5.99%
FHLB overnight account 5,956 360 6.04% 4.97%
--------- -------
Total interest-earning assets 172,210 15,053 8.74% 8.48%
Federal Home Loan Bank stock 1,662 123 7.40% 7.50%
--------- -------
Total interest earning and dividend
paying assets 173,872 15,176 8.73% 8.47%
--------- -------
Non interest earning/dividend paying asset
Office properties and equipment, net 3,752
Real estate owned 336
Cash on hand and in banks 4,827
Accrued interest receivable 1,832
Other 559
---------
Total non interest-earning/dividend
paying assets 11,306
---------
Total assets $185,178
=========
interest-bearing liabilities
Deposit accounts:
Passbook accounts $ 17,402 $ 481 2.76% 2.76%
NOW accounts 11,486 255 2.22% 2.00%
Money market accounts 3,527 106 3.01% 3.00%
Certificates of deposit 95,686 5,361 5.60% 5.33%
--------- --------
Total interest-bearing deposits 128,101 6,203 4.84% 4.57%
Other interest-bearing liabilities:
Advances from Federal Home Loan Bank
of Atlanta 30,231 1,727 5.71% 5.61%
Other borrowings 297 25 8.42% 0.00%
--------- --------
Total borrowings 30,528 1,752 5.74% 5.61%
--------- --------
Total interest-bearing liabilities 158,629 7,955 5.01% 4.78%
--------- --------
Non interest-bearing liabilities
Non interest bearing deposit accounts 5,235
Other liabilities 1,155
---------
Total liabilities 165,019
Stockholders' equity 20,159
---------
Total liabilities and stockholders' equity $185,178
=========
Net interest income $ 7,221
========
Interest rate spread (2) 3.72% 3.69%
======== ========
Net interest margin (2) 4.15%
========
Ratio of average interest-earning assets
to average interest-bearing liabilities (2) 109.61%
=========
</TABLE>
- ---------------------------------------------
(1) Loans on nonaccrual status have been included in the computation of average
balances
<PAGE>
TABLE IV - EFFECTS OF CHANGING RATES AND VOLUME ON NET INTEREST INCOME
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); (iii) changes in
rate/volume (change in rate multiplied by change in volume); and (iv) the net
change (the sum of the prior columns).
<TABLE>
<CAPTION>
1996 Compared to 1995 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning/
dividend paying assets
Mortgage loans $ 112 $ (973) $ (13) $ (874) $ (339) $ (766) $ 36 $ (1,069)
Other loans (127) 2,603 (75) 2,401 256 1,263 48 1,567
-------- ------- ------- -------- ------- ------- ----- --------
Total net loans (15) 1,630 (88) 1,527 (83) 497 84 498
Mortgage-backed
securities (18) (80) 5 (93) 3 (58) (1) (56)
Investment securities 2 (87) - (85) (48) (6) 1 (53)
Overnight deposits (47) 22 (4) (29) 58 (122) (29) (93)
-------- ------- ------- -------- ------- ------- ----- --------
Total net change in
income on interest
earning assets (78) 1,485 (87) 1,320 (70) 311 55 296
Federal Home Loan
Bank stock - 1 - 1 - 61 - 61
-------- ------- ------- -------- ------- ------- ----- --------
Total net change in
income on interest
earning/dividend
paying assets (78) 1,486 (87) 1,321 (70) 372 55 357
-------- ------- ------- -------- ------- ------- ----- --------
Interest-bearing
liabilities:
Deposits 205 375 14 594 221 443 16 680
Other interest-bearing
liabilities (37) 300 (10) 253 (13) 251 (3) 235
-------- ------- ------- -------- ------- ------- ----- --------
Total net change in
expense on interest
bearing liabilities 168 675 4 847 208 694 13 915
-------- ------- ------- -------- ------- ------- ----- --------
Net change in
net interest
income $ (246) $ 811 $ (91) $ 474 $ (278) $ (322) $ 42 $ (558)
======== ======= ======= ======== ======= ======= ===== ========
<CAPTION>
1998 Compared to 1997
Increase (Decrease)
Due to
Rate/
Rate Volume Volume Net
<S> <C> <C> <C> <C>
Interest-earning/
dividend paying assets
Mortgage loans $ (68) $ (996) $ 11 $ (1,053)
Other loans (180) 956 (19) 757
------ ------ ------ --------
Total net loans (248) (40) (8) (296)
Mortgage-backed
securities (2) (40) 1 (41)
Investment securities 46 (139) (18) (111)
Overnight deposits (31) 318 (69) 218
------ ------ ------ --------
Total net change in
income on interest
earning assets (235) 99 (94) (230)
Federal Home Loan
Bank stock 4 (40) (1) (37)
------ ------ ------ --------
Total net change in
income on interest
earning/dividend
paying assets (231) 59 (95) (267)
------ ------ ------ --------
Interest-bearing
liabilities:
Deposits (425) (286) 18 (693)
Other interest-bearing
liabilities (40) 242 (6) 196
------ ------ ------ --------
Total net change in
expense on interest
bearing liabilities (465) (44) 12 (497)
------ ------ ------ --------
Net change in
net interest
income $ 234 $ 103 $ (107) $ 230
====== ====== ====== ========
</TABLE>
6
<PAGE>
TABLE V - INTEREST RATE SENSITIVITY
The table below measures interest rate risk by estimating the change in market
value of the Bank's assets, liabilities, and off balance sheet contracts in
response to an instantaneous change in market interest rates. The data was
compiled by an independent third-party service bureau. Using the composition of
the Bank's portfolio of interest-earning assets and interest-bearing liabilities
at December 31, 1998, an estimate of the level of the Bank's stockholders'
equity (market value of assets, less market value of liabilities, plus or minus
the market value of any off-balance sheet items) was computed under the rate
environment prevailing on or about December 31, 1998. The Bank's stockholders'
equity was then computed under different interest rate scenarios. The change in
stockholders' equity under the different interest rate scenarios provides a
measure of the Bank's exposure to interest rate risk. The data presented below
is as of December 31, 1998 and is for the Bank only. Since, with minor
exceptions, all of Bancshares' separate company assets and liabilities,
exclusive of its investment in the Bank, are adjustable rate financial
instruments, the fair value of such instruments would remain substantially
unchanged in the changed interest rate scenarios.
<TABLE>
<CAPTION>
Percent
change in
Stock- Stock-
holders' holders'
Assets Liabilities equity equity
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Change in level of interest rates:
Minus 400 basis points (4.00)% $ 186,704 $ 176,764 $ 9,940 (43.77)%
Minus 300 basis points (3.00)% 184,805 175,096 9,709 (45.08)%
Minus 200 basis points (2.00)% 182,967 171,469 11,498 (34.96)%
Minus 100 basis points (1.00)% 181,185 166,310 14,875 (15.86)%
No change 179,459 161,781 17,678 0.00%
Plus 100 basis points 1.00% 177,785 157,788 19,997 13.12%
Plus 200 basis points 2.00% 176,160 154,245 21,915 23.97%
Plus 300 basis points 3.00% 174,583 151,077 23,506 32.97%
Plus 400 basis points 4.00% 173,052 148,225 24,827 40.44%
</TABLE>
Certain assumptions, relating to interest rates, loan prepayment rates, deposit
decay rates, and the market values of certain assets under differing interest
rate scenarios, among others, were used in preparing the preceding table. As
with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. The interest on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgage loans, have features that restrict changes in
interest rates on a short-term basis and over the life of the asset.
Furthermore, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in the table.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Bancshares is primarily engaged in the business of directing and planning the
activities of its wholly-owned subsidiary, the Bank. Bancshares' primary assets
are comprised of its investment in the Bank and a note receivable from the
Bank's Employee Stock Ownership Plan ("ESOP").
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, 1997, as well as certain material changes in results of operations
during the years ended December 31, 1996, 1997 and 1998.
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
In 1998, management changed its strategy from an aggressive growth in deposits
and assets to a more conservative position of maximizing profits through an
increase in its average interest spread. This change in strategy was prompted
by the lack of growth in the Company's primary lending area and the increased
competition with other 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 of this change in strategy, average interest bearing assets
have decreased from $175.6 million in 1997 to $173.9 million in 1998 and total
assets decreased $5.3 million from $183.7 million at December 31, 1997, to
$178.4 at December 31, 1998. Average interest bearing liabilities have
decreased from $160.1 million in 1997 to $158.6 million in 1998 and total
deposits have decreased $16.2 million from $143.7 million at December 31, 1997,
to $127.6 million at December 31, 1998. The interest spread between the average
yield on the average interest bearing assets and the average cost on average
interest bearing liabilities has increased from 3.52% in 1997 to 3.72% in 1998.
Cash and cash equivalents
As disclosed in the Company's "Consolidated Statements of Cash Flows," net cash
provided by operating activities increased from $1.9 million in 1997 to $3.3
million in 1998 primarily due to the increase in net income for 1998. Cash from
investing activities increased significantly from a cash source of $2.4 million
in 1997 to a source of cash of $11.7 in 1998, as a result of loan payoffs and
maturities of investments and mortgage backed securities. The increase in cash
from investing activities was partially offset by the decrease in cash provided
from financing activities. Cash used in financing activities increased from
$2.2 million in 1997 to $8.2 in 1998. The primary uses in 1998 were the
decrease in deposits of $16.2 million and $3.6 million of funds used to continue
the Company's Stock Repurchase Plan. These uses were offset by $12.8 million of
new borrowing
8
<PAGE>
from the FHLB. Overall, the cash and cash equivalent balance increased $6.8
million at December 31, 1998 when compared to December 31, 1997.
Investments and mortgage-backed securities
The Company did not increase its investments in mortgage-backed securities
during 1998. The decrease in investment and mortgage-backed securities
available for sale of $6.0 million from $8.0 million at December 31, 1997 to
$2.0 million at December 31, 1998, and the decrease in mortgage-backed
securities held to maturity of $487,000 from $1.4 million at December 31, 1997
to $945,000 at December 31, 1998, was primarily due to the maturity of
investments securities.
At December 31, 1998, the Company had $18,000 of net unrealized gains on
investment securities classified as available for sale of the amortized cost
basis ($2 million) of the related securities, and $49,000 of net unrealized
gains on mortgage-backed securities held to maturity. If future market interest
rates were to decrease, the unrealized gains on these securities would, for a
period of time, become greater. In a decreasing interest rate environment, the
fair value of the investments increases in relation to the cost of the
investment, thereby reducing the net unrealized loss and/or increasing any
unrealized gain on the related securities. However, assuming that the
securities are held to their individual dates of maturity, even in periods of
changing market interest rates, as the securities approach their dates of
maturity, the unrealized gain/loss will begin to decrease and eventually be
eliminated.
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 1998 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 $2.1 million from $162.8 million in
1997 to $160.7 million in 1998. The year end balance was especially effected as
the Company had three borrowers to payoff loans aggregating $5.5 million in
December 1998.
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, 1997 and December 31, 1998 follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
-------------------- -----------------------
Amount Percent Amount Percent
--------- -------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $ 75,983 47.6% $ 69,524 45.4 %
Commercial 39,141 24.5 35,566 23.2
-------- ----- -------- -----
Total mortgage loans 115,124 72.1 105,090 68.6
Commercial business loans 27,792 17.4 29,010 18.9
Consumer loans 19,978 12.5 21,766 14.2
-------- ----- -------- -----
Total loans 162,894 102.0 155,866 101.7
Less:
Undisbursed loans 1,404 0.9 1,103 0.7
Unamortized loan fees 148 0.1 69 0.1
Allowance for possible losses 1,584 1.0 1,441 0.9
-------- ----- -------- -----
Net loans receivable $159,758 100.0% $153,253 100.0%
======== ===== ======== =====
</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.
9
<PAGE>
At December 31, 1998, the allowance for loan losses was $1.4 million and
represented 0.9% of total net loans and 35.4% of non performing assets. The
provision for loan losses was $605,000 in 1998 as compared to $242,000 in 1997.
The increase in the provision was due to loan charge-offs incurred in 1998,
mostly in impaired commercial loans. In the opinion of management at December
31, 1998, the allowance for loan losses was adequate at that date. There can be
no assurance that the Company will not be required to increase the allowance in
the future.
At December 31, 1998, the Company had no significant commitments to originate
fixed-rate loans. At December 31, 1998, the Company had commitments to
originate variable rate loans, including unused commercial business lines of
credit as follows:
Commitments to extend credit $ 1,254
Unused lines of credit $12,279
Standby letters of credit $ 10
Premises and Equipment
Premises and equipment increased from $3.5 million in 1997 to $3.9 million in
1998 primarily as of the result of the Bank acquiring facilities for opening one
new branch in its lending area. The new branch is located in Colbert County,
Alabama, in the City of Tuscumbia, and was opened in August 1998. Management
opened this branch in order to attract new deposits and loans, as well as
provide a more convenient location to existing customers. The Company has one
other branch in Colbert County located in Muscle Shoals, Alabama. The main
office and three other branches are located in Lauderdale County, Alabama.
Deposits, FHLB advances and other notes payable
Deposit balances decreased $16.2 million from $143.7 million at December 31,
1997 to $127.5 at December 31, 1998. The decrease was primarily in certificates
of deposits as the Company had a large block of short term certificates that
matured in the first quarter of 1998. 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 10.0% or $689,000 from $6.9 million in 1997 to $6.2 million
in 1998, and the interest rate paid on the average balance of deposits decreased
from 5.16% in 1997 to 4.84% in 1998. The decrease in interest paid on deposits
in 1998 was partially offset by the increase in interest paid on FHLB advances
of $184,000 from $1.5 million in 1997 to $1.7 million in 1998; however the
effective rate paid on the average outstanding balance of FHLB advances
decreased from 5.88% in 1997 to 5.71% in 1998.
At December 31, 1998, savings certificates amounted to $88.7 million, or 69.6%,
of the Company's total deposits, including $70.1 million that were scheduled to
mature by December 31, 1999. Management of the Company believes it has adequate
resources to fund all loan commitments with savings deposits and FHLB of Atlanta
advances and with proceeds from the sale of mortgage loans, and that it can
adjust the offering rates of savings certificates to retain deposits in changing
interest rate environments.
Borrowings from the Federal Home Loan Bank increased $12.8 million from $18.5
million at December 31, 1997, to $31.3 million at December 31, 1998. The
increase in advances was used to offset the decline in deposits as previously
explained. At December 31, 1998, the Company had unused credit availability
with the FHLB of $8.7 million.
Stockholders' equity
At December 31, 1998, aggregate stockholders' equity was $18.0 million as
compared $20.9 million at December 31, 1997. The reduction in stockholders'
equity from the payment of $1.4 million in regular and special dividends and
the acquisition of treasury stock of $3.6 million, which were offset by net
income of $1.5 million, and $471,000 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 (as
discussed in Note 19 of Consolidated Notes to Financial Statements) which was
originated in 1995. During years ended December 31, 1997 and 1998, the Company
acquired 79,930 and 224,182, respectively, of treasury shares at a cost of $1.1
million and $3.6 million, respectively, at an average price per share of $13.47
and $16.23, respectively. The current program will continue until August 1999,
at which time the Company will decide whether to terminate or continue the
program.
10
<PAGE>
A strong capital position promotes depositor and investor confidence for a solid
foundation for future growth. Average shareholders' equity as a percentage of
total average assets is one measure used to determine capital strength.
Overall, the Company's capital position remains strong as the ratio of average
shareholders' equity to average assets for was 10.89% for 1998. The decrease in
1998 is primarily related to the special dividend aggregating $566,000 to
shareholders in the first quarter of 1998.
The Bank is required to maintain specific amounts of capital pursuant to FDIC
requirements and the Company is required to maintain specific amounts of capital
pursuant to the regulations of the Federal Reserve Board. As summarized below,
the Company and Bank are in compliance with all such requirements at December
31, 1998:
<TABLE>
<CAPTION>
Percentage of
adjusted total
Amount assets
First Southern Bancshares, Inc: (Dollars in thousands)
<S> <C> <C>
Primary capital ratios:
GAAP capital $ 18,008
Adjustments:
Mortgage servicing rights (8)
Net unrealized loss on securities available for
sale (11)
--------
Tier 1 capital 17,989 9.96%
Minimum Tier 1 (leverage) requirement 7,227 4.00%
-------- --------
Excess $ 10,762 5.96%
======== ========
Risk-based capital ratios:
Core (Tier 1) Capital 17,989 12.85%
Minimum core capital 5,601 4.00%
-------- --------
Excess $ 12,388 8.85%
======== ========
Risk-based capital $ 19,430 13.88%
Minimum risk-based capital requirement 11,202 8.00%
-------- --------
Excess $ 8,228 5.88%
======== ========
</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) $ 18,934 13.53%
To be well capitalized under the FDICIA
prompt corrective action provisions 13,993 10.00%
-------- -------
Excess $ 4,941 3.53%
======== =======
Tier 1 capital (to risk-weighted assets) $ 17,493 12.50%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,396 6.00%
-------- -------
Excess $ 9,097 6.50%
======== =======
Tier 1 capital (to average assets) $ 17,493 9.69%
To be well capitalized under the FDICIA
prompt corrective action provisions 9,029 5.00%
-------- -------
Excess $ 8,464 4.69%
======== =======
</TABLE>
11
<PAGE>
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 December 31, 1998, the Bank's qualifying reserves of $1.7 million
significantly exceeded the required reserve of $297,000.
Additionally, the parent holding company 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 subsidiary Bank. At December 31, 1998, the Bank could have paid additional
dividends for the parent holding company of $4.9 million while continuing to
meet the capital requirements for "well-capitalized" banks. The parent holding
company 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.
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
12
<PAGE>
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 December 31,
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.
COMPARISON OF OPERATING RESULTS FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1998
General
Consolidated net income for the year ended December 31, 1998, increased 7.5% to
$1.5 million from $1.4 million in 1997. Basic earnings per share for the year
ended December 31, 1998, was $0.83 as compared to $0.74 in 1997, and diluted
earnings per share for the year ended December 31, 1998 was $0.82 as compared to
$0.73 in 1997.
Net Interest Income
Favorable increases over 1997 in net interest income in 1998 were offset by an
increase in the provision for loan losses recognized for certain commercial
loans. For the year ended December 31, 1998, net interest income after
provision for loan losses decreased 2.0% to $6.6 million from $6.8 million
reported in 1997. Increases in the net interest spread of 3.72% for 1998 to
3.52% for 1997, was primarily a result of the decrease in interest expense for
deposits and advances from the FHLB as further discussed below.
Interest Income
Interest income for 1998 was $15.2 million compared with $15.5 million for 1997,
representing a decrease of $269,000 or 1.7%. The decrease was primarily
attributable to a decrease of $1.7 million, or 1.0% in average interest earning
assets in 1998 to $173.9 million over those in 1997 of $175.6 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 8.80%
for 1997 to 8.73% for 1998, as a result of lower market interest rates. The
yield on the average balance of loans decreased from 9.0% in 1997 to 8.93% in
1998. The annual yield is expected to continue to decrease as the effect of
such decreases impacts commercial loans related to the prime interest rate and
adjustable mortgages in 1999.
Interest on loans receivable decreased $298,000 to $14.3 million during 1998 as
compared to $14.6 million in 1997. The decrease was primarily attributable to a
decrease in average net loans of $2.1 million in 1998 ($160.7 million) from the
comparable period in 1997 ($162.8 million). Additionally, the average yield on
total loans decreased as previously mentioned.
Interest on mortgage-related securities decreased by $41,000 from $137,000
during 1997 to $96,000 during in 1998 as a result of the average balance of
mortgage-related securities decreasing by $500,000 during 1998 ($1.2 million)
as compared to 1997 ($1.7 million). In addition, the average yields from such
securities decreased from 8.11% in 1997 to 8.01% in 1998 as a result of lower
yielding mortgage-related securities remaining in the portfolio.
Income from the investment securities portfolio decreased by $110,000 from
$362,000 during 1997 to $252,000 in 1998 as the result of a $6.0 million
decrease in the portfolio as a result of sales and maturities from $8.0 million
at December 31, 1997 to $2.0 million at December 31, 1998. The effect of this
decrease in the average balance was partially offset by an increase in the
average yield on investment securities from 5.12% in 1997 to 5.78% in 1998 as a
result of the changes in the investment securities portfolio.
13
<PAGE>
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 $180,000 increase in other interest income in 1998 to
$484,000 when compared to 1997 other interest income of $304,000 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 $1.8 million in
1997 to $5.9 million in 1998. FHLB dividends were $160,000 during 1997 as
compared to $124,000 in 1998 due to decrease in average FHLB stock from $2.2
million in 1997 to $1.7 million in 1998.
Interest Expense
Interest expense for 1998 was $8.0 million compared with $8.5 million for 1997,
representing a decrease of $500,000 or 5.9%.
Interest on deposits for 1998 was $6.2 million compared with $6.9 million for
1997, representing a decrease of $700,000 or 10.2%. The decrease is due to a
$5.5 million decrease in average deposits in 1998 ($128.1 million) as compared
to 1997 ($133.7 million). The 1998 average interest cost decreased to 4.84% as
compared to 5.16% in 1997 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 $193,000 to $1.8 million in 1998 when compared to 1997 total of
$1.6 million due to an increase in average borrowings of $4.0 million during
1998 ($30.2 million) from 1997 average levels of $26.2 million. The increase
caused by the higher average balance was partially offset by decreased interest
costs on borrowed funds from 5.88% in 1997 to 5.71% in 1998 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 is dependent 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.
14
<PAGE>
For 1998, the provision for loan losses was $605,000 as compared to $242,000 in
1997. 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 incurred in 1998. As shown in the
following table, charge-offs in 1998 were $780,000, or 0.49% of average loans,
compared with $347,000, or 0.21% of average loans, in 1997. The increase in the
level of net charge-off in 1998 was related primarily to loans to one customer
whose loans have been classified as impaired. Management recorded charge-offs
of $611,000 for such impaired in 1998 to reflect management's estimate of
collection at December 31, 1998. No additional allowances had been specified at
December 31, 1998, for the impaired loans.
The following table set forth information with respect to the Company's
allowance for loan losses for the last three years (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1996 1997 1998
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance at beginning of period $ 1,509 $ 1,659 $ 1,584
---------- ---------- ----------
Provision for loan losses 270 242 605
---------- ---------- ----------
Recoveries:
Residential real estate 20 9 -
Commercial business 70 17 1
Consumer and other - 4 31
---------- ---------- ----------
Total recoveries 90 30 32
---------- ---------- ----------
Charge offs:
Residential real estate (13) (52) (36)
Commercial real estate (25) (185) -
Commercial business (172) (54) (496)
Consumer and other - (56) (248)
---------- ---------- ----------
Total charge offs (210) (347) (780)
---------- ---------- ----------
Net charge offs (120) (317) (748)
---------- ---------- ----------
Balance at end of period $ 1,659 $ 1,584 $ 1,441
========= ========= =========
Ratio of allowance to net loans
outstanding at the end of the period 1.04% 0.99% 0.94%
Ratio of net charge offs to average loans
outstanding during the period 0.08% 0.19% 0.49%
</TABLE>
When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
nonperforming 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, was $1.4 million, or 0.94% of net loans,
compared with $1.6 million, or 0.99% of loans, at December 31, 1997. As shown
in the following table, the percentages of the allowance allocated as a
percentage of the total allowance and by loans in each category has increased in
nonresidential classification as these classifications make up a larger
percentage of total loans. Due to uncertainties in the portfolio, in particular
the impaired loans as described in nonperforming assets below, 26.72% of the
total allowance at December 31, 1998, remained unallocated to any specific
category compared to 33.21% at the end of 1997. This unallocated portion could
decline as the ongoing loan review procedures provide more management insight
with regard to the analysis of the allowance for loan losses.
<PAGE>
The following table sets forth the allocation of the allowance for loan losses
at December 31, 1997 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
--------------------------------- ------------------------------------------
As a % As a % As a % As a %
of Total of Out- of Total of Out-
Allowance standing Allowance standing
for Loan Loans in for Loan Loans in
<S> Amount Losses Category Amount Losses Category
------ --------- -------- ------ -------- --------
Real estate mortgage loans: <C> <C> <C> <C> <C> <C>
Residential $ 234 14.77% 0.34% $ 217 15.06% 0.36%
Other 210 13.26% 0.46% 188 13.05% 0.41%
Consumer and commercial business 614 38.76% 1.29% 651 45.18% 1.28%
Unallocated 526 33.21% 385 26.72%
------- ------ ------- ------
Total allowance for loan
losses $ 1,584 100.00% $ 1,441 100.00%
======= ====== ======= ======
</TABLE>
Nonperforming 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. As shown in the following table, nonperforming assets of $4.1 million
as of December 31, 1998, increased $2.9 million from $1.2 million at December
31, 1997. The largest increase was in 1 - 4 unit residential that historically
is well collateralized and no significant losses are anticipated. The increase
is partly reflective of the slow down in the local economy and partly due to the
inclusion of two mortgage loans aggregating $550,000 that were brought current
with their terms subsequent to year end.
Other increases were primarily in commercial real estate and business due to the
impaired loans to one borrower of $484,000. The impaired loans are commercial
business loans secured by real estate, equipment, accounts receivable and other
tangible assets. In order to value impaired loans at estimated net realizable
value, the Company has recorded charge-offs in 1998 of $611,000. Subsequent to
year end these impaired loans were classified as in-substance foreclosures and
additional charge offs of approximately $170,000 were incurred.
16
<PAGE>
The following table sets forth nonperforming assets as of December 31, 1997 and
1998 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Loans accounted for on
A nonaccrual basis:
Real estate:
1 - 4 unit residential $ - 0.00% $ 132 3.24%
Commercial 401 33.25% - 0.00%
Commercial business 135 11.20% 782 19.22%
Consumer and other 25 2.07% 0.00%
------- ------ ------- -------
Total 561 46.52% 914 22.46%
------- ------ ------- -------
Accruing loans which are contractually
past due 90 days or more:
Real estate:
1 - 4 unit residential 216 17.91% 1,553 38.17%
Commercial - 0.00% 243 5.97%
Construction - 0.00% 112 2.75%
Commercial business 148 12.27% 432 10.62%
Consumer and other 181 15.01% 105 2.58%
------- ------ ------- ------
Total 545 45.19% 2,445 60.09%
------- ------ ------- ------
Total of nonaccrual and
90 days past due loans 1,106 91.71% 3,359 82.55%
Real estate owned 100 8.29% 710 17.45%
------- ------ ------- ------
Total non-performing assets $ 1,206 100.00% $ 4,069 100.00%
======= ====== ======= ======
Total loans delinquent
90 days or more to net loans 0.69% 2.19%
Total loans delinquent 90 days or more
to total assets 0.60% 1.88%
Total non-performing assets
to total assets 0.66% 2.28%
</TABLE>
Accruing loans contractually past due 90 days or more is primarily comprised of
mortgage loans or collateralized commercial business or consumer loans. Such
loans are generally based on 75% to 90% of appraised or estimated fair value,
and collection efforts are ongoing. Management participates in the monitoring
of these loans and at such time as full collection of principal and interest is
in doubt, the loans are classified as nonaccrual and evaluated for impairment.
Non-interest Income.
Non-interest income increased by $190,000 in 1998 to $956,000 as compared to
$766,000 in 1997. This increase was primarily the result of an increase in loan
and service fees of $189,000 from $468,000 in 1997 to $657,000 in 1998. This
increase is due largely to the increased activity in refinanced loans resulting
from lower mortgage rates.
Non-interest Expense.
Non-interest expenses decreased $116,000 or 2.2% to $5.1 million in 1998
compared to $5.2 million in 1997. The decrease was primarily in compensation
and employee benefit expense as in 1997 the Company incurred a $600,000 pension
plan expense to terminate its defined benefit pension plan. This plan was
replaced with a contributory 401K retirement plan for which there was less
expense in 1998, as well as future periods in comparison to the defined benefit
retirement plan.
17
<PAGE>
Income Taxes
Income tax expense in 1998 and 1997 was $1.0 million and $945,000, respectively,
or 40.0% of income before income taxes representing expected federal and state
tax rates.
COMPARISON OF OPERATING RESULTS FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1997
General
Consolidated net income for 1997, increased to $1.4 million from $538,000 in
1996. Basic earnings per share for 1997, were $0.74 as compared to $0.28 in
1996. Diluted earnings per share for 1997 were $0.73 as compared to $0.28 in
1996. The increase in earnings between 1996 and 1997 is primarily due to the
$1.1 million expense recognized in 1996 for the one-time Savings Association
Insurance Fund ("SAIF") premium assessment.
Net Interest Income
Net interest income after provision for loan losses of $6.8 million for 1997 was
$530,000 lower or 7.3% less than the $7.3 million reported for the comparable
period in 1996. Decreases in the net interest spread of 3.75% for 1996 to 3.52%
for 1997, was primarily a result of the increase in interest expense for
deposits and advances from the FHLB as further discussed below.
Interest Income
Interest income for 1997 was $15.5 million compared with $15.1 million for 1996,
representing an increase of $357,000 or 2.4%. The increase was primarily
attributable to an increase of $2.9 million, or 1.7% in average interest earning
assets in 1997 to $175.6 million over those in 1996 of $172.7 million as a
result of loan growth. Also contributing to the increase in interest income
was an increase in the average yield on interest-earning assets from 8.74% for
1996 to 8.80% for 1997, as a result of the increase within the loan portfolio to
higher yielding but inherently riskier, as compared to residential mortgage
loans, commercial mortgage and commercial business loans.
Interest on loans receivable increased $500,000 to $14.6 million during 1997 as
compared to in 1996 ($14.1 million). The increase was primarily attributable to
an increase in average net loans of $4.8 million in 1997 ($162.8 million) from
the comparable period in 1996 ($158.0 million). Additionally, the average yield
on total loans increased from 8.96% in 1996 to 9.00% during 1997, as a result
of the increase within the loan portfolio of higher yielding commercial mortgage
and commercial business loans.
Interest on mortgage-related securities decreased by $56,000 from $193,000
during 1996 to $137,000 during in 1997 as a result of the average balance of
mortgage-related securities decreasing by $700,000 during 1997 ($1.7 million)
as compared to 1996 ($2.4 million). The effect of this decrease in the average
balance was partially offset by an increase in 1997 average yields from such
securities from 7.98% in 1996 to 8.11% in 1997 as a result of higher yielding
mortgage-related securities remaining in the portfolio.
Income from the investment securities portfolio decreased by $53,000 from
$415,000 during 1996 to $362,000 during the same period in 1997 as the result of
a $3.0 million decrease in the portfolio as a result of sales and maturities
from $11.0 million at December 31, 1996 to $8.0 million at December 31, 1997.
Additionally, the average yield on investment securities decreased slightly from
5.79% in 1996 to 5.12% in 1997 as a result the changes in the investment
securities portfolio.
Other interest income is comprised of earnings on the overnight account and time
deposits at the FHLB of Atlanta, FHLB stock dividends, and earnings on money
market funds. The $32,000 decrease in other interest income in 1997 to $304,000
when compared to 1996 other interest income of $336,000 is due primarily to the
decreased interest earnings on the FHLB overnight and on money market funds due
to a decrease in average invested balances from $3.8 million in 1996 to $1.8
million in 1997. FHLB dividends were $99,000 during 1996 as compared to
$160,000 in 1997 due to increase in average FHLB stock from $1.4 million in 1996
to $2.0 million in 1997.
18
<PAGE>
Interest Expense
Interest expense for 1997 was $8.5 million compared with $7.5 million for 1996,
representing an increase of $1.0 million or 12.1%.
Interest on deposits for 1997 was $6.9 million compared with $6.2 million for
1996, representing an increase of $700,000 or 10.9%. The increase is due to a
$4.8 million increase in average deposits in 1997 ($133.7 million) as compared
to 1996 ($128.9 million). The 1997 average interest cost increased to 5.16% as
compared to 4.82% in 1996 as higher interest rates were offered on certificates
of deposits due primarily to the Company raising the rates paid on its
certificates in relation to local market rates being offered by other financial
institutions in order to attract additional deposits.
Other interest expense relates to FHLB of Atlanta borrowings and increased by
$235,000 to $1.6 million in 1997 when compared to 1996 total of $1.3 million
due to an increase in average borrowings of $4.3 million during 1997 ($26.2
million) from 1996 average levels of $21.9 million. The increase caused by the
higher average balance was partially offset by decreased interest costs on
borrowed funds from 5.92% in 1996 to 5.88% in 1997 as a consequence of the
adjustable rate nature of the majority of the FHLB of Atlanta borrowings and
lower market interest rates.
Provision for Loan Losses.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may effect the borrower's ability to repay
the estimated value of any underlying collateral, and current economic
conditions. For 1997, the Company's provision for loan losses was $242,000 as
compared to $270,000 in 1996. These provisions were made based on management's
analysis of the various factors which effect the loan portfolio and management's
desire to maintain the allowance at a level considered adequate to provide for
losses. The decrease of $28,000 in 1997 compared to 1996 is a result of the Bank
incurring fewer loan charge-offs than estimated, and therefore, less provision
was required to maintain an adequate allowance at December 31, 1997.
Non-interest Income.
Non-interest income increased by $340,000 in 1997 to $766,000 as compared to
$426,000 in 1996. This increase was the result of an increase in loan and
service fees of $73,000 from $395,000 in 1996 to $468,000 in 1997, and the
reduction of $277,000 in losses on real estate owned in 1997 as compared to
1996.
Non-interest Expense.
Non-interest expenses decreased $2.0 million or 28.1% to $5.2 million in 1997
compared to $7.2 million in 1996. This decrease resulted from a $1.2 million
decrease in insurance expense and $100,000 decrease in other expenses. The
decrease in insurance expense is due to the $1.1 million decrease in insurance
expenses relating to the one-time SAIF premium assessment recognized in the
third quarter of 1996 and the decrease in the SAIF premium rate as a result of
the SAIF special assessment paid in 1996. Decreases in other expenses were
primarily related to the decrease in real estate owned operating expenses
reflecting the decrease in the average balance of foreclosed real estate in 1997
as compared to 1996.
Compensation and employee benefits decreased $600,000 from $3.2 million in 1997
from $3.8 million in 1996. The decrease reflects the decrease in ESOP related
compensation of $1.1 million from that incurred in 1996 related to the special
dividends, offset by an increase of $600,000 in pension plan expense due to
benefits being frozen with the intent to terminate the plan. In addition,
compensation and benefits related to the amortization of the deferred management
and recognition and development plan ("MRDP") expense increased $100,000 over
the same period in 1996.
Income Taxes
Income tax expense in 1997 was $945,000 or 40.0% of income before income taxes
representing expected federal and state tax rates. The income tax benefit of
$24,000 in 1996 was primarily due to charitable contributions recognized in
relation to a lower income before income taxes.
19
<PAGE>
[Marmann, McCrary & Associates, P.C. Letterhead appears here]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
First Southern Bancshares, Inc. and Subsidiary
Florence, Alabama
We have audited the accompanying consolidated statements of financial condition
of First Southern Bancshares, Inc. and subsidiary (the "Company") as of December
31, 1997 and 1998 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each year in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Southern
Bancshares, Inc. and subsidiary at December 31, 1997 and 1998, and the results
of their operations and their cash flows for each year in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Marmann, McCrary & Associates, P.C.
Sheffield, Alabama
March 5, 1999
20
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1998 (Dollars in thousands)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,420 $ 13,188
Investment securities available for sale, at market 7,993 2,016
Mortgage-backed securities, held to maturity, at cost 1,432 945
Loans held for sale, at cost, which approximates market 223 659
Loans receivable, net 159,535 152,594
Foreclosed real estate 100 710
Premises and equipment, net 3,509 3,852
Federal Home Loan Bank stock, at cost 1,970 1,918
Accrued interest receivable 1,822 1,758
Deferred income taxes 165 397
Other assets 504 338
------------- -------------
TOTAL ASSETS $ 183,673 $ 178,375
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 143,731 $ 127,550
Advances from Federal Home Loan Bank 18,468 31,316
Other notes payable - -
Income taxes currently payable 115 356
Deferred income taxes - -
Other liabilities 410 1,145
------------- -------------
Total liabilities 162,724 160,367
------------- -------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares authorized; none
issued and outstanding - -
Common stock, $.01 par value; 4,000,000 shares authorized;
2,076,969 and shares issued 21 21
Additional paid-in capital 11,375 11,414
Retained earnings - Substantially restricted 13,199 13,340
Unearned employee compensation - ESOP (280) (172)
Unearned employee compensation - MRDP (861) (550)
Net unrealized loss on securities available for sale (2) 11
Treasury stock, at cost (2,503) (6,056)
------------- -------------
Total stockholders' equity 20,949 18,008
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 183,673 $ 178,375
============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 and 1998
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended
December 31,
<S> 1996 1997 1998
INTEREST INCOME: <C> <C> <C>
Loans $ 14,145 $ 14,643 $ 14,345
Mortgage-backed securities 193 137 96
Investment securities 415 362 252
Other 336 304 484
------------- ------------ ------------
Total interest income 15,089 15,446 15,177
------------- ------------ ------------
INTEREST EXPENSE:
Deposits 6,212 6,892 6,203
Advances from Federal Home Loan Bank and other 1,325 1,560 1,753
------------- ------------ ------------
Total interest expense 7,537 8,452 7,956
------------- ------------ ------------
NET INTEREST INCOME 7,552 6,994 7,221
PROVISION FOR LOAN LOSSES 270 242 605
------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,282 6,752 6,616
------------- ------------ ------------
NON INTEREST INCOME:
Loan fees and service charges 395 468 657
Net gains on sale of loans 268 258 263
Gains (losses) on real estate owned (275) 2 2
Loss on sale of other assets (32) (2) -
Other 70 40 34
------------- ------------ ------------
Total non interest income 426 766 956
------------- ------------ ------------
NON INTEREST EXPENSES:
Compensation and employee benefits 3,800 3,218 3,001
Building and occupancy expense 519 559 630
Data processing expense 466 296 395
Advertising 159 185 164
Insurance expense 1,474 242 202
Other 776 676 668
------------- ------------ ------------
Total non interest expenses 7,194 5,176 5,060
------------- ------------ ------------
INCOME BEFORE INCOME TAXES 514 2,342 2,512
INCOME TAX EXPENSE (BENEFIT) (24) 945 1,010
------------- ------------ -------------
NET INCOME $ 538 $ 1,397 $ 1,502
============= ============ ============
BASIC EARNINGS PER SHARE $ 0.28 $ 0.74 $ 0.83
============= ============ ============
DILUTED EARNINGS PER SHARE $ 0.28 $ 0.73 $ 0.82
============= ============ ============
DIVIDENDS PER SHARE
Regular cash dividends $ 0.50 $ 0.50 $ 0.50
Special cash dividends $ 5.40 $ - $ 0.30
------------- ------------ ------------
Total dividends per share $ 5.90 $ 0.50 $ 0.80
============= ============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 and 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Common stock Additional earnings
Issued In treasury paid-in Substantially
Shares Amount Shares Amount capital restricted
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 2,049,875 20 49,906 (757) 19,586 14,203
------------ ---------- ------------ ------------- ------------- ---------------
Net income for the year ended
December 31, 1996 - - - - - 538
Cash dividends - - - - (9,056) (2,069)
Acquisition of treasury stock - - (114,400) (1,501) - -
ESOP shares committed
for release - - - - 347 -
Common stock grants
to MRDP 27,094 1 54,906 833 457 -
Amortization of MRDP
unearned compensation - - - - - -
Increase in unrealized loss on
securities available for sale, net
of related income taxes - - - - - -
--------- ------ --------- --------- ---------- --------
Balances at December 31, 1996 2,076,969 $ 21 (109,400) $ (1,425) $ 11,334 $ 12,672
--------- ------ --------- --------- ---------- --------
Net income for the year
ended December 31, 1997 - - - - - 1,397
Cash dividends - - - - - (870)
Acquisition of treasury stock - - (79,930) (1,078) - -
ESOP shares committed
for release - - - - 41 -
Amortization of MRDP
unearned compensation - - - - - -
Increase in unrealized loss on
securities available for sale, net
of related income taxes - - - - - -
--------- ----- --------- --------- -------- ----------
Balances at December 31, 1997 2,076,969 $ 21 (189,330) $ (2,503) $ 11,375 $ 13,199
--------- ----- --------- --------- -------- ----------
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 -
Amortization of MRDP
unearned compensation - - - - - -
Increase in unrealized loss on
securities available for sale,
net of related income taxes - - - - - -
--------- --- --------- --------- ------- ---------
Balances at December 31, 1998 2,076,969 $21 (408,262) $ (6,056) $11,414 $ 13,340
========= === ========= ========== ======= =========
<CAPTION>
Net
unrealized
Unearned employee loss Total
compensation securities stock- Compre-
available holders' hensive
ESOP MRDP for sale equity income
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 (1,531) - (26) 31,495 -
---------------------------------------------------------------
Net income for the year ended
December 31, 1996 - - - 538 $ 538
Cash dividends - - - (11,125) -
Acquisition of treasury stock - - - (1,501) -
ESOP shares committed
for release 1,130 - - 1,477 1,477
Common stock grants
to MRDP - (1,291) - - -
Amortization of MRDP
unearned compensation - 172 - 172 172
Increase in unrealized loss on
securities available for sale, net
of related income taxes - - (14) (14) (14)
----------- ----------- -------- -------- ---------
Balances at December 31, 1996 $ (401) $ (1,119) $ (40) $ 21,042 $ 2,173
----------- ----------- -------- -------- =========
Net income for the year
ended December 31, 1997 - - - 1,397 $ 1,397
Cash dividends - - - (870) -
Acquisition of treasury stock - - - (1,078) -
ESOP shares committed
for release 121 - - 162 162
Amortization of MRDP
unearned compensation - 258 - 258 258
Increase in unrealized loss on
securities available for sale, net
of related income taxes - - 38 38 38
----------- ----------- -------- ---------- --------
Balances at December 31, 1997 $ (280) $ (861) $ (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 108
for release - - 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
----------------------------------------------------------------
Balances at December 31, 1998 $ (172) $ (550) $ 11 $ 18,008 $ 1,973
=================================================================
</TABLE>
The accompanying notes are an integral part of the fnancial statements
23
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Dollars in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 538 $ 1,397 $ 1,502
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 227 272 313
Provision for loan losses 270 242 605
Provision for deferred income taxes (benefit) (491) (72) (232)
Amortization/accretion of premiums/discounts on investment
and mortgage-backed securities 3 (33) (5)
Amortization of deferred loan fees (249) (95) (121)
Fair market value of ESOP shares committed for release and
charged to employee compensation 1,477 162 147
FHLB stock dividends
Amortization of unearned compensation - MRDP 172 258 311
(Gains) losses on real estate owned 275 2 2
(Gain) on sale of premises and equipment - (2) -
Loss on disposal of premises and equipment 32 - -
(Increase) decrease in:
Loans held for sale 393 9 (436)
Accrued interest receivable (200) (94) 64
Other assets (54) 376 166
Increase (decrease) in:
Income taxes currently payable (89) 112 241
Other liabilities 795 (610) 735
------------ ------------ ------------
Net cash provided by operating activities 3,099 1,924 3,292
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in total loans (8,974) (196) 6,457
Real estate owned 1,606 96 (612)
Premises and equipment 10 - -
Proceeds from maturities of:
Investment and mortgage-backed securities 4,066 3,405 6,482
Mortgage-backed securities
Acquisition of:
Investment and mortgage-backed securities (5,000) - -
Federal Home Loan Bank stock - (613) 52
Premises and equipment (681) (326) (656)
Capitalized improvements to real estate owned (33) 78 -
------------ ------------ ------------
Net cash provided by (used in) investing activities (9,006) 2,444 11,723
------------ ------------ ------------
</TABLE>
(Continued)
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts $ 933 $ 10,931 $ (16,181)
Net proceeds from sale of stock in Initial Public Offering - - -
Cash dividends paid (11,125) (870) (1,361)
Proceeds from FHLB advances 14,000 - 12,848
Proceeds from other borrowings 4,250 - -
Reductions in FHLB advances (5,151) (7,151) -
Reductions in other borrowings (250) (4,000) -
Acquisition of treasury stock (1,501) (1,078) (3,553)
------------ ------------- --------------
Net cash provided by (used in) financing activities 1,156 (2,168) (8,247)
------------ ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,751) 2,200 6,768
CASH AND CASH EQUIVALENTS-
BEGINNING OF PERIOD $ 8,971 4,220 6,420
----------- ------------ -------------
CASH AND CASH EQUIVALENTS- $ 4,220 $ 6,420 $ 13,188
END OF PERIOD =========== ============ =============
SUPPLEMENTAL INFORMATION FOR CASH FLOW:
Noncash transactions:
Loans foreclosed and transferred to real estate owned $ 948 $ 477 $ 1,218
=========== ============ =============
Increase (decrease) in net unrealized loss on securities
available for sale $ 14 $ (38) $ (13)
=========== ============ =============
Cash paid during the period for:
Income taxes $ 674 $ 815 $ 850
============ ============ =============
Interest $ 7,470 $ 8,531 $ 7,919
============ ============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Southern Bancshares, Inc. ("Bancshares") was incorporated in the State of
Delaware on November 22, 1994, and is the holding company for First Southern
Bank, Inc. (the "Bank"). The Bank is an Alabama-chartered commercial bank that
is the successor to First Federal Savings and Loan Association of Florence,
which converted from a mutual savings and loan to a stock savings and loan on
April 13, 1995.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of First
Southern Bancshares, Inc. and its wholly-owned subsidiary, First Southern Bank.
All significant intercompany transactions and balances have been eliminated in
consolidation.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash due from banks, interest-
bearing overnight deposits and time deposits in the Federal Home Loan Bank
(FHLB) of Atlanta, and highly liquid investments with a maturity of three months
or less at purchase date.
Investments in debt and equity securities
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS NO.
115"), management classifies its investment portfolio into three categories:
(i) held to maturity, (ii) available for sale, and (iii) trading securities, and
sets forth specific criteria for determining these classifications. SFAS No.
115 requires unrealized holding gains and losses for trading securities to be
included in earnings while unrealized holding gains and losses for available for
sale securities are to be reported as a separate component of equity, net of
related income taxes, until realized. Held to maturity securities are to be
recorded at their amortized cost. Portfolio additions subsequent to the
adoption of the statement are classified into the appropriate category when
purchased.
Investments securities and certain mortgage-backed securities available for sale
As required by SFAS No. 115, available for sale securities have been recorded in
the accompanying consolidated statement of financial condition at estimated fair
value. The related net unrealized holding loss has been reported as a separate
component of equity, net of related income taxes. Gain or loss on any sale of
investment securities classified as available for sale continues to be recorded
based on the specific identification method.
Mortgage-backed securities held to maturity
The Company has both the intent and ability to hold its mortgage-backed
securities to maturity, and therefore, are classified in the accompanying
consolidated statements of financial condition as held to maturity. The
securities are stated at cost, as adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using the interest
method over the estimated life of the security. An allowance for loss on
mortgage-backed securities held to maturity is recorded only when the security
is deemed to be permanently impaired. Mortgage-backed securities are accounted
for on a specific identification basis.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
Loans receivable
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan origination fees. The allowance for loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the allowance
is based on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay the estimated value of any underlying collateral, and current economic
conditions. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued and unpaid, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures requires that certain impaired loans be measured based on the
present value of expected future cash flows discounted at the loans' original
effective interest rate. As a practical expedient, impairment may be measured
based on the loan's observable market price or the fair value of the collateral
if the loan is collateral dependent. When the measure of the impaired loan is
less than the recorded investment in the loan, the impairment is recorded
through a valuation allowance. At December 31, 1998 and 1997, the Company had
non-accrual loans aggregating $3.4 million and $1.1 million, respectively, of
which $484,000 of such loans in 1998 were determined to be impaired.
Loan origination fees
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is amortized to income using a method that approximates the interest
method over the contractual lives of the loans.
Loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
Real estate owned
For real estate acquired through foreclosure and in-substance foreclosed assets,
a new cost basis is established at fair value at the time of foreclosure through
a charge to the allowance for loan losses with a valuation allowance established
for estimated costs to sell. The charge to establish the valuation allowance is
reflected in other expenses. Subsequent to foreclosure, foreclosed assets are
carried at the lower of fair value, less estimated costs to sell, or cost, with
the difference recorded as a valuation allowance on an individual asset's basis.
Subsequent decreases in fair value and increases in fair value, up to the value
established at foreclosure, are recognized as charges or credits to expense.
Premises and equipment
Office properties and equipment are carried at cost less accumulated
depreciation. Renewals and betterments are capitalized, whereas repairs and
maintenance are charged to expense as incurred. Depreciation is provided by the
straight-line method at rates intended to distribute the cost of buildings and
equipment over their estimated service lives of ten to fifty years and three to
ten years, respectively.
Income taxes
Federal and state income taxes are recognized under the asset and liability
method of accounting for income taxes prescribed by SFAS No. 109 Accounting for
Income Taxes. Balance sheet amounts of deferred income taxes are recognized on
the temporary differences between the bases of assets and liabilities as
measured by tax laws and their bases as reported in the financial statements.
Recognition of deferred tax asset balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences will be realized.
Deferred tax expense or benefit is recognized for the change in deferred tax
liabilities or assets between periods. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
Savings Association Insurance Fund
The Bank is a member of the Savings Association Insurance Fund ("SAIF"). In
1996 legislation was passed in the United States Congress that required
institutions that are members of SAIF to pay a one-time premium to recapitalize
the SAIF. In accordance with the Emerging Issues Task Force of the Financial
Accounting Standards Board, the SAIF Special Assessment premium expense was
recognized in the year the legislation was enacted. The Company recorded the
expense of the one-time SAIF Special Assessment (65.7 basis points applied to
March 31, 1995 deposit balances) of $1.1 million (approximately $0.39 per share
after income taxes) in the third quarter of 1996
Earnings per share
SFAS No. 128 Earnings Per Share was adopted by the Company in the fourth quarter
of 1997. Under SFAS No. 128, Basic Earnings Per Share ("Basic EPS") and
Diluted Earning Per Share ("Diluted EPS") are reported in the accompanying
financial statements. Basic EPS is based on the weighted average number of
common shares outstanding to income available to common stockholders.
Outstanding common shares include shares issuable for little or no cash
consideration upon the satisfaction of certain conditions as of the date that
all necessary conditions have been satisfied. Diluted EPS is based on the
weighted average number of common shares outstanding plus any potential dilutive
shares committed to be issued upon the satisfaction of certain conditions to
income available to common stockholders. A reconciliation of the weighted
average of common shares outstanding used in the earnings per share computation
follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1998
---- ----
<S> <C> <C>
Common Shares outstanding 2,076,969 2,076,969
Treasury shares (153,146) (264,027)
Unreleased ESOP Shares (31,546) (20,102)
Options - uncontingent 2,525 9,112
--------- ---------
Basic EPS 1,894,802 1,801,952
Options - contingent 19,682 16,271
Unreleased ESOP shares 31,546 20,102
--------- ---------
Diluted EPS 1,946,030 1,838,325
========= =========
</TABLE>
[CAPTION]
Mortgage Servicing Rights
Mortgage servicing rights retained on loans sold are capitalized as an asset at
estimated fair value and amortized over the estimated servicing period in
accordance with SFAS No. 125 Accounting for Transfers Servicing of Financial
Assets and Extinguishments of Liabilities that was adopted in 1997. The
adoption of SFAS No. 125 had no significant effect on the method utilized in
1996.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made in the 1996 and 1997 financial statements in
order for them to conform with the reporting format utilized in 1998.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents were comprised of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
(In thousands)
<S> <C> <C>
Cash on hand $ 1,678 $ 1,861
Cash due from banks 2,857 2,737
Interest bearing deposits at FHLB of Atlanta 1,849 8,579
Other interest bearing accounts 36 11
--------- ---------
$ 6,420 $13,188
========= =========
</TABLE>
Cash due from banks at December 31, 1997 and 1998 includes aggregate bank
balances of approximately $4.4 million and $11.0 million, respectively, which
are not covered by FDIC insurance.
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The Company's investment and mortgage-backed securities classified as available
for sale consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
<S> <C> <C> <C> <C>
Investment securities
Maturity in less than one year:
U.S. Government and agency obligations $ 5,001 $ 3 $ (5) $ 4,999
Maturity between one and five years:
U.S. Government and agency obligations 2,997 6 (9) 2,994
----------- --------- ------------ -----------
$ 7,998 $ 9 $ (14) $ 7,993
=========== ========= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
<S> <C> <C> <C> <C>
Investment securities
Maturity in less than one year:
U.S. Government and agency obligations $ 1,001 $ 3 $ - $ 1,004
Maturity between one and five years:
U.S. Government and agency obligations 997 15 - 1,012
----------- --------- ------------ -----------
$ 1,998 $ 18 $ - $ 2,016
=========== ========= ============ ===========
</TABLE>
Investments securities of $1.0 million have been pledged as collateral for
public funds on deposit.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
At December 31, 1997 and 1998, the portfolio of securities classified as
available for sale have been recorded in the accompanying statement of financial
condition at their estimated market value. The difference between amortized
cost and estimated market value has been reflected as a separate component of
equity, net of related income taxes:
<TABLE>
<CAPTION>
December 31,
1997 1998
(In thousands)
<S> <C> <C>
Unrealized gain (loss) on securities available for sale $ (5) $ 18
Deferred income taxes 3 (7)
----------- ----------
Net unrealized gain (loss) on securities available for sale $ (2) $ 11
=========== ==========
</TABLE>
NOTE 4 - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following summarizes the amortized cost basis, estimated market value and
unrealized holding gains and losses related to investments in mortgage-backed
securities classified as held to maturity:
<TABLE>
<CAPTION>
December 31, 1997
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
<S> <C> <C> <C> <C>
Maturing in one to five years:
FNMA certificates $ 81 $ 2 $ - $ 83
FHLMC certificates 159 2 - 161
GNMA certificates 54 1 - 55
Maturing in five to ten years:
FHLMC certificates 240 9 - 249
GNMA certificates 390 14 (1) 403
Maturing in over ten years:
GNMA certificates 143 12 - 155
FNMA certificates 104 4 - 108
FHLMC certificates 261 10 - 271
----------- ----------- ------------ -------------
$ 1,432 $ 54 $ (1) $ 1,485
=========== =========== ============ =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
<S> <C> <C> <C> <C>
Maturing in one to five years:
FHLMC certificates $ 89 $ 1 $ - $ 90
GNMA certificates 26 1 - 27
Maturing in five to ten years:
FHLMC certificates 217 7 - 224
GNMA certificates 292 13 - 305
Maturing in over ten years:
GNMA certificates 84 10 - 94
FNMA certificates 69 9 - 78
FHLMC certificates 168 8 - 176
----------- ----------- ------------ -------------
$ 945 $ 49 $ - $ 994
=========== =========== ============ =============
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
The Company has the intent and ability to hold these mortgage-backed securities
to maturity and in accordance with the provisions of SFAS No. 115 are recorded
in the accompanying statement of financial condition at amortized cost. At
December 31, 1997 and 1998, neither a disposal, nor conditions that could lead
to a decision not to hold mortgage-backed securities classified as held to
maturity, were reasonably foreseen.
NOTE 5 - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
(In thousands)
<S> <C> <C>
Type of loan
One-four family residential mortgage loans,
including loans held for sale $ 58,339 $ 53,019
Multi-family residential mortgage loans 11,020 6,473
Commercial mortgage and business loans 65,327 62,526
Construction loans 8,230 12,082
Consumer loans 19,978 21,766
------------ ------------
Total loans 162,894 155,866
------------ ------------
Less:
Loans held for sale (223) (659)
Undisbursed loans in process (1,404) (1,103)
Unamortized loan origination fees (148) (69)
Allowance for loan losses (1,584) (1,441)
------------ ------------
(3,359) (3,272)
------------ ------------
Total loans receivable, net $ 159,535 $ 152,594
============ =============
</TABLE>
Loans and participations serviced on behalf of the Company by others were
approximately $4.7 million and $3.6 million at December 31, 1997 and 1998,
respectively. Loans and participations serviced by the Company on behalf of
others were approximately $23.0 million and $16.2 million at December 31, 1997
and 1998, respectively.
The weighted average yield for all loans was 8.92% and 8.70% at December 31,
1997 and 1998, respectively.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
The Company originates both adjustable and fixed interest rate loans. At
December 31, 1997 and 1998, the composition of these loans was as follows:
<TABLE>
<CAPTION>
Fixed rate loans Adjustable rate loans
Term December 31, December 31, Term to rate December 31, December 31,
to maturity 1997 1998 adjustment 1997 1998
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C>
1 mo - 1 yr $ 18,814 $ 12,171 1 mo - 1 yr $ 87,348 $ 81,208
1 yr - 5 yrs 28,563 38,587 1 yr - 5 yrs 492 625
Over 5 yrs 27,677 23,275 Over 5 yrs - -
-------------- -------------- -------------- --------------
$ 75,054 $ 74,033 $ 87,840 $ 81,833
============== ============== ============== ==============
</TABLE>
The adjustable rate loans have interest rate adjustment limitations. The
majority of the adjustable rate loans are indexed to the one-year U.S. Treasury
bill rate. Future market factors may affect the correlation of the interest
rate adjustment with the rates the Company pays on the short-term deposits that
have been primarily utilized to fund these loans.
Activity in the allowance for loan losses account is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
(In thousands)
<S> <C> <C> <C>
Balance - Beginning of period $ 1,509 $ 1,659 $ 1,584
Provision for loan losses 270 242 605
Charge-offs (210) (347) (780)
Recoveries 90 30 32
----------- ----------- ----------
Balance - End of period $ 1,659 $ 1,584 $ 1,441
=========== =========== ==========
</TABLE>
Loans to executive officers and directors are made in the ordinary course of
business on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated parties. The Company gives employees who
are not directors or executive officers a preferred interest rate on adjustable-
rate mortgages of up to 3/4%.
Loan activity relating to loans made to executive officers and directors and
companies in which executive officers and directors own a significant interest
is summarized as follows:
<TABLE>
<CAPTION>
Balance Balance
Year ended Beginning End
December 31, of year Advances Repayments of year
(In thousands)
<S> <C> <C> <C> <C>
1996 $ 1,601 $ 957 $ 337 $ 2,221
1997 $ 2,221 $ 642 $ 594 $ 2,269
1998 $ 2,269 $ 465 $ 2,329 $ 405
</TABLE>
Unused credit lines or commitments to extend credit to executive officers and
directors, and companies to which executive officers and directors own a
significant interest aggregated $66,000 and $1.8 million for the years ended
December 31, 1997, and 1998, respectively.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized by major classifications as follows:
<TABLE>
<CAPTION>
December 31
1997 1998
<S> <C> <C>
(In thousands)
Land $ 583 $ 636
Building and Improvements 3,711 4,175
Furniture, fixtures and equipment 1,501 1,277
------- -------
5,795 6,088
Less - Accumulated depreciation (2,286) (2,236)
------- -------
$ 3,509 $ 3,852
======= =======
</TABLE>
Depreciation expense aggregated approximately $227,000, $285,000 and $320,000
during the years ended December 31, 1996, 1997, and 1998, respectively.
NOTE 7 - INVESTMENT IN FHLB STOCK
The Bank, as a member of the FHLB System is required to maintain an investment
in the FHLB of Atlanta. Although the stock represents a form of equity interest
in the FHLB of Atlanta, it does not meet the marketability criteria of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, because
its ownership is restricted and it lacks a market. As a result, the FHLB stock
is classified as a restricted investment security and is stated at cost.
NOTE 8 - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
<S> <C> <C>
(In thousands)
Interest on loans $ 1,609 $ 1,654
Interest on investments and mortgage-backed
securities 174 68
Dividends on Federal Home Loan Bank Stock 39 36
------- -------
$ 1,822 $ 1,758
======= =======
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 9 - DEPOSITS
Deposits by major classification and interest rate are summarized as follows:
<TABLE>
<CAPTION>
December 31,
Rates 1997 1998
1997 1998 Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Non interest-bearing accounts - - $ 4,119 2.9 $ 5,939 4.7
NOW accounts 2.50% 2.00% 11,015 7.7 11,757 9.2
Money market demand accounts 3.00% 3.00% 4,310 3.0 3,421 2.7
Passbook accounts 2.75% 2.75% 15,918 11.1 15,415 12.1
Statement savings 2.875% 2.875% 1,400 0.9 2,300 1.7
--------- ---- --------- ----
36,762 25.6 38,832 30.4
--------- ---- --------- ----
Certificate accounts:
2.00% to 5.00% 1,311 0.9 18,360 14.4
5.01% to 6.00% 64,433 44.8 62,697 49.2
6.01% to 7.00% 38,524 26.8 6,835 5.4
Over 7.00% 2,701 1.9 826 0.6
--------- ---- --------- ----
106,969 74.4 88,718 69.6
--------- ---- --------- ----
$ 143,731 100.0 $ 127,550 100.0
========= ===== ========= =====
Weighted-average cost of interest-bearing deposits 5.10% 4.57%
========= =========
</TABLE>
Scheduled maturities of certificate accounts were as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
(in thousands)
<S> <C> <C>
Less than one year $ 84,922 $ 70,086
One year to two years 19,870 13,347
Two years to three years 1,053 2,331
Three years to four years 288 1,310
Over four years 836 1,644
------------ ------------
$ 106,969 $ 88,718
============ ============
</TABLE>
As of December 31, 1997 and 1998, the Company had aggregate deposit accounts
with balances greater than $100,000 of approximately $14.7 million and $11.7
million, respectively. Balances in excess of $100,000 are not covered by FDIC
insurance.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
Interest expense, by deposit type, for the years ended December 31, 1996, 1997
and 1998 is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
(In thousands)
<S> <C> <C> <C>
NOW acccounts $ 233 $ 248 $ 255
Money market demand accounts 87 100 105
Passbook and statement savings accounts 542 505 481
Certificate accounts 5,350 6,039 5,362
------- ------- -------
$ 6,212 $ 6,892 $ 6,203
======= ======= =======
</TABLE>
NOTE 10 - BORROWED FUNDS
Borrowed funds at December 31, 1997 and 1998 are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
(In thousands)
<S> <C> <C>
Advances under a $40,000,000 Credit Availability Program(a) expiring
May 14, 1999, interest rate determined daily at FHLB determined
"spread" over the rate paid on FHLB overnight deposit accounts,
interest due monthly $ 2,000 $ -
Advances from Community Investment Fund:
7.36% principal reducing credit advance dated May 1, 1992, interest
due monthly, principal due in equal quarterly installments of $13,514
commencing May 1993 and continuing through May 2002 243 189
6.53% principal reducing credit advance dated November 2, 1992,
interest due monthly, principal due in equal quarterly installments of
$18,919 commencing in November 1993 and continuing through
November 2002 378 303
6.91% principal reducing credit advance dated March 4, 1994,
interest due monthly, principal due in equal quarterly installments of
$33,333 commencing in March 2004 and continuing through
March 2009 700 700
7.49% principal reducing credit advance dated July 8, 1994,
interest due monthly, principal due in equal quarterly installments of
$5,405 commencing in July 1995 and continuing through
July 2004 147 124
5.27% advance under fixed rate credit plan dated August 25, 1993,
interest due monthly, principal due August 25, 1998 3,000 -
6.08% advance under fixed rate credit plan dated August 25, 1993,
interest due monthly, principal due August 25, 2003 2,000 2,000
5.66% five year convertible advance renewed September 24, 1997,
interest due quarterly, principal due September 24, 2002 5,000 5,000
6.28% advance under fixed rate credit plan dated October 24, 1995,
interest due monthly, principal due October 24, 2000 5,000 5,000
5.49% ten year convertible advance dated February 4, 1998,
interest due quarterly, principal due February 4, 2008 - 10,000
4.97% ten year convertible advance dated June 19, 1998,
interest due quarterly, principal due June 19, 2008 - 8,000
------- -------
Total advances from Federal Home Loan Bank $18,468 $31,316
======= =======
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
(a) The Company has a "Credit Availability" agreement with the Federal Home
Loan Bank of Atlanta expiring in May 1999, which generally, limits the
Company's aggregate borrowings to the amount of credit availability ($40
million). At December 31, 1998, the Company has unused credit availability of
approximately $8.7 million.
The Company's advances from the FHLB of Atlanta are secured by a blanket
floating lien on qualifying first mortgage loans (approximately $52.4 million at
December 31, 1998). The Company incurred interest expense on FHLB advances of
approximately $1.3 million, $1.5 million and $1.7 million in 1996, 1997 and
1998, respectively.
Borrowed funds at December 31, 1998 have maturities and/or are scheduled to be
liquidated in future years as follows:
<TABLE>
<CAPTION>
Year ending Principal
December 31, reductions
(In thousands)
<S> <C>
1999 $ 151
2000 5,151
2001 151
2002 5,124
2003 2,022
2004 - 2008 18,684
2009 33
------------
$31,316
============
</TABLE>
NOTE 11 - INCOME TAXES
Income tax expense is comprised of the following elements of current and
deferred Federal and state income taxes:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
(In thousands)
<S> <C> <C> <C>
Current income tax expense:
Federal $ 464 $ 935 $ 1,142
State 3 108 112
-------- -------- ---------
467 1,043 1,254
-------- -------- ---------
Deferred income tax expense (benefit):
Federal (462) (104) (251)
State (29) 6 7
-------- -------- ---------
(491) (98) (244)
-------- -------- ---------
$ (24) $ 945 $ 1,010
======== ======== =========
</TABLE>
Bancshares and the Bank file separate federal and state income tax returns. At
December 31, 1997, the Company had prepaid federal income taxes of approximately
$217,000 and a liability for unpaid state income taxes of approximately
$108,000. As of December 31, 1998, the Company had a liability for federal
income taxes of approximately $104,000 and a liability for unpaid state income
taxes of approximately $152,000.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
The provisions for income taxes are different than the amounts determined by
applying the federal statutory rate to income before income taxes due to the
following:
<TABLE>
<CAPTION>
Year ended December 31
1996 1997 1998
<S> <C> <C> <C>
(Dollars in thousands)
Expected income tax at statutory rate $ 175 $ 754 $ 854
Charitable contribution of appreciated property (285) 90 -
Excess of fair value over cost of ESOP shares committed for release 118 14 13
Federal Home Loan Bank stock dividends
Dividend received deduction (24) (35) (29)
State excise taxes based on income, net of Federal
income tax expense (benefit) (17) 117 119
Other, net 9 5 53
-------- ------- --------
Total income tax expense (benefit) $ (24) $ 945 $ 1,010
======== ======= ========
Effective income tax rate (5)% 40% 40%
======== ======= ========
</TABLE>
Deferred income tax expense (benefit) results from temporary differences in the
recognition of revenues and expenses for tax and financial statement purposes.
Deferred income taxes are also provided on certain components of equity. The
sources and tax effects of these temporary differences and the separately stated
components of equity resulting in deferred income taxes are as follows:
<TABLE>
<CAPTION>
Deferred tax (benefit) liability related to:
Accrued
Temporary Bad debt deduction Loan Accumulated Prepaid Contribution compensated
reporting difference (Asset) Liability Fees Depreciation Expenses carryforward MRDP Other absences Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Balance-December 31, 1995 (457) 857 (101) 28 95 - - - - 422
1996 changes (52) (172) 62 2 37 (268) (45) (31) (48) (515)
------- ------ ------- ------- ------ -------- ------ ----- ------ ------
Balance-December 31, 1996 (509) 685 (39) 30 132 (268) (45) (31) (48) (93)
1997 changes (38) (84) (20) 31 (281) 268 (8) 73 (13) (72)
------- ------ ------- ------- ------ -------- ------ ----- ------ ------
Balance-Deember 31, 1997 (547) 601 (59) 61 (149) - (53) 42 (61) (165)
1998 changes (84) (198) 22 9 - - (10) - 29 (232)
------- ------ ------- ------- ------- -------- ------ ----- ------ -------
Balance-December 31, 1998 $ (631) $ 403 $ (37) $ 70 $ (149) $ - $ (63) $ 42 $ (32) $ (397)
======= ====== ======= ======= ======= ======== ======= ===== ====== =======
</TABLE>
NOTE 12 - PENSION PLAN
The Company froze the benefits of its defined benefit noncontributory retirement
plan ("Plan") in May 1997 with the intention of terminating the plan and
recognized an expense in 1997 of $588,000 for the unfunded projected liability
in accordance with SFAS No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits. The
Plan covered substantially all of its employees. Benefits were generally based
upon the fractional rule based on service. It was the Company's policy to make
contributions to the Plan sufficient to meet minimum funding requirements of
applicable laws and regulations. Plan assets consist principally of passbook
savings, certificates of deposit and life insurance. During 1998 the Plan was
terminated and the Plan's assets were distributed to the participants.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 13 - STOCK OWNERSHIP AND OPTION PLANS
Employee Stock Ownership Plan
The Bank has established an internally-leveraged Employee Stock Ownership Plan
("ESOP") for the exclusive benefit of the Bank's participating employees meeting
certain eligibility requirements. In general, participating employees must be
full-time employees (defined as an employee working 1,000 hours or more during
an employment year) with one or more years of service and must have attained the
age of 21 years.
The ESOP borrowed funds from the Company in an amount sufficient to purchase
163,990 shares. The loan is secured by the shares purchased and will be repaid
by the contributions to the ESOP by the Bank and any other earnings on ESOP
assets. The loan has an outstanding balance of $280,000 and $172,000 as of
December 31, 1997 and 1998, respectively.
Accounting for the ESOP is in accordance with Statement of Position 93-6,
Employers Accounting for Employee Stock Ownership Plans issued by the American
Institute of Certified Public Accountants. Accordingly, the Company's loan to
the ESOP is reflected as a reduction of stockholders' equity as "unearned
employee compensation". The ESOP is expected to cover its debt service
requirements through discretionary contributions to the ESOP by the Bank and
through dividends paid on shares of Company common stock held by the ESOP. The
shares held by the ESOP are committed for release from collateral as principal
repayment of the loan is made. At such time, unearned employee compensation is
reduced by the cost basis of shares released and compensation is charged for the
fair value of such shares at the date of release. Any difference between the
cost basis and fair value of shares committed for release is charged or credited
to additional paid-in capital, net of related income taxes. As shares are
committed for release, they become outstanding for earnings per share
computations.
Shares committed for release are held in a suspense account for allocation among
participants. Contributions to the ESOP and shares released from the suspense
account are allocated among participants at the end of each Plan year (December
31) in proportion to their compensation relative to total compensation of all
active participants. Benefits generally become 100% vested after five years of
credited service. Vesting is accelerated upon retirement, death or disability.
Since the Company's annual contributions are discretionary, benefits payable
under the ESOP cannot be estimated.
Dividends paid on unallocated ESOP shares are recorded as reductions of debt and
accrued interest, whereas dividends on allocated ESOP shares are recorded as a
reduction in retained earnings. The following summarizes activity related to
the ESOP for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Unearned employee Additional
compensation paid-in Compensation
Shares Amount capital expense
(Dollars in thousands)
<S> <C> <C> <C> <C>
1996
Shares committed for release: 112,949 1,130 $ 347 $ 1,477
------------ ------------ ============ ============
Balances - December 31, 1996 (40,111) $ (401)
1997
Shares committed for release: 12,070 121 $ 41 $ 162
------------ ------------ ============ ============
Balances - December 31, 1997 (28,041) $ (280)
1998
Shares committed for release: 10,878 108 $ 65 $ 173
------------ ------------ ============ ============
Balances - December 31, 1998 (17,163) $ (172)
============ ============
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
Management Recognition and Development Plan
On April 17, 1996, the Company established the 1996 Management Recognition and
Development Plan (the "MRDP"). The MRDP was established in order to increase
the proprietary and vested interest of certain key Company employees and
Directors in the growth, development and financial success of the Company by
granting them awards of a maximum of 82,000 restricted shares of the Company's
common stock. Among other provisions of the MRDP, the MRDP shares are
restricted as to transferability prior to vesting, which vesting is to occur
generally over a five-year period at a rate of 20% per year, commencing one year
after the original date of grant.
As of December 31, 1998, the Company has awarded the 82,000 restricted shares of
the Company's common stock in accordance with the terms and conditions of the
MRDP. The restricted shares were obtained from stock held in treasury (54,906
shares) and from authorized and unissued common stock (27,094 shares) and were
recorded to unearned employee compensation at the then prevailing market price
of the company's common stock ($15.75 per share). Unearned compensation related
to the MRDP is reflected as a reduction of stockholders' equity and is being
amortized to expense on a ratable basis over the five-year vesting period. MRDP
amortization expense was $272,000 in 1998. As of December 31, 1998, 34,028
shares are vested, 615 shares have been forfeited, and 47,357 remain unreleased.
Stock Option Plan
On April 17, 1996, the Company established the 1996 Stock Option Plan (the
"Plan"). The Plan was established in order to promote the interests of the
Company by attracting, retaining and motivating exceptional executive personnel
and other key employees and Directors of the Company. The Plan sets an exercise
price not less than 100% of the per share fair market value at the date of grant
(110% under certain circumstances), contains various anti-dilution/enlargement
provisions, and generally provides for vesting of awards at a rate of 20% per
year, commencing one year after the original date of grant. Options are
generally exercisable until the tenth anniversary date of the grant.
The Plan provides that a maximum of 204,988 options to acquire the Company's
common stock may be granted under the Plan. Commensurate with its April 17,
1996 adoption of the Plan, the Board of Directors granted awards aggregating
102,492 share options to the Company's Directors and certain key Company
employees, at an exercise price equal to the fair market value per share at the
date of grant ($15.75 per share, which amount was subsequently adjusted in
accordance with Plan provisions to $11.75 per share so as to give appropriate
recognition to the effects of 1996 Special dividends). During 1998, an
additional 14,000 options were granted to certain officers and directors under
the Plan.
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, on
January 1, 1996. SFAS No. 123 encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation cost would be shown as an expense on the
income statement. Companies may choose to continue to measure compensation for
stock-based plans using the intrinsic method of accounting prescribed by APB
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees. Entities
electing to continue the accounting prescribed in APB 25 will be required to
disclose in the notes to the financial statements what net income and earnings
per share would have been if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. Such pro forma information is as follows for
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Net income $1,339 $1,444
Basic EPS $ 0.71 $ 0.80
Diluted EPS $ 0.70 $ 0.79
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 14 - REGULATORY COMPLIANCE
The Bank is required to maintain specific amounts of capital pursuant to FDIC
requirements and the Company is required to maintain specific amounts of capital
pursuant to the regulations of the Federal Reserve Board. As summarized below,
the Company and Bank are in compliance with all such requirements at December
31, 1998:
<TABLE>
<CAPTION>
Percentage of
adjusted total
Amount assets
First Southern Bancshares, Inc: (Dollars in thousands)
<S> <C> <C>
Primary capital ratios:
GAAP capital $ 18,008
Adjustments:
Mortgage servicing rights (8)
Net unrealized loss on securities available for sale (11)
-----------
Tier 1 capital 17,989 9.96%
Minimum Tier 1 (leverage) requirement 7,227 4.00%
----------- ------
Excess $ 10,762 5.96%
=========== ======
Risk-based capital ratios:
Core (Tier 1) Capital 17,989 12.85%
Minimum core capital 5,601 4.00%
----------- ------
Excess $ 12,388 8.85%
=========== ======
Risk-based capital $ 19,430 13.88%
Minimum risk-based capital requirement 11,202 8.00%
----------- ------
Excess $ 8,228 5.88%
----------- ------
</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) $ 18,934 13.53%
To be well capitalized under the FDICIA
prompt corrective action provisions 13,993 10.00%
----------- ------
Excess $ 4,941 3.53%
=========== ======
Tier 1 capital (to risk-weighted assets) $ 17,493 12.50%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,396 6.00%
----------- ------
Excess $ 9,097 6.50%
=========== ======
Tier 1 capital (to average assets) $ 17,493 9.69%
To be well capitalized under the FDICIA
prompt corrective action provisions 9,029 5.00%
----------- ------
Excess $ 8,464 4.69%
----------- ------
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
As an Alabama state-chartered bank which is not a member of the Federal Reserve
System, the Bank is required by Alabama law to maintain at all times a reserve
(comprised of cash on hand) based upon average daily deposits of the Bank. At
December 31, 1998, the Bank's qualifying reserves of approximately $1.7 million
significantly exceeded the required reserve of $297,000.
NOTE 15 - INTEREST RATE RISK
The Company is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At December 31, 1998, the Company's
interest earning assets consisted of approximately 49% fixed interest rates and
approximately 51% adjustable interest rates (47% and 53%, respectively, at
December 31, 1997). Approximately 95% of the Company's assets at December 31,
1998 earned interest. Those assets were funded primarily with short-term
liabilities that have interest rates that vary with market rates over time. The
shorter duration of the interest-sensitive liabilities indicates that the
Company is exposed to interest rate risk because, in a rising rate environment,
liabilities will be repricing faster at higher interest rates, thereby reducing
the market value of long-term assets and net interest income. Conversely, in a
stable or decreasing rate environment, the Company's asset value and net
interest income will show improvement.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Loan commitments and other matters
The Company makes loan commitments and incurs contingent liabilities in the
normal course of business. The Company is, from time to time, a defendant in
legal actions arising from normal business activities. Management does not
anticipate that the ultimate liability, if any, arising from litigation
outstanding at December 31, 1998 will have a materially adverse effect on the
financial statements.
Outstanding loan commitments issued by the Company (excluding loans in process
and standby letters of credit) in the normal course of business were comprised
of unused advances under line-of-credit agreements totaling $12.3 million as of
December 31, 1998.
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. The Company has a task force that has
completed an initial study of its computerized IT systems, equipment non-IT
systems, including third party servicers, and prepared a plan to address the
Year 2000 problem. The plan is in various stages of completion and is monitored
by management and the audit committee of the board of directors. Bancshares does
not estimate that the costs associated with the Year 2000 Issue will materially
impact future operating results. The expense to modify and test its computer
programs and systems are estimated to be $50,000 through 1999. Such costs will
be recognized as incurred.
Bancshares contingency plan includes the use of alternative vendors, another
bank's system or manual entry until an acceptable alternative is established.
The Company's process of evaluating potential effects of Year 2000 issues on
customers of the Bank is in its early stages, and it is therefore impossible to
quantify the potential adverse effects of incompatible IT and non-IT systems on
loan customers. The failure to prepare adequately for Year 2000 compatibility
could have a significant adverse effect on such customer's operations and
profitability, in turn inhibiting its ability to repay loans in accordance with
their terms. Until sufficient information is accumulated from customers of the
bank 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.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, letters of credit, interest
rate caps and floors written on variable rate loans. Those instruments involve,
to varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, and
letters of credit are represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making commitments as
it does for on-balance-sheet instruments. For interest rate caps and floors,
the contract or notional amounts do not represent exposure to credit loss.
<TABLE>
<CAPTION>
Contract or notional amount
December 31,
1997 1998
(In thousands)
<S> <C> <C>
Financial instruments and contract amounts
which represent credit risk:
Commitments to extend credit $ 2,240 $ 1,254
Unused lines of credit $ 7,745 $ 12,279
Standby letters of credit $ 316 $ 10
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained,
if it is deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
NOTE 18 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
Substantially, all of the Company's business activity is with customers located
in Lauderdale and Colbert Counties, and surrounding counties in Northwest
Alabama. As such, a significant portion of its loan portfolio is collateralized
by real estate located in the same geographic location.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 19 - STOCK REPURCHASE PROGRAM
In October 1995, the Company's Board of Directors approved a Stock Repurchase
Program whereby the Company may repurchase up to 102,493 shares of its common
stock, which number of shares represents 5% of the Company's issued common
stock. In June 1996 the Company's Board of Directors approved an extension of
the Stock Repurchase Program whereby the Company, upon completion of the
repurchase original 102,493 shares of its common stock, could then repurchase up
to an additional 102,493 shares of its common stock. The ongoing program has
resulted in the 1996, 1997 and 1998 acquisition of 114,400, 79,930 and 224,182
shares, respectively, of Company common stock (aggregating 20.2% of issued
shares) at an aggregate cost of $1.5 million, $1.1 million and $3.6 million in
1996, 1997 and 1998, respectively. 54,906 of such shares were utilized in the
funding of the MRDP, 5,250 were used to satisfy options exercised and 408,262
are held in treasury at December 31, 1998.
NOTE 20 - BANK DIVIDEND RESTRICTIONS
As required by OTS regulations, the Association established a liquidation
account at the time of the conversion. The liquidation account (which account
was assumed by the Bank) is maintained for the benefit of eligible account
holders who continue to maintain their accounts at the Bank after the
conversion. The initial balance of this liquidation account was equal to the
Association's net worth as defined by OTS regulations as of the date of the
latest statement of financial condition contained in the final offering
circular. The liquidation account will be reduced annually to the extent the
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank (and
only in such event) each eligible holder shall be entitled to receive a
liquidation distribution from this account in the amount of the then current
adjusted balance for deposits then held, before any liquidation distribution may
be made to the Bank's stockholder, Bancshares. The liquidation account
restricts the Bank's use of its net worth related to the repurchase of its stock
from or payment of dividends to Bancshares.
The Bank may not declare or pay a cash dividend on any of its capital stock if
the effect thereof would cause the Bank's regulatory capital to be reduced below
the amount required for the liquidation account, which account, was assumed by
the Bank. In addition, the Bank is subject to restrictions on dividends under
the Alabama Banking Code, which provides that an Alabama state bank must
transfer to surplus each year at least 10% of its net earnings (and thus cannot
declare or pay a dividend in excess of 90% of net earnings) until its surplus
equals at least 20% of its capital. Furthermore, the Bank must obtain
regulatory approval to declare dividends in any calendar year in excess of the
total of its net earnings of that year combined with its retained net earnings
of the preceding two years, less any required transfers to surplus.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 21 - FIRST SOUTHERN BANCSHARES, INC. PARENT COMPANY ONLY FINANCIAL
STATEMENTS
Condensed parent company only financial statements for First Southern
Bancshares, Inc. are set forth below:
CONDENSED BALANCE SHEET (In thousands)
<TABLE>
<CAPTION>
December 31,
1997 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 121 $ 284
Notes receivable 280 172
Investment in wholly-owned subsidiary 20,520 17,512
Other assets 74 102
--------- ---------
TOTAL ASSETS $ 20,995 $ 18,070
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other accrued liabilities $ 46 $ 62
--------- ---------
Total liabilities 46 62
STOCKHOLDERS' EQUITY 20,949 18,008
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,995 $ 18,070
========= =========
</TABLE>
CONDENSED STATEMENT OF INCOME (In thousands, except share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
<S> <C> <C> <C>
INCOME
Equity in earnings of wholly-owned subsidiary $ 510 $ 1,477 $ 1,583
Other 276 18 18
--------- ---------- ---------
Total income 786 1,495 1,601
EXPENSES 231 139 157
--------- ---------- ---------
Net income before income taxes 555 1,356 1,443
Provision for income taxes 17 (41) (58)
--------- ---------- ---------
NET INCOME $ 538 $ 1,397 $ 1,502
========= ========== =========
BASIC EARNINGS PER SHARE $ 0.28 $ 0.74 $ 0.83
DILUTED EARNINGS PER SHARE $ 0.28 $ 0.73 $ 0.82
DIVIDENDS PER SHARE, REGULAR AND SPECIAL $ 5.90 $ 0.50 $ 0.80
DIVIDEND PAYOUT RATIO DURING THE PERIOD 2107.14% 67.57% 96.39%
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS (In thousands)
Year ended December 31,
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 538 $ 1,397 $ 1,502
Adjustments to reconcile net income to net cash provided by operations:
Equity in earnings of wholly-owned subsidiary (510) 3,512 3,095
(Increase) decrease in other assets 31 (52) (28)
(Decrease) in income taxes payable (13) (3) -
Increase ( decrease) in other accrued liabilities 17 (30) 16
------------- --------------- -------------
Cash flows from operating activities 63 4,824 4,585
------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity and sales of investment and mortgage-backed securities 2,804 - -
Principal reductions in notes receivable 5,530 121 108
------------- --------------- -------------
Cash flows from (used in) investing activities 8,334 121 108
------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 4,250 - 2,750
Repayments of borrowings (250) (4,000) (2,750)
Cash dividends, including dividends on unallocated ESOP shares (12,021) (870) (1,361)
Acquisition of treasury stock (1,501) (1,078) (3,640)
ESOP shares committed for release 1,477 162 147
Amortization of MRDP shares 172 258 311
Equity in reserves of wholly-owned subsidiary (40) 38 13
------------- --------------- -------------
Cash flows from (used in) financing activities (7,913) (5,490) (4,530)
------------- --------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 484 (545) 163
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 182 666 121
------------- --------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 666 $ 121 $ 284
------------- --------------- -------------
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
NOTE 22 - CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of financial instruments as of December 31,
1998 are summarized as follows:
<TABLE>
<CAPTION>
Carrying Fair
amount value
<S> (In thousands)
FINANCIAL ASSETS <C> <C>
Cash and cash equivalents $ 13,188 $ 13,188
Investment securities 2,016 2,016
Mortgage-backed securities 945 994
Loans receivable, net 152,594 153,428
Loans held for sale 659 659
Federal Home Loan Bank stock 1,918 1,918
Accrued dividends and interest receivable 1,758 1,758
--------------- -------------
$ 173,078 $ 173,961
============== ==============
FINANCIAL LIABILITIES
Deposits:
Demand accounts $ 38,832 $ 38,832
Certificates of deposit 88,718 88,651
Advances from Federal Home Loan Bank 31,316 31,316
-------------- --------------
$ 158,866 $ 158,799
============== ==============
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Certain
financial instruments and all nonfinancial instruments are excluded. The
disclosures also do not include certain intangible assets, such as customer
relationships, deposit base intangibles, and goodwill. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it was practicable
to estimate the value:
Cash and cash equivalents
Based upon the nature of the instrument, carrying value approximates fair
value.
Investment and mortgage-backed securities
Fair value was determined based upon quoted market prices and/or dealer
quotes.
Loans receivable and loans held for sale
The fair value of loans receivable was estimated (1) by market value for those
loans which have a readily available market, and (2) discounting future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and with the same remaining term to
maturity, as adjusted for an estimate of borrower prepayments and estimated
loan losses. The fair value of loans held for sale, which instruments were of
recent creation and reflect currently existing market rates and attributes,
approximates their carrying value.
Federal Home Loan Bank stock
The carrying value of the Federal Home Loan Bank stock reasonably reflects its
fair value.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
Accrued dividends and interest receivable
Based upon the nature of the instrument, the carrying value approximates fair
value.
Deposits
The carrying value of demand deposits and other non fixed maturity deposit
accounts reflects the amount payable on demand and therefore, is a reasonable
approximation of fair value. The estimated fair values of certificates of
deposit were estimated by discounting future cash flows using the rates
currently being offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
The estimated fair value of Federal Home Loan Bank loan balances was
determined by discounting future cash flows using the rates currently being
offered by Federal Home Loan Bank on advances having similar characteristics.
Off-balance sheet financial commitments
The Company had $13.5 million of off-balance sheet financial commitments as of
December 31,1998, which are commitments to originate loans and unused lines of
credit. Since these obligations are based on current market rates, the
carrying amount is considered to be a reasonable estimate of fair value.
By their nature, estimates are subjective in nature and involve uncertainties
and matters of significant judgment, and therefore, cannot be determined with
precision. Changes in any of the assumptions used in calculating fair value
could significantly affect the estimates. Further, the fair value estimates
were calculated as of December 31, 1998. Subsequent changes in market interest
rates and other conditions could significantly change the fair value.
Fair value estimates are based on existing on and off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of these estimates.
47
<PAGE>
COMMON STOCK INFORMATION
The common stock of First Southern Bancshares, Inc. is quoted on The NASDAQ
National Stock Market under the symbol "FSTH." As of February 23, 1999, First
Southern Bancshares, Inc. had 662 shareholders and 1,653,707 shares of common
stock outstanding. This does not include the number of persons or entities who
hold the stock in nominee or "street name."
Bancshares' ability to pay dividend depends primarily upon the Bank's ability to
pay dividends. As discussed in Note 20 to the consolidated financial
statements, the Bank's ability to pay dividends is restricted by regulatory
capital requirements, the required maintenance of a liquidation account
established by First Federal Savings and Loan Association of Florence (which
account was assumed by the Bank), and provisions of the Alabama Banking Code.
The following table sets forth per share market prices and dividend information
for Bancshares common stock. Dividends are listed by quarter in which declared
by the Board of Directors.
<TABLE>
<CAPTION>
1997 High Low Dividend
<S> <C> <C> <C>
First quarter $ 13.750 $ 12.000 $ 0.125
Second quarter $ 13.250 $ 12.750 $ 0.125
Third quarter $ 15.250 $ 13.250 $ 0.125
Fourth quarter $ 16.250 $ 14.375 $ 0.125
<CAPTION>
1998 High Low Dividend
<S> <C> <C> <C>
First quarter $ 16.500 $ 14.750 $ 0.425
Second quarter $ 18.375 $ 15.500 $ 0.125
Third quarter $ 17.375 $ 14.750 $ 0.125
Fourth quarter $ 16.875 $ 13.375 $ 0.125
</TABLE>
48
<PAGE>
DIRECTORS AND OFFICERS OF
FIRST SOUTHERN BANCSHARES, INC. AND
FIRST SOUTHERN BANK
<TABLE>
<CAPTION>
<S> <C>
Members of the Board of Directors Officers
---------------------------------- -------------------------------------
William E. Batson Charles L. Frederick, Jr.
Chairman of the Board President and Chief Executive Officer
Self-employed accountant
Thomas N. Ward
Charles L. Frederick, Jr. Executive Vice President and
President and Chief Executive Officer Chief Operating Officer
First Southern Bancshares, Inc. and
First Southern Bank Glenda Young
Senior Vice President and
Thomas N. Ward Chief Accounting Officer
Executive Vice President and
Chief Operating Officer Marva Kaye Townsend
First Southern Bank Assistant to the President and
Corporate Secretary
Milka S. Duke
Retired Brent Turpen
Former officer of First Federal Savings Treasurer/Controller
and Loan of Florence
Sharon Robbins
Kenneth Williams Assistant Corporate Secretary
Partner of Williams & Son Oil Co.
(An oil distribution company) Vice Presidents:
----------------
Linda Allen
J. Acker Rogers Tyler Calhoun III
Partner Kenneth McLain
Rogers, Carlton & Associates, Inc. Farrell Southern
(Insurance Agency) Irene Woods
Jerry Hastings
Gary Gamble
President
Plantation Springs, Inc. Assistant Vice Presidents:
(Land development company) --------------------------
Donna Ezekiel
James E. Bishop Marsha Rochester
President and Owner Natalie Tackett
Jim Bishop Chevrolet, Inc. and Marc Tays
Buick Oldsmobile, Inc. Brenda Crittenden
(Automobile and truck dealership)
S. Gregory Beadle
President
SBS Electric Supply
(Electrical supply company)
Steve McKinney
President
Southern Fastening Systems, Inc.
(Fastener manufacturer)
</TABLE>
49
<PAGE>
COMPANY INFORMATION
Corporate Headquarters Transfer Agent
102 South Court Street Registrar and Transfer Agent
Florence, Alabama 35630 10 Commerce Drive
Cranford, New Jersey 07016
Independent Auditors Common Stock
Marmann, McCrary & Associates, P.C. The NASDAQ National Market System
900 E. Second St. NASDAQ Symbol: FSTH
Sheffield, Alabama 35660
Special Securities Counsel
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders will be held Wednesday, April 21, 1999, at
10:00 a.m., Central Time, at the main office of First Southern Bank, 102 South
Court Street, Florence, Alabama. Stockholders of record as of the close of
business on March 6, 1999 are those stockholders entitled to notice of and to
vote at the Annual Meeting.
- --------------------------------------------------------------------------------
A COPY OF THE ANNUAL REPORT ON FORM 10-KSB, INCLUDING FINANCIAL STATEMENTS, AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT
CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR VOTING AT THE ANNUAL MEETING
OF STOCKHOLDERS UPON WRITTEN REQUEST TO THE SECRETARY OF FIRST SOUTHERN
BANCSHARES, INC., 102 SOUTH COURT STREET, FLORENCE, ALABAMA 35630.
- --------------------------------------------------------------------------------
50
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
First Southern Bancshares, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
First Southern Bank 100% Alabama
- ------------------
(a) The operation of the Company's wholly owned subsidiary is included in the
Company's Financial Statements contained in the Annual Report attached
hereto as Exhibit 13.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements for First Southern Bancshares, Inc. for the year ended
December 31, 1998 and is qualified in its entirety by reference to such
financial statements. Dollars are in thousands except for per share data.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,598
<INT-BEARING-DEPOSITS> 8,590
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,016
<INVESTMENTS-CARRYING> 945
<INVESTMENTS-MARKET> 994
<LOANS> 153,253
<ALLOWANCE> 1,441
<TOTAL-ASSETS> 178,375
<DEPOSITS> 127,550
<SHORT-TERM> 151
<LIABILITIES-OTHER> 1,501
<LONG-TERM> 31,165
0
0
<COMMON> 21
<OTHER-SE> 17,987
<TOTAL-LIABILITIES-AND-EQUITY> 178,375
<INTEREST-LOAN> 15,002
<INTEREST-INVEST> 348
<INTEREST-OTHER> 484
<INTEREST-TOTAL> 15,177
<INTEREST-DEPOSIT> 6,203
<INTEREST-EXPENSE> 7,956
<INTEREST-INCOME-NET> 7,221
<LOAN-LOSSES> 605
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,060
<INCOME-PRETAX> 2,512
<INCOME-PRE-EXTRAORDINARY> 1,502
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,502
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 3.72
<LOANS-NON> 914
<LOANS-PAST> 2,445
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 484
<ALLOWANCE-OPEN> 1,584
<CHARGE-OFFS> 780
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 1,441
<ALLOWANCE-DOMESTIC> 1,056
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 385
</TABLE>
