<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, 1999
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.
- -------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 63-1133624
---------- -----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
102 South Court Street, Florence, Alabama 35630
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(Address of principal executive offices (Zip Code)
Issuer's telephone number (256) 764-7131
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under
Section 12(g) of the Exchange Act: Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant'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.
The issuer's revenues for the fiscal year ended December 31, 1999 were
$14,733,000.
The aggregate market value of the outstanding voting stock held by nonaffiliates
of the Registrant, based on the average of the bid and ask prices of the
registrant's Common Stock as quoted on The Nasdaq National Market under the
symbol "FSTH" on March 10, 2000, was $8,623,189 (851,673 shares at $10.125 per
share). It is assumed for purposes of this calculation that the issuer's
executive officers, directors and 5% stockholders are affiliates.
As of March 10, 2000, the issuer has 1,268,626 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1999 ("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, and changes in federal and state legislation and regulation.
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, 1999, the
Company had total assets of $178.8 million, total deposits of $126.9 million and
stockholders' equity of $14.0 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 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 Wise Alloys 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.
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.
1
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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.
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."
2
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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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1997 1998 1999
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
----------- ----------- ----------- ----------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family residential(1). $ 58,339 36.52% $ 53,019 34.60% $ 49,808 31.97%
Multi-family residential........... 11,020 6.90 6,473 4.22 4,132 2.65
Commercial......................... 37,535 23.49 33,516 21.87 29,792 19.12
----------- -------- --------- -------- ---------- -------
Total non-construction
mortgage loans............... 106,894 66.91 93,008 60.69 83,732 53.74
----------- -------- --------- -------- ---------- -------
Construction loans:
One- to four-family residential.... 6,624 4.14 10,032 6.54 9,862 6.33
Multi-family residential........... -- -- -- -- 255 .16
Commercial......................... 1,606 1.01 2,050 1.34 4,467 2.87
----------- -------- --------- -------- ---------- -------
Total construction loans........ 8,230 5.15 12,082 7.88 14,584 9.36
----------- -------- --------- -------- ---------- -------
Total mortgage loans.................. 115,124 72.06 105,090 68.57 98,316 63.10
----------- -------- --------- -------- ---------- -------
Commercial business loans............. 27,792 17.40 29,010 18.93 36,332 23.32
----------- -------- --------- -------- ---------- -------
Consumer loans:
Home equity and second
mortgage loans.................. 9,999 6.26 10,140 6.62 11,757 7.55
Automobile loans................... 3,152 1.97 3,953 2.58 4,019 2.58
Savings loans...................... 739 0.46 886 0.58 1,005 .64
Other.............................. 6,088 3.81 6,787 4.43 6,536 4.19
----------- -------- --------- -------- ---------- -------
Total consumer loans............ 19,978 12.50 21,766 14.21 23,317 14.96
----------- -------- --------- -------- ---------- -------
Total loans........................... 162,894 101.96 155,866 101.71 157,965 101.38
----------- -------- --------- -------- ---------- -------
Less:
Undisbursed loans in process....... 1,404 0.88 1,103 0.72 675 0.43
Unamortized loan origination
fees, net of direct costs....... 148 0.09 69 0.05 72 0.05
Allowance for possible
loan losses..................... 1,584 0.99 1,441 0.94 1,400 0.90
----------- -------- --------- -------- ---------- -------
Net loans receivable............ $159,758 100.00% $153,253 100.00% $155,818 100.00%
=========== ======== ========= ======== ========== =======
</TABLE>
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(1) Includes loans held for sale.
One- to Four-Family Residential Loans. The Bank presently originates
both fixed-rate mortgage loans and adjustable rate mortgage ("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 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.
3
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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, 1999, the initial
interest rate on the Bank's ARM loans was 6.75% per annum. The Bank does not
originate negative amortization loans. The Bank originated $8.2 million of one-
to four-family ARM loans for the year ended December 31, 1999.
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.
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 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.
4
<PAGE>
Multi-Family Loans. 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 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, 1999, 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, 1999, the three largest multi-family loans were $1.4
million loan secured by an apartment building in Muscle Shoals, Alabama, $1.0
million loan secured by an apartment building in Tampa, Florida, and a $420,000
loan secured by an apartment building in Muscle Shoals, Alabama. All three loans
were current at December 31, 1999.
Construction Loans. 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 made with a
six-month term. The Bank's construction loans bear interest rates which adjust
with the U.S. Treasury Index.
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.
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, 1999, 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 $5.2 million loan
commitment secured by land and a shopping center in Killen, Alabama. The Bank's
interest amounts to $1.8 million. At December 31, 1999, there was $5.2 million
outstanding under the commitment, in which the Bank had a 34% interest. The
second is a $1.2 million loan secured by a residential sub-division development
located in Tuscumbia, Alabama, with an outstanding balance of $1.2 million at
December 31, 1999. The third is a $1.1 million loan secured
5
<PAGE>
by a residential sub-division development in Athens, Alabama with an outstanding
balance of $1.1 million at December 31, 1999. This loan was paid in full
February 1, 2000.
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. 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.
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.
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,
1999, $158,000, or .68%, 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 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, 1999, the three largest commercial real estate loans
were a $2.0 million loan secured by country club and golf course located in
Muscle Shoals, Alabama, a $1.3 million loan secured by five furniture stores in
north Alabama, and a $896,000 loan secured by commercial land in Tuscumbia,
Alabama. All three loans were current at December 31, 1999.
6
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At December 31, 1999, 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 $59,000. See " -- Nonperforming Assets and
Delinquencies."
Commercial Business Loans. 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, 1999, the three largest commercial business loans had
outstanding balances of $2.1 million, $1.4 million and $1.1 million and were
collateralized by non-real estate business assets. At December 31, 1999, 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, 1999, nonperforming (i.e. loans accounted for on a
nonaccrual basis and accruing loans contractually past due 90 days or more)
commercial business loans aggregated $1.1 million.
7
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Loan Maturity
The following table sets forth scheduled contractual amortization of
loans and mortgage-backed securities at December 31, 1999 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, 1999
Commercial
Mortgage Consumer Business Total
Loans Loans Loans Loans
---------- ---------- ------------ ----------
(In thousands)
Amounts due:
<S> <C> <C> <C> <C>
Within one year(1)......................... $33,185 $ 8,459 $22,883 $ 64,527
After one year through three years......... 10,742 6,386 8,195 25,323
After three years through five years....... 17,624 7,735 3,376 28,735
After five years........................... 36,765 737 1,878 39,380
------- ------- ------- --------
Total................................... $98,316 $23,317 $36,332 $157,965
======= ======= ======= ========
Interest rate terms on amounts due after one year:
Fixed...................................... $29,188 $14,462 $ 8,428 $52,078
Adjustable................................. 35,943 396 5,021 41,360
</TABLE>
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(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 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.
8
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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, 1999,
the Bank sold $18.6 million of loans, resulting in net gains on sale of
$193,000. The total of loans serviced for others as of December 31, 1999 was
approximately $16.6 million.
During the year ended December 31, 1999, the Bank's total mortgage loan
originations was $60.9 million, of which 38% was subject to periodic interest
rate adjustments and 62% was fixed-rate loans.
The Bank purchases loan participation interests periodically. At
December 31, 1999, the outstanding balance of purchased participation interests
was approximately $3.3 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, 1999, 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,
--------------------------------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Total mortgage loans at beginning of period........................ $118,639 $115,124 $105,090
-------- -------- --------
Loans originated:
Single-family residential....................................... 27,707 38,175 30,575
Multi-family residential and commercial real estate............. 16,171 15,450 13,811
Construction loans.............................................. 8,316 10,837 16,522
-------- -------- --------
Total loans originated....................................... 52,194 64,462 60,908
-------- -------- --------
Loans purchased:
Single-family residential....................................... -- -- --
Other........................................................... -- -- --
-------- -------- --------
Total loans purchased........................................ -- -- --
-------- -------- --------
Total loans originated and purchased...................... 52,194 64,462 60,908
-------- -------- --------
Loans sold:
Total whole loans sold.......................................... 17,327 22,608 14,855
Other........................................................... -- 683 3,727
-------- -------- --------
Total loans sold............................................. 17,327 23,291 18,582
Mortgage loan principal repayments................................. 37,593 49,207 48,407
Other (increase) decrease)......................................... 789 1,998 693
-------- -------- --------
Total net loan decreases........................................ 55,709 74,496 67,682
-------- -------- --------
Net loan activity................................................. (3,515) (10,034) (6,774)
-------- -------- --------
Total gross mortgage loans at end of period........................ $115,124 $105,090 $98,316
======== ======== ==========
</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, 1999, the Bank had
$724,000 of outstanding net loan commitments and $11.5 million of unused
portions on lines of credit, and $10,000 of outstanding letters of credit. See
Note 17 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 $72,000
of net deferred mortgage loan fees at December 31, 1999.
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, 1999, the Bank had
$683,000 of impaired loans within the meaning of SFAS No. 114.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- -----------
(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 -- 135 782 683
Consumer........................................... -- 18 25 -- --
-------- -------- ------- -------- -------
Total........................................ 356 18 561 914 683
-------- -------- ------- -------- -------
Accruing loans which were contractually
past due 90 days or more:
Real estate:
One- to four-family............................. 324 508 216 1,553 952
Commercial...................................... 770 489 -- 243 59
Construction.................................... -- 327 -- 112 --
Commercial business................................ 3 39 148 432 398
Consumer........................................... 33 60 181 105 158
-------- -------- ------- -------- -------
Total........................................ 1,130 1,423 545 2,445 1,567
-------- -------- ------- -------- -------
Total of nonaccrual and 90 days
past due loans............................ 1,486 1,441 1,106 3,359 2,250
Real estate owned..................................... 1,098 198 100 710 918
-------- -------- ------- -------- -------
Total nonperforming assets................... $2,584 $1,639 $1,206 $4,069 $3,168
======== ======== ======= ======== =======
Total loans delinquent 90 days
or more to net loans............................... 0.98% 0.90% 0.69% 2.19% 1.44%
Total loans delinquent 90 days
or more to total assets............................ 0.82% 0.78% 0.60% 1.88% 1.26%
Total nonperforming assets
to total assets.................................... 1.43% 0.89% 0.66% 2.28% 1.77%
</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, 1999, the Bank's real
estate owned consisted of four single-family properties and one commercial
property.
11
<PAGE>
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses, which includes
techniques such as loan grading and monitoring of financial information. 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 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.
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.
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.
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.
12
<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,
-----------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period............ $1,100 $1,509 $1,659 $1,584 $1,441
------ ------ ------ ------ ------
Provision for loan losses................... 565 270 242 605 528
------ ------ ------ ------ ------
Recoveries:
Residential real estate.................. -- 20 9 -- 2
Commercial business...................... -- 70 17 1 114
Consumer and other....................... 41 -- 4 31 19
------ ------ ------ ------ ------
Total recoveries...................... 41 90 30 32 135
------ ------ ------ ------ ------
Chargeoffs:
Residential real estate.................. (4) (13) (52) (36) (56)
Commercial real estate................... -- (25) (185) -- (2)
Commercial business...................... -- (172) (54) (496) (421)
Consumer and other....................... (193) -- (56) (248) (225)
------ ------ ------ ------ ------
Total chargeoffs...................... (197) (210) (347) (780) (704)
------ ------ ------ ------ ------
Net chargeoffs........................ (156) (120) (317) (748) (569)
------ ------ ------ ------ ------
Balance at end of period.................... $1,509 $1,659 $1,584 $1,441 $1,400
====== ====== ====== ====== ======
Ratio of allowance to net loans
outstanding at the end of the period..... 0.99% 1.04% 0.99% 0.94% 0.90%
Ratio of net chargeoffs to average loans
outstanding during the period............ 0.11% 0.08% 0.19% 0.49% 0.38%
</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,
-----------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------- ---------------- ---------------- ---------------- ----------------
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................ $ 331 0.39% $ 261 0.33% $ 234 0.34% $ 217 0.36% $ 270 0.50%
Other...................... 441 1.25 167 0.43 210 0.46 188 0.41 222 0.50
Consumer and commercial busines 729 2.00 580 1.29 614 1.29 651 1.28 298 0.50
Impaired loans................ -- -- -- -- -- -- -- -- 200 29.28
Unallocated................... 8 -- 651 -- 526 -- 385 -- 410 --
------- ------- ------- ------- ------
Total allowance for loan
losses $ 1,509 $ 1,659 $ 1,584 $ 1,441 $1,400
======= ======= ======= ======= ======
</TABLE>
13
<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 Company also invests in
mortgage-backed securities. See Notes 3 and 4 of Notes to Consolidated Financial
Statements.
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, 1999, the Bank's qualifying reserves of $3.2 million exceeded the
required reserve of $292,000. 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.
14
<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,
-----------------------------------------------------------------------------
1997 1998
-------------------------------------- --------------------------------------
Amortized Market Percent of Amortized Market Percent of
Cost(1) Value Portfolio Cost(1) Value Portfolio
----------- ----------- ------------ ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Corporate Bonds......................... $ -- $ -- --% $ -- $ -- --%
U.S. Government and agency
obligations.......................... 7,998 7,993 100.00 1,998 2,016 100.00
------ ------ ------ ------ ------ ------
Total................................ $7,998 $7,993 100.00% $1,998 $2,016 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
At December 31,
------------------------------------
1999
------------------------------------
Amortized Market Percent of
Cost(1) Value Portfolio
--------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Corporate Bonds......................... $3,081 $2,923 67.26%
U.S. Government and agency
obligations.......................... 1,500 1,485 32.74
------ ------ ------
Total................................ $4,581 $4,408 100.00%
====== ====== ======
</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, 1999.
<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........................... $ -- --%
Due after one year through five years............. 1,485 6.14
Corporate Bonds:
Due after one year through five years............ 2,923 6.27
------ ----
$4,408 6.23%
====== ====
</TABLE>
15
<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,
-----------------------------------------------------------------------------------
1997 1998
-------------------------------------- --------------------------------------
Amortized Market Percent of Amortized Market Percent of
Cost Value Portfolio(1) Cost Value Portfolio(1)
----------- ----------- ------------ ------------ ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FNMA certificates(2).................... $ 185 $ 191 12.92% $ 69 $ 78 7.30%
GNMA certificates(2).................... 587 613 40.99 402 426 42.54
FHLMC certificates(2)................... 660 681 46.09 474 490 50.16
----------- ----------- ------------ ------------ ------------ ----------
$1,432 $1,485 100.00% $945 $994 100.00%
=========== =========== ============ ============ ============ ==========
<CAPTION>
At December 31,
--------------------------------------
1999
--------------------------------------
Amortized Market Percent of
Cost Value Portfolio(1)
----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
FNMA certificates(2).................... $ -- $ -- --%
GNMA certificates(2).................... 3,252 3,010 92.20
FHLMC certificates(2)................... 275 280 7.80
----------- ----------- ------------
$3,527 $3,290 100.00%
=========== =========== ============
</TABLE>
- ----------------
(1) Percentage of portfolio value computed based upon amortized cost of
mortgage-backed securities.
(2) Classified as "held to maturity" at December 31, 1997, 1998 and 1999.
The following table sets forth the maturities and weighted average
yields of the mortgage-backed securities portfolio at December 31, 1999.
<TABLE>
<CAPTION>
Weighted
Carrying Average
Value Yield
---------- -------------
(Dollars in Thousands)
<S> <C> <C>
Due in one year or less.............................. $ -- --%
Due after one year through five years................ 41 8.68
Due after five years through ten years............... 320 8.27
Due after ten years.................................. 3,166 6.66
------ ----
$3,527 6.83%
====== ====
</TABLE>
16
<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.
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, 1999. Other deposits with balances of $100,000 or
greater aggregated $4.1 million, and have been shown in the following table as
having maturities of three months or less.
Maturity Period Amount
--------------- ------
(In thousands)
Three months or less $11,607
Three through twelve months 6,060
Over twelve months 8,023
-----
Total $25,690
======
17
<PAGE>
Deposit Flow
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1997 1998
------------------------------------ ------------------------------------
Percent Increase Percent Increase
Amount of Total (Decrease) Amount of Total (Decrease)
------------ ---------- ---------- ------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noncertificate of deposit accounts(1):
Noninterest-bearing...................... $ 4,119 2.87% $ (70) $ 5,939 4.65% $ 1,820
NOW checking............................. 11,015 7.66 271 11,757 9.22 742
Regular savings accounts................. 15,918 11.08 (1,921) 15,415 12.09 (503)
Money market deposit..................... 4,310 3.00 1,402 3,421 2.68 (889)
Statement savings........................ 1,400 0.97 (86) 2,300 1.80 900
Certificates of deposit(2)(3):
Variable rate certificates which mature:
Within one year....................... -- -- (3,693) -- -- --
Within three years.................... -- -- -- -- -- --
Fixed-rate certificates which mature:
Within one year....................... 84,922 59.08 16,418 70,086 54.95 (14,836)
Within three years.................... 20,923 14.56 (2,428) 15,678 12.29 (5,245)
After three years..................... 1,124 0.78 1,038 2,954 2.32 1,830
-------- ------- ------ -------- ------- ---------
Total.............................. $143,731 100.00% $10,931 $127,550 100.00% $(16,181)
======== ======= ======= ======== ======= =========
<CAPTION>
-----------------------------------
1999
-----------------------------------
Percent Increase
Amount of Total (Decrease)
------------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Noncertificate of deposit accounts(1):
Noninterest-bearing...................... $ 5,349 4.22% $ (590)
NOW checking............................. 11,316 8.92 (441)
Regular savings accounts................. 14,218 11.21 (1,197)
Money market deposit..................... 3,824 3.00 403
Statement savings........................ 2,664 2.10 364
Certificates of deposit(2)(3):
Variable rate certificates which mature:
Within one year....................... -- -- --
Within three years.................... -- -- --
Fixed-rate certificates which mature:
Within one year....................... 56,405 44.46 (13,681)
Within three years.................... 31,043 24.47 15,365
After three years..................... 2,051 1.62 (903)
-------- ------- --------
Total.............................. $126,870 100.00% $ (680)
======== ======= =========
</TABLE>
- ----------------------------
(1) Includes accounts with balances of $100,000 and greater of $4.6 million,
$4.4 million and $4.1 million at December 31, 1997, 1998 and 1999,
respectively.
(2) Includes certificates of deposit with balances of $100,000 and greater of
$18.7 million, $16.1 million and $21.6 million at December 31, 1997, 1998
and 1999, respectively.
(3) Includes IRA accounts of $8.0 million at December 31, 1997, $8.5 million at
December 31, 1998, and $8.3 million at December 31, 1999.
18
<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,
---------------------------------------------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
2.01 - 4.00%................... $ 605 $ 200 $ 177
4.01 - 5.00%................... 706 18,160 42,829
5.01 - 6.00%................... 64,433 62,697 32,731
6.01 - 7.00%................... 38,524 6,835 13,249
7.01 or greater................ 2,701 826 513
-------- ------- -------
Total........................ $106,969 $88,718 $89,499
======== ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits at
December 31, 1999.
<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%................. $ 177 $ -- $ -- $ -- $ -- $ 177 0.20%
4.01 - 5.00%................. 37,331 4,279 983 84 152 42,829 47.86
5.01 - 6.00%................. 17,113 13,005 864 1,640 109 32,731 36.57
6.01 - 7.00%................. 1,658 10,997 594 -- -- 13,249 14.80
7.01 - or greater............ 126 -- 321 66 -- 513 0.57
------- ------- ------ ------ ---- ------- ------
Total..................... $56,405 $28,281 $2,762 $1,790 $261 $89,499 100.00%
======= ======= ====== ====== ==== ======= ======
</TABLE>
The following table sets forth the deposit activities of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance............. $132,800 $143,731 $127,550
-------- -------- --------
Net increase (decrease)
before interest credited..... 5,798 (20,910) (5,065)
Interest credited............. 5,133 4,729 4,385
--------- -------- ----------
Net increase (decrease)
in savings deposits.......... 10,931 (16,181) (680)
--------- ---------- ----------
Ending balance................ $143,731 $127,550 $126,870
======== ======== ========
</TABLE>
19
<PAGE>
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. 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 Bank also has two outstanding credit facilities with two separate
third party financial institutions. See Note 10 to Notes to Consolidated
Financial Statements for further information.
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,
-------------------------------------
1997 1998 1999
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average rate paid on:
FHLB advances............................................... 6.00% 5.61% 5.42%
Securities sold under agreements to repurchase.............. -- -- 5.68
Other borrowings(1)......................................... -- -- 8.62
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1998 1999
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding at any month end:
FHLB advances................................................. $36,043 $35,392 $35,697
Securities sold under agreements to repurchase................ -- -- 1,530
Other borrowings(1)........................................... 450 1,600 2,000
Approximate average outstanding:
FHLB advances................................................. $26,221 $30,231 $31,939
Securities sold under agreements to repurchase................ -- -- 225
Other borrowings(1)........................................... 195 297 397
Approximate weighted average rate paid on:
FHLB advances................................................. 5.88% 5.71% 5.65%
Securities sold under agreements to repurchase................ -- -- 5.33
Other borrowings(1)........................................... 8.51 8.42 8.82
</TABLE>
- ------------------------
(1) Credit facilities from third party financial institutions.
20
<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. This matrix results in nine
assessment risk classifications, with rates currently ranging from 0 basis
points for well capitalized, financially sound institutions with only a few
minor weaknesses to 27 basis points 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,
1999, equaled $75,000.
SAIF-insured institutions are also required to add to their
assessments to the FDIC 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 fiscal
1999, the FICO assessment amounted to approximately 6.3 basis points. Effective
January 1, 2000, SAIF members and members of the Bank Insurance Fund will be
assessed at the same rate for FICO payments whereas previously SAIF members were
assessed at a rate five times that of BIF members.
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 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
21
<PAGE>
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, 1999, 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 various matters such as: (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 have 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. 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 servicing
rights and certain other accounting adjustments. All other banks must have a
Tier 1 leverage ratio of at least 4%. 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. Based on the
22
<PAGE>
definitions contained in the FDIC's capital regulations, the Bank had a Tier 1
leverage capital ratio of 8.28% as of December 31, 1999.
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.
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.
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
23
<PAGE>
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, 1999, the Bank's loans-to-one
borrower limit was approximately $2.9 million. At December 31, 1999, the largest
aggregate amount of loans by the Bank to any one borrower was approximately $2.7
million, which was comprised of 4 loans ($606,000 in commercial real estate and
$2.1 million in commercial non-real estate), 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 $44.3 million of transaction
accounts, of which the first $5.0 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, 1999, 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 each affiliate to 10% of the bank's capital and
surplus and limiting all transactions with all affiliates 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 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 two years,
less any required transfers to surplus.
24
<PAGE>
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.
The BHCA 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. The Gramm-Leach-Bliley Act of 1999 authorizes a bank
holding company that meets specified conditions, including being "well
capitalized" and "well managed," to become a "financial holding company" and
thereby engage in a broader array of financial activities than previously
permitted. Such activities can include insurance underwriting and investment
banking. The Gramm-Leach-Bliley Act also authorizes banks to engage, through
"financial" subsidiaries in certain of the activities permitted for financial
holding companies.
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
25
<PAGE>
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 if 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,
1999, the Company met its minimum regulatory capital requirements. See Note 14
to Notes to Consolidated Financial Statements.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a calendar
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.
If 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.
26
<PAGE>
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% 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.
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 Bank's state tax returns have not been audited during the
last five years.
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.
27
<PAGE>
Personnel
As of December 31, 1999, the Bank had 62 full-time and 14 part-time
employees. The employees are not represented by a collective bargaining unit.
The Bank believes its relationship with its employees is good.
Item 2. Description of Property
- --------------------------------
The following table sets forth certain information regarding the Bank's
offices as of December 31, 1999. The net book value of the Bank's investment in
office, properties and equipment totaled $3.7 million at December 31, 1999.
<TABLE>
<CAPTION>
Year Building Land Building
Location County Opened Owned/Leased Owned/Leased Square Footage Deposits
- -------- ------ ------ ------------ ------------ -------------- --------
(In thousands)
Main Office
- -----------
<S> <C> <C> <C> <C> <C> <C>
102 South Court Street Lauderdale 1935 Owned Owned 45,000 $73,496
Florence, Alabama 35630
Branch Offices
- ---------------
U.S. Highway 72 E. Lauderdale 1977 Owned Owned 1,890 10,800
Killen, Alabama 35645
U.S. Highway 72 E. Lauderdale 1977 Owned Owned 1,890 11,825
Rogersville, Alabama 35652
2727 Mall Drive Lauderdale 1979 Owned Owned 1,216 19,892
Florence, Alabama 35630
1027 Avalon Avenue Colbert 1990 Owned Owned 3,500 5,710
Muscle Shoals, Alabama 35661
506 N. Main Street Colbert 1998 Owned Owned 2,500 5,147
Tuscumbia, Alabama 35674
</TABLE>
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, 1999.
28
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained in the section captioned "Common Stock
Information" in the Annual Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan 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, 1998 and
1999*
Consolidated Statements of Income For the Years Ended December
31, 1997, 1998 and 1999*
Consolidated Statements of Changes in Shareholders' Equity For the
Years Ended December 31, 1997, 1998 and 1999*
Consolidated Statements of Cash Flows For the Years Ended December 31,
1997, 1998 and 1999*
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 changes in and disagreements with the Company's independent
accountants on accounting and financial disclosure has occurred during the two
most recent fiscal years.
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 "Section 16(a) Beneficial Ownership Reporting Compliance" 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.
29
<PAGE>
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 "Stock Ownership" of the
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Stock Ownership" 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" and
"Transactions With Management" of the Proxy Statement.
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
(23) Consent of Marmann, McCrary & Associates, P.C.
(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, 1999.
30
<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 27, 2000 By:/s/Charles L. Frederick, Jr.
----------------------------
Charles L. Frederick, Jr.
President, Chief Executive Officer
and Chairman of the Board
(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.
<TABLE>
<CAPTION>
<S> <C>
By:/s/Charles L. Frederick, Jr. March 27, 2000
----------------------------
Charles L. Frederick, Jr.
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer and Principal
Financial Officer)
By:/s/Thomas N. Ward March 27, 2000
----------------------------
Thomas N. Ward
Executive Vice President and Chief Operating Officer
(Principal Accounting Officer)
By:/s/James E. Bishop March 27, 2000
----------------------------
James E. Bishop
Director
By:/s/Milka S. Duke March 27, 2000
----------------------------
Milka S. Duke
Director
By:/s/Gary A. Gamble March 27, 2000
----------------------------
Gary A. Gamble
Director
By:/s/J. Acker Rogers March 27, 2000
----------------------------
J. Acker Rogers
Director
By:/s/Kenneth A. Williams March 27, 2000
----------------------------
Kenneth A. Williams
Director
By:/s/Steve McKinney March 27, 2000
----------------------------
Steve McKinney
Director
By:/s/S. Greg Beadle March 27, 2000
----------------------------
S. Greg Beadle
Director
</TABLE>
31
<PAGE>
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 - 18
Independent auditors' report on consolidated financial statements 19
Consolidated financial statements 20 - 24
Notes to consolidated financial statements 25 - 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>
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, 1999.
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 to total assets as of
December 31, 1999 was 7.8% compared to 10.1% as of December 31, 1998. The
reduced equity is a result of our continuing effort to repurchase outstanding
stock in an effort to enhance shareholder value. Total assets as of December 31,
1999 were $178,798,000, an increase of $423,000 from December 31, 1998.
Consolidated net income for 1999 was $1,246,000.
Many factors contributed to our 1999 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 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Total assets $ 180,855 $ 184,484 $ 183,673 $ 178,375 $ 178,798
Loans receivable, net 152,105 159,718 159,758 153,253 155,818
Cash and cash equivalents 8,971 4,220 6,420 13,188 5,906
Investment securities 8,792 10,948 7,993 2,016 4,408
Mortgage-backed securities 3,135 1,887 1,432 945 3,527
Deposits 131,867 132,800 143,731 127,550 126,870
Advances from Federal Home Loan Bank 16,770 25,619 18,468 31,316 33,665
Other notes payable - 4,000 - - 2,000
Agreement to repurchase securities - - - - 1,487
Total stockholders' equity 31,495 21,042 20,949 18,008 13,969
Non performing assets 2,584 1,639 1,206 4,069 3,168
Allowance for loan losses 1,509 1,659 1,584 1,441 1,400
</TABLE>
<TABLE>
<CAPTION>
Ended December 31,
--------------------------------------------------------
(In thousands, except per share amounts)
Operating data 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Interest income $ 13,768 $ 15,089 $ 15,446 $ 15,177 $ 13,951
Interest expense 6,690 7,537 8,452 7,956 7,105
----------- --------- ---------- ----------- ----------
Net interest income 7,078 7,552 6,994 7,221 6,846
Provision for loan losses 565 270 242 605 528
----------- --------- ---------- ----------- ----------
Net interest income after provision
for loan losses 6,513 7,282 6,752 6,616 6,318
Noninterest income 432 426 766 956 782
Noninterest expense 3,921 7,194 5,176 5,060 5,046
----------- --------- ---------- ----------- ----------
Income before income taxes 3,024 514 2,342 2,512 2,054
Income tax expense (benefit) 1,069 (24) 945 1,010 808
----------- --------- ---------- ----------- ----------
Net income $ 1,955 $ 538 $ 1,397 $ 1,502 $ 1,246
=========== ========= ========== =========== ==========
Basic Earnings per share N/A $ 0.28 $ 0.74 $ 0.83 $ 0.80
=========== ========= ========== =========== ==========
Diluted Earnings per share N/A $ 0.28 $ 0.73 $ 0.82 $ 0.79
=========== ========= ========== =========== ==========
Cash dividends per share:
Regular dividends $ 0.23 $ 0.50 $ 0.50 $ 0.50 $ 0.50
Special cash dividends $ - $ 5.40 $ - $ 0.30 $ -
----------- --------- ---------- ----------- ----------
Total cash dividends $ 0.23 $ 5.90 $ 0.50 $ 0.80 $ 0.50
=========== ========= ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
(In Thousands)
Other data 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Real estate loans 2,137 1,975 2,032 1,828 1,709
Deposit accounts 12,741 12,584 12,508 12,092 11,697
Number of branch offices 5 5 5 6 6
</TABLE>
3
<PAGE>
TABLE II - 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,
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Performance ratios
Return on average assets (net income
divided by average assets) 1.17% 0.29% 0.75% 0.81% 0.70%
Return on average stockholders' equity (net
income divided by average equity) 7.42% 2.04% 6.74% 7.45% 7.30%
Dividend payout ratio (dividends declared per
share divided by basic earnings
per share):
Regular dividends (1) N/A 178.57% 67.57% 60.24% 62.50%
Special dividends N/A 1928.57% N/A 36.14% N/A
Interest rate spread (difference between
average yield on interest-earning assets and
average cost of interest-bearing liabilities) 3.83% 3.75% 3.52% 3.72% 3.82%
Net interest margin (net interest income as a
percentage of average interest-earning assets) 4.45% 4.37% 3.98% 4.15% 4.16%
Non-interest expense to average assets 2.34% 3.94% 2.78% 2.73% 2.85%
Average interest-earning assets to interest
bearing liabilities 114.95% 114.26% 109.69% 109.61% 107.81%
Asset quality ratios
Allowance for loan losses to net loans
at end of period 0.99% 1.04% 0.99% 0.94% 0.90%
Net charge offs to average outstanding
loans during period 0.11% 0.08% 0.19% 0.49% 0.38%
Ratio of nonperforming assets to total assets
at end of period 1.43% 0.89% 0.66% 2.28% 1.77%
Capital ratios
Average stockholders' equity to average assets
during period 15.71% 14.47% 11.12% 10.89% 9.63%
</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, At
1997 1998 1999 December 31,
Interest Interest Interest 1999
Average and Yield/ Average and Yield/ Average and Yield/ Yield/
balance dividends cost balance dividends cost balance dividends cost cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning/dividend paying assets
Interest-earning assets
Mortgage loans and contracts $ 75,207 $ 6,232 8.29% $ 63,187 $ 5,179 8.20% $ 47,814 $ 3,788 7.92% 8.05%
Other loans 87,556 8,411 9.61% 97,506 9,166 9.40% 103,146 9,306 9.02% 8.95%
--------- ------- --------- -------- -------- --------
Total net loans (1) 162,763 14,643 9.00% 160,693 14,345 8.93% 150,960 13,094 8.67% 8.71%
Mortgage-backed securities 1,689 137 8.11% 1,199 96 8.01% 2,472 171 6.92% 6.83%
Investment securities 7,069 362 5.12% 4,362 252 5.78% 3,951 260 6.58% 6.23%
FHLB overnight account and other 1,846 144 7.80% 5,956 360 6.04% 5,553 296 5.33% 4.39%
--------- ------- --------- -------- -------- --------
Total interest-earning assets 173,367 15,286 8.82% 172,210 15,053 8.74% 162,936 13,821 8.48% 8.60%
Federal Home Loan Bank stock 2,215 160 7.22% 1,662 123 7.40% 1,709 130 7.61% 7.75%
--------- ------- --------- -------- -------- --------
Total interest earning and dividend
paying assets 175,582 15,446 8.80% 173,872 15,176 8.73% 164,645 13,951 8.47% 8.59%
--------- ------- --------- -------- -------- --------
Non interest earning/dividend paying
assets
Office properties and equipment, net 3,537 3,752 3,767
Real estate owned 232 336 1,010
Cash on hand and in banks 4,740 4,827 5,654
Accrued interest receivable 1,725 1,832 1,638
Other 617 559 534
--------- --------- --------
Total non interest-earning/dividend
paying assets 10,851 11,306 12,603
--------- --------- --------
Total assets $ 186,433 $ 185,178 $177,248
========= ========= ========
Interest-bearing liabilities
Deposit accounts:
Passbook accounts $ 18,301 $ 505 2.76% $ 17,402 $ 481 2.76% $ 17,720 $ 491 2.77% 2.77%
NOW accounts 10,541 248 2.35% 11,486 255 2.22% 11,720 223 1.90% 2.00%
Money market accounts 3,337 100 3.00% 3,527 106 3.01% 3,797 115 3.03% 3.00%
Certificates of deposit 101,473 6,039 5.95% 95,686 5,361 5.60% 86,913 4,425 5.09% 5.24%
--------- ------- --------- --------- -------- --------
Total interest-bearing deposits 133,652 6,892 5.16% 128,101 6,203 4.84% 120,150 5,254 4.37% 4.52%
Other interest-bearing liabilities:
Advances from Federal Home Loan Bank
of Atlanta 26,221 1,543 5.88% 30,231 1,727 5.71% 31,939 1,804 5.65% 5.42%
Agreement to repurchase securities - - 0.00% - - 0.00% 225 12 5.33% 5.68%
Other borrowings 195 17 8.71% 297 25 8.42% 397 35 8.82% 8.62%
--------- ------- --------- -------- -------- --------
Total borrowings 26,416 1,560 5.89% 30,528 1,752 5.74% 32,561 1,851 5.68% 5.61%
--------- ------- --------- -------- -------- --------
Total interest-bearing liabilities 160,068 8,452 5.28% 158,629 7,955 5.01% 152,711 7,105 4.65% 4.78%
--------- ------- --------- -------- -------- --------
Non interest-bearing liabilities
Non interest bearing deposit accounts 4,433 5,235 6,204
Other liabilities 1,210 1,155 1,269
--------- --------- --------
Total liabilities 165,711 165,019 160,184
Stockholders' equity 20,722 20,159 17,064
--------- --------- --------
Total liabilities and stockholders'
equity $ 186,433 $ 185,178 $177,248
========= ========= ========
Net interest income $ 6,994 $ 7,221 $ 6,846
======= ======== ========
Interest rate spread (2) 3.52% 3.72% 3.82% 3.81%
===== ===== ===== =====
Net interest margin (2) 3.98% 4.15% 4.16%
===== ===== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities 109.64% 109.61% 107.81%
========= ========= ========
</TABLE>
- ---------------------------------------
(1) Loans on nonaccrual status have been included in the computation of average
balances.
(2) Includes Federal Home Loan Bank stock and related dividends, as
applicable.
5
<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 1997 1997 Compared to 1998
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 $ (339) $(766) $ 36 $ (1,069) $ (68) $ (996) $ 11 $(1,053)
Other loans 256 1,263 48 1,567 (180) 956 (19) 757
------ ----- ---- -------- ----- ------ ----- -------
Total net loans (83) 497 84 498 (248) (40) (8) (296)
Mortgage-backed securities 3 (58) (1) (56) (2) (40) 1 (41)
Investment securities (48) (6) 1 (53) 46 (139) (18) (111)
Overnight deposits 58 (122) (29) (93) (31) 318 (69) 218
------ ----- ---- -------- ----- ------ ----- -------
Total net change in income on
interest earning assets (70) 311 55 296 (235) 99 (94) (230)
Federal Home Loan Bank stock - 61 - 61 4 (40) (1) (37)
------ ----- ---- -------- ----- ------ ----- -------
Total net change in income on
interest earning/dividend
paying assets (70) 372 55 357 (231) 59 (95) (267)
------ ----- ---- -------- ----- ------ ----- -------
Interest-bearing liabilities:
Deposits 221 443 16 680 (425) (286) 18 (693)
Other interest-bearing liabilities (13) 251 (3) 235 (40) 242 (6) 196
------ ----- ---- -------- ----- ------ ----- -------
Total net change in expense on
interest bearing liabilities 208 694 13 915 (465) (44) 12 (497)
------ ----- ---- -------- ----- ------ ----- -------
Net change in net interest income $ (278) $(322) $ 42 $ (558) $ 234 $ 103 $(107) $ 230
====== ===== ==== ======== ===== ====== ===== =======
<CAPTION>
1998 Compared to 1999
Increase (Decrease)
Due to
Rate/
Rate Volume Volume Net
<S> <C> <C> <C> <C>
Interest-earning/dividend
paying assets
Mortgage loans $(173) $ (1,260) $ 42 $ (1,391)
Other loans (369) 530 (20) 141
----- -------- ----- --------
Total net loans (542) (730) 22 (1,250)
Mortgage-backed securities (13) 102 (14) 75
Investment securities 35 (24) (3) 8
Overnight deposits (43) (24) 4 (63)
----- -------- ----- --------
Total net change in income on
interest earning assets (563) (676) 9 $ (1,230)
Federal Home Loan Bank stock 3 3 1 7
----- -------- ----- --------
Total net change in income on
interest earning/dividend
paying assets (559) (674) 10 (1,223)
----- -------- ----- --------
Interest-bearing liabilities:
Deposits (601) (352) 34 (919)
Other interest-bearing liabilities (17) 117 (1) 99
----- -------- ----- --------
Total net change in expense on
interest bearing liabilities (618) (235) 33 (820)
----- -------- ----- --------
Net change in net interest income $ 59 $ (439) $ (23) $ (403)
===== ======== ===== ========
</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, 1999, 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, 1999. 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, 1999 and is for the Bank only. Since, with minor
exceptions, all of Bancshares' 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)% $ 185,762 $172,958 $12,804 (8.60)%
Minus 300 basis points (3.00)% 183,642 171,325 12,317 (12.08)%
Minus 200 basis points (2.00)% 181,591 169,045 12,546 (10.44)%
Minus 100 basis points (1.00)% 179,606 166,311 13,295 (5.10)%
No change 177,683 163,674 14,009 0.00%
Plus 100 basis points 1.00% 175,821 161,136 14,685 4.83%
Plus 200 basis points 2.00% 174,017 158,691 15,326 9.40%
Plus 300 basis points 3.00% 172,268 156,335 15,933 13.73%
Plus 400 basis points 4.00% 170,573 154,064 16,509 17.85%
</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.
7
<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 years ended December 31, 1997, 1998 and 1999.
Forward-looking Statements Safe-harbor Statement
This report may contain forward-looking statements that are subject to numerous
assumptions, risks and uncertainties. Statements pertaining to future periods
are subject to uncertainty because of the possibility of changes in underlying
factors and assumptions. Actual results could differ materially from those
contained in or implied by such forward-looking statements for a variety of
factors including: sharp and rapid changes in interest rates; significant
changes in the economic scenario from the current anticipated scenario which
could materially change anticipated credit quality trends and the ability to
generate loans; significant delay in or inability to execute strategic
initiatives designed to grow revenues and/or control expenses; and significant
changes in accounting, tax or regulatory practices or requirements. Because of
the risks and uncertainties inherent in forward-looking statements, readers are
cautioned not to place undue reliance on them, whether included in this report
or made elsewhere from time to time by the Company or on its behalf. The Company
assumes no obligation to update any forward-looking statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
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 in 1998. 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 holds true for deposits as competitor banks are offering
aggressive rates that are higher than the interest cost to the Company of
borrowing from the FHLB. Therefore management 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 in
1999 to $164.6 million reflecting the continuing effect of this strategy.
Average interest bearing liabilities have correspondingly decreased from $160.1
million in 1997 to $158.6 million in 1998, and in 1999 to $152.7 million. As
planned, 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, and in 1999 to 3.82%.
8
<PAGE>
This section of the annual report provides a narrative discussion and analysis
of the Company's financial condition and results of operations for the previous
three years. All tables and financial statements included in this report should
be considered an integral part of this analysis.
Cash and cash equivalents
Cash and cash equivalents at December 31, 1999 of $5.9 million had decreased
from $13.2 million in 1998. The changes in the sources and uses of cash related
to operating, investing and financing activities are disclosed in the Company's
"Consolidated Statements of Cash Flows". Net cash provided by operating
activities decreased from $3.3 million in 1998 to $1.8 million in 1999 partially
due to the decrease in net income, but largely due to the accelerated payment of
income taxes and other liabilities. Net cash from investing activities decreased
significantly from a cash source of $11.7 million in 1998 to a cash use of $8.7
million in 1999, as a result of the increase in total loans and additions to the
securities portfolio. Net cash used in financing activities decreased from $8.2
million in 1998 to $300,000 in 1999. The primary uses in 1999 were the decrease
in deposits of $680,000, $730,000 payment of dividends and $4.8 million of funds
used to continue the Company's Stock Repurchase Plan. These uses were offset by
$5.8 million of new borrowings from the FHLB and other banks.
Investments and mortgage-backed securities
At December 31, 1999, the Company had $104,000 of net unrealized losses on
investment securities classified as available for sale of the amortized cost
basis ($4.6 million) of the related securities, and $247,000 of net unrealized
losses 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.
The Company increased its investment in investment securities and mortgage-
backed securities in 1999 over 1998 utilizing the cash held in short-term
investments at December 31, 1998. Investment securities available for sale
increased from $2.0 million at December 31, 1998 to $4.4 million at December
31,1999. The additional securities were in corporate bonds that are fixed rate
guaranteed or senior notes with an S&P A rating. The average balance for
investment securities for 1999 was $3.9 million as compared to $4.4 million in
1998. The average yield increased from 5.78% in 1998 to 6.58% in 1999 due to the
higher interest rate earned on corporate bonds verses the U.S. Government
obligations held in 1998.
Mortgage-backed securities increased from $1.0 million at December 31, 1998 to
$3.5 million at December 31, 1999. The additional investments were in GNMA
participations. The average balance for mortgage-backed investment securities
for 1999 was $2.5 million as compared to $1.1 million in 1998. The average yield
decreased from 8.01% in 1998 to 6.92% in 1999 due to the effect of lower
interest rates for residential mortgages offered by GNMA in recent periods.
Loans
The primary 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 1999 the
average balance and year end balance of loans declined as a result of the change
in management strategy as previously discussed. The average balance declined
$9.7 million from $160.7 million in 1998 to $151.0 million in 1999.
9
<PAGE>
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 December 31, 1999 follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $ 69,524 45.4% $ 64,057 41.1%
Commercial 35,566 23.2% 34,259 22.0%
-------- ------ -------- -----
Total mortgage loans 105,090 68.6% 98,316 63.1%
Commercial business loans 29,010 18.9% 36,332 23.3%
Consumer Loans 21,766 14.2% 23,317 15.0%
-------- ----- ------- -----
Total loans 155,866 101.7% 157,965 101.4%
Less:
Undisbursed loans 1,103 0.7% 675 0.4%
Unamortized loan fees 69 0.1% 72 0.1%
Allowance for possible losses 1,441 0.9% 1,400 0.9%
-------- ------ -------- -----
Net loans receivable $153,253 100.0% $155,818 100.0%
======== ====== ======== =====
</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.
At December 31, 1999, the allowance for loan losses was $1.4 million and
represented 0.9% of total net loans and 44.2% of non performing assets. The
provision for loan losses was $528,000 in 1999 as compared to $605,000 in 1998.
The decrease in the provision was due to the decrease in net loan charge-offs
from $748,000 in 1998 to $569,000 in 1999. In the opinion of management at
December 31, 1999, the allowance for loan losses was adequate at that date.
There can be no assurance that the Company will not be required to increase the
allowance in the future.
At December 31, 1999, the Company had no significant commitments to originate
fixed-rate loans. At December 31, 1999, the Company had commitments to originate
variable rate loans, including unused commercial business lines of credit as
follows:
Commitments to extend credit $ 724,000
Unused lines of credit $ 11,548,000
Standby letters of credit $ 10,000
10
<PAGE>
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. As shown in the following table, non performing assets of $4.1 million
as of December 31, 1998, decreased $900,000 from $3.2 million at December 31,
1999. The increase in non performing 1 - 4 unit family residential loans in 1998
was 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 subsequently
brought current as reflected by the decrease in accruing loans contractually
past due 90 days in 1999.
Other increases in 1998 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. In
1999 these impaired loans were classified as in-substance foreclosures and
additional charge offs of approximately $170,000 were incurred. As of December
31, 1999 impaired loans aggregated $683,000 and had specific allowances of
$100,000.
The following table sets forth nonperforming assets as of December 31, 1997,1998
and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
--------- -------- ---------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
1 - 4 unit residential $ - $ 132 $ -
Commercial 401 - -
Commercial business 135 782 683
Consumer 25 - -
------ ------ -------
Total 561 914 683
------ ------ -------
Accruing loans which are contractually past
due 90 days or more:
Real estate:
1 - 4 unit residential 216 1,553 952
Commercial - 243 59
Construction - 112 -
Commercial business 148 432 398
Consumer 181 105 158
------ ------ ------
Total 545 2,445 1,567
------ ------ ------
Total of nonaccrual and
90 days past due loans 1,106 3,359 2,250
Foreclosed real estate and other assets 100 710 918
------ ------ ------
Total non-performing assets $1,206 $4,069 $3,168
====== ====== ======
Total loans delinquent
90 days or more to net loans 0.69% 2.19% 1.44%
Total loans delinquent 90 days or more
to total assets 0.60% 1.88% 1.26%
Total non-performing assets
to total assets 0.66% 2.28% 1.77%
</TABLE>
11
<PAGE>
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.
Premises and Equipment
Premises and equipment decreased from $3.9 million in 1998 to $3.7 million in
1999 as of the result of depreciation and retirements. The Company now has six
locations of which the newest is 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 $700,000 from $127.6 million at December 31, 1998 to
$126.9 at December 31, 1999. 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
15.3% or $949,000 from $6.2 million in 1998 to $5.3 million in 1999, and the
interest rate paid on the average balance of deposits decreased from 4.84% in
1998 to 4.37% in 1999. The decrease in interest paid on deposits in 1999 was
partially offset by the increase in interest paid on FHLB advances of $98,000
from $1.7 million in 1998 to $1.8 million in 1999; however the effective rate
paid on the average outstanding balance of FHLB advances decreased from 5.71% in
1998 to 5.65% in 1999.
At December 31, 1999, savings certificates amounted to $89.5 million, or 70.6%,
of the Company's total deposits, including $56.4 million that were scheduled to
mature by December 31, 2000. Management of the Company believes it has adequate
resources to fund all loan commitments with savings deposits, FHLB of Atlanta
advances and 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 $2.4 million from $31.3
million at December 31, 1998, to $33.7 million at December 31, 1999. The
increase in advances was used to offset the increase in loans as previously
explained. At December 31, 1999, the Company had unused credit availability with
the FHLB of $6.3 million.
Other borrowings and securities sold under repurchase agreements increased to
$3.5 million. Such new borrowings were utilized for the acquisition of treasury
stock as explained below. The terms of this debt is set forth in the notes to
the financial statements and is secured by the Company's stock in the Bank or
other securities.
Stockholders' equity
Total stockholders' equity at December 31, 1999 is $14.0 million as compared to
$18.0 million at December 31, 1998. The payment of $730,000 in dividends and the
acquisition of treasury stock of $4.8 million, were offset by net income of $1.2
million, and $227,000 of other increases in stockholders' equity related
primarily to the unearned employee stock benefit compensation plans.
The Company is continuing with its Stock Repurchase Program that originated in
1995. During years ended December 31, 1998 and 1999, the Company acquired
224,182 and 356,272, respectively, of treasury shares at a cost of $3.6 million
and $4.8 million, respectively, at an average price per share of $16.23 and
$13.42, respectively. Treasury shares acquired in 1999 include the 307,871
shares purchased at $13.50 per share through a tender offer that closed in
October 1999. See Note 19 to the Consolidated Financial Statements.
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 9.63% for 1999 as compared to
10.89% in 1998. The decrease is primarily related to the acquisition of treasury
shares in 1999.
12
<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,
the Company and Bank are in compliance with all such requirements at December
31, 1999:
<TABLE>
<CAPTION>
Percentage of
adjusted total
Amount assets
First Southern Bancshares, Inc: (Dollars in thousands)
<S> <C> <C>
Primary capital ratios:
GAAP capital $ 13,969
Adjustments:
Mortgage servicing rights (5)
Net unrealized loss on securities available for sale 104
--------
Tier 1 capital 14,068 7.92%
Minimum Tier 1 (leverage) requirement 7,108 4.00%
-------- ------
Excess $ 6,960 3.92%
======== ======
Risk-based capital ratios:
Core (Tier 1) Capital 14,068 9.73%
Minimum core capital 5,781 4.00%
-------- ------
Excess $ 8,287 5.73%
======== ======
Risk-based capital $ 15,468 10.70%
Minimum risk-based capital requirement 11,562 8.00%
-------- ------
Excess $ 3,906 2.70%
======== ======
</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) $ 16,099 11.15%
To be well capitalized under the FDICIA
prompt corrective action provisions 14,441 10.00%
-------- -------
Excess $ 1,658 1.15%
======== =======
Tier 1 capital (to risk-weighted assets) $ 14,699 10.18%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,664 6.00%
-------- -------
Excess $ 6,035 4.18%
======== =======
Tier 1 capital (to average assets) $ 14,699 8.28%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,880 5.00%
-------- -------
Excess $ 5,819 3.28%
======== =======
</TABLE>
13
<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, 1999, the Bank's qualifying reserves of $3.2 million
significantly exceeded the required reserve of $292,000.
Additionally, Bancshares requires cash for various operating needs including
dividends to shareholders and the general corporate expenses. The primary source
of liquidity for Bancshares is dividends from the subsidiary Bank. At December
31, 1999, the Bank could have paid additional dividends to Bancshares of $1.7
million while continuing to meet the capital requirements for "well-capitalized"
banks. Bancshares does not anticipate any liquidity requirements in the near
future that it will not be able to meet.
Pending Legislation
Legislation recently enacted by Congress eliminates many Federal and State law
barriers to affiliations among banks and other financial services providers. The
legislation establishes a statutory framework pursuant to which full
affiliations can occur between banks and securities firms. Insurance companies,
and other financial companies. The legislation provides some degree of
flexibility in structuring these new affiliations, although certain activities
may only be conducted through a holding company structure. The legislation,
preserves the role of the Board of Governors of the Federal Reserve System as
the umbrella supervisor for holding companies, but incorporates a system of
functional regulation pursuant to which the various Federal and state financial
supervisors will continue to regulate the activities traditionally within their
jurisdictions. The legislation specifies that banks may not participate in the
new affiliations unless the banks are well-capitalized and well-managed or if
any bank affiliate had received a less than "satisfactory" Community
Reinvestment Act of 1977 rating as of its most recent examination.
COMPARISON OF OPERATING RESULTS FOR THE
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Summary of Consolidated Financial Performance
Consolidated net income for the year ended December 31, 1999, decreased 17.0% to
$1.2 million from $1.5 million in 1998. Consolidated net income for 1997 was
$1.4 million or 7.0% less than 1998. Basic earnings per share for the year ended
December 31, 1999, was $0.80 as compared to $0.83 in 1998, and diluted earnings
per share for the year ended December 31, 1999 was $0.79 as compared to $0.82 in
1998. 1997 basic and diluted earning per share were $0.74 and $0.73,
respectively.
The decrease in net income for 1999 was primarily related to the reduction of
average interest earning assets, loans in particular, as previously discussed.
Although basic and diluted earnings per share were less than 1998, the reduction
was not proportionate to the decrease in earnings due to the reduction in
weighted average shares outstanding as of the result of the Stock Repurchase
Program and tender offer. The weighted average of shares outstanding will
continue to decline in 2000.
Increased net income in 1998 over 1997 was primarily due to a higher interest
spread in 1998 and lower noninterest expenses due to a pension termination
charge of $600,000 incurred in 1997.
Two key measures of profitability in the banking industry are return on average
equity (ROE) and return on average assets (ROA). ROE was 7.30% in 1999 versus
7.45% in 1998 and 6.74% in 1997. ROA was .70% in 1999 compared to .81% in 1998
and .75% in 1997.
14
<PAGE>
Net Interest Income
1999 net interest income after provision for loan losses was $6.3 million or
4.5% less than the $6.6 million reported in 1998. The Company had less average
interest earning assets in 1999 as compared to 1998, but had a net interest
spread on such assets of 3.82% in 1999 as compared to 3.72% in 1998. The
increase in the net interest spread was related to the decrease in interest cost
on certificates of deposit and FHLB advances due to the change in management's
strategy as previously discussed.
For 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 to 3.72% for 1998 from 3.52% for 1997, was offset by a higher provision
for loan losses in 1998 related to impaired loans.
Interest Income
Interest income for 1999 was $14.0 million as compared to $15.2 million in 1998
and $15.5 million for 1997. The decrease in interest income of $1.2 million or
7.9% in 1999 and $269,000 or 1.7% in 1998 is primarily attributable to the
decrease in average interest earning assets from $175.6 million in 1997 to
$173.9 million in 1998 to $164.6 million in 1999. The continual reduction is
primarily in loans reflecting management's strategy as previously discussed.
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
to 8.47% in 1999, 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 to 8.67%
in 1999 reflecting the competitive market rates in the Company's lending area.
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 2000.
Interest on loans receivable decreased $1.3 million in 1999 to $13.1 million
from $14.3 million in 1998, and $298,000 in 1998 as compared to $14.6 million in
1997. The continual decrease is primarily attributable to a decrease in average
net loans of $9.7 million in 1999 ($151.0 million), $2.1 million in 1998 ($160.7
million) from 1997 ($162.8 million). Additionally, the average yield on total
loans decreased as previously mentioned.
Interest on mortgage-backed securities increased in 1999 by $75,000 to $171,000
from $96,000 in 1998, primarily from the increase in the average balance in 1999
of $2.5 million from $1.2 million in 1998. 1998 interest on mortgage-backed
securities decreased by $41,000 from $137,000 during 1997 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 increased by $8,000 from
$252,000 during 1998 to $260,000 in 1999 as the result of the yield on the
average balance increasing from 5.78% in 1998 to 6.58%. The increase in the
yield is related to the investment in corporate bonds as previously discussed.
The effect of the increase in the yield was partially offset by the decrease in
the average balance of investment securities from $4.4 million in 1998 to $4.0
million in 1999. In 1998, income from investment securities decreased by
$110,000 from $362,000 in 1997, due to a $2.7 million decrease in the average
balance from $7.1 million in 1997 to $4.4 million in 1998. The effect of the
decrease in securities in 1998 was partially offset by the increase in yield on
the average balances from 5.12% in 1997 to 5.78% in 1998.
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 $58,000 decrease in other interest income in 1999 to $426,000
when compared to 1998 other interest income of $484,000 is due primarily to the
decreased in the average yield on overnight account and time deposits at the
FHLB from 6.04% in 1998 to 5.33% in 1999. In addition to the decrease in yield,
the average invested balance of FHLB overnight funds decreased from $6.0 million
in 1998 to $5.6 million in 1999. FHLB dividends were $123,000 during 1998 as
compared to $130,000 in 1999 due to increase in the yield on the average balance
from 7.40% in 1998 to 7.61% in 1999. 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 $123,000 in 1998 due to decrease in average
FHLB stock from $2.2 million in 1997 to $1.7 million in 1998. 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.
15
<PAGE>
Interest Expense
Interest expense for 1999 was $7.1 million compared with $8.0 million for 1998,
representing a decrease of $900,000 or 11.3%. Interest expense for 1998 was $8.0
million compared to $8.5 million for 1997, representing a decrease of $500,000
or 5.9%.
Interest on deposits for 1999 was $5.3 million compared with $6.2 million for
1998, representing a decrease of $900,000 or 14.5%, and $6.9 million for 1997,
representing a decrease of $700,000 or 10.2% for 1998. The decreases are due to
a $8.0 million decrease in average deposits in 1999 ($120.1 million) as compared
to 1998 ($128.1 million), and a $5.5 million decrease for 1998 from 1997 ($133.7
million). The 1999 average interest cost decreased to 4.37% as compared to 4.84%
in 1998, and 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 $98,000 over 1998 to $1.8 million in 1999, and $193,000 over 1997
to $1.8 million in 1998. The increases in interest expense were due to the
increase in average FHLB borrowings each year from $26.2 million in 1997 to
$30.2 million in 1998 to $31.9 million in 1999. The increases in interest
expense caused by the higher average balances were partially offset by decreased
interest rates of 5.88% in 1997 to 5.71% in 1998 to 5.65% in 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 strong national economy overall.
However, there is very little growth in the Bank's primary lending area and
there is aggressive competition for existing loan and deposit customers. A
slowdown in the economy could further impact asset growth and have a negative
impact on real estate lending as well as the level of net charge-offs and
delinquencies. Since such a slowdown in the economy could have an adverse effect
on property values and for commercial development projects, cause an increase in
vacancy rates, the possibilities exist for write-downs, charge-offs and transfer
of currently performing loans to a nonaccrual status in the real estate and
commercial loan categories.
The Company utilizes loan reviews procedures, including techniques such as loan
grading and monitoring of financial information, in order to identify early
potential problem loans in order for management to take steps to lessen any
potential losses. Reports are prepared and used in conjunction with
identification and monitoring of such loans on a monthly basis. Management's
involvement continues throughout the process and includes participation in the
work-out process and recovery activity. These procedures are monitored by the
loan and audit committees whose work is supplemented periodically by regulatory
agencies. A determination of a potential loss will result in a charge to the
provision for loan losses, thereby increasing the allowance for loan losses.
Management monitors the entire loan portfolio in an attempt to identify problem
loans so that risks in the portfolio can be timely identified and an appropriate
allowance or charge-off recognized. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
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 1999, the provision for loan losses was $528,000 as compared to $605,000 in
1998 and $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. As shown in the following table, charge-offs in 1999 were $704,000 or
0.47% of average loans as compared to $780,000, or 0.49% of average loans in
1998 and $347,000, or 0.21% of average loans, in 1997. The increase in the level
of charge-offs in 1998 was related primarily to loans to one customer whose
loans were impaired. Management recorded charge-offs of $611,000 for such
impaired in 1998 to reflect management's estimate of collection at December 31,
1998. In 1999, impaired loans aggregated $683,000 and have a specific loan loss
allowance of $100,000.
16
<PAGE>
The following table sets forth information with respect to the Company's
allowance for loan losses for the last three years:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1998 1999
--------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance at beginning of period $ 1,659 $ 1,584 $ 1,441
------- ------- -------
Provision for loan losses 242 605 528
------- ------- -------
Recoveries:
Residential real estate 9 - 2
Commercial business 17 1 114
Consumer and other 4 31 19
------- ------- -------
Total recoveries 30 32 135
------- ------- -------
Charge offs:
Residential real estate (52) (36) (56)
Commercial real estate (185) - (2)
Commercial business (54) (496) (421)
Consumer and other (56) (248) (225)
------- ------- -------
Total charge offs (347) (780) (704)
------- ------- -------
Net charge offs (317) (748) (569)
------- ------- -------
Balance at end of period $ 1,584 $ 1,441 $ 1,400
======= ======= =======
Ratio of allowance to net loans
outstanding at the end of the period 0.99% 0.94% 0.90%
Ratio of net charge offs to average loans
outstanding during the period 0.19% 0.46% 0.38%
</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, 1999, was $1.4 million or 0.90% of net loans as
compared with $1.4 million, or 0.94% of net loans in 1998, and $1.6 million, or
0.99% of loans in 1997. As shown in the following table, the percentages of the
allowance allocated as a percentage of the total allowance was consistent for
1997 and 1998. In 1999, the Bank established a loan rating system to assist in
the loan loss allowance determination. The fluctuations in 1999 are a result of
this systematic change in estimating the allowance. The following table sets
forth the allocation of the allowance for loan losses at December 31, 1997, 1998
and 1999:
<TABLE>
<CAPTION>
------------------------- ---------------------- ---------------------
1997 1998 1999
------------------------- ---------------------- ---------------------
As a % As a % As a %
of Total of Total of Total
Allowance Allowance Allowance
for Loan for Loan for Loan
Amount Losses Amount Losses Amount Losses
------------------------- ---------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $ 234 14.77% $ 217 15.06% $ 270 19.26%
Other 210 13.26% 188 13.04% 222 15.85%
Consumer and commercial business 614 38.76% 651 45.18% 298 21.30%
Impaired loans - 0.00% - 0.00% 200 14.29%
Unallocated 526 33.21% 385 26.72% 410 29.30%
--------------------- -------------------- -------------------
Total allowance for loan losses $ 1,584 100.00% $1,441 100.00% $ 1,400 100.00%
===================== ==================== ===================
</TABLE>
17
<PAGE>
Non-interest Income.
Non-interest income decreased by $174,000 in 1999 to $782,000 as compared to
$956,000 in 1998, and $766,000 in 1997. The decrease was primarily due to losses
on sales of real estate owned in 1999. The 1998 increase over 1997 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 was due largely to the increased
activity in refinanced loans resulting from lower mortgage rates.
Non-interest Expense.
Non-interest expenses were consistent in 1999 and 1998 at approximately $5.0
million as the Company had no major changes in operations. In 1998 non-interest
expense decreased $116,000 or 2.2% to $5.1 million 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.
Income Taxes
Income tax expense in 1999, 1998 and 1997 was $800,000, $1.0 million and
$945,000, respectively, or approximately 40.0% of income before income taxes
representing expected combined federal and state income tax rates.
18
<PAGE>
[LETTERHEAD OF MARMANN, MCCRARY & ASSOCIATES, P.C.]
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, 1998 and 1999 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, 1999. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Southern
Bancshares, Inc. and subsidiary at December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each year in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Marmann, McCrary & Associates, P.C.
Marmann, McCrary & Associates, P.C.
Sheffield, Alabama
March 3, 2000
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,188 $ 5,906
Investment securities available for sale, at market 2,016 4,408
Mortgage-backed securities, available for sale, at market - -
Mortgage-backed securities, held to maturity, at cost 945 3,527
Loans held for sale, at cost, which approximates market 659 80
Loans receivable, net 152,594 155,738
Foreclosed real estate and other assets 710 918
Premises and equipment, net 3,852 3,663
Federal Home Loan Bank stock, at cost 1,918 1,685
Accrued interest receivable 1,758 1,855
Deferred income taxes 397 592
Other assets 338 426
------------ ------------
TOTAL ASSETS $ 178,375 $ 178,798
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 127,550 $ 126,870
Advances from Federal Home Loan Bank 31,316 33,665
Other notes payable - 2,000
Securities sold under repurchase agreement - 1,487
Income taxes currently payable 356 183
Other liabilities 1,145 624
------------ ------------
Total liabilities 160,367 164,829
------------ ------------
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 11,414 11,425
Retained earnings - Substantially restricted 13,340 13,856
Unearned employee compensation - ESOP (172) (112)
Unearned employee compensation - MRDP (550) (290)
Net unrealized loss on securities available for sale 11 (104)
Net provision for additional minimum pension liability
Treasury stock, at cost (6,056) (10,827)
------------ ------------
Total stockholders' equity 18,008 13,969
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,375 $ 178,798
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 and 1999 (Dollars in thousands,
- ---------------------------------------------------------------------------
except per share data)
- ----------------------
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1998 1999
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 14,643 $ 14,345 $ 13,094
Mortgage-backed securities 137 96 171
Investment securities 362 252 260
Other 304 484 426
---------- ---------- ----------
Total interest income 15,446 15,177 13,951
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 6,892 6,203 5,254
Advances from Federal Home Loan Bank and other 1,560 1,753 1,851
---------- ---------- ----------
Total interest expense 8,452 7,956 7,105
---------- ---------- ----------
NET INTEREST INCOME 6,994 7,221 6,846
PROVISION FOR LOAN LOSSES 242 605 528
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,752 6,616 6,318
---------- ---------- ----------
NON INTEREST INCOME:
Loan fees and service charges 468 657 651
Net gains on sale of loans 258 263 193
Gains (losses) on sales of investments - - (1)
Gains (losses) on real estate owned 2 2 (89)
Other 38 34 28
---------- ---------- ----------
Total non interest income 766 956 782
---------- ---------- ----------
NON INTEREST EXPENSES:
Compensation and employee benefits 3,218 3,001 2,849
Building and occupancy expense 559 630 669
Data processing expense 296 395 446
Advertising 185 164 191
Insurance expense 242 202 177
Other 676 668 714
---------- ---------- ----------
Total non interest expenses 5,176 5,060 5,046
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,342 2,512 2,054
INCOME TAX EXPENSE 945 1,010 808
---------- ---------- ----------
NET INCOME $ 1,397 $ 1,502 $ 1,246
========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.74 $ 0.83 $ 0.80
========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.73 $ 0.82 $ 0.79
========== ========== ==========
DIVIDENDS PER SHARE
Regular cash dividends $ 0.50 $ 0.50 $ 0.50
Special cash dividends $ - $ 0.30 $ -
---------- ---------- ----------
Total dividends per share $ 0.50 $ 0.80 $ 0.50
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 and 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Retained Unearned other Total
Common stock Additional earnings employee compre- stock-
Issued In treasury paid-in Substantially compensation hensive holders'
Shares Amount Shares Amount capital restricted ESOP MRDP income equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 2,076,969 $ 21 (109,400) $ (1,425) $11,334 $ 12,672 $(401) $(1,119) $ (40) $ 21,042
Comprehensive income:
Net income for the year
ended December 31, 1997 - - - - - 1,397 - - - 1,397
Change in net unrealized gain
(loss) on securities available
for sale, net of reclassification
adjustments and tax effects - - - - - - - - 38 38
--------
Total comprehensive income - - - - - - - - 1,435
--------
Cash dividends - - - - - (870) - - - (870)
Acquisition of treasury stock - - (79,930) (1,078) - - - - - (1,078)
ESOP shares committed
for release - - - - 41 - 121 - - 162
Amortization of MRDP
unearned compensation - - - - - - - 258 - 258
--------- ------ -------- -------- ------- -------- ----- ------- ----- --------
Net for the period 2,076,969 21 (79,930) (1,078) 41 527 121 258 38 (93)
--------- ------ -------- -------- ------- -------- ----- ------- ----- --------
Balances at December 31, 1997 2,076,969 $ 21 (189,330) $ (2,503) $11,375 $ 13,199 $(280) $ (861) $ (2) $ 20,949
Net income for the year
ended December 31, 1998 - - - - - 1,502 - - - 1,502
Change in net unrealized gain
(loss) on securities available
for sale, net of reclassification
adjustments and tax effects - - - - - - - - 13 13
--------
Total comprehensive income - - - - - - - - 1,515
--------
Cash dividends - - - - - (1,361) - - - (1,361)
Options exercised - - 5,250 87 (25) - - - - 62
Acquisition of treasury stock - - (224,182) (3,640) - - - - - (3,640)
ESOP shares committed
for release - - - - 64 - 108 - - 172
Common stock grants
to MRDP - - - - - - - - - -
Amortization of MRDP
unearned compensation - - - - - - - 311 - 311
--------- ------ -------- -------- ------- -------- ----- ------- ----- --------
Net for the period - - (218,932) (3,553) 39 141 108 311 13 (2,941)
--------- ------ -------- -------- ------- -------- ----- ------- ----- --------
Balances at December 31, 1998 2,076,969 $ 21 (408,262) $ (6,056) $11,414 $ 13,340 $(172) $ (550) $ 11 $ 18,008
Net income for the year
ended December 31, 1998 - - - - - 1,246 - - - 1,246
Change in net unrealized gain
(loss) on securities available
for sale, net of reclassification
adjustments and tax effects - - - - - - - - (115) (115)
--------
Total comprehensive income - - - - - - - - 1,131
--------
Cash dividends - - - - - (730) - - - (730)
Options exercised - - 936 11 (1) - - - - 10
Acquisition of treasury stock - - (356,272) (4,782) - - - - - (4,782)
ESOP shares committed
for release - - - - 12 - 60 - - 72
Common stock grants
to MRDP - - - - - - - - - -
Amortization of MRDP
unearned compensation - - - - - - - 260 - 260
--------- ------ -------- -------- ------- -------- ----- ------- ----- --------
Net for the period - - (355,336) (4,771) 11 516 60 260 (115) (4,039)
--------- ------ -------- -------- ------- -------- ----- ------- ----- --------
Balances at December 31, 1999 2,076,969 $ 21 (763,598) $(10,827) $11,425 $ 13,856 $(112) $ (290) $(104) $ 13,969
========= ====== ======== ======== ======= ======== ===== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
(Continued)
<TABLE>
<CAPTION>
December 31,
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,397 $ 1,502 $ 1,246
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 272 313 334
Provision for loan losses 242 605 528
Provision for deferred income taxes (benefit) (72) (232) (195)
Amortization/accretion of premiums/discounts on investment
and mortgage-backed securities (33) (5) (1)
Amortization of deferred loan fees (95) (121) (77)
Fair market value of ESOP shares
committed for release and charged to
employee compensation 162 147 71
Amortization of unearned compensation - MRDP 258 311 260
(Gains) losses on real estate owned 2 2 (89)
(Gain) on sale of premises and equipment (2) - -
Loss on disposal of premises and equipment - - -
(Increase) decrease in:
Loans held for sale 9 (436) 579
Accrued interest receivable (94) 64 (97)
Other assets 376 166 (88)
Increase (decrease) in:
Income taxes currently payable 112 241 (173)
Other liabilities (610) 735 (521)
------- ------- -------
Net cash provided by operating activities 1,924 3,292 1,777
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease:
Total loans (196) 6,457 (3,595)
Real estate owned 96 (612) (119)
Federal Home Loan Bank stock (613) 52 233
Proceeds from maturities of:
Investments 3,405 6,482 41
Mortgage-backed securities - - 1,001
Acquisition of:
Investments - - (2,622)
Mortgage-backed securities - - (3,508)
Premises and equipment (326) (656) (145)
Capitalized improvements to real estate owned 78 - -
------- ------- -------
Net cash provided by (used in) investing activities 2,444 11,723 (8,714)
------- ------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, and 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts $ 10,931 $ (16,181) $ (680)
Cash dividends paid (870) (1,361) (730)
Proceeds from FHLB advances - 12,848 2,349
Proceeds from other borrowings - - 2,000
Proceeds from securities sold under agreement to repurchase - - 1,487
Reductions in FHLB advances (7,151) - -
Reductions in other borrowings (4,000) - -
Acquisition of treasury stock (1,078) (3,553) (4,771)
--------- --------- ---------
Net cash provided by (used in) financing activities (2,168) (8,247) (345)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,200 6,768 (7,282)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 4,220 6,420 13,188
--------- --------- ---------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 6,420 $ 13,188 $ 5,906
========= ========= =========
SUPPLEMENTAL INFORMATION FOR CASH FLOW:
Noncash transactions:
Loans foreclosed and transferred to real estate owned $ 477 $ 1,218 $ 1,148
========= ========= =========
Increase (decrease) in net unrealized loss on securities
available for sale $ (38) $ (13) $ 115
========= ========= =========
Cash paid during the period for:
Income taxes $ 815 $ 850 $ 1,091
========= ========= =========
Interest $ 8,531 $ 7,919 $ 7,116
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<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. Bancshares and the Bank are collectively referred to as the
"Company."
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.
Loans receivable
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan origination fees. Interest income is accrued
daily based upon the outstanding principal amounts except for those classified
as nonaccrual loans. Interest accrual is discontinued when it appears that
future collection of principal or interest according to the contractual terms
may be doubtful. Interest collections on nonaccrual loans for which the ultimate
collectibility of principal is uncertain are applied as principal reductions.
Otherwise, such collections are credited to income when received.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Impaired loans are specifically reviewed loans for which it is probable that the
creditor will be unable to collect all amounts due according to the terms of the
loan agreement. Impairment of a loan is measured by comparing the recorded
investment in the loan with the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
A valuation allowance is provided to the extent that the measure of the impaired
loan is less than the recorded investment. A loan is not considered impaired
during a period of delay in payment if the ultimate collectiblity of all amounts
due is expected. Larger groups of homogeneous loans such as consumer
installment, bankcard and residential real estate mortgage loans are
collectively evaluated for impairment. Impaired loans are therefore primarily
commercial loans and commercial real estate loans. Payments received on impaired
loans for which the ultimate collectibility of principal is uncertain are
generally applied first as principal reductions.
The allowance for loan losses is maintained at a level that is considered to be
adequate to reflect estimated credit losses for specifically identified loans,
as well as estimated probable credit losses inherent in the remainder of the
loan portfolio at the balance sheet date. A formal review of the allowance for
loan losses is prepared quarterly to assess the risk in the portfolio and to
determine the adequacy of the allowance for loan losses. Commercial and
commercial real estate loans are assigned a risk rating on a numerical
scale of one to nine by loan officers using established credit policy
guidelines. These risk ratings are periodically reviewed, and all risk ratings
are subject to review by an independent reviewer. The risk ratings are assigned
an allocation percentage which, when multiplied times the dollar value of loans
in that risk category, results in the amount of the allowance for loan losses
allocated to these loans. The allocation of allowance for loans with a grade of
one through six is based upon historical loss rates adjusted for current
conditions that include estimated current economic developments. The allocations
for loans with a grade of seven through nine are generally nonaccrual, impaired
or charge-offs. Management reviews its allocation of the loan losses versus
actual performance of each of its portfolios and adjusts allocation rates to
reflect the recent performance of the portfolio as well as other factors that
might impact the estimated losses in the portfolio.
In determining the appropriate level for the allowance, management ensures that
the overall allowance appropriately reflects a margin for the imprecision
inherent in most estimates of expected credit losses. This additional allowance
is reflected in the unallocated portion of the allowance. Based on management's
periodic evaluation of the allowance for loan losses, a provision for loan
losses is charged to operations if additions to the allowance are required.
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.
Foreclosed real estate owned and other assets
For real estate and other assets 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.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Income taxes
The consolidated financial statements have been prepared on an accrual basis.
When income and expenses are recognized in different periods for financial
reporting purposes and for purposes of computing income taxes currently payable,
deferred taxes are provided on such temporary differences. Deferred tax assets
and liabilities are recorded for the expected future tax consequences of events
that have been recognized in the financial statements or tax returns. Deferred
tax assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be realized or settled.
Transfer of assets and liabilities
Transfers and servicing of financial assets and extinguishment of liabilities
are based on a consistent application of a "financial components approach" that
focuses on control. Under that approach, after a transfer of financial assets,
and entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets that are sales from
transfers that are secured borrowings.
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>
December 31,
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Common shares outstanding 2,076,969 2,076,969 2,076,969
Treasury shares (153,146) (264,027) (509,185)
Unreleased ESOP shares (31,546) (20,102) (14,195)
Options - uncontingent 2,525 9,112 2,529
--------------- --------------- ---------------
Basic EPS 1,894,802 1,801,952 1,556,118
Options - contingent 19,682 16,271 3,708
Unreleased ESOP shares 31,546 20,102 14,195
--------------- --------------- ---------------
Diluted EPS 1,946,030 1,838,325 1,574,021
=============== =============== ===============
</TABLE>
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.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Comprehensive income
Comprehensive income includes net income as well as certain items that are
reported directly within a separate component of stockholders' equity and bypass
net income. The components of other comprehensive income and related tax effects
are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1998 1999
---------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Unrealized holdings gains (losses) on available for sale securities $ 59 $ 23 $ (190)
Reclassification adjustment for gains (losses) realized in income - - (1)
---------- ----------- ----------
Net unrealized gains (losses) 59 23 (191)
Tax effect (21) (10) 76
---------- ----------- ----------
Net of tax amount $ 38 $ 13 $ 115
========== =========== ==========
</TABLE>
Segment reporting and disclosures
An operating segment is defined as a component of an enterprise that engages in
business activities that generate revenue and incur expense, whose operating
results are reviewed by the chief operating decision maker in the determination
of resource allocation and performance, and for which discrete financial
information is available. The Company has determined it has no segment reporting
requirements.
Recent accounting pronouncements
SFAS No. 133 - Accounting for Derivative Instruments and for Hedging Activities
requires all derivatives to be recorded on the balance sheet at fair value. SFAS
No. 137 has deferred the effective date of the adoption of this statement until
after June 15, 2000. The impact of adopting SFAS No. 133 on the financial
condition of the Company has not been determined at this time.
SFAS No. 134 - Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
amended SFAS No. 65 and SFAS No. 115 to require the classification as trading
any retained mortgage-backed securities that it commits to sell before or during
the securitization process. SFAS No. 134 has been adopted by the Company and has
had no significant impact on its financial condition in 1999.
SFAS No. 135 - Rescission of FASB Statement No. 75 and Technical Corrections.
This statement made various minor corrections to other pronouncements and
rescinded FASB No. 75 which had no significant effect on the financial condition
of the Company.
SFAS No. 136 - Transfers of Assets to a Not-for Profit Organization or
Charitable Trust that Raises or Holds Contributions for Others. This statement
establishes standards for transactions in which an entity makes a contribution
by transferring assets to a not-for profit organization or charitable trust that
accepts the assets and agrees to use those assets on behalf of another specified
entity. SFAS No. 136 has been adopted by the Company and has had no significant
impact on its financial condition in 1999.
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 1997 and 1998 financial statements in
order for them to conform with the reporting format utilized in 1999.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents were comprised of the following:
December 31,
1998 1999
(In thousands)
Cash on hand $ 1,861 $ 3,119
Cash due from banks 2,737 2,553
Interest bearing deposits at FHLB of Atlanta 8,579 198
Other interest bearing accounts 11 36
-------- --------
$ 13,188 $ 5,906
======== ========
Cash due from banks at December 31, 1999 includes aggregate bank balances of
approximately $2.4 million that 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, 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>
<TABLE>
<CAPTION>
December 31, 1999
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
<S> <C> <C> <C> <C>
Investment securities
Maturity between one and five years:
Corporate Bonds $ 3,081 $ - $ (158) $ 2,923
U.S. Government and agency obligations 1,500 - (15) 1,485
-------- --------- -------- ---------
$ 4,581 $ - $ (173) $ 4,408
======== ========= ======== =========
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
At December 31, 1998 and 1999, 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:
December 31,
1998 1999
(In thousands)
Unrealized gain (loss) on securities available for sale $ 18 $ (173)
Deferred income taxes (7) 69
----- ------
Net unrealized gain (loss) on securities available for sale $ 11 $ (104)
===== ======
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, 1998
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 $ - $ - $ - $ -
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>
<TABLE>
<CAPTION>
December 31, 1999
Amortized Unrealized holding Estimated
cost basis Gains Losses market value
(In thousands)
<S> <C> <C> <C> <C>
Maturing in one to five years:
GNMA certificates $ 41 $ 2 $ - $ 43
Maturing in five to ten years:
FHLMC certificates 148 3 - 151
GNMA certificates 172 3 - 175
Maturing in over ten years:
GNMA certificates 3,039 (247) 2,792
FHLMC certificates 127 2 - 129
------ ---- ------ ------
$3,527 $ 10 $ (247) $3,290
====== ==== ====== ======
</TABLE>
Mortgage-back securities of $3.4 million have been pledged as collateral for
public funds on deposit.
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, 1998 and 1999, 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,
1998 1999
(In thousands)
<S> <C> <C>
Type of loan
One-four family residential mortgage loans,
including loans held for sale $ 53,019 $ 49,808
Multi-family residential mortgage loans 6,473 4,132
Commercial mortgage and business loans 62,526 66,124
Construction loans 12,082 14,584
Consumer loans 21,766 23,317
--------- ---------
Total loans 155,866 157,965
--------- ---------
Less:
Loans held for sale (659) (80)
Undisbursed loans in process (1,103) (675)
Unamortized loan origination fees (69) (72)
Allowance for loan losses (1,441) (1,400)
--------- ---------
(3,272) (2,227)
--------- ---------
Total loans receivable, net $ 152,594 $ 155,738
========= =========
</TABLE>
Loans and participations serviced on behalf of the Company by others were
approximately $3.6 million and $3.3 million at December 31, 1998 and 1999,
respectively. Loans and participations serviced by the Company on behalf of
others were approximately $16.2 million and $16.6 million at December 31, 1998
and 1999, respectively.
The weighted average yield for all loans was 8.70% and 8.71% at December 31,
1998 and 1999, respectively.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
The Company originates both adjustable and fixed interest rate loans. At
December 31, 1998 and 1999, 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 1998 1999 adjustment 1998 1999
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C>
1 mo - 1 yr $ 12,171 $ 14,621 1 mo - 1 yr $ 81,208 $ 83,936
1 yr - 5 yrs 38,587 42,010 1 yr - 5 yrs 625 131
Over 5 yrs 23,275 17,267 Over 5 yrs - -
-------- -------- -------- --------
$ 74,033 $ 73,898 $ 81,833 $ 84,067
======== ======== ======== ========
</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:
Year ended December 31,
1997 1998 1999
(In thousands)
Balance - Beginning of period $1,659 $1,584 $1,441
Provision for loan losses 242 605 528
Charge-offs (347) (780) (704)
Recoveries 30 32 135
------ ------ ------
Balance - End of period $1,584 $1,441 $1,400
====== ====== ======
At December 31, 1999 and 1998, the Company had non-accrual loans aggregating
$2.3 million and $3.4 million, respectively, of which $484,000 in 1998 and
$683,000 in 1999 were determined to be impaired. The specific allowance for
impaired loans was $100,000 as of December 31, 1999.
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% less than published interest rates.
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:
Balance Balance
Year ended Beginning End
December 31, of year Advances Repayments of year
(In thousands)
1997 $ 2,221 $ 642 $ 594 $2,269
1998 $ 2,269 $ 465 $ 2,329 $ 405
1999 $ 405 $ 5,772 $ 2,721 $3,456
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 $1.8 million and $391,000 for the years ended
December 31, 1998, and 1999, respectively.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized by major classifications as follows:
December 31,
1998 1999
(In thousands)
Land $ 636 $ 636
Building and improvements 4,175 4,192
Furniture, fixtures and equipment 1,277 1,325
------ ------
6,088 6,153
Less - Accumulated depreciation (2,236) (2,490)
------ ------
$3,852 $3,663
====== ======
Depreciation expense aggregated approximately $285,000, $320,000 and $343,000
during the years ended December 31, 1997, 1998, and 1999 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:
December 31,
1998 1999
(In thousands)
Interest on loans $1,654 $1,725
Interest on investment and mortgage-backed securities 68 97
Dividends on Federal Home Loan Bank Stock 36 33
------ ------
$1,758 $1,855
====== ======
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 1998 1999
1998 1999 Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Demand accounts: (Dollars in thousands)
Non interest-bearing accounts - - $ 5,939 4.7 $ 5,349 4.2
NOW accounts 2.00% 2.00% 11,757 9.2 11,316 8.9
Money market demand accounts 3.00% 3.00% 3,421 2.7 3,824 3.0
Passbook accounts 2.75% 2.75% 15,415 12.1 14,218 11.2
Statement savings 2.875% 2.875% 2,300 1.7 2,664 2.1
--------- ----- --------- -----
38,832 30.4 37,371 29.4
--------- ----- --------- -----
Certificate accounts:
2.00% to 5.00% 18,360 14.4 43,006 33.9
5.01% to 6.00% 62,697 49.2 32,731 25.8
6.01% to 7.00% 6,835 5.4 13,249 10.5
Over 7.00% 826 0.6 513 0.4
--------- ----- --------- -----
88,718 69.6 89,499 70.6
--------- ----- --------- -----
$ 127,550 100.0 $ 126,870 100.0
========= ===== ========= =====
Weighted-average cost of interest-bearing deposits 4.57% 4.52%
========= =========
</TABLE>
Scheduled maturities of certificate accounts were as follows:
December 31,
1998 1999
(In thousands)
Less than one year $ 70,086 $ 56,405
One year to two years 13,347 28,281
Two years to three years 2,331 2,762
Three years to four years 1,310 1,790
Over four year 1,644 261
-------- --------
$ 88,718 $ 89,499
======== ========
As of December 31, 1998 and 1999, the Company had aggregate deposit accounts
with balances greater than $100,000 of approximately $11.7 million and $15.6
million, respectively. Balances in excess of $100,000 are not covered by FDIC
insurance. Deposits from directors, executive officers, and related parties
held by the Bank at December 31, 1999 amounted to $628,000.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Interest expense by deposit type is summarized as follows:
Year ended December 31,
1997 1998 1999
(In thousands)
NOW accounts $ 248 $ 255 $ 223
Money market demand accounts 100 105 115
Passbook and statement savings accounts 505 481 491
Certificate accounts 6,039 5,362 4,425
------ ------ ------
$6,892 $6,203 $5,254
====== ====== ======
NOTE 10 - BORROWED FUNDS
Federal Home Loan Bank:
Advances from the Federal Home Loan Bank are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1999
(In thousands)
<S> <C> <C>
Advances under a $40,000,000 Credit Availability Program(a) expiring
May 14, 2000, interest rate determined daily at FHLB determined
"spread" over the rate paid on FHLB overnight deposit accounts,
interest due monthly $ - $ 9,000
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 189 135
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 303 227
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 124 103
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 -
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 10,000
4.97% ten year convertible advance dated June 19, 1998,
interest due quarterly, principal due June 19, 2008 8,000 -
5.36% five year convertible advance dated September 29, 1999,
interest due quarterly, principal due September 29, 2004 - 6,500
------- -------
Total advances from Federal Home Loan Bank $31,316 $33,665
======= =======
</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 2000, which generally, limits the
Company's aggregate borrowings to the amount of credit availability ($40
million). At December 31, 1999, the Company has unused credit availability of
approximately $6.3 million.
The Company's advances from the FHLB of Atlanta are secured by a blanket
floating lien on qualifying first mortgage loans (approximately $46.4 million at
December 31, 1999). The Company incurred interest expense on FHLB advances of
approximately $1.6 million, $1.7 million and $1.8 million in 1997, 1998 and
1999, respectively.
Other Notes Payable:
Other notes payable are as follows at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
1999
<S> <C>
Advances under a $3 million line of credit with a bank,
interest of LIBOR plus 2.25% or bank's prime rate payable
monthly, principal due December 1, 2000. Secured with
the Bank's stock. $1,000
Advances under a $1.2 million unsecured line of credit with
A bank, interest at the bank's prime, interest and principal due
October 25, 2000 1,000
--------
Total other notes payable $2,000
========
</TABLE>
Securities Sold Under Agreements to Repurchase:
Securities sold under agreements to repurchase were as follows as of December
31, 1999 (in thousands):
6.14% Federal Home Loan Bank Bond of $1,500,000,
estimated fair value of $1,485,000 $1,487
Weighted average interest rate of the agreement 5.68%
This agreement matures February 29, 2000. The security underlying the agreement
was delivered to the institution that arranged the transaction.
Total borrowed funds at December 31, 1999 have maturities and/or are scheduled
to be liquidated in future years as follows:
Year ending Principal
December 31, reductions
(In thousands)
2000 $17,638
2001 151
2002 124
2003 2,022
2004 6,650
2005 - 2009 10,567
----------
$37,152
==========
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
Income tax expense is comprised of the following elements of current and
deferred Federal and state income taxes:
Year ended December 31,
1997 1998 1999
(In thousands)
Current income tax expense:
Federal $ 935 $1,142 $ 902
State 108 112 26
------- -------- --------
1,043 1,254 928
------- -------- --------
Deferred income tax expense (benefit):
Federal (104) (251) (152)
State 6 7 32
------- -------- --------
(98) (244) (120)
------- -------- --------
$ 945 $1,010 $ 808
======= ======== ========
The Company files consolidated federal and state income tax returns. At
December 31, 1999, the Company had prepaid federal income taxes of approximately
$168,000 and a liability for unpaid state income taxes of approximately $95,000.
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.
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,
1997 1998 1999
(Dollars in thousands)
<S> <C> <C> <C>
Expected income tax, at statutory rate $ 754 $ 854 $ 698
Charitable contribution of appreciated property 90 - -
Excess of fair value over cost of ESOP shares committed for release 14 13 4
Federal Home Loan Bank stock dividends
Dividend received deduction (35) (29) (31)
State excise taxes based on income, net of Federal
income tax expense 117 119 79
Other, net 5 53 58
------ ------ -----
Total income tax expense $ 945 $1,010 $ 808
====== ====== =====
Effective income tax rate 40% 40% 40%
====== ====== =====
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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 as follows:
<TABLE>
<CAPTION>
Deferred tax (benefit) liability related to:
Accrued
Temporary Bad debt deduction Loan Accumulated Prepaid compensated
reporting differences (Asset) Liability Fees Depreciation Expenses MRDP Other absences Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $(509) $ 685 $ (39) $ 30 $ 132 $ (45) $(299) $ (48) $ (93)
1997 changes (38) (84) (20) 31 (281) (8) 341 (13) (72)
----- ----- ------ ----- ----- ----- ------ ----- -----
Balance - December 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)
1999 changes 7 (232) 8 (12) 149 11 (93) (33) (195)
----- ----- ------ ----- ----- ----- ------ ----- -----
Balance - December 31, 1999 $(624) $ 171 $ (29) $ 58 - $ (52) $ (51) $ (65) $ (592)
===== ======= ===== ===== ===== ===== ===== ===== ======
</TABLE>
NOTE 12 - PENSION PLAN
The Company froze the benefits of its defined benefit noncontributory retirement
plan ("Plan") in May 1997 and subsequently terminated 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.
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 $172,000 and $112,000 as of
December 31, 1998 and 1999, 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.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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, 1999:
<TABLE>
<CAPTION>
Unearned employee Additional
compensation paid-in Compensation
Shares Amount capital expense
(Dollars in thousands)
<S> <C> <C> <C> <C>
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 $ 64 $ 172
------------ ---------- ============ ===========
Balances - December 31, 1998 (17,163) $ (172)
1999
Shares committed for release: 5,987 60 $ 12 $ 72
------------ ---------- ============ ===========
Balances - December 31, 1999 (11,176) $ (112)
============ ==========
</TABLE>
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, 1999, 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 $243,000 in 1999. As of December 31, 1999, 50,837
shares are vested, 3,541 shares have been forfeited, and 27,622 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.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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). In 1998, 14,000 options
were granted to certain officers and directors under the Plan. No options were
granted in 1999.
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 (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net income $1,339 $1,444 $1,179
Basic EPS $ 0.71 $ 0.80 $ 0.76
Diluted EPS $ 0.70 $ 0.79 $ 0.75
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model using weighted-average assumptions of
expected life-10 years, volatility-30%, risk-free interest rate-7.5%, and
dividend yield -3.3%.
A summary of the status (shares in thousands) of the Company's stock option plan
is as follows:
<TABLE>
<CAPTION>
-------------------- ------------------- --------------------
1997 1998 1999
-------------------- ------------------- --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 102,492 $ 11.75 102,492 $ 11.75 111,242 $ 11.69
Granted - - 14,000 11.25 - -
Exercised - - (5,250) 11.75 (936) 11.75
Forfeited - - - - - -
---------- --------- --------- --------- ---------- ---------
Outstanding, ending of year 102,492 $ 11.75 111,242 $ 11.69 110,306 $ 11.69
========== ========= ========= ========= ========== =========
Options exercisable at year-end 20,498 $ 11.75 35,746 $ 11.75 55,308 $ 11.75
---------- --------- --------- --------- ---------- ---------
Weighted-average fair value of
options granted during the year $ - $ 3.34 $ -
--------- --------- ---------
</TABLE>
40
<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, 1999:
<TABLE>
<CAPTION>
Percentage of
adjusted total
Amount assets
First Southern Bancshares, Inc: (Dollars in thousands)
<S> <C> <C>
Primary capital ratios:
GAAP capital $ 13,969
Adjustments:
Mortgage servicing rights (5)
Net unrealized loss on securities available for sale 104
---------
Tier 1 capital 14,068 7.92%
Minimum Tier 1 (leverage) requirement 7,108 4.00%
--------- --------
Excess $ 6,960 3.92%
========= ========
Risk-based capital ratios:
Core (Tier 1) Capital 14,068 9.73%
Minimum core capital 5,781 4.00%
--------- --------
Excess $ 8,287 5.73%
========= ========
Risk-based capital $ 15,468 10.70%
Minimum risk-based capital requirement 11,562 8.00%
--------- --------
Excess $ 3,906 2.70%
========= ========
</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 Bancshares, Inc: (Dollars in thousands)
<S> <C> <C>
Total capital (to risk-weighted assets) $ 16,099 11.15%
To be well capitalized under the FDICIA
prompt corrective action provisions 14,441 10.00%
----------- ----------
Excess $ 1,658 1.15%
=========== ==========
Tier 1 capital (to risk-weighted assets) $ 14,699 10.18%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,664 6.00%
----------- ----------
Excess $ 6,035 4.18%
=========== ==========
Tier 1 capital (to average assets) $ 14,699 8.28%
To be well capitalized under the FDICIA
prompt corrective action provisions 8,880 5.00%
----------- ----------
Excess $ 5,819 3.28%
=========== ==========
</TABLE>
41
<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, 1999, the Bank's qualifying reserves of approximately $3.2 million
significantly exceeded the required reserve of $292,000.
NOTE 15 - INTEREST RATE RISK
The Company is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At December 31, 1999, the Company's
interest earning assets consisted of approximately 48% fixed interest rates and
approximately 52% adjustable interest rates (49% and 51%, respectively, at
December 31, 1998). Approximately 93% of the Company's assets at December 31,
1999 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, 1999 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 $11.5 million as of
December 31, 1999.
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.
Contract or notional amount
December 31,
1998 1999
(In thousands)
Financial instruments and contract amounts
which represent credit risk:
Commitments to extend credit $ 1,254 $ 724
Unused lines of credit $ 12,279 $ 11,548
Standby letters of credit $ 10 $ 10
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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.
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 1997, 1998 and 1999 acquisition of 79,930, 224,182 and 356,272
shares, respectively, of Company common stock (aggregating 36.8% of issued
shares) at an aggregate cost of $1.1 million, $3.6 million and $4.8 million in
1997, 1998 and 1999, respectively. 54,906 of such shares were utilized in the
funding of the MRDP, 6,186 were used to satisfy options exercised and 763,598
(aggregating 36.8% of issued shares) are held in treasury at December 31, 1999.
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.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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.
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,
1998 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 284 $ 1,220
Notes receivable 172 112
Investment in wholly-owned subsidiary 17,512 14,600
Other assets 102 94
--------- ---------
TOTAL ASSETS $ 18,070 $ 16,026
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable $ - $ 2,000
Income taxes currently payable -
Other accrued liabilities 62 57
--------- ---------
Total liabilities 62 2,057
STOCKHOLDERS' EQUITY 18,008 13,969
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,070 $ 16,026
========= =========
</TABLE>
CONDENSED STATEMENT OF INCOME (In thousands, except share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
<S> <C> <C> <C>
INCOME
Equity in earnings of wholly-owned subsidiary $ 1,477 $ 1,583 $ 1,375
Other 18 18 36
------- ------- -------
Total income 1,495 1,601 1,411
EXPENSES 139 157 227
------- ------- -------
Net income before income taxes 1,356 1,444 1,184
Provision for income taxes (41) (58) (62)
------- ------- -------
NET INCOME $ 1,397 $ 1,502 $ 1,246
======= ======= =======
BASIC EARNINGS PER SHARE $ 0.74 $ 0.83 $ 0.80
DILUTED EARNINGS PER SHARE $ 0.73 $ 0.82 $ 0.79
DIVIDENDS PER SHARE, REGULAR AND SPECIAL $ 0.50 $ 0.80 $ 0.50
DIVIDEND PAYOUT RATIO DURING THE PERIOD 67.57% 96.39% 62.50%
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS (In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,397 $ 1,502 $ 1,246
Adjustments to reconcile net income to net cash provided by operations:
Equity in earnings of wholly-owned subsidiary 3,512 3,095 2,912
(Increase) decrease in other assets (52) (28) 8
(Decrease) in income taxes payable (3) - -
Increase (decrease) in other accrued liabilities (30) 16 (5)
-------- -------- --------
Cash flows from operating activities 4,824 4,585 4,161
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity and sales of investment and mortgage-backed securities - - -
Principal reductions in notes receivable 121 108 60
-------- -------- --------
Cash flows from (used in) investing activities 121 108 60
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - 2,750 2,800
Repayments of borrowings (4,000) (2,750) (800)
Cash dividends, including dividends on unallocated ESOP shares (870) (1,361) (730)
Acquisition of treasury stock (1,078) (3,640) (4,771)
ESOP shares committed for release 162 147 71
Amortization of MRDP shares 258 311 260
Equity in reserves of wholly-owned subsidiary 38 13 (115)
-------- -------- --------
Cash flows from (used in) financing activities (5,490) (4,530) (3,285)
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS (545) 163 936
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 666 121 284
-------- -------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 121 $ 284 $ 1,220
======== ======== ========
</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,
1999 are summarized as follows:
<TABLE>
<CAPTION>
Carrying Fair
amount value
(In thousands)
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 5,906 $ 5,906
Investment securities 4,408 4,408
Mortgage-backed securities 3,527 3,290
Loans receivable, net 155,738 155,813
Loans held for sale 80 80
Federal Home Loan Bank stock 1,685 1,685
Accrued dividends and interest receivable 1,855 1,855
---------- -----------
$173,199 $ 173,037
========== ===========
FINANCIAL LIABILITIES
Deposits:
Demand accounts $ 37,371 $ 37,371
Certificates of deposit 89,499 89,424
Advances from Federal Home Loan Bank 33,665 33,665
Other notes payable 2,000 2,000
Securities sold under repurchase agreement 1,487 1,485
Off-balance sheet commitments - -
---------- -----------
$164,022 $ 163,945
========== ===========
</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.
Accrued dividends and interest receivable
Based upon the nature of the instrument, the carrying value approximates fair
value.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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 and other notes payable
The estimated fair value of Federal Home Loan Bank loan advances and other
notes payable was determined by discounting future cash flows using the rates
currently being offered on Federal Home Loan Bank advances and bank borrowings
having similar characteristics.
Off-balance sheet financial commitments
The Company had $12.3 million of off-balance sheet financial commitments as of
December 31,1999, which are commitments to originate loans and unused lines of
credit. Since these obligations are based on current market, 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, 1999. 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.
NOTE 23 - QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1999
------------------------------------ ----------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- ------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,780 $ 3,823 $ 3,913 $3,661 $ 3,444 $3,468 $ 3,471 $ 3,568
Interest expense 2,050 1,970 2,040 1,896 1,779 1,759 1,734 1,833
-------- ------- ------- ------- ------- -------- -------- -------
Net interest income 1,730 1,853 1,873 1,765 1,665 1,709 1,737 1,735
Provision for loan losses 60 61 103 381 195 148 49 136
-------- ------- ------- ------- ------- -------- -------- -------
Net interest income after provisions
for loan losses 1,670 1,792 1,770 1,384 1,470 1,561 1,688 1,599
Noninterest income 210 253 230 263 247 218 156 161
Noninterest expense 1,228 1,322 1,276 1,234 1,180 1,249 1,308 1,309
-------- ------- ------- ------- ------- -------- -------- -------
Income before income taxes 652 723 724 413 537 530 536 451
Income tax expense 246 280 270 214 213 207 211 177
-------- ------- ------- ------- ------- -------- -------- -------
Net income $ 406 $ 443 $ 454 $ 199 $ 324 $ 323 $ 325 $ 274
======== ======= ======= ======= ======= ======== ======== =======
Basic Earnings per share $ 0.22 $ 0.24 $ 0.25 $ 0.13 $ 0.20 $ 0.20 $ 0.20 $ 0.21
======== ======= ======== ======== ======= ======== ======== =======
Diluted Earnings per share $ 0.21 $ 0.24 $ 0.25 $ 0.13 $ 0.19 $ 0.20 $ 0.20 $ 0.20
======== ======= ======== ======== ======= ======== ======== =======
</TABLE>
Note: Quarterly amounts may not add to year-to-date due to rounding.
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 March 10, 2000, First
Southern Bancshares, Inc. had 629 shareholders and 1,268,626 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>
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
1999 High Low Dividend
First quarter $ 14.438 $ 12.750 $ 0.125
Second quarter $ 13.500 $ 11.125 $ 0.125
Third quarter $ 13.375 $ 10.000 $ 0.125
Fourth quarter $ 13.250 $ 10.000 $ 0.125
</TABLE>
48
<PAGE>
DIRECTORS AND OFFICERS OF
FIRST SOUTHERN BANCSHARES, INC. AND
FIRST SOUTHERN BANK
<TABLE>
<CAPTION>
Members of the Board of Directors Officers
- ---------------------------------- ---------------------------------
<S> <C>
Charles L. Frederick, Jr. Charles L. Frederick, Jr.
Chairman of the Board President and Chief Executive Officer
President and Chief Executive Officer
First Southern Bancshares, Inc. and Thomas N. Ward
First Southern Bank Executive Vice President and
Chief Operating Officer
Thomas N. Ward
Executive Vice President and Glenda Young
Chief Operating Officer Senior Vice President and
First Southern Bank Chief Accounting Officer
Milka S. Duke Marva Kaye Townsend
Retired Assistant to the President and
Former officer of First Federal Savings Corporate Secretary
and Loan of Florence
Brent Turpen
Kenneth Williams Treasurer/Controller
Partner of Williams & Son Oil Co.
(An oil distribution company) Sharon Robbins
Assistant Corporate Secretary
J. Acker Rogers Vice President:
Partner ---------------
Rogers, Carlton & Associates, Inc. Linda Allen
(Insurance Agency) Tyler Calhoun III
Kenneth McLain
Gary Gamble Farrell Southern
President Irene Woods
Plantation Springs, Inc. Marc Tays
(Land development company)
James E. Bishop Assistant Vice President:
President and Owner -------------------------
Jim Bishop Chevrolet, Inc. and Donna Ezekiel
Buick Oldsmobile, Inc. Marsha Rochester
(Automobile and truck dealership) Natalie Tackett
Brenda Crittenden
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 19, 2000, 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 10, 2000 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.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in First Southern
Bancshares, Inc.'s Registration Statement No. 333-03832 on Form S-8 and in First
Southern Bancshares, Inc.'s Registration Statement No. 333-32619 on Form S-8 of
our report dated March 3, 2000 for the year ended December 31, 1999 appearing in
this Form 10-KSB.
/s/ MARMANN, McCRARY & ASSOCIATES, P.C.
Sheffield, Alabama
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of First Southern Bancshares, Inc. for the year ended
December 31, 1999 and is qualified in its entirety by reference to such
financial statements. Dollars are in thousands except for per share data.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
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0
0
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</TABLE>
