<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______to_______
Commission file number 0-25478
-------
First Southern Bancshares, Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1133624
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 South Court Street, Florence, Alabama 35630
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(256) 764-7131
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,643,562 shares of $.01 par
value common stock as of August 9, 1999.
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
FORM 10-QSB
June 30, 1999
TABLE OF CONTENTS
- -----------------
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS
<S> <C>
Consolidated statements of financial condition (unaudited) 1
Consolidated statements of income (unaudited) 2
Consolidated statement of stockholders' equity (unaudited) 3
Consolidated statements of cash flows (unaudited) 4
Selected notes to consolidated financial statements (unaudited) 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 18
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 18
ITEM 5 - OTHER INFORMATION 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
</TABLE>
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED (In thousands)
December 31, June 30,
1998 1999
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 13,188 $ 8,909
Investment securities available for sale, at market 2,016 6,490
Mortgage-backed securities, held to maturity, at cost 945 3,643
Loans held for sale, at cost, which approximates market 659 145
Loans receivable, net 152,594 148,126
Foreclosed real estate and other assets 710 1,200
Premises and equipment, net 3,852 3,754
Federal Home Loan Bank stock, at cost 1,918 1,564
Accrued interest receivable 1,758 1,720
Deferred income taxes 397 443
Other assets 338 437
--------- --------
TOTAL ASSETS $ 178,375 $176,431
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 127,550 $126,469
Advances from Federal Home Loan Bank 31,316 31,241
Other notes payable - -
Income taxes currently payable 356 137
Other liabilities 1,145 538
--------- --------
Total liabilities 160,367 158,385
--------- --------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares authorized; none
issued and outstanding - -
Common stock, $.01 par value; 4,000,000 shares authorized;
2,076,969 and shares issued and outstanding 21 21
Additional paid-in capital 11,414 11,421
Retained earnings - Substantially restricted 13,340 13,609
Unearned employee compensation - ESOP (172) (141)
Unearned employee compensation - MRDP (550) (411)
Net unrealized gain (loss) on securities available for sale 11 (58)
Treasury stock, at cost (6,056) (6,395)
--------- --------
Total stockholders' equity 18,008 18,046
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,375 $176,431
========= ========
</TABLE>
See accompanying selected notes to consolidated financial statements.
1
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (In thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans 3,624 3,240 7,164 6,482
Mortgage-backed securities 25 33 53 49
Investment securities 73 59 164 97
Other 101 136 222 284
------- ------- ------ ------
Total interest income 3,823 3,468 7,603 6,912
INTEREST EXPENSE:
Deposits 1,564 1,316 3,276 2,656
Federal Home Loan Bank advances and other 406 443 744 882
------- ------- ------ ------
Total interest expense 1,970 1,759 4,020 3,538
------- ------- ------ ------
NET INTEREST INCOME 1,853 1,709 3,583 3,374
PROVISION FOR LOAN LOSSES 61 148 121 343
------- ------- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,792 1,561 3,462 3,031
------- ------- ------ ------
NON INTEREST INCOME:
Loan fees and service charges 174 151 320 308
Net gains on sale of loans 70 60 126 138
Gains on real estate owned 2 2 2 4
Other 7 3 15 15
------- ------- ------ ------
Total non interest income 253 216 463 465
------- ------- ------ ------
NON INTEREST EXPENSES:
Compensation and employee benefits 816 732 1,552 1,444
Building and occupancy expense 147 153 280 293
Data processing expense 107 124 209 214
Advertising 33 42 76 80
Insurance expense 58 50 112 92
Other 161 148 321 306
------- ------- ------ ------
Total non interest expenses 1,322 1,249 2,550 2,429
------- ------- ------ ------
INCOME BEFORE INCOME TAXES 723 530 1,375 1,067
INCOME TAX EXPENSE 280 207 526 420
------- ------- ------ ------
NET INCOME $ 443 $ 323 $ 849 $ 647
======= ======= ====== ======
BASIC EARNINGS PER SHARE $ 0.24 $ 0.20 $ 0.45 $ 0.39
======= ======= ====== ======
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.20 $ 0.44 $ 0.39
======= ======= ====== ======
DIVIDENDS PER SHARE
Regular cash dividends $ 0.125 $ 0.125 $ 0.25 $ 0.25
Special cash dividends $ - $ - $ 0.30 $ -
------- ------- ------ ------
Total dividends per share $ 0.125 $ 0.125 $ 0.55 $ 0.25
======= ======= ====== ======
</TABLE>
See accompanying selected notes to consolidated financial statements.
2
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED (Dollars in thousands)
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, 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 - - - - - -
--------- --- -------- ------- -------- -------
Net for the period - - (218,932) (3,553) 39 141
--------- --- -------- ------- -------- -------
Balances at December 30, 1998 2,076,969 $21 (408,262) $(6,056) $ 11,414 $13,340
Net income for the six months
ended June 30, 1999 - - - - - 647
Cash dividends - - - - - (378)
Options exercised - - 936 11 - -
Acquisition of treasury stock - - (26,081) (350) - -
ESOP shares committed
for release - - - - 7 -
Amortization of MRDP
unearned compensation - - - - - -
Increase in unrealized loss on
securities available for sale,
net of related income taxes - - - - - -
--------- --- -------- ------- -------- -------
Net for the period - - (25,145) (339) 7 269
--------- --- -------- ------- -------- -------
Balances at June 30, 1999 2,076,969 $21 (433,407) $(6,395) $ 11,421 $13,609
--------- --- -------- ------- -------- -------
<CAPTION>
Net
unrealized
Unearned loss on
employee securities Total
compensation available stockholders' Comprehensive
ESOP MRDP for sale equity income
<S> <C> <C> <C> <C> <C>
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
for release 108 - - 147 147
Amortization of MRDP
unearned compensation - 311 - 311 311
Increase in unrealized loss on
securities available for sale
net of related income taxes - - 13 13 13
----- ----- ----- -------- ------
Net for the period 108 311 13 (2,941) 1,973
----- ----- ----- -------- ------
Balances at December 30, 1998 $(172) $(550) $ 11 $ 18,008 $1,973
======
Net income for the six months
ended June 30, 1999 - - - 647 647
Cash dividends - - - (378) -
Options exercised - - - 11 -
Acquisition of treasury stock - - - (350) -
ESOP shares committed
for release 31 - - 38 38
Amortization of MRDP
unearned compensation - 139 - 139 139
Increase in unrealized loss on
securities available for sale
net of related income taxes - - (69) (69) (69)
----- ----- ----- -------- ------
Net for the period 31 139 (69) 38 755
----- ----- ----- -------- ------
Balances at June 30, 1999 $(141) $(411) $ (58) $ 18,046 $ 755
----- ----- ----- -------- ------
</TABLE>
See accompanying selected notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands)
Six months ended
June 30,
---------------------------
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 849 $ 647
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 72 161
Provision for loan losses 121 343
Provision for deferred income taxes (benefit) 22 (46)
Amortization/accretion of premiums/discounts on investment
and mortgage-backed securities (2) 6
Amortization of deferred loan fees (26) (48)
Fair market value of ESOP shares
committed for release and charged to
employee compensation 123 38
Amortization of unearned compensation - MRDP 173 139
(Gains) losses on real estate owned 2 4
(Increase) decrease in:
Loans held for sale 223 514
Accrued interest receivable 28 38
Other assets 88 (99)
Increase (decrease) in:
Income taxes currently payable (13) (219)
Other liabilities 133 (607)
--------- ---------
Net cash provided by operating activities 1,793 871
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in:
Total loans (1,436) 4,173
Real estate owned
Proceeds from maturity of:
Investment and mortgage-backed securities 243 (2,704)
Investment securities 3,980 (4,543)
Real estate owned (269) (494)
Acquisition of:
Federal Home Loan Bank stock 200 354
Premises and equipment (367) (63)
--------- ---------
Net cash provided by (used in) investing activities 2,351 (3,277)
--------- ---------
</TABLE>
See accompanying selected notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands)
Six months ended
June 30,
---------------------------
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (10,596) (1,081)
Cash dividends paid (950) (378)
Proceeds from (reduction in) FHLB advances 16,924 (75)
Acquisition of treasury stock, net (38) (339)
--------- ---------
Net cash provided by (used in) financing activities 5,340 (1,873)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,484 (4,279)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 6,420 13,188
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 15,904 $ 8,909
========= =========
SUPPLEMENTAL INFORMATION FOR CASH FLOW:
Noncash transactions:
Increase (decrease) in net unrealized loss on securities
available for sale $ 7 $ (69)
Loans foreclosed and transferred to real estate own $ 606 $ 659
Cash paid during the period for:
Interest $ 3,928 $ 3,558
Income taxes $ 350 $ 456
</TABLE>
See accompanying selected notes to consolidated financial statements.
5
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- ---------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated interim financial statements as of June 30, 1999 and for the
quarter and six months then ended include the accounts of the Registrant, First
Southern Bancshares, Inc. (the "Bancshares"), and its wholly-owned subsidiary,
First Southern Bank (the "Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation. Bancshares and the Bank are
collectively referred to herein as the "Company".
The June 30, 1998 and 1999 interim financial statements included in this report
have been prepared by the Company without audit. In the opinion of management,
all adjustments (consisting only of normal recurring entries) necessary for a
fair presentation are reflected in the June 30, 1998 and 1999 interim financial
statements. The results of operations for the quarter and six months ended June
30, 1999 are not necessarily indicative of the operating results for the full
year. The December 31, 1998 Consolidated Statement of Financial Condition
presented with the interim financial statements is derived from the Consolidated
Statement of Financial Condition filed as part of the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1998. Such Consolidated
Statement of Financial condition included therein was audited and received an
unqualified opinion.
NOTE 2 - EARNINGS PER SHARE
Basic and diluted earnings per share are computed based upon the weighted
average common shares outstanding during the period. A reconciliation of the
weighted average of common shares outstanding used in the earnings per share
computation to total shares outstanding follows:
<TABLE>
<CAPTION>
Six months ended June 30
1998 1999
---- ----
<S> <C> <C>
Common shares outstanding 2,076,969 2,076,969
Treasury shares (189,740) (426,308)
Unreleased ESOP shares (22,278) (16,026)
Options - uncontingent 9,185 5,853
---------- ----------
Basic EPS 1,874,136 1,640,488
Options - contingent 20,547 8,033
Unreleased ESOP shares 22,278 16,026
========== ==========
Diluted EPS 1,916,961 1,664,547
========== ==========
</TABLE>
NOTE 3 - SUBSEQUENT EVENT
On July 8, 1999, the Company's Board of Directors declared a cash dividend of
$.125 per share, payable July 29, 1999 to stockholders of record as of July 19,
1999.
NOTE 4 - COMMITMENTS
At June 30, 1999, the Company had $1.5 million of outstanding net loan
commitments, $13.3 million of unused portions on lines of credit, and $36,000 of
outstanding letters of credit.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Southern Bancshares, Inc. ("Bancshares") is primarily engaged in the
business of directing and planning the activities of its wholly-owned
subsidiary, First Southern Bank (the "Bank"). Bancshares' primary assets are
comprised of its investment in the Bank and a note receivable from the Bank's
Employee Stock Ownership Plan ("ESOP"). Bancshares and the Bank are
collectively referred to herein as the "Company".
The consolidated operating results of the Company include those of the Bank and
Bancshares. All significant intercompany transactions and balances have been
eliminated in consolidation. The operating results of the Company depend
primarily on net interest income, which is the difference between interest
income on interest-earning assets, primarily loans and investment securities,
and interest expense on interest-bearing liabilities, primarily deposits and
advances from Federal Home Loan Bank ("FHLB") and other financial institutions.
Net earnings are also effected by non-interest income and non-interest expenses,
such as compensation and benefits, building and occupancy expense, and
provisions for federal and state taxes.
The discussion and analysis included herein covers those material changes in
financial condition, liquidity and capital resources that have occurred since
December 31, 1998, as well as certain material changes in results of operations
during the quarter and six months ended June 30, 1998 and 1999.
Forward-looking Statements Safe-harbor Statement
This report may contain forward-looking statements that are subject to numerous
assumptions, risks and uncertainties. Statements pertaining to future periods
are subject to uncertainty because of the possibility of changes in underlying
factors and assumptions. Actual results could differ materially from those
contained in or implied by such forward-looking statements for a variety of
factors including: sharp and rapid changes in interest rates; significant
changes in the economic scenario from the current anticipated scenario which
could materially change anticipated credit quality trends and the ability to
generate loans; significant delay in or inability to execute strategic
initiatives designed to grow revenues and/or control expenses; and significant
changes in accounting, tax or regulatory practices or requirements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
The Company's primary lending area is currently experiencing a lack of growth
and increased competition among the banks. Due to the lack of economic growth,
many competitor banks have offered low rates to the Company's loan customers
that the Company was unwilling to match due to the low interest yield commitment
over the long term. The same hold true for deposits as competitor banks are
offering aggressive rates that are higher than the interest cost to the Company
of borrowing from the FHLB. Therefore, management has decided to retain loans
or originate and retain new loans that have a satisfactory long term yield, and
to offer competitive rates for deposits while maintaining an acceptable interest
spread. As a result, average interest bearing assets have decreased from $174.3
million at June 30, 1998 to $165.7 million at June 30, 1999. Average interest
bearing liabilities have decreased from $163.7 million at June 30, 1998 to
$152.5 million at June 30, 1999. The interest spread between the average yield
on the average interest bearing assets and the average cost on average interest
bearing liabilities has remained constant at 3.75% in the first six months of
1998 and 1999.
Cash and cash equivalents
As disclosed in the Company's "Consolidated Statements of Cash Flows," net cash
provided by operating activities decreased from $1,793,000 in the first six
months of 1998 to $871,000 in the first six months of 1999 due to the decrease
in net income and other liabilities in 1999. Cash from investing activities
decreased from a cash source of $2.4 million in the first six months of 1998 to
a use of cash of $3.3 million in the first six months of 1999, as a result of an
increase of $7.2 million in investments and mortgage backed securities in 1999
partially funded through the decrease in loans of $4.5 million in 1999. Cash
provided from financing activities decreased from a source of $5.3 million in
the first six months 1998 to a use of $1.9 million in the first six months of
1999. The primary use in the first six months of 1999 was the decrease in
deposits of $1.1 million.
7
<PAGE>
Investments and mortgage-backed securities
The Company increased its investments in investment securities and mortgage-
backed securities during the first six months of 1999. Investment securities
available for sale increased from $2.0 million at December 31, 1998 to $6.5
million at June 30, 1999. The additional investments securities were in
corporate and U.S. Government obligations and were funded from loan payoffs.
The corporate investments are fixed rate guaranteed or senior notes with a S&P A
rating. The average balance for investment securities for the six months ended
June 30, 1999 was $2.9 million as compared to $5.7 million for the comparable
period in 1998 and the average yield was 6.83% in 1999 as compared to 5.73% in
1998.
Mortgage-backed securities increased from $945,000 at December 31, 1998 to $3.6
million at June 30, 1999. The additional investments were in GNMA
participations and were funded from loan payoffs. The average balance for
investment securities for the six months ended June 30, 1999 and 1998 was $1.3
million and the average yield was 7.37% in 1999 as compared to 8.06% in 1998.
Loans
The principle investing activity of the Company is the origination of
residential mortgage loans, commercial business and real estate loans, multi-
family mortgage loans and consumer loans in its primary lending area of
Lauderdale and Colbert Counties, and surrounding counties located in Northwest
Alabama. During the first six months of 1999 the average balance of loans
declined as a result of the change in management strategy as previously
discussed. The average balance of loans declined $9.1 million from $160.3
million in the first six months of 1998 to $151.2 million in the first six
months of 1999.
The loan portfolio composition is changing as the result of management's
continued efforts to expand and diversify the Company's loan portfolio into
higher yielding commercial mortgage loans, commercial business loans, and
consumer loans. These types of loans are inherently riskier than residential
mortgage loans. A comparison of the Bank's loan portfolio analysis at December
31, 1998 and June 30, 1999 follows:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
---------------------- ----------------------
Amount Percent Amount Percent
---------- ---------- -------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $ 69,524 47.6% $ 63,676 42.9%
Commercial 35,566 23.2 34,664 23.4
-------- ----- -------- -----
Total mortgage loans 105,090 68.6 98,340 66.3
Commercial business loans 29,010 18.9 30,469 20.6
Consumer loans 21,766 14.2 22,143 14.9
-------- ----- -------- -----
Total loans 155,866 101.7 150,952 101.8
Less:
Undisbursed loans 1,103 0.7 1,352 0.9
Unamortized loan fees 69 0.1 61 0.1
Allowance for possible losses 1,441 0.9 1,268 0.8
-------- ----- -------- -----
Net loans receivable $153,253 100.0% $148,271 100.0%
======== ===== ======== =====
</TABLE>
The Company's loan portfolio above continues to reflect the market served by the
Bank's primary lending area. Mortgage loans decreased in volume and percentage
of the portfolio as the Company has not been inclined to invest in low yielding
loans for the long term.
At June 30, 1999, the allowance for loan losses was $1.3 million and represented
0.9% of total net loans and 45.3% of non performing assets. The provision for
loan losses was $343,000 in the first six months of 1999 as compared to $121,000
in the first six months of 1998. The increase in the provision was due to loan
charge-offs of $624,000 incurred in 1999, mostly in impaired loans valued at net
realizable value, and reclassified as real estate owned and other foreclosed
assets. In the opinion
8
<PAGE>
of management at June 30, 1999, the allowance for loan losses was adequate at
that date. There can be no assurance that the Company will not be required to
increase the allowance in the future.
At June 30, 1999, the Company had no significant commitments to originate fixed-
rate loans. At June 30, 1999, the Company had commitments to originate variable
rate loans, including unused commercial business lines of credit, and standby
letters of credit as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Commitments to extend credit $ 1,500
Unused lines of credit $ 13,253
Standby letters of credit $ 36
</TABLE>
Non performing Assets
Non performing assets include loans classified as nonaccrual and repossessed
assets. The Company's policy is to classify loans as nonaccrual and stop
accruing interest when a loan is 90 days delinquent as to principal or interest
unless collection of both is assured by collateral, guarantees or other
security. Non performing assets of $2.8 million as of June 30, 1999, decreased
$1.3 million from $4.1 million at December 31, 1998. Non performing assets at
June 30, 1999, include $1.2 million of real estate owned and other foreclosed
assets, and $1.6 million of loans on nonaccrual or 90 days delinquent. Non
performing loans include $573,000 of commercial business and real estate loans,
$89,000 of consumer loans, and $938,000 of residential mortgages.
Deposits, FHLB advances and other notes payable
Deposit balances decreased $1.1 million from $127.6 million at December 31, 1998
to $126.5 at June 30, 1999. The decrease was primarily in certificates of
deposits. The Company changed its strategy from paying aggressive market
interest rates to retain these certificates of deposits to borrowing from the
FHLB at a lower interest rate compared to the market rate for the certificates
of deposits. As a result of this strategy, interest paid on deposits decreased
18.9% or $620,000 from $3.3 million in the first six months of 1998 to $2.7
million in the first six months of 1999, and the interest rate paid on the
average balance of deposits decreased from 4.76% in the first six months of 1998
to 4.39% in the first six months of 1999. The decrease in interest paid on
deposits in the first six months of 1999 was partially offset by the increase in
interest paid on FHLB advances of $138,000 from $744,000 in the first six months
of 1998 to $882,000 in the first six months of 1999; however the effective rate
paid on the average outstanding balance of FHLB advances decreased from 5.75% in
the first six months of 1998 to 5.62% in the first six months of 1999.
At June 30, 1999, savings certificates amounted to $85.3 million, or 67.4%, of
the Company's total deposits, including $65.7 million that were scheduled to
mature by June 30, 2000. Management of the Company believes it has adequate
resources to fund all loan commitments with savings deposits and FHLB of Atlanta
advances and with proceeds from the sale of mortgage loans, and that it can
adjust the offering rates of savings certificates to retain deposits in changing
interest rate environments.
There were no additional borrowings from the FHLB in the six months ended June
30, 1999. At June 30, 1999, the Company had unused credit availability with
the FHLB of $8.8 million.
Stockholders' equity
At June 30, 1999, and December 31, 1998, aggregate stockholders' equity remained
at $18.0 million. The reduction in stockholders' equity from the payment of
$378,000 in dividends and the acquisition of treasury stock of $339,000, were
offset by net income of $647,000, and $108,000 of other increases in
stockholders' equity (other comprehensive income) related primarily to the
unearned employee stock benefit compensation plans.
The Company continued with its Stock Repurchase Program which was started in
1995. During the six months of 1999, the Company acquired 26,081 shares at a
cost of $350,000 or at an average price per share of $13.45. The current
program will continue until August 1999, at which time the Company will decide
whether to terminate or continue the program.
9
<PAGE>
The Bank is required to maintain specific amounts of capital pursuant to FDIC
requirements and the Company is required to maintain specific amounts of capital
pursuant to the regulations of the Federal Reserve Board. As summarized below,
Bancshares and the Bank are in compliance with all such requirements at June 30,
1999:
<TABLE>
<CAPTION>
Percentage of
adjusted total
Amount assets
(Dollars in thousands)
<S> <C> <C>
First Southern Bancshares, Inc:
Primary capital ratios:
GAAP capital $ 18,046
Adjustments:
Mortgage servicing rights (7)
Net unrealized loss on securities available for sale 58
--------
Tier 1 capital 18,097 10.16%
Minimum Tier 1 (leverage) requirement 7,123 4.00%
-------- --------
Excess $ 10,974 6.16%
======== ========
Risk-based capital ratios:
Core (Tier 1) Capital 18,097 13.00%
Minimum core capital 5,570 4.00%
-------- --------
Excess $ 12,527 9.00%
======== ========
Risk-based capital $ 19,365 13.91%
Minimum risk-based capital requirement 11,139 8.00%
-------- --------
Excess $ 8,226 5.91%
======== ========
</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
(Dollars in thousands)
<S> <C> <C>
First Southern Bank:
Total capital (to risk-weighted assets) $ 18,445 13.26%
To be well capitalized under the FDICIA
prompt corrective action provisions 13,911 10.00%
-------- --------
Excess $ 4,534 3.26%
======== ========
Tier 1 capital (to risk-weighted assets) $ 17,177 12.35%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,347 6.00%
-------- --------
Excess $ 8,830 6.35%
======== ========
Tier 1 capital (to average assets) $ 17,177 9.65%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,897 5.00%
-------- --------
Excess $ 8,280 4.65%
======== ========
</TABLE>
10
<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 June 30, 1999, the Bank's qualifying reserves of $1.8 million
significantly exceeded the required reserve of $310,000.
Additionally, Bancshares requires cash for various operating needs including
dividends to shareholders and the general corporate expenses. The primary
source of liquidity for the parent holding company is dividends from the Bank.
At June 30, 1999, the Bank could have paid additional dividends for Bancshares
of $4.5 million while continuing to meet the capital requirements for "well-
capitalized" banks. Bancshares does not anticipate any liquidity requirements
in the near future that it will not be able to meet.
Year 2000
The Company and Bank are subject to risks associated with the "Year 2000"
software problem, a term that refers to uncertainties about the ability of
various software systems to interpret dates correctly after the beginning of the
Year 2000. Many existing computer programs (information technology "IT systems")
and embedded technology such as microcontrollers ("non-IT systems") use only two
digits to identify a year in the data field. These programs were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, computer and/or equipment applications could fail or create
erroneous results in the year 2000.
Thomas N. Ward, Executive Vice President and Chief Operating Officer, is the
chairman of the Company's Year 2000 task force. This task force has adopted a
plan to address the Year 2000 problem and periodically reports to the Company's
audit committee on its progress. The plan is comprised of the following phases:
1. Awareness - (i) address the Year 2000 problem and gain executive level
support and sponsorship, (ii) establish Year 2000 task force and develop an
overall strategy, and (iii) ensure that everyone in the organization is fully
aware of the issue.
STATUS: This phase has been completed by the task force;
however, the awareness activity is ongoing to keep employees updated, and
especially as it relates to informing customers of the Company's Year 2000
preparedness.
2. Assessment - (i) identify core business areas and processes, inventory and
analyze systems supporting the core business areas, and prioritize their
conversion or replacement, (ii) develop contingency plans to handle data
exchange issues, lack of data, and bad data, and (iii) identify and secure the
necessary resources.
STATUS: This phase was completed as of December 31, 1998. The Company does not
estimate that the costs associated with the Year 2000 Issue will materially
impact future operating results. Such costs will be recognized as incurred.
The expense to modify and test its computer programs and systems are estimated
to be $50,000 through 1999.
3. Renovation - (i) Convert, replace, or eliminate selected platforms,
applications, databases, and utilities, and (ii) modify interfaces.
STATUS: This phase was completed as of December 31, 1998.
4. Validation - (i) Test, verify converted or replaced platforms,
applications, databases, and utilities, (ii) test the performance,
functionality, and integration of converted or replaced platforms,
applications, databases, utilities, and interfaces in an operational
environment.
STATUS: This is an ongoing phase and is being conducted as revised or new
computerized IT systems or equipment non-
11
<PAGE>
IT systems are evaluated by the task force. A validation test of the manual
contingency plan for tellers and accounting personnel was performed on June
29, 1999, with satisfactory results.
12
<PAGE>
5. Implementation - (i) Implement converted or replaced platforms,
applications, databases, utilities, and interfaces, and (ii) implement data
exchange contingency plans, if necessary.
STATUS: This phase is scheduled to occur throughout 1999 and includes disaster
recovery and contingency plans if failure occurs in the year 2000.
Implementation of revised or new computerized IT systems or equipment non-IT
systems is ongoing after the related validation phase is completed. The
Company's contingency plan includes the use of alternative vendors, another
bank's system or manual entry until an acceptable alternative is established.
Although the Company is addressing the Year 2000 problem, the process of
evaluating potential effects of Year 2000 issues on customers of the Bank is in
its early stages, and it is therefore impossible to quantify the potential
adverse effects of incompatible IT and non-IT systems on loan customers. This
evaluation process is ongoing and is expected to be completed by the fourth
quarter of 1999, and includes customer awareness brochures for all customers,
and verification of compliance with commercial business customers with loan
balances over $250,000. The failure to prepare adequately for Year 2000
compatibility could have a significant adverse effect on such customer's
operations and profitability, in turn inhibiting its ability to repay loans in
accordance with their terms. Until sufficient information is accumulated from
customers of the banks to enable the Company to assess the degree to which
customers' operations are susceptible to potential problems, the Company will be
unable to quantify the potential losses from loans to commercial customers.
COMPARISON OF OPERATING RESULTS FOR THE
THREE MONTHS ENDED JUNE 30, 1998 AND 1999
General
Consolidated net income for the quarter ended June 30, 1999, decreased to
$323,000 from $443,000 in the comparable quarter in 1998. Basic earnings per
share for the second quarter of 1999 was $0.20 as compared to $0.24 for the
comparable period in 1998, and diluted earnings per share for the second quarter
of 1999 was $0.20 as compared to $0.24 for the comparable period in 1998.
Net Interest Income
The second quarter net interest income after provision for loan losses was $1.6
million, or 12.9% less than the $1.8 million reported for the comparable period
in 1998, as a result of the decrease in loans and increase in the provision for
loan losses.
Interest Income
Interest income for the second quarter of 1999 was $3.5 million compared with
$3.8 million for the second quarter of 1998, representing a decrease of $355,000
or 9.3%. The decrease was primarily attributable to a decrease of $7.6 million,
or 4.4% in average interest earning assets in the second quarter of 1999 to
$165.4 million over those in the second quarter of 1998 of $173.0 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 8.84%
for the second quarter of 1998 to 8.38% for 1999, as a result of lower market
interest rates. The yield on the average balance of loans decreased from 9.03%
in the second quarter of 1998 to 8.64% in the second quarter of 1999. The
annual yield is expected to continue to decrease in 1999 as the effect of such
rate decreases impacts commercial loans related to the prime interest rate and
adjustable mortgages.
Interest on loans receivable decreased $384,000 to $3.2 million during the
second quarter of 1999 as compared to $3.6 million in the second quarter of
1998. The decrease was primarily attributable to a decrease in average net
loans of $10.5 million in the second quarter of 1999 ($150.0 million) from the
comparable period in 1998 ($160.5 million). Additionally, the average yield on
total loans decreased as previously mentioned.
Interest on mortgage-related securities increased by $8,000 from $25,000 during
the second quarter of 1998 to $33,000 during in 1999 as a result of the average
balance of mortgage-related securities increasing by $562,000 during the second
quarter of 1999 ($1.8 million) as compared to the second quarter of 1998 ($1.3
million). The average yields from such securities decreased from 8.01% in the
second quarter of 1998 to 7.11% in the second quarter of 1999 as a result of
lower yielding mortgage-related securities in the portfolio.
13
<PAGE>
Income from the investment securities portfolio decreased by $14,000 from
$73,000 during the second quarter of 1998 to $59,000 in the second quarter of
1999 as the result of the average balance of investment securities decreasing by
$1.3 million during the second quarter of 1999 ($3.7 million) as compared to
the second quarter of 1998 ($5.0 million). The effect of this decrease in the
average balance was partially offset by an increase in the average yield on
investment securities from 5.80% in the second quarter of 1998 to 6.39% in the
second quarter of 1999 as a result of the changes in the investment securities
portfolio.
Other interest income is comprised of earnings on the overnight account and time
deposits at the FHLB of Atlanta, FHLB stock dividends, and earnings on money
market funds. The $35,000 increase in other interest income in 1999 to $136,000
when compared to the second quarter of 1998 other interest income of $101,000 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 $4.8
million in the second quarter of 1998 to $8.3 million in the second quarter of
1999. FHLB dividends were $27,000 during the second quarter of 1998 as compared
to $31,000 in the second quarter of 1999 due to increase in average FHLB stock
from $1.5 million at June 30, 1998 to $1.6 million at June 30, 1999.
Interest Expense
Interest expense the second quarter of 1999 was $1.8 million compared with $2.0
million the second quarter of 1998, representing a decrease of $211,000 or
10.7%.
Interest on deposits the second quarter of 1999 was $1.3 million compared with
$1.6 million the second quarter of 1998, representing a decrease of $248,000 or
15.9%. The decrease is due to a $12.6 million decrease in average deposits in
the second quarter of 1999 ($121.1 million) as compared to the second quarter of
1998 ($133.7 million). The second quarter of 1999 average interest cost
decreased to 4.35% as compared to 4.68% in the second quarter of 1998 as lower
interest rates were offered on certificates of deposits due primarily to the
Company changing its strategy from paying aggressive market rates to retain
certificates of deposits to borrowing from the FHLB at a lower interest rate
compared to the market rate for the certificates of deposits.
Other interest expense primarily relates to FHLB of Atlanta borrowings and
increased by $37,000 to $443,000 in the second quarter of 1999 when compared to
the second quarter of 1998 total of $406,000 due to an increase in average
borrowings of $2.9 million during the second quarter of 1999 ($31.3 million)
from the second quarter of 1998 average levels of $28.3 million. The increase
caused by the higher average balance was partially offset by decreased interest
costs on borrowed funds from 5.73% in the second quarter of 1998 to 5.65% in the
second quarter of 1999 as a consequence of the adjustable rate nature of the
majority of the FHLB of Atlanta borrowings and lower market interest rates.
Provision for Loan Losses.
The provision for loan losses is the cost of providing an allowance for
anticipated future losses on loans. The amount depends upon many factors
including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of loan portfolio quality, the
value of collateral and general economic factors. The loan portfolio is
changing as of the result of management's continued effort to expand and
diversify into commercial mortgage loans, commercial business loans, and
consumer loans. These types of loans are inherently riskier than residential
mortgage loans.
The economic outlook for the Bank's primary lending area is guardedly optimistic
as the local economy is assisted by the improvement in the overall economy.
However, there is very little growth in the Bank's primary lending area and
there is aggressive competition for existing loan and deposit customers. A
slowdown in the economy could further impact asset growth and have a negative
impact on real estate lending as well as the level of net charge-offs and
delinquencies. Since such a slowdown in the economy could have an adverse
effect on property values and for commercial development projects, cause an
increase in vacancy rates, the possibilities exist for write-downs, charge-offs
and transfer of currently performing loans to a nonaccrual status in the real
estate and commercial loan categories.
Loan reviews procedures, including such techniques as loan grading and
monitoring of financial information, are utilized by the Company in order to
identify early potential problem loans in order for management to take steps to
lessen any potential losses. Reports are prepared and used in conjunction with
identification and monitoring of such loans on a monthly basis. Management's
involvement continues throughout the process and includes participation in the
work-out process and recovery
14
<PAGE>
activity. These procedures are monitored by the loan and audit committees whose
work is supplemented periodically by regulatory agencies. A determination of a
potential loss will result in a charge to the provision for loan losses, thereby
increasing the allowance for loan losses. Management monitors the entire loan
portfolio in an attempt to identify problem loans so that risks in the portfolio
can be timely identified and an appropriate allowance or charge-off recognized.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may effect the borrower's ability to repay
the estimated value of any underlying collateral, and current economic
conditions.
For the second quarter of 1999, the provision for loan losses was $148,000 as
compared to $61,000 in the second quarter of 1998. These provisions were made
based on management's analysis of the various factors that effect the loan
portfolio and management's desire to maintain the allowance at a level
considered adequate to provide for losses. The increase in the provision was
due to loan charge offs of $377,000 incurred in 1999. The increase in the level
of net charge-off in 1999 was related primarily to loans foreclosed and loans
identified as unrecoverable. Management recorded charge-offs of $150,000 for
such loans in the second quarter of 1999, to reflect management's estimate of
the fair value of the underlying collateral. No additional allowances had been
specified at June 30, 1999, for the impaired loans.
When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
non performing and past due loans, historical loan loss experience, the existing
risk of individual loans, concentrations of loans to specific borrowers or
industries and existing and prospective economic conditions. The allowance for
loan losses at December 31, 1998, of $1.4 million and June 30, 1999, of $1.3
million was 0.9% of net loans.
Non-interest Income.
Non interest income for the second quarter decreased from $253,000 in 1998 to
$216,000 in 1999 due to decreases in gains on loans sold and closing fees on
residential mortgages.
Non-interest Expense.
The second quarter non interest expenses for 1999 were $1.2 million as compared
to $1.3 million in 1998, primarily due to decreases in employee compensation and
benefits related to termination of the Company's defined benefit retirement
plan.
Income Taxes
Income taxes decreased by $73,000 in 1999, as a result of the decrease in income
before income taxes. Income tax expense in the second quarter of 1999 and 1998
was $207,000 and $280,000, respectively, or approximately 40.0% of income before
income taxes representing expected federal and state tax rates.
COMPARISON OF OPERATING RESULTS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
General
Consolidated net income for the six months ended June 30, 1999, decreased 24% to
$647,000 from $849,000 for the comparable six months in 1998. Basic earnings
per share for the six months ended June 30, 1999, was $0.39 as compared to $0.45
for the comparable period in 1998, and diluted earnings per share for the six
months ended June 30, 1999 was $0.39 as compared to $0.44 for the comparable
period in 1998.
Net Interest Income
15
<PAGE>
For the six months ended June 30, 1999, net interest income after provision for
loan losses was $3,031,000, or 12.4% less than the $3,462,000 reported for the
comparable period in 1998, as a result of the decrease in loans and increase in
the provision for loan losses.
Interest Income
Interest income for the six months ended June 30, 1999 was $6.9 million compared
with $7.6 million for the six months ended June 30, 1998, representing a
decrease of $691,000 or 9.1%. The decrease was primarily attributable to a
decrease of $8.6 million, or 4.9% in average interest earning assets in the six
months ended June 30, 1999 to $165.7 million over those in the six months ended
June 30, 1998 of $174.3 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 8.72% for the six months ended June 30,
1998 to 8.34% for 1999, as a result of lower market interest rates. The yield
on the average balance of loans decreased from 8.94% in the six months ended
June 30, 1998 to 8.57% in the six months ended June 30, 1999. The annual yield
is expected to continue to decrease in 1999 as the effect of such rate decreases
impacts commercial loans related to the prime interest rate and adjustable
mortgages.
Interest on loans receivable decreased $682,000 to $6.5 million during the six
months ended June 30, 1999 as compared to $7.2 million in the six months ended
June 30, 1998. The decrease was primarily attributable to a decrease in average
net loans of $9.2 million in the six months ended June 30, 1999 ($151.2 million)
from the comparable period in 1998 ($160.4 million). Additionally, the average
yield on total loans decreased as previously mentioned.
Interest on mortgage-related securities decreased by $4,000 from $53,000 during
the six months ended June 30, 1998 to $49,000 during in 1999 as a result of the
average yields from such securities decreasing from 8.06% in the six months
ended June 30, 1998 to 7.37% in the six months ended June 30, 1999 as a result
of lower yielding mortgage-related securities in the portfolio.
Income from the investment securities portfolio decreased by $67,000 from
$164,000 during the six months ended June 30, 1998 to $67,000 in the six months
ended June 30, 1999 as the result of the average balance of investment
securities decreasing by $2.9 million during the six months ended June 30, 1999
($2.8 million) as compared to the six months ended June 30, 1998 ($5.7 million).
The effect of this decrease in the average balance was partially offset by an
increase in the average yield on investment securities from 5.73% in the six
months ended June 30, 1998 to 6.83% in the six months ended June 30, 1999 as a
result of the changes in the investment securities portfolio.
Other interest income is comprised of earnings on the overnight account and time
deposits at the FHLB of Atlanta, FHLB stock dividends, and earnings on money
market funds. The $62,000 increase in other interest income in 1999 to $284,000
when compared to the six months ended June 30, 1998 other interest income of
$222,000 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 $5.4 million in the six months ended June 30, 1998 to $8.6 million
in the six months ended June 30, 1999. FHLB dividends were $54,000 during the
six months ended June 30, 1998 as compared to $66,000 in the six months ended
June 30, 1999 due to increase in average FHLB stock from $1.5 million at June
30, 1998 to $1.8 million at June 30, 1999.
Interest Expense
Interest expense in the six months ended June 30, 1999 was $3.5 million compared
with $4.0 million in the six months ended June 30, 1998, representing a decrease
of $482,000 or 12.0%.
Interest on deposits in the six months ended June 30, 1999 was $2.7 million
compared with $3.3 million in the six months ended June 30, 1998, representing a
decrease of $620,000 or 18.9%. The decrease is due to a $16.5 million decrease
in average deposits in the six months ended June 30, 1999 ($121.1 million) as
compared to the six months ended June 30, 1998 ($133.7 million). The six months
ended June 30, 1999 average interest cost decreased to 4.39% as compared to
4.76% in the six months ended June 30, 1998 as lower interest rates were offered
on certificates of deposits due primarily to the Company changing its strategy
from paying aggressive market rates to retain certificates of deposits to
borrowing from the FHLB at a lower interest rate than the market rate for the
certificates of deposits.
16
<PAGE>
Other interest expense primarily relates to FHLB of Atlanta borrowings and
increased by $138,000 to $882,000 in the six months ended June 30, 1999 when
compared to the six months ended June 30, 1998 total of $744,000 due to an
increase in average borrowings of $5.4 million during the six months ended June
30, 1999 ($31.3 million) from the six months ended June 30, 1998 average levels
of $25.9 million. The increase caused by the higher average balance was
partially offset by decreased interest costs on borrowed funds from 5.75% in the
six months ended June 30, 1998 to 5.62% in the six months ended June 30, 1999 as
a consequence of the adjustable rate nature of the majority of the FHLB of
Atlanta borrowings and lower market interest rates.
Provision for Loan Losses.
The provision for loan losses is the cost of providing an allowance for
anticipated future losses on loans. The amount depends upon many factors
including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of loan portfolio quality, the
value of collateral and general economic factors. The loan portfolio is
changing as of the result of management's continued effort to expand and
diversify into commercial mortgage loans, commercial business loans, and
consumer loans. These types of loans are inherently riskier than residential
mortgage loans.
The economic outlook for the Bank's primary lending area is guardedly optimistic
as the local economy is assisted by the improvement in the overall economy.
However, there is very little growth in the Bank's primary lending area and
there is aggressive competition for existing loan and deposit customers. A
slowdown in the economy could further impact asset growth and have a negative
impact on real estate lending as well as the level of net charge-offs and
delinquencies. Since such a slowdown in the economy could have an adverse
effect on property values and for commercial development projects, cause an
increase in vacancy rates, the possibilities exist for write-downs, charge-offs
and transfer of currently performing loans to a nonaccrual status in the real
estate and commercial loan categories.
Loan reviews procedures, including such techniques as loan grading and
monitoring of financial information, are utilized by the Company in order to
identify early potential problem loans in order for management to take steps to
lessen any potential losses. Reports are prepared and used in conjunction with
identification and monitoring of such loans on a monthly basis. Management's
involvement continues throughout the process and includes participation in the
work-out process and recovery activity. These procedures are monitored by the
loan and audit committees whose work is supplemented periodically by regulatory
agencies. A determination of a potential loss will result in a charge to the
provision for loan losses, thereby increasing the allowance for loan losses.
Management monitors the entire loan portfolio in an attempt to identify problem
loans so that risks in the portfolio can be timely identified and an appropriate
allowance or charge-off recognized. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may effect
the borrower's ability to repay the estimated value of any underlying
collateral, and current economic conditions.
For the six months ended June 30, 1999, the provision for loan losses was
$343,000 as compared to $121,000 in the six months ended June 30, 1998. These
provisions were made based on management's analysis of the various factors that
effect the loan portfolio and management's desire to maintain the allowance at a
level considered adequate to provide for losses. The increase in the provision
was due to loan charge offs of $624,000 incurred in 1999. The increase in the
level of net charge-off in 1999 was related primarily to loans to impaired loans
written down to fair value and transferred to foreclosed real estate and other
assets. Management recorded charge-offs of $360,000 for such loans in the six
months ended June 30, 1999, to reflect management's estimate of the fair value
of the underlying collateral. No additional allowances had been specified at
June 30, 1999, for the impaired loans.
When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
non performing and past due loans, historical loan loss experience, the existing
risk of individual loans, concentrations of loans to specific borrowers or
industries and existing and prospective economic conditions. The allowance for
loan losses at December 31, 1998, of $1.4 million and June 30, 1999, of $1.3
million was 0.9% of net loans.
Non-interest Income.
Non interest income for the six months ended June 30, 1999 of $465,000 remained
constant with the comparable period of 1998 of $463,000.
17
<PAGE>
Non-interest Expense.
For the six months ended June 30, 1999, non interest expenses for 1999 were $2.4
million as compared to $2.6 million in 1998, primarily due to decreases in
employee compensation and benefits related to termination of the Company's
defined benefit retirement plan.
Income Taxes
Income taxes decreased by $106,000 in 1999, as a result of the decrease in
income before income taxes. Income tax expense in the six months ended June 30,
1999 and 1998 was $420,000 and $526,000, respectively, or approximately 40.0% of
income before income taxes representing expected federal and state tax rates.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Neither Bancshares nor the Bank is a party to any material legal proceedings at
this time. From time to time, the Bank is involved in various claims and legal
actions arising in the ordinary course of business.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
(3a) Certificate of Incorporation of the Company*
(3a)(i) Certificate of Amendment of Certificate of Incorporation****
(3b) Bylaws of the Company*
(3b)(i) Amendment to Bylaws dated September 10, 1998*****
(10a) 1996 Stock Option Plan of the Company**
(10b) 1996 Management Recognition and Development Plan of the Company**
(10c) Employment Agreement with Charles L. Frederick, Jr.***
(10d) Employment Agreement with Thomas N. Ward***
(27) Financial Data Schedule
_____________________
* Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended.
** Incorporated by reference to the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders.
*** Incorporated by reference to the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1995.
**** Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1997.
***** Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the period ended September 30, 1998.
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended June 30, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SOUTHERN BANCSHARES, INC.
Date August 16, 1999 /s/ Charles L. Frederick, Jr.
--------------- -----------------------------
Mr. Charles L. Frederick, Jr.
President and Chief Executive Officer
Date August 16, 1999 /s/ Ms. Glenda Young
--------------- --------------------
Ms. Glenda Young
Senior Vice President and Chief
Accounting Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of First Southern Bancshares, Inc. and subsidiary for the
six months ended June 30, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,457
<INT-BEARING-DEPOSITS> 1,452
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,490
<INVESTMENTS-CARRYING> 3,643
<INVESTMENTS-MARKET> 3,552
<LOANS> 148,271
<ALLOWANCE> 1,268
<TOTAL-ASSETS> 176,431
<DEPOSITS> 126,469
<SHORT-TERM> 0
<LIABILITIES-OTHER> 675
<LONG-TERM> 31,241
0
0
<COMMON> 21
<OTHER-SE> 18,025
<TOTAL-LIABILITIES-AND-EQUITY> 176,431
<INTEREST-LOAN> 6,790
<INTEREST-INVEST> 146
<INTEREST-OTHER> 284
<INTEREST-TOTAL> 6,912
<INTEREST-DEPOSIT> 2,656
<INTEREST-EXPENSE> 3,538
<INTEREST-INCOME-NET> 3,374
<LOAN-LOSSES> 343
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,429
<INCOME-PRETAX> 1,067
<INCOME-PRE-EXTRAORDINARY> 647
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 647
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 4.07
<LOANS-NON> 483
<LOANS-PAST> 1,117
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,441
<CHARGE-OFFS> 624
<RECOVERIES> 108
<ALLOWANCE-CLOSE> 1,268
<ALLOWANCE-DOMESTIC> 1,062
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 206
</TABLE>
