<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
June 30, 1996 1-13640
SOUTHFIRST BANCSHARES, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1121255
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
126 North Norton Avenue, Sylacauga, Alabama 35150
- - --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, includding area code: (205) 245-4365
- - --------------------------------------------------------------------------------
Not applicable
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
------- -------
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Common Stock, par value $.01 per share 838,700 shares
- - --------------------------------------------------------------------------------
Class Outstanding at August 9, 1996
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SOUTHFIRST BANCSHARES, INC.
FORM 10-Q
FOR QUARTER ENDED
JUNE 30, 1996
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SOUTHFIRST BANCSHARES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition at June 30, 1996
(Unaudited) and September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Earnings for the Nine Months Ended
June 30, 1996 and 1995, (Unaudited), and Three Months Ended
June 30, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 1996, and 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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SOUTHFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1996 (UNAUDITED) AND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ASSETS JUNE 30, SEPT 30,
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions 3,410,619 4,464,099
Interest-bearing deposits in other financial institutions 3,182 303,000
Investment securities held to maturity at cost (market value of $150,000 at
June 30, 1996 and $13,375,240 at September 30, 1995) (note 2) 150,000 13,266,095
Investment securities available for sale, at market value (amortized
cost of $20,021,411 at June 30, 1996 and $10,920,391 at
September 30, 1995) (note 2) 22,109,364 11,418,696
Loans receivable 62,288,474 53,798,634
Less allowance for loan losses (253,537) (265,759)
---------- ----------
Net Loans 62,034,936 53,532,875
Loans held for sale (cost and market value of $102,150 in 1996) 102,150 --
Premises and equipment, net 1,792,320 1,456,673
Foreclosed real estate, net 28,886 28,886
Accrued interest receivable 482,604 533,519
Other assets 194,875 414,880
Investment in affiliates 233,294 76,310
---------- ----------
Total Assets 90,542,230 85,495,033
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing 1,458,928 1,516,160
Interest bearing 63,830,799 61,315,998
---------- ----------
Total deposits 65,289,727 62,832,158
Advances by borrowers for property taxes and insurance 375,295 400,405
Accrued interest payable 686,780 823,885
Borrowed Funds 10,511,909 6,069,852
Income taxes payable 399,580 396,577
Accrued expenses and other liabilities 228,771 201,570
---------- ----------
Total Liabilities 77,492,062 70,724,447
Stockholder's equity:
Common stock $.01 par value, authorized 2,000,000 shares,
863,200 shares issued 8,632 8,300
Treasury Stock (178,923) --
Additional Paid-in Capital 7,239,734 7,240,066
Retained earnings substantially restricted (note 3) 5,957,767 7,624,515
Unrealized gain on investment securities available for sale, net of tax 620,558 495,305
Employee Stock Ownership Plan Debt (597,600) (597,600)
---------- ----------
Total stockholders' equity 13,050,168 14,770,586
---------- ----------
Total liabilities and stockholders' equity 90,542,230 85,495,033
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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SOUTHFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1996 AND 1995 AND
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Nine months ended June 30, Three months ended June 30,
-------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and Dividend Income:
Interest and fees on loans 3,587,803 3,159,486 1,261,842 1,068,968
Interest and dividend income on investment
securities held to maturity 9,254 672,014 1,879 221,648
Interest and dividend income on investment
securities available for sale 1,290,538 769,212 419,980 281,618
--------- --------- --------- ---------
Total interest and dividend income 4,887,595 4,600,712 1,683,701 1,572,234
Interest Expense:
Interest on deposits 2,219,431 2,023,469 740,858 717,092
Interest on borrowed funds 380,585 265,586 157,328 69,159
--------- --------- --------- ---------
Total interest expense 2,600,016 2,289,055 898,186 786,251
--------- --------- --------- ---------
Net interest income 2,287,579 2,311,657 785,515 785,983
Provision for loan losses 1,200 - 0 -
--------- --------- --------- ---------
Net interest income after provision
for loan losses 2,286,379 2,311,657 785,515 785,983
Other Income:
Settlement of lawsuit (note 4) 583,000 - 75,000 -
Service charges and other fees 427,117 336,310 137,620 107,198
Gain on sale of loans 104,925 37,307 50,307 19,679
Gain on sale of foreclosed real estate - 14,770 - -
Insurance commissions 1,348 7,001 182 1,367
Profit (loss) from Sale of Equipment (7,543) - (7,543) -
Equity in net loss of affiliate (18,016) - 12,097 -
Other 51,251 29,075 22,428 4,163
--------- --------- --------- ---------
Total Other Income 1,142,082 424,463 290,091 132,407
--------- --------- --------- ---------
Other Expenses:
Compensation and benefits 1,650,182 1,102,391 473,793 395,206
Insurance Expense 109,810 - 42,883 -
Net occupancy expense 115,393 104,088 37,781 32,756
Furniture and Fixtures 118,076 115,391 36,794 37,574
Data processing 127,785 117,503 43,511 37,020
Office supplies and expense 144,175 130,464 49,361 42,947
Deposit insurance premiums 132,146 134,964 43,785 45,059
Other 436,910 235,576 74,053 73,487
--------- --------- --------- ---------
Total Other Expenses 2,834,477 1,940,377 801,961 664,049
--------- --------- --------- ---------
Income before income taxes 593,984 795,743 273,645 254,341
Income Tax Expense 214,781 296,587 85,265 90,200
--------- --------- --------- ---------
Net Income 379,204 499,156 188,381 164,141
========= ========= ========= =========
Net income per common share 0.44 1.20 0.22 0.20
========= ========= ========= =========
Weighted average common shares outstanding 856,822 416,520 863,200 830,000
</TABLE>
See accompanying notes to consolidated financial statements.
2
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SOUTHFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Nine months ended June 30,
--------------------------------
1996 1995
-------- --------
<S> <C> <C>
Operating Activities:
Net Income $ 379,204 $ 499,156
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 83,056 99,550
Equity in loss of unconsolidated affiliate 18,016 -
Gain on sale of loans (104,925) (37,307)
Loss on sale of premises and equipment 7,543 6,355
Increase (decrease) in deferred loan origination fees 28,696 101
Net amortization of premium on investment securities held to maturity - (7,154)
Net amortization of premium on investment securities
available for sale 4,669 11,758
Gain on sale of foreclosed real estate - (14,770)
Loans Originated for Sale (3,525,404) -
Proceeds from Sale of Loans 3,589,602 -
Decrease (increase) in accrued interest receivable 50,915 (41,285)
Decrease (Increase) in other assets 220,005 (621,060)
Increase in accrued interest payable (137,105) 74,298
Increase (decrease) in income taxes payable (74,337) 16,969
Increase (decrease) in accrued expenses and other liabilities 27,201 14,726
---------- -----------
Net cash provided by operating activities 567,136 1,337
Investing Activities:
Investment in affiliated company (175,000) -
Maturity of interest-bearing deposits in other financial institutions 300,000 -
Reinvestment of Div-Int-bearing dep in other (182) -
Proceeds from maturity of investment securities held to maturity 357,000 -
Proceeds from maturity of investment securities available for sale - 1,000,000
Purchases of investment securities available for sale (4,070,385) -
Purchase of Discount on Investments AFS 2,813 -
Proceeds from sale of investments 3,640,274 -
Purchases of Federal Home Loan Bank time deposits held to maturity - (1,107,000)
Purchases of Federal Home Loan Bank agency note AFS - (1,500,000)
Reinvestment of mutual fund dividend (14,238) -
Gain on Sale of Inv Securities AFS 23,842 -
Principal repayments of investment securities available for sale 2,403,595 1,309,053
Principal repayments of investment securities held to maturity 280,451 755,161
Net (increase) decrease in loans (8,592,180) (1,500,535)
Proceeds from sale of premises and equipment - 3,355
Purchase of premises and equipment (426,246) (69,577)
Proceeds from sale of foreclosed real estate - 48,708
------------ -----------
Net cash used in investing activities (6,270,256) (1,060,835)
</TABLE>
See accompanying notes to consolidated financial statements.
(Cont'd)
3
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SOUTHFIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Nine months ended June 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Financing activities:
Net decrease in NOW accounts and savings accounts (16,367) (2,077,606)
Net increase in certificates of deposit 2,473,936 390,244
Proceeds from borrowed funds 6,817,594 --
Repayment of borrowed funds (2,375,537) (5,063,114)
Net proceeds from issuance of common stock -- 7,248,366
Cash dividends paid (2,045,951) (166,000)
Decrease in advances by borrowers for property taxes and insurance (25,110) (73,331)
----------
Treasury Stock Purchased (178,925)
---------- ----------
Net cash provided by financing activities 4,649,640 258,559
---------- ----------
(Decrease) in cash and cash equivalents (1,053,480) (800,939)
Cash and cash equivalents at beginning of year 4,464,099 4,239,639
---------- ----------
Cash and cash equivalents at end of year 3,410,619 3,438,700
========== ==========
Supplemental information on cash payments:
Interest paid 2,737,121 2,155,013
========== ==========
Income taxes paid 211,778 (107,098)
========== ==========
Supplemental information on noncash transactions:
Transfers to investment securities available for sale from
investment securities held to maturity 12,476,980 11,958,543
========== ==========
Change in net unrealized gain on investment securities
available for sale 125,253 516,001
========== ==========
</TABLE>
4
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SOUTHFIRST BANCSHARES, INC.
June 30, 1996
PART I. FINANCIAL INFORMATION
ITEM 1: NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
Information filed on this Form 10-Q as of and for the quarter ended June 30,
1996 was derived from the financial records of SouthFirst Bancshares, Inc.
(the "Corporation") and its wholly-owned subsidiary, First Federal of the South
(the "Bank", formerly First Federal Savings & Loan Association of Sylacauga,
collectively as the "Company"). As of February 13, 1995, the Bank converted
from a mutual to a stock form of ownership, whereby all of the of the stock of
the Bank was purchased by the Corporation upon the issuance of 830,000 shares
of the Corporation's common stock (the "Conversion").
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (none of which are
other than normal recurring accruals) necessary for a fair statement of the
financial position of the Company and the results of operations for the nine
month period ended June 30, 1996. The results contained in these statements
are not necessarily indicative of the results which may be expected for the
entire year.
(2) INVESTMENT SECURITIES
In November 1995, the Financial Accounting Standards Board issued Special
Report - A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities - Questions and Answers.
Concurrent with the initial adoption of this implementation guidance, an entity
may reassess the appropriateness of the classifications of all securities held
at that time and account for any resulting reclassifications at fair value.
This one-time reclassification should occur as of a single date between
November 15, 1995 and December 31, 1995, not over a number of days throughout
that period. Reclassifications from the held-to-maturity category that result
from this one- time reassessment will not call into question the intent of an
entity to hold other debt securities to maturity in the future. In conjunction
with this special report, the Bank transferred, effective December 31, 1995,
all of its collateralized mortgage obligations with a total amortized cost of
$12,476,980 and fair value of $12,551,775 to the classification of available
for sale. The unrealized net holding gains on the collateralized mortgage
obligations at December 31, 1995 totaled approximately $75,000 and were
included as a separate component of stockholders' equity, net of income taxes
of approximately $28,000.
The stock of the Federal Home Loan Bank has no quoted fair value and no ready
market exists. The investment in the stock is required of insured institutions
that utilize the services of the Federal Home Loan Bank. As management has the
intent and ability to hold the investment until such time that the Federal Home
Loan Bank requires remittance, the investment is classified as held to
maturity.
(3) RETAINED EARNINGS
The Bank, pursuant to applicable OTS regulations, established a special
"liquidation account" for the benefit of the eligible account holders and
supplemental eligible account holders in the Conversion. The liquidation
account was established in an amount equal to the regulatory capital of the
Bank as of the date of the statement of financial condition contained in the
final Prospectus. Each eligible account holder and supplemental eligible
account holder is entitled, on a complete liquidation of the Bank after the
Conversion (and only in such event), to an interest in the liquidation account.
The initial interest in such liquidation account is determined by multiplying
the opening balance in the liquidation account by a fraction of which the
numerator is the amount of the qualifying deposit in the related deposit
account and the denominator is the total amount of the qualifying deposits of
all eligible account holders and supplemental eligible account holders in the
Bank. If, on any annual closing date subsequent to the Conversion, the amount
in any qualifying deposit account is less than the amount in such account on
the initial applicable date, then the interest in the liquidation account is
reduced by an amount proportionate to any such reduction. If, subsequent to
the Conversion, a qualified deposit account is closed, then the interest of the
account holder in the liquidation account will be reduced to zero. A merger,
consolidation, sale of bulk assets or similar combination as transaction with
an FDIC-insured institution, in which the Bank is not the surviving insured
institution, would not be considered to be a "liquidation" under which any
distribution of the liquidation account would be made. In such a transaction,
the liquidation account would be assumed by the surviving institution. The
creation and maintenance of the liquidation account would not restrict the use
or application of any of the capital accounts of the Bank, except that the Bank
may not declare or pay a cash dividend to, or repurchase any of its capital
stock from, SouthFirst Bancshares, Inc., if the effect of such dividend or
repurchase would be to cause its equity to be reduced below the aggregate
amount then required for the liquidation account.
5
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SOUTHFIRST BANCSHARES, INC.
(4) SETTLEMENT OF LAWSUIT
On December 21, 1993, the Bank filed a Complaint against United States Fidelity
& Guaranty Company (USF&G) and Robert R. Peoples in the Circuit Court of
Talladega County, Alabama. The complaint alleged that USF&G breached its
contractual obligations under a fidelity bond and that Robert R. Peoples
defrauded the Bank. USF&G denied the Bank's claim under its fidelity bond and
the Bank sought compensatory damages in the amount of approximately $612,000
and punitive damages against USF&G. Mr. Peoples, a former employee of the
Bank, pled guilty to a federal banking crime indictment. The Bank, for 20
years, maintained a fidelity bond with USF&G. This bond insured the Bank
against losses resulting from numerous causes, including the fraudulent acts
committed against the Bank by Mr. Peoples. On March 3, 1995, a jury awarded
$788,000 to the Bank against USF&G, in compensatory damages and punitive
damages for bad faith. The Bank received, as of December 31, 1995, $619,487 of
this jury award and has paid therefrom $111,230 in legal fees associated with
the case, for a net amount of $508,257. The punitive damages and certain of
the compensatory damages, in the aggregate amount of approximately $200,000,
were appealed by USF&G.
On or about March 8, 1995, USF&G filed a subrogation action in the Circuit
Court against current and former officers and directors of the Bank, alleging
negligence in their oversight of Mr. Peoples. Management believes that this
action was filed by USF&G to force a settlement of the bad faith portion of the
judgment against USF&G. Management also believes that the current and former
officers and directors of the Bank have acted properly and in good faith with
respect to their duties, including the oversight of Mr. Peoples; and,
therefore, are required to be indemnified by the Bank, for any adverse judgment
and for the reasonable costs of their legal defense, under applicable
regulations of the OTS. On December 22, 1995, the Circuit Court dismissed this
action in a final judgment in favor of the current and former officers and
directors of the Bank. USF&G subsequently filed an appeal of this dismissal.
On May 23, 1996 the Company received $75,000, net of legal fees, from USF&G.
This amount represents the final settlement pertaining to the aforementioned
bond claim and subrogation action.
In the normal course of its business, the Corporation and the Bank from time to
time are involved in legal proceedings. The Corporation and Bank management
believe there are no pending or threatened legal proceedings which upon
resolution are expected to have a material effect upon the Corporation's or the
Bank's financial condition.
(5) NET INCOME PER COMMON SHARE
For purposes of computing net income per common share, the weighted average
number of common shares included in the calculation is based on the 830,000
shares outstanding on the date of the initial public offering on February 13,
1995 and includes 33,200 shares issued on November 15, 1995 under the Company's
Management Recognition Plans. Also, the Company acquired 14,500 shares of
Treasury Stock during the quarter ended June 30, 1996.
6
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SOUTHFIRST BANCSHARES, INC.
(6) SUBSEQUENT EVENTS
On July 17, 1996, the Company declared a regular dividend of $.125 per share,
payable on August 15, 1996 to shareholders of record on August 1, 1996,
resulting in a regular dividend of $107,900.31.
On May 15, 1996, the board of directors agreed, with the approval from the
Office of Thrift Supervision to implement a stock Repurchase Program. This
program would allow SouthFirst Bancshares to re-purchase 5% or 43,160 shares of
it's outstanding common stock over a one year period.
On July 5, 1996, 10,000 shares were re-purchased, for a total re-purchase of
24,500 shares or 2.8% of common stock outstanding as of August 1, 1996.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
REVIEW OF RESULT OF OPERATIONS
OVERVIEW
Net Income for the nine months ended June 30, 1996, decreased $119,952 or 24.0%
when compared to the comparable period during 1995. This decrease in net
income resulted primarily from an increase in other expense due to costs
associated with implementing the Company's Management Recognition Plans, costs
associated with the Company's Stock Option and Incentive Plan, and costs
associated with the Special Dividend of $2.00 per share which was paid on
January 22, 1996, to stockholders of record on January 8, 1996. These costs
were partially offset by a settlement in a fidelity bond claim. Net income per
common share, based on weighted average shares outstanding was $.44 and $.22
for the nine months and three months ended June 30, 1996, respectively.
Further discussion of major items affecting net earnings are discussed in
detail below.
NET INTEREST INCOME
Net interest income is the difference between the interest and fees earned on
loans, securities, and other interest- bearing assets (interest income) and the
interest paid on deposits (interest expense). Higher net interest income is a
result of the relationship between the interest-earning assets and the
interest-bearing liabilities.
Interest rates increased in the nine months ended June 30, 1996, as compared to
the same period in 1995. As of June 30, 1996, net interest margin decreased 9
basis points as rates earned on interest-earning assets increased 34 basis
points to 7.97%, while cost of funds increased 43 basis points to
7
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SOUTHFIRST BANCSHARES, INC.
4.91%, when compared to the comparable period during 1995. As a result, net
interest income after provision for loan losses decreased by $25,278 or 1.1% in
the first nine months of fiscal 1996, compared to the first nine months of
fiscal 1995.
OTHER INCOME
Other income increased by $717,619, primarily as a result of a net bond claim
settlement with USF&G of approximately $583,000, an increase of $67,678 in the
amount realized for gain on sale of loans, and an increase of $90,807 in
service charges and other fees during the nine months ended June 30, 1996, as
compared to the same period in 1995. These increases were partially offset by
a loss of $18,016 from affiliated companies due to start-up costs associated
with the companies.
For the three-month period ended June 30, 1996, other income increased by
approximately $158,000 compared to the same period in 1995. This increase was
primarily the result of a final settlement of the bond claim with USF&G
amounting to $75,000, net of legal fees. In addition, service charges and
other fees increased by approximately $30,000, and gain on sale of loans and
investments increased by approximately $50,000.
OTHER EXPENSE
Total other expense increased from $1,940,377 for the nine months ended June
30, 1995, to $2,834,477 for the same period in 1996. The increase of $894,100
was due to several factors, which included costs associated with the
implementation of employee benefit plans, costs associated with the production
of the Company's first 10-K and Annual Report to the stockholders, and costs
associated with the Special Dividend paid on January 22, 1996, which required
an in-depth analysis on whether or not the dividends could qualify as return of
capital. The majority of these costs are non-recurring in nature.
For the three month period ended June 30, 1996, other expense increased by
approximately $138,000 as compared to the same period in 1995. This increase
was primarily due to costs associated with the implementation of employee
benefit plans.
INCOME TAX EXPENSE
The Company's effective tax rate for the nine month period ended June 30, 1996,
was 38.0% compared to the federal statutory rate of 34.0%. The Company's
effective tax rate was higher than the statutory rate due primarily to state
income taxes. Income tax expense decreased $81,806 or 27.6% to $214,781 for
the nine months ended June 30, 1996, as compared to the nine months ended June
30, 1995, due to the decline in pre-tax earnings.
REVIEW OF FINANCIAL CONDITION
OVERVIEW
Management continuously monitors the financial condition of the Company in
order to protect depositors, increase retained earnings, and protect current
and future earnings.
8
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SOUTHFIRST BANCSHARES, INC.
Return on average stockholders' equity is one way of assessing the return the
Company has generated for its stockholders. The table below sets forth the
return on average stockholders' equity and other performance ratios of the
Company for the periods indicated.
<TABLE>
<CAPTION>
At or for the
Nine months ended
June 30 June 30
1996 1995
<S> <C> <C>
Return on assets 0.58% .80%
Return on equity 3.66% 6.63%
Equity-to-assets ratio 15.85% 12.06%
Interest rate spread 3.66% 3.73%
Net interest margin 3.06% 3.15%
Total risk-based capital ratio 22.23% 31.30%
Nonperforming loans to loans 0.77% 0.31%
Allowance for loan losses to loans 0.44% 0.43%
Allowance for loan losses to nonperforming loans 57.36% 137.74%
Ratio of net charge-offs to average loans outstanding 0.02% 0.01%
Book value per common share outstanding $15.28 $17.71
</TABLE>
Significant factors affecting the Company's financial condition from September
30, 1995, to June 30, 1996 are detailed below:
ASSETS
Total assets increased from $85,495,033 at September 30, 1995, to $90,542,230
at June 30, 1996, an increase of $5,047,197 or 5.9%. Net loans receivable
increased, during this same period, by $8.5 million due to increased loan
demand in residential mortgages, as well as in residential construction loans.
Mortgage-backed securities and CMOs decreased by approximately $2.4 million
with principal pay downs being used to fund the residential mortgage and
construction loans.
LIABILITIES
Total liabilities increased $6,767,615 or 9.6% from September 30, 1995, to June
30, 1996. Deposits increased by approximately $2.5 million or 3.9%,
reflecting a recent trend of customers adding savings and certificates of
deposits, as opposed to investing in other markets. In addition, advance
borrowings from the Federal Home Loan Bank of Atlanta increased by
approximately $4.5 million or 73.2% from September 30, 1995, to June 30, 1996.
This increase reflected the funding requirements as a result of increased
residential mortgage and construction loan demand.
9
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SOUTHFIRST BANCSHARES, INC.
LOAN QUALITY
A major key to long-term earnings growth is maintenance of a high-quality loan
portfolio. The Company's directive in this regard is carried out through its
policies and procedures for review of loans. The goal and result of these
policies and procedures is to provide a sound basis for new credit extensions
and an early recognition of problem assets to allow the most flexibility in
their timely disposition.
At June 30, 1996, the allowance for loan losses was $253,537, as compared to
$265,759 at September 30, 1995. Provisions for loan losses were $1,200 and
$.00 in the first nine months of fiscal 1996 and 1995, respectively.
Charge-offs were insignificant during these periods. Nonperforming loans at
June 30, 1996 were approximately $442,000 as compared to approximately $301,000
at September 30, 1995. Foreclosed real estate remained constant at $28,886
from September 30, 1995 to June 30, 1996. Although loans have increased,
management believes loan loss reserves are adequate due to the fact that the
Company has not experienced significant loan charge offs.
LIQUIDITY AND INTEREST SENSITIVITY
Liquidity is the ability of an organization to meet its financial commitments
and obligations on a timely basis. These commitments and obligations include
credit needs of customers, withdrawals by depositors, and payment of operating
expenses and dividends.
The Company is required under applicable federal regulations to maintain
specified levels of cash and "liquid" investments in qualifying types of United
States Treasury and Federal Agency securities, and other investments generally
having maturities of five years or less. Such investments serve as a source of
funds upon which the Company may rely to meet deposit withdrawals and other
short-term needs. The required level of such investments is calculated on a
"liquidity base" consisting of net withdrawable accounts plus borrowings
payable on demand or with maturities of one year or less. Management's
objectives continue to include maintaining liquidity in excess of the required
regulatory amount of 5.0% of net deposits and short-term borrowings in order to
provide greater flexibility and to better match maturities of the requirements
of normal operations, potential deposit outflows and loan demand. The Company
closely monitors its cash flow position to assure necessary liquidity and to
take advantage of market opportunities. At June 30, 1996, and September 30,
1995, the Company's liquid assets represented 10.35% and 10.63%, respectively,
of its liquidity base. Management believes that the Company's liquidity is
adequate to fund all outstanding commitments and other cash needs.
Changes in interest rates will necessarily lead to changes in the net interest
margin. It is the Company's goal to minimize volatility in the net interest
margin by taking an active role in managing the level, mix and maturities of
assets and liabilities.
To reduce the adverse effect of changes in interest on its net interest margin,
the Company is pursuing various strategies to improve the rate sensitivity of
its assets and stabilize net interest income.
10
<PAGE> 14
SOUTHFIRST BANCSHARES, INC.
CAPITAL ADEQUACY AND RESOURCES
Management is committed to maintaining capital at a level sufficient to protect
depositors, provide for reasonable growth, and fully comply with all regulatory
requirements. Management's strategy to achieve this goal is to retain
sufficient earnings while providing a reasonable return on equity.
The Office of Thrift Supervision has issued guidelines identifying minimum
regulatory "tangible" capital equal to 1.50% of adjusted total assets, a
minimum 3.0% core capital ratio, and a minimum risk-based capital of 8.0% of
risk-weighted assets. The Company has provided the majority of its capital
requirements through the retention of earnings and issuance of common stock in
the Company's initial public offering.
At June 30, 1996, the Company satisfied all regulatory capital requirements.
The Company's compliance with the current standards is as follows:
<TABLE>
<CAPTION>
Percent of
asset
Amount base
------ ----
(Dollars in thousands)
<S> <C> <C>
Tangible Capital $ 11,080 12.24%
Core 11,080 12.24%
Risk-based 11,334 22.23%
</TABLE>
The OTS has proposed an amendment to its capital regulations establishing a
minimum core capital ratio of 3.0 percent for savings associations rated
composite 1 under the OTS MACRO rating system. For all other savings
associations, the minimum core capital ratio will be 3.0 percent plus at least
an additional 100 to 200 basis points. In determining the amount of additional
core capital, the OTS will assess both the quality of risk management systems
and the level of overall risk in each individual savings association through
the supervisory process on a case-by-case basis.
The OTS also requires savings institutions with more than a normal level of
interest rate risk to maintain additional capital except institutions with less
than $300 million in assets and at least a 12 percent risk-based capital ratio
are not subject to this interest rate risk capital component (IRR) unless
notified by the OTS. The Company is not currently required to maintain an IRR.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000
for each insured member (as defined by law and regulation). Under FIRREA, the
FDIC was given the authority, should it initiate proceedings to terminate an
institution's deposit insurance, to suspend the insurance of any such
institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan, or
the institution is operating in an unsafe or unsound manner.
11
<PAGE> 15
SOUTHFIRST BANCSHARES, INC.
Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits based on
the risk a particular institution poses to its deposit insurance fund. The
risk-related assessment program provided a transition period between the prior
flat-rate system and the final risk-related system that took effect on January
1, 1994, in accordance with the FDICIA.
Under the interim system (which has been continued without substantial change
as the permanent system), a bank or thrift pays within a range of 23 cents to
31 cents per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates on a semi-annual basis if it
determines that such action is necessary to cause the balance in the SAIF to
reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a
reasonable period of time. In addition, under the FDICIA, the FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. In November of
1995, the FDIC approved a significant reduction in the deposit insurance
premiums charged to those financial institutions that are members of the Bank
Insurance Fund (BIF). Under the new rate structure, the best-rated BIF
members will not be required to pay deposit insurance premiums on domestic
deposits, as compared to the current rate of 23 cents per $100 of domestic
deposits. While the impact of this premium disparity on the Bank's results of
operations cannot be determined at this time, a long-term disparity between BIF
and SAIF insurance premiums could place the Bank at a material competitive
disadvantage.
Among ideas under consideration for addressing this disparity is a possible
one-time assessment of up to 0.90% on thrift institutions sufficient to
recapitalize the SAIF to a level comparable to that of the BIF. Based on the
Bank's SAIF-assessable deposits at March 31, 1995, such an assessment could
result in a one-time charge of up to $571,000. While there can be no assurance
that this or any other idea for addressing the premium disparity will in fact
materialize, an assessment of this kind could have an adverse impact on the
Bank's results of operation. The Bank's federal deposit insurance premium
expense for the year ended September 30, 1995, amounted to $152,244.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(FAS 123). FAS 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. Such instruments include
stock purchase plans, stock options, restricted stock, and stock appreciation
rights. FAS 123 also applies to transactions in which an
12
<PAGE> 16
SOUTHFIRST BANCSHARES, INC.
entity issues its equity instruments to acquire goods or services from
nonemployees. Those transactions are accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. FAS 123 provides a choice for
accounting for employee stock compensation plans. A company can elect to use
the new fair-value-based method of accounting for employee stock compensation
plans, under which compensation cost is measured and recognized in results of
operations, or companies may continue to account for these plans under the
current accounting standards. Entities electing to remain with the present
accounting method must make disclosure of what net income and earnings per
share would have been if the fair-value-based method of accounting had been
applied. The Company plans to continue to account for employee stock options
using the present accounting method and include the required disclosures in the
financial statements. FAS 123 is effective for financial statements issued for
fiscal years beginning after December 15, 1995.
13
<PAGE> 17
SOUTHFIRST BANCSHARES, INC.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On December 21, 1993, First Federal filed a complaint against United States
Fidelity & Guaranty Company (USF&G) and Robert R. Peoples in the Circuit Court
of Talladega County, Alabama. The Complaint alleged that USF&G breached its
contractual obligations under a fidelity bond and that Robert R. Peoples
defrauded the Bank. USF&G denied the Bank's claim under its fidelity bond and
the Bank sought compensatory damages in the amount of approximately $612,000
and punitive damages against USF&G. Mr. Peoples, a former employee of the
Bank, pled guilty to a federal banking crime indictment. The Bank, for 20
years, maintained a fidelity bond with USF&G. This bond insured the Bank
against losses resulting from numerous causes, including the fraudulent acts
committed against the Bank by Mr. Peoples. On March 3, 1995, a jury awarded
$788,000 to the Bank against USF&G, in compensatory damages and punitive
damages for bad faith. The punitive damages and certain of the compensatory
damages, in the aggregate amount of approximately $200,000, were appealed by
USF&G.
On or about March 8, 1995, USF&G filed a subrogation action in the Circuit
Court against current and former officers and directors of the Bank, alleging,
among other things, negligence in their oversight of Mr. Peoples. Management
believes that this action was filed by USF&G to force a settlement of the bad
faith portion of the judgment against USF&G. Management also believes that the
current and former officers and directors of the Bank have acted properly and
in good faith with respect to their duties, including the oversight of Mr.
Peoples, and, therefore, are required to be indemnified by the Bank, for any
adverse judgment and for the reasonable costs of their legal defense, under
applicable regulations of the OTS. On December 22, 1995, the Circuit Court
dismissed this action in a final judgment in favor of the current and former
officers and directors of the Bank. USF&G subsequently filed an appeal of this
dismissal.
On May 23, 1996 the Company received $75,000, net of legal fees, from USF&G.
This amount represents the final settlement pertaining to the aforementioned
bond claim and subrogation action.
In the normal course of its business, the Corporation and the Bank from time to
time are involved in legal proceedings. The Corporation and Bank management
believe there are no pending or threatened legal proceedings which upon
resolution are expected to have a material effect upon the Corporation's or the
Bank's financial condition.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (For SEC Purposes only)
(b) Reports on Form 8-K. No report on Form 8-K was filed during
the quarter ended June 30, 1996.
14
<PAGE> 18
SOUTHFIRST BANCSHARES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHFIRST BANCSHARES, INC.
Date: August 14, 1996 By: /s/ Donald C. Stroup
-----------------------------------
Donald C. Stroup, President and
Chief Executive Officer
Date: August 14, 1996 By: /s/ Joe K. McArthur
-----------------------------------
Joe K. McArthur, Executive Vice
President and Chief
Financial Officer
(principal financial officer)
15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,414
<INT-BEARING-DEPOSITS> 3
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,109
<INVESTMENTS-CARRYING> 150
<INVESTMENTS-MARKET> 150
<LOANS> 62,288
<ALLOWANCE> (254)
<TOTAL-ASSETS> 90,542
<DEPOSITS> 65,290
<SHORT-TERM> 4,368
<LIABILITIES-OTHER> 1,691
<LONG-TERM> 5,690
0
0
<COMMON> 8
<OTHER-SE> 13,042
<TOTAL-LIABILITIES-AND-EQUITY> 90,542
<INTEREST-LOAN> 3,588
<INTEREST-INVEST> 1,300
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,888
<INTEREST-DEPOSIT> 2,219
<INTEREST-EXPENSE> 381
<INTEREST-INCOME-NET> 2,288
<LOAN-LOSSES> 1
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 2,834
<INCOME-PRETAX> 594
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 379
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 7.97
<LOANS-NON> 90
<LOANS-PAST> 442
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 238
<CHARGE-OFFS> 14
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 254
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
