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Filed pursuant to Rule 424(b)(3)
Registration No. 333-36493
JOINT PROXY STATEMENT
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SOUTHFIRST BANCSHARES, INC. FIRST FEDERAL SAVINGS AND LOAN
FOR SPECIAL MEETING ASSOCIATION OF CHILTON COUNTY
OF SHAREHOLDERS FOR SPECIAL MEETING
TO BE HELD ON OF SHAREHOLDERS
OCTOBER 29, 1997 TO BE HELD ON
OCTOBER 28, 1997
</TABLE>
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PROSPECTUS
SOUTHFIRST BANCSHARES, INC.
--------------------
This Joint Proxy Statement/Prospectus is being furnished to
shareholders of SouthFirst Bancshares, Inc. ("SouthFirst") and First Federal
Savings and Loan Association of Chilton County ("Chilton County"), in
connection with the solicitation of proxies by the respective Boards of
Directors of such organizations for use at the Special Meeting of Shareholders
of SouthFirst (the "SouthFirst Special Meeting") and the Special Meeting of
Shareholders of Chilton County (the "Chilton County Special Meeting")
(including any adjournments or postponements thereof), to be held on October
29, 1997 and October 28, 1997, respectively. This Joint Proxy
Statement/Prospectus relates to a proposal to adopt the Amended and Restated
Agreement and Plan of Merger, dated as of September 17, 1997 (the "Merger
Agreement"), by and among SouthFirst, First Federal of the South ("First
Federal"), a federally chartered stock savings bank and a wholly-owned
subsidiary of SouthFirst, and Chilton County, and to approve the merger (the
"Merger") of Chilton County and First Federal, pursuant to which Chilton County
will be merged with and into First Federal, and each issued and outstanding
share of common stock, par value $.01 per share, of Chilton County ("Chilton
County Common Stock") will be converted into the right to receive (i) cash,
(ii) shares of common stock, par value $.01 per share, of SouthFirst
("SouthFirst Common Stock"), or (iii) any combination of cash and shares
(subject to certain limitations which are detailed more fully in this Joint
Proxy Statement/Prospectus). A copy of the Merger Agreement is attached hereto
as Appendix A and is incorporated herein by reference.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus
of SouthFirst relating to the shares of SouthFirst Common Stock issuable to
holders of Chilton County Common Stock in connection with the Merger.
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE
MERGER, SEE "RISK FACTORS CONSIDERATIONS" BEGINNING ON PAGE 17.
This Joint Proxy Statement/Prospectus and the accompanying form of
proxy are first being mailed to shareholders of SouthFirst and Chilton County
on or about October 1, 1997.
NEITHER THIS TRANSACTION NOR THE SECURITIES COVERED BY THIS JOINT PROXY
STATEMENT/PROSPECTUS HAVE BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION. NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE
FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR BANK DEPOSITS,
ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NONBANKING
AFFILIATE OF SOUTHFIRST, AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
--------------------
The date of this Joint Proxy Statement/Prospectus is October 1, 1997.
<PAGE> 2
AVAILABLE INFORMATION
SouthFirst is subject to the information and reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
regional offices of the Commission located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such information can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
Such documents may also be obtained at the web site maintained by the
Commission (http://www.sec.gov). In addition, such reports, proxy statements
and other information concerning SouthFirst can be inspected at the offices of
The American Stock Exchange, 86 Trinity Place, New York, New York 10006-1881.
This Joint Proxy Statement/Prospectus is filed as part of a
Registration Statement on Form S-4 (together with any exhibits and amendments
thereto, the "Registration Statement") filed by SouthFirst with the Commission
under the Securities Act of 1933, as amended (the "Securities Act") and does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. The Registration Statement and any amendments thereto,
including exhibits filed as a part thereof, are available for inspection and
copying as set forth above.
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<PAGE> 3
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SOUTHFIRST OR CHILTON
COUNTY.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
EXCHANGE OR SELL, OR A SOLICITATION OF AN OFFER TO EXCHANGE OR PURCHASE, THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS; NOR DOES IT
CONSTITUTE THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR TO OR FROM ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
SPEAKS AS OF THE DATE HEREOF UNLESS OTHERWISE SPECIFICALLY INDICATED.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
SOUTHFIRST OR CHILTON COUNTY SINCE THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS OR THAT THE INFORMATION IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS CORRECT AT ANY TIME SUBSEQUENT TO THAT DATE.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT COVER ANY RESALES OF
THE SOUTHFIRST COMMON STOCK OFFERED HEREBY TO BE RECEIVED BY SHAREHOLDERS OF
CHILTON COUNTY DEEMED TO BE "AFFILIATES" OF SOUTHFIRST OR CHILTON COUNTY UPON
THE CONSUMMATION OF THE MERGER. NO PERSON IS AUTHORIZED TO MAKE USE OF THIS
JOINT PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH ANY SUCH RESALES.
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<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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Page
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AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Terms of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
No Prior Acquisition History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Dependence on Key Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Highly Competitive Nature of Banking Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Unpredictable Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interest Rate Sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exposure to Regulatory and Legislative Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Restrictions on Future Acquisitions of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Possible Stock Price Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Unpredictable Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
THE SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Date, Time and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Purpose of Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Record Date; Shares Entitled to Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Quorum; Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Voting; Solicitation and Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
BACKGROUND OF AND REASONS FOR THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Reasons for the Merger; Recommendation of Boards of Directors . . . . . . . . . . . . . . . . . . . . . . . 24
Opinion of SouthFirst's Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Opinion of Chilton County's Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
TERMS OF THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
The Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Election, Allocation and Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Conditions Precedent to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Conduct of Business Prior to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Modification, Waiver and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Expenses and Termination Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
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Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Restrictions on Resales by Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
DISSENTERS' RIGHTS OF APPRAISAL OF
CHILTON COUNTY SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
DESCRIPTION OF SOUTHFIRST CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SouthFirst Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SouthFirst Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Chilton County Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Chilton County Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
COMPARISON OF SHAREHOLDER RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Cumulative Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Quorum of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Adjournment and Notice of Shareholder Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Special Meetings of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Shareholder Consent In Lieu of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Indemnification of Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Limitation of Personal Liability of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Amendment of Articles of Incorporation/Federal Stock Charter and Bylaws . . . . . . . . . . . . . . . . . . 60
Shareholder Vote Required to Approve Certain Business Combinations . . . . . . . . . . . . . . . . . . . . . 61
Restrictions on Acquisitions of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
INFORMATION REGARDING SOUTHFIRST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Business of SouthFirst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Business of First Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
MANAGEMENT OF SOUTHFIRST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Compliance With Section 16(a) of the Securities Exchange Act of 1934 . . . . . . . . . . . . . . . . . . . . 74
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Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Employment and Deferred Compensation Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . 80
Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . 81
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
SOUTHFIRST--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . .. 83
Asset/Liability Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Average Balance, Interest and Average Yields and Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
INFORMATION REGARDING CHILTON COUNTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Business of Chilton County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Aggregated Options Exercises and Fiscal Year-End Option Values . . . . . . . . . . . . . . . . . . . . . . . 116
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . 117
CHILTON COUNTY--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . 119
Operating Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Asset/Liability Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Average Balance, Interest and Average Yields and Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
SUPERVISION AND REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Savings and Loan Holding Company Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Regulation of First Federal and Chilton County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
PROPOSALS BY SOUTHFIRST SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
INDEX TO SOUTHFIRST CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
INDEX TO CHILTON COUNTY FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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APPENDIX A Amended and Restated Agreement and Plan of Merger, dated as of
September 17, 1997, among SouthFirst Bancshares, Inc., First
Federal of the South and First Federal Savings and Loan
Association of Chilton County
APPENDIX B Opinion of Trident Financial Corporation
APPENDIX C Opinion of Professional Bank Services, Inc.
APPENDIX D Dissenters' Rights of Appraisal
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SUMMARY
Certain significant matters discussed in this Joint Proxy
Statement/Prospectus are summarized below. This summary is not intended to be
complete and is qualified in all respects by reference to the more detailed
information contained elsewhere in this Joint Proxy Statement/Prospectus, the
Appendices hereto and the documents referred to and incorporated by reference
herein.
THE PARTIES
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SOUTHFIRST BANCSHARES, INC. . . . . . . . . . SouthFirst is a thrift holding company headquartered in Sylacauga,
Alabama, conducting its primary banking business through its
subsidiary, First Federal of the South ("First Federal").
SouthFirst was incorporated under the laws of the State of Delaware
in April of 1994, as a vehicle to enhance First Federal's ability to
serve its customers' requirements for various financial services.
The holding company structure provides flexibility for expansion of
SouthFirst's banking and other financial services businesses. See
"INFORMATION REGARDING SOUTHFIRST -- Business of SouthFirst."
FIRST FEDERAL OF THE SOUTH . . . . . . . . . Beginning its operation as a federally chartered mutual savings and
loan association in 1949, First Federal is a member of the Federal
Home Loan Bank System and the Federal Deposit Insurance Corporation.
First Federal is a federally chartered savings bank without trust
powers. It operates as a locally owned bank, targeting primarily
the banking needs of individuals, professionals and small to medium-
sized businesses. First Federal's principal business consists of
attracting deposits from the general public and investing those
deposits, together with funds generated from principal and interest
payments on loans and mortgage-backed securities and from
operations, primarily in one-to-four family residential mortgage
loans, and to a lesser extent, construction loans and consumer
loans. First Federal may also originate commercial loans. First
Federal's main office is located in Sylacauga, Alabama. In
addition, First Federal operates a branch office in Talladega,
Alabama, and a loan production office in Birmingham. See
"INFORMATION REGARDING SOUTHFIRST -- Business of First Federal."
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHILTON COUNTY . . . . . . . Chilton County was founded in 1963 as a federally chartered mutual
savings and loan association and converted in
</TABLE>
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<TABLE>
<S> <C>
November 1988 to a federally chartered stock savings and loan
association. Chilton County's main office is located in Clanton,
Alabama, which is located in Chilton County. Chilton County also
operates a branch office in Centreville, Alabama, which is located
in Bibb County. Chilton County is primarily a real estate mortgage
lender whose business revolves around the origination of one-to-four
family residential mortgage loans. In addition, Chilton County
engages in an array of traditional banking activities, including the
acceptance of savings and time deposit accounts, as well as NOW and
money market accounts. Chilton County derives its operating
revenues largely from interest and fees in connection with its
lending activities. Chilton County also receives significant
operating revenues from its holdings of mortgage-backed securities.
See "INFORMATION REGARDING CHILTON COUNTY."
THE SPECIAL MEETINGS
DATE, TIME AND PLACE OF THE
SPECIAL MEETINGS . . . . . . . . . . . . . SouthFirst. The Special Meeting of SouthFirst shareholders is to be
held on Wednesday, October 29, 1997, at 2:00 p.m., local time, at
the main office of SouthFirst, located at 126 North Norton Avenue,
Sylacauga, Alabama 35150 (together with any adjournments or
postponements thereof, the "SouthFirst Special Meeting"). See "THE
SPECIAL MEETINGS -- Date, Time and Place."
Chilton County. The Special Meeting of Chilton County shareholders is
to be held on Tuesday, October 28, 1997, at 4:00 p.m., local time,
at the main office of Chilton County, located at 102 5th Street
North, Clanton, Alabama 35046 (together with any adjournments or
postponements thereof, the "Chilton County Special Meeting"). See
"THE SPECIAL MEETINGS -- Date, Time and Place."
PURPOSE OF THE SPECIAL MEETINGS . . . . . . . SouthFirst. The purpose of the SouthFirst Special Meeting is to
consider and vote upon a proposal to approve the Merger Agreement
and to approve the Merger as set forth in the Merger Agreement; and
to transact such other business as may properly come before the
SouthFirst Special Meeting or any adjournments or postponements
thereof. See "THE SPECIAL MEETINGS -- Purpose of Special Meetings."
</TABLE>
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Chilton County. The purpose of the Chilton County Special Meeting is
to consider and vote upon a proposal to approve the Merger Agreement
and to approve the Merger as set forth in the Merger Agreement and
to transact such other business as may properly come before the
Chilton County Special Meeting or any adjournments or postponements
thereof. See "THE SPECIAL MEETINGS -- Purpose of Special Meetings."
RECORD DATE . . . . . . . . . . . . . . . . . SouthFirst. Only holders of record of shares of SouthFirst Common
Stock at the close of business on September 10, 1997 (the
"SouthFirst Record Date") are entitled to notice of and to vote at
the SouthFirst Special Meeting. On that date, 847,600 shares of
SouthFirst Common Stock were outstanding and entitled to vote. See
"THE SPECIAL MEETINGS -- Shares Entitled to Vote."
Chilton County. Only holders of record of shares of Chilton County
Common Stock at the close of business on September 22, 1997 (the
"Chilton County Record Date") are entitled to notice of and to vote
at the Chilton County Special Meeting. On that date, 169,222 shares
of Chilton County Common Stock were outstanding and entitled to
vote. See "THE SPECIAL MEETINGS -- Shares Entitled to Vote."
VOTES REQUIRED . . . . . . . . . . . . . . . SouthFirst. The affirmative vote of the holders of a majority of the
shares of SouthFirst Common Stock present and voting at the
SouthFirst Special Meeting is necessary to approve the Merger.
Directors and executive officers of SouthFirst beneficially owned as
of September 10, 1997, 160,889 shares of SouthFirst Common Stock
(approximately 18.6% of the shares then outstanding). See "THE
MEETINGS -- Quorum; Vote Required."
Chilton County. The affirmative vote of the holders of two-thirds
(66 2/3%) of the outstanding shares of Chilton County Common Stock is
required for approval of the Merger Agreement and the Merger.
Directors and executive officers of Chilton County beneficially
owned as of September 22, 1997, 108,177 shares of Chilton County
Common Stock (approximately 61% of the shares then outstanding).
See "THE SPECIAL MEETINGS -- Quorum; Vote Required."
</TABLE>
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<PAGE> 11
TERMS OF THE MERGER
<TABLE>
<S> <C>
STRUCTURE . . . . . . . . . . . . . . . . . . Pursuant to the Merger Agreement, Chilton County will be merged with
and into First Federal. First Federal will be the surviving bank in
the Merger. As a result of the Merger, the separate legal existence
of Chilton County will cease.
MERGER CONSIDERATION . . . . . . . . . . . . Under the terms of the Merger Agreement, each share of Chilton County
Common Stock issued and outstanding immediately prior to the
Effective Time (excluding shares held by shareholders who perfect
their dissenters' rights) shall cease to be outstanding and shall be
converted at the option of such shareholders into the right to
receive (i) $31.50 per share (the "Cash Price Per Share"), (ii) the
"Stock Price Per Share" (as defined below) or (iii) any combination
of the Cash Price Per Share and the Stock Price Per Share; subject
to the limitations more fully described below and provided that no
single share of Chilton County Common Stock may be converted into a
combination of the Cash Price Per Share and the Stock Price Per
Share. See "TERMS OF THE MERGER -- Merger Consideration."
The Stock Election. Holders of Chilton County Common Stock may elect
to receive shares of SouthFirst Common Stock in the Merger in
accordance with the election procedures set forth in the Merger
Agreement. See "TERMS OF THE MERGER -- Election, Allocation and
Exchange of Certificates." Holders who elect SouthFirst Common
Stock will receive an amount of SouthFirst Common Stock (the "Stock
Price Per Share") in respect of each share of Chilton County Common
Stock that is so converted equal to the product of the Average
Closing Price (as defined below) multiplied by the Exchange Ratio
(as defined below). The Average Closing Price shall mean the
average of the closing sale price per share of SouthFirst Common
Stock on the American Stock Exchange (as reported in The Wall Street
Journal, or if not reported thereby, any other authoritative source
as mutually determined by SouthFirst and Chilton County) for each of
the 10 Trading Days immediately preceding the five consecutive
Business Days immediately preceding the Effective Time. A "Trading
Day" means any day in which the American Stock Exchange is open and
no less than 100 shares of SouthFirst Common Stock are traded.
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C>
A "Business Day" shall mean any day, except Saturdays, Sundays and
Federal Holidays, in which First Federal is open. See "TERMS OF THE
MERGER -- Merger Consideration."
The exchange ratio (the "Exchange Ratio") for each share of Chilton
County Common Stock shall be that number of shares of SouthFirst
Common Stock equal to the quotient obtained by dividing $31.50 by
the Average Closing Price. See "TERMS OF THE MERGER -- Merger
Consideration."
The Cash Election. Holders of Chilton County Common Stock may elect to
receive cash in the Merger in accordance with the election
procedures set forth in the Merger Agreement. Holders who elect
cash will receive $31.50 in respect of each share of Chilton County
Common Stock that is so converted. The Merger Agreement provides
that the Aggregate Cash Amount (which includes the cash paid for
(1) the Chilton County Options, (2) any dissenters' rights
(estimated at $31.50 per share) and (3) fractional shares) that may
be paid in the Merger to satisfy such elections will not exceed 50%
of the aggregate merger consideration (the "Threshold Cash Amount").
If the Aggregate Cash Amount is more or less than the Threshold Cash
Amount, the number of shares of SouthFirst Common Stock and the
amount of cash paid to each electing holder of Chilton County Common
Stock shall be allocated pro rata so that the 50% threshold
described above is not exceeded. See "TERMS OF THE MERGER --
Election, Allocation and Exchange of Certificates."
Notwithstanding the preceding discussion of the merger consideration,
the aggregate amount of shares of SouthFirst Common Stock that will
be paid in the merger to satisfy such elections will not exceed 50%
of the total Merger consideration paid in exchange for shares of
Chilton County Common Stock. If the aggregate elections of cash or
shares exceeds 50% of the total merger consideration, then
SouthFirst shall allocate shares and cash to each electing
shareholder on a pro rata basis. Therefore, no shareholder of
Chilton County can be guaranteed that, if so elected, all shares of
Chilton County
</TABLE>
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<TABLE>
<S> <C>
Common Stock will be converted into the right to receive SouthFirst
Common Stock, or that a cash election will be accepted in full, or
that, if so elected, a particular combination of shares of
SouthFirst Common Stock and cash will be received. See "TERMS OF
THE MERGER -- Election, Allocation and Exchange of Certificates."
RECOMMENDATIONS OF THE
BOARD OF DIRECTORS . . . . . . . . . . . . SouthFirst. The Board of Directors of SouthFirst (the "SouthFirst
Board") believes that the Merger is in the best interests of
SouthFirst and its shareholders and has unanimously approved the
Merger Agreement and the Merger. The SouthFirst Board recommends
that SouthFirst shareholders approve the Merger Agreement and the
Merger. The SouthFirst Board's recommendation is based upon a
number of factors discussed in this Joint Proxy
Statement/Prospectus. See "BACKGROUND OF AND REASONS FOR THE MERGER
-- Reasons for the Merger; Recommendation of Boards of Directors."
Chilton County. The Board of Directors of Chilton County (the
"Chilton County Board") believes that the Merger is in the best
interests of Chilton County and its shareholders and has approved
(by a majority vote with one director abstaining) the Merger
Agreement and the Merger. The Chilton County Board recommends that
Chilton County shareholders approve the Merger Agreement and the
Merger. The Chilton County Board's recommendation is based upon a
number of factors discussed in this Joint Proxy
Statement/Prospectus. See "BACKGROUND OF AND REASONS FOR THE MERGER
-- Reasons for the Merger; Recommendation of Boards of Directors."
OPINIONS OF FINANCIAL ADVISERS . . . . . . . SouthFirst. Trident Financial Corporation ("Trident") has delivered
its opinion to the SouthFirst Board that, as of September 26, 1997, the
financial terms of the Merger are fair, from a financial point of view,
to the shareholders of SouthFirst. A copy of the opinion of Trident, setting
forth the assumptions made, the matters considered and the limitations on
the review undertaken in rendering such opinion, is attached to this Joint
Proxy Statement/Prospectus as Appendix B and should be read in its
entirety. See "BACKGROUND OF AND
</TABLE>
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<TABLE>
<S> <C>
REASONS FOR THE MERGER -- Opinion of SouthFirst's Financial Advisor."
Chilton County. Professional Bank Services, Inc. ("PBS") has
delivered its opinion to the Chilton County Board that, as of
October __, 1997, the financial terms of the Merger are fair, from a
financial point of view, to the shareholders of Chilton County. A copy
of the opinion of PBS, setting forth the assumptions made, the matters
considered and the limitations on the review undertaken in rendering such
opinion, is attached to this Joint Proxy Statement/Prospectus as Appendix C
and should be read in its entirety. See "BACKGROUND OF AND REASONS FOR THE
MERGER -- Opinion of Chilton County's Financial Advisor."
MANAGEMENT AND OPERATIONS
AFTER THE MERGER . . . . . . . . . . . . . Management. Following consummation of the Merger, the SouthFirst
Board will be expanded by one member (the SouthFirst Board is
currently comprised of eight members) to include Bobby R. Cook, the
President and Chief Executive Officer of Chilton County. The Board
of Directors of First Federal (the "First Federal Board") will be
expanded by three members (the First Federal Board is currently
comprised of eight members) to include Mr. Cook, L. Neal Bice and
Kenneth E. Easterling, all of whom currently serve on the Chilton
County Board. See "TERMS OF THE MERGER -- Management and
Operations After the Merger."
INTERESTS OF CERTAIN PERSONS
IN THE MERGER . . . . . . . . . . . . . . . Certain members of Chilton County's management and the Chilton County
Board may be deemed to have interests in the Merger in addition to
their interests, if any, as shareholders of Chilton County
generally. These interests include, among others, (i) that
SouthFirst has agreed to replace the current employment agreement
between Chilton County and its President and Chief Executive
Officer, Bobby R. Cook, with a new employment agreement with First
Federal to be effective upon consummation of the Merger; (ii) the
election or appointment of certain members of the Chilton County
Board to the SouthFirst and/or First Federal Boards; and (iii)
agreements by SouthFirst to indemnify present and former directors,
officers, employees and agents of Chilton County from and after the
Merger against certain
</TABLE>
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<TABLE>
<S> <C>
liabilities arising prior to the Merger to the fullest extent
permitted under applicable regulations of the Office of Thrift
Supervision (the "OTS"), the Chilton County Federal Stock Charter,
and the Chilton County Bylaws. Pursuant to his employment agreement
with Chilton County, as of June 30, 1997, Mr. Cook would have been
entitled to severance payments aggregating approximately $185,000,
payable in monthly installments. However, Mr. Cook has indicated
that he currently intends to enter into the employment agreement
with First Federal.
EFFECTIVE TIME OF THE
MERGER . . . . . . . . . . . . . . . . . . If the Merger Agreement and the Merger are approved by the requisite
vote of shareholders of SouthFirst and Chilton County and the other
conditions to the Merger are satisfied or waived, the Merger will be
consummated and become effective on the last to occur of (i) the
effective date of the last required consent of any federal
regulatory authority having authority over the Merger (including the
expiration of all applicable waiting periods following such consents
or the delivery of appropriate notices) or (ii) the date on which
the shareholders of SouthFirst and Chilton County approve the Merger
Agreement, unless otherwise agreed upon by SouthFirst and Chilton
County. If approved by SouthFirst and Chilton County shareholders
and applicable regulatory authorities, the parties expect that the
Effective Time will occur on or before October 31, 1997, although
there can be no assurance as to whether or when the Merger will
occur. See "TERMS OF THE MERGER -- The Effective Time."
GOVERNMENTAL AND
REGULATORY MATTERS . . . . . . . . . . . . The Merger is subject to the prior approval (or waiver of the approval
requirements) by the OTS and the Department of Justice. The Merger
may not be consummated until expiration of all applicable waiting
periods. See "TERMS OF THE MERGER -- Regulatory Matters."
SouthFirst has filed all requisite applications for regulatory review
and approval or notice with the OTS in connection with the Merger.
There can be no assurance that such approvals will be obtained or as
to the date of any such approvals.
</TABLE>
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<TABLE>
<S> <C>
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES . . . . . . . . . . . . . . . The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986 as amended.
Smith, Gambrell & Russell, LLP, has delivered an opinion, based upon
certain customary assumptions and representations, to the effect
that, for federal income tax purposes, no gain or loss will be
recognized by the Chilton County shareholders as a result of the
Merger to the extent that they receive SouthFirst Common Stock
solely in exchange for their Chilton County Common Shares. For a
more complete description of the federal income tax consequences,
see "TERMS OF THE MERGER -- Federal Income Tax Consequences."
ACCOUNTING TREATMENT . . . . . . . . . . . . The Merger will be accounted for by the purchase method of accounting
under generally accepted accounting principals. See "TERMS OF THE
MERGER -- Accounting Treatment."
CONDITIONS OF THE
MERGER; TERMINATION . . . . . . . . . . . . The consummation of the Merger is conditioned upon the fulfillment or
waiver of certain conditions set forth in the Merger Agreement,
including, among other things, approval of the Merger by the
shareholders of SouthFirst and Chilton County and the absence of any
material adverse change in the business of SouthFirst or Chilton
County and approval (or waiver of the approval requirements) by the
applicable regulatory authorities. See "TERMS OF THE MERGER
Conditions Precedent to the Merger" and "Modification, Waiver and
Termination." The Merger Agreement may be terminated (i) by either
party if the Merger has not been consummated on or before
October 31, 1997, (ii) by mutual consent of the parties, or (iii) by
one or both of the parties in certain other situations. See "TERMS
OF THE MERGER -- Modification, Waiver and Termination."
DISSENTERS' RIGHTS . . . . . . . . . . . . . Each holder of Chilton County Common Stock who dissents from the Merger is
entitled to the rights and remedies of dissenting shareholders as
set forth in 12 CFR ss. 552.14 (the "Dissenter Provisions"), subject
to the compliance with the procedures set forth therein. Among
other things, a dissenting shareholder is entitled to receive an
amount in cash equal to the fair value (as defined) of such holder's
</TABLE>
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<TABLE>
<S> <C>
shares, as discussed under "DISSENTERS' RIGHTS OF CHILTON COUNTY
SHAREHOLDERS." See also Appendix D hereto. To perfect dissenters'
rights, a shareholder must comply with the Dissenter Provisions
which require, among other things, that the shareholder give Chilton
County notice of such holder's intention to dissent from the Merger
Agreement prior to the vote of the shareholders of Chilton County at
the Chilton County Special Meeting and that such shareholder not
vote his or her shares in favor of the Merger Agreement. Any
Chilton County shareholder who returns a signed proxy but fails to
provide instructions as to the manner in which such holder's shares
are to be voted will be deemed to have voted in favor of the Merger
Agreement and thus will not be entitled to assert dissenters'
rights. Shareholders should note that the obligations of each party
to consummate the Merger are subject to the condition, among others,
that Chilton County shall not have received notification of demands
from dissenting shareholders who hold an aggregate of 10% or more of
the outstanding Chilton County Common Stock. See "DISSENTERS'
RIGHTS OF CHILTON COUNTY SHAREHOLDERS."
Any holder of Chilton County Common Stock who dissents and then elects not to
perfect his or her rights under the Dissenter Provisions, shall receive the
Cash Price Per Share (i.e., $31.50) for each share of Chilton County Common
Stock held by such holder. See "DISSENTERS' RIGHTS OF CHILTON COUNTY
SHAREHOLDERS."
EFFECT OF THE MERGER . . . . . . . . . . . . The rights of SouthFirst shareholders differ in certain respects
ON RIGHTS OF CHILTON COUNTY SHAREHOLDERS from the rights of Chilton County shareholders, including, but not limited to,
rights relating to the removal of directors, filling vacancies on the board
of directors, the establishment of a quorum for meetings of shareholders and the
shareholder vote required to approve certain business combinations. For a
comparison of the rights of SouthFirst shareholders and Chilton County
shareholders, respectively, see "COMPARISON OF SHAREHOLDER RIGHTS."
ELECTION DEADLINE . . . . . . . . . . . . . . Any shares of Chilton County Common Stock with respect to which the holder (or the
beneficial owner, as the case may be) has not made an election on or before
4:00 p.m., October 28, 1997, will be converted into cash at the Cash Price Per
Share (i.e., $31.50). See "THE TERMS OF THE MERGER - Elections, Allocation and
Exchange of Certificates."
RISK FACTORS . . . . . . . . . . . . . . . . Shareholders of Chilton County and SouthFirst should carefully
consider the matters set forth under "CERTAIN CONSIDERATIONS." The
matters to be considered, among other things, include the ability of
SouthFirst to manage its growth, its dependence on senior
management, intense competition among financial institutions,
unpredictable economic conditions, future legislation and government
regulation, and other considerations.
</TABLE>
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<PAGE> 18
SELECTED FINANCIAL DATA
Selected Financial Data of SouthFirst. The following table sets forth
selected historical financial data of SouthFirst for each of the five fiscal
years in the period ended September 30, 1996 and the nine month periods ended
June 30, 1997 and 1996. The financial data for the fiscal years has been
derived from SouthFirst's audited consolidated financial statements. The
financial data for the nine month periods has been derived from SouthFirst's
unaudited consolidated financial statement. The information set forth below
should be read in conjunction with "SOUTHFIRST MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," SouthFirst's
financial statements and related notes and selected financial data included
elsewhere herein.
FINANCIAL CONDITION:
<TABLE>
<CAPTION>
At June 30, At September 30,
---------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- -----
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Total amount of:
Assets . . . . . . . . . . . . $97,283 $90,542 $90,282 $85,495 $82,477 $80,558 $83,002
Loans . . . . . . . . . . . . 71,513 62,035 62,402 53,533 50,101 44,441 45,852
Investments (1) . . . . . . . 17,291 22,263 21,789 27,888 29,331 32,909 33,960
Deposits . . . . . . . . . . . 62,542 65,290 64,095 62,832 64,771 66,541 71,541
Borrowed funds . . . . . . . . 18,493 10,512 10,959 6,070 9,135 6,144 4,502
Retained earnings . . . . . . 5,752 5,958 5,690 7,624 7,262 6,902 6,110
Shareholders' equity . . . . . 13,616 13,050 12,888 14,771 7,262 6,902 6,110
</TABLE>
RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>
Nine Months
Ended June 30, Year ended September 30,
------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------ ------- -------- ------ -------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income . . . . . . . . $ 2,475 $ 2,288 $ 3,061 $ 3,104 $ 2,838 $ 2,772 $ 2,551
Provision for loan losses . . . . . (36) (1) (1) (29) (50) (30) (35)
Other income . . . . . . . . . . . 732 1,142 1,290 559 593 488 394
Other expense . . . . . . . . . . . (2,554) (2,834) (4,274) (2,660) (2,767) (2,031) (2,072)
------- ------- ------- -------- ------- ------- -------
Income before taxes . . . . . . . 616 593 75 974 614 1,199 838
Income tax expense . . . . . . . . (246) (214) (92) (363) (235) (407) (300)
------- ------- ------- -------- ------- ------- -------
Income (loss) before
accounting change . . . . . . 370 379 (17) 611 379 792 538
Accounting change (2) . . . . . . . - - -- - (18) - -
------- ------- ------- -------- ------- ------- -------
Net income (loss) . . . . . . . . . $ 370 $ 379 (17) $ 611 $ 361 $ 792 $ 538
======= ======= ======= ======== ======= ======= =======
Per common share data (3):
Net income (loss) . . . . . . $ 0.43 $ 0.44 $ (0.02) $ 1.17 $ -- $ -- $ --
======= ======= ======= ======== ======= ======= =======
Cash dividends declared . . . $ 0.38 $ 2.38 $ 2.50 $ 0.30 $ -- $ -- $ --
======= ======= ======= ======== ======= ======= =======
</TABLE>
(1) Includes overnight deposits in other financial institutions.
(2) Cumulative effect of change in accounting for income taxes under FAS No.
109, Accounting for Income Taxes.
(3) First Federal was converted to a stock form of ownership on February 13,
1995.
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<PAGE> 19
Selected Financial Data of Chilton County. The following tables set forth
selected financial data for each of the five fiscal years in the period ended
June 30, 1997. Such financial data has been derived from Chilton County's
audited financial statements. The information set forth below should be read
in conjunction with "CHILTON COUNTY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," Chilton County's financial
statements and related notes and selected financial data included elsewhere
herein.
FINANCIAL CONDITION:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets . . . . . . . . . . . . . . . . . $ 74,753 $ 73,915 $ 73,516 $ 71,325 $ 68,853
Loans . . . . . . . . . . . . . . . . . 33,843 34,369 29,226 29,839 31,212
Investments . . . . . . . . . . . . . . 30,238 35,348 40,032 38,793 30,295
Interest-bearing deposits
and federal funds sold . . . . . . . . 7,828 734 1,496 246 4,362
Deposits . . . . . . . . . . . . . . . . 68,152 69,525 67,399 66,503 64,575
Borrowed funds . . . . . . . . . . . . . 2,000 1,000
Retained earnings . . . . . . . . . . . 3,491 3,558 3,499 3,393 2,873
Stockholders' equity . . . . . . . . . . 4,376 4,119 4,573 4,358 4,076
</TABLE>
RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net interest income . . . . . . . . . . . . $ 1,674 $ 1,373 $ 1,711 $ 1,840 $ 1,889
Provision for loan losses . . . . . . . . . (64) (85) (53) (76) 90
Other income . . . . . . . . . . . . . . . 228 257 195 278 173
Other expense . . . . . . . . . . . . . . . (1,910) (1,375) (1,618) (1,231) (1,731)
--------- -------- -------- ------- -------
Income (loss) before
taxes . . . . . . . . . . . . . . . . . (72) 170 235 811 421
Income tax expense . . . . . . . . . . . . 52 (63) (80) (244) (267)
-------- -------- -------- ------- -------
Net income (loss) . . . . . . . . . . . . . $ (20) $ 107 $ 155 $ 567 $ 154
======== ======== ======== ======= =======
Per common share data:
Net income (loss) . . . . . . . . . . . . . $ (0.12)(1) $ 0.63 $ 0.91 $ 3.35 $ 0.91
======== ======== ======== ======= =======
Cash dividends declared . . . . . . . . . . $ 0.28 $ 0.28 $ 0.29 $ 0.28 $ 0.26
======== ======== ======== ======= =======
</TABLE>
(1) Includes the special deposit insurance assessment imposed during the
year ended June 30, 1997 by the FDIC on all institutions whose
deposits were insured by the SAIF on March 31, 1995. See "SUPERVISION
AND REGULATION." Chilton County's assessment was $430,000 in September
1996. If such assessment had not been imposed, Chilton County's net
income would have been approximately $238,000 for the year ended June
30, 1997, and its net income per share would have been approximately
$1.41.
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SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth selected, unaudited, pro forma,
combined financial data of SouthFirst, after giving effect to the Merger,
accounted for under the purchase method as of October 1, 1995, for income
statement data and, as of June 30, 1997, for balance sheet data. For a
description of the effect of purchase accounting on the Merger and the
historical financial statements of SouthFirst, see "TERMS OF THE MERGER
Accounting Treatment." The selected unaudited pro forma combined financial
data reflects the Merger based upon preliminary purchase accounting
adjustments. Actual adjustments, which may include adjustments to additional
assets, liabilities and other items, will be made on the basis of appraisals
and evaluations as of the Effective Time and, therefore, is likely to differ
from those reflected in the selected, unaudited, pro forma, combined financial
data.
SouthFirst and Chilton County expect that combined operations will
achieve substantial benefits from the Merger, including operating cost savings
and revenue enhancements. However, the selected, unaudited, pro forma,
combined financial data does not reflect any direct costs, potential savings or
revenue enhancements which are expected to result from the consolidation of
operations of SouthFirst and Chilton County, and, therefore, does not purport
to be indicative of the results of future operations.
Results of each of SouthFirst and Chilton County for the nine months
ended June 30, 1997, are not necessarily indicative of results expected for the
entire year. All adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of results of interim periods, have been
included.
The selected, unaudited, pro forma, combined financial data has been
derived from, and should be read in conjunction with, the Pro Forma Condensed
Consolidated Financial Information and the separate historical financial
statements of SouthFirst and Chilton County, all of which are included
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended June 30, 1997 September 30, 1996
------------------- ------------------
(In thousands, except per share data and ratios)
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income . . . . . . . . . . . . $ 3,595 $ 4,531
Provision for loan losses . . . . . . . . . (91) (65)
Other income . . . . . . . . . . . . . . . 906 1,518
Other expense . . . . . . . . . . . . . . . (3,750) (6,325)
Income (loss) before taxes . . . . . . . . 649 (341)
Income tax expense . . . . . . . . . . . . (286) 31
Net income (loss) . . . . . . . . . . . . . $ 374 $ (310)
PER COMMON SHARE DATA:
Net income (loss) . . . . . . . . . . . . . $ 0.36 $ (0.31)
Book value . . . . . . . . . . . . . . . . $ 16.10 $ 15.36
Weighted average common shares
outstanding . . . . . . . . . . . . . . 1,033,071 991,175
<CAPTION>
At June 30, 1997 At September 30, 1996
---------------- ---------------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . $ 170,572 $ 162,616
Loans, net . . . . . . . . . . . . . . . . 105,356 96,902
Investments(1) . . . . . . . . . . . . . . 52,272 54,594
Deposits . . . . . . . . . . . . . . . . . 130,693 133,620
Total shareholders' equity . . . . . . . . $ 16,528 $ 15,426
</TABLE>
- -------------------
(1) Includes overnight deposits in other financial institutions.
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<PAGE> 21
COMPARATIVE UNAUDITED PER-SHARE DATA
The following table sets forth comparative, unaudited, per share
information (i) for SouthFirst on a historical basis and on a pro forma,
combined basis, assuming the Merger had been effective during the periods
presented, and (ii) for Chilton County on a historical basis and on a pro forma
equivalent basis. The pro forma information has been prepared giving effect to
the Merger as a purchase using the purchase method of accounting. For a
description of the effect of purchase accounting on the Merger and the
historical financial statements of SouthFirst, see "TERMS OF THE MERGER
Accounting Treatment." The comparative, unaudited, per-share data reflects the
Merger based upon preliminary purchase accounting adjustments. Actual
adjustments, which may include adjustments to additional assets, liabilities
and other items, will be made on the basis of appraisals and evaluations as of
the Effective Time and, therefore, are likely to differ from those reflected in
the comparative, unaudited, per-share data.
SouthFirst and Chilton County expect that combined operations will
achieve substantial benefits from the Merger, including operating cost savings
and revenue enhancements. However, the comparative, unaudited, per-share data
does not reflect any direct costs, potential savings or revenue enhancements
which are expected to result from the consolidation of operations of SouthFirst
and Chilton County, and, therefore, does not purport to be indicate of the
results of future operations.
Results of each of SouthFirst and Chilton County for the nine months
ended June 30, 1997, are not necessarily indicative of results expected for the
entire year, nor are pro forma amounts necessarily indicative of results of
operations or the combined financial position that would have resulted had the
Merger been consummated at the beginning of the periods indicated. All
adjustments consisting of only normal recurring adjustments necessary for a
fair statement of results of interim periods have been included.
The information presented below should be read in conjunction with the
Pro Forma Condensed Consolidated Financial Information and the separate
historical financial statements of SouthFirst and of Chilton County, all of
which are included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Nine Months
Ended
June 30,
1997 Year Ended(1)
-------- -------------
<S> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS PER SHARE:
SouthFirst
Historical . . . . . . . . . . . . . . . . . . $ 0.43 $(0.02)
Pro forma combined . . . . . . . . . . . . . . $ 0.36 $(0.31)
Chilton County
Historical . . . . . . . . . . . . . . . . . . $ 1.07 $(0.12)
Pro forma combined . . . . . . . . . . . . . . $ 2.20 $(0.25)
</TABLE>
- ---------------------
(1) For SouthFirst: September 30, 1996; for Chilton County: June 30, 1997.
<TABLE>
<CAPTION>
At
June 30, 1997 Year End(1)
------------- --------
<S> <C> <C>
BOOK VALUE PER SHARE:
SouthFirst
Historical . . . . . . . . . . . . . . . . . . $16.53 $15.20
Pro forma combined . . . . . . . . . . . . . . $16.10 $15.36
Chilton County
Historical . . . . . . . . . . . . . . . . . . $25.86 $25.86
Pro forma combined . . . . . . . . . . . . . . $53.27 $53.27
</TABLE>
- ----------------------
(1) For SouthFirst: September 30, 1996; for Chilton County: June 30, 1997.
-14-
<PAGE> 22
SHARE INFORMATION AND MARKET PRICES
SouthFirst. SouthFirst Common Stock is listed and traded on the
American Stock Exchange (the "AMEX") under the symbol "SZB." On April 11,
1997, the last business day preceding the public announcement of the Merger,
the closing sale price for SouthFirst Common Stock was $14.13 per share. On
September 10, 1997, the SouthFirst Record Date, the closing sale price for
SouthFirst Common Stock was $16.50 per share.
The following table sets forth the quarterly range of high and low
closing sale prices per share of SouthFirst Common Stock, from February 14,
1995 (the first day of trading in SouthFirst Common Stock), through June 30,
1997, as reported on the AMEX, together with the amounts of cash dividends per
share declared by SouthFirst during each such quarter. For a discussion of
SouthFirst's policies concerning the declaration of dividends and regulatory
restrictions on such declaration, see "DESCRIPTION OF SOUTHFIRST CAPITAL STOCK
AND CHILTON COUNTY CAPITAL STOCK -- Distributions."
<TABLE>
<CAPTION>
PRICES OF
COMMON STOCK
------------
HIGH LOW CASH DIVIDENDS(1)
---- --- -----------------
<S> <C> <C> <C>
FISCAL 1997
Third Quarter . . . . . . . . . . . . . . . . . . . . . . $ 16.00 $ 13.88 $ 0.125
Second Quarter . . . . . . . . . . . . . . . . . . . . . $ 14.50 $ 12.88 $ 0.125
First Quarter . . . . . . . . . . . . . . . . . . . . . . $ 13.25 $ 12.25 $ 0.125
FISCAL 1996
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . $ 13.00 $ 12.00 $ 0.125
Third Quarter . . . . . . . . . . . . . . . . . . . . . . $ 12.75 $ 12.00 $ 0.125
Second Quarter . . . . . . . . . . . . . . . . . . . . . $ 12.75 $ 11.50 $ 2.125
First Quarter . . . . . . . . . . . . . . . . . . . . . . $ 16.13 $ 11.50 $ 0.125
FISCAL 1995
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . $ 14.75 $ 11.88 $ 0.10
Third Quarter . . . . . . . . . . . . . . . . . . . . . . $ 12.00 $ 11.25 $ 0.10
Second Quarter (February 14, 1995 through June 30, 1995) . $ 11.88 $ 10.63 $ 0.10
</TABLE>
- ---------------
(1) Certain cash dividends associated with SouthFirst's MRP and ESOP
shares are reflected as compensation expense in the consolidated
financial statements. See "MANAGEMENT OF SOUTHFIRST -- Management
Recognition Plans" and "-- Employee Stock Ownership Plan" for further
information.
SouthFirst Common Stock was held by approximately 400 shareholders of
record as of September 10, 1997.
Chilton County. There is no established public trading market for
Chilton County Common Stock, nor are there any uniformly quoted price for such
shares. There are, however, occasional transactions in Chilton County Common
Stock as a result of private negotiations. Management of Chilton County does
not maintain a record of the sales prices of trades of Chilton County Common
Stock. The last known sale of Chilton County Common Stock was on July 11, 1996
at a price of $10.00 per share.
-15-
<PAGE> 23
Chilton County has paid dividends on shares of Chilton County Stock
$0.28 per share in 1997 and 1996. See "TERMS OF THE MERGER -- Conduct of
Business Prior to the Merger."
Chilton County Common Stock was held by approximately 150 shareholders
of record as of September 10, 1997.
BECAUSE THE EXCHANGE RATIO IS NOT FIXED AND BECAUSE THE MARKET PRICE
OF SOUTHFIRST COMMON STOCK IS SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE
SHARES OF SOUTHFIRST COMMON STOCK THAT HOLDERS OF CHILTON COUNTY COMMON STOCK
WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE PRIOR TO AND FOLLOWING THE
MERGER. SHAREHOLDERS OF SOUTHFIRST AND CHILTON COUNTY ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR SOUTHFIRST COMMON STOCK.
-16-
<PAGE> 24
RISK FACTORS
In addition to the other information contained in this Joint Proxy
Statement/Prospectus, the following factors should be considered carefully by
shareholders of SouthFirst and Chilton County in evaluating the Merger.
This Joint Proxy Statement/Prospectus contains certain statements that
constitute "forward-looking statements" within the meaning of Section 27(A) of
the Securities Act and Section 21(E) of the Exchange Act. Those statements
appear in a number of places in this Joint Proxy Statement/Prospectus and
include statements with respect to the financial condition, results of
operations and business of SouthFirst following the consummation of the Merger,
including statements relating to the cost savings, revenue enhancements and
funding advantages that are expected to be realized from the Merger, the
expected impact of the Merger on SouthFirst's financial performance, and
earnings estimates for the combined thrifts. See "BACKGROUND OF AND REASONS
FOR THE MERGER -- Reasons for the Merger; Recommendations of Boards of
Directors." These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others,
the following possibilities: (1) expected cost savings from the Merger cannot
be fully realized; (2) deposit attrition, customer loss or revenue loss
following the Merger is greater than expected; (3) competitive pressure in the
banking industry increases significantly; (4) costs or difficulties related to
the integration of the business of SouthFirst and Chilton County are greater
than expected; (5) changes in the interest rate environment reduce margins; (6)
general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality; (7) changes in the regulatory environment; (8) changes in
business conditions and inflation; and (9) changes in the securities markets.
NO PRIOR ACQUISITION HISTORY
With the Merger, SouthFirst will be experiencing significant growth
and its future operating results will depend largely upon its ability to
successfully integrate the operations of Chilton County. The process of
integrating Chilton County into SouthFirst's operations may result in
unforeseen difficulties and may require a disproportionate amount of resources
and management's attention. Further, SouthFirst has no history of prior
acquisitions of other financial institutions with which to judge the likelihood
of improved performance as a result of the Merger. As a result, there can be
no assurance that SouthFirst's acquisition of Chilton County will be
successful, that SouthFirst will be able to expand its market presence in its
current locations or successfully compete in Chilton County's markets or that
any such expansion will be as profitable as existing operations. If
SouthFirst's management is unable to manage growth effectively, SouthFirst's
business, results of operations and financial condition could be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL
The success of SouthFirst has been largely dependent on the skills,
experience and efforts of its senior management and especially its President
and Chief Executive Officer, Donald C. Stroup and its Chief Operating Officer,
Chief Financial Officer and Executive Vice President, Joe K. McArthur. First
Federal also relies primarily on the expertise and experience of Jimmy C.
Maples, First Vice President, in connection with First Federal's construction
lending activities. Upon consummation of the Merger, the success of
SouthFirst's integration of Chilton County's operations will be dependent upon
the skills, experience and efforts of the senior management of Chilton County
and especially of Bobby R. Cook, Chilton County's President and Chief Executive
Officer. The loss of the services of Messrs. Stroup, McArthur, Maples or Cook
or other members of senior management of SouthFirst or Chilton County could
have a material adverse effect on SouthFirst's and Chilton County's combined
business and prospects. Upon consummation of the Merger, First Federal will
enter into an employment agreement with Mr. Cook. See "TERMS OF THE MERGER --
Interests of Certain Persons in the Merger." SouthFirst maintains a key man
life insurance policy on Mr. Stroup in the
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<PAGE> 25
amount of $1.5 million. SouthFirst believes that its future success will also
depend in part upon its ability to attract, retain and motivate qualified
personnel. There can be no assurance that SouthFirst will be successful in
attracting and retaining such personnel.
HIGHLY COMPETITIVE NATURE OF BANKING BUSINESS
Competition among financial institutions in SouthFirst's and Chilton
County's market areas are extremely intense. First Federal and Chilton County
compete with other savings associations, state and national banks, consumer
financial companies, credit unions, money market mutual funds, and other
financial institutions which have resources greater than those available to
SouthFirst, First Federal and Chilton County. Further, SouthFirst's size after
the Merger may impact its ability to compete effectively with larger
institutions in offering other services. If First Federal is unable to compete
for deposits effectively in its primary service areas after the Merger, such
inability would likely have an adverse effect on SouthFirst's potential for
growth and profitability. There can be no assurance that SouthFirst will be
able to compete successfully against existing financial institutions or new
entrants to the marketplace.
UNPREDICTABLE ECONOMIC CONDITIONS
Thrift holding companies, such as SouthFirst, and financial
institutions, such as First Federal and Chilton County, are affected by
economic and political conditions, both domestic and international, and by
governmental monetary policies. Conditions such as inflation, recession,
unemployment, high interest rates, short money supply, scarce natural
resources, international disorders and other factors, which are beyond the
control of SouthFirst, First Federal and Chilton County, may adversely affect
their continued profitability.
INTEREST RATE SENSITIVITY
First Federal's and Chilton County's results of operations are
dependent to a large extent upon their net interest income, which is the
difference between interest income on interest-earning assets, such as loans
and investments, and interest expense on interest-bearing liabilities, such as
deposits. First Federal and Chilton County, like most financial institutions,
will continue to be affected by general changes in levels of interest rates and
other economic factors beyond their control. Changes in the level of interest
rates can affect the amount of loans originated by First Federal and Chilton
County, the level of First Federal's and Chilton County's deposits and the
value of First Federal's and Chilton County's investments. In addition, First
Federal and Chilton County will continue to be affected by factors influencing
the markets for debt and equity securities, as well as legislative, regulatory,
accounting and tax changes which are beyond their control.
Like other financial institutions, First Federal and Chilton County
are subject to interest rate risk to the degree that their interest-bearing
liabilities with short and medium term maturities mature or reprice more
rapidly, or on a different basis, than their interest-earning assets. First
Federal's and Chilton County's strategies in reducing interest rate risk are to
originate adjustable-rate loans and to purchase adjustable-rate mortgage
products such as mortgage-backed securities, mortgage derivative securities,
such as collateralized mortgage obligations ("CMOs"), real estate mortgage
investment conduits ("REMICS") and other investment securities. Any relative
increase in fixed-rate loans or fixed-rate mortgage products would decrease
interest rate sensitivity of First Federal's and Chilton County's assets, but
increase interest rate risk. Volatility in interest rates can also result in
disintermediation, which is the flow of funds away from savings institutions
and to direct investments such as United States Government and corporate
securities and other investment vehicles which, because of the absence of
federal insurance premiums and reserve requirements, generally pay a higher
rate of return than savings institutions.
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<PAGE> 26
EXPOSURE TO REGULATORY AND LEGISLATIVE CHANGES
SouthFirst, First Federal and Chilton County operate in a highly
regulated environment and are subject to supervision by several governmental
regulatory agencies, including the Office of Thrift Supervision (the "OTS") and
the Federal Deposit Insurance Corporation (the "FDIC"). SouthFirst, First
Federal and Chilton County are vulnerable to future legislation and government
policy, including continued bank deregulation and interstate expansion, which
could significantly affect the banking industry as a whole including the
operations of SouthFirst. See "SUPERVISION AND REGULATION."
RESTRICTIONS ON FUTURE ACQUISITIONS OF THE COMPANY
SouthFirst's Certificate of Incorporation contains provisions
requiring supermajority shareholder approval to effect certain extraordinary
corporate transactions which are not approved by the SouthFirst Board. These
provisions make it more difficult to effect a merger, sale of control or
similar transaction involving SouthFirst even though a majority of SouthFirst's
shareholders may vote in favor of such a transaction. In addition, SouthFirst's
Certificate of Incorporation authorizes the issuance of up to 500,000 shares of
preferred stock, issuable in series, the relative rights and preferences of
which may be designated by the SouthFirst Board of Directors. The effect of
these provisions is to make it more difficult to effect a change in control of
SouthFirst through the acquisition of a large block of SouthFirst Common Stock.
POSSIBLE STOCK PRICE VOLATILITY
The market price of SouthFirst Common Stock could be subject to
significant fluctuations in response to SouthFirst's operating results and
other factors, and there can be no assurance that the market price of
SouthFirst Common Stock will not decline below the current market price. In
addition, the stock market has, from time to time, experienced extreme price
and volume volatility. These fluctuations may be unrelated to the operating
performance of particular companies whose shares are publicly traded and may
adversely affect the market price of SouthFirst Common Stock.
UNPREDICTABLE ELECTIONS; ELECTION DEADLINE
Assuming consummation of the Merger, 50% of the aggregate merger
consideration will be paid in stock and 50% will be paid in cash. As a result
of the foregoing limitation, shareholders of Chilton County cannot be
guaranteed that all shares of Chilton County Common Stock in which stock is
elected will be converted into the right to receive SouthFirst Common Stock, or
that a cash election will be accepted in full or that any shareholder will
receive the combination of SouthFirst Common Stock, or cash that he or she
elected. Consequently, a Chilton County shareholder may receive shares of
SouthFirst Common Stock, cash, or a combination of both, which may not be
consistent with his or her election, and Chilton County shareholders should
consider such a result when voting on the Merger Agreement.
Any shares of Chilton County Common Stock with respect to which the
holder (or the beneficial owner, as the case may be) has not made an election
on or before 4:00 p.m., October 28, 1997, will be converted into cash at the
Cash Price Per Share (i.e., $31.50). See "THE TERMS OF THE MERGER --
Elections, Allocation and Exchange of Certificates."
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<PAGE> 27
INTRODUCTION
This Joint Proxy Statement/Prospectus is being furnished to holders of
SouthFirst Common Stock in connection with the solicitation of proxies by the
Board of Directors of SouthFirst (the "SouthFirst Board") for use at the
SouthFirst Special Meeting to consider and vote upon the approval of the Merger
Agreement and the Merger and to transact such other business as may properly
come before the SouthFirst Special Meeting or any adjournments or postponements
thereof. In addition, this Joint Proxy Statement/Prospectus is being furnished
to holders of Chilton County Common Stock in connection with the solicitation
of proxies by the Board of Directors of Chilton County (the "Chilton County
Board") for use at the Chilton County Special Meeting to consider and vote upon
the approval of the Merger Agreement and the Merger and to transact such other
business as may properly come before the Chilton County Special Meeting or any
adjournments or postponements thereof. Each copy of this Joint Proxy
Statement/Prospectus mailed to holders of SouthFirst Common Stock is
accompanied by a form of proxy for use at the SouthFirst Special Meeting, and
each copy of this Joint Proxy Statement/Prospectus mailed to holders of Chilton
County Common Stock is accompanied by a form of proxy for use at the Chilton
County Special Meeting.
This Joint Proxy Statement/Prospectus is also furnished by SouthFirst
to Chilton County shareholders as a prospectus in connection with the issuance
by SouthFirst of the shares of SouthFirst Common Stock upon consummation of the
Merger.
All information contained in this Joint Proxy Statement/Prospectus
relating to Chilton County has been furnished by Chilton County, and SouthFirst
is relying upon the accuracy of that information. All information contained in
this Joint Proxy Statement/Prospectus relating to SouthFirst has been furnished
by SouthFirst, and Chilton County is relying upon the accuracy of that
information.
THE SPECIAL MEETINGS
DATE, TIME AND PLACE
SouthFirst. The SouthFirst Special Meeting is to be held on October
29, 1997 at 2:00 p.m., local time, at the main office of SouthFirst, located at
126 North Norton Avenue, Sylacauga, Alabama 35150.
Chilton County. The Chilton County Special Meeting is to be held on
October 28, 1997 at 4:00 p.m., local time, at the main office of Chilton
County, located at 102 5th Street North, Clanton, Alabama 35046.
PURPOSE OF SPECIAL MEETINGS
SouthFirst. The purpose of the SouthFirst Special Meeting is to
consider and vote upon a proposal to approve the Merger Agreement and the
Merger and such other business as may properly come before the SouthFirst
Special Meeting or any adjournments or postponements thereof.
Chilton County. The purpose of the Chilton County Special Meeting is
to consider and vote upon a proposal to approve the Merger Agreement and the
Merger and such other business as may properly come before the Chilton County
Special Meeting or any adjournments or postponements thereof.
-20-
<PAGE> 28
RECORD DATE; SHARES ENTITLED TO VOTE
SouthFirst. Only holders of record of shares of SouthFirst Common
Stock at the close of business on September 10, 1997 (the "SouthFirst Record
Date") are entitled to notice of and to vote at the SouthFirst Special Meeting.
On that date, 847,600 shares of SouthFirst Common Stock were outstanding and
entitled to vote. The holders of record on the SouthFirst Record Date of
shares of SouthFirst Common Stock are entitled to one vote per share on each
matter submitted to a vote at the SouthFirst Special Meeting.
Chilton County. Only holders of record of shares of Chilton County
Common Stock at the close of business on September 22, 1997 (the "Chilton
County Record Date") are entitled to notice of and to vote at the Chilton
County Special Meeting. On that date, 169,222 shares of Chilton County Common
Stock were outstanding and entitled to vote. The holders of record on the
Chilton County Record Date of shares of Chilton County Common Stock are
entitled to one vote per share on each matter submitted to a vote at the
Chilton County Special Meeting.
QUORUM; VOTE REQUIRED
SouthFirst. The affirmative vote of the holders of a majority of the
shares of SouthFirst Common Stock present and voting at the SouthFirst Special
Meeting is required for approval of the Merger. Directors and executive
officers of SouthFirst beneficially owned as of September 10, 1997 160,889
shares of SouthFirst Common Stock (approximately 18.6% of the shares then
outstanding). All directors and executive officers of SouthFirst have
indicated that they currently intend to vote all shares of SouthFirst Common
Stock over which they have voting power in favor of the Merger. The presence
in person or by proxy of the holders of a majority of the outstanding shares of
SouthFirst Common Stock is necessary to constitute a quorum for the transaction
of business at the SouthFirst Special Meeting.
Chilton County. The affirmative vote of the holders of two-thirds (66
2/3%) of the outstanding shares of Chilton County Common Stock is required for
approval of the Merger. Directors and executive officers of Chilton County
beneficially owned as of September 22, 1997, 108,177 shares of Chilton County
Common Stock (approximately 61% of the shares then outstanding). A majority of
the directors and executive officers of Chilton County have indicated that they
currently intend to vote all shares of Chilton County Common Stock over which
they have voting power in favor of the Merger. The presence in person or by
proxy of the holders of a majority of the outstanding shares of Chilton County
Common Stock is necessary to constitute a quorum for the transaction of
business at the Chilton County Special Meeting.
VOTING; SOLICITATION AND REVOCATION OF PROXIES
Proxies for use at the SouthFirst Special Meeting and the Chilton
County Special Meeting (each sometimes referred to herein as a "Special
Meeting" or collectively, the "Special Meetings") accompany copies of this
Joint Proxy Statement/Prospectus delivered to record holders of SouthFirst
Common Stock and Chilton County Common Stock, respectively. A shareholder may
use his proxy if he is unable to attend the appropriate Special Meeting in
person or wishes to have his shares voted by proxy even if he does attend the
appropriate Special Meeting. Shares represented by properly executed proxies
received at or prior to the appropriate Special Meeting and which have not been
revoked will be voted at such Special Meeting and will be voted in accordance
with the instructions contained in such proxies. All shares of SouthFirst
Common Stock represented by properly executed proxies for which no instruction
is given will be voted at the SouthFirst Special Meeting in favor of the
Merger. All shares of Chilton County Common Stock represented by properly
executed proxies for which no instruction is given will be voted at the Chilton
County Special Meeting in favor of the Merger.
SouthFirst and Chilton County shareholders are requested to complete,
sign, date and return promptly the enclosed proxy in the postage prepaid
envelope provided for this purpose, regardless of whether they plan
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<PAGE> 29
to attend the appropriate Special Meeting, to ensure that their shares are
voted. A shareholder may revoke a proxy by submitting at any time prior to the
vote at the appropriate Special Meeting a later dated proxy with respect to the
same shares, by delivering written notice of revocation to the Secretary of
SouthFirst, for SouthFirst shareholders, or to the Secretary of Chilton County,
for Chilton County shareholders, at any time prior to such vote or by attending
the appropriate Special Meeting and voting in person. Mere attendance at the
appropriate Special Meeting will not in and of itself revoke a proxy.
Abstentions and broker non-votes will not be counted as votes either
in favor of or against the Merger. The approval of the Merger Agreement and
the Merger by the shareholders of Chilton County requires the affirmative vote
of the holders of two-thirds (66 2/3%) of shares outstanding. As a result, a
Chilton County shareholder who fails to return a proxy or who abstains from
voting on the Merger in his proxy or at the Chilton County Special Meeting will
have effectively voted against approval of these proposals.
If a quorum is not obtained, or if fewer shares of SouthFirst Common
Stock or Chilton County Common Stock are voted in favor of approval of the
Merger than the number required for approval, it is expected that the
appropriate Special Meeting will be postponed or adjourned for the purpose of
allowing additional time for obtaining additional proxies or votes, and, at any
subsequent reconvening of such Special Meeting, all proxies will be voted in
the same manner as such proxies would have been voted at the original convening
of the meeting (except for any proxies which have theretofore effectively been
revoked), notwithstanding that they might have been effectively voted on the
same or any other matter at a previous meeting.
The SouthFirst and Chilton County Boards do not know of any other
matters which are to come before their respective Special Meetings. If any
other matters are properly presented at the SouthFirst Special Meeting or the
Chilton County Special Meeting for consideration, the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment unless authority therefor
is withheld on the enclosed proxy card. Such discretionary matters may include
motions to adjourn the meeting for the purpose of further soliciting proxies in
favor of the Merger.
SouthFirst and Chilton County will bear their respective costs of the
solicitation of proxies from their respective shareholders. In addition to
solicitation by mail, directors, officers and employees of SouthFirst and
Chilton County may solicit proxies by telephone, telegram or otherwise. The
directors, officers and employees of SouthFirst and Chilton County will not be
additionally compensated for such solicitation but may be reimbursed for out-
of-pocket expenses incurred in connection therewith. SouthFirst and/or Chilton
County may also employ a proxy solicitation firm at customary fees to assist it
in the solicitation effort. Brokerage firms, fiduciaries and other custodians
who forward soliciting material to the beneficial owners of shares of
SouthFirst Common Stock or Chilton County Common Stock held by them will be
reimbursed for their reasonable expenses incurred in forwarding such material.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER
During the last several years, there has been a trend toward
consolidation in the banking industry. This trend has been fueled by recent
national and state banking-related legislation and has enabled participants in
business combinations to benefit from the economies of scale and greater
efficiencies available to the combined entities. Financial institutions have
increasingly sought suitable combinations as a means of obtaining such
benefits.
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During 1995, the Chilton County Board evaluated alternative operating
strategies to improve Chilton County's financial condition and operating
results and thereby enhance shareholder value, including the possible formation
of a holding company for Chilton County and other long-term plans for remaining
an independent organization.
From late 1995 to early 1996, Chilton County received unsolicited
inquiries from several financial institutions, including SouthFirst, regarding
their interest in acquiring Chilton County. None of these discussions led to
any agreement or understanding regarding such an acquisition.
In early 1996, Chilton County retained Professional Bank Services,
Inc. ("PBS") as its financial advisor to assist in developing a business plan
as a mechanism to measure actual results against expectations and to satisfy
certain regulatory requirements. The business plan focused on long-term
results with specific annual objectives, goals and strategies. Although the
business plan indicated that Chilton County had a number of strengths and
opportunities for growth, it also indicated certain areas needing improvement
and possible threats to successful future operation. For its services in
connection with the business plan, PBS received a fee of $16,260, plus
reimbursement of out-of- pocket expenses.
In May 1996, Chilton County once again retained PBS as its financial
advisor to provide consultation regarding strategic issues, particularly the
future structure and focus of Chilton County under the business plan as
compared to the indications of interest from other financial institutions. In
June 1996, the Chilton County Board considered PBS' analysis of Chilton County,
including a valuation of Chilton County and an analysis of Chilton County's
potential profitability and growth under the business plan. For its services
on these strategic issues, PBS received a fee of $12,510, plus reimbursement of
out-of-pocket expenses.
Based on the PBS analysis of Chilton County, the Chilton County Board
reaffirmed its preference to remain an independent financial institution.
However, the Chilton County Board also recognized that the interests of
shareholders might be better served if Chilton County were to combine with
another financial institution. The Chilton County Board agreed that all
strategic alternatives to enhance shareholder value should be carefully
considered, including an evaluation of acquisition opportunities with those
financial institutions which had previously expressed an interest in acquiring
Chilton County, as well as other appropriate potential acquirers.
In July 1996, Chilton County retained PBS and its subsidiary,
Investment Bank Services, Inc. ("IBS"), to consult with Chilton County
regarding strategic alternatives to enhance shareholder value, including using
IBS' best efforts as Chilton County's investment banker to solicit,
confidentially, indications of interest from various financial institutions and
other appropriate potential acquirers. Chilton County selected PBS and IBS
because of their familiarity with Chilton County and its market area, as well
as their knowledge of Alabama commercial banks and thrift institutions and
their previous experience with combinations involving financial institutions.
In August 1996, IBS contacted a total of 13 interested parties, all of
which had previously indicated an interest in possibly acquiring Chilton
County. IBS prepared and forwarded informational materials to all interested
parties after receiving a confidentially agreement from each of them.
Subsequent to the distribution of the informational materials, it was
determined that any responses thereto should be delayed until after Chilton
County's audited financial statements for the year ended June 30, 1996 were
available to the interested parties.
On January 30, 1997, IBS received non-binding indications of interest
from four financial institutions (one of which was SouthFirst). One of the
indications of interest consisted of an all cash proposal, another involved an
all stock proposal, and two proposals (including the proposal from SouthFirst)
involved a combination of cash and stock. The range of values for these
indications of interest was from approximately
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$4.1 million to $5.3 million in the aggregate, with SouthFirst's indication of
interest being the highest received.
At a meeting held on February 5, 1997, the Chilton County Board, with
the assistance of IBS and PBS, thoroughly analyzed each of the indications of
interest that had been submitted. Based on this analysis and upon the
recommendation of IBS and PBS, the Chilton County Board unanimously determined
the SouthFirst proposal to be in the best interests of Chilton County and its
shareholders. Although IBS and PBS analyzed the proposed terms of the
SouthFirst proposal to acquire Chilton County, they did not recommend the
amount of consideration to be paid. SouthFirst subsequently conducted an
extensive due diligence review of Chilton County's operations and financial
condition. SouthFirst concluded its due diligence review in April 1997 and
advised Chilton County that it wished to proceed with the proposed transaction.
At that time, a draft of a merger agreement (the "First Agreement") was
prepared by SouthFirst and forwarded to Chilton County. After a series of
meetings and discussions regarding the First Agreement, it was unanimously
approved by the SouthFirst Board and the Board of Directors of First Federal of
the South ("the First Federal Board") on March 19, 1997. The Chilton County
Board unanimously approved the First Agreement on April 14, 1997. The First
Agreement was executed by all parties on April 14, 1997.
Subsequent to the execution of the First Agreement by SouthFirst,
First Federal and Chilton County, the price per share of SouthFirst Common
Stock increased from $14.13 on April 11, 1997 (the last business day preceding
the public announcement of the Merger) to over $16.00 in early September 1997.
This increase exceeded a $15.50 price per share limit which had been
established as a condition precedent to SouthFirst's obligation to close the
Merger. As a result, the parties agreed to amend the First Agreement and, on
August 20, 1997, the SouthFirst and First Federal Boards unanimously approved
certain amendments to the First Agreement which, among other things, (i) did
not condition the Merger on the price of SouthFirst Common Stock, (ii)
increased the Cash Price Per Share from $30.00 to $31.50, and (iii) revised the
calculation of the Exchange Ratio from the quotient obtained by dividing $30.00
by the Average Closing Price to the quotient obtained by dividing $31.50 by the
Average Closing Price. In early September 1997, these amendments were restated
in the form of the Merger Agreement and after a series of meetings and
discussions between the parties, on September 17, 1997, the Merger Agreement
was approved by the SouthFirst Board. At a meeting also held on September 17,
1997, the Chilton County Board, with the assistance of IBS and PBS, thoroughly
analyzed the Merger Agreement and, based on such analysis as well as an opinion
of PBS with respect to the fairness of the consideration to be received by
Chilton County shareholders, approved the Merger by a majority vote with one
director abstaining. The Merger Agreement was executed by all parties on
September 17, 1997.
REASONS FOR THE MERGER; RECOMMENDATION OF BOARDS OF DIRECTORS
SOUTHFIRST. The SouthFirst Board recommends that shareholders
vote FOR approval and adoption of the Merger Agreement and consummation of the
transactions contemplated thereby. In recommending that shareholders approve
and adopt the Merger Agreement, the SouthFirst Board considered and based their
opinion as to the fairness of the transactions contemplated by the Merger
Agreement on:
(i) The belief that the Merger would allow SouthFirst to
leverage or better employ the equity capital position of First
Federal. This creation of a larger asset base was viewed as a means
by which an improved return on equity to SouthFirst's shareholder base
could be attained.
(ii) The financial terms of the Merger. In this regard,
the SouthFirst Board considered the consideration to be paid to
Chilton County to be fair in relation to relative book values,
earnings per share, and shareholders' equity of SouthFirst and Chilton
County.
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(iii) The general structure of the Merger, with SouthFirst
retaining control of the SouthFirst Board along with the compatibility
of management and the business philosophies of SouthFirst and Chilton
County.
(iv) The belief that the larger combined entity would be
more likely to continue independent banking operations in a banking
environment of "big bank" mergers and acquisitions.
(v) The complementary, rather than competitive,
geographical scope of the businesses of First Federal and Chilton
County whereby First Federal will have a significant banking presence
in Chilton and Bibb Counties.
Each of the above factors support, directly or indirectly, the
determination of the SouthFirst Board as to the fairness of the Merger. The
SouthFirst Board did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination;
however, the SouthFirst Board of Directors placed a special emphasis on the
consideration payable in the Merger and the receipt of a favorable opinion from
Trident Financial Corporation ("Trident"), SouthFirst's financial advisor. See
"Opinion of SouthFirst's Financial Advisor."
THE SOUTHFIRST BOARD RECOMMENDS THAT THE SOUTHFIRST SHAREHOLDERS VOTE
FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
CHILTON COUNTY. On September 17, 1997, a majority of the Chilton
County Board (with one director abstaining) approved the Merger Agreement and
determined that, subject to satisfaction of the conditions in the Merger
Agreement, the completion of the Merger on the terms set forth in the Merger
Agreement is in the best interests of Chilton County and its shareholders.
Accordingly, the Chilton County Board has recommended that the holders of
Chilton County Common Stock vote FOR approval of the Merger Agreement and the
Merger.
Prior to approving the Merger and the Merger Agreement, the Chilton
County Board received information regarding and analyzed and considered the
following:
(i) The financial terms of the Merger. In this regard,
the Chilton County Board considered, among other things, the opinion
of PBS as to the fairness of the Merger Consideration, from a
financial point of view, to the shareholders of Chilton County and the
fact that SouthFirst Common Stock has a more liquid trading market
than Chilton County Common Stock.
(ii) A comparison of Chilton County as an independent
entity with the Merger, particularly as to shareholder value. The
Chilton County Board considered the benefits that could reasonably be
expected to accrue to Chilton County shareholders from the Merger,
including the premium offered over Chilton County's then-current stock
price. As of September 18, 1997, the most recent sale price for the
Chilton County Common Stock of which management was aware was $10.00
per share on July 11, 1996. The Merger Agreement provides for either
(i) a cash price of $31.50 per share, (ii) approximately 157,986
shares of SouthFirst Common Stock depending on the price of SouthFirst
Common Stock (based on a per share of $17.75 as of September 18,
1997), or (iii) a combination of cash and shares of SouthFirst Common
Stock. See "TERMS OF THE MERGER -- Merger Consideration."
(iii) Certain financial and other information concerning
SouthFirst. Such information included, among other things,
information with respect to the business, operations, condition and
future prospects of SouthFirst, particularly its capital position and
asset quality.
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(iv) The non-financial terms and structure of the Merger,
in particular, the fact that the Merger qualifies as a tax-free
reorganization to Chilton County shareholders, except in respect of
cash received for their Chilton County Common Stock.
(v) The likelihood of the Merger being approved by the
appropriate regulatory authorities.
(vi) The limited adverse impact, generally, of the Merger
on the various constituencies served by Chilton County, including its
employees, customers and the community.
THE CHILTON COUNTY BOARD RECOMMENDS THAT THE CHILTON COUNTY
SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
OPINION OF SOUTHFIRST'S FINANCIAL ADVISOR
On April 14, 1997, the date upon which the First Agreement was
executed, Trident delivered a preliminary written opinion to the SouthFirst
Board that, as of such date, the consideration to be paid pursuant to the
Merger was fair to SouthFirst's shareholders from a financial point of view.
On January 28, 1997, Trident delivered its valuation report and merger analysis
of Chilton County to the SouthFirst Board. On February 19, 1997, Trident
presented a report to the SouthFirst Board summarizing the results of its due
diligence examination of Chilton County. Trident discussed with the SouthFirst
Board the information in the reports and the financial data and other factors
considered by Trident in conducting its analysis. These reports provided the
basis for the preliminary written opinion delivered by Trident on April 14,
1997, as well as the basis for an updated written opinion to the SouthFirst
Board (the "SouthFirst Opinion") confirming that, as of the date of this Joint
Proxy Statement/Prospectus, the consideration to be paid pursuant to the Merger
continued to be fair to SouthFirst from a financial point of view. Trident is
not affiliated with either SouthFirst or Chilton County.
In requesting the SouthFirst Opinion, the SouthFirst Board did not
give any special instructions to Trident or impose any limitation upon the
scope of the investigation that Trident deemed necessary to enable it to
deliver the SouthFirst Opinion. A copy of the SouthFirst Opinion, which
Trident has consented to the inclusion of in this Joint Proxy
Statement/Prospectus and which sets forth the assumptions made, matters
considered and limits on the review undertaken, is attached to this Joint Proxy
Statement/Prospectus as Appendix B and is incorporated herein by reference.
The summary of the SouthFirst Opinion set forth below is qualified in its
entirety by reference to the full text of the SouthFirst Opinion. SouthFirst
shareholders are urged to read the SouthFirst Opinion in its entirety.
THE SOUTHFIRST OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF
SOUTHFIRST AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE CONSIDERATION TO BE PAID BY SOUTHFIRST BASED ON CONDITIONS AS THEY
EXISTED AND COULD BE EVALUATED AS OF THE DATE OF THE OPINION. THE SOUTHFIRST
OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SOUTHFIRST SHAREHOLDER AS
TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SOUTHFIRST SPECIAL MEETING. NOR
DOES THE SOUTHFIRST OPINION ADDRESS THE UNDERLYING BUSINESS DECISION TO EFFECT
THE MERGER. THIS SUMMARY OF THE SOUTHFIRST OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE TEXT OF SUCH OPINION, WHICH IS ATTACHED TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AS APPENDIX B. SOUTHFIRST SHAREHOLDERS ARE
URGED TO READ THE SOUTHFIRST OPINION IN ITS ENTIRETY FOR A DESCRIPTION OF THE
ASSUMPTIONS MADE AND MATTERS CONSIDERED AND THE LIMITS ON THE REVIEW UNDERTAKEN
IN RENDERING SUCH OPINION.
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In connection with rendering the SouthFirst Opinion, Trident reviewed
and analyzed, among other things, the following: (i) the First Agreement as
well as the Merger Agreement; (ii) certain publicly available information
concerning Chilton County, including the audited financial statements of
Chilton County for each of the years in the three-year period ended June 30,
1997, and unaudited financial statements for the nine months ended June 30,
1997; (iii) certain publicly available information concerning SouthFirst,
including the audited financial statements of SouthFirst for each of the years
in the three-year period ended September 30, 1996, and unaudited financial
statements for the nine months ended June 30, 1997; (iv) certain other internal
information, primarily financial in nature, concerning the business and
operations of Chilton County and SouthFirst furnished to Trident by Chilton
County and SouthFirst for purposes of Trident's analysis; (v) certain
information with respect to the limited trading market for Chilton County
Common Stock; (vi) certain information with respect to the pricing and trading
of SouthFirst Common Stock; (vii) certain publicly available information with
respect to other companies that Trident believed to be comparable to Chilton
County and SouthFirst and the trading markets for such other companies'
securities; and (viii) certain publicly available information concerning the
nature and terms of other transactions that Trident considered relevant to its
inquiry. Trident met with certain officers and employees of Chilton County
and SouthFirst to discuss the foregoing, as well as other matters which it
believed relevant to its inquiry, such as: (i) the current business operations,
financial condition, and future prospects of SouthFirst and Chilton County;
(ii) the results of Trident's due diligence examination of Chilton County; and
(iii) the expected cost savings and revenue enhancements resulting from the
Merger. Trident also took into account its assessment of general economic,
market, financial and regulatory conditions and trends, as well as its
knowledge of the financial institutions industry, its experience in connection
with similar transactions, and its knowledge of securities valuation generally.
In its review and analysis, and in arriving at the SouthFirst Opinion,
Trident assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to it or that was publicly available
and did not attempt independently to verify any such information. Trident did
not conduct a physical inspection of the properties or facilities of Chilton
County or SouthFirst, nor did it make or obtain any independent evaluations or
appraisals of any of such properties or facilities.
The summaries set forth below reflect all the material analysis,
factors and assumptions considered by Trident and the material valuation
methodologies used by Trident in arriving at the SouthFirst Opinion as to
fairness described above. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial or summary description.
Trident believes that its analyses and the summary set forth below must be
considered as a whole and that selecting portions of its analyses, without
considering all of the analyses, or all of the above summary, without
considering all factors and analyses, would create an incomplete view of the
processes underlying the analyses set forth in Trident's reports and the
SouthFirst Opinion. Therefore, the ranges of valuations resulting from any
single analysis described below should not be taken to be Trident's view of the
actual value of Chilton County or the combined company. In performing its
analyses, Trident made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of SouthFirst or Chilton County. The results
of the specific analyses performed by Trident may differ from SouthFirst's or
Chilton County's actual values or actual future results as a result of changing
economic conditions, changes in company strategy and policies, as well as a
number of other factors. Such individual analyses were prepared to provide
valuation guidance solely as part of Trident's overall valuation analysis and
the determination of the fairness of the consideration to be paid by
SouthFirst's shareholders, and were provided to the SouthFirst Board in
connection with the delivery of the SouthFirst Opinion. The analyses do not
purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future. In addition, as described above, the
SouthFirst Opinion and presentations to the SouthFirst Board were among the
many factors taken into consideration by the SouthFirst Board in making its
determination to approve the Merger Agreement.
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Financial Analysis of Chilton County. Trident examined Chilton
County's financial performance for the period June 30, 1993 through December
31, 1996 by analyzing the composition of its balance sheet, adjusting and
normalizing its earnings (as further described in the "income approach" below),
and calculating a variety of operating and financial ratios for Chilton County.
Peer Group Analysis. Trident evaluated Chilton County's strengths and
weaknesses by comparing the financial performance of Chilton County to that of
the following groups of SAIF-insured, OTS-regulated thrift institutions as of
June 30, 1996: (i) all United States institutions; (ii) all institutions in the
Southeast; (iii) all Alabama institutions; (iv) all United States institutions
with total assets between $50 million and $100 million; and (v) Southeast
institutions with total assets between $50 million and $100 million (the
"Aggregates"). This analysis compared a number of Chilton County's historical
financial ratios to those of the Aggregates, including but not limited to: (i)
the balance sheet composition as a percentage of total assets; (ii) the loan
portfolio as a percentage of total assets; (iii) the investment portfolio as a
percentage of total assets; and (iv) asset quality. Trident also compared
Chilton County's growth rates between December 31, 1993 and June 30, 1996, its
yields on assets and costs of liabilities and its income and expense data for
1995 and the six months ended June 30, 1996 to those of the Aggregates.
Valuation of Chilton County. Trident estimated the fair market value
of Chilton County in a merger scenario. In valuing Chilton County, Trident
utilized the asset approach, income approach and market approach, and then
reconciled the values derived therefrom.
The asset approach considers the market value of a company's assets
and liabilities, as well as any intangible value the company may have. Trident
estimated Chilton County's net asset value by adjusting the carrying value of
its assets and liabilities to reflect current market values. In addition, the
net asset value of Chilton County was adjusted downward based on an estimate of
transaction and other costs. Finally, Trident increased Chilton County's net
asset value for the proceeds and tax effect of exercising all outstanding
options to purchase Chilton County Common Stock. Based on the adjustments
discussed above, Trident estimated Chilton County's fully-diluted net asset
value to be approximately $3.9 million or $21.35 per share. After determining
Chilton County's net asset value, Trident added an intangible premium to
reflect the estimated value of its customer relationships. According to the
asset approach, the total value of Chilton County is the sum of its net asset
value and its intangible value. Based on a branch purchase methodology and
intangible ("core deposit") premiums observed in the market for thrift
acquisitions, as well as Trident's knowledge of Chilton County, Trident applied
premiums equal to 3.5% and 6.0% of core deposits to Chilton County's estimated
fully-diluted net asset value. Using the asset approach, Trident established a
reference range of $33.00 to $41.25 per share of Chilton County Common Stock.
Trident also used an income approach in its valuation of Chilton
County by capitalizing Chilton County's annualized earnings for the quarter
ended September 30, 1996 (adjusted to exclude non-recurring income and expense
items and lower deposit insurance premiums) plus merger cost savings of 15% to
22% as a result of an assumed acquisition of Chilton County (the "normalized
earnings"). The normalized earnings were capitalized at rates of 11% and 13%.
The capitalization rates chosen were estimates of the required rates of return
for holders or prospective holders of shares of financial institutions similar
to Chilton County, based on a number of factors including prevailing interest
rates, the pricing ratios of publicly traded financial institutions, the
financial condition and operating results of Chilton County, as well as
Trident's general knowledge of valuation, the securities markets, and
acquisition values in other mergers of financial institutions. Trident
adjusted the resulting values to reflect the exercise of stock options and
certain merger-related expenses. Using the income approach, Trident
established a reference range of $18.50 to $26.50 per share of Chilton County
Common Stock.
In the market approach, Trident analyzed certain median pricing ratios
(e.g., price to book value, price to tangible book value, price to reported
earnings, price to assets, and the premium paid over tangible book value as a
percentage of core deposits) resulting from selected completed thrift merger
transactions, as
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well as recently announced pending transactions. In applying the market
approach, Trident considered the pricing ratios for the following groups of
thrift merger transactions: (i) all pending thrift merger transactions (33
transactions); (ii) all pending thrift mergers announced during the 90 days
prior to January 13, 1997 (the date of the market data) (14 transactions);
(iii) all pending thrift mergers involving thrifts located in the Southeast (2
transactions); (iv) all pending thrift mergers in which the aggregate
consideration was less than $10 million (4 transactions); (v) all pending
thrift mergers in which the target thrift had assets between $50 million and
$100 million (5 transactions); (vi) all pending thrift mergers in which the
target thrift had a return on assets of between 0.00% and 0.40% (4
transactions); (vii) all pending thrift mergers in which the target thrift had
a return on equity of between 2% and 5% (6 transactions); (viii) all pending
thrift mergers in which the target thrift had a tangible equity ratio of
between 5% and 6% of assets (4 transactions); and (ix) all pending thrift
mergers in which the target thrift had a ratio of non- performing assets to
total assets between 0.6% and 1.0% (6 transactions). Trident also considered
the pricing ratios for six pending or completed thrift merger transactions in
which the target thrift was of similar size and capital structure as Chilton
County, and in which the target thrift had similar profitability and asset
quality. Trident then performed a comparison of a number of financial ratios
for Chilton County to those of the target thrift institutions. Based on
Chilton County's financial condition and results of operations, as well as
other factors, relative to the groups of thrift mergers noted above, Trident
chose ranges of pricing ratios to apply to Chilton County. Trident chose price
to book value ratios of 115% to 135%, resulting in per share values of $28.25
to $33.25; price to tangible book value ratios of 115% to 135%, resulting in
per share values of $28.25 to $33.25; price to earnings multiples of 25 to 30
times earnings, resulting in per share values of $22.25 to $26.75; price to
assets ratios of 7% to 9%, resulting in per share values of $31.75 to $40.75;
and premiums over tangible book value as a percentage of core deposits of 2% to
5%, resulting in per share values of $31.75 to $42.50. Based on these derived
ranges of value, Trident established a reference range of $28.25 to $33.25 per
share using the market approach.
Trident then reviewed the results from the three approaches, and after
consideration of all relevant facts, reconciled the acquisition values
generated by each approach and determined a final range for the acquisition
value of Chilton County of $28.00 to $32.00 per share.
Contribution and Dilution Analysis. Trident presented a pro forma
combined balance sheet as of December 31, 1996 and a pro forma combined income
statement for the four quarters ended December 31, 1996 assuming a purchase
transaction in which Chilton County shareholders would receive, in the
aggregate, 50% cash and 50% SouthFirst Common Stock. Trident analyzed the
contribution of each of SouthFirst and Chilton County (on a fully diluted basis
assuming fully phased-in projected cost savings and revenue enhancements) to
the pro forma combined company for, among other things, ownership, equity, and
earnings. Trident also compared the earnings per share of SouthFirst Common
Stock to the earnings per share of the common stock of the combined company on
a pro forma basis. Based on such analysis and assuming certain projected cost
savings and revenue enhancements, the proposed transaction would be accretive
to SouthFirst's earnings per share. The pro forma merger analysis also showed
the Merger would be dilutive to SouthFirst's book value and tangible book value
per share, but the dilution would be recovered through higher earnings in less
than ten years.
Review of Due Diligence Examination of Chilton County. Trident
presented a summary of its on-site due diligence examination of Chilton County.
The positive and negative findings were presented, as well as an update of
Chilton County's financial condition and operating results through December 31,
1996. Trident discussed Chilton County's investment portfolio, the change in
its book value from September 30, 1996, the feasibility of achieving projected
cost savings, asset quality, loan loss reserve coverage, asset classifications,
deposits, recent earnings, recent regulatory examinations of Chilton County,
and other issues. During its investigation, Trident did not discover any
conditions that would prevent it from rendering the SouthFirst Opinion to the
SouthFirst Board.
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Trident, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwriting, and valuations for corporate
and other purposes. Trident has extensive experience with the valuation of
financial institutions. The SouthFirst Board selected Trident as its financial
advisor because SouthFirst was familiar with Trident, because Trident is a
nationally recognized investment banking firm specializing in financial
institutions and because of its substantial experience in transactions similar
to the Merger.
Pursuant to the terms of an engagement letter dated September 26,
1996, SouthFirst has agreed to pay Trident its customary hourly rates for
acting as financial advisor in connection with the Merger. In addition,
SouthFirst agreed to pay Trident a fee of $15,000 for rendering the SouthFirst
Opinion. However, Trident agreed to refund $2,500 of its hourly fees in the
event it rendered a final fairness opinion. Whether or not the Merger is
consummated, SouthFirst also has agreed to reimburse Trident for reasonable
out-of-pocket expenses and to indemnify Trident and certain related persons
against certain liabilities relating to or arising out of its engagement.
OPINION OF CHILTON COUNTY'S FINANCIAL ADVISOR
PBS was engaged by Chilton County to advise the Chilton County Board
as to the fairness of the consideration, from a financial perspective, to be
paid by SouthFirst to Chilton County's shareholders as set forth in the Merger.
PBS is a bank consulting firm with offices in Louisville, Atlanta,
Chicago, Nashville, and Washington, D.C. PBS's subsidiary, IBS, is a
registered broker/dealer and was retained by Chilton County to serve as the
association's investment banker in order to evaluate and facilitate the
possible sale of Chilton County. See " Background of the Merger." As part of
its investment banking business, PBS is regularly engaged in reviewing the
fairness of financial institution acquisition transactions from a financial
perspective and in the valuation of financial institutions and other businesses
and their securities in connection with mergers, acquisitions, estate
settlements, and other transactions. Neither PBS, nor any of its affiliates,
has a material financial interest in Chilton County or SouthFirst. PBS and IBS
were selected to advise the Chilton County Board based upon their familiarity
with Alabama financial institutions and knowledge of the financial industry as
a whole.
PBS performed certain analyses described below and discussed the range
of values for Chilton County resulting from such analyses with the Chilton
County Board in connection with its advice as to the fairness of the
consideration to be paid by SouthFirst.
PBS delivered a fairness opinion to the Chilton County Board on March
28, 1997, at a special meeting of the Chilton County Board. PBS confirmed such
opinion on April 14, 1997, the date upon which the First Agreement was
executed. On September 17, 1997, PBS delivered a second fairness opinion (the
"Chilton County Opinion") at a meeting of the Chilton County Board where the
Merger Agreement was considered. A copy of the Chilton County Opinion, which
includes a summary of the assumptions made and information analyzed in deriving
the Chilton County Opinion, together with PBS' confirmation of the Chilton
County Opinion as of October __, 1997, are attached as Appendix C to this
Joint Proxy Statement/Prospectus and should be read in its entirety.
In arriving at the Chilton County Opinion, PBS reviewed certain
publicly available business and financial information relating to Chilton
County and SouthFirst. PBS considered certain financial and stock market data
of Chilton County and SouthFirst, compared that data with similar data for
certain other publicly-held savings institutions and considered the financial
terms of certain other comparable regional transactions that had recently been
effected. PBS also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria that it
deemed relevant. In connection with its review, PBS did not independently
verify the foregoing information and relied on such information as being
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complete and accurate in all material respects. Financial forecasts prepared by
PBS were based on assumptions believed by PBS to be reasonable and to reflect
currently available information. PBS did not make an independent evaluation or
appraisal of the assets of Chilton County or SouthFirst. PBS took into account
the contacts made by IBS with other financial institutions concerning their
interest in affiliation with Chilton County. PBS reviewed the correspondence
and information regarding the financial institutions contacted concerning their
interest in a merger or acquisition of Chilton County. PBS reviewed all offers
received by Chilton County.
PBS reviewed and analyzed the historical performance of Chilton County
contained in Audited Financial Statements as of June 30, 1994, 1995, 1996 and
1997; September 30, 1996 and December 31, 1996 Thrift Financial Reports filed
with the OTS by Chilton County; historical common stock trading activity of
Chilton County; and the premises and other fixed assets. PBS further reviewed
and tabulated statistical data regarding the loan portfolio, securities
portfolio and other performance ratios and statistics and also prepared and
analyzed financial projections. In addition, PBS prepared and analyzed other
financial studies, analyses and investigations as it deemed relevant for the
purposes of the Chilton County Opinion. In review of the aforementioned
information, PBS took into account its assessment of general market and
financial conditions, experience in other transactions, and knowledge of the
financial industry generally.
In connection with rendering the Chilton County Opinion and preparing
its various written and oral presentations to the Chilton County Board, PBS
performed a variety of financial analyses, including those summarized below.
The summary does not purport to be a complete description of the analyses
performed by PBS in this regard. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and therefore, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors
summarized below, PBS believes that its analyses must be considered as a whole
and that selecting portions of its analyses and of the factors considered by
it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying the Chilton County Opinion. In
performing its analyses, PBS made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond Chilton County's or SouthFirst's control. The analyses performed by
PBS are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the process by which businesses actually may be sold.
Acquisition Comparison Analysis. In performing this analysis, PBS
reviewed thrift acquisition transactions in the states of Alabama, Florida and
Georgia (the "Southeast Region"). There were 73 Southeast Region thrift
acquisition transactions announced since 1990 for which detailed financial
information was available. The purpose of the analysis was to obtain an
evaluation range based on these Southeast Region acquisition transactions.
Median multiples of earnings and book value implied by the comparable
transactions were utilized in obtaining a range for the acquisition value of
Chilton County. In addition to reviewing recent Southeast Region thrift
transactions, PBS performed separate comparable analyses for acquisitions of
Southeast Region thrifts which, like Chilton County, had an equity-to-asset
ratio of less than 7.0%, total deposits between $50.0 million and $125.0
million and those located within the State of Alabama. Median values for the 73
Southeast Region acquisitions expressed as multiples of both book value and
earnings were 1.46X and 15.04X, respectively. The median multiples of book
value and earnings for acquisitions of Southeast Region thrifts with an
equity-to-asset ratio less than 7.0% were 1.48X and 14.22X, respectively. For
acquisitions of Southeast Region thrifts with total deposits between $50.0
million and $125.0 million, the median multiples were 1.43X and 17.22X,
respectively. For acquisitions of Alabama thrifts the median multiples were
1.20X and 15.80X, respectively. In the proposed merger, Chilton County
shareholders will receive $31.50 per common share in cash or SouthFirst Common
Stock for an aggregate value of $5,608,510. This represents a multiple of June
30, 1997 book value and a multiple of June 30, 1997 adjusted earnings of 1.28X
and 19.89X, respectively. Trailing four-quarter December 31, 1996 earnings were
adjusted to reflect the after-tax
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effect of a non-recurring loss on foreclosed assets of $38,000, net gain on
sale of securities of $20,000 and a one-time SAIF assessment of $430,000. See
"CHILTON COUNTY -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Results of Operations -- Other Expense."
Adjusted Net Asset Value Analysis. PBS reviewed Chilton County's
balance sheet data to determine the amount of material adjustments required to
the stockholder's equity of Chilton County based on differences between the
market value of Chilton County's assets and their value reflected on Chilton
County's financial statements. PBS determined that two adjustments were
warranted. The investment securities portfolio had depreciation of
approximately $115,000 after adjustment for income taxes. PBS also reflected a
value of the non-interest bearing demand deposits of approximately $84,000. The
adjusted net asset value was determined to be $24.56 per share of Chilton
County Common Stock.
Discounted Earnings Analysis. A dividend discount analysis was
performed by PBS pursuant to which a range of stand-alone values of Chilton
County was determined by adding (i) the present value of estimated future
dividend streams that Chilton County could generate over a five-year period
beginning in 1998 and ending in 2003, and (ii) the present value of the
"terminal value" of Chilton County's earnings at the end of the year 2003. The
"terminal value" of Chilton County's earnings at the end of the five-year
period was determined by applying a multiple of 1.46 times the projected
terminal year's equity. The 1.46 multiple represents the median price paid as a
multiple of book value for all Southeast Region thrift transactions since 1990.
Dividend streams and terminal values were discounted to present values using a
discount rate of 12%. This rate reflects assumptions regarding the required
rate of return of holders or buyers of Chilton County Common Stock. The value
of Chilton County, determined by adding the present value of the total cash
flows, was $29.67 per share of Chilton County Common Stock. In addition, using
the five-year projection as a base, a twenty-year projection was prepared
assuming an annual growth rate of 5% and a return on assets of 1.00% by year
thirteen remaining in effect for the rest of the period. Dividends also were
assumed to be 50% of income for all years. This long-term projection resulted
in a value of $29.29 per share of Chilton County Common Stock.
Specific Acquisition Analysis. PBS valued Chilton County based on an
acquisition analysis assuming a "break-even" earnings scenario to an acquirer
as to price, current interest rates and amortization of the premium paid. Based
on this analysis, an acquiring institution would pay $28.70 per share of
Chilton County Common Stock, assuming it was willing to accept no impact to its
net income in the initial year. This analysis was based on a funding cost of
7.5% adjusted for taxes, amortization of the acquisition premium over 15 years
and an earnings level for Chilton County of $282,000. The same assumptions were
utilized assuming a 10% and 20% overhead reduction. Based on a 10% and 20%
overhead reduction, an acquiring institution would pay $32.10.
The Chilton County Opinion is directed only to the question of whether
the consideration to be received by Chilton County's shareholders under the
Merger Agreement is fair and equitable from a financial perspective and does
not constitute a recommendation to any Chilton County shareholder to vote in
favor of the Affiliation. No limitations were imposed on PBS regarding the
scope of its investigation or otherwise by Chilton County or any of its
affiliates.
Based on the results of the various analyses described above, PBS
concluded that the consideration to be received by Chilton County's
shareholders under the Merger Agreement is fair and equitable from a financial
perspective to the shareholders of Chilton County.
PBS and IBS will receive a fee of $75,000 plus 3% of the total
consideration received by Chilton County shareholders in excess of $3,700,000
from Chilton County for all of their services performed in connection with the
Merger, including rendering the Chilton County Opinion. As of September 22,
1997, the total fee to PBS and IBS would have been approximately $132,255. In
addition, Chilton County has
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agreed to indemnify PBS and IBS and their directors, officers and employees,
from liability in connection with the Merger, and to hold PBS and IBS harmless
from any losses, actions, claims, damages, expenses or liabilities related to
any of PBS' or IBS' acts or decisions made in good faith and in the best
interest of Chilton County.
TERMS OF THE MERGER
The description of the Merger Agreement set forth in this Section does
not purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated by reference herein. Reference is
made to the Merger Agreement for the definition of such capitalized terms used
herein for which no definition is provided. ALL SOUTHFIRST AND CHILTON COUNTY
SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
GENERAL
The Merger Agreement provides that, subject to the satisfaction or
waiver of certain conditions (including, among other things, approval of the
Merger by the shareholders of each of SouthFirst and Chilton County and the
OTS), Chilton County will be merged with and into First Federal, which will be
the surviving entity and which will remain a 100% controlled subsidiary of
SouthFirst.
At the Effective Time, each share of Chilton County Common Stock
issued and outstanding immediately prior to the Effective Time (excluding
shares held by shareholders who perfect their dissenters' rights) shall, by
virtue of the Merger, cease to be outstanding and shall be converted at the
option of such shareholders into the right to receive, subject to certain
limitations, (i) cash, (ii) shares of SouthFirst Common Stock, or (iii) a
combination thereof.
THE EFFECTIVE TIME
Subject to the satisfaction or waiver of certain conditions contained
in the Merger Agreement, the Effective Time will occur on the last to occur of
(i) the effective date of the last required consent of any state or federal
regulatory authority having authority over the Merger (including the expiration
of all applicable waiting periods following such consents or the delivery of
appropriate notices) or (ii) the date on which the shareholders of each of
SouthFirst and Chilton County approve the Merger Agreement. If approved by
SouthFirst and Chilton County shareholders and the applicable regulatory
authorities, the parties expect that the Effective Time will occur on or before
October 31, 1997, although there can be no assurance as to whether or when the
Merger will occur.
MERGER CONSIDERATION
Under the terms of the Merger Agreement, each share of Chilton County
Common Stock issued and outstanding immediately prior to the Effective Time
(excluding shares held by shareholders who perfect their dissenters' rights)
shall cease to be outstanding and shall be converted, at the option of such
shareholders, into the right to receive (i) $31.50 per share (the "Cash Price
Per Share"), (ii) the Stock Price Per Share (as defined below) or (iii) any
combination of the Cash Price Per Share and the Stock Price Per Share; subject
to the limitations more fully described below and provided that no single share
of Chilton County Common Stock may be converted into a combination of the Cash
Price Per Share or the Stock Price Per Share.
The Stock Election. Holders of Chilton County Common Stock may elect
to receive shares of SouthFirst Common Stock in the Merger in accordance with
the election procedures set forth in the Merger Agreement. See " -- Election,
Allocation and Exchange of Certificates." Holders who elect SouthFirst Common
Stock will receive an amount of SouthFirst Common Stock (the "Stock Price Per
Share") in respect
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of each share of Chilton County Common Stock that is so converted equal to the
product of the Average Closing Price (as defined below) multiplied by the
Exchange Ratio (as defined below). The Average Closing Price shall mean the
average of the closing sale price per share of SouthFirst Common Stock on the
American Stock Exchange (the "AMEX") (as reported in The Wall Street Journal,
or if not reported thereby, any other authoritative source as mutually
determined by SouthFirst and Chilton County) for each of the 10 Trading Days
immediately preceding the 10 consecutive Business Days immediately preceding
the Effective Time. A "Trading Day" means any day in which the AMEX is open
and no less than 100 shares of SouthFirst Common Stock are traded. A "Business
Day" shall mean any day, except Saturdays, Sundays and Federal Holidays, in
which First Federal is open.
The exchange ratio (the "Exchange Ratio") for each share of Chilton
County Common Stock shall be that number of shares of SouthFirst Common Stock
equal to the quotient obtained by dividing $31.50 by the Average Closing Price.
Notwithstanding the preceding two paragraphs, the aggregate amount of
stock that will be paid in the Merger to satisfy such elections will not exceed
50% of the aggregate consideration paid in exchange for shares of Chilton
County Common Stock.
The Cash Election. Holders of Chilton County Common Stock may elect
to receive cash in the Merger in accordance with the election procedures set
forth in the Merger Agreement. Holders who elect cash will receive an amount
in cash at the Cash Price Per Share in respect of each share of Chilton County
Common Stock that is so converted. The Aggregate Cash Amount (which includes
the cash paid for (1) Chilton County Options (as defined below), (2) any
dissenters' rights (estimated at $31.50 per share) and (3) fractional shares)
that will be paid in the Merger to satisfy such elections will not exceed 50%
of the aggregate consideration paid in exchange for shares of Chilton County
Common Stock (the "Threshold Cash Amount").
If the Aggregate Cash Amount is more or less than the Threshold Cash
Amount, the number of shares of SouthFirst Common Stock and the amount of cash
paid to each electing holder of Chilton County Common Stock will be allocated
pro rata in accordance with the Merger Agreement. See " -- Election, Allocation
and Exchange of Certificates."
FRACTIONAL SHARES
No fractional shares of SouthFirst Common Stock will be issued in the
Merger. Each holder of shares of Chilton County Common Stock converted
pursuant to the Merger, who would otherwise have been entitled to receive a
fraction of a share of SouthFirst Common Stock shall receive, in lieu thereof,
cash (without interest) in an amount equal to such fractional part of a share
of SouthFirst Common Stock multiplied by the Average Closing Price. No such
holder will be entitled to dividends, voting rights or any other rights as a
shareholder in respect of any fractional shares.
OPTIONS
At the Effective Time, each award, option, warrant, or other right to
purchase or acquire shares of Chilton County Common Stock pursuant to stock
awards, stock options, warrant agreements, or stock appreciation rights
("Chilton County Options") granted by Chilton County which are outstanding at
the Effective Time shall be canceled and all rights in respect thereof will
cease to exist. As consideration for the cancellation of all of the Chilton
County Options, each holder thereof shall receive cash in an amount equal to
(i) the aggregate number of options which each holder of Chilton County Options
could have been converted into immediately prior to the Effective Time,
multiplied by (ii) the difference between (A) the Cash Price Per Share (i.e.,
$31.50) and (B) the exercise price for each Chilton County Option.
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ELECTION, ALLOCATION AND EXCHANGE OF CERTIFICATES
Pursuant to the Merger Agreement, 50% of the consideration to be paid
in the Merger must be paid in shares of SouthFirst Common Stock and 50% must be
paid in cash. To satisfy this requirement, SouthFirst may, in its discretion,
modify the elections of Chilton County shareholders to increase or decrease
their respective allocations of cash or shares of SouthFirst Common Stock in
the manner as set forth below. As a result of the foregoing limitation,
shareholders of Chilton County cannot be guaranteed that all shares of Chilton
County Common Stock in which stock is elected will be converted into the right
to receive SouthFirst Common Stock, or that a cash election will be accepted in
full or that any shareholder will receive the combination of SouthFirst Common
Stock, or cash that he or she elected. Consequently, a Chilton County
shareholder may receive shares of SouthFirst Common Stock, cash, or a
combination of both, which may not be consistent with his or her election, and
Chilton County shareholders should consider this when voting on the Merger
Agreement.
An election form (an "Election Form") is being mailed along with this
Joint Proxy Statement/Prospectus. Subject to the Election Deadline (as defined
below), each holder of Chilton County Common Stock will be entitled to make an
election and to submit an Election Form to SouthFirst. Each Election Form
will permit a holder (or the beneficial owner through appropriate and customary
documentation and instructions) of Chilton County Common Stock to elect to
receive cash or SouthFirst Common Stock with respect to all or a portion of
such holder's Chilton County Common Stock. Prior to the Election Deadline,
SouthFirst and Chilton County will make available one or more Election Forms as
may be reasonably requested by all persons who become holders (or beneficial
owners) of Chilton County Common Stock by the Election Deadline.
Any shares of Chilton County Common Stock with respect to which the
holder (or the beneficial owner, as the case may be) has not submitted to
SouthFirst an effective, properly completed Election Form on or before
4:00 p.m., October 28, 1997 (the "Election Deadline") will be converted
into cash at the Cash Price Per Share (i.e., $31.50).
All elections shall be final, and any holder of Chilton County Common
Stock who made a valid election shall not have the right to withdraw such
election. SouthFirst shall determine whether or not elections have been
properly or timely made and shall promptly notify the holder of any Chilton
County Common Stock with respect to any election that has not been properly or
timely made. SouthFirst, with the agreement of Chilton County, may make such
equitable changes in the procedures described herein as are necessary or
desirable to effect any elections.
Prior to the Effective Time, SouthFirst shall determine whether the
Aggregate Cash Amount is greater than or less than the Threshold Cash Amount.
If such determination indicates that the Aggregate Cash Amount is greater than
or less than the Threshold Cash Amount, the aggregate merger consideration will
be allocated pro rata in accordance with the Merger Agreement. Under the
Merger Agreement, if the Aggregate Cash Amount is greater than the Threshold
Cash Amount, SouthFirst shall eliminate from the total number of Cash Election
Shares (pro rata as to each holder of Cash Election Shares) an amount of Cash
Election Shares necessary to reduce the Aggregate Cash Amount to the Threshold
Cash Amount. However, if the Aggregate Cash Amount is less than the Threshold
Cash Amount, SouthFirst shall attribute to and deem increased the total number
of Cash Election Shares by allocating to each holder of Stock Election Shares
(pro rata as to each holder of Stock Election Shares) an amount of Cash
Election Shares that, when added to the Aggregate Cash Amount, will increase
the Aggregate Cash Amount to the Threshold Cash Amount.
Prior to, or as promptly as practicable after, the Effective Time,
SouthFirst will send, or cause to be sent, to each holder of record of shares
of Chilton County Common Stock, transmittal materials for use in
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exchanging such holder's share certificates for Chilton County Common Stock
(the "Chilton County Certificates") for the consideration due in respect
thereof. SouthFirst will cause share certificates for SouthFirst Common Stock
(the "SouthFirst Certificates"), into which shares of a holder's Chilton County
Common Stock are converted at the Effective Time, and/or any check in respect
of the cash consideration and any fractional share interests which such person
will be entitled to receive, to be delivered to such Chilton County
shareholder, upon delivery to SouthFirst of Chilton County Certificates (or
indemnity reasonably satisfactory to SouthFirst, if any of such certificates
are lost, stolen or destroyed) owned by such shareholder. No interest will be
paid on any such cash to be paid upon such delivery.
CHILTON COUNTY SHAREHOLDERS SHOULD NOT SEND IN THEIR CHILTON COUNTY
CERTIFICATES UNTIL THEY RECEIVE THE TRANSMITTAL MATERIALS FROM SOUTHFIRST.
Notwithstanding the foregoing, neither SouthFirst, nor any party to
the Merger Agreement, will be liable to any holder (or, if after the Effective
Time, former holder) of Chilton County Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
Beginning 60 days after the Effective Time, no dividends or other
distributions with respect to SouthFirst Common Stock, with a record date
occurring after the Effective Time, will be paid to the holder of any
unsurrendered Chilton County Certificate, until the holder thereof will
surrender such Chilton County Certificate in accordance with the terms of the
Merger Agreement. After the proper surrender of a Chilton County Certificate,
the record holder thereof will be entitled to receive any such dividends or
other distributions, without any interest thereon, which theretofore had become
payable with respect to shares of SouthFirst Common Stock represented by such
Chilton County Certificate.
CONDITIONS PRECEDENT TO THE MERGER
The Merger will occur only if the Merger Agreement is approved by the
requisite vote of the shareholders of SouthFirst and Chilton County.
Consummation of the Merger is subject to the satisfaction of certain other
conditions, unless waived, to the extent legally permitted. Such conditions
include (i) the receipt of all required governmental orders, permits,
approvals, or qualifications (and the expiration of all applicable waiting
periods following the receipt of such items or the delivery of appropriate
notices), provided that such approvals shall not have imposed any condition or
restriction that, in the reasonable judgment of either the SouthFirst Board or
the Chilton County Board, would so materially adversely impact the economic or
business benefits of the transactions contemplated by the Merger Agreement
that, had such condition or requirement been known, such party would not, in
its reasonable judgment, have entered into the Merger Agreement; (ii) the
receipt, with certain exceptions, of all consents required for consummation of
the Merger and the preventing of any default under any contract of such party
which, if not obtained or made, is reasonably likely to have, individually or
in the aggregate, a material adverse effect on such party; (iii) the absence of
any action by a court or governmental or regulatory authority that restricts,
prohibits or makes illegal the transactions contemplated by the Merger
Agreement; (iv) the effectiveness of the Registration Statement under the
Securities Act and the receipt of all necessary approvals under state
securities laws, the Securities Act or the Exchange Act relating to the
issuance or trading of the shares of SouthFirst Common Stock issuable pursuant
to the Merger; and (v) the receipt of the tax opinion referred to in "-- Certain
Federal Income Tax Consequences."
In addition, unless waived, each party's obligation to effect the
Merger is subject to the accuracy of the other party's representations and
warranties at the Effective Time and the performance by the other party of its
obligations under the Merger Agreement and the receipt of certain closing
certificates from the other party. The obligation of SouthFirst to effect the
Merger also is subject to (i) the loan loss reserves of Chilton County, prior
to the Effective Time, being not less than $260,000; (ii) the sale of any of
the investment securities held in the "available for sale" investment portfolio
of Chilton County, prior to the Effective Time,
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as requested by SouthFirst, (iii) the unrealized loss on investment securities
held in the "held to maturity" investment portfolio of Chilton County not
exceeding $500,000 prior to the Effective Time; (iv) SouthFirst's receipt of a
written legal opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
P.C., special counsel to Chilton County, dated as of the Effective Time, with
respect to such matters and in such form as shall be agreed upon between such
firm and SouthFirst; (v) SouthFirst's receipt from Trident of a letter, dated
not more than five days prior to the date of this Joint Proxy
Statement/Prospectus, stating that in the opinion of Trident, the Exchange
Ratio and the Cash Price Per Share are fair, from a financial point of view, to
the holders of SouthFirst Common Stock and such opinion is not withdrawn prior
to SouthFirst Shareholders' Special Meeting; (vi) Bobby R. Cook, President and
Chief Executive Officer of Chilton County, entering into a new First Federal
employment contract in exchange for the cancellation of his existing Chilton
County employment contract and corresponding change of control and severance
pay agreements; and (vii) the holders of not more than 10% of all of the issued
and outstanding shares of Chilton County Common Stock exercise their
dissenters' rights of appraisal.
The obligation of Chilton County to effect the Merger is further
subject to (i) Chilton County's receipt from PBS of a letter, dated not more
than five business days prior to the date of this Joint Proxy
Statement/Prospectus, stating that in the opinion of PBS, the Exchange Ratio
and the Cash Price Per Share are fair, from a financial point of view, to the
holders of Chilton County Common Stock and such opinion is not withdrawn prior
to the Chilton County Special Meeting; (ii) SouthFirst having delivered the
consideration to be paid to holders of Chilton County Common Stock; and (iii)
Chilton County's receipt of a written opinion of Smith, Gambrell & Russell,
LLP, dated as of the Effective Time, with respect to such matters and in such
form as shall be agreed upon between such firm and Chilton County.
No assurances can be provided as to when or if all of the conditions
precedent to the Merger can or will be satisfied or waived by the party
permitted to do so. Either Chilton County or SouthFirst may waive certain of
the conditions imposed with respect to its or their respective obligations to
consummate the Merger, except for requirements that the Merger be approved by
SouthFirst's and Chilton County's respective shareholders and that all required
regulatory approvals be received.
CONDUCT OF BUSINESS PRIOR TO THE MERGER
Under the terms of the Merger Agreement, Chilton County has agreed,
except as otherwise contemplated by the Merger Agreement, to (i) operate its
business only in the usual, regular and ordinary course, (ii) use its
reasonable efforts to preserve intact its business organization and assets and
maintain its rights and franchises, (iii) use its reasonable efforts to
maintain its current employee relationships, and (iv) take no action which
would materially adversely affect the ability of any party to obtain any
consent or approvals required for the transactions contemplated by the Merger
Agreement without imposition of a condition or restriction which in the
reasonable judgement of either the SouthFirst Board or the Chilton County Board
would so materially adversely impact the economic or business benefits of the
transactions contemplated by the Merger Agreement that, had such condition or
requirement been known, such party would not, in its reasonable judgement, have
entered into the Merger Agreement.
In addition, Chilton County has agreed that it will not, without the
prior written consent of SouthFirst:
(a) amend the Federal Stock Charter, Bylaws, or other
governing instruments of Chilton County;
(b) incur any additional debt obligation or other
obligation for borrowed money (other than indebtedness of Chilton County in
excess of an aggregate of $100,000 except in the ordinary course of the
business consistent with past practices, or impose, or suffer the imposition,
with certain exceptions, of a lien on any asset of Chilton County (other than
in connection with deposits, repurchase agreements, bankers
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acceptances, treasury tax and loan accounts established in the ordinary course
of business, the satisfaction of legal requirements in the exercise of trust
powers, and already existing liens);
(c) repurchase, redeem, or otherwise acquire or
exchange (other than exchanges in the ordinary course under employee benefit
plans), directly or indirectly, any shares, or any securities convertible into
any shares, of the capital stock of Chilton County, or declare or pay any
dividend or make any other distribution in respect of its capital stock (except
for a dividend paid in accordance with Section 8.6 of the Merger Agreement);
(d) except for the Merger Agreement or the exercise of
the Chilton County Options, issue, sell, pledge, encumber, authorize the
issuance of, enter into any contract to issue, sell, pledge, encumber, or
authorize the issuance of, or otherwise permit to become outstanding, any
additional shares of Chilton County Common Stock or any right to acquire any
such stock;
(e) adjust, split, combine, or reclassify the capital
stock of Chilton County or issue or authorize the issuance of any other
securities in respect of or in substitution for Chilton County Common Stock or
sell, lease, mortgage, or otherwise dispose of or otherwise encumber any asset
(other than loan participations) having a book value in excess of $25,000 other
than in the ordinary course of business for reasonable and adequate
consideration;
(f) except for purchases of United States Treasury
securities or United States government agency securities, which in either case
have maturities of five years or less, purchase any securities or make any
material investment, either by purchase of stock or securities, contributions
to capital, asset transfers, or purchase of any assets, in any person other
than a wholly-owned subsidiary or otherwise acquire direct or indirect control
over any person, other than in connection with (i) foreclosures in the ordinary
course of business, or (ii) acquisitions of control in its fiduciary capacity;
(g) grant any increase in compensation or benefits to
the employees or officers of Chilton County, except in accordance with past
practice or as required by law; pay any severance or termination pay or any
bonus other than pursuant to written policies or written contracts in effect on
the date of the Merger Agreement or as otherwise disclosed; enter into or amend
any severance agreements with officers of Chilton County or its subsidiaries;
grant any material increase in fees or other compensation to directors of
Chilton County or any of its subsidiaries except in accordance with past
practice; or voluntarily accelerate the vesting of any Chilton County Options
or other employee benefits;
(h) enter into or amend any employment contract
(unless such amendment is required by law) that Chilton County does not have
the unconditional right to terminate without liability (other than liability
for services already rendered) at any time on or after the Effective Time;
(i) adopt any new employee benefit plan or make any
material change in or to any existing employee benefit plans other than such
changes required by law or to maintain the tax qualified status of any such
plan;
(j) make any significant change in any tax or
accounting methods or systems of internal accounting controls, except as may be
appropriate to conform to changes in tax laws, regulatory accounting
requirements or GAAP;
(k) commence any litigation other than in accordance
with past practice or settle any litigation for material money damages or
restrictions upon the operations of Chilton County; or
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(l) except in the ordinary course of business, modify, amend,
or terminate any material contract, other than renewals without a material
adverse change of terms, or waive, release, compromise, or assign any material
rights or claims.
In the Merger Agreement, SouthFirst has agreed (i) to conduct its
business and the business of its subsidiaries in a manner designed, in its
reasonable judgment, to enhance the long-term value of SouthFirst Common Stock
and its business prospects and (ii) to take no action which would materially
adversely affect the ability of any party to obtain any consent or approvals
required by the Merger Agreement or to perform its covenants and agreements
under the Merger Agreement; provided that SouthFirst or any of its subsidiaries
may discontinue or dispose of any of its assets or business if SouthFirst
determines that such action is desirable in the conduct of its business.
SouthFirst further agreed that it will not, without the prior written consent
of the Chief Executive Officer of Chilton County, which consent shall not be
unreasonably withheld, amend the Certificate of Incorporation or the Bylaws of
SouthFirst in any manner adverse to the holders of Chilton County Common Stock.
MODIFICATION, WAIVER AND TERMINATION
The Merger Agreement provides that it may be amended by a subsequent
writing signed by each party upon the approval of each of their respective
Board of Directors. However, the provision relating to the consideration to be
received by the holders of Chilton County Common Stock may not be amended after
the Chilton County Special Meeting in a manner to reduce or modify in any
material respect the consideration to be received by holders of Chilton County
Common Stock without the further approval of the holders of the issued and
outstanding shares of Chilton County Common Stock entitled to vote thereon.
The Merger Agreement provides that each party may (i) waive any
default in the performance of any term of the Merger Agreement by the other
party, (ii) waive or extend the time for compliance of fulfillment by the other
party of any of its obligations under the Merger Agreement and (iii) waive any
of the conditions precedent to its obligations to consummate the Merger to the
extent legally permitted. Neither of the parties intends, however, to waive any
conditions of the Merger if such waiver would, in the judgment of the waiving
party, have a material adverse effect on its shareholders.
The Merger Agreement may be terminated by mutual agreement of the
SouthFirst Board and the Chilton County Board. The Merger Agreement may also be
terminated by either the SouthFirst Board or the Chilton County Board (i) if
the Merger is not consummated on or before October 31, 1997 (provided that the
terminating party shall not have breached in any material respect its
obligations under the Merger Agreement in a manner that proximately contributed
to the failure to consummate the Merger by such date); (ii) if any governmental
regulatory body, the consent of which is a condition to the obligations of
SouthFirst and Chilton County to consummate the transactions contemplated by
the Merger Agreement, shall have determined not to grant its consent and all
appeals of such determination shall have been taken and have been unsuccessful;
(iii) if any court of competent jurisdiction shall have issued an order or
judgment restraining, enjoining or otherwise prohibiting the Merger and such
order or judgment shall have become final and unappealable. The Merger
Agreement may also be terminated by SouthFirst (i) if any event shall have
occurred as a result of which certain conditions are no longer capable of being
satisfied; (ii) if there has been a breach by Chilton County of any
representation or warranty contained in the Merger Agreement which would have
or would be reasonably likely to have a material adverse effect on the assets,
liabilities, financial condition, results of operations, business or prospects
of Chilton County taken as a whole, or there has been a material breach by
Chilton County of a covenant or agreement set forth in the Merger Agreement
which breach is not curable, or, if curable, is not cured within 20 days after
written notice of such breach is given by SouthFirst; (iii) if Chilton County
or the Chilton County Board shall have authorized, recommended, proposed or
publicly announced its intention to enter into a Superior Proposal or a
Competing Transaction which has not been consented to in writing by SouthFirst;
or (iv) if the Chilton County Board shall have withdrawn or materially modified
its recommendation to the shareholders of Chilton County with respect to the
Merger or the Merger
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Agreement (unless the Chilton County Final Opinion has been withdrawn or, after
receipt of the Chilton County Opinion, such opinion failed to make a favorable
recommendation).
The Merger Agreement may further be terminated by Chilton County (i)
if any event shall have occurred as a result of which certain conditions are no
longer capable of being satisfied; (ii) if there has been a breach by
SouthFirst of any representation or warranty contained in the Merger Agreement
which would have or would be reasonably likely to have a material adverse
effect on the assets, liabilities, financial condition, results of operations,
business or prospects of SouthFirst and its subsidiaries taken as a whole, or
there has been a material breach of any of the covenants or agreements set
forth in the Merger Agreement on the part of SouthFirst which breach is not
curable or, if curable, is not cured within 20 days after written notice of
such breach is given by Chilton County; or (iii) if the SouthFirst Board shall
have withdrawn or materially modified its recommendation to the shareholders of
SouthFirst with respect to the Merger or the Merger Agreement (unless the
SouthFirst Final Opinion has been withdrawn or, after receipt of the SouthFirst
Opinion, such opinion failed to make a favorable recommendation).
NO SOLICITATION
Pursuant to the Merger Agreement, Chilton County agreed that neither
it, nor any director, officer, employee, investment banker, attorney or other
advisor or representative of Chilton County (i) initiate, solicit or encourage
the submission of any Takeover Proposal (as defined below), or (ii) participate
in any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to any Competing Transaction (as defined below) or Superior
Proposal (as defined below) prior to the Effective Time. In addition, neither
the Chilton County Board nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to SouthFirst,
the approval or recommendation of such Board or any such committee of the
Merger Agreement or the Merger, (ii) approve or recommend, or propose to
approve or recommend, any Takeover Proposal or (iii) enter into any agreement
with respect to any Takeover Proposal.
Notwithstanding the foregoing, the Merger Agreement provides that
Chilton County, may, to the extent the Chilton County Board determines in good
faith, after consultation with its legal counsel, that the Chilton County
Board's fiduciary duties under applicable law require it to do so, participate
in discussions or negotiations with, and furnish information to any person,
entity or group after such person, entity or group shall have delivered to
Target in writing a Superior Proposal. As used in the Merger Agreement, a
"Takeover Proposal" means any inquiry, proposal or acquisition or purchase of a
substantial amount of assets of Chilton County (other than investors in the
ordinary course of business) or of over 20% of any class of equity securities
of Chilton County or any tender offer or exchange offer that if consummated
would result in any Person beneficially owning 20% or more of any class of
equity securities of Chilton County, or any merger, consolidation, business
combination, sale of substantially all assets, recapitalization, liquidation,
dissolution or similar transaction involving Chilton County or any other
transaction the consummation of which would reasonably be expected to impede,
interfere with, prevent or materially delay the Merger or which would
reasonably be expected to dilute materially the benefits to SouthFirst of the
transactions contemplated by the Merger. Further, a "Superior Proposal" means
any bona fide Takeover Proposal to acquire, directly or indirectly, for
consideration consisting of cash and/or securities, more than 50% of the shares
of Chilton County Common Stock then outstanding or all or substantially all of
the assets of Chilton County and otherwise on terms which the Chilton County
Board determines in good faith judgment (based on the advice of a financial
advisor of national reputation) to be more favorable to its shareholders than
the terms of the Merger Agreement.
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EXPENSES AND TERMINATION FEE
In the Merger Agreement, each of the parties has agreed to pay its own
expenses and one-half of the printing costs of this Joint Proxy
Statement/Prospectus and related materials. In the event the Merger Agreement
is terminated as a result of SouthFirst's failure to satisfy any of its
representations, warranties or covenants set forth therein, SouthFirst shall
reimburse Chilton County for its reasonable out-of-pocket expenses relating to
the Merger in an amount not to exceed $300,000. Similarly, in the event the
Merger Agreement is terminated as a result of Chilton County's failure to
satisfy any of its representations, warranties or covenants set forth therein,
and Chilton County is not otherwise liable for payment of the fee (as defined
and described below), Chilton County shall reimburse SouthFirst for its
reasonable out-of-pocket expenses relating to the Merger in an amount not to
exceed $300,000.
The Merger Agreement provides that Chilton County is required to pay
liquidated damages in the amount of $270,000 plus all reasonable out-of-pocket
expenses and fees (including, without limitation, fees and expenses payable to
all investment banking firms and counsel, and all fees of counsel, accountants,
experts and consultants to SouthFirst) actually incurred by SouthFirst or on
its behalf in connection with the Merger and all transactions contemplated by
the Merger Agreement (the "Fee") to SouthFirst if: (1) SouthFirst terminates
the Merger Agreement by reason of a failure of Chilton County to meet certain
conditions (which were not previously waived by SouthFirst) due to Chilton
County's knowing and intentional misrepresentation or knowing and intentional
breach of warranty or of any covenant or agreement, and, between the date of
the Merger Agreement and the date of such event or breach, Chilton County made
certain contacts regarding a Competing Transaction; (2) if SouthFirst
terminates the Merger Agreement after the Chilton County Board shall have
withdrawn or materially modified its authorization, approval or recommendation
to the shareholders of Chilton County regarding the Merger or the Merger
Agreement in a manner adverse to SouthFirst (unless the Chilton County Opinion
is withdrawn or such opinion fails to make a favorable recommendation); (3) if
SouthFirst terminates the Merger Agreement because, without first obtaining
SouthFirst's consent, Chilton County or the Chilton County Board shall have
authorized, recommended, proposed or publicly announced its intention to enter
into a Superior Proposal or a Competing Transaction and within nine months from
the date of such termination a Superior Proposal or a Competing Transaction is
consummated or Chilton County shall have entered into an agreement which if
consummated would constitute a Competing Transaction; or (4) if Chilton County
terminates the Merger Agreement because the Merger Agreement did not receive
the requisite vote of the Chilton County shareholders and within nine months
from the date of such termination a Superior Proposal or a Competing
Transaction is consummated or Chilton County shall have entered into an
agreement which if consummated would constitute a Competing Transaction. If
SouthFirst is entitled to the Fee, Chilton County is also obligated to pay to
SouthFirst interest at a simple interest rate per annum equal to the highest
prime rate of interest published from time to time in the "Money Rates" section
of the Wall Street Journal on any amounts that are not paid when due, plus all
costs and expenses in connection with or arising out of the enforcement of the
obligation of Chilton County to pay the Fee or such interest. As used in the
Merger Agreement, a "Competing Transaction" means any of the following
involving Chilton County: (1) any merger, consolidation, share exchange,
business combination, or other similar transaction; (2) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 15% or more of the
assets of Chilton County in a single transaction or series of transactions to
the same person, entity or group; or (3) any public announcement of a proposal,
plan or intention to do any of the foregoing or any agreement to engage in any
of the foregoing.
It is not possible to know whether a terminating event will occur
until after the Effective Time. SouthFirst and Chilton County have made no
decision as to whether either one of them would exercise its termination right
in such a situation. Both SouthFirst and Chilton County would, consistent with
their fiduciary duties, take into account all relevant facts and circumstances
that exist at such time, and would consult with their financial advisors and
legal counsel.
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Approval of the Merger Agreement by the shareholders of SouthFirst and
Chilton County at the Special Meetings will confer on the SouthFirst Board and
the Chilton County Board, respectively, the power, consistent with each of
their fiduciary duties, to elect to consummate the Merger in the event of a
terminating event without any further action by, or resolicitation of, the
shareholders of SouthFirst or Chilton County.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Smith, Gambrell & Russell, LLP has delivered to SouthFirst and Chilton
County its opinion that, based upon certain customary assumptions and
representations, under federal law as currently in effect, (a) the proposed
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended; (b) no gain or loss will be
recognized by the shareholders of Chilton County on the exchange of their
shares of Chilton County Common Stock solely for SouthFirst Common Stock
pursuant to the terms of the Merger to the extent of such exchange; (c) the
federal income tax basis of SouthFirst Common Stock for which shares of Chilton
County Common Stock are exchanged pursuant to the Merger will be the same as
the basis of such Chilton County Common Stock exchanged therefor; (d) the
holding period of SouthFirst Common Stock for which shares of Chilton County
Common Stock are exchanged will include the period that such shares of Chilton
County Common Stock were held by the holder, provided that such shares were
capital assets of the holder; (e) the receipt of cash by Target shareholders
electing to receive cash in exchange for all or a portion of their shares of
Chilton County Common Stock pursuant to the terms of Merger Agreement will be a
taxable event upon which gain or loss will be recognized by Chilton County
shareholders to the extent of such exchange; and (f) the receipt of cash in
lieu of fractional shares will be treated as if the fractional shares were
distributed as part of the exchange and then redeemed by SouthFirst, and gain
or loss will be recognized in an amount equal to the difference between the
cash received and the basis of the fractional share of SouthFirst Common Stock
surrendered, which gain or loss will be capital gain or loss if the shares of
Chilton County Common Stock was a capital asset in the hands of the
shareholder.
THE FOREGOING IS A SUMMARY OF THE ANTICIPATED MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF THE PROPOSED MERGER UNDER THE CODE AND IS FOR GENERAL
INFORMATION ONLY. IT DOES NOT INCLUDE CONSEQUENCES OF STATE, LOCAL OR OTHER TAX
LAWS OR SPECIAL CONSEQUENCES TO PARTICULAR SHAREHOLDERS HAVING SPECIAL
SITUATIONS. SHAREHOLDERS OF CHILTON COUNTY SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING
THE APPLICATION AND EFFECT OF FEDERAL, STATE AND LOCAL TAX LAWS AND TAX
CONSEQUENCES OF SUBSEQUENT SALES OF SOUTHFIRST COMMON STOCK.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL
Certain members of Chilton County's management and of the Chilton
County Board have interests in the Merger that are in addition to any interests
they may have as shareholders of Chilton County generally. These interests
include, among others, provisions in the Merger Agreement relating to the
management of Chilton County after the Effective Time, election or appointment
of certain members of the Chilton County Board to the First Federal and
SouthFirst Boards, a proposed employment agreement between First Federal and
the President and Chief Executive Officer of Chilton County and certain other
employee benefits and indemnification of Chilton County directors and officers,
as hereinafter described.
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<PAGE> 50
MANAGEMENT POST-MERGER; FIRST FEDERAL EMPLOYMENT AGREEMENT
SouthFirst has agreed to cause certain of the Chilton County directors
to be appointed to the Board of Directors of First Federal and/or SouthFirst.
After the Effective Time, Chilton County will be merged with and into
First Federal under the charter of First Federal and the branch offices of
Chilton County operating in Clanton and Centreville, Alabama will become
branches of First Federal. At such time, Bobby R. Cook, a current director of
Chilton County, will be appointed as a director of SouthFirst and First
Federal. In addition, L. Neal Bice and Kenneth E. Easterling, both of whom are
current directors of Chilton County, will be appointed to director positions at
First Federal. Bobby R. Cook, who currently is the President and Chief
Executive Officer of Chilton County, will be named President of the Western
Division of First Federal. SouthFirst has offered to provide Mr. Cook with a
new First Federal employment agreement, in exchange for the cancellation by Mr.
Cook of his existing Chilton County employment agreement and corresponding
severance pay agreement, which is explained in detail below. The proposed
salary under Mr. Cook's new employment agreement with First Federal is $66,000
and vacation and group life and health insurance are provided to the same
extent as is provided to similarly positioned employees of First Federal.
The term of Mr. Cook's current employment agreement with Chilton
County ends June 30, 1998. For the year ended June 30, 1997, Mr. Cook's base
salary was $66,000. The agreement provides for a salary review by the Chilton
County Board not less often than annually, as well as for annual one-year
renewals upon affirmative action by the Chilton County Board and written
acceptance thereof by Mr. Cook. The agreement also provides for disability
benefits and for a severance payment in the event employment is involuntarily
terminated within 12 months after a change in "control" of Chilton County which
has not been approved in advance by two-thirds vote of the Chilton County
Board. This payment will be equal to the total amount of 2.99 times the average
annual compensation paid Mr. Cook during the five years immediately prior to
the change in control. As of June 30, 1997, Mr. Cook would have been entitled
to receive approximately $185,000 had a change in "control" occurred on such
date. In addition, Mr. Cook will be entitled to the same amount if he
voluntarily terminates his employment with Chilton County following a change in
"control" where, without his prior written consent, (i) he must move his
personal residence or work more than 45 miles from Clanton, Alabama, (ii) his
base compensation is reduced, (iii) Chilton County fails to maintain the same
employee benefits plans, (iv) his duties would be other than those normally
associated with the position of President and Chief Executive Officer, or (v)
his responsibilities would be materially reduced or diminished. The term
"control" is defined in the agreement as "the ownership, holding or power to
vote more than 50% of the Chilton County Common Stock, the control of the
election of a majority of Chilton County's directors, or the exercise of a
controlling influence over the management or policies of the Chilton County by
any person or by persons acting as a group within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, as amended."
At present, only Mr. Cook has an employment agreement with Chilton
County. Mr. Cook currently intends to enter into the proposed First Federal
employment agreement. However, if Mr. Cook were to decline the proposed First
Federal employment agreement, SouthFirst will honor the existing severance pay
agreement entered into between Mr. Cook and Chilton County.
Set forth below is further information with respect to those
individuals currently serving as directors of Chilton County who will be
appointed directors of SouthFirst and/or First Federal. Unless otherwise
indicated, the principal occupation listed for each person below has been his
principal occupation for the past five years.
BOBBY R. COOK has served as President and Chief Executive Officer of
Chilton County since 1973. Mr. Cook is past president of the Clanton, Alabama
Kiwanis Club, past treasurer of the Clanton, Alabama
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Jaycees and serves as a Deacon of The First Baptist Church of Clanton, Alabama.
Mr. Cook will serve as a director of both First Federal and SouthFirst.
L. NEAL BICE has been a professor at George C. Wallace State Community
College in Clanton, Alabama since 1975. Mr. Bice teaches investment banking,
economics, accounting and management. Mr. Bice will serve as a director of
First Federal.
KENNETH E. EASTERLING has owned and operated Home Printing Company
since 1970. Mr. Easterling also owns and operates High Rise Cattle Farm. Mr.
Easterling will serve as a director of First Federal.
INDEMNIFICATION
SouthFirst has agreed that it will, following the Effective Time,
indemnify, defend, and hold harmless the current and former directors,
officers, employees, and agents of Chilton County against all losses, expenses,
claims, damages, or liabilities arising out of actions or omissions occurring
at or prior to the Effective Time to the fullest extent then permitted under
OTS regulations and by the Chilton County Federal Stock Charter and Chilton
County Bylaws as in effect on the date of the Merger Agreement, including
provisions relating to advances of expenses incurred in defense of any
litigation.
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CHILTON COUNTY OPTIONS
Chilton County has granted incentive and non-qualified stock options
to certain Chilton County officers and directors under the Chilton County Stock
Option Plan (the "Stock Option Plan"). All options granted under the Stock
Option Plan have vested.
The following table sets forth, as of September 22, 1997, with respect
to Chilton County officers and directors (i) the number of shares covered by
options held by such persons, (ii) the number of shares covered by
currently-exercisable options held by such persons, (iii) the exercise price of
all such options held by such persons, and (iv) the aggregate value (i.e., Cash
Price Per Share less option exercise price multiplied by currently-exercisable
options) of all such options.
<TABLE>
<CAPTION>
OPTIONS AGGREGATE
CURRENTLY EXERCISE PRICE VALUE OF
NAME OPTIONS HELD EXERCISABLE PER OPTION OPTIONS
- ---- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C>
Bobby R. Cook (1)(2) 1,443 1,443 $10.00 $ 31,025
Elizabeth G. Smith(1) 1,423 1,423 10.00 30,595
David W. Smitherman(1) 1,200 1,200 10.00 25,800
Joann Adams(1) 875 875 10.00 18,813
Renee E. Sample 775 775 10.00 16,663
H.D. Bice(3) 1,443 1,443 10.00 31,025
Raymond Hamilton(2) 1,443 1,443 10.00 31,025
Lewis W. Headley(2) 1,443 1,443 10.00 31,025
Joseph W. Moore(4) 1,443 1,443 10.00 31,025
Estate of Charles W. Moore(4) 1,443 1,443 10.00 31,025
Officers, Directors and Director 12,931 12,931 $10.00 $273,226
Emeritus as a Group (10 persons
in all)
</TABLE>
- --------------------------
(1) Employee
(2) Director
(3) Director Emeritus
(4) Mr. Moore served as Director Emeritus.
Under the Merger Agreement all outstanding Chilton County Options
granted by Chilton County which are outstanding at the Effective Time shall be
canceled and all rights in respect thereof will cease to exist. As
consideration for the cancellation of all of the Chilton County Options, each
holder thereof shall receive cash in an amount equal to (i) the aggregate
number of shares of Chilton County Common Stock which each holder of Chilton
County Options could have acquired upon the exercise of such Options into
immediately prior to the Effective Time, multiplied by (ii) the difference
between (A) the Cash Price Per Share (i.e., $31.50) and (B) the exercise price
for each Chilton County Option (i.e., $10.00).
OTHER MATTERS RELATING TO CHILTON COUNTY EMPLOYEE BENEFIT PLANS
The Merger Agreement also provides that, following the Effective Time,
SouthFirst will provide generally to officers and employees of Chilton County
employee benefits under employee benefit plans (other than stock option or
other plans involving the potential issuance of SouthFirst Common Stock), on
terms and conditions which when taken as a whole are no less favorable than
those currently provided by Chilton County or those currently provided by
SouthFirst or its subsidiaries to their similarly situated officers and
employees.
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<PAGE> 53
For purposes of participation and vesting (but not benefit accrual
under any employee benefit plans of SouthFirst other than under the Chilton
County Stock Plans) under such employee benefit plans, the service of the
employees of Chilton County prior to the Effective Time will be treated as
service with SouthFirst.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of
accounting for financial reporting purposes. Under purchase accounting, the
assets and liabilities of an acquired company as of the Effective Time of the
acquisition are recorded at their respective fair values and added to those of
the acquiring company. Financial statements issued after consummation of an
acquisition accounted for as a purchase would reflect such values and would not
be restated retroactively to reflect the historical financial position or
results of operations of the acquired company. See "PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION."
REGULATORY MATTERS
GENERAL
The Merger is subject to prior approval by the Office of Thrift
Supervision ("OTS"). Under OTS regulations, the OTS is required, when approving
a transaction such as the Merger, to take into consideration the financial and
managerial resources (including the competence, experience and integrity of the
officers, directors and principal shareholders) and future prospects of the
existing and proposed institutions and the convenience and needs of the
communities to be served. In considering financial resources and future
prospects, the OTS will, among other things, evaluate the adequacy of the
capital levels of the parties to a proposed transaction.
OTS regulations prohibit the OTS from approving a merger if it would
result in a monopoly or be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any part of
the United States, or if its effect in any section of the country would be
substantially to lessen competition or to tend to create a monopoly, or if it
would in any other manner result in a restraint of trade, unless the OTS finds
that the anti-competitive effects of a merger are clearly outweighed in the
public interest by the probable effect of the transaction in meeting the
convenience and needs of the communities to be served. In addition, under the
Community Reinvestment Act of 1978, as amended (the "CRA"), the OTS must take
into account the record of performance of the existing institutions in meeting
the credit needs of the entire community, including low- and moderate-income
neighborhoods, served by such institutions.
Applicable federal law provides for the publication of notice and
public comment on applications filed with the OTS and authorizes the agency to
permit interested parties to intervene in the proceedings. If an interested
party is permitted to intervene, such intervention could delay the regulatory
approvals required for consummation of the Merger.
The Merger generally may not be consummated until 15 days following
the date of applicable federal regulatory approval, during which time the
United States Department of Justice (the "Justice Department") may challenge
the Merger on antitrust grounds. The commencement of an antitrust action would
stay the effectiveness of the regulatory agency's approval unless a court
specifically ordered otherwise. SouthFirst and Chilton County believe that the
Merger does not raise substantial antitrust or other significant regulatory
concerns and that any divestitures that may be required in order to consummate
the Merger will not be material to the financial condition or results of
operations of SouthFirst or Chilton County prior to the Effective Time, or
SouthFirst after the Effective Time.
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<PAGE> 54
STATUS OF REGULATORY APPROVALS AND OTHER INFORMATION
SouthFirst and Chilton County will file all applications and notices
and have taken (or will take) other appropriate action with respect to any
requisite approvals or other action of any governmental authority.
The Merger Agreement provides that the obligation of each of
SouthFirst and Chilton County to consummate the Merger is conditioned upon the
receipt of all requisite regulatory approvals, including the approval of the
OTS. There can be no assurance that any governmental agency will approve or
take any other required action with respect to the Merger, and, if approvals
are received or action is taken, there can be no assurance as to the date of
such approvals or action, that such approvals or action will not be conditioned
upon matters that would cause the parties to abandon the Merger, or that no
action will be brought challenging such approvals or action, including a
challenge by the Justice Department or, if such a challenge is made, the result
thereof.
SouthFirst and Chilton County are not aware of any governmental
approvals or actions that may be required for consummation of the Merger other
than as described above. Should any other approval or action be required,
SouthFirst and Chilton County currently contemplate that such approval or
action would be sought.
THE MERGER CANNOT PROCEED IN THE ABSENCE OF THE REQUISITE REGULATORY
APPROVALS. THERE CAN BE NO ASSURANCES THAT SUCH REGULATORY APPROVALS WILL BE
OBTAINED OR AS TO THE DATES OF ANY SUCH APPROVALS. THERE CAN ALSO BE NO
ASSURANCE THAT SUCH APPROVALS WILL NOT CONTAIN A CONDITION OR REQUIREMENT WHICH
CAUSES SUCH APPROVALS TO FAIL TO SATISFY THE CONDITIONS SET FORTH IN THE MERGER
AGREEMENT. SEE "-- CONDITIONS PRECEDENT TO THE MERGER." THERE CAN LIKEWISE BE
NO ASSURANCE THAT THE JUSTICE DEPARTMENT WILL NOT CHALLENGE THE MERGER, OR, IF
SUCH A CHALLENGE IS MADE, AS TO THE RESULT THEREOF.
See "-- The Effective Time," "-- Conditions Precedent to the Merger"
and "-- Modification, Waiver and Termination."
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of SouthFirst Common Stock to be issued to shareholders of
Chilton County in the Merger have been registered under the Securities Act.
Such shares may be traded freely and without restriction by those shareholders
not deemed to be "affiliates" of Chilton County or SouthFirst as that term is
defined under the Securities Act. Any subsequent transfer of such shares,
however, by any person who is an affiliate of Chilton County at the time the
Merger is submitted for vote or consent of the shareholders of Chilton County
will, under existing law, require either (a) the further registration under the
Securities Act of the shares of SouthFirst Common Stock to be transferred, (b)
compliance with Rule 145 promulgated under the Securities Act (permitting
limited sales under certain circumstances), or (c) the availability of another
exemption from registration. As a result, SouthFirst may place restrictive
legends on certificates representing SouthFirst Common Stock issued to all
persons who are deemed to be "affiliates" of Chilton County under Rule 145. An
"affiliate" of Chilton County, as defined by the rules promulgated pursuant to
the Securities Act, is a person who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Chilton County. Moreover, the foregoing restrictions are expected to apply to
the directors, executive officers, and the beneficial holders of 10% or more of
the Chilton County Common Shares (and to certain relatives or the spouse of any
such person and any trusts, estates, corporations, or other entities in which
any such person has a 10% or greater beneficial or equity interest). Stop
transfer instructions will be given by SouthFirst to the transfer agent with
respect to SouthFirst Common Stock to be received by persons subject to the
restrictions described above.
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DISSENTERS' RIGHTS OF APPRAISAL OF CHILTON COUNTY SHAREHOLDERS
Pursuant to 12 CFR ss. 552.14 (the "Dissenter Provisions"), any
Chilton County shareholder who desires to receive the "fair value" of his or
her Chilton County stock in cash rather than to receive shares of SouthFirst
Common Stock or the Cash Price Per Share as part of the Merger may do so if he
or she complies with the Dissenter Provisions. The following is a summary of
such provisions and is qualified in its entirety by reference to such
provisions, a copy of which is attached hereto as Appendix D and is
incorporated by reference herein.
The Dissenter Provisions provide that any dissenting shareholder
desiring to object to the Merger and receive payment in cash for his or her
shares of Chilton County Stock must deliver, prior to the vote of the Chilton
County shareholders, written notice of his or her intent to demand appraisal of
and payment for his or her shares of Chilton County Common Stock. The notice
must be delivered to First Federal Savings and Loan Association of Chilton
County, Attention: Secretary, 102 5th Street North, Clanton, Alabama 35046.
Such demand must be in addition to, and separate from, any proxy or vote
against the Merger.
If the Merger is approved by the Chilton County and SouthFirst
shareholders, Chilton County is required, within 10 days of the Effective Time,
to send by mail written notice (the "Dissenters' Notice") to each of the
dissenting Chilton County shareholders who filed a written notice of his or her
intent to dissent. The Dissenters' Notice shall (i) make an offer to each
dissenting shareholder to pay for dissenting shares at a specified price deemed
by First Federal to be the fair value thereof and (ii) state that within 60
days of the Effective Time, the dissenting shareholder shall (a) send to the
OTS and First Federal by registered or certified mail, a written petition
demanding a determination of the fair market value of the stock of all Chilton
County shareholders and (b) submit to the transfer agent his or her
certificates of Chilton County stock for notation thereon that an appraisal and
payment have been demanded with respect to such stock and that appraisal
proceedings are pending. Any dissenting shareholder who fails to meet any one
of the requirements set forth in the preceding sentence shall no longer be
entitled to appraisal rights under the Dissenters Provisions and shall be
deemed to have accepted the terms offered under the Merger. The Dissenters'
Notice is to be sent to each dissenting shareholder at his or her address as it
appears in the Chilton County stock transfer books or at such address as the
dissenting shareholder supplies by notice to Chilton County.
Notwithstanding the foregoing, at any time within 60 days after the
Effective Time, any dissenting shareholder shall have the right to withdraw his
or her demand for appraisal and to accept the terms offered upon the Merger.
The Director of the OTS (the "Director") shall, as he or she may
elect, either appoint one or more independent persons, or direct appropriate
staff of the OTS, to appraise the shares of Chilton County Common Stock in
which appraisal rights have been properly exercised to determine their fair
market value, as of the Effective Time, exclusive of any element of value
arising from the accomplishment or expectation of the Merger. The OTS staff
shall review and provide an opinion on appraisals prepared by independent
persons as to the suitability of the appraisal methodology and the adequacy of
the analysis and supportive data. The Director, after consideration of the
appraisal report and the advice of the appropriate staff, shall, if he or she
concurs in the valuation of the shares, direct payment by First Federal of the
appraised fair market value of the shares, upon surrender of the certificates
representing such stock. Payment shall be made, together with interest from the
Effective Time, at a rate deemed equitable by the Director.
The costs and expenses of any proceeding under the Dissenter
Provisions may be apportioned and assessed by the Director as he or she may
deem equitable against all or some of the parties. In making this
determination, the Director will consider whether any party acted arbitrarily,
vexatiously, or not in good faith in respect to the rights provided by the
Dissenter Provisions.
Any holder of Chilton County Common Stock who dissents and then elects
not to perfect his or her rights under the Dissenter Provisions, shall receive
the Cash Price Per Share (i.e., $31.50) for each share of Chilton County Common
Stock held by such holder.
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<PAGE> 56
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following presentation sets forth certain unaudited proforma
financial information of SouthFirst giving effect to SouthFirst's acquisition
of Chilton County. The acquisition will be accounted for as a purchase. For a
description of the terms of the Merger, see "TERMS OF THE MERGER."
Specifically, the presentation below sets forth SouthFirst's
historical statement of condition as of September 30, 1996, and historical
statement of operations for the year ended September 30, 1996, derived from
audited financial statements of SouthFirst. In addition, the presentation below
sets forth SouthFirst's historical statement of operations for the nine months
ended June 30, 1997 derived from unaudited financial statements. Chilton
County's historical statement of condition as of June 30, 1997 and historical
statement of operations for the year ended June 30, 1997, derived from the
audited financial statements of Chilton County, are also shown. Chilton
County's historical statement of operations for the nine months ended June 30,
1997, derived from unaudited financial statements, are further shown below. The
unaudited pro forma financial information combined the historical financial
information of SouthFirst and Chilton County and provides the pro forma
purchase accounting adjustments.
The proforma information should be read in conjunction with the
historical financial statements of SouthFirst and Chilton County and the
related notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus. The following presentation is not necessarily indicative
of the results of operations or combined financial position that would have
resulted had the Merger been consummated at the periods indicated, nor is it
necessarily indicative of the results of operations of future periods or future
combined financial positions.
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<PAGE> 57
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Chilton Pro forma adjustments Pro forma
Assets: SouthFirst County Debit Credit Amounts
---------- ----------- --------------------- ----------
<S> <C> <C> <C> <C>
Cash and amounts due from depository institutions $ 3,981 $ 968 $ 4,949
Federal funds sold - 7,500 7,500
Interest-bearing deposits in other financial institutions 3 328 331
Investment securities held to maturity at cost 154 8,732 174(2) 8,712
Investment securities available for sale at market 17,134 21,507 2,912(1) 35,729
Loans receivable 71,513 33,843 105,356
Premises and equipment, net 1,826 1,080 2,906
Foreclosed real estate, net 157 60 217
Accrued interest receivable 559 502 1,061
Other Assets 1,760 233 61(1) 2,054
Investments in affiliates 196 - 196
1,387(1)
Goodwill - - 174(2) 1,561
---------- --------- ----------
Total assets $ 97,283 $ 74,753 $ 170,572
========== ========= ==========
Liabilities:
Deposits:
Non-interest bearing $ 1,424 $ 139 $ 1,563
Interest bearing 61,117 68,013 129,130
---------- --------- ----------
Total deposits 62,541 68,152 130,693
Advance by borrowers for property taxes insurance 342 55 397
Accrued interest payable 736 72 808
Borrowed funds 18,493 2,000 20,493
Income taxes payable 704 5 709
Accrued expenses and other liabilities 851 93 944
---------- --------- ----------
Total liabilities $ 83,667 $ 70,377 $ 154,044
Stockholders' equity
Common stock 9 2 2(1) 2(1) 11
Treasury stock (198) (51) 51(1) (198)
Additional paid-in capital 7,909 1,521 1,521(1) 2,910(1) 10,819
Retained earnings 5,752 3,491 3,491(1) 5,752
Unrealized gain (loss) on investment securities
securities available for sale 1,056 (587) 587(1) 1,056
Deferred compensation (912) - (912)
---------- --------- ---------
Total stockholders' equity 13,616 4,376 16,528
---------- --------- ---------
Total liabilities and stockholders' equity $ 97,283 $ 74,753 $ 170,572
========== ========= =========
</TABLE>
- ----------
(1) To reflect issuance of 179,178 shares of SouthFirst common stock and
liquidation of $2,912,000 of SouthFirst investments to acquire Chilton
County Common Stock.
(2) To adjust Chilton County's held to maturity investments to fair value.
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<PAGE> 58
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Chilton Pro forma adjustments Pro forma
SouthFirst County Debit Credit Amounts
------------- ------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans $ 4,241 $ 2,280 $ 6,521
Interest on investment securities held to maturity 7 66 73
Interest and dividend income on securities available
for sale 1,023 1,244 153(1) 2,114
Interest on mortgage backed securities - 549 549
-------- -------- ----------
Total interest and dividend income 5,271 4,139 9,257
Interest expense:
Interest on deposits 2,119 2,773 4,892
Interest on Borrowed funds 677 93 770
-------- -------- ----------
Total interest expense 2,796 2,866 5,662
3,595
Net interest income before provision for loan losses 2,475 1,273 91
Provision for loan losses 36 55 ----------
-------- -------- 3,504
Net interest income 2,439 1,218
906
Noninterest income 732 174 78(1) 3,750
Noninterest expense 2,554 1,118 ----------
-------- --------
660
Income before income taxes 617 274 54(1) 286
Income tax expense 247 93 ----------
-------- -------- $ 374
Net income $ 370 $ 181 ==========
======== ======== $ 0.36
Net income per common share $ 0.43 $ 1.07
1,033,071
Weighted average common shares 853,893 169,222
</TABLE>
- ----------------------------------
(1) To reflect loss of investment earnings on securities liquidated to
fund the acquisition and to record goodwill amortization.
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<PAGE> 59
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED(2)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Chilton Pro forma adjustments Pro forma
SouthFirst County Debit Credit Amounts
---------- -------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans $ 4,888 $ 3,036 $ 7,924
Interest on investment securities held to maturity 44 90 134
Interest and dividend income on securities available
for sale 1,688 1,640 204(1) 3,124
Interest on mortgage backed securities - 744 744
--------- --------- ---------
Total interest and dividend income 6,620 5,510 11,926
Interest expense:
Interest on deposits 3,006 3,724 6,730
Interest on borrowed funds 553 112 665
-------- ---------- ---------
Total interest expense 3,559 3,836 7,395
Net interest income before provision for loan losses 3,061 1,674 4,531
Provision for loan losses 1 64 65
--------- -------- ---------
Net interest income 3,060 1,610 4,466
Noninterest income 1,290 228 1,518
Noninterest expense 4,275 1,910 140(1) 6,325
------- ------- ---------
Loss before income taxes 75 (72) (341)
Income tax expense (benefit) 92 (52) (31)
-------- ---------- ---------
Net loss $ (17) $ (20) 71(1) $ (310)
======== ========= =========
Net loss per common share $ (0.02) $ (0.12) $ (0.31)
Weighted average common shares 810,997 169,222 991,175
</TABLE>
- ----------
(1) To reflect loss of investment earnings on securities liquidated to
fund the acquisition and to record goodwill amortization.
(2) For SouthFirst: September 30, 1996; for Chilton County: June 30, 1997.
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<PAGE> 60
DESCRIPTION OF SOUTHFIRST CAPITAL STOCK
SOUTHFIRST COMMON STOCK
GENERAL
SouthFirst is authorized to issue 2,000,000 shares of SouthFirst
Common Stock, of which 847,600 shares were outstanding as of September 22,
1997. SouthFirst Common Stock is traded on the AMEX under the trading symbol
"SZB." Registrar and Transfer Company, Cranford, New Jersey acts as the
transfer agent and the registrar for SouthFirst Common Stock.
As of September 22, 1997, approximately 116,200 shares of SouthFirst
Common Stock were reserved for issuance under various employee benefit plans.
After taking into account the shares reserved under various employee benefit
plans, as well as the approximately 180,000 shares reserved for issuance in
connection with the Merger, the number of authorized shares of SouthFirst
Common Stock available for other corporate purposes as of September 22, 1997
was approximately 857,000.
VOTING AND OTHER RIGHTS
The holders of SouthFirst Common Stock are entitled to one vote per
share, and, in general, a majority of votes cast with respect to a matter is
sufficient to authorize action upon routine matters. Directors are elected by a
plurality of the votes cast, and each shareholder entitled to vote in such
election is entitled to vote each share of common stock for as many persons as
there are directors to be elected. In elections for directors, shareholders do
not have the right to cumulate their votes.
In the event of liquidation, holders of SouthFirst Common Stock would
be entitled to receive pro rata any assets legally available for distribution
to shareholders with respect to shares held by them, subject to any prior
rights of any SouthFirst Preferred Stock (as defined and described below) then
outstanding.
SouthFirst Common Stock does not have any preemptive rights,
redemption privileges, sinking fund privileges or conversion rights. All the
outstanding shares of SouthFirst Common Stock are, and upon issuance the shares
of SouthFirst Common Stock to be issued to shareholders of Chilton County will
be, validly issued, fully paid and nonassessable.
DISTRIBUTIONS
The holders of SouthFirst Common Stock are entitled to receive such
dividends or distributions as the SouthFirst Board may declare out of funds
legally available for such payments. The payment of distributions by SouthFirst
is subject to the restrictions of Delaware law applicable to the declaration of
distributions by a business corporation. A corporation generally may not
authorize and make distributions if, after giving effect thereto, it would be
unable to meet its debts as they become due in the usual course of business or
if the corporation's total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if it were to be dissolve at
the time of distribution, to satisfy claims upon dissolution of shareholders
who have preferential rights superior to the rights of the holders of its
common stock. In addition, the payment of distributions to shareholders is
subject to any prior rights of outstanding SouthFirst Preferred Stock. Share
dividends, if any are declared, may be paid from authorized but unissued
shares.
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<PAGE> 61
The ability of SouthFirst to pay distributions is affected by the
ability of its subsidiaries to pay dividends. The ability of SouthFirst's
subsidiaries, as well as of SouthFirst, to pay dividends in the future is
influenced by thrift regulatory requirements and capital guidelines.
SOUTHFIRST PREFERRED STOCK
SouthFirst has authorized 500,000 shares of preferred stock, $.01 par
value (the "SouthFirst Preferred Stock"), none of which are issued and
outstanding. The SouthFirst Board has the authority to issue SouthFirst
Preferred Stock in one or more series and to fix the dividend rights, dividend
rate, liquidation preference, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), and the number of
shares constituting any such series, without any further action by the
shareholders unless such action is required by applicable rules or regulations
or by the terms of other outstanding series of SouthFirst Preferred Stock. Any
shares of SouthFirst Preferred Stock which may be issued may rank prior to
shares of SouthFirst Common Stock as to payment of dividends and upon
liquidation.
CHILTON COUNTY COMMON STOCK
Chilton County is authorized to issue 15,000,000 shares of Chilton
County Common Stock, of which 169,222 shares were issued and outstanding as of
the Chilton County Record Date. Chilton County acts as the transfer agent and
the registrar for the shares of Chilton County Common Stock.
CHILTON COUNTY PREFERRED STOCK
Chilton County is authorized to issue 5,000,000 shares of preferred
stock ("Chilton County Preferred Stock"), none of which are issued and
outstanding. The Chilton County Board has the authority to issue Chilton County
Preferred Stock in one or more series and to fix the dividend rights, dividend
rate, liquidation preference, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, and the number of shares constituting any such series, without any
further action by the shareholders unless such action is required by applicable
rules or regulations or by the terms of other outstanding series of Chilton
County Preferred Stock. Any shares of Chilton County Preferred Stock which may
be issued may rank prior to shares of Chilton County Common Stock as to payment
of dividends and upon liquidation.
COMPARISON OF SHAREHOLDER RIGHTS
GENERAL
At the Effective Time, the shareholders of Chilton County, a federal
stock association, will become shareholders of SouthFirst, a Delaware
corporation, and Delaware law will govern shareholder rights after the Merger.
Differences between the Delaware General Corporation Law (the "DGCL") and the
Regulations of the OTS ("OTS Regulations") and between the SouthFirst Restated
Certificate of Incorporation (the "SouthFirst Certificate of Incorporation")
and the SouthFirst Bylaws and the Chilton County Federal Stock Charter (the
"Chilton County Charter") and the Chilton County Bylaws will result in various
changes in the rights of shareholders of Chilton County.
The following is a summary of all material differences between the
rights of SouthFirst shareholders under the DGCL, the SouthFirst Certificate of
Incorporation and the SouthFirst Bylaws, as compared with
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<PAGE> 62
those of Chilton County shareholders under OTS Regulations, the Chilton County
Charter and the Chilton County Bylaws. This summary does not purport to be a
complete description of the provisions discussed and is qualified in its
entirety by the DGCL, OTS Regulations, the SouthFirst Certificate of
Incorporation, the SouthFirst Bylaws, the Chilton County Charter and the
Chilton County Bylaws, to which Chilton County shareholders are referred.
CUMULATIVE VOTING
SouthFirst. The SouthFirst Certificate of Incorporation provides that
there shall be no cumulative voting by shareholders of any class or series of
SouthFirst stock for the election of directors.
Chilton County. The Chilton County Bylaws provide that, unless
otherwise provided in the Chilton County Charter, every shareholder entitled to
vote in an election for directors has the right to cumulate his votes. The
Chilton County Charter provides that shareholders may not cumulate their votes
for the election of directors for a five-year period commencing February 13,
1995.
BOARD OF DIRECTORS
NUMBER AND ELECTION OF DIRECTORS
SouthFirst. The DGCL provides that a corporations' bylaws shall fix
the number of directors, unless the certificate of incorporation fixes the
number of directors, in which case the number may only be changed by amending
the certificate of incorporation. Under the DGCL, the board of directors may be
divided into one, two or three classes, with the term of office of one class of
directors to expire each year and the terms of office of no two classes to
expire during the same year. The SouthFirst Certificate of Incorporation sets
the number of directors at not less than seven nor more than fifteen (exclusive
of directors, if any, to be elected by holders of preferred stock of the
corporation, voting separately as a class). The precise number of directors is
to be set by the SouthFirst Bylaws, provided that no action shall be taken to
decrease or increase the number of directors unless at least two-thirds (66
2/3%) of the directors then in office shall concur. Presently, the SouthFirst
Bylaws provide that the SouthFirst Board shall consist of eight members and
shall be divided into three classes, as nearly equal in number as possible, who
shall be elected for staggered three-year terms.
Chilton County. OTS Regulations provide that an association's board of
directors shall consist of not fewer than five nor more than fifteen directors,
to be prescribed in the bylaws of Chilton County. The directors shall be
divided into three classes, as nearly equal in number as possible, with the
members of each class elected for staggered three-year terms. The Chilton
County Charter specifies that the Chilton County Board shall consist of not
fewer than seven nor more than fifteen directors, except when a greater number
is approved by the Chilton County Board. The Chilton County Bylaws provide that
the Chilton County Board shall consist of eight members, divided into three
classes as nearly equal in number as possible, with the members of each class
elected for staggered three-year terms.
NOMINATIONS OF DIRECTORS
SouthFirst. The SouthFirst Certificate of Incorporation provides that
the SouthFirst Board shall make nominations for the election of directors at
any annual or special meeting of SouthFirst shareholders. SouthFirst
shareholders may also nominate directors if such nomination is made in writing
and is either delivered or mailed to the Secretary of SouthFirst not less than
thirty (30) days nor more than sixty (60) days
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<PAGE> 63
prior to the annual or special meeting date (unless less than forty (40) days
notice of the meeting is given by SouthFirst to the shareholders in which case
any shareholder nominations must be delivered or mailed to the Secretary of
SouthFirst not later than the close of business on the tenth day following the
day on which notice of the meeting was mailed to the shareholders). The written
notice must contain certain information concerning the nominee including his or
her name and occupation and the number of shares of stock of SouthFirst
beneficially owned by such nominee. The Chairman of the annual or special
meeting will pass upon the timeliness and sufficiency of the nomination and may
declare it to be lacking in which case such nomination will not be considered
and will be held over to be voted upon at the next annual or special meeting.
Chilton County. The Chilton County Bylaws provide that the Chilton
County Board shall act as a nominating committee for selecting nominees for
election as directors. Chilton County shareholder nominations are permitted and
will be voted upon at any annual meeting of shareholders if made in writing and
delivered to the Secretary of Chilton County at least five (5) days prior to
the date of the annual meeting. Neither the Chilton County Bylaws nor the
Chilton County Charter requires any specific information to be contained in the
written notice of nomination. The Chilton County Board is required to post any
shareholder nominations in a conspicuous place in each office of Chilton County
and to print ballots containing the names of all nominees for director within
twenty (20) days prior to the annual meeting. A failure of the Chilton County
Board to so act permits nominations for directors to be made by Chilton County
shareholders at the annual meeting by any shareholder entitled to vote at such
meeting.
REMOVAL OF DIRECTORS
SouthFirst. The SouthFirst Certificate of Incorporation provides that
a director or the entire SouthFirst Board (other than directors elected by
holders of preferred stock pursuant to certain special rights) may be removed
only for cause by the affirmative vote of the holders of at least 80% of the
outstanding shares entitled to vote generally in an election of directors.
Chilton County. Under the Chilton County Bylaws, at a meeting of
shareholders called expressly for that purpose, any director may be removed for
cause by a vote of a majority of the shares then entitled to vote at the
election of directors. If less than the entire board is to be removed, no
director may be removed if the votes cast against the removal would be
sufficient to elect a director cumulatively at an election of the class of
directors of which the director is a part.
FILLING VACANCIES
SouthFirst. Under the DGCL, unless otherwise provided in a
corporation's certificate of incorporation or bylaws, vacancies and newly
created directorships resulting from any increase in the authorized number of
directors elected by all of the shareholders having the right to vote as a
single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. Whenever the
holders of any class or classes of stock or series are entitled to elect one or
more directors by the certificate of incorporation, vacancies and newly created
directorships of such class or classes or series may be filled by a majority of
the directors elected by such class or classes or series then in office or by a
sole remaining director. The SouthFirst Certificate of Incorporation and the
SouthFirst Bylaws provide that any vacancy occurring in the SouthFirst Board,
including a vacancy created by an increase in the number of directors, shall be
filled for the remainder of the unexpired term by the affirmative vote of
two-thirds (66 2/3%) vote of the directors then in office, whether or not a
quorum. The SouthFirst Bylaws further provide that a
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<PAGE> 64
vacancy may be filled by election at an annual meeting or at a special meeting
of the shareholders held for that purpose.
Chilton County. OTS Regulations and the Chilton County Bylaws provide
that any vacancy occurring on the Chilton County Board, including a vacancy
created by an increase in the number of directors, may be filled for a term of
office continuing only until the next election of directors by the affirmative
vote of a majority of the remaining directors, although less than a quorum.
QUORUM OF SHAREHOLDERS
SouthFirst. The DGCL provides that the certificate of incorporation or
bylaws of any corporation authorized to issue stock may specify the quorum
requirements for a meeting of shareholders. The DGCL further provides that in
no event shall a quorum consist of less than one-third (33 1/3%) of the shares
entitled to vote at the meeting. In the absence of any specification in the
certificate of incorporation or bylaws of a corporation, the DGCL provides that
a majority of the shares entitled to vote, present in person or represented by
proxy, shall constitute a quorum at a meeting of shareholders. The SouthFirst
Bylaws provide that one-third (33 1/3%) of the outstanding shares of SouthFirst
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders.
Chilton County. OTS Regulations and the Chilton County Bylaws provide
that a majority of the outstanding shares entitled to vote, represented in
person or by proxy, shall constitute a quorum at a meeting a shareholders.
ADJOURNMENT AND NOTICE OF SHAREHOLDER MEETINGS
SouthFirst. The SouthFirst Bylaws require that the corporation provide
to shareholders entitled to vote at any annual or special meeting written
notice of such shareholder meeting, such notice to contain the date, time and
purpose of the meeting and to be mailed not less than ten (10) nor more than
sixty (60) days prior to the meeting. The SouthFirst Bylaws further provide
that the attendance of any shareholder at an annual or special meeting or a
writing waiving notice thereof shall make the giving of notice to such
shareholder unnecessary.
Chilton County. The Chilton County Bylaws require that notice of any
shareholder meeting be delivered to shareholders entitled to vote at such
meeting not fewer than twenty (20) days nor more than fifty (50) days before
the date of the meeting.
Both the SouthFirst Bylaws and the Chilton County Bylaws provide that
when any shareholders' meeting, either annual or special, is adjourned for 30
days or more, notice of the adjourned meeting shall be given as in the case of
an original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for less than 30 days or of the business to
be transacted at the meeting, other than an announcement at the meeting at
which such adjournment is taken.
SPECIAL MEETINGS OF SHAREHOLDERS
SouthFirst. The DGCL provides that special meetings of the
shareholders may be called by the board of directors or by such person or
persons authorized by the certificate of incorporation or the bylaws. The
SouthFirst Bylaws provide that special meetings of the shareholders may be
called at any time by the SouthFirst Board or by a committee appointed by the
SouthFirst Board whose power and authority, as
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provided in a resolution of the SouthFirst Board or in the SouthFirst Bylaws,
include the power and authority to call such meetings and not by any other
person or persons.
Chilton County. OTS Regulations provide that, unless otherwise
provided in the Chilton County Charter, special meetings of the shareholders
may be called by the Chilton County Board or upon the request of the holders of
10% or more of the shares entitled to vote at the meeting, or by such other
persons as may be specified in the Chilton County Bylaws. The Chilton County
Bylaws provide that special meetings of the shareholders may be called at any
time by the Chairman of the Chilton County Board, the President of Chilton
County, or a majority of the Chilton County Board. Moreover, the Chilton County
Bylaws provide that the Chairman of the Chilton County Board, the President of
Chilton County or the Secretary of Chilton County must call a special meeting
of the shareholders upon the written request of the holders of not less than
one-fifth (20%) of all of the outstanding capital stock entitled to vote at a
meeting. The Chilton County Charter provides that, for the duration of the
five-year period commencing February 13, 1995, special meetings relating to
changes in control of Chilton County or amendments to the Chilton County
Charter may be called only by the Chilton County Board.
SHAREHOLDER CONSENT IN LIEU OF MEETING
SouthFirst. The SouthFirst Certificate of Incorporation prohibits the
South First shareholders from taking any action by written consent in lieu of a
meeting though such action would otherwise be permissibly taken at any annual
or special meeting.
Chilton County. The Chilton County Bylaws provide that any action
required to be taken at a meeting of shareholders, or any other action which
may be taken at a meeting of shareholders, may be taken without a meeting if
consent in writing, setting forth the action so taken, is given by all of the
shareholders entitled to vote on the matter.
SHAREHOLDER PROPOSALS
SouthFirst. The SouthFirst Certificate of Incorporation specifies that
SouthFirst shareholders may propose any new business at any annual or special
meeting of SouthFirst shareholders by either delivering or mailing written
notice of the proposal to the SouthFirst Board not less than thirty (30) days
nor more than sixty (60) days prior to the date of any such meeting (unless
less than forty (40) days notice of the meeting is given by SouthFirst to the
shareholders in which case any shareholder nominations must be delivered or
mailed to the Secretary of SouthFirst not later than the close of business or
the tenth day following the day on which notice of the meeting was mailed to
the shareholders). The written notice must include, among other things, a brief
description of the business desired to be brought before the meeting, the
background and identity of each person or entity involved in the proposal and
the number of shares of SouthFirst stock beneficially owned by each such person
or entity.
Chilton County. The Chilton County Bylaws require that any new
business proposed to be taken up at an annual meeting of Chilton County
shareholders by any shareholder must be stated in writing and filed with the
Chilton County Secretary at least five (5) days before the date of the annual
meeting in order to be considered and voted upon at such meeting. However,
Chilton County shareholders are permitted to make any proposal at an annual
meeting which proposal may be discussed and considered but will not be voted
upon until any adjourned, special or annual meeting taking place thirty (30)
days or more thereafter.
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<PAGE> 66
INDEMNIFICATION OF OFFICERS AND DIRECTORS
SouthFirst. The SouthFirst Certificate of Incorporation provides that
SouthFirst shall indemnify any person who is or was a director, officer,
employee or agent of SouthFirst and any person who serves or served at
SouthFirst's request as a director, officer, employee, agent, partner or
trustee of another entity, in the following circumstances: (i) In the case of a
derivative suit, only if he is successful on the merits or otherwise, or if he
acted in good faith in the subject suit or action and in a manner he reasonably
believed to be in, or not opposed to, the best interests of SouthFirst. A
person is not entitled to indemnity if he has been adjudged liable to
SouthFirst unless and only to the extent that the court in which the suit was
brought determines, upon application, that he is entitled to indemnity for
expenses as the court deems proper. In such cases, an officer or director shall
be indemnified for expenses (including attorney's fees, but excluding amounts
paid in settlement) actually and reasonably incurred by him in connection with
the defense or settlement of the action or suit, and (ii) In the case of a
nonderivative suit against an officer or director by reason of his holding such
position, SouthFirst shall indemnify him if he is successful on the merits or
otherwise, or if he acted in good faith in the subject transaction and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of SouthFirst. In the case of a nonderivative suit, SouthFirst shall indemnify
the officer or director for amounts actually and reasonably incurred by him in
connection with the defense or settlement of the nonderivative suit, including,
but not limited to, expenses (including attorneys' fees), amounts paid in
settlement, judgments and fines.
In the SouthFirst Bylaws, a determination that the applicable standard
for indemnification has been satisfied may be made by a court, or, unless
otherwise provided, by the SouthFirst Board by a majority vote of a quorum
consisting of directors of SouthFirst who were not parties to the action, suit
or proceeding; by independent legal counsel (appointed by a majority of the
disinterested directors of the corporation, whether or not a quorum) in a
written opinion; or by the shareholders of SouthFirst. Anyone making a
determination that the standard has been met may determine that a person has
met the standard as to some matters but not as to others, and may reasonably
prorate amounts to be indemnified.
In the SouthFirst Certificate of Incorporation, SouthFirst must pay in
advance any expenses (including attorneys' fees) which may become subject to
indemnification if the SouthFirst Board authorizes the specific payment and if
the person receiving the payment undertakes in writing to repay the same if it
is ultimately determined that he is not entitled to indemnification.
The DGCL requires indemnification for expenses actually and reasonably
incurred by any director, officer, employee or agent in connection with any
action, suit or proceeding against such person for actions in such capacity to
the extent that the person has been successful on the merits or otherwise in
defense of any action.
The SouthFirst Certificate of Incorporation further provides that,
notwithstanding any other provision, no person shall be indemnified for
expenses, penalties or other payments incurred in connection with an
administrative proceeding or action instituted by a federal or state regulatory
authority that results in a final order assessing civil monetary penalties or
requiring such person to make payments to SouthFirst. SouthFirst shall not make
any advance payments of expenses to a person in connection with an
administrative proceeding or action instituted by the federal or state
regulatory authority that results in a final order assessing civil monetary
penalties or requiring such person to make payments to SouthFirst.
The SouthFirst Certificate of Incorporation states that SouthFirst may
purchase and maintain insurance on behalf of any officer or director against
any liability incurred by him in any such position, or arising out
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of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the preceding paragraphs. SouthFirst
maintains such insurance on each officer and director.
Chilton County. The Chilton County Charter and Bylaws do not address
the issue of officer and director indemnity. OTS Regulations provide that a
savings association shall indemnify any director, officer or employee by reason
of the fact that he is or was a director, officer or employee only (i) if a
final judgment on the merits is in his favor or (ii) in case of settlement, a
final judgment against him, or a final judgment in his favor, other than on the
merits, if a majority of the disinterested directors determine that he was
acting in good faith and within what he reasonably could perceive to be in the
scope of his employment and in the best interests of the association. An
association must give the OTS sixty (60) days notice of its intent to
indemnify.
There is no parallel provision in the Chilton County Charter or Bylaws
to that in the SouthFirst Certificate of Incorporation which requires Chilton
County to advance to an officer, director or other employer the expenses of
defending an action brought against him in such capacity. The OTS Regulations
permit a savings associations board of directors to advance payment of such
expenses and authorizes the board to obtain such agreement or to apply such
conditions as it deems necessary to ensure repayment in the event the
indemnification is later determined to be improper.
In contrast to the DGCL, neither the OTS Regulations nor the Chilton
County Charter or Bylaws requires mandatory indemnification of officers,
directors and other employees for reasonable expenses incurred in defense of
any claim or action when any such officer, director or employee has prevailed
on the merits of such claim or action.
Under OTS Regulations, an association is permitted, but not required,
to obtain insurance to protect itself and its directors, officers and
employees. Unlike the DGCL and the SouthFirst Bylaws, the OTS Regulations do
not permit insurance to be obtained by Chilton County for losses stemming from
the willful or criminal misconduct of any director, officer or employee.
Chilton County maintains insurance to the extent allowed by the OTS Regulations
for the benefit of its officers and directors.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
SouthFirst. The DGCL allows a Delaware corporation to limit or
eliminate the personal liability of a director to a corporation and its
shareholders for monetary damages for breach of fiduciary duty as a director,
subject to certain limitations. The SouthFirst Certificate of Incorporation
provides for the limitation of liability as provided in the DGCL.
Chilton County. There is no comparable provision for limitation of
director liability in the Chilton County Charter or Bylaws and such limitation
is not permitted by the OTS Regulations.
AMENDMENT OF ARTICLES OF INCORPORATION/FEDERAL STOCK CHARTER AND BYLAWS
SouthFirst. The SouthFirst Certificate of Incorporation provides that
specified provisions contained in the SouthFirst Certificate of Incorporation
may not be amended except upon the affirmative vote of not less than 80% of the
outstanding shares of the stock entitled to vote generally in the election of
directors, after giving effect to any limits on special voting rights. The
SouthFirst Certificate of Incorporation further provides that the SouthFirst
Bylaws may be amended either by a two-thirds (66 2/3%) vote of the SouthFirst
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Board or by the affirmative vote of the holders of not less than 80% of the
outstanding shares of SouthFirst stock entitled to vote generally in the
election of directors, after giving effect to any limits on voting rights.
Chilton County. OTS Regulations and the Chilton County Charter provide
that, except as otherwise provided, no amendment shall be made unless it is
first proposed and approved by the Chilton County Board and thereafter approved
by a majority of the shareholders. OTS Regulations further provide that if the
proposed charter amendment is not covered by certain provisions specified in
the OTS Regulations, an association first must obtain the prior approval of the
OTS. The Chilton County Bylaws provide that they may be amended by either a
majority of the shareholders or a majority of the Chilton County Board.
SHAREHOLDER VOTE REQUIRED TO APPROVE CERTAIN BUSINESS COMBINATIONS
SouthFirst. Under the DGCL, business combinations, including mergers,
consolidations and sales of substantially all of the assets of a corporation,
must be approved by a vote of the holders of a majority of the outstanding
shares of common stock of that corporation. Unless otherwise required in a
corporation's certificate of incorporation, however, the DGCL does not require
the vote of the shareholders of a constituent corporation surviving the
business combination if (i) the merger agreement does not amend the certificate
of incorporation; (ii) each share of stock of the surviving corporation
outstanding before the merger is an identical outstanding or treasury share
after the merger; and (iii) either no shares of the surviving corporation and
no securities convertible into such stock are to be issued in the merger or the
number of shares to be issued by the surviving corporation in the merger does
not exceed 20% of the shares outstanding immediately prior to the merger.
The SouthFirst Certificate of Incorporation requires the approval of
the holders of: (i) at least 80% of the outstanding shares of voting stock and
(ii) at least a majority of the outstanding shares of voting stock, not
including shares held by a "Related Person," to approve certain "Business
Combinations" and related transactions. The increased voting requirements apply
in connection with Business Combinations involving a Related Person, except in
cases where the proposed transaction has been approved in advance by two-thirds
(66 2/3%) of those members of the SouthFirst Board who are unaffiliated with
the Related Person and who were directors prior to the time when the Related
Person became a Related Person (the "Continuing Directors"). The term "Related
Person" is defined to include any individual, corporation, partnership or other
entity which owns beneficially or controls, directly or indirectly, 10% or more
of the outstanding shares of voting stock of SouthFirst. A "Business
Combination" is defined to include: (i) any merger, reorganization or
consolidation of SouthFirst with or into any Related Person; (ii) any sale,
lease exchange, mortgage, transfer or other disposition of all or a substantial
part of the assets of SouthFirst or of a subsidiary to any Related Person (the
term "substantial part" is defined to include more than 25% of SouthFirst's
total assets); (iii) any merger or consolidation of a Related Person with or
into SouthFirst or a subsidiary of SouthFirst; (iv) any sale, lease, exchange,
transfer or other disposition of all or any substantial part of assets of a
Related Person to SouthFirst or a subsidiary of SouthFirst; (v) the issuance of
any securities of SouthFirst or a subsidiary of SouthFirst to a Related Person;
(vi) the acquisition by SouthFirst of any securities of the Related Person;
(vii) any reclassification of the Common Stock, or any recapitalization
involving SouthFirst Common Stock; and (viii) any agreement, contract or other
arrangement providing for any of the above transactions.
Chilton County. OTS Regulations provide that any merger or
consolidation with another depository institution, or an acquisition of all or
substantially all of the assets or assumption of all or substantially all of
the liabilities of a depository institution by another depository institution,
depending on the circumstances, requires either the approval of the OTS,
notification to the OTS, or notification and the passage of a specified time
period. Unless otherwise provided, an affirmative vote of two-thirds (66 2/3%)
of the outstanding voting
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stock of any constituent federal savings association is required for a merger,
consolidation or acquisition. If any class of shares is entitled to vote, an
affirmative vote of a majority of the shares of each voting class and
two-thirds (66 2/3%) of the total voting shares is required.
OTS Regulations further provide that the shareholders of the resulting
federal stock association are not required to authorize a merger, consolidation
or acquisition if (i) an interim federal savings association or state savings
association is not involved; (ii) the charter is not changed; (iii) each share
of stock outstanding immediately prior to the effective date of the merger,
consolidation or acquisition is to be an identical share of the resulting
federal stock association after the effective date; and (iv) either no shares
of voting stock of the resulting federal stock association and no securities
convertible into such stock are to be issued or delivered, or the authorized
unissued shares or the treasury shares of voting stock of the resulting federal
stock association to be issued or delivered, plus those initially issuable upon
conversion of any securities to be issued or delivered, do not exceed 15% of
the total shares of voting stock of the association that were outstanding
immediately prior to the effective date of the merger, consolidation or
acquisition. Moreover, there are additional exceptions for certain combinations
involving an interim association. Following shareholder approval of any merger,
consolidation or acquisition in which a federal savings association is the
resulting institution, articles of combination must be executed by each
constituent institution as well as certain officers.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES
SouthFirst. With the exception of securities acquired through
SouthFirst employee stock benefit plans, the SouthFirst Certificate of
Incorporation provides that for a period of five years from February 13, 1995
(the effective date of First Federal's conversion from a federally chartered
mutual savings and loan to a federally chartered stock savings bank), no person
may acquire, directly or indirectly, the beneficial ownership of more than 10%
of any class of the corporation's equity securities, unless the offer or
acquisition is approved in advance by a two-thirds (66 2/3%) vote of the
corporation's Continuing Directors. Moreover, during such five year period, no
shares beneficially owned in violation of the 10% limitation, as determined by
the SouthFirst Board, are entitled to vote in connection with any matter
submitted for a shareholder's vote. The SouthFirst Certificate of Incorporation
also provides for additional restrictions on voting rights of shares owned in
excess of 10% of any class of equity securities of the corporation beyond the
five year period, although an exception is provided from the restriction if the
acquisition of more than 10% of the securities received prior approval by a
two-thirds (66 2/3%) vote of the Continuing Directors. Under the SouthFirst
Certificate of Incorporation the restriction on voting shares beneficially
owned in violation of the foregoing limitations is imposed automatically. In
order to prevent the imposition of such restrictions, the SouthFirst Board must
take affirmative action approving in advance a particular offer.
Chilton County. The Chilton County Charter no longer contains
applicable similar provisions with respect to the acquisition of Chilton County
capital stock.
INFORMATION REGARDING SOUTHFIRST
BUSINESS OF SOUTHFIRST
GENERAL
SouthFirst was formed in April of 1994 at the direction of the First
Federal Board for the purpose of becoming a holding company to own all of the
outstanding common stock of First Federal. On February
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13, 1995, First Federal was converted from a mutual to a stock form of
ownership (the "Conversion") whereupon SouthFirst, approved by the OTS as a
thrift holding company, acquired all of the issued and outstanding shares of
First Federal. SouthFirst's business primarily involves directing, planning and
coordinating the business activities of First Federal. In addition, the
business of SouthFirst involves three fee-for-service subsidiaries. In the
future, SouthFirst may acquire or organize other operating affiliates or
subsidiaries, including other financial institutions.
To date, SouthFirst has neither owned nor leased any property, but has
instead used the premises, equipment and furniture of First Federal. At the
present time, because SouthFirst does not intend to employ any persons other
than officers, it will continue utilizing the support staff of First Federal
from time to time. Additional employees may be hired as appropriate to the
extent SouthFirst expands in the future.
FEE-FOR-SERVICE SUBSIDIARIES
On April 11, 1997, SouthFirst's wholly-owned subsidiary, Benefit
Financial Services, Inc. ("Benefit Financial"), purchased substantially all of
the assets of Pension & Benefit Financial Services, Inc., a Montgomery-based
employee benefits consulting firm. The acquisition immediately enhanced
SouthFirst's earnings by approximately $0.10 per share.
In addition, SouthFirst owns 50% stakes in two start-up companies,
Magnolia Title Services, Inc. ("Magnolia"), which provides title insurance and
related services to borrowers and lenders, and the Meta Company ("Meta"), a
financial planning business. Neither Magnolia nor Meta have been profitable
since their inception. Start-up losses at Magnolia have resulted in write-downs
of SouthFirst's initial investment of $165,000 to $87,170 and start-up losses
at Meta have resulted in write-downs of SouthFirst's initial investment of
$175,000 to $107,425. As a consequence, SouthFirst has undertaken programs to
re-evaluate its investments in these two subsidiaries. The results of these
re-evaluations may lead SouthFirst to make certain strategic changes, including
further write-downs of its investments, as circumstances may require or if
certain performance-based goals are not met.
BUSINESS OF FIRST FEDERAL
GENERAL
First Federal was organized in 1949 as a federally chartered mutual
savings and loan association under the name Sylacauga Federal Savings and Loan
Association. In 1959, First Federal changed its name to First Federal Savings
and Loan Association of Sylacauga. In the Conversion, First Federal changed its
name to First Federal of the South. First Federal is a member of the Federal
Home Loan Bank (the "FHLB") System and its deposit accounts are insured up to
the maximum amount allowable by the FDIC.
First Federal currently conducts business from two full-service
locations in Talladega County, Alabama, consisting of its home office in
Sylacauga and one branch in Talladega, Alabama and a loan production office in
Hoover, Alabama, a suburb of Birmingham. See "Properties." Prior to opening
this office in 1994, First Federal had not engaged in construction lending
activities. See "-- Construction Lending."
First Federal's principal business has been and continues to be
attracting retail deposits from the general public and investing those
deposits, together with funds generated from operations, primarily in
one-
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to-four family mortgage loans, constructions loans, mortgage-backed securities
("MBS"), collateralized mortgage obligations ("CMOs") and investment
securities.
First Federal's revenues are derived principally from interest and
fees on loans in its portfolio and from MBS, CMOs, investment securities
portfolios and customer service fees. First Federal's primary sources of funds
are deposits and proceeds from principal and interest payments on loans, MBS,
CMOs and other investment securities. First Federal's primary expense is
interest paid on deposits.
First Federal markets its one-to-four family residential loans and
deposit accounts primarily to persons in Talladega County, Alabama. Mortgage
loans are generated from depositors, walk-in customers, referrals from local
real estate brokers and developers and, to a limited extent, local radio and
newspaper advertising. Construction loan originations are attributable largely
to the lending officer's reputation and his long-standing relationships with
builders and developers in the Hoover, Alabama area. See "-- Construction
Lending."
First Federal offers its customers fixed rate and adjustable rate
mortgage loans, residential construction loans, as well as consumer loans,
including savings account loans. Fixed rate mortgage loans with maturities of
15 years or less are originated for retention in First Federal's loan portfolio
while other fixed rate mortgage loans are generally sold upon origination to
the secondary market. One-year adjustable rate loans with 30-year maturities
are generally originated for retention in First Federal's loan portfolio while
other adjustable rate loans are generally sold upon origination to the
secondary market. All consumer loans are retained in First Federal's portfolio.
See "-- Loan Originations, Sales and Repayments."
To attract deposits, First Federal offers a selection of deposit
accounts including NOW, money market, passbook savings and certificates of
deposit. First Federal offers competitive rates and relies substantially on
customer service, advertising and long-standing relationships with customers to
attract and retain deposits.
MARKET AREA
First Federal's primary deposit gathering and lending area covers the
County of Talladega in central Alabama. To a lesser extent, First Federal's
deposits gathering and lending area covers the adjoining Alabama counties of
Coosa, Shelby, Clay, Cleburne, Calhoun, and St. Clair. Talladega County has a
population of approximately 75,000 based on the 1993 CACI, Inc. estimates.
First Federal's main office is situated approximately 38 miles to the south and
east of Birmingham, the largest city in the state of Alabama. First Federal's
branch office in Talladega is situated approximately 55 miles to the east of
Birmingham and approximately 25 miles north of First Federal's main office in
Sylacauga. First Federal's loan production office in Hoover is situated within
the Birmingham metropolitan area.
First Federal is the largest financial institution headquartered in
Sylacauga, Alabama and is the second largest in the County of Talladega. The
County of Talladega has a diversified economy based primarily on textile and
other manufacturing, wholesale, retail, mining, service, government,
agriculture and tourism. Manufacturing accounts for approximately one-third of
total employment in Talladega County. The economy is generally stable and there
has been no substantial increase or decrease in the population in the last five
years.
Sylacauga's economy is based primarily on major industrial employers
such as ECC International, Inc., Sullivan Graphics, Inc., Avondale Mills,
Russell Corporation, Pursell Industries and Georgia Marble.
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Kimberly-Clarke Corporation is a major employer in Childersburg, Alabama which
is 10 miles from Sylacauga and is in Talladega County.
Talladega's economy is based on major textile manufacturing employers
such as Brecon Knitting Mills, Wehadkee Yarn Mills, and Image Industries, Inc.
Georgia Pacific Corporation and other industries also employ a number of
persons in Talladega. In addition, Talladega is the home of the Talladega
Superspeedway which hosts the Winston 500 and other NASCAR events and attracts
persons to Talladega County primarily from the southeast region of the United
States.
RESIDENTIAL LENDING
First Federal's primary lending activity consists of the origination
of one-to-four family, owner-occupied, residential mortgage loans secured by
property located in First Federal's market area. Originations for such loans
are generally obtained from existing or past customers, realtors, referrals,
walk- ins, and to a lesser extent, local newspaper and radio advertising. Loans
are originated by First Federal personnel. No loan brokers or commissioned loan
officers are used. Conventional residential loans are priced based on rates
offered by the local competition and the secondary market. At June 30, 1997,
First Federal had $51.0 million or 72% of its loan portfolio invested in
one-to-four family residential mortgage loans. Management believes that this
policy of focusing on one-to-four family lending has been effective in
contributing to net interest income while reducing credit risk by keeping loan
delinquencies and losses to a minimum.
First Federal offers conventional fixed rate one-to-four family
mortgage loans with terms of 15 and 30 years. Fixed-rate loans are generally
underwritten either according to Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA") guidelines,
utilizing their approved documents so that the loans qualify for sale in the
secondary mortgage market. Generally, First Federal holds a portion of its
fixed-rate mortgage loans with maturities not exceeding 15 years in its
portfolio as long-term investments.
Adjustable rate mortgage ("ARM") loans originated by First Federal
consist of one-, three-, five-, and seven-year ARMs that are indexed to the
comparable maturity Treasury index or various cost of funds indexes. At June
30, 1997, First Federal held approximately $12.4 million ARMs, which
represented approximately 15.60% of First Federal's total loan portfolio. First
Federal's ARM loans are subject to a limitation of 2.0% per adjustment for
interest rate increases and decreases. In addition, ARM loans currently
originated by First Federal typically have a lifetime cap of 6.0% on increases
in the interest rate. These limits, based on the initial rate, may reduce the
interest rate sensitivity of such loans during periods of changing interest
rates. The repayment terms of ARM loans may increase the likelihood of
delinquencies during periods of rising interest rates. First Federal offers
teaser rates on ARM loans to remain competitive. Adjustable-rate loans which
provide for teaser rates may be subject to increased risk of delinquency or
default as the higher, fully indexed rate of interest subsequently replaces the
lower, initial rate.
Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. First Federal's lending policies, however,
generally limit the maximum loan-to-value ratio to 80% of the appraised value
of the property, based on an independent appraisal. For Federal Housing
Administration ("FHA"), Veterans' Administration ("VA") and Farmers' Home
Loans, First Federal generally limits the maximum loan-to-value ratio to 100%
of the appraised value of the property. When First Federal
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makes a loan in excess of 80% of the appraised value or purchase price, private
mortgage insurance is required.
The loan-to-value ratio, maturity and other provisions of the
residential real estate loans made by First Federal reflect the policy of
making loans generally below the maximum limits permitted under applicable
regulations. For all residential mortgage loans originated by First Federal,
upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered, income, employment and certain other information are
verified; and, if necessary, additional financial information is requested.
First Federal requires an independent appraisal, title insurance (or an
attorney's opinion), flood hazard insurance (if applicable), and fire and
casualty insurance on all properties securing real estate loans made by First
Federal. First Federal reserves the right to approve the selection of which
title insurance companies' policies are acceptable to insure the real estate in
the loan transactions.
Members of the First Federal Board receive a monthly summary of all
loans which are closed. Construction loans in excess of $350,000 and all other
loans in excess of $250,000 require authorizations by the Loan Committee of the
First Federal Board prior to closing. First Federal issues written, formal
commitments as to interest rates to prospective borrowers upon request on real
estate loans at the date of application. The interest rate commitment remains
valid for 45 to 60 days (the "lock-in period") from the date of the
application. Upon receipt of loan approval, the borrower has the balance of the
lock-in period to close the loan at the interest rate committed.
Originated mortgage loans held in First Federal's portfolio generally
include due-on-sale clauses which provide First Federal with the contractual
right to deem the loan immediately due and payable in the event that the
borrower transfers ownership of the property without First Federal's consent.
It is First Federal's policy to endorse due-on-sale provisions or to require
that the interest rate be adjusted to the current market rate when ownership is
transferred.
First Federal also offers loans such as home improvement loans secured
by second mortgages on real estate. On June 30, 1997, such loans amounted to
$957,837. Second mortgage loans are extended for up to 80% of the appraised
value of the property, less existing liens, at an adjustable or fixed interest
rate. First Federal generally holds the first mortgage loans on the properties
securing the second mortgages.
CONSTRUCTION LENDING
First Federal opened a loan production office in Hoover in March of
1994 for its construction lending activities. In April of 1994, First Federal
purchased its initial construction loan portfolio from another Alabama
financial institution for approximately $5.0 million. At June 30, 1997,
committed construction loans secured by single-family residential property
totaled $25.0 million; of such amount, $7.5 million was not disbursed. Such
loans consisted of loans to home builders for construction of single-family
residences.
Jimmy C. Maples, First Vice President of First Federal, was hired in
March of 1994 to manage the Hoover loan production office. His primary
responsibility is to manage the construction lending portfolio of First
Federal, substantially all of which was purchased from Mr. Maples' former
employer. The purchased loans were all previously originated and serviced by
Mr. Maples at another Alabama institution immediately prior to joining First
Federal. Mr. Maples performs all underwriting of the construction loans and has
the authority to originate construction loans out of the Hoover office up to
$350,000. No other loan officer of First Federal has such authority. Loans in
excess of $350,000 must be approved by the Loan Committee of
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the First Federal Board. Funds are disbursed based upon percentage of
completion as verified by on-site inspections performed by Mr. Maples.
First Federal makes loans primarily to builders for the construction
of single-family residences in the Birmingham area on both a pre-sold and
speculative basis. However, in 1996, approximately 50% of First Federal's
construction loans were made on a pre-sold basis. First Federal also makes
construction loans on single-family residences to individuals who will
ultimately be the owner-occupant of the house. First Federal currently
originates out of its Hoover loan production office only construction loans;
however, First Federal intends to expand its construction lending activities to
include originating permanent one-to-four family residential loans.
Construction loan proceeds are disbursed in increments as construction
progresses. Disbursements are scheduled by contract, with First Federal
reviewing the progress of the underlying construction project prior to each
disbursement. First Federal's construction loan agreements with builders
generally provide that principal repayments are required as individual units
are sold to third parties so that the remaining loan balance on the property is
paid off.
Construction loans are principally made to builders who have an
established credit history with First Federal or Mr. Maples, as well as to
builders who are referred by such borrowers. New builders must be approved by
First Federal's Loan Committee and must display the same levels of
knowledgeability and financial strength as existing builders. The application
process includes a submission to First Federal of plans, specifications and
costs of the project to be constructed or developed. The Loan Committee also
reviews the borrower's existing financial condition and total debt outstanding.
All borrower relationships are reviewed annually by the Loan Committee. First
Federal's residential construction loans are originated with adjustable or
fixed rates of interest that are negotiated with the builders, but typically
will be tied to the prime rate plus a spread and have terms of 12 months or
less. Construction loans generally have a maximum loan-to-value ratio of 80% on
an "as completed" basis. First Federal generally obtains personal guarantees
for all of its construction loans. First Federal anticipates that it will
convert many of its construction loans to permanent loans with First Federal
upon completion of the construction phase.
Construction loans generally involve a higher level of credit risk
than permanent single-family residential lending, due to the concentration of
principal in a limited number of borrowers and the effects of changing
economic, governmental and weather conditions. The nature of these loans is
such that they require a sophisticated knowledge of building standards,
material costs, union rules, real estate values and housing demand; and, thus,
are more difficult to evaluate and monitor. First Federal's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value upon completion of the project and the
estimated cost (including interest) of the project. If the estimate of
construction cost proves to be inaccurate, First Federal may be required to
advance funds beyond the amount originally committed in order to permit
completion of the project and will be confronted, at or prior to the maturity
of the loan, with a project having a value which is insufficient to assure full
repayment.
Mr. Maples is responsible for soliciting business, performing credit
risk assessments and annual credit reviews, preparing loan origination
documents, maintaining loan files, performing site inspections and disbursing
loan proceeds. Also, as previously discussed, Mr. Maples has the authority to
originate construction loans out of the Hoover office up to $350,000. First
Federal is heavily dependent on Mr. Maples for determining the quality of the
construction loan portfolio and the accuracy of the recorded balances. Mr.
Maples reports loan information to the First Federal Board on a monthly basis.
In addition, First Federal has instituted a system of internal procedures to
help ensure that construction loan interest, construction loan
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balances and other related construction loan accounts are fairly stated. These
procedures have been developed and closely coordinated with First Federal's
independent auditors and First Federal's Internal Control Review Committee
which reports to the First Federal Board on a quarterly basis.
As of June 30, 1997, 12 borrowers had construction loan commitments in
excess of $500,000 with the largest commitment being $3,788,000. The majority
of loans in the construction loan portfolio are speculative loans. As
previously discussed, construction loans are for a period of 12 months or less.
If the loan is not paid within the original twelve month period, it is renewed
for a six month period. All renewals are approved by the Loan Committee. As of
June 30, 1997, there were 24 such renewal loans totaling $3,538,041.
Under federal law, the aggregate amount of loans that First Federal is
permitted to make to any one borrower is generally limited to the greater of
15% (25% if the security has a readily ascertainable value) of unimpaired
capital and surplus or $500,000. First Federal has received permission from the
OTS to increase its loan-to-one borrower limits for single-family residential
builders, as permitted under applicable federal law and regulations. The
increased limits for these borrowers are 30% of unimpaired capital and surplus
of First Federal, with an aggregate limit to all such borrowers equal to 150%
of First Federal's unimpaired capital and surplus.
CONSUMER LENDING AND OTHER LENDING
Commercial loans represent a small portion of First Federal's lending
activities, only $388,000, or 0.54% of First Federal's total loan portfolio, at
June 30, 1997. First Federal's commercial loans are secured by real estate or
other acceptable collateral. In addition, borrowers generally must personally
guarantee loans secured by commercial real estate. Commercial loans are mostly
made at adjustable rates.
Commercial loans generally involve a greater degree of risk than
residential mortgage loans. Because payments on loans are often dependent on
successful operation or management of business, repayment of such loans may be
subject to a greater extent to adverse economic conditions. First Federal seeks
to minimize these risks by lending to established customers and generally
restricting such loans to its primary market area. First Federal does not
actively market commercial loans.
COMMERCIAL LENDING
As a community-oriented financial institution, First Federal offers
certain secured and unsecured consumer loans, including loans secured by
deposits, vehicles, heavy equipment and other secured and unsecured loans.
Consumer loans totaled $2.9 million (including $807,000 in loans secured by
savings accounts, $899,000 in loans secured by vehicles, and $1.2 million in
other secured loans) or 4% of First Federal's net loan portfolio at June 30,
1997.
The underwriting standards employed by First Federal for consumer
loans include a determination of the applicant's payment history on other debts
and an assessment of ability to meet existing obligations and payments on the
proposed loan. In addition, the stability of the applicant's monthly income
from primary employment is considered during the underwriting process.
Creditworthiness of the applicant is of primary consideration; however, the
underwriting process also includes a comparison of the value of the security,
if any, in relation to the proposed loan amount.
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LOAN APPROVAL
All first-mortgage loans, other than construction loans less than
$350,000, are underwritten and approved by the Loan Committee of the First
Federal Board. One-to-four family loans in excess of $250,000 and construction
loans in excess of $350,000 must be approved by the Loan Committee. Mr. Maples
has sole underwriting and loan approval authority for any construction loans up
to $350,000. See "-- Construction Lending." First Federal has implemented a
second loan review policy of all loans that are brought before the Loan
Committee that the Loan Committee has not yet approved or denied. The second
loan review for loans that have not yet been approved or denied is performed by
designated members of First Federal's Internal Control Review Committee on a
timely basis following the initial meeting of the Loan Committee. After the
second loan review, the Loan Committee makes a final determination as to
whether the loan application will be denied or approved.
LOAN ORIGINATION, COMMITMENT AND OTHER FEES AND COMMISSIONS
In addition to interest earned on loans, First Federal charges fees
for originating and making loan commitments (which are included in non-interest
income), prepayments of non-residential loans, late payments, changes in
property ownership and other miscellaneous services. The income realized from
such fees varies with the volume of loans made or repaid, and the fees vary
from time to time depending upon the supply of funds and other competitive
conditions in the mortgage markets. Loan demand and the availability of money
also affect these conditions. Fees, net of related origination costs, are
deferred as an adjustment to yield. First Federal also charges commissions on
the sale of credit life insurance and fees in connection with retail banking
activities which are reflected in First Federal's non-interest operations
income. See "Consolidated Statements of Earnings."
COMPETITION
First Federal has significant competition for its residential real
estate mortgage loans, construction loans, and other loans and deposits in
Talladega County. Sylacauga and Talladega, Alabama, have a high density of
financial institutions, some of which are larger, have a state-wide or regional
presence and have greater financial resources than First Federal, and all of
which are competitors of First Federal to varying degrees. First Federal faces
significant competition both in originating mortgage loans and other loans and
in attracting deposits. First Federal's competition for loans comes principally
from savings and loan associations and commercial banks. In addition, there are
a number of mortgage bankers, mortgage brokers, finance companies and insurance
companies that compete with First Federal for loan customers. Credit unions,
securities firms and mutual funds compete with First Federal in raising
deposits. Many of these institutions also seek to provide the same
community-oriented services as First Federal. First Federal competes for
deposit accounts by offering depositors competitive interest rates and a high
level of personal service. First Federal competes for loans primarily through
the interest rates and loan fees it charges and the efficiency and quality of
service it provides borrowers and contractors.
First Federal also faces significant competition for originations of
residential construction loans out of its Hoover loan production office. First
Federal's competition for these loans is principally from larger savings
institutions and commercial banks whose primary market is the Birmingham area
and who have greater financial resources than First Federal. First Federal
competes for residential construction loans primarily through the quality of
service it provides borrowers and the long-standing business relationships that
First Federal has with builders and developers in this area.
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First Federal is a community and retail-oriented financial institution
serving its market area with deposit services, residential and commercial real
estate loans and consumer loans. Management considers First Federal's
reputation for financial strength and quality customer service to be its major
competitive advantage in attracting and retaining customers in its market area.
While First Federal is subject to competition from other financial institutions
which may have greater financial and marketing resources, management believes
First Federal benefits by its community orientation and its long-standing
relationship with many of its customers.
PROPERTIES
First Federal conducts its business through its main office located in
Sylacauga, Alabama, a branch office located in Talladega, Alabama, and a loan
production office in Hoover, Alabama. SouthFirst believes that First Federal's
current facilities are adequate to meet the present and immediately foreseeable
needs of First Federal and SouthFirst.
The following table sets forth information relating to each of
SouthFirst's offices as of June 30, 1997. The total net book value of First
Federal's land and buildings at June 30, 1997 was approximately $1 million.
<TABLE>
<CAPTION>
NET BOOK VALUE DEPOSITS
LEASED AS OF AS OF
LOCATION OR OWNED DATE OPENED JUNE 30, 1997 JUNE 30, 1997
-------- -------- ----------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
MAIN OFFICE Owned April 1966 $ 529 $44,138
126 North Norton Avenue
Sylacauga, Alabama 35150
BRANCH OFFICE Owned April 1961 $ 237 $18,408
301 West North Street
Talladega, Alabama 35160
LOAN PRODUCTION OFFICE Leased (1) March 1994 -- --
3055 Lorna Road
Birmingham, Alabama 35216
OFFICE/STORAGE BUILDING Owned (2) November 1995 $ 252 --
North Norton Avenue
Sylacauga, Alabama 35150
Total $1,018 $62,546
====== =======
</TABLE>
- -----------------
(1) The landlord, Lorna Land Company, Inc. and First Federal are operating
under a three-year contract which provides for monthly lease payments
of $2,663 and which expires on May 1, 1998.
(2) In 1995, First Federal made improvements to a building adjacent to the
main office's parking lot with the intention of renting four offices
to the general public while using the remainder of the building for
storage space for First Federal. In December 1995, one office was
rented by SouthFirst's affiliate, Meta Company. Meta remits a monthly
amount of $750 to SouthFirst. In 1996, one office was rented to a
local radio station. The station remits a monthly amount of $1,450 to
SouthFirst.
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LEGAL PROCEEDINGS
On December 21, 1993, First Federal filed a complaint against United
States Fidelity & Guaranty Company ("USF&G") and Robert R. Peoples, a former
employee of First Federal, in the Circuit Court of Talladega County, Alabama.
First Federal, for 20 years, maintained a fidelity bond with USF&G. This bond
insured First Federal against losses resulting from numerous causes, including
the fraudulent acts committed against First Federal by its employees. The
complaint alleged that USF&G breached its contractual obligations under the
fidelity bond and that Mr. Peoples defrauded First Federal. Further, First
Federal sought compensatory damages in the amount of approximately $612,000 and
punitive damages against USF&G. USF&G denied First Federal's claim and Mr.
Peoples pled guilty to a federal banking crime indictment. On March 3, 1995, a
jury awarded $788,000 to First Federal 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 First
Federal, 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 First
Federal 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 First Federal, 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 First Federal.
USF&G subsequently filed an appeal of this dismissal.
On May 23, 1996 First Federal entered into a final settlement
agreement with USF&G, under which USF&G withdrew its appeal and subrogation
action, and First Federal received $75,000, net of legal fees, from USF&G. This
amount, which brought the total amount received, net of legal fees, to
$619,000, represents the final settlement pertaining to the aforementioned bond
claim and subrogation action.
In the normal course of its business, SouthFirst and First Federal
from time to time are involved in legal proceedings. SouthFirst and First
Federal management believe there are no pending or threatened legal proceedings
which upon resolution are expected to have a material effect upon SouthFirst's
or First Federal's financial condition.
MANAGEMENT OF SOUTHFIRST
The SouthFirst Board currently consists of eight persons (not
including one Director, Emeritus) and is divided into three classes, each of
which contains approximately one-third of the SouthFirst Board. The directors
of SouthFirst are elected by the shareholders of SouthFirst for staggered,
three year terms, such that approximately one-third of the directors will be
elected at each annual meeting of shareholders, or until their successors are
elected and qualified. The executive officers of SouthFirst are elected
annually by the Board of Directors of SouthFirst and shall hold office until
their successors are elected and qualified or until their earlier resignation,
removal from office or death.
The direction and control of First Federal is vested in the First
Federal Board. Directors of First Federal serve three-year terms. The terms of
the directors of First Federal are staggered (as in the case of SouthFirst)
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so that approximately one-third of the directors will be elected at each annual
meeting of shareholders. Since SouthFirst owns all of the issued and
outstanding shares of common stock of First Federal, SouthFirst will elect the
directors of First Federal in accordance with applicable law.
There are no arrangements or understandings pursuant to which the
directors or executive officers of SouthFirst or First Federal were elected and
there are no family relationships between any of such persons.
The following table sets forth certain information regarding the
executive officers and directors of SouthFirst. Each director of SouthFirst is
also a director of First Federal.
<TABLE>
<CAPTION>
YEAR YEAR OF
POSITIONS HELD ELECTED AS EXPIRATION
NAME AGE(1) WITH COMPANY DIRECTORS OF TERM
---- ------ ------------ --------- -------
<S> <C> <C> <C> <C>
Donald C. Stroup 48 President, Chief Executive 1994 1999
Officer and Vice Chairman
of the Board
Joe K. McArthur 45 Executive Vice President,
Chief Operating Officer,
Chief Financial Officer,
Secretary/Treasurer and
Director 1995 1998
Paul A. Brown 71 Chairman of the Board 1994 1999
Hobert Cook 74 Director Emeritus 1994 1995
H. David Foote, Jr. 47 Director 1994 1997
John T. Robbs 42 Director 1994 1997
Allen Gray McMillan, III 40 Director 1995 1998
Charles R. Vawter, Jr. 35 Director 1994 1999
J. Malcomb Massey 48 Director 1997 1997
</TABLE>
- ---------------
(1) At September 2, 1997.
Set forth below is certain information with respect to the directors
and executive officers of SouthFirst and First Federal. Unless otherwise
indicated, the principal occupation listed for each person below has been his
principal occupation for the past five years.
DIRECTORS
PAUL A. BROWN has served as a member of First Federal since 1972 and
of SouthFirst since 1994. Mr. Brown has served as Chairman of First Federal
Board since 1987 and of the SouthFirst Board since 1994. Mr. Brown was owner of
Brown Auto Parts from 1977 to 1987 and is presently retired.
HOBERT COOK has served as a member of First Federal since 1977 and of
SouthFirst since 1994. Mr. Cook is currently serving on the SouthFirst Board as
a director, emeritus. Mr. Cook was formerly Senior Vice President of First
Federal from 1966 to 1986. Mr. Cook has 36 years of experience in the banking
industry and is presently retired.
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H. DAVID FOOTE, JR. has served as a director of First Federal since
1988 and of SouthFirst since 1994. Mr. Foote has been President and owner of
Foote Bros. Furniture since 1973. Mr. Foote has been a member of the Board of
Directors of the Sylacauga Chamber of Commerce, the Coosa Valley Country Club
and Talladega County E-911. He has served as President of Wesley Chapel
Methodist Men's Club and head of the Wesley Chapel Methodist Administrative
Board.
JOHN T. ROBBS has served as a director of First Federal since 1988 and
of SouthFirst since 1994. Mr. Robbs is President of Michael Supply Co., Inc.,
where he has been employed since 1980.
ALLEN GRAY MCMILLAN, III has served as a director of First Federal
since 1993 and of SouthFirst since 1994. Mr. McMillan is President of Brecon
Knitting Mill, where he has been employed since 1979. Mr. McMillan has been
active in the Kiwanis Club, United Way, and Boy Scouts of America. He is a
member of the First United Methodist Church.
CHARLES R. VAWTER, JR. has served as a director of First Federal since
1992 and of SouthFirst since 1994. Mr. Vawter is Chief Financial Officer of
Automatic Gas and Appliance Co., Inc., where he has been employed since 1987.
Mr. Vawter is a member of the First Baptist Church. He is a member of the Board
of Directors of B. B. Comer Library Foundation and the Coosa Valley Country
Club. He is a past Board member of the Sylacauga Chamber of Commerce. He is
currently a member of the Planning Commission of the City of Sylacauga Chamber
of Commerce and has served on the Planning Committee of Alabama LP Gas
Association.
J. MALCOMB MASSEY has served as a director of First Federal and
SouthFirst since May, 1997. Mr. Massey is President and Chief Executive Officer
of SouthFirst's wholly owned subsidiary, Benefit Financial Services, Inc.,
("Benefit Financial"), a position he has held since he joined Benefit Financial
in 1997 after Benefit Financial acquired substantially all of the assets of
Lambert, Massey, Roper & Taylor, Inc., an employee benefits consulting firm
based in Montgomery in which Mr. Massey served as President since 1980. Mr.
Massey is a member of the American Society of Pension Actuaries and serves as
the insurance consultant to Southern Community Bankers, an industry trade group
comprised of 20 savings institutions and community banks located in the
Southeastern United States.
EXECUTIVE OFFICERS
DONALD C. STROUP has served as the President and Chief Executive
Officer of First Federal since 1988 and of SouthFirst since 1994. Mr. Stroup
has also been a member of the First Federal Board since 1988 and of the
SouthFirst Board since 1994. Mr. Stroup has 22 years of experience in the
banking industry and has a B.S. in Business Administration from Samford
University, and a Certificate of Achievement and Diploma of Merit from the
Institute of Financial Education, Chicago, Illinois. He is Chairman of the
Southern Community Bankers, a Director of the Boys' Club and a member of the
Sylacauga School Board, Red Cross, Sylacauga Industrial Development Board,
Hospice Care, Talladega County Economic Development Authority and Boy Scouts
Advisory. Mr. Stroup is a current member and former President of Sylacauga
Rotary Club and a former Board member of the Sylacauga Chamber of Commerce and
Coosa Valley Country Club. Mr. Stroup is a member of the First Baptist Church
of Sylacauga.
JOE K. MCARTHUR has served as the Executive Vice President, Chief
Operating Officer and Chief Financial Officer of First Federal and SouthFirst
since 1992 and 1994, respectively. Mr. McArthur has served as a director of
First Federal and SouthFirst since February 1996. He is currently serving as
Chairman of First Federal's Internal Control Review Committee, Compliance
Officer, and Secretary/Treasurer. Mr.
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McArthur has 19 years of experience in the banking industry and a B.S. in
Accounting from the University of Alabama-Birmingham and a Masters of Business
Administration equivalent from the National School of Finance and Management.
He has also completed all courses with the Institute of Financial Education.
Prior to joining First Federal, Mr. McArthur was Assistant Executive Director
of Finance of Humana, a hospital, from 1990 to 1992, and Senior Vice president
of First Federal of Alabama from 1983 to 1990. Mr. McArthur is a member of the
Sylacauga Kiwanis Club and a member of the United Way Committee. He has also
served as a manager of various Little League and Babe Ruth Baseball teams. Mr.
McArthur is a member of First United Methodist Church of Sylacauga.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires SouthFirst's directors,
certain officers and persons who own more than 10% of the outstanding Common
Stock of SouthFirst to file with the Securities and Exchange Commission reports
of changes in ownership of the Common Stock of SouthFirst held by such persons.
Officers, directors and greater than 10% shareholders are also required to
furnish SouthFirst with copies of all forms they file under this regulation.
SouthFirst first became subject to this regulation on February 13, 1995, and
from such date through the end of fiscal 1996. To SouthFirst's knowledge, based
solely on a review of copies of such reports furnished to SouthFirst and
representations that no other reports were required, all Section 16(a) filing
requirements applicable to its officers, directors and 10% holders were
complied with, except John T. Robbs failed to file on a timely basis one report
relating to four transactions.
Although it is not SouthFirst's obligation to make filings pursuant to
Section 16 of the Exchange Act, SouthFirst has adopted a policy requiring all
Section 16 reporting persons to report monthly to a designated employee of
SouthFirst as to whether any transactions in SouthFirst's Common Stock occurred
during the previous month.
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EXECUTIVE COMPENSATION
The following table provides certain summary information for fiscal
1996, 1995 and 1994 concerning compensation paid or accrued by SouthFirst and
First Federal to or on behalf of SouthFirst's Chief Executive Officer and the
other executive officers of SouthFirst whose total annual salary and bonus
exceeded $100,000 during such periods (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation (1) Long Term Compensation
Restricted Securities
Name and Principal Fiscal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation(2) Award(s)$ Options/SARs(#) Compensation
------------------ ------ -------- ---------- --------------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald C. Stroup, 1996 $95,568 $163,093(3) $10,250 $116,200(5) 20,750 $2,255(7)
President, Chief 1995 91,000 15,168 10,500 -- -- 2,258
Executive Officer and 1994 78,456 12,656 13,554 -- -- 1,800
Vice Chairman
Joe K. McArthur, 1996 $69,900 $100,316(4) $9,750 $74,368(6) 13,280 $1,400(8)
Executive Vice 1995 66,564 11, 094 6,000 -- -- 1,286
President, Chief 1994 64,000 9,590 -- -- -- 954
Operating Officer, Chief
Financial Officer and
director
</TABLE>
- -------------------------
(1) All compensation received by Mr. Stroup and Mr. McArthur was paid by
First Federal. No other officer of SouthFirst received cash
compensation in excess of $100,000 during 1996.
(2) Fees received as member of First Federal and SouthFirst Boards.
(3) Includes a regular bonus of $15,928 as well as $147,165 of
compensation recognized on dividends paid under SouthFirst's Dividend
Investment Plan on unexercised stock options and unvested shares of
restricted stock issued under SouthFirst's Management Recognition
Plans "A" and "B" and a corresponding bonus paid to assist in the
payment of the applicable federal tax due in connection with such
dividend payments. See "-- Compensation of Directors"
(4) Includes a regular bonus of $11,650 as wells as $88,666 of
compensation recognized on dividends paid under SouthFirst's Dividend
Investment Plan on unexercised stock options and unvested shares of
restricted stock issued under SouthFirst's Management Recognition
Plans "A" and "B" and a corresponding bonus paid to assist in the
payment of the applicable federal tax due in connection with such
dividend payments. See "-- Compensation of Directors."
(5) Represents 8,300 shares all of which, as of September 30, 1996, were
subject to certain vesting requirements as more fully described in "--
Management Recognition Plans." As of September 30, 1996, the aggregate
market value of the shares was $103,750.
(6) Represents 5,312 shares all of which, as of September 30, 1996, were
subject to certain vesting requirements as more fully described in "--
Management Recognition Plans." As of September 30, 1996, the aggregate
market value of the shares was $66,400.
(7) Represents a $1,733 automobile allowance and income of $522 recognized
on employer provided group term life insurance in excess of $50,000.
(8) Represents an $878 automobile allowance and income of $522 recognized
on employer provided group term life insurance in excess of $50,000.
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EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENT
Employment Agreements. SouthFirst and First Federal have entered into
employment agreements with Donald C. Stroup, President and Chief Executive
Officer of SouthFirst and First Federal and Joe K. McArthur, Executive Vice
President, Chief Operating Officer and Chief Financial Officer of SouthFirst
and First Federal (collectively, the "Employment Agreements").
The Employment Agreement with Mr. Stroup was effective as of October
1, 1996 and provides for a term of three years. Pursuant to the Employment
Agreement, First Federal will pay Mr. Stroup an annual base salary of $100,308,
for which SouthFirst is jointly and severally liable. On each anniversary date
from the expiration of the initial three year term of the Employment Agreement,
the term of Mr. Stroup's employment will be extended for an additional one-year
period beyond the then effective expiration date, upon a determination by the
SouthFirst Boards that the performance of Mr. Stroup has met the required
performance standards and that such Employment Agreement should be extended.
The Employment Agreement with Mr. McArthur was effective as of October
1, 1996 and provides for a term of three years. Pursuant to the Employment
Agreement, First Federal will pay Mr. McArthur an annual base salary of $73,380
for which SouthFirst will be jointly and severally liable. On each anniversary
date from the expiration of the initial three year term, the term of Mr.
McArthur's employment will be extended for an additional one-year period beyond
the then effective expiration date, upon a determination by the SouthFirst
Boards that the performance of Mr. McArthur has met the required performance
standards and that such Employment Agreement should be extended.
The Employment Agreements entitle both Mr. Stroup and Mr. McArthur to
participate with all other senior management employees of SouthFirst or First
Federal in any discretionary bonuses that the SouthFirst or First Federal
Boards may award. In addition, Mr. Stroup and Mr. McArthur participate in
standard retirement and medical plans, and are entitled to customary fringe
benefits, vacation and sick leave. The Employment Agreements will terminate
upon the employee's death or disability, and are terminable for "cause" as
defined in the Employment Agreements. In the event of termination for cause, no
severance benefits are payable to the employee. If SouthFirst or First Federal
terminates the employee without cause, the employee will be entitled to a
continuation of his salary and benefits from the date of termination through
the remaining term of the Employment Agreement plus an additional twelve-month
period. The employee may voluntarily terminate his Employment Agreement by
providing sixty days written notice to the SouthFirst and First Federal Boards,
in which case the employee is entitled to receive only his compensation, vested
rights and benefits up to the date of termination.
The Employment Agreements provide that, in the event of the employee's
involuntary termination in connection with, or within one year after, any
change in control of First Federal or, SouthFirst, other than for "cause," or
death or disability, the employee will be paid, within 10 days of such
termination, an amount equal to the difference between: (i) 2.99 times his
"base amount," as defined in Section 280G(b)(3) of the Internal Revenue Code;
and (ii) the sum of any other parachute payments, as defined under Section
280G(b)(2) of the Internal Revenue Code, that the employee receives on account
of the change in control. Such payment would be reduced to the extent it would
cause First Federal to fail to meet any of its regulatory capital requirements.
Under the Employment Agreements, "change in control" generally refers to a
change in ownership, holding or power to vote more than 25.0% of SouthFirst's
or First Federal's voting stock, a change in the ownership or possession of the
ability to control the election of a majority of First Federal's or
SouthFirst's directors or the exercise of a controlling influence over the
management or policies of SouthFirst or First Federal. In addition, under each
Employment Agreement, a change in control occurs when, during
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any consecutive two-year period, directors of SouthFirst or First Federal, at
the beginning of such period, cease to constitute two-thirds of the SouthFirst
or First Federal Board, unless the election of replacement directors was
approved by a two-thirds (66 2/3%) vote of the initial directors then in
office. Each Employment Agreement also provides for a similar lump sum payment
to be made in the event of the employee's voluntary termination of employment
within one year following a change in control of First Federal or SouthFirst.
Deferred Compensation Agreements. First Federal has entered into
deferred compensation agreements with its president and executive vice
president, pursuant to which each will receive certain retirement benefits at
age 65. Under the Deferred Compensation Agreements, benefits are payable for 15
years. A portion of the retirement benefits accrue each year until age 65 or,
if sooner, until termination of employment. If the president remains in the
employment of First Federal until age 65, his annual benefit will be $65,000.
If the executive vice president remains in the employment of First Federal
until age 65, his annual benefit will be $45,000. If either of these such
officers die prior to age 65, while in the employment of First Federal, the
full retirement benefits available under the deferred compensation agreements
will accrue and will, thereupon, be payable to their respective beneficiaries.
The retirement benefits available under the deferred compensation agreements
are unfunded. However, First Federal has purchased life insurance policies on
the lives of these officers that will be available to SouthFirst and First
Federal to provide, both, for retirement benefits and for key man insurance.
The costs of these arrangements was $51,045 in 1996 and 1995, and was $28,522
in 1994.
MANAGEMENT RECOGNITION PLANS
The SouthFirst Board has adopted two management recognition plans,
denominated SouthFirst Bancshares, Inc. Management Recognition Plan "A" ("Plan
A") and SouthFirst Bancshares, Inc. Management Recognition Plan "B" ("Plan B")
(Plan A and Plan B referred to collectively as the "Plans" or the "MRPs"). The
objective of the MRPs is to enable SouthFirst and First Federal to reward and
retain personnel of experience and ability in key positions of responsibility
by providing such personnel with a proprietary interest in SouthFirst and by
recognizing their past contributions to SouthFirst and First Federal, and to
act as an incentive to make such contributions in the future.
Plan A and Plan B are identical except that Plan A provides for awards
to employees, as well as to non-employee directors, of SouthFirst and First
Federal, while Plan B provides for awards only to employees. Non-employee
directors are entitled to participate in Plan A only, as described in the
preceding sentence. The Plans are administered by a committee (the "Committee")
of the SouthFirst Board. Awards under the Plans are in the form of restricted
stock awards. Each MRP has reserved a total of 16,600 shares of Common Stock
for issuance pursuant to awards made by the Committee. Such shares, with
respect to each Plan, are held in trust until awards are made by the Committee,
at which time the shares are distributed from the trust to the award recipient.
Such shares will bear restrictive legends until vested, as described below. The
Committee may make awards to eligible participants under the MRPs in its
discretion, from time to time. Under Plan A, on November 15, 1995 each
non-employee director serving in such capacity on February 13, 1995 (the
effective date of the Conversion) automatically received an award of 1,660
shares. In selecting the employees to whom awards are granted under the Plans,
the Committee considers the position, duties and responsibilities of the
employees, the value of their services to SouthFirst and First Federal and any
other factors the Committee may deem relevant. As of September 30, 1996, a
total of 33,200 shares had been awarded under the Plans and no shares remain
available for future issuance.
Once an award is made, a participant "earns" the shares under the
award (i.e., the shares vest) at the rate of 20% per year, commencing on the
first anniversary of the date of the award. The Committee may,
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however, from time to time and in its sole discretion, accelerate the vesting
with respect to any participant, if the Committee determines that such
acceleration is in the best interest of SouthFirst. If a participant terminates
employment for reasons other than death or disability, the participant forfeits
all rights to the allocated shares under restriction. If the participant's
termination is caused by death or disability, all restrictions expire and all
shares allocated become vested and consequently, unrestricted. Participants
will recognize compensation income when their interests vest, or at such
earlier date pursuant to a participant's election to accelerate recognition
pursuant to Section 83(b) of the Internal Revenue Code.
STOCK OPTION PLAN
On June 8, 1994, the SouthFirst Board adopted a Stock Option Plan
denominated SouthFirst Bancshares, Inc. Stock Option and Incentive Plan (the
"Stock Option Plan"). The objective of the Stock Option Plan is to attract,
retain, and motivate the best possible personnel for positions of substantial
responsibility with SouthFirst and First Federal. The Stock Option Plan
provides select officers, directors, and employees of First Federal and
SouthFirst with an opportunity to participate in the ownership of SouthFirst.
The Stock Option Plan authorizes the grant of up to 83,000 shares of Common
Stock to select officers, directors, and employees in the form of (i) incentive
and nonqualified stock options ("Options") or (ii) Stock Appreciation Rights
("SARs;" Options and SARs are referred to herein collectively as "Awards"), as
determined by the committee administering the Stock Option Plan. The exercise
price for Options and SARs may not be less than the fair market value of the
shares on the day of the grant, and no Awards shall be exercisable after the
expiration of ten years from the date of this grant. The Stock Option Plan has
a term of 10 years unless earlier terminated by the SouthFirst Board. The Stock
Option Plan is administered by a committee of the directors of SouthFirst (the
"Option Plan Committee"). Except as discussed below with respect to
non-employee directors, the Option Plan Committee has complete discretion to
make Awards to persons eligible to participate in the Stock Option Plan, and
will determine the number of shares to be subject to such Awards, and the terms
and conditions of such Awards. In selecting the persons to whom Awards are
granted under the Stock Option Plan, the Option Plan Committee will consider
the position, duties, and responsibilities of the employees, the value of their
services to SouthFirst and First Federal, and any other factor the Option Plan
Committee may deem relevant to achieving the stated purpose of the Stock Option
Plan.
Options granted under the Stock Option Plan are exercisable on a
cumulative basis in equal installments of 20% per year commencing one year from
the date of grant except that all options would be 100% exercisable in the
event the optionee terminates his employment due to death, disability or
retirement or in the event of a change in control of First Federal or
SouthFirst.
In order to attract and retain members of the board of directors who
contribute to SouthFirst's success, the Stock Option Plan further provides for
the award of nonqualified stock options to non-employee directors of
SouthFirst. All directors who were not employees of SouthFirst, as of November
15, 1995 (the date of the approval of the Stock Option Plan by the shareholders
of SouthFirst and OTS), received non-qualified stock options for the purchase
of 4,150 shares with an exercise price equal to $14.00 per share, the fair
market value of the Common Stock on the date of grant. As of September 30,
1996, a total of 83,000 shares have been issued under the Stock Option Plan and
no shares remain available for future issuance.
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<PAGE> 86
The following table presents information regarding fiscal 1996 grants
to the named Executive Officers of options to purchase shares of SouthFirst's
Common Stock.
OPTIONS GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term(1)
------------------------------------- ----------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees
Options in Fiscal Exercise Expiration
Name Granted(2) Year Price Date 5% 10%
- ------------------------ ---------- ------ ------- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Donald C. Stroup 20,750 25 $14.00 11/15/05 $182,808 $463,140
Joe K. McArthur 13,280 16 $14.00 11/15/05 $116,997 $296,410
</TABLE>
- ---------------------------
(1) The dollar amounts under these columns represent the potential
realizable value of each option assuming that the market price of the
common stock appreciates in value from the date of grant for the full
10 year term at the 5% and 10% annualized rates prescribed by
regulation and therefore are not intended to forecast possible future
appreciation, if any, of the price of the common stock.
(2) Options vest with respect to 20% of the underlying shares on each of
November 15, 1996, 1997, 1998, 1999 and 2000.
The following table provides certain information concerning each
exercise of stock options under SouthFirst's Stock Option Plan during the
fiscal year ended September 30, 1996, by the named Executive Officers and the
fiscal year end value of unexercised options held by such person:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options at Options at Fiscal
Fiscal Year End Year End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable(1)
---- ------------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Donald C. Stroup 0 $0 0/20,750 $0/$0
Joe K. McArthur 0 $0 0/13,280 $0/$0
- --------------
</TABLE>
(1) The market value of SouthFirst's common stock on September 30, 1996
was $12.50 per share. The actual value, if any, an executive may
realize will depend upon the amount by which the market price of
SouthFirst's common stock exceeds the exercise price when the options
are exercised.
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<PAGE> 87
COMPENSATION OF DIRECTORS
Each member of the First Federal Board (other than the Chairman)
receives a fee of $750 for each board meeting attended (with one excused
absence), and each non-employee director of First Federal, if a member of a
committee, receives $500 for each committee meeting attended. The Chairman of
the First Federal Board receives a fee of $850 for each board meeting attended.
Each member of the SouthFirst Board receives a fee of $250 for each board
meeting attended.
During fiscal 1996, SouthFirst also granted to each non-employee
director of SouthFirst an option to purchase 4,150 shares of Common Stock at an
exercise price of $14.00 per share. The options were granted under SouthFirst's
Stock Option and Incentive Plan and have a 10 year term. SouthFirst also
awarded 1,660 shares of Common Stock to each non-employee director of
SouthFirst. The shares were awarded under SouthFirst's Management Recognition
Plan "A" in the form of restricted stock (the "Restricted Stock"), which stock
vests at the rate of 20% per year, commencing on the first anniversary of the
date of grant. As of September 30, 1996, all of the Restricted Stock remained
unvested.
In addition, SouthFirst has adopted, by board resolution, a dividend
investment plan pursuant to which holders of SouthFirst's options to purchase
Common Stock and holders of Restricted Stock issued under SouthFirst's
Management Recognition Plans which remain subject to vesting requirements, are
paid an amount equal to the number of shares underlying stock options or the
number of shares of Restricted Stock held by them, as the case may be,
multiplied by the amount of dividends SouthFirst pays to the holders of its
Common Stock. As such, during fiscal 1996, each non-employee director was paid
a total of $10,375 with respect to the shares of Common Stock underlying
options held by him and a total of $4,150 with respect to the Restricted Stock
held by him as provided under the dividend investment plan. In addition, in
connection with the grant of Restricted Stock to SouthFirst's directors, each
non-employee director was paid a bonus of $15,458 to assist such director pay
the applicable federal tax due in connection with such grants.
Mr. Stroup and Mr. McArthur, each an executive officer and a director
of SouthFirst, also received awards of stock options and Restricted Stock. See
"-- Summary Compensation Table" and "-- Option Grants in Fiscal 1996."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
SouthFirst presently does not have a compensation committee because no
officers of SouthFirst receive any compensation for services to SouthFirst. All
officers of SouthFirst are compensated by First Federal solely for their
services to First Federal. In addition, directors are paid for attendance at
First Federal committee meetings, but employee members of committees are not
paid. Donald C. Stroup, President and Chief Executive Officer of SouthFirst and
First Federal, and Joe K. McArthur, Executive Vice President, Chief Operating
Officer, and Chief Financial Officer of First Federal, serve as members of the
Wage and Compensation Committee of First Federal. First Federal's Wages and
Compensation Committee is responsible for reviewing salaries and benefits of
directors, officers, and employees of First Federal. SouthFirst had no
"interlocking" relationships existing on or after the year ended September 30,
1996 in which (i) any executive officer is a member of the Board of
Directors/Trustees of another entity, one of whose executive officers is a
member of the First Federal Board, or where (ii) any executive officer is a
member of the compensation committee of another entity, one of whose executive
officers is a member of the First Federal Board.
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<PAGE> 88
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of May 12, 1997
with respect to the beneficial ownership of SouthFirst's common stock by (i)
each person known by SouthFirst to own beneficially more than five percent (5%)
of SouthFirst's common stock, (ii) each director of SouthFirst, (iii) each of
the Named Executive Officers and (iv) all directors and executive officers of
SouthFirst as a group. Unless otherwise indicated, each of the shareholders has
sole voting and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
Shares of
Common Stock Percent of
Beneficial Owner Beneficially Owned(1) Outstanding Shares
---------------- --------------------- ------------------
<S> <C> <C>
Paul A. Brown(2) 16,478 1.9%
Hobert Cook(3) 13,810 1.6
H. David Foote, Jr.(4) 8,490 1.0
John T. Robbs(5) 17,490 2.0
Allen Gray McMillan, III(6) 12,490 1.5
Charles R. Vawter, Jr.(7) 32,190 3.8
Donald C. Stroup(8) 41,750 4.9
Joe K. McArthur(9) 14,556 1.7
J. Malcomb Massey(10) 17,445 2.1
Jeffrey L. Gendell, et. al.(11) 62,600 7.4
All directors and
executive officers
as a group (8 persons)(12) 160,889 18.6%
</TABLE>
- -------------------
(1) "Beneficial Ownership" includes shares for which an individual,
directly or indirectly, has or shares voting or investment power or
both and also includes options which are exercisable within sixty days
of the date hereof. Beneficial ownership as reported in the above
table has been determined in accordance with Rule 13d-3 of the
Exchange Act. The percentages are based upon 847,600 shares
outstanding, except for certain parties who hold presently exercisable
options to purchase shares. The percentages for those parties holding
presently exercisable options are based upon the sum of 847,600 shares
plus the number of shares subject to presently exercisable options
held by them, as indicated in the following notes.
(2) Of the amount shown, 4,690 shares are owned jointly by Mr. Brown and
his wife, 3,000 shares are owned by his wife, 4,698 shares are held in
an individual retirement account, 830 shares are subject to presently
exercisable options and 1,660 shares represent restricted stock
granted under SouthFirst's Management Recognition Plan "A," 332 shares
of which are fully vested.
(3) Of the amount shown, 7,500 shares are owned jointly by Mr. Cook and
his wife, 500 shares are owned jointly by Mr. Cook and his son, 4,150
shares are subject to presently exercisable options and 1,660 shares
representing stock granted under SouthFirst's Management Recognition
Plan "A," all of which are fully vested.
(4) Of the amount shown, 3,000 shares are owned jointly by Mr. Foote and
his wife, 1,500 shares are held by Mr. Foote as custodian for each of
his two minor children, 830 shares are subject to presently
exercisable options and 1,660 shares represent restricted stock
granted under SouthFirst's Management Recognition Plan "A," 332 shares
of which are fully vested.
(5) Of the amount shown, 2,293 shares are held jointly by Mr. Robbs and
his wife, 3,662 shares are held in an Individual retirement account
for the benefit of Mr. Robb's wife, 5,000 shares are held jointly with
his father, 830 shares are subject to presently exercisable options
and 1,660 shares represent restricted stock granted under SouthFirst's
Management Recognition Plan "A," 332 shares of which are fully vested.
(6) Of the amount shown, 10,000 shares are held jointly by Mr. McMillan
and his wife, 830 shares are subject to presently exercisable options
and 1,660 shares represent restricted stock granted under SouthFirst's
Management Recognition Plan "A," 332 shares of which are fully vested.
(7) Of the amount shown, 28,500 shares are held jointly by Mr. Vawter and
his wife, 900 shares are held by Mr. Vawter as custodian for his two
minor children, 830 shares are subject to presently exercisable
options and 1,660 shares represent restricted stock granted under
SouthFirst's Management Recognition Plan "A," 332 shares of which are
fully vested.
(8) Of the amount shown, 14,100 shares are owned jointly by Mr. Stroup and
his wife, 3,000 shares are held jointly with Gwendolyn W. Abercrombie,
300 shares are held by one of Mr. Stroup's sons, 9,094 shares are held
in his account under SouthFirst's 401(k) plan, 2,781 shares are held
in his account under First Federal's ESOP, 4,150 shares are subject to
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<PAGE> 89
presently exercisable options and 8,300 shares represent restricted
stock granted under SouthFirst's Management Recognition Plans "A" and
"B," 1,660 shares of which are fully vested.
(9) Of the amount shown, 1,500 shares are owned jointly by Mr. McArthur
and his wife, 2,621 shares are held in his account under SouthFirst's
401(k) plan, 2,467 shares are held in his account under First
Federal's ESOP, 2,656 shares are subject to presently exercisable
options and 5,312 shares represent restricted stock granted under
SouthFirst's Management Recognition Plans "A" and "B," 1,062 shares of
which are fully vested.
(10) Represents 15,512 shares of restricted stock acquired pursuant to that
certain employment agreement between Mr. Massey and Benefit Financial,
vesting in equal increments over a period of 15 years beginning on
April 11, 1997 and 1,933 shares held in a profit sharing account.
(11) Of the amount shown, Jeffrey L. Gendell has shared voting power with
respect to 51,100 shares, Tontine Partners, L.P. ("TP") has shared
voting power with respect to 10,500 shares and Tontine Financial
Partners, L.P. ("TFP") has shared voting power with respect to 40,600
shares. Tontine Management, L.L.C., the general partner of TP and TFP,
has the power to direct the affairs of TP and TFP. Mr. Gendell is the
Managing Member of Tontine Management, L.L.C. and, in that capacity,
directs its operations. The business address of Mr. Gendell, TP and
TFP is 200 Park Avenue, Suite 3900, New York, New York 10166. The
foregoing information is based on a Schedule 13G dated April 28, 1997
filed by Mr. Gendell, TP and TFP. SouthFirst makes no representation
as to the accuracy or completeness of the information reported.
(12) Amount shown does not include the shares beneficially owned by Hobert
Cook who is currently serving on the SouthFirst and First Federal
Boards as a Director, Emeritus. Joe K. McArthur and Donald C. Stroup
are the only executive officers of SouthFirst.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No directors, executive officers, or immediate family members of such
individuals were engaged in transactions with SouthFirst (other than loans)
involving more than $60,000 during the nine month period ended June 30, 1997 or
the year ended September 30, 1996. First Federal, like many financial
institutions, has followed a policy of granting various types of loans to
officers, directors and employees. The loans have been made in the ordinary
course of business and on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with First Federal's other customers, and do not involve more than
the normal risk of collectibility, nor present other unfavorable features. All
loans by First Federal to its officers and executive officers are subject to
OTS regulations restricting loans and other transactions with affiliated
persons of First Federal. In addition, all future credit transactions with such
directors, officers and related interests of SouthFirst and First Federal will
be on substantially the same terms as, and following credit underwriting
procedures that are not less stringent than, those prevailing at the time for
comparable transactions with unaffiliated persons and must be approved by a
majority of the directors of SouthFirst, including the majority of the
disinterested directors. At June 30, 1997, the aggregate of all loans by First
Federal to its officers, directors, and related interests was $1,126,857.
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<PAGE> 90
SOUTHFIRST -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is designed to provide a better
understanding of the major factors which affected SouthFirst's results of
operations and financial condition for the referenced periods. Such discussion
and analysis should be read in conjunction with the Financial Statements of
SouthFirst included elsewhere in this Joint Proxy Statement/Prospectus.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
An integral part of the funds management of First Federal is to
maintain a reasonably balanced position between interest rate sensitive assets
and liabilities. First Federal's Asset/Liability Committee ("ALCO") is charged
with the responsibility of managing, to the degree prudently possible, its
exposure to "interest rate risk," while attempting to provide a stable and
steadily increasing flow of depositors and borrowers and to seek earnings
enhancement opportunities. An asset or liability is said to be interest rate
sensitive within a specific period if it will mature or reprice within that
period. First Federal measures its interest rate risk as the ratio of
cumulative interest sensitivity gap to total interest earning assets ("ratio").
The ratio is defined as the difference between the amount of interest-earning
assets maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time
period, divided by the total interest earning assets. The ratio is considered
positive when the amount of interest rate sensitive assets exceeds the amount
of interest sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative ratio would adversely affect net interest income, while a positive
ratio would result in an increase in net interest income. Conversely, during a
period of falling interest rates, a negative ratio would result in an increase
in net interest income and a positive ratio would adversely affect net interest
income. Due to the nature of First Federal's balance sheet structure and its
use of the market approach to pricing liabilities, First Federal's management
and the First Federal Board recognize that achieving a perfectly matched gap
position in any given time frame would be extremely rare. At June 30, 1997,
First Federal had a negative one-year cumulative ratio of 11.88% and a negative
five-year cumulative ratio of 2.25%, as a result of which its net interest
income could be adversely affected by rising interest rates and positively
affected by falling interest rates. At September 30, 1996, First Federal had a
negative one-year cumulative ratio of 7.76% and a positive five-year cumulative
ratio of 1.16%. During the stable interest rate environment of 1996 and 1997,
First Federal's interest rate spread remained fairly constant. Consistent with
a positive ratio during the increasing interest rate environment experienced in
late 1994 and 1995, when interest rates increased further and more rapidly on
interest-bearing liabilities than on interest-earning assets, First Federal
experienced a decrease in its interest rate spread. Conversely, consistent with
a negative ratio, during the declining interest rate environment experienced
from 1991 through late 1994, when interest rates declined further and more
rapidly on interest-bearing liabilities than on interest-earning assets, First
Federal experienced an increase in its interest rate spread.
There are other factors that may affect the interest rate sensitivity
of First Federal's assets and liabilities. These factors generally are
difficult to quantify but can have a significant impact on First Federal when
interest rates change. Such factors include features in adjustable rate loans
that limit the changes in interest rates on a short-term basis and over the
life of the loan. First Federal's portfolio of one-to-four family residential
mortgage loans includes $12.4 million and $10.0 million (16% of First Federal's
total loan portfolio) of adjustable rate loans at June 30, 1997 and September
30, 1996, respectively. These loans have
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<PAGE> 91
restrictions limiting interest rate changes to 1.0% or 2.0% per year and 6.0%
over the life of the loan. In a rapidly declining or rising interest rate
environment, these restrictions could have a material effect on interest income
by slowing the overall response of the portfolio to market movements. ALCO
utilizes the "Asset and Liability Management Report" prepared by Morgan Keegan
& Company, Inc. (the "Morgan Keegan Analysis") in order to assist First Federal
in determining First Federal's gap and interest rate position. Through use of
the Morgan Keegan Analysis, ALCO analyzed the effect of an increase or decrease
of up to 400 basis points on the market value of First Federal's portfolio
equity ("MVPE") at June 30, 1997 and September 30, 1996. At a 400 basis point
increase, First Federal's MVPE increased approximately $108,000 and $107,000 at
June 30, 1997 and September 30, 1996, respectively and, at a 400 basis point
decrease, First Federal's MVPE decreased approximately $116,000 and $146,000 at
June 30, 1997 and September 30, 1996, respectively. Management determined that
these changes in MVPE were acceptable.
The following table sets forth information regarding the projected
maturities and repricing of the major asset and liability categories of First
Federal as of June 30, 1997 and September 30, 1996. Maturity and repricing
dates have been projected by applying the assumptions set forth below as to
contractual maturity and repricing dates. Classifications of items in the table
are different from those presented in other tables and the financial statements
and accompanying notes included therein.
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<PAGE> 92
Interest Rate Sensitivity Gap
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------------------------------------------------------------
One
year One to Two to Three to Four to Over
or less two years three years four years five years five years Total
------- --------- ----------- ---------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 38,737 $ 5,325 $ 4,601 $ 3,970 $3,420 $12,834 $68,887
All other loans 737 809 889 477 2,912
Collateralized mortgage 5,925 586 50 6,561
obligations
Mortgage-backed securities 3,387 205 220 237 254 542 4,845
Investments(1)
- 154 - - 1,500 4,227 5,881
-------- ------- ------- ------- ------ ------- -------
Total interest earnings $ 48,786 $ 7,079 $ 5,760 $ 4,684 $5,174 $17,603 $89,086
======== ======= ======= ======= ====== ======= =======
Interest-bearing liabilities:
Deposits 42,328 5,196 5,192 1,140 1,140 7,546 62,542
Borrowed funds 17,049 630 286 271 257 18,493
-------- ------- ------- ------- ------ ------- -------
Total interest bearing $ 59,377 $ 5,826 $ 5,478 $ 1,411 $1,397 $ 7,546 $81,035
======== ======= ======= ======= ====== ======= =======
Interest sensitivity gap $(10,591) $ 1,253 $ 282 $ 3,273 $3,777 $10,097 $ 7,897
Cumulative interest sensitivity $(10,591) $(9,338) $(9,056) $(5,783) $(2,006) $ 8,051 $ 7,897
gap
Ratio of cumulative interest
Sensitivity gap to total
interest earning assets (11.88)% (10.48)% (10.16)% (6.49)% (2.25)% 9.05% 9.05%
Ratio of cumulative interest
Sensitivity gap to total (10.89)% (9.60)% (9.31)% (5.94)% (2.06)% 8.28% 8.28%
assets of $97,283
<CAPTION>
At September 30, 1996
-------------------------------------------------------------------------------------
One
year One to Two to Three to Four to Over
Or less two years three years four years five years five years Total
------- --------- ----------- ---------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 29,477 $ 5,319 $ 4,600 $ 3,971 $3,423 $12,784 $59,573
All other loans 714 786 864 464 -- -- 2,829
Collateralized mortgage 6,705 1,080 93 -- -- -- 7,878
obligations
Mortgage-backed securities 4,444 232 249 267 288 612 6,091
Investments(1)
3,757 1,761 -- -- -- -- --
Total interest earnings $ 45,097 $ 9,178 $ 5,806 $ 4,702 $3,711 $15,697 $84,191
======== ======= ======= ======= ====== ======= =======
Interest-bearing liabilities:
Deposits 42,225 5,538 5,534 1,631 1,631 7,535 64,095
Borrowed funds 9,401 679 308 292 277 -- 10,958
-------- ------- ------- ------- ------ ------- -------
Total interest bearing $ 51,627 $ 6,217 $ 5,842 $ 1,923 $1,908 $ 7,535 $75,053
======== ======= ======= ======= ====== ======= =======
Interest sensitivity gap $ (6,529) $ 2,961 $ (36) $ 2,779 $1,802 $ 8,162 $ 9,138
Cumulative interest sensitivity $ (6,529) $(3,569) $(3,605) $ (826) $ 976 $ 9,138 $ 9,138
Ratio of cumulative interest
Sensitivity gap to total
interest earning assets (7.76)% (4.24)% (4.28)% (0.98)% 1.16% 10.85% 10.85%
Ratio of cumulative interest
Sensitivity gap to total (7.23)% (3.95)% (3.99)% (0.91)% 1.08% 10.12% 10.12%
assets of $97,283
</TABLE>
- ---------------------
(1) Includes investments in overnight deposits.
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<PAGE> 93
The Morgan Keegan Analysis for 1997 and 1996 and the preceding table
was prepared based upon contractual terms of the asset or liability and with
the following assumptions regarding prepayment of loans, CMOs and
mortgage-backed securities and decay rates of deposits. These prepayment and
decay rate assumptions are management's estimates based on expectations of
future interest rates. Fixed rate mortgage loans are assumed to prepay at rates
ranging from 12% to 18%. Adjustable rate loans, CMOs and mortgage-backed
securities are presented in the period in which they next reprice. All other
loans (principally consumer installment loans) are presented at their
contractual maturities. Fixed rate CMOs are assumed to prepay at rates ranging
from 12% to 18%. The decay rates for money market demand accounts are assumed
to be 33% for the first year and 18% thereafter. The decay rates for passbook
accounts are assumed to be 56% for the first year and 10% thereafter and the
decay rates for NOW accounts are assumed to be 18% for the first year and 33%
thereafter. Certificate accounts and borrowed funds are presented at their
contractual maturities. Certain shortcomings are inherent in the method of
analysis presented in the table above. Although certain assets and liabilities
may have similar maturities or periods of repricing, they may react in
different degrees to changes in the market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while rates on other types of assets and liabilities
may lag behind changes in market interest rates. Certain assets, such as ARMs,
generally have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels would cause significant
deviations in the table. Additionally, an increased credit risk may result if
the ability of many borrowers to service their debt decreases in the event of
an interest rate increase. A majority of the adjustable-rate loans in First
Federal's portfolio contain conditions which restrict the periodic change in
interest rates. See "Business of First Federal -- Residential Lending."
On October 6, 1994, the Financial Accounting Standards Board issued
Financial Accounting Statement No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value Financial Investments" ("FAS 119"). FAS 119 amends
FAS 105 and FAS 107 and provides specific disclosure requirements for
derivative financial instruments. FAS 119 is effective for financial statements
issued for fiscal years ending after December 15, 1994, except for entities
with less than $150 million in total assets in the current statement of
financial position for which the effective date is for fiscal years ending
after December 15, 1995. SouthFirst has not entered into derivative products.
Therefore, FAS 119 does not require additional disclosures in the financial
statements.
INTEREST RATE RISK STRATEGY
First Federal has employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations by providing a better
match between the interest rate sensitivity of its assets and liabilities.
First Federal's strategies are intended to stabilize net interest income for
the long term by protecting its interest rate spread against decreases and
increases in interest rates. To offset the interest rate risk associated with
holding a substantial amount of fixed-rate loans and having a predominantly
short-term certificate of deposit base, First Federal maintains a portfolio of
residential adjustable-rate mortgage loans that reprice in less than one year
equal to $3,049,824 at June 30, 1997 and $10,061,000 at September 30, 1996.
First Federal also sells a significant portion of its fixed-rate loan
originations with maturities more than 15 years in the secondary markets, and
directs excess cash flow into short-term and adjustable-rate investment
securities. Recent diversification into more interest-sensitive consumer loans
and in construction loans in the Birmingham area has also served to reduce
First Federal's interest-rate risk exposure. First Federal has also
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<PAGE> 94
reduced the interest-rate risk through the use of an increasing level of
fixed-rate FHLB advances, which have effectively lengthened the
term-to-maturity of liabilities.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the costs of funds and operating
overhead, and to the extent loans and other assets bear variable rates, the
yields on such assets. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on the
performance of a financial institution than the effects of general levels of
inflation. Although interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services, increases
in inflation generally have resulted in increased interest rates. In addition,
inflation affects a financial institution's cost of goods and services
purchased, the cost of salaries and benefits, occupancy expense, and similar
items. Inflation and related increases in interest rates generally decrease the
market value of investments and loans held and may adversely affect liquidity,
earnings, and shareholders' equity. Mortgage originations and refinancings tend
to slow as interest rates increase and would likely reduce First Federal's
earnings from such activities. Further, First Federal's income from the sale of
residential mortgage loans in the secondary market would also likely decrease
if interest rates increased.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to First
Federal's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. Average balances are derived from
month-end-balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
The table also presents information for the periods indicated with
respect to the difference between the average yield earned on interest-earning
assets and average rate paid on interest-bearing liabilities, or "interest rate
spread," which savings institutions have traditionally used as an indicator of
profitability. Another indicator of an institution's net interest income is its
"net yield on total interest-earning assets," which is its net interest income
divided by the average balance of interest-earning assets. Net interest income
is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income.
-87-
<PAGE> 95
Average Balance, Interest and Average Yields and Rates
<TABLE>
<CAPTION>
Nine months ended June 30,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Total investment securities $19,023,755 $1,029,998 7.22% $25,626,435 $ 1,299,792 6.76%
Loans receivable 68,011,074 4,241,169 8.31% 57,685,586 3,587,803 8.24%
---------- ---------- ---- ---------- ----------- ----
Total interest earning assets 87,034,829 5,271,167 8.00% 83,312,021 4,867,594 7.97%
Allowance for loan losses (264,927) (261,126)
Cash and amounts due from
depository institutions 3,829,610 1,370,870
Premises and equipment 1,817,879 1,644,287
Foreclosed real estate 70,096 28,886
Accrued interest receivable 532,735 464,228
Other assets 1,025,117 316,297
Investments in Affiliates 199,709 238,000
----------- -----------
Total assets $94,245,048 $87,113,465
=========== ===========
Interest bearing liabilities:
Deposits:
NOW accounts $6,592,839 $ 160,310 3.24% $ 6,622,344 $ 179,847 3.62%
Money market demand 468,498 9,004 2.56% 475,852 8,865 2.50%
Passbook savings 9,658,132 189,075 2.61% 9,691,428 209,748 2.88%
Certificates of deposit, other than
Jumbos 43,862,578 1,695,173 5.15% 44,164,769 1,777,691 5.40%
Jumbos 1,508,163 65,253 5.77% 1,232,318 43,280 4.70%
----------- ---------- ---- ----------- ----------- ----
<CAPTION>
Year ended September 30,
--------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------- -------- ---- ------- -------- ---- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Total investment securities $24,717,374 $1,732,093 7.01% $29,559,792 $1,909,814 6.46% $ 13,282,131 $1,688,142 5.40%
Loans receivable 58,902,758 4,888,183 8.30% 50,969,731 4,291,653 8.42% 47,280,290 3,982,406 8.42%
----------- ---------- ---- ----------- ---------- ----- ------------ ---------- ----
Total interest earning assets 83,620,132 6,620,276 7.92% 80,529,523 6,201,467 7.70% 78,562,421 5,670,548 7.22%
Allowance for loan losses (259,024) (255,771) (230,066)
Cash and amounts due from
depository institutions 1,752,025 765,359 672,451
Premises and equipment 1,686,613 1,328,517 1,334,963
Foreclosed real estate 26,479 19,257 119,156
Accrued interest receivable 478,798 454,080 432,934
Other assets 344,974 576,294 563,832
Investments in Affiliates 224,635 -- -
----------- ---------- ------------
Total assets $87,882,937 $83,417,259 $ 81,455,691
=========== =========== ============
Interest bearing liabilities:
Deposits:
NOW accounts $ 6,634,502 $ 247,025 3.72% $ 6,819,336 $ 241,954 3.55% $ 7,141,205 $ 236,088 3.31%
Money market demand 474,725 5,152 1.09% 506,936 6,228 1.23% 618,578 6,880 1.11%
Passbook savings 9,724,844 279,365 2.87% 11,180,900 300,705 2.69% 11,119,725 300,496 2.70%
Certificates of deposit, other than
Jumbos 44,264,844 2,717,380 6.13% 43,555,875 2,173,867 4.99% 42,722,089 1,845,532 4.04%
Jumbos 1,319,337 57,115 4.33% 1,130,134 37,636 3.33% 550,000 26,528 4.82%
----------- ---------- ---- ----------- ---------- ----- ------------ ---------- ----
</TABLE>
-88-
<PAGE> 96
Average Balance, Interest and Average Yields and Rates
<TABLE>
<CAPTION>
Nine months ended June 30,
-----------------------------------------------------------------
1997 1996
-------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Total interest-bearing
deposits $62,090,210 $2,118,815 4.55% $62,186,711 $2,219,431 4.76%
-
Borrowed funds 15,403,351 676,922 5.86% 8,371,025 380,585 6.06%
----------- ----------- ---- ----------- ---------- ----
Total interest-bearing
liabilities 77,493,561 2,795,737 4.81% 70,557,736 2,600,016 4.91%
Non-interest bearing demand
deposits 1,406,270 1,191,689
Advances by borrowers for
property taxes 292,297 310,153
Accrued interest payable 615,161 594,200
Income taxes payable 602,666 491,586
Accrued expenses and other
liabilities 690,465 161,739
----------- ------------
Total liabilities 81,101,292 73,307,103
Stockholders' equity 13,144,628 13,806,361
----------- -----------
Total liabilities
& stockholders'
equity $94,245,048 $87,113,464
=========== ===========
Net interest income $3,300,573 $3,175,315
========== ==========
Interest rate spread 3.19% 3.06%
====== ======
Net yield on total interest earning
assets 3.79% 3.66%
====== ======
Average interest earning assets to
average total interest-bearing
liabilities ratio 112.31% 118.08%
====== ======
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ---------------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-bearing
deposits $62,417,609 $3,006,037 4.82% $63,193,181 $2,760,390 4.37% $65,151,597 $2,415,524 3.71%
Borrowed funds 8,978,744 553,372 6.16% 5,368,525 337,375 6.28% 7,056,214 416,806 5.91%
----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
Total interest-bearing
liabilities 71,396,353 3,559,409 4.99% 68,561,706 3,097,765 4.52% 72,207,811 $2,832,330 3.92%
Non-interest
bearing demand
deposits 1,222,123 1,239,805 1,039,327
Advances by borrowers for
property taxes 328,858 337,710 392,135
Accrued interest payable 655,018 355,538 384,785
Income taxes payable 463,812 430,629 58,280
Accrued expenses and other
liabilities 238,643 162,070 131,048
----------- ----------- -----------
Total liabilities 74,304,807 71,087,458 74,213,386
Stockholders' equity 13,578,131 12,386,160 7,242,305
----------- ----------- -----------
Total liabilities
& stockholders'
equity $87,882,937 $83,473,618 $81,455,691
=========== =========== ===========
Net interest income $3,060,867 $3,103,702 $2,838,218
========== ========== ==========
Interest rate spread 2.93% 3.18% 3.30%
====== ====== ======
Net yield on total
interest earning
assets 3.66% 3.85% 3.61%
====== ====== ======
Average interest
earning assets to
average total
interest-bearing
liabilities ratio 117.12% 117.46% 108.80%
====== ====== ======
</TABLE>
-89-
<PAGE> 97
FINANCIAL CONDITION
INVESTMENT SECURITIES
Investment securities held to maturity were $154,000, $154,000 and
$13,266,000 at June 30, 1997, September 30, 1996 and September 30, 1995,
respectively. The decline of $13,112,000 (98.8%) in 1996 was due primarily to
the reclassification, on December 31, 1995, of approximately $11,959,000 of the
Collateralized Mortgage Obligations ("CMO's") to First Federal's available for
sale portfolio as a result of the adoption of the Financial Accounting Standards
Board's Statement No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). The investment securities available for sale portfolio
totaled $22,109,364 and $21,793,000 at June 30, 1997 and September 30, 1996,
respectively.
The composition of First Federal's total investment securities portfolio
reflects First Federal's former investment strategy to provide acceptable levels
of interest income from portfolio yields while maintaining an appropriate level
of liquidity to assist with controlling First Federal's interest rate position.
In previous years, First Federal invested primarily in investment grade CMOs and
MBS because of their liquidity, credit quality and yield characteristics. The
yields, values, and duration of such securities generally vary with the interest
rates, prepayment levels, and general economic conditions; and, as a result, the
values of such instruments may be more volatile than other instruments with
similar maturities. Such securities also may have longer stated maturities than
other securities, which may result in further price volatility. First Federal
made purchases of CMOs amounting to $3,329,000 in 1994, along with purchases of
MBS amounting to $204,000 in 1994. No purchases of CMOs or MBS were made in
1995, 1996 and 1997. With First Federal's purchase of the construction loan
portfolio of another Alabama thrift institution in April of 1994, First Federal
revised its investment strategy, deciding to curtail its purchases of CMOs and
MBS and utilize the principal repayments on these securities to fund
construction loans. Principal repayments on both CMOs and MBS during the first
nine months of 1997 and the years ended September 30, 1996 and 1995 were
$1,360,000, $7,247,000 and $2,806,000, respectively. In 1997, First Federal
invested $2,000,000 in FHLB agencies. In 1996, First Federal purchased stock in
other financial institutions valued at $570,000, invested $500,000 in a mutual
fund, and invested $3,200,000 in FHLB agencies.
The following table indicates the amortized cost of the portfolio of
investment securities held to maturity at June 30, 1997 and at the end of the
last three years:
<TABLE>
<CAPTION>
Amortized Cost
June 30, September 30,
-------- -------------
1997 1996 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Investment Securities Held to Maturity:
U.S. Government agency................................. $154 $154 $ 507 $ 1,005
Mortgage-backed securities............................. -- -- -- 10,047
Collateralized mortgage obligations.................... -- -- 12,759 13,740
Other.................................................. -- -- -- 907
---- ---- ------- -------
Total investment securities
held to maturity............................... $154 $154 $13,266 $25,699
==== ==== ======= =======
</TABLE>
-90-
<PAGE> 98
The following table indicates the fair value of the portfolio of
investment securities available for sale at June 30, 1997, September 30, 1996
and September 30, 1995:
<TABLE>
<CAPTION>
Fair Value
June 30, September 30,
-------- -------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Investment Securities Available for Sale:
U.S. Government agency............................................ $ 2,003 $ 4,697 $ 1,502
Mortgage-backed securities........................................ 5,008 6,091 8,293
Collateralized mortgage obligations............................... 6,403 7,878 --
Other ............................................................ 3,720 3,127 1,927
------- ------- -------
Total investment securities available for sale................ $17,134 $21,793 $11,722
======= ======= =======
</TABLE>
All CMOs are subjected to the Federal Financial Institutions Examination
Council's ("FFIEC") "Stress Test" on a monthly basis. Securities are tested as
to their average life, average life sensitivity, and price volatility. Because
all CMOs passed their most recent stress test, First Federal had none that were
considered high risk at June 30, 1997, September 30, 1996 or September 30, 1995.
Additionally, no MBS in the investment portfolio are inverse floaters, or
interest only ("I/Os") or principal only ("P/Os") securities; and, therefore,
are not considered high risk by the FFIEC.
At June 30, 1997 and September 30, 1996, First Federal owned CMOs totaling
$6,403,000 and $7,878,000, respectively. These issues were all backed by federal
agency guaranteed mortgages except for three issues, in the amount of $358,000
which are privately issued mortgage pass-through certificates. Four issues
totaling $1,259,000 are fixed rate; the remainder are variable. Prior to
purchase, SouthFirst applies the FFIEC "Stress Test" and looks at both
increasing and decreasing prepayment speeds. CMOs are purchased based on
SouthFirst's evaluation of the CMOs at these extremes.
The MBS portfolio, totaling $5,008,000 and $6,091,000 at June 30, 1997 and
September 30, 1996, respectively, is a mixture of fixed rate mortgages
($1,712,382 as of June 30, 1997) and ARMs ($3,295,618 as of June 30, 1997). At
the time of purchase, SouthFirst looks at various prepayment speeds and makes
the purchase based on the ability to accept the yield and average life based on
both increasing and decreasing prepayment speeds.
The following table presents the contractual maturities and weighted
average yields of investment securities available for sale at June 30, 1997:
-91-
<PAGE> 99
<TABLE>
<CAPTION>
Maturities of
Investment Securities
After one After five
Within through through After
one year five years ten years ten years
-------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government agencies, excluding
mortgage-backed securities $ -- $ 1,504 $ 499 $ --
Mortgage-backed securities 101 138 229 4,381
Collateralized mortgage obligations -- 592 591 5,379
Other securities -- -- -- 3,720
---- -------- -------- --------
Total investment securities
available for sale $101 $ 2,234 $ 1,319 $ 13,480
==== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Weighted Average Yields(1)
After one After five
Within through through After
one year five years ten years ten years
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Government agencies, excluding
mortgage-backed securities -- 7.08% 7.00% --
Mortgage-backed securities 8.07% 8.68% 7.73% 7.61%
Collateralized mortgage obligations -- 6.67% 6.48% 6.15%
Other securities -- -- -- 8.94%
---- ---- ---- ----
Total weighted average yield 8.07% 7.07% 6.89% 7.17%
==== ==== ==== ====
</TABLE>
- -------------------
(1) None of SouthFirst's investment securities are tax exempt.
Investment securities held to maturity at June 30, 1997 have contractual
maturities within one year.
The maturities for CMOs and MBS presented above represent contractual
maturities of such securities. Due to the nature of these securities, the timing
and amount of principal repayments is generally unpredictable. However, assuming
current prepayment rates and normal, required principal repayments, the
following table sets forth certain information regarding the expected principal
payments, carrying values, fair values, and weighted average yields of
SouthFirst's CMOs and MBS at June 30, 1997.
-92-
<PAGE> 100
<TABLE>
<CAPTION>
Principal payments expected during the year
ended June 30, At June 30, 1997
--------------------------------------------------- ---------------------------------
(Dollar amounts in thousands)
Weighted
Amortized Fair Average
1998 1999 2000 2001 2002 Thereafter Cost Value Yield
---- ---- ---- ---- ---- ---------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Collateralized
mortgage
obligations $599 $549 $504 $462 $423 $4,026 $6,562 $6,403 6.20%
Mortgage-backed
securities $430 $395 $363 $334 $307 $3,021 $4,849 $5,008 7.65%
</TABLE>
LOANS
Total loans of $71,798,000 at June 30, 1997, reflected an increase of
$9,145,000 (14.6%) compared to total loans of $62,653,000 at September 30, 1996.
Total loans of $62,653,000 at September 30, 1996, reflected an increase of
$8,854,000 (16.5%) compared to total loans of $53,799,000 at September 30, 1995.
Total loans for year-end 1995 also showed an increase of $3,467,000 (6.9%) over
the September 30, 1994 level of $50,332,000. SouthFirst has experienced strong
loan demand in its one-to-four family construction loan portfolio since
SouthFirst's purchase of the construction loan portfolio and the opening of a
loan production office in 1994. See "Business -- Construction Lending."
One-to-four family real estate mortgage loans increased $1,604,000 (4%)
from September 30, 1994 to September 30, 1995. The increase from September 30,
1995 to September 30, 1996 was $6,257,000 (15%). The increase from September 30,
1996 to June 30, 1997 was $3,531,000 (7%). The Company aggressively pursues real
estate mortgage loans within its own market area. In addition to originating
mortgage loans for its own portfolio, SouthFirst also actively originates
residential mortgage loans which are sold in the secondary market, with
servicing released. SouthFirst sells a significant portion of all residential
mortgage loans with terms greater than 15 years. For the most part, such sales
are composed of residential mortgage loans with terms of 30 years. Proceeds from
loan sales were $2,454,964, $3,589,602, $4,360,000, $1,034,000, and $1,593,000
for the first nine months of 1997 and 1996 and for the years ended September 30,
1996, 1995, and 1994, respectively. See "Financial Statements and Supplementary
Data -- Consolidated Statements of Cash Flows." Had First Federal not sold
residential mortgage loans over the past several years, the one-to-four family
real estate mortgage loan portfolio would have increased by a larger margin than
the percentage indicated above. The relatively stable interest rate market for
much of 1997 and 1996 resulted in an increase in volume of loans sold during
these periods. The following table presents the composition of the loan
portfolio for each of the past five and one-half years:
-93-
<PAGE> 101
Loan Portfolio Composition
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------- ------------------------------------------------------------
1997 1996 1995 1994
------------------- ------ ------ ------
(Dollar amounts in thousands)
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
loans:
One-to-four family $51,381 71.89% $47,850 76.89% $41,593 77.70% $39,989 79.82%
Multi-family and
commercial 388 0.54 485 0.78 535 1.00 585 1.17
Construction loans 24,920 34.85 17,717 28.39 13,495 25.21 10,715 21.39
Savings account loans 807 1.13 753 1.21 873 1.63 793 1.48
Installment loans 2,093 2.93 2,129 3.41 2,736 5.11 3,163 6.31
------- ----- ------- ------ ------- ------ ------- -----
Total loans $79,589 $68,934 $59,232 $55,191
======= ======= ======= =======
Less:
Loans in process (7,550) (10.56) (6,064) (9.93) (5,243) (9.79) $(4,670) (9.32)
Discounts and other, net (242) (0.34) (217) (0.35) (190) (0.35) (189) (0.38)
Allowance for loan
losses: (285) (0.40) (251) (0.40) (266) (0.50) (231) (0.46)
------- ------ ------- ------ ------- ------ ------- ------
Total loans, net $71,512 100.00% $62,402 100.00% $53,533 100.00% $50,101 100.00%
======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
At September 30,
---------------------------------
1993 1992
------ -----
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
Real estate mortgage
loans:
One-to-four family $40,291 90.66% $41,917 91.42%
Multi-family and
commercial 549 1.24 582 1.27
Construction loans 20 0.05 -- --
Savings account loans 934 2.10 957 2.09
Installment loans 3,049 6.86 2,797 6.10
------- ----- ------- -----
Total loans $44,843 $46,253
======= =======
Less:
Loans in process $ (20) (0.05) $ -- --
Discounts and other, net (193) (0.43) (229) (0.50)
Allowance for loan
losses: (189) (0,43) (172) (0.38)
------- ------ ------- ------
Total loans, net $44,441 100.00% $45,852 100.00%
======= ====== ======= ======
</TABLE>
The following table shows the maturity of First Federal's loan portfolio at
June 30, 1997, based upon contractual maturity dates. Demand loans, loans having
no schedule of repayment and no stated maturity, and overdrafts are reflected as
due during the nine months ended June 30, 1997. The table below does not include
an estimate of prepayments, which significantly shortens the average life of all
mortgage loans and will cause First Federal's actual repayment to differ from
that shown below.
-94-
<PAGE> 102
Loan Maturities
<TABLE>
<CAPTION>
Due during the year
ending June 30,
--------------------------
Due after Due after Due After Due after
1998 1999 2000 3-5 years 5-10 years 10-15 years 15 years Total
---- ---- ---- --------- ---------- ----------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans $ 2,167 $ 2,436 $ 2,633 $ 5,923 $19,552 $ 9,092 $ 8,908 $50,711
Construction loans(1) 18,175 - - - - - - 18,175
All other loans 737 809 1,366 - - - - 2,912
------- ------- ------- -------- ------- ------- ------- -------
Total $21,079 $ 3,245 $ 3,999 $ 5,923 $19,552 $ 9,092 $ 8,908 $71,798
======= ======= ======= ======== ======= ======= ======= =======
</TABLE>
- --------------------
(1) The maturity period for construction loans is typically one year. If the
home is not sold at the maturity date, however, the loan may be extended
for an additional six months; provided, the builder restructures the loan
to provide for principal reduction or finds permanent financing that will
pay off the construction loan.
The following tables set forth at June 30, 1997, the dollar amount of loans
due after June 30, 1997 based upon whether such loans have fixed interest rates
or adjustable interest rates:
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans $55,806 $12,418 $68,224
Commercial loans 388 -- 388
Savings and installments loans 2,900 -- 2,900
------- ------- -------
Total $59,094 $12,418 $71,512
======= ======= =======
</TABLE>
The following table sets forth First Federal's loan originations, sales and
principal repayments for the periods indicated:
<TABLE>
<CAPTION>
Nine Months ended June 30, Year ended September 30,
-------------------------- ---------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loan Originations:
Real estate mortgage
and construction loans $39,519 $37,298 $46,096 $28,368 $25,435
All other loans 2,759 802 1,125 1,648 2,162
------- ------- ------- ------- -------
Total 42,278 38,100 47,221 30,016 27,597
======= ======= ======= ======= =======
Portfolio Loan Purchases:
Real estate mortgage loans -- -- -- 1,349 5,360
======= ======= ======= ======= =======
Portfolio Loan Sales Proceeds:
Real estate mortgage loans 2,455 3,590 4,360 1,034 1,593
======= ======= ======= ======= =======
Principal Repayments:
Real estate mortgage
and construction loans 25,397 25,476 34,928 25,227 18,245
All other loans 2,776 1,955 399 1,355 2,244
------- ------- ------- ------- -------
Total $28,173 $27,431 $35,327 $26,582 $20,489
======= ======= ======= ======= =======
</TABLE>
-95-
<PAGE> 103
ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS
The performance of loans is evaluated primarily on the basis of a review of
each customer relationship over a period of time and the judgment of lending
officers as to the ability of borrowers to meet the repayment terms of loans. If
there is reasonable doubt as to the repayment of a loan in accordance with the
agreed terms, the loan may be placed on a nonaccrual basis pending the sale of
any collateral or a determination as to whether sources of repayment exist.
Generally, delinquency of 90 days or more creates reasonable doubt as to
repayment. This action may be taken even though the financial condition of the
borrower or the collateral may be sufficient ultimately to reduce or satisfy the
obligation. Generally, when a loan is placed on a nonaccrual basis, all payments
are applied to reduce principal to the extent necessary to eliminate doubt as to
the repayment of the loan. Any interest income on a nonaccrual loan is
recognized only on a cash basis. See "--Nonperforming Assets."
Lending officers are responsible for the ongoing review and administration
of each particular loan. As such, they make the initial identification of loans
which present some difficulty in collection or where circumstances indicate that
the probability of loss exists. The responsibilities of the lending officers
include the collection effort on a delinquent loan. Senior management and the
First Federal Board are informed of the status of delinquent loans on a monthly
basis. Senior management reviews the allowance for loan losses and makes
recommendations to the First Federal Board as to loan charge-offs on a monthly
basis.
At June 30, 1997, September 30, 1996 and September 30, 1995, loans
accounted for on a nonaccrual basis were approximately $152,000, $203,000 and
$82,000, respectively, or 0.21%, 0.32% and 0.15% of the total loans outstanding,
net of unearned income. The balances of accruing loans past due 90 days or more
as to principal and interest payments were $209,000, $343,000 and $219,000 at
June 30, 1997, September 30, 1996 and September 30, 1995, respectively.
The allowance for loan losses represents management's assessment of the
risk associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for loan losses and the appropriate provision required to
maintain a level considered adequate to absorb anticipated loan losses. In
assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans in the portfolio. Management also considers such factors as
First Federal's historical loan loss experience, the level, severity, and trend
of criticized assets, the distribution of loans by risk class, and various
qualitative factors such as current and anticipated economic conditions.
First Federal began construction lending activities in March of 1994. As of
June 30, 1997, First Federal has not experienced significant loss on the
construction loan portfolio. Since these lending activities are fairly new to
First Federal, First Federal does not have the same historical data available
for construction loans as for other loans. Due to the concentration of these
loans, a default by certain construction loan borrowers or other financial
difficulty could result in a significant addition to the allowance for loan
losses.
While it is First Federal's policy to charge off loans in the period in
which a loss is considered probable, there are additional risks of future losses
which cannot be quantified precisely or attributed to
-96-
<PAGE> 104
particular loans or classes of loans. Because these risks include the state of
the economy, management's judgment as to the adequacy of the allowance is
necessarily approximate and imprecise.
In assessing the adequacy of the allowance, management relies predominately
on its ongoing review of the loan portfolio, which is undertaken both to
ascertain whether there are probable losses which must be charged off and to
assess the risk characteristics of the portfolio in the aggregate. This review
takes into consideration the judgments of the responsible lending officers,
senior management and those of bank regulatory agencies that review the loan
portfolio as part of First Federal's examination process. Specific percentages
are allocated to each loan type. Management recognizes that there is more risk
traditionally associated with commercial and consumer lending as compared to
real estate mortgage lending; as such, a greater allocation is made for
commercial and consumer loans than real estate mortgage loans. While all
information available is used by management to recognize losses in the loan
portfolio, there can be no assurances that future additions to the allowance
will not be necessary. First Federal's Board of Directors reviews the
assessments of management in determining the adequacy of the allowance for loan
losses. Generally, the only loans, including construction loans, which are
classified are loans which are greater than 90 days delinquent. However, the
Board of Directors may also classify loans less than 90 days delinquent should
such classification be considered necessary.
First Federal's allowance for loan losses is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the allowance for loan loss
reserves and the size of the loan loss reserve in comparison to a group of peer
banks identified by the regulators. During its routine examinations of banks,
the OTS has, from time to time, required additions to banks' provisions for loan
losses and allowances for loan losses as the regulators' credit evaluations and
allowance for loan loss methodology have differed from those of the management
of such banks. Such regulatory examinations have focused on loan quality,
particularly that of real estate loans. First Federal attempts to reduce the
risks of real estate lending through maximum loan-to-value requirements as well
as systematic cash flow and initial customer credit history analyses. See
"SUPERVISION AND REGULATION."
Management believes that the $285,000 and the $251,000 in allowance for
loan losses at June 30, 1997 and September 30, 1996, respectively of total
outstanding loans, net of unearned income at such dates, is adequate to absorb
known risks in the portfolio. No assurance can be given, however, that adverse
economic circumstances will not result in increased losses in First Federal's
loan portfolio. At June 30, 1997, $166,000 of the allowance for loan losses was
reserved for possible losses on construction loans, $69,000 was reserved for
possible losses on real estate mortgage loans, and the remaining $50,000 was
reserved for all other loan classifications.
-97-
<PAGE> 105
The following table summarizes the levels of the allowance for loan losses
at the end of the last five years:
<TABLE>
<CAPTION>
Nine Months
Ended June 30, Year Ended September 30,
-------------- -----------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $251 $266 $266 $231 $189 $172 $180
Charge-offs:
Real estate -- -- 3 1 10 4 --
Installment 3 14 14 14 6 17 70
---- ---- ---- ---- ---- ---- ----
Total charge-offs 3 14 21 15 16 21 70
---- ---- ---- ---- ---- ---- ----
Recoveries:
Real estate mortgage -- -- -- -- -- -- 9
---- ---- ---- ---- ---- ---- ----
Installment 1 2 2 21 8 8 18
---- ---- ---- ---- ---- ---- ----
Total recoveries 1 2 5 21 8 8 27
---- ---- ---- ---- ---- ---- ----
Net loans (recovered) charged off 2 12 16 (6) 13 13 43
Provisions for loan losses 36 -- 1 29 50 30 35
---- ---- ---- ---- ---- ---- ----
Balance at end of period $285 $254 $251 $266 $231 $189 $172
==== ==== ==== ==== ==== ==== ====
Ratio of net charge-offs
to total loans
outstanding net of
unearned income 0.00% 0.02% (0.02)% (0.01)% 0.02% 0.03% 0.09%
==== ==== ====== ===== ==== ==== ====
Ratio of allowance for
loan losses to loans
outstanding, net of
unearned income 0.35% 0.44% 0.40% 0.49% 0.46% 0.42% 0.37%
==== ==== ===== ===== ==== ==== ====
</TABLE>
As indicated in the above table, loan loss provisions recorded by First
Federal have been at modest levels since fiscal 1992, as the credit quality of
First Federal's loans has substantially improved.
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily an indication of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
At September 30,
At June 30, ----------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- ------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
------ -------------- ------ -------------- ------ --------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Construction loans $ 166 59% $118 47% $ 83 31%
Real estate mortgage
loans 69 24 53 21 90 34
All other loans 50 17 80 32 93 35
----- --- ---- --- ---- ---
Total allowance for
loan losses $ 285 100% $251 100% $266 100%
===== === ==== === ==== ===
</TABLE>
-98-
<PAGE> 106
On October 1, 1994, SouthFirst adopted the Financial Accounting Standards
Board's Statement No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114"), as amended by FAS 118. FAS 114 addresses the accounting by
creditors for impairment of certain loans and requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent. Under FAS
114, creditors are permitted to use existing methods for recognizing interest
income on impaired loans. FAS 114 requires that an entity disclose its policy
for recognizing interest income on impaired loans, including how cash receipts
are recorded. The effect of the adoption of FAS 114 was immaterial. At June 30,
1997, September 30, 1996 and September 30, 1995, there were no impaired loans
and no specific reserve for impaired loans.
NONPERFORMING ASSETS
First Federal has policies, procedures and underwriting guidelines intended
to assist in maintaining the overall quality of its loan portfolio. First
Federal monitors its delinquency levels for any adverse trends. Nonperforming
assets consist of loans on nonaccrual status, accruing loans which are past due
90 days or more, and foreclosed real estate.
SouthFirst's policy generally is to place a loan on nonaccrual status when
there is reasonable doubt as to the repayment of the loan in accordance with the
agreed terms. Generally, delinquency of 90 days or more creates reasonable doubt
as to repayment. At the time a loan is placed on nonaccrual status, interest
previously accrued but not collected is reversed and charged against current
earnings. Income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower is able to
make periodic interest and principal payments and the loan is no longer
delinquent and is returned to accrual status.
Nonperforming assets were $361,000, $546,000, $330,000, and $516,000 at
June 30, 1997, September 30, 1996, September 30, 1995 and September 30, 1994,
respectively. These levels represent a decrease of $185,000 (34%) between June
30, 1997 and September 30, 1996, an increase of $216,000 (65%) between September
30, 1996 and September 30, 1995, and a decline of $186,000 (36%) between
September 30, 1995 and September 30, 1994. The increase in nonperforming assets
in 1996 coincides with the increase in loan balances. As a percentage of total
loans, nonperforming assets continue to be at levels which management considers
to be acceptable and commensurate with its conservative lending policies.
-99-
<PAGE> 107
An analysis of the components of nonperforming assets at June 30, 1997,
September 30, 1996, and September 30, 1995 and September 30, 1994 is presented
in the following table:
Nonperforming Assets
<TABLE>
<CAPTION>
At June 30, At September 30,
----------- ----------------------------------------
1997 1996 1995 1994
-------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate mortgage loans $ 121 $ 147 $ 24 $ 126
All other loans 31 56 58 25
-------- --------- --------- ---------
Total $ 152 $ 203 $ 82 $ 151
-------- --------- --------- ---------
Accruing loans which are past due 90
days or more:
Real estate mortgage loans $ 188 $ 342 $ 170 $ 304
All other loans 21 1 49 27
-------- --------- --------- ---------
Total $ 209 $ 343 $ 219 $ 331
-------- --------- --------- ---------
Total of non-accrual and 90 days past
due loans $ 361 $ 546 $ 301 $ 482
Foreclosed real estate (net of related
loss provisions) 0 - 29 34
-------- --------- --------- ---------
Total non-performing assets $ 361 $ 546 $ 330 $ 516
======== ========= ========= =========
Nonaccrual and 90 days past due loans
as a % of total loans .51% 0.87% 0.56% 0.95%
======== ========= ========= =========
Nonperforming assets as a % of total
loans .51% 0.87% 0.61% 1.02%
======== ========= ========= =========
Total Loans Outstanding $ 71,513 $ 62,653 $ 53,799 $ 50,521
======== ========= ========= =========
</TABLE>
If nonaccrual loans had performed in accordance with their original
contractual terms, interest income would have increased approximately $11,855,
$14,192, $11,023 and $11,089 for the first nine months of 1997 ended June 30,
1997 and for the years ended September 30, 1996, September 30, 1995 and
September 30, 1994, respectively. The amount of interest income earned and
collected on nonaccrual loans, which is included in income, was $4,767, $6,162,
$4,064, and $30,098 for 1997, 1996, 1995, and 1994, respectively.
Management regularly reviews and monitors the loan portfolio in a effort to
identify borrowers experiencing financial difficulties, but such measures are
subject to uncertainties that cannot be predicted.
-100-
<PAGE> 108
DEPOSITS
Total deposits decreased $1,553,000 (2.4%) to $62,542,000 at June 30, 1997
and compared to September 30, 1996, and increased $1,263,000 (2.0%) to
$64,095,000 at September 30, 1996, as compared to $62,832,000 at September
30,1995. Deposits at September 30, 1995 showed a slight decrease of $1,942,000
(3.0%) over total deposits at September 30, 1994. Non-interest-bearing demand
deposits were $1,424,000, $1,087,000, $1,516,000, and $1,287,000, while total
interest-bearing deposits were $61,117,000, $63,008,000, $61,316,000 and
$63,487,000 at June 30, 1997, September 30, 1996, September 30, 1995, and
September 30, 1994, respectively.
First Federal's deposit mix at June 30, 1997 remained fairly constant
compared to year-end 1996. NOW accounts decreased $318,000 (4.72%), while money
market demand accounts increased $3,000 (0.65%). Certificates of deposits other
than jumbo certificates of deposit, which are certificates of deposit greater
than or equal to $100,000 with specially negotiated rates ("Jumbos"), decreased
$1,579,000 (3.5%). Non-interest-bearing demand deposits increased $335,000
(30.82%). During 1997, certificates of deposit comprised approximately 70.1% of
total deposits while low cost funds, including NOW accounts, money market demand
accounts, and passbook savings accounts, made up 27.1% of First Federal's total
deposits. Jumbos comprised 2.5% of total deposits at June 30, 1997.
The composition of total deposits for the last three years is presented in
the following table:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------
June 30, 1997 1996 1995 1994
--------------- -------------------- --------------------- --------------------
(Dollar amounts in thousands)
Percent Percent Percent Percent
change change change from change
from prior from prior prior from prior
Amount year-end Amount year-end Amount year-end Amount year-end
------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 1,422 30.82% $ 1,087 (28.30)% $ 1,516 17.79% $ 1,287 95.00%
Interest bearing deposits:
NOW accounts 6,423 (4.72) 6,741 (6.93) 7,243 (1.42) 7,347 4.35
Money market demand 466 .65 463 (7.95) 503 (3.82 523 (27.56)
Passbook savings 9,860 (.01) 9,861 1.63 9,703 (12.47) 11,085 1.26
Certificates of deposit other
than Jumbos 42,816 (3.56) 44,395 3.17 43,031 (1.88) 43,857 (6.28)
Jumbos 1,555 .45 1,548 85.17 836 23.85 675 80.00
-------- -------- ------- ------ ------- ------- -------
Total interest bearing deposits 61,120 (3.00) 63,008 2.76 61,316 (3.42) 63,487 (3.63)
-------- -------- ------- ------ ------- ------- -------
Total deposits $ 62,542 (2.42)% $64,095 2.01% $62,832 (3.00)% $64,774 (2.66)%
======== ======== ======= ====== ======= ======= ======= =====
</TABLE>
-101-
<PAGE> 109
The following tables set forth the distribution of First Federal's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented based on average balances:
<TABLE>
<CAPTION>
At June 30, 1997
----------------
Interest Minimum
rate Term Category balance Balances Percentage of Total
---- ---- -------- ------- -------- -------------------
<S> <C> <C> <C> <C> <C>
2.15% None Non-interest bearing demand $ 50 $ 1,425 2.28%
2.15% None NOW accounts 250 6,423 10.27
2.15% None Money market checking 50 466 0.75
2.15% None Passbook savings 50 9,860 15.77
4.75% 3 months Fixed-term Fixed-rate Certificate 250 332 0.53
5.27% 6 months Fixed-term Fixed-rate Certificate 250 9,667 15.46
5.50% 12 months Fixed-term Fixed-rate Certificate 250 9,154 14.64
5.75% 18 months Fixed-term Fixed-rate Certificate 250 3,514 5.62
6.25% IRA Fixed-term Fixed-rate Certificate 250 8,196 13.10
6.25% 30 months Fixed-term Fixed-rate Certificate 250 9,681 15.48
6.25% 1 month Fixed-term Fixed-rate Certificate 100,000 1,556 2.49
6.25% 4 year Fixed-term Fixed-rate Certificate 1,500 725 1.16
6.25% 5 year Fixed-term Fixed-rate Certificate 1,500 1,543 2.47
6.25% IRA Fixed-term Fixed-rate Certificate 250 - -
--------- --------
$ 62,542 100.00%
========= ========
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
---------------------
Interest Minimum
rate Term Category balance Balances Percentage of Total
- ----- ---- -------- ------- -------- -------------------
<S> <C> <C> <C> <C> <C>
- % None Non-interest bearing demand $ 50 $ 1,087 1.70%
2.50% None NOW accounts 250 6,741 10.52
2.50% None Money market checking 50 463 .72
2.50% None Passbook savings 50 9,861 5.38
3.75% 3 months Fixed-term Fixed-rate Certificate 250 275 0.43
5.13% 6 months Fixed-term Fixed-rate Certificate 250 9,873 15.40
5.25% 12 months Fixed-term Fixed-rate Certificate 250 9,734 15.19
5.38% 18 months Fixed-term Fixed-rate Certificate 250 3,504 5.47
5.50% IRA Fixed-term Fixed-rate Certificate 250 8,407 13.12
5.38% 30 months Fixed-term Fixed-rate Certificate 250 10,436 16.28
5.52% 1 month Fixed-term Fixed-rate Certificate 100,000 1,548 2.42
5.38% 4 year Fixed-term Fixed-rate Certificate 1,500 680 1.06
5.50% 5 year Fixed-term Fixed-rate Certificate 1,500 1,486 2.32
- % IRA Fixed-term Fixed-rate Certificate 250 - -
--------- -------
$ 64,095 100.00%
========= =======
</TABLE>
-102-
<PAGE> 110
<TABLE>
<CAPTION>
At September 30, 1995
---------------------
Interest Minimum Percentage
rate Term Category balance Balances of Total
- -------- ---- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
- % None Non-interest bearing demand $ 50 $ 1,516 2.41%
2.50% None NOW accounts 250 7,243 11.53
2.50% None Money market checking 50 503 0.80
2.50% None Passbook savings 50 9,703 15.44
3.75% 3 months Fixed-term Fixed-rate Certificate 250 348 0.55
5.44% 6 months Fixed-term Fixed-rate Certificate 250 9,612 15.30
5.66% 12 months Fixed-term Fixed-rate Certificate 250 8,357 13.30
5.54% 18 months Fixed-term Fixed-rate Certificate 250 2,78 4.43
6.25% IRA Fixed-term Fixed-rate Certificate 250 7,91 12.70
5.50% 30 months Fixed-term Fixed-rate Certificate 250 12,69 19.37
4.86% 1 month Fixed-term Fixed-rate Certificate 100,000 836 1.33
6.85% 4 year Fixed-term Fixed-rate Certificate 1,500 610 0.98
7.02% 5 year Fixed-term Fixed-rate Certificate 1,500 1,171 1.86
- % IRA Fixed-term Fixed-rate Certificate 250 - -
------- ------
$62,832 100.00%
======= ======
</TABLE>
Information about the average balances of interest-bearing demand deposits
and time deposits for the periods indicated based upon average balances is
provided below:
<TABLE>
<CAPTION>
Nine Months Year ended September 30,
Ended June 30, ----------------------------------------------------------------------
1997 1996 1995 1994
---------------------- ---------------------- -------------------- ----------------------
(Dollar amounts in thousands)
Interest Interest Interest Interest
bearing bearing bearing bearing
demand Time demand Time demand Time demand Time
deposits deposits deposits deposits deposits deposits deposits deposits
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average balance $ 16,720 $ 45,370 $ 16,835 $ 45,583 $ 18,507 $ 44,686 $ 1,880 $ 46,272
Average rate 2.85% 5.16% 3.15% 5.43% 2.97% 4.95% 2.88% 4.05%
</TABLE>
The following table presents changes in deposits for the periods indicated:
<TABLE>
<CAPTION>
Nine months
ended June 30, Year ended September 30,
------------------- ------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Opening balance $ 64,095 $ 62,832 $ 62,832 $ 64,774 $ 66,541
Net deposits(withdrawals) (3,118) 810 (626) (3,901) (3,816)
Interest credited on deposits 1,565 1,648 1,889 1,959 2,049
-------- -------- --------- --------- ---------
Ending balance $ 62,542 $ 65,290 $ 64,095 $ 62,832 $ 64,774
======== ======== ========== ========= =========
Total increase (decrease) in
deposits $ (1,552) $ (2,458) $ 1,263 $ (1,942) $ (1,767)
========= ========= ========= ========= =========
Percentage increase(decrease) 0.24% (.39)% 2.01% (3.00)% (2.66)%
========= ========= ========= ========= =========
</TABLE>
-103-
<PAGE> 111
The following table presents, by various interest rate categories, the
amount of certificate accounts outstanding at June 30, 1997, September 30, 1996,
September 30, 1995, and September 30, 1994:
<TABLE>
<CAPTION>
Nine months Year ended September 30,
ended June 30, ----------------------------------
1997 1996 1995 1994
--------------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest Rate
2.00-2.99% $ - $ 119 $ - $ 202
3.00-3.99% - 276 1,163 11,291
4.00-4.99% 453 1,507 7,784 30,640
5.00-5.99% 38,335 38,106 20,450 2,075
6.00-6.99% 4,503 4,889 13,449 323
7.00-7.99% 1,080 1,046 1,021 1
---------- --------- -------- --------
Total $ 44,371 $ 45,943 $ 43,867 $ 44,532
========== ========= ======== ========
</TABLE>
There were no certificates of deposit with an interest rate less than 2.0%
at June 30, 1997 or September 30, 1996. At June 30, 1997, First Federal had
outstanding approximately $44.3 million in certificate accounts that mature as
follows:
<TABLE>
<CAPTION>
Amount due
------------------------------------------------------------------------------
Less One Two to Three Four
than one to two three to four to five
year years years years years Thereafter Total
---- ----- ----- ----- ----- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
2.00-2.99% $ - $ - $ - $ - $ - $ - $ -
3.00-3.99% - - - - - - -
4.00-4.99% 453 - - - - - 453
5.00-5.99% 32,084 4,317 1,539 359 36 - 38,335
6.00-6.99% 3,477 432 545 49 - - 4,503
7.00-7.99% - 246 834 - - - 1,080
-------- ------- ------- ----- ------- ---------- --------
Total $ 36,014 $ 4,995 $ 2,918 $ 408 $ 36 $ - $ 44,371
======== ======= ======= ===== ======= ========== ========
</TABLE>
Certificates of deposit of $100,000 or more, other than Jumbos, mature as
follows at June 30, 1997:
<TABLE>
<CAPTION>
Amount due
------------------------------------------------------------------------------
Less One Two to Three Four
than one to two three to four to five
year years years years years Thereafter Total
---- ----- ----- ----- ----- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
2.00-2.99% $ - $ - $ - $ - $ - $ - $ -
3.00-3.99% - - - - - - -
4.00-4.99% 115 - - - - - 115
5.00-5.99% 1,604 157 - 105 - - 1,866
6.00-6.99% - - - - - - -
7.00-7.99% 200 - - - 300 - 500
------ ----- -------- ------ ------- -------- ------
Total $1,919 $ 157 $ - $ 105 $ - $ - $2,481
====== ===== ======== ====== ======= ======== ======
</TABLE>
-104-
<PAGE> 112
Jumbos mature as follows at June 30, 1997:
<TABLE>
<CAPTION>
Amount due
---------------------------------------------------------------------
Less One Two to Three Four
than one to two three to four to five
year years years years years Total
---- ----- ----- ----- ----- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate
2.00-2.99% $ - $ - $ - $ - $ - $ -
3.00-3.99% - - - - - -
4.00-4.99% 121 - - - - 121
5.00-5.99% 558 - - - - 558
6.00-6.99% 876 - - - - 876
7.00-7.99% - - - - - -
------- ------- ------- ------ ------- -------
Total $ 1,555 $ - $ - $ - $ - $ 1,555
======= ======= ======= ====== ======= =======
</TABLE>
The following table presents the maturities of certificates of deposit at
June 30, 1997, September 30, 1996 and September 30, 1995:
<TABLE>
<CAPTION>
Maturities of Time Deposits
September 30,
June 30, -----------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Three months or less $ 11,309 $ 8,099 $ 8,211
After three within six months 8,577 10,655 9,886
After six within twelve months 15,052 15,302 7,834
One year to two years 4,995 8,115 5,235
Two years to three years 2,918 2,372 2,959
Three years to four years 408 1,106 8,858
Four years to five years 1,112 294 884
--------- -------- --------
Total $ 44,371 $ 45,943 $ 43,867
========= ======== ========
Weighted average rate on all certificates
of deposit at period-end 5.48% 5.53% 5.59%
========= ======== ========
</TABLE>
SHORT-TERM BORROWINGS
SouthFirst has a line of credit of up to $1,500,000 which bears interest at
the prime lending rate plus 1%. The line of credit requires monthly interest
payments and payments of the outstanding balance on May 20, 1997. At June 30,
1997 and September 30, 1996, the prime lending rate was 8.25% and the
outstanding balance on the line of credit was $1,435,000 and $900,253,
respectively.
Short-term borrowings also include borrowings from the FHLB of Atlanta (See
"-- Liquidity"). The balances outstanding at June 30, 1997, September 30, 1996
and September 30, 1995 were $13,268,000, $4,614,017 and $2,367,540,
respectively. The interest rates on these advances are fixed and average 6.62%
at June 30, 1997, 5.41% at year-end 1996 and 7.20% at year-end 1995.
-105-
<PAGE> 113
CAPITAL RESOURCES
STOCKHOLDERS EQUITY
SouthFirst's consolidated shareholders' equity was $13,616,000, $12,888,000
and $14,771,000 at June 30, 1997, September 30, 1996 and September 30, 1995,
respectively. The 1997 results are an increase of $728,000 while the 1996
results are a decrease of $1,883,000 (12.7%) and the 1995 results were an
increase of $7,509,000 (103.4%) from 1994. The increase in 1997 was primarily
due to earnings in excess of dividends paid. The decrease in 1996 was primarily
due to a special cash dividend to shareholders of $2.00 per share. The increase
in 1995 was due primarily to the initial public offering and earnings. Net
proceeds from the initial public offering in February 1995 amounted to
$7,248,000.
There were no dividends declared prior to 1995 due to the mutual form of
ownership of SouthFirst. During 1996, cash dividends of $1,918,000, or $2.50 per
share, were declared. During 1997, cash dividends of $308,237, or $0.375 per
share, were declared on the SouthFirst Common Stock. The cash dividends declared
during 1996 included a special dividend of $2.00 per share, paid in connection
with SouthFirst's equity management programs. SouthFirst's special dividend in
1996 should be considered a non-recurring event and, although SouthFirst plans
to continue a dividend payout policy that allows it to maintain adequate capital
to support future growth and capital adequacy, the 1996 dividend payout ratio,
which was based in part on excess capital, cannot be viewed as a guarantee of
future dividend payments. Management believes that a strong capital position is
vital to the continued profitability of SouthFirst and provides a foundation for
future growth as well as promoting depositor and investor confidence in the
institution.
Certain financial ratios for SouthFirst at the end of June 30, 1997 and the
last three years are presented in the following table:
<TABLE>
<CAPTION>
Equity and Assets Ratio
June 30, 1997 September 30,
------------- ---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets 0.70% (0.02)% 0.73% 0.44%
Return on average stockholder's equity 5.05% (0.12)%(1) 4.94% 4.98%
Common dividend payout ratio 83.87% (11,513)% 40.73% -
Average shareholders' equity to average assets 13.90% 15.45 % 14.84% 8.89%
</TABLE>
- --------------
(1) Includes a special cash dividend of $2.00 per share paid in connection with
SouthFirst's equity management programs. The special dividend should be
considered a non-recurring event.
FIRREA and the implementing regulations of the OTS, which became effective
on December 7, 1989, changed the capital requirements applicable to thrifts,
including SouthFirst, and the consequences for failing to comply with such
standards. The capital standards include (i) a core capital requirement, (ii) a
tangible capital requirement, and (iii) a risk-based capital requirement. FIRREA
specifies such capital requirements and states that such standards shall be no
less stringent than the capital standards applicable to national banks. The OTS
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. See "SUPERVISION AND
REGULATION -- Regulatory Capital Requirements." As shown in the table
-106-
<PAGE> 114
below, First Federal was in compliance with these regulatory capital
requirements at June 30, 1997 and at September 30, 1996 and September 30, 1995.
<TABLE>
<CAPTION>
At June 30, 1997 At September 30, 1996
------------------------------------------ -------------------------------------------
Tangible Core Risk-based Tangible Core Risk-based
Capital Capital Capital Capital Capital Capital
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Retained earnings $13,615,753 $13,615,753 $13,330,765 $12,887,814 $12,887,814 $12,887,814
General valuation allowance -- -- 284,988 -- -- 250,714
Regulatory capital 13,615,753 13,615,753 13,615,753 12,887,814 12,887,814 13,138,528
Regulatory asset base 97,283,050 97,283,050 58,505,558 90,281,934 90,281,934 49,788,000
Capital ratio 14.00% 14.00% 23.27% 11.98% 11.98% 21.72%
Minimum required ratio 1.50% 3.00% 8.00% 1.50% 3.00% 8.00%
Capital ratio required for
"well-capitalized" designation -- 5.00% 10.00% -- 5.00% 10.00%
</TABLE>
LIQUIDITY
Liquidity is First Federal's ability to convert assets into cash
equivalents in order to meet daily cash flow requirements, primarily for deposit
withdrawals, loan demand, and maturing liabilities. Without proper management,
First Federal could experience higher costs of obtaining funds due to
insufficient liquidity. On the other hand, excessive liquidity could lead to a
decline in earnings due to the cost of foregoing alternative higher-yielding
investment opportunities.
Asset liquidity is provided primarily through cash, the repayment and
maturity of investment securities, and the sale and repayment of loans.
Sources of liability liquidity include customer deposits and participation
in the FHLB advance program. Although deposit growth historically has been a
primary source of liquidity, such balances may be influenced by changes in the
banking industry, interest rates available on other investments, general
economic conditions, competition and other factors. FHLB advances include both
fixed and variable terms and are taken out with varying maturities. First
Federal can borrow an amount equal to 75% of its mortgage loans which are backed
by one-to-four family residential properties. At June 30, 1997, First Federal
had credit available, net of advances drawn down, of approximately $25,268,000.
First Federal has drawn down such advances of $13,268,000 at June 30, 1997 in
order to fund dividend payments to shareholders and to pay various holding
company expenses.
On a consolidated basis, net cash provided by operating activities
increased $4,172,978 (88%) to $4,740,114 from $567,136 at June 30, 1996,
respectively. The $8,972,124 in net cash used in investing activities during
1997 consisted primarily of $14,318,537 increase in net loans originated and
$5,828,000 in proceeds received from the sale of investments. The $5,587,614 in
net cash provided by financing activities resulted from a decrease of $1,553,000
in deposits, coupled with a net increase of $7,535,048 in borrowed funds and a
payment of $308,237 in common stock dividends.
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On a consolidated basis, net cash provided by operating activities
decreased $724,000 (63.6%) to $415,000 from $1,139,000 at September 30, 1996 and
1995, respectively. The $5,979,000 in net cash used in investing activities
during 1996 consisted primarily of a $8,761,000 increase in net loans
originated, $4,541,000 in purchases of investment securities available for sale
and net proceeds from repayments/maturities and purchases of investments
securities held to maturity and available for sale of $7,314,000. The $3,725,000
in net cash provided by financing activities resulted from an increase of
$1,262,000 in deposits, coupled with a net increase of $4,889,000 in borrowed
funds, payment of $1,918,000 in common stock dividends, and net issuance of and
contributions to the employee stock ownership plan of $501,000.
First Federal's liquidity ratio at June 30, 1997 was 9.28% and at September
30, 1996 was 12.88% compared to 10.63% on September 30, 1995 and 6.67% on
September 30, 1994. Liquidity levels may be increased or decreased depending
upon the yields on investment alternatives, management's expectations to the
level of yield that will be available in the future, and management's
projections as to the short-term demand for funds to be used in loan
origination. First Federal is subject to certain regulatory limitations with
respect to the payment of dividends to SouthFirst. First Federal paid no
dividends to SouthFirst during 1997, 1996 or 1995.
SouthFirst also requires cash for various purposes including servicing
debt, paying dividends to shareholders and paying general corporate expenses.
The primary source of funds for SouthFirst is dividends from First Federal.
First Federal's capital levels meet the requirements for a "well capitalized"
institution and enable First Federal to pay dividends to SouthFirst. See
"SUPERVISION AND REGULATION -- Regulation of First Federal and Chilton County --
Capital Adequacy Requirements." In addition to dividends, SouthFirst has access
to various capital markets and other sources of borrowings.
SouthFirst retained $3,624,000 of the net proceeds from the initial public
offering of common stock in 1994. Substantially all of those funds have been
used to pay dividends, (including the special $2.00 per share dividend in 1996),
acquire treasury stock, invest in affiliates and pay general corporate expenses.
Accordingly, SouthFirst will likely rely on dividends from First Federal to
repay borrowings under its line of credit and to continue paying dividends to
shareholders. See " -- Financial Condition -- Short-Term Borrowings."
RESULTS OF OPERATIONS
NET INCOME
For the nine months ended June 30, 1997, net income decreased $9,115 (2.4%)
to $370,089 when compared to net income of $379,204 for the nine months ended
June 30, 1996. Earnings per common share was $0.43 for the nine months ended
June 30, 1997 versus $0.44 for the same period in 1996. The primary reasons for
the decrease in net income are an increase in interest income on loans of
$653,366, a decrease in interest income on investments available for sale of
$267,000, a decrease in other income of $583,000, an increase in interest
expense for borrowed funds of $296,000, and a decrease of $180,000 for
compensation and benefits.
For the year ended September 30, 1996, net income decreased $628,000
(102.8%) to a net loss of $17,000, or $0.02 per share, when compared with 1995's
net income of $611,000, or $1.17 per share. The primary reasons for the decline
in net income are an increase in compensation and benefits of $990,000, and the
one-time SAIF assessment of $430,230 offset by $619,000 income received in the
settlement of the USF&G litigation. See "INFORMATION REGARDING SOUTHFIRST --
Business of First Federal -- Legal
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Proceedings." Net income increased $250,000 (69.2%) during 1995 and decreased
$431,000 (54.4%) to $361,000 during 1994. Increases in net interest income and
other income are primarily responsible for the 1995 increase while the write-off
of the bond claim receivable primarily caused the decline in 1994.
Weighted average shares outstanding in 1997 and 1996 reflects shares
outstanding for the entire year. However, weighted average shares for 1995 only
reflects shares outstanding for the 199 days since the initial public offering
on February 13, 1995.
The items discussed in the preceding paragraphs are discussed more fully
below.
NET INTEREST INCOME
Net interest income is the difference between the interest First Federal
earns on its loans, investment securities and other earning assets and the
interest cost of its deposits and borrowed funds. This is the primary component
of First Federal's earnings. Net interest income was $2,475,000 for the nine
months ended June 30, 1997. This increase of $188,000 (8.2%) over the first nine
months of 1996 is primarily the result of an increase in the net yield. The net
yield increased 13 basis points as rates on interest-earning assets increased 30
basis points to 8.00%, while cost of funds decreased ten basis points to 4.81%
when compared to June 30, 1996.
Net interest income was $3,061,000 for the twelve months ended September
30, 1996. This decrease of $43,000 (1.4%) over 1995 resulted primarily from the
increase in interest on deposits and interest on borrowed funds. The net yield
decreased 25 basis points as rates on interest-earning assets increased 22 basis
points to 7.92%, while cost of funds increased 47 basis points to 4.99% when
compared to 1995. The 25 basis point decrease in the interest rate spread is a
result of a small decrease in the yield on loans during 1996 and an increase on
the yield on interest-bearing liabilities offset by a slight increase in the
yield on investments. These changes in yields resulted from the stabilization of
interest rates in the market.
Net interest income for 1995 was $3,104,000, $266,000 (9.4%) higher than
1994 net interest income of $2,838,000. Net interest income for 1994 increased
$66,000 (24%) from the 1993 level of $2,772,000. The moderation of the interest
rate environment during 1995 and 1994 was the primary reason for the increases
in SouthFirst's net interest income for these periods.
As previously described above, First Federal's ALCO conducts a gap analysis
in order to assist in analyzing the yields on earning assets and the rates paid
on interest-bearing liabilities. However, there can be no assurance that such
analysis will positively affect earnings. See "-- Capital Resources -- Interest
Rate Sensitivity Management" and "Consolidated Average Balances, Interest
Income/Expense and Yields/Rates" tables that appears elsewhere herein.
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RATE/VOLUME VARIANCE ANALYSIS
The following table sets forth information regarding the extent to which
changes in interest rates and changes in volume of interest assets and changes
in volume of interest related assets and liabilities have affected SouthFirst's
interest income and expense during the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
for changes attributable to (i) changes in volume (change in volume multiplied
by old rate), (ii) changes in rates (change in rate multiplied by old volume)
and (iii) changes in rate/volume (change in rate multiplied by change in
volume). Changes in rate/volume have been allocated proportionately between
changes in volume and changes in rates.
<TABLE>
<CAPTION>
Nine months ended June 30, Year Ended September 30,
------------------------ ----------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease) Increase (Decrease)
------------------------ ------------------------- -------------------------- ---------------------
Due to Due to Due to Due to
------------------------ ------------------------- -------------------------- ---------------------
Volume Rate Total Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- ----- ------ ---- -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Investment securities $(361) 92 $(269) $(306) 128 $(178) $(947) 1,168 $221 $(214) (107) $(321)
Loans receivable 666 13 653 666 (71) 595 311 (2) 309 314 (369) (55)
----- ------ ----- ----- ---- ----- ----- ----- ----- ----- ---- -----
Total interest income 305 79 384 360 57 417 (636) 1,166 530 100 (476) (376)
===== ====== ===== ===== ==== ===== ===== ===== ===== ===== ==== =====
Interest expense:
NOW accounts - (18) (18) (7) 11 4 (11) 17 6 6 (9) (3)
Money market demand - - - (1) (1) (2) (1) - (1) (2) (1) (3)
Passbook savings (1) (20) (21) (39) 18 (21) 2 (2) - (2) 4 2
Certificates of deposit
other than Jumbos (10) (70) (80) 35 217 252 (88) 416 328 (169) (342) (511)
Jumbos 9 10 19 6 3 9 28 (17) 11 9 (15) (6)
Borrowed funds 308 (12) 296 229 (11) 218 (99) 20 (79) 135 (56) 79
----- ------ ----- ----- ---- ----- ----- ----- ----- ----- ---- -----
Total interest expense 306.0 (110.0) 196.0 223 237 460 (169) (434) (265) (23) (419) (442)
===== ====== ===== ===== ==== ===== ===== ===== ===== ----- ---- -----
Change in net interest income (1) 189.0 188.0 137 (180) (43) (467) 732 265 123 (57) 66
===== ====== ===== ===== ==== ===== ===== ===== ===== ===== ==== =====
</TABLE>
INTEREST INCOME
Interest income is a fluctuation of the volume of interest earning assets
and their related yields. Interest income was $5,271,000 and $4,888,000 for the
nine months ended June 30, 1997 and June 30, 1996, respectively, and $6,620,000,
$6,201,000, and $5,671,000 for the twelve months ended September 30, 1996,
September 30, 1995, and September 30, 1994, respectively. Average interest
earning assets increased 3,723,000 (4.5%) during 1997, and $3,090,000 (3.8%)
during 1996, following an increase of $1,967,000 (2.5%) in 1995 and a decrease
of $322,000 (.4%) in 1994. The 1997, 1996 and 1995 yield remained relatively
constant, reflecting the relative stability of the interest rate environment
during the first nine months of 1997, 1996 and 1995. The yield on loans
receivable in 1994 reflected the downward trend in the interest rate environment
during 1994 as the yield declined 78 basis points. Interest and fees on loans
were $4,241,000 and $3,588,000 for the nine months ended June 30, 1997 and June
30, 1996, respectively, and $4,888,000, $4,292,000, and $3,982,000 for the
twelve months ended September 30, 1996, September 30, 1995,
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and September 30, 1994, respectively. Interest and fees on loans during the
first nine months of 1997 reflected an increase of $653,000 (18.2%), as compared
with the first nine months of 1996. Interest and fees on loans in 1996 reflected
an increase of $596,000 (13.9%) as compared with 1995. The 1995 and 1994 levels
reflected increases of $310,000 (7.8%) and $55,000 (1.4%), respectively. The
increase in average loans receivable during 1997 and 1996, offset somewhat by
the small decrease in yields in loans during 1997 and 1996, resulted in the
increase in interest and fees on loans for 1997 and 1996. The increase in
average loans receivable during 1995, combined with the stability of yields on
loans during the same period, resulted in the increase in interest and fees on
loans for 1995. The declines in the average yield on loans receivable during
1994, combined with the decreases of average loans receivable in 1994 resulted
in decreases in interest and fee income.
Interest income on total investment securities, including those held to
maturity and those available for sale, decreased $270,000 (20.8%) to $1,030,000
in 1997. Interest income on investment securities was $1,300,000 for the nine
months ended June 30, 1996. The average balance outstanding of investment
securities, including those held to maturity and those available for sale,
decreased $6,603,000 (26%) to $19,024,000 in 1997 from $25,626,000 in 1996. The
yields on total investment securities were 7.22% in 1997 and 6.76% in 1996. The
decrease in interest income during 1997 was primarily due to the outstanding
volume of investment securities declining as a result of prepayments on MBS and
CMO securities.
Interest income on total investment securities, including those held to
maturity and those available for sale, decreased $178,000 (9.3%) to $1,732,000
in 1996, compared to a increase of $222,000 (13.2%) during 1995. Interest income
on investment securities was $1,910,000, which represented an increase of
$222,000 (13.1%) for the twelve months ended September 30, 1995. The average
balance outstanding of investment securities, including those held to maturity
and those available for sale, decreased $4,791,000 (16.2%) to $24,718,000 in
1996 from $29,507,000 in 1995 following a decrease of $1,775,000 (5.7%) in 1995
from the 1994 level of $31,282,000. The yields on total investment securities
were 7.01% in 1996, 6.47% in 1995, and 5.40% in 1994. The decrease in interest
income during 1996 was primarily due to the outstanding volume of investment
securities declining as a result of prepayments on MBS and CMO securities. The
increase in income during 1995 was due to an increase in yield as variable rate
investment securities adjusted to the stabilizing interest rate environment
which had steadily increased since the second quarter of fiscal 1994. The
decrease in income during 1994 was due to both the decline in the average volume
outstanding and the drop in the yield on those balances as a result of
prepayments on MBS and CMO securities with high coupons.
INTEREST EXPENSE
Total average interest-bearing liabilities were $77,494,000 and $70,558,000
for June 30, 1997 and June 30, 1996, respectively. Interest bearing liabilities
reflected an increase of $6,936,000 (10%) for 1997. The rates paid on these
liabilities decreased ten basis points to 4.81% during 1997. Total interest
expense was $2,796,000 for 1997, which represented an increase of $195,000
(7.5%) and a decrease of $12,648,000 (18.3%). The increase during 1997 resulted
from this increase in cost of funds.
Interest on deposits, the primary component of total interest expense,
decreased to $2,119,000 for 1997. Interest expense on total deposits for 1996
was $2,219,000. The average volume of outstanding interest bearing deposits
decreased in 1997 but the effect on interest expense was offset by the increase
in rates paid due to market conditions. For 1996, interest on deposits increased
$246,000 (8.9%) to $3,006,000. Interest expense on total deposits for 1995 was
$2,760,000 and $2,415,000 in 1994, which represented an increase of $345,000
(14.3%) and a decrease of $522,000 (17.8%) in 1995 and 1994, respectively. The
average volume of outstanding interest bearing deposits decreased slightly in
1996 but the effect on interest expense was offset by the increase in rates paid
which was also due to market conditions. Although the average volume outstanding
decreased in 1995, the increase in rates paid due to market conditions resulted
in increases.
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Interest expense on borrowed funds, including both short-term and other
borrowed funds, was $677,000 in 1997 and $381,000 in 1996. These levels
represented an increase of $296,000 (78%) during 1997. The increase in 1997 is a
result of additional advances of $7,500,000 from the FHLB to fund First
Federal's continued loan growth. The average balance of FHLB advances
outstanding was $15,403,351 for 1997 and $8,371,025 for 1996. Interest expense
on borrowed funds, including both short-term and other borrowed funds, was
$553,000 in 1996, $337,000 in 1995 and $417,000 in 1994. These levels
represented an increase of $216,000 (95.5%) during 1996 and an decrease of
$80,000 (19.2%) during 1995, while interest expense on borrowed funds showed an
increase of $79,000 (23.4%) during 1994. The increase in 1996 is a result of
First Federal acquiring additional advances of $4,000,000 from the FHLB to fund
loan growth. The decrease in 1995 is a direct result of First Federal repaying
FHLB advances amounting to $5,056,000 through use of cash proceeds from the
issuance of common stock in the public offering. First Federal obtained an
additional advance of $2,000,000 at the end of September 1995, and at the end of
1995 had $6,058,000 of outstanding FHLB advances. The average balance of FHLB
advances outstanding was $8,979,000 for 1996, $5,369,000 for 1995 and $7,056,000
for 1994. The interest cost associated with these advances was $553,000,
$337,000, and $417,000 for 1996, 1995, and 1994, respectively.
Total average interest-bearing liabilities were $71,396,000, $68,562,000,
and $72,208,000 for 1996, 1995 and 1994, respectively. Interest bearing
liabilities reflected an increase of $2,834,000 (4.1%) for 1996, followed by
decreases of $3,646,000 (5.1%) and $1,504,000 (2.0%) for 1995 and 1994,
respectively. The rates paid on these liabilities increased 47 basis points to
4.99% during 1996, increased 60 basis points to 4.52% during 1995, and decreased
52 basis points to 3.92% during 1994. Total interest expense was $3,559,000 for
1996, $3,098,000 for 1995, and $2,832,000 for 1994, which represented an
increase of $461,000 (14.9%) an increase of $266,000 (9.4%) and a decrease of
$442,000 (13.5%) during 1996, 1995 and 1994 , respectively. The increase during
1996 resulted from an increase in the rate paid associated with the general rise
in market interest rates and an increase in the average balance. The increase in
1995 was caused by the increase in rates, offset somewhat by the decrease in
average balance. During 1994, the reduction in interest cost resulted from a
drop in rates paid associated with the general decline in market interest rates
and the lower average volume outstanding.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on management's assessment of the
risk in the loan portfolio, as reflected in the amount of recent loan losses.
The provision for loan losses was $36,000 and $1,000 for the nine months ended
June 30, 1997 and June 30, 1996, respectively and $1,000, $29,000, and $50,000
during 1996, 1995, and 1994, respectively. These provisions for loan losses
reflect management's assessment of the quality of the loan portfolio. As
previously discussed, the loan portfolio is comprised primarily of one-to-four
family residential mortgage loans and residential construction loans. The
one-to-four family residential mortgage loans are originated in First Federal's
primary market area of Talladega County, Alabama. Management believes that the
credit risks associated with this type of loan are significantly lower than
other loan types. This belief is substantiated by the low level of net
charge-offs which have averaged less than $5,000 each year over the past four
years.
Although residential construction loans have characteristics of relatively
higher credit risks, such as concentrations of amounts due from a smaller number
of borrowers and dependence on the expertise of the builder, management believes
that its residential construction lending policies and procedures substantially
reduce the credit risks associated with this type of loan. First Federal entered
the residential construction lending area in 1994 by purchasing the portfolio of
another Alabama thrift and hiring the loan officer who originated and managed
the portfolio. All of First Federal's residential construction loans are in
Hoover, Alabama, a suburb of Birmingham and one of the most affluent areas of
the state. See "INFORMATION
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REGARDING SOUTHFIRST -- Business of First Federal -- General -- Construction
Lending." Since acquiring the portfolio, First Federal has not suffered a
significant loss on a residential construction loan.
For the reasons discussed above, charge-offs for the total loan portfolio,
net of recoveries, have averaged less than $9,000 each year over the past four
years. Based on this historical level of loan losses, the low level of
nonperforming loans and general economic conditions, management believes the
allowances for loan losses at June 30, 1997 and June 30, 1996, and at September
30, 1996, September 30, 1995 and September 30, 1994 were adequate. The
provisions for loan losses in 1997, 1996, 1995 and 1994 reflect amounts
management considered necessary to maintain an acceptable level of loan loss
allowance relative to the total loan portfolio and relative to nonperforming
loans.
Future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies periodically
review First Federal's allowance for loan losses and may require First Federal
to recognize additions to the allowance based on judgments about information
available to them at the time of their review. See further discussion at
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Allowance for Loan Losses and Risk Elements."
OTHER INCOME
Other income decreased $410,000 (35.9%) to $732,114 in 1997 from $1,142,000
in 1996. Other income increased $731,000 (130.0%) to $1,290,000 in 1996 from
$559,000 in 1995, compared to a decrease of $34,000 (5.7%) over the 1994 level
of $593,000. Other income for 1994 represented an increase of $105,000 (21.5%)
from 1993. The increase in 1996 resulted from the $619,000 settlement of
SouthFirst's lawsuit against USF&G. See "INFORMATION REGARDING SOUTHFIRST --
Business of First Federal -- Legal Proceedings." The decrease in 1995 resulted
primarily from a decline in insurance commissions of $29,000 and a decrease in
gain on sale of loans of $23,000. The increase in 1994 was primarily due to a
$132,000 increase in service charges and other fees, reflecting higher charges
for deposit account privileges.
Service charges and other fees were $295,000 and $289,000 for 1997 and
1996, respectively, which represents an increase of $6,000 (2.1%). Service
charges and other fees were $563,000, $474,000, and $432,000 for 1996, 1995, and
1994, respectively, which represent increases of $89,000 (18.8%) in 1996,
$42,000 (9.7%) in 1995, and $132,000 (44.0%) in 1994. These fluctuations were
due almost entirely to increases in income on nonsufficient funds and overdraft
charges.
Gain on sale of loans increased $9,000 (16.7%) in 1997. The increase is due
to the increased volume of loans sold in 1997 compared to prior years. Proceeds
from sales of loans increased by $157,000 (9.02%) to $1,898,000 in 1997 from
1,741,000 in 1996. Gain on sale of loans decreased $56,000 (78.9%) in 1996 and
$23,000 (24.5%) in 1995 and increased $14,000 (17.5%) in 1994. The increase in
1996 is due to the increased volume of loans sold in 1996 compared to prior
years. The decrease in 1995 resulted from the increase in market interest rates
in late 1994, coupled with the continuing trend in the early part of 1995.
Proceeds from sales of loans increased by $3,326,000 in 1996 end decreased by
$559,000 during 1995 and decreased by $329,000 in 1994. The increases during the
first nine months of 1997 and in 1996 were due to favorable interest rates and
increased marketing efforts. The decrease in 1995 and increases in 1994 were due
to lower levels of loan origination volumes.
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OTHER EXPENSE
Total other expense decreased $280,000 to $2,554,000 for 1997 from
$2,834,000 for 1996.
Compensation and benefits was $1,470,000 and $1,650,000 for 1997 and 1996,
respectively. These levels reflect a decrease of $180,000 (10.92%). The decrease
was primarily due to additional compensation awarded to selected employees under
SouthFirst's two Management Recognition Plans in 1996 including non-recurring
cash bonuses to SouthFirst's officers of $263,409 and the cost of a large number
of shares released to participants in SouthFirst's Employee Stock Ownership Plan
(the "ESOP") in 1996. The increase in the number of shares released is
attributable to the special $2.00 dividend paid to qualifying shareholders,
including the ESOP, on January 22, 1996. These costs did not recur in 1997.
Other noninterest expense was $359,000 for 1997 and $437,000 for 1996. This
decrease of $78,000 (18%) was due primarily to costs associated with legal and
accounting expenses in 1996 in connection with the special $2.00 dividend and
certain regulatory filings. These costs did not recur in 1997.
Total other expense was $4,274,000 for 1996, $2,660,000 for 1995 and
$2,767,000 for 1994. The increase for 1996 was $1,614,000 (60.6%), compared to a
decrease of $107,000 (3.9%) in 1995 and an increase of $736,000 (36.2%) in 1994.
Compensation and benefits was $2,469,000, $1,479,000, and $1,369,000 for
1996, 1995, and 1994, respectively. These levels reflect increases of $990,000
(66.9%) in 1996, $114,000 (8.4%) in 1995, and $153,000 (12.6%) in 1994. The
increase in 1996 was primarily due to additional compensation awarded to
selected employees under the Management Recognition Plan (MRP) including
non-recurring cash bonuses to SouthFirst's officers of $263,409 and the cost of
a large number of shares released to participants in SouthFirst's ESOP. The
increase in the number of shares released is attributable to the special $2.00
dividend paid to qualifying shareholders, including the ESOP, on January 22,
1996. Additionally, increases in 1996, 1995, and 1994 can be attributed to merit
and cost-of-living raises and the cost of benefits associated with such
increases, and the addition of key personnel.
Other expenses in 1996 also reflected a special one time SAIF assessment in
the amount of $430,230. This expenditure, in connection with the federal
insurance of accounts, was assessed on an industry wide basis and was not
assessed in prior years. See "SUPERVISION AND REGULATION."
Other noninterest expense was $520,000 for 1996, $369,000, and $645,000 for
1995 and 1994 respectively. These levels represent an increase of $151,000
(40.9%) in 1996, compared to a decrease of $276,000 (42.8%) in 1995 and an
increase of $485,000 (303.1%) in 1994. The increase in 1996 was due primarily to
increased costs associated with legal and accounting expenses. The decrease in
1995 was due primarily to a $407,000 write-off during 1994 for a possible loss
on a fidelity bond related to a complaint filed by First Federal against United
States Fidelity & Guaranty Company as compared to no allowance during 1995. The
effect of the absence of the write-off in 1995 was mitigated somewhat by an
increase in professional expenses of $87,000 incurred in relation to the cost of
additional regulatory filings and other costs associated with being a public
entity.
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INCOME TAX EXPENSE
Income tax expense was $247,000 and $215,000 for the first nine months
of 1997 and 1996, respectively, and $92,000, $362,000, and $235,000 for the
years 1996, 1995, and 1994, respectively. These levels represent an effective
tax rate on pre-tax earnings of 39% and 36% for the nine months ended June 30,
1997 and June 30, 1996, respectively and 122% for the year ended September 30,
1996, 37% for the year ended September 30, 1995, and 38% for the year ended
September 30, 1994. The increase in the effective tax rate for the year ended
1996 was due to the nondeductibility of portions of compensation expense related
to SouthFirst's ESOP and the MRP. For all other periods, First Federal's
effective tax rate was slightly higher than the statutory rate due to state
income taxes and differences between taxable income for financial reporting and
income tax purposes.
INFORMATION REGARDING CHILTON COUNTY
Chilton County was founded in 1963 by a group of local businessmen for the
purpose of providing home loans in Chilton County and the surrounding area. Four
of the original ten directors are still associated with Chilton County either as
directors or directors emeritus. Chilton County converted from a federally
chartered mutual savings and loan association to a federally chartered stock
savings and loan association in November 1988.
Chilton County operates two full service bank facilities. The home office
is located at 102 5th Street North, Clanton, Alabama, and the branch office,
which was opened in 1979, is located at 125 Olon Heights Shopping Center,
Centreville, Alabama. Chilton County's telephone number is (205) 755-3975.
BUSINESS OF CHILTON COUNTY
The principal business of Chilton County is to attract savings deposits
from the general public and to originate mortgage loans for the purpose of
constructing, financing or refinancing one-to-four family, owner-occupied
residential real estate in Chilton and Bibb Counties. Chilton County also
engages in an array of traditional banking activities, including the acceptance
of savings and time deposit accounts, as well as NOW and money market accounts.
The deposits obtained by Chilton County are invested primarily in real
estate and related mortgage banking activities in the secondary market. Chilton
County offers construction and permanent loans secured by one-to-four family
residences, home improvement, consumer and other types of loans. Operating
revenues are derived from interest earned on lending and investment activities
as well as from fees assessed on lending and retail services. Chilton County
also receives significant operating revenues from its holdings of
mortgage-backed securities. Expenses are primarily interest paid on savings
deposits, cost of borrowing and operating expenses.
Chilton County's deposits are insured by the SAIF up to applicable limits
for each depositor. Chilton County is subject to comprehensive examination,
supervision and regulation by the OTS and FDIC. This regulation is intended
primarily for the protection of depositors. See "SUPERVISION AND REGULATION."
EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation for the
fiscal years ended June 30, 1997, 1996 and 1995 awarded to or earned by the
Chief Executive Officer of Chilton County. No executive officer of Chilton
County earned in excess of $100,000 in salary and bonus during those fiscal
years.
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<PAGE> 123
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
---------------------------------- -------------------------- --------
Restricted Securities
Name and Fiscal Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Options(1) Payouts Compensation
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bobby R. Cook 1997 $66,000 $ -- $-- $-- -- $-- $8,872(2)
President and 1996 61,200 750 -- -- -- -- 8,872(2)
Chief Executive 1995 61,200 500 -- -- -- -- 9,372(3)
Officer
</TABLE>
- ----------------
(1) Executive officers of Chilton County receive indirect compensation in
the form of certain perquisites and other personal benefits. The
amount of such benefits in the fiscal year by the named executive
officer did not exceed 10% of the executive officer's annual salary
and bonus.
(2) Consists of $6,000 in directors' fees and $2,872 in life insurance
premiums paid by Chilton County on behalf of the named executive
officer.
(3) Consists of $6,500 in directors' fees and $2,872 in life insurance
premiums paid by the Association on behalf of the named executive
officer.
The term of Mr. Cook's current employment agreement with Chilton
County ends June 30, 1998. For the year ended June 30, 1997, Mr. Cook's
base salary was $66,000. The agreement provides for a salary review by the
Chilton County Board not less often than annually, as well as for annual
one-year renewals upon affirmative action by the Chilton County Board and
written acceptance thereof by Mr. Cook. The agreement also provides for
disability benefits and for a severance payment in the event employment is
involuntarily terminated within 12 months after a change in "control" of Chilton
County which has not been approved in advance by two-thirds vote of the Chilton
County Board. This payment will be equal to the total amount of 2.99 times the
average annual compensation paid Mr. Cook during the five years immediately
prior to the change in control. As of June 30, 1997, Mr. Cook would have been
entitled to receive approximately $185,000 had a change in "control" occurred on
such date. In addition, Mr. Cook will be entitled to the same amount if he
voluntarily terminates his employment with Chilton County following a change in
"control" where, without his prior written consent, (i) he must move his
personal residence or work more than 45 miles from Clanton, Alabama, (ii) his
base compensation is reduced, (iii) Chilton County fails to maintain the same
employee benefits plans, (iv) his duties would be other than those normally
associated with the position of President and Chief Executive Officer, or (v)
his responsibilities would be materially reduced or diminished. The term
"control" is defined in the agreement as "the ownership, holding or power to
vote more than 50% of the Chilton County Common Stock, the control of the
election of a majority of Chilton County's directors, or the exercise of a
controlling influence over the management or policies of the Chilton County by
any person or by persons acting as a group within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, as amended."
AGGREGATED OPTIONS EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of stock
options with respect to Chilton County Common Stock during fiscal year 1997 by
Bobby R. Cook, and the fiscal year-end value of unexercised options held by Mr.
Cook.
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<PAGE> 124
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options/SARs Options/SARs at
at Fiscal Year-End Fiscal Year-End
Name (All Exercisable)(1) (All Exercisable)(2)
- ---- -------------------- --------------------
<S> <C> <C>
Bobby R. Cook 1,443 $--
</TABLE>
- ------------------
(1) Consists of options granted to the named executive officer under the
First Federal Savings and Loan Association of Chilton County 1988 Stock
Option and Incentive Plan.
(2) Based on the aggregate fair market value of the shares of Common Stock
underlying the options less the aggregate exercise price. For purposes
of this calculation, the fair market value per share of the Common
Stock is assumed to be equal to the last sale during the fiscal year
and known to Chilton County's management ($10.00 per share).
Unexercised options are considered "in-the-money" if the exercise price
is less than fair market value of the underlying Common Stock. See "TERMS
OF THE MERGER-Interests of Certain Persons in the Merger-Chilton County
Options."
No options were granted or exercised during the year ended June 30, 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Chilton County offers loans to its officers, directors and employees for
the financing and improvement of their personal residences. All such loans are
approved under loan policies established by the Chilton County Board. Until
August 1989, Chilton County granted loans to all full-time employees and
directors at a reduced rate of interest. Interest under this loan program was
computed at 1% above the savings rate of Chilton County at the time the loan was
made for share loans and 1% above the highest rate paid on any savings account
for mortgage loans. The loan program also permitted a waiver of all loan
origination and application fees which would normally be charged for comparable
loans. The loans were made in the ordinary course of business, were
substantially on the same terms, except for interest rates and the waiver of
loan origination and application fees, as those prevailing at the time for
comparable transactions with other persons and did not involve more than the
normal risk of collectibility or present other unfavorable features. Since
August 1989, all loans to employees and directors have been made in the ordinary
course of business, on substantially the same terms as those prevailing at the
time for comparable transactions with other persons and do not involve more than
the normal risk of collectibility or present other unfavorable features.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 22, 1997 with
respect to those persons known by Chilton County to be beneficial owners of more
than 5% of Chilton County's outstanding shares, and as to shares of Chilton
County Common Stock beneficially owned by all executive officers and directors
of Chilton County as a group. Management is not aware of any other person who
beneficially owned more than 5% of the outstanding shares of Common Stock as of
September 22, 1997.
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<PAGE> 125
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE OF SHARES OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) COMMON STOCK OUTSTANDING
------------------- ------------------------ ------------------------
<S> <C> <C>
H.D. Bice 9,887(2) 5.79%
P.O. Box 326
Clanton, Alabama 35046
L. Neal Bice 8,444(2) 4.99%
89 County Road 765
Clanton, Alabama 35046
Bobby R. Cook 17,326 10.15%
P.O. Box 1194
Clanton, Alabama 35046
Kenneth E. Easterling 12,350(2) 7.30%
4141 County Road 85
Clanton, Alabama 35046
Raymond Hamilton 12,969(2) 7.60%
1416 7th Street South
P.O. Box 130A
Clanton, Alabama 35045
Lewis W. Headley 10,113(2) 5.93%
P.O. Box 1610
Clanton, Alabama 35046
Clark G. Hutchinson 14,667 8.67%
1489 Bollingbrook Road
Marietta, Georgia 30067
James W. Gore 16,902 9.99%
1154 Country Club Circle
Birmingham, Alabama 35244
C. Richard Moore 15,500 9.16%
P.O. Box 1140
Clanton, Alabama 35046
Joseph W. Moore 2,943
502 5th Avenue North
Clanton, Alabama 35046 1.71%
John H. Smith and 10,893(3) 6.38%
Elizabeth G. Smith
14418 County Road 29
Jemison, Alabama 35085
All officers and directors 108,177(4) 60.90%
as a group (10 persons)
</TABLE>
- -------------------
(1) Unless otherwise indicated, the table includes shares owned by spouses,
other immediate family members, in trust and other forms of ownership, over
which the persons possess sole voting and investment power. Although
Chilton County's Common Stock is no longer registered under the Exchange
Act, as amended, for purposes of the above table, Chilton County has
continued to utilize Rule 13d-3 under such Act, which provides that a
person is considered to "beneficially own" any shares of Common Stock (a)
over which he has or shares voting or investment power, or (b) of which he
has the right to acquire beneficial ownership at any time within 60 days of
the Chilton County Record Date. As used herein, "voting power" is the power
to vote or direct the vote of shares and "investment power" is the power to
dispose or direct the disposition of shares.
(2) Includes 1,443 shares of Chilton County Common Stock underlying stock
options granted pursuant to the First Federal Savings and Loan Association
of Chilton County 1988 Stock Option Plan.
(3) Includes 1,423 shares of Chilton County Common Stock underlying stock
options granted to Ms. Smith pursuant to the First Federal Savings and Loan
Association of Chilton County 1988 Stock Option Plan.
(4) Includes 8,395 shares of Chilton County Common Stock underlying stock
options granted pursuant to the First Federal Savings and Loan Association
of Chilton County 1988 Stock Option and Incentive Plan.
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<PAGE> 126
CHILTON COUNTY -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Chilton County's results of operations in recent years have reflected the
fundamental changes which have occurred in the regulatory, economic and
competitive environment in which savings institutions operate. Chilton County's
results of operations are primarily dependent on its net interest income, which
is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities. Interest income is a function
of the balances of interest-earning assets outstanding during the period and the
yields earned on such assets. Interest expense is a function of the amount of
interest-bearing liabilities outstanding during the period and the rates paid on
such liabilities. Chilton County also generates non-interest income, such as
service charges on transaction accounts and other fees. Net income is further
affected by the level of operating expenses, such as compensation, occupancy and
equipment expenses, professional and data processing services, federal deposit
insurance premiums and the establishment of loan loss reserves.
The operations of Chilton County, and savings institutions generally, are
significantly influenced by general economic conditions and the monetary and
fiscal policies of governmental regulatory agencies. Deposit flows and costs of
funds are influenced by interest rates on competing investments and prevailing
market rates of interest. Lending activities are affected by the demand for
financing real estate and other types of loans, which in turn is affected by the
interest rates at which such financing may be offered and other factors
affecting loan demand and the availability of funds.
The following discussion and analysis focuses on changes in the financial
condition and results of the operations of Chilton County during the three
fiscal years ended June 30, 1997, 1996 and 1995. This discussion and analysis
should be read in conjunction with the financial statements and related notes
and selected financial data included elsewhere herein.
OPERATING STRATEGY
Chilton County's Board of Directors and management have developed a
strategic plan with the express purpose of identifying strengths, areas needing
improvement, opportunities for growth and possible threats to operating
successfully. Overall strengths include local ownership and independence, an
adequate capital base, a stable base of customers, a number of mortgage loan
products and a good economic outlook in a diversified market. Areas in need of
improvement include the asset size of Chilton County which faces strong
competition both in originating real estate and consumer loans and in attracting
deposits, the present balance of interest sensitive deposits and loans, a need
for established products and services, a need to increase and broaden the
customers base, and a need to grow and/or maintain market share in an expanding
market. Opportunities for growth include expanding commercial lending and other
types of loans and improving the level of non-interest income. Finally, threats
to operating successfully include increasing costs associated with regulatory
compliance, dramatic increases in interest rates which would adversely affect
net interest income in the short run and increased competition as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a function of the repricing characteristics of
Chilton County's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity during
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<PAGE> 127
the life of the instruments. Asset/liability management focuses on repricing
relationships of assets and liabilities during periods of changes in market
interest rates. Effective asset/liability management seeks to ensure that both
assets and liabilities respond to changes in interest rates within an acceptable
time frame, thereby minimizing the effect of interest rate movements on net
interest income. Interest rate sensitivity is measured as the ratio of the
difference between the volumes of assets and liabilities in Chilton County's
current portfolio that are subject to repricing at various time horizons,
divided by interest earning assets. A ratio is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities, and is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
Generally, during a period of rising interest rates, a negative ratio, would
adversely affect net interest income, while a positive ratio would result in an
increase in net interest income. Conversely, during a period of falling interest
rates, a negative ratio would result in an increase in net interest income and a
positive ratio would adversely, affect net interest income. At June 30, 1997,
Chilton County had a negative one year ratio of 16.93% and a negative five year
cumulative ratio of 12.29%.
The following table sets forth information regarding the projected
maturities and repricing of the major asset and liability categories of Chilton
County as of June 30, 1997. Maturities and repricing dates have been projected
by applying the assumptions set forth below as to contractual maturity and
repricing dates. Classification of items in the tables are different from those
presented in other tables and the financial statements and accompanying notes
included therein.
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<PAGE> 128
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------------------------------------------
One year One to Two to Three to Four to Over
or less two years three years four years five years five years Total
-------- --------- ----------- ---------- ---------- ---------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans ................ $ 12,724 $ 4,900 $ 4,730 $ 1,505 $ 221 $ 1,718 $ 25,798
All other loans ............... 2,117 2,219 1,674 1,020 270 745 8,045
Collateralized mortgage
obligations ................... 971 -- -- -- -- -- 971
Mortgage-backed securities .... 2,517 2,473 94 102 110 5,055 10,351
Investments (1) ............... 15,478 1,325 1,100 555 690 7,597 26,745
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets . $ 33,807 $ 10,917 $ 7,598 $ 3,182 $ 1,291 $ 15,115 $ 71,910
======== ======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Deposits ...................... $ 43,980 $ 9,180 $ 9,184 $ 644 $ 644 $ 4,520 $ 68,152
Borrowed funds ................ 2,000 -- -- -- -- -- 2,000
-------- -------- -------- -------- -------- -------- --------
Total interest-earning
liabilities ................... $ 45,980 $ 9,180 $ 9,184 $ 644 $ 644 $ 4,520 $ 70,152
======== ======== ======== ======== ======== ======== ========
Interest sensitivity gap ............ (12,173) 1,737 (1,586) 2,538 647 10,595 1,758
Cumulative interest sensitivity gap.. (12,173) (10,436) (12,022) (9,484) (8,837) 1,758 1,758
Ratio of cumulative interest
sensitivity gap to total
interest earning assets ....... (16.9)% (14.15)% (16.72)% (13.19)% (12.29)% 2.44% 2.44%
Ratio to cumulative interest
sensitivity gap to total assets
of $74,753 .................... (16.28)% (13.96)% (16.08)% (12.69)% (11.82)% 2.35% 2.35%
</TABLE>
- --------------------
(1) Includes investments in interest-bearing deposits and federal funds sold.
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<PAGE> 129
The preceding tables were prepared based upon contractual terms of the
asset or liabilities and with the following assumptions regarding prepayment of
loans, CMO/REMICS and MBS and decay rates of deposits. These prepayment and
decay rate assumptions are management's estimates based on expectations of
future interest rates. Fixed rate mortgage loans are assumed to prepay at rates
ranging from 7% to 22%. Adjustable rate loans, CMO/REMICS and MBS are presented
in the period in which they next reprice. All other loans (principally consumer
installment loans) are presented at their contractual maturities. Fixed rate MBS
are assumed to prepay at rates ranging from 8% to 20%. The decay rate for
passbook and NOW accounts are assumed to be 20% for the first year and
approximately 10% thereafter. Certificate accounts and borrowed funds are
presented at their contractual maturities. Changes in the mix of earning assets
or supporting liabilities can either increase or decrease the net interest
margin without affecting interest rate sensitivity. In addition, the interest
rate spread between an asset and its supporting liability can vary significantly
while the timing of repricing for both the asset and the liability remains the
same, thus impacting net interest income. Varying interest rate environments can
create unexpected changes in prepayment levels of assets and repricing of
liabilities which are not reflected in the interest sensitivity analysis table.
These prepayments may have significant effects on Chilton County's net interest
margin. Certain assets, such as adjustable rate mortgages, generally have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset.
INTEREST RATE RISK STRATEGY
Chilton County recognizes that the current negative gap presents a risk to
net interest income margin should an increase occur in the current level of
interest rates. Accordingly, Chilton County's current asset/liability management
strategy attempts to provide an acceptable balance between interest rate risk,
credit risk and maintenance of yield. Chilton County has recently undertaken
certain restructuring activities in order to minimize the impact of fluctuations
in market rates on net interest income and improve the overall quality of
Chilton County's assets. On May 29, 1997, Chilton County sold $10.0 million of
investments and MBS, which resulted in a net realized loss of approximately
$6,500. These securities had weighted average interest rates of 7.18%. While
Chilton County will continue to evaluate the quality of its assets and the
maturities of its assets and liabilities, in order to implement its
asset/liability management strategies, and investment and interest rate risk
policies, it does not expect that in the foreseeable future it will engage in
similar extraordinary transactions.
Chilton County has used and will continue to use various methods to
minimize the adverse effect of interest rate risk on future earnings. Chilton
County has contracted with an outside service to assist its monitoring of
interest rate risk. Chilton County maintains a portfolio of adjustable rate
mortgage loans that reprice in less than one year, equal to $7,609,000 at June
30, 1997 and $10,717,000 at June 30, 1996. Chilton County has also increased its
portfolio of more interest-sensitive consumer loans. Long term borrowings from
the FHLB of Atlanta have also been used to lengthened the maturity of Chilton
County's liabilities.
Although Chilton County is attempting to better match the terms to
repricing of its assets and liabilities, there is no assurance that Chilton
County will be able to achieve this objective, nor is it possible to predict
whether future changes in regulatory, economic and competitive conditions will
cause Chilton County to revise its operating strategies. The operating results
of Chilton County are expected to remain dependent primarily upon prevailing
levels of interest rates.
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<PAGE> 130
IMPACT OF INFLATION AND CHANGING PRICES
A financial institution's asset and liability structure is substantially
different from that of an industrial company in that virtually all assets and
liabilities of a financial institution are monetary in nature. Management
believes the impact of inflation on financial results depends upon Chilton
County's ability to react to changes in interest rates and, by such reaction,
reduce the inflationary impact on performance. Interest rates do not necessarily
move in the same direction, or at the same magnitude, as the prices of other
goods and services. Management is seeking to manage the relationship between
interest-sensitive assets and liabilities, in order to protect against wide
interest rate fluctuations, including those resulting from inflation. In a
volatile interest rate environment, liquidity and the maturity structure of
Chilton County's assets and liabilities are critical to the maintenance of
acceptable performance levels. Chilton County is unable to predict future
changes in market rates of interest and their impact on Chilton County's
profitability.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to Chilton
County's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. Average balances are derived from month-end-balances.
Management does not believe that the use of month-end balances instead of daily
balances has caused any material difference in the information presented.
The table also presents information for the periods indicated with respect
to the difference between the average yield earned on interest-earning assets
and average rate paid on interest-bearing liabilities, or "interest rate
spread," which savings institutions have traditionally used as an indicator of
profitability. Another indicator of an institution's net interest income is its
"net yield on total interest-earning assets," which is its net interest income
divided by the average balance of interest-earning assets. Net interest income
is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
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<PAGE> 131
Average Balance, Interest and Average Yields and Rates
<TABLE>
<CAPTION>
Year ended June 30, 1997
---------------------------------------------------------------
Average Balance Interest Yield/Cost
--------------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Total investment securities....................... $38,981,318 $2,474,197 6.35%
Loans receivable.................................. 34,313,303 3,036,074 8.85%
---------- ---------
Total interest-earning assets..................... 73,294,621 5,510,271 7.52%
Reserve for loan losses........................... (240,024)
Total cash and due from bank...................... 612,087
Total fixed assets - net.......................... 1,112,288
Foreclosed real estate............................ 93,785
Accrued interest receivable....................... 350,240
Other assets...................................... 272,844
------------
Total assets...................................... $75,495,841
===========
Interest-bearing liabilities:
Demand deposits................................... $5,430,383 $154,413 2.84%
Passbook savings.................................. 6,393,942 207,320 3.24%
Certificates of deposit........................... 57,381,344 3,362,366 5.86%
---------- ----------
Total interest-bearing deposits................... 69,205,669 3,724,099 5.38%
Borrowed funds.................................... 1,811,828 112,152 6.19%
----------- ----------
Total interest-bearing liabilities................ 71,017,497 3,836,251 5.40%
Non-interest-bearing demand deposits.............. 84,789
Accrued interest on deposits...................... 26,072
Other liabilities................................. 197,351
-----------
Total liabilities............................... 71,325,709
Stockholders' equity.................................. 4,170,132
------------
Total liabilities and stockholders' equity........ $75,495,841
===========
Net interest income............................... $1,674,020
==========
Interest rate spread.............................. 2.12%
Net yield on total income earning assets.......... 2.28%
Average interest-earning assets to 103.21%
average total interest-bearing liabilities ratio
</TABLE>
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<PAGE> 132
Average Balances, Interest Income/Expense and Yield Rates
<TABLE>
<CAPTION>
Year ended June 30, 1996 Year ended June 30, 1995
----------------------------------------------- ------------------------------------
Yield/
Average Balance Interest Yield/Cost Average Balance Interest Cost
--------------- -------- ---------- --------------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total investment securities.......... $39,479,032 $2,438,016 6.18% $40,286,459 $2,463,226 6.11%
Loans receivable..................... 32,064,503 2,801,778 8.74% 29,487,598 2,505,385 8.50%
----------- ---------- ----------- ----------
Total interest-earning assets........ 71,543,535 5,239,794 7.32% 69,774,057 4,968,611 7.12%
Reserve for loan losses.............. (228,850) (243,975)
Total cash and due from bank......... 923,319 744,995
Total fixed assets - net............. 1,174,820 1,232,198
Foreclosed real estate............... 90,836 69,846
Accrued interest receivable.......... 359,179 364,194
Other assets......................... 115,693 102,918
----------- -----------
Total assets.................... $73,978,532 $72,044,233
=========== ===========
Interest-bearing liabilities:
Demand deposits...................... $ 5,382,562 $ 154,388 2.87% $ 5,994,186 $ 186,598 3.11%
Passbook savings..................... 6,586,360 214,188 3.25% 9,348,102 300,654 3.22%
Certificates of deposit.............. 56,595,504 3,464,621 6.12% 50,337,342 2,675,926 5.32%
----------- ---------- ----------- ----------
Total interest-bearing deposits...... 68,564,426 3,833,197 5.59% 65,679,630 3,163,178 4.82%
Borrowed funds....................... 413,889 34,081 8.23% 1,394,958 94,482 6.77%
----------- ---------- ----------- ----------
Total interest-bearing liabilities... 68,978,315 3,867,278 5.61% 67,074,588 3,257,660 4.86%
Non-interest-bearing demand deposits. 62,531 43,730
Accrued interest on deposits......... 65,184 45,107
Other liabilities.................... 116,157 974,971
----------- -----------
Total liabilities............... 69,222,187 68,138,396
Stockholders' equity..................... 4,756,345 3,905,837
----------- -----------
Total liabilities and stockholders' $73,978,532 $72,044,233
equity............................. =========== ===========
Net interest income...................... $1,372,516 $1,710,951
========== ==========
Interest rate spread..................... 1.71% 2.26%
Net yield on total income earning assets. 1.92% 2.45%
Average interest-earning assets to
average total interest-bearing
liabilities ratio.................... 103.72% 104.02%
</TABLE>
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<PAGE> 133
FINANCIAL CONDITION
INVESTMENT SECURITIES
Investment securities held to maturity were $8,731,000, $9,312,000 and
$27,033,000 at June 30, 1997, 1996 and 1995, respectively. In November 1995,
$17,252,000 of the investment portfolio was reclassified as "available for sale"
from "held to maturity," resulting in a decline of $17,721,000, or 65.6%, in
1996. At June 30, 1997, the portfolio had a net unrealized loss of $587,000 (net
of tax benefits of $61,000), as compared to a net unrealized loss of $912,000
(net of tax benefits of $263,000) at June 30, 1996. See Notes 1 and 2 of Notes
to Financial Statements for additional discussion on investment securities.
The following table indicates the amortized cost of the portfolio of
investment securities held to maturity as of the dates presented below:
<TABLE>
<CAPTION>
Amortized Cost
June 30,
-------------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Investment Securities Held to Maturity:
U.S. Government Agencies........................................ $5,956 $5,960 $12,567
Mortgage-backed securities...................................... 134 402 8,278
Corporate securities............................................ 2,641 2,950 4,378
Obligations of state and political subdivisions................. -- -- 1,810
Collateralized mortgage obligations............................. -- -- --
Other........................................................... -- -- --
------ ------ -------
Total investment securities held to maturity.................... $8,731 $9,312 $27,033
====== ====== =======
</TABLE>
The following table indicates the fair value of the portfolio of investment
securities available for sale as of the dates presented below:
<TABLE>
<CAPTION>
Fair Value
June 30,
--------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Investment Securities Available for Sale:
U.S. Government Agencies........................................ $ 5,218 $ 7,295 $ 4,015
Mortgage-backed securities...................................... 10,217 10,520 3,932
Collateralized mortgage obligations............................. 971 959 956
Federal Home Loan Bank stock.................................... 622 622 622
Obligations of states and political subdivisions................ 55 1,734 --
Corporate securities............................................ 1,404 1,444 460
Other........................................................... 3,020 3,462 3,014
------- ------- -------
Total investment securities available for sale.................. $21,507 $26,036 $12,999
======= ======= =======
</TABLE>
-126-
<PAGE> 134
At June 30, 1997 and 1996, Chilton County maintained a portfolio of
collateralized mortgage obligations and real estate mortgage investment
conduits (collectively, "CMO/REMICS") totaling $971,000 and $959,000,
respectively. All of the CMO/REMICS owned by Chilton County are secured
through mortgage-backed securities underlying the obligations by the Federal
Home Loan Mortgage Corporation ("FHLMC"). See Note 2 to Notes to Financial
Statements.
Chilton County maintains a portfolio of mortgage-backed securities
("MBS") guaranteed by the FHLMC, the Federal National Mortgage Associations
("FNMA") and the Government National Mortgage Association ("GNMA"). At June
30, 1997 and 1996, the carrying values of such securities were $10,351,000 and
$10,922,000, respectively, and their estimated market values were $10,349,000
and $10,914,000, respectively. MBS entitle Chilton County to receive a pro
rata portion of the cash flows from an identified pool of mortgages. Although
MBS generally offer lesser yields than the loans for which they are exchanged,
MBS present substantially lower credit risk by virtue of the guarantees that
back them, are more liquid than individual mortgage loans, and may be used to
collateralize borrowings or other obligations of Chilton County. Further,
since they are primarily adjustable-rate and have relatively short terms,
Chilton County's MBS are helpful in limiting Chilton County's interest rate
risk. At the time of MBS purchases, Chilton County considers various
prepayment speeds and makes the purchase based on the ability to accept the
yield and average life based on both increasing and decreasing prepayment
speeds. See Note 2 to Notes to Financial Statements.
There is no assurance that Chilton County will continue to be able to
invest in these securities at attractive yields.
The following tables present the contractual maturities and weighted
average yields of investment securities available for sale at June 30, 1997:
<TABLE>
<CAPTION>
Maturities of Investment Securities
------------------------------------------------------------------------------
After one After five Equity securities
Within through through After having no
one year five years 10 years 10 years specific due date
-------- ---------- ---------- -------- ------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government agencies, excluding
mortgage-backed securities . . . . . . . . . . . $ -- $ 302 $4,916 $ -- $ --
Mortgage-backed securities . . . . . . . . . . . . -- -- -- 10,217 --
Collateralized mortgage obligations . . . . . . . . -- -- -- 971 --
Corporate securities . . . . . . . . . . . . . . . -- 1,168 236 -- --
Federal Home Loan Bank stock . . . . . . . . . . . -- -- -- -- 622
Obligations of states and political subdivisions. . -- 55 -- -- --
Other . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 3,020
--------- ------ ------ ------- ------
$ -- $1,525 $5,152 $11,188 $3,642
Total investment securities available for sale. . . ========= ====== ====== ======= ======
</TABLE>
-127-
<PAGE> 135
<TABLE>
<CAPTION>
Weighted Average Yields
--------------------------------------------------------------------
After one After five Equity securities
Within through through After having no
one year five years 10 years 10 years specific due date
-------- ---------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
U.S. Government agencies, excluding
mortgage-backed securities . . . --% 7.07% 6.38% --% --%
Mortgage-backed securities . . . . -- 8.42 -- 6.40 --
Collateralized mortgage
obligations . . . . . . . . . . -- -- -- 6.16 --
Corporate securities . . . . . . . -- 6.11 6.07 -- --
Federal Home Loan Bank stock . . . -- -- -- -- 7.24
Obligations of states and political
subdivisions (1) . . . . . -- 6.52 -- -- --
Other . . . . . . . . . . . . . . . -- -- -- -- 6.19
---- ---- ---- ---- ----
Total weighted average yield . . . -- 6.31% 6.36% 6.38% 6.37%
==== ==== ==== ==== ====
</TABLE>
- ----------------------------------------
(1) Weighted average yields on tax-exempt obligations have been computed on
a fully tax-equivalent basis using a federal tax rate of 34% at June 30,
1997.
The following tables present the contractual maturities and weighted
average yields of investment securities held to maturity at June 30, 1997.
<TABLE>
<CAPTION>
Maturities of Investment Securities
-----------------------------------------------
After one After five
Within through through After
one year five years 10 years 10 years
-------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government agencies, excluding mortgage- $ 3,452 $2,504 $ -- $ --
backed securities . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . -- 134 -- --
Corporate securities . . . . . . . . . . . . . 200 2,441 -- --
-------- ------ -------- -------
Total investment securities held to maturity. . $ 3,652 $5,079 $ -- $ --
======== ====== ======== =======
</TABLE>
-128-
<PAGE> 136
<TABLE>
<CAPTION>
Weighted Average Yields
-----------------------------------------------
After one After five
Within through through After
one years five years 10 years 10 years
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
U.S. Government agencies, excluding mortgage- 3.90% 4.77% --% --%
backed securities . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . -- 6.00 -- --
Corporate securities . . . . . . . . . . . . . 6.38 6.69 -- --
---- ---- ----- -----
Total weighted average yield . . . . . . . . . 4.03% 5.73% --% --%
==== ==== ===== =====
</TABLE>
The maturities for CMO/REMICS and MBS presented above represent
contractual maturities of such securities. Due to the nature of these
securities, the timing and amount of principal repayments are generally
unpredictable. However, assuming current prepayment rates and normal, required
principal repayments, the following table set forth certain information
regarding the expected principal payments, carrying values, fair values, and
weighted average yields of the Chilton County's CMO/REMICS and MBS at June 30,
1997.
<TABLE>
<CAPTION>
Principal payments expected during the
year ending June 30, At June 30, 1997
------------------------------------------ ---------------------------------
Weighted
Amortized Fair Average
1998 1999 2000 2001 2002 Thereafter Cost Value Yield
---- ---- ---- ---- ---- ---------- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMO/REMICS . . . . . $ 971 -- -- -- -- -- $ 1,001 $ 959 6.16%
MBS . . . . . . . . . $2,517 $2,473 $ 94 $102 $110 $5,055 $11,155 $10,914 6.35%
</TABLE>
LOANS
Total loans of $34,108,000 at June 30, 1997, reflected a decrease of
$528,000, or 1.52%, compared to total loans of $34,636,000 at June 30,1996.
Total loans of $34,636,000 at June 30, 1996 reflected an increase of
$5,182,000, or 17.59%, compared to total loans of $29,454,000 at June 30, 1995.
Total loans at June 30, 1995 reflected a decrease of $663,000, or 2.20%, over
the June 30, 1994 level of $30,117,000. The loan growth in fiscal 1996 was
attributable primarily to the Chilton County's increased emphasis on
construction loans, which increased $2,629,000, or 196.0%, in the year ended
June 30, 1996.
One-to-four family real estate mortgage loans decreased $1,514,000, or
6.7%, from June 30, 1996 to June 30, 1997. From June 30, 1995 to June 30, 1996,
one-to-four family real estate mortgage loans increased $913,000, or 4.2%,
while there was a decrease of $2,007,000, or 8.5%, from June 30, 1994 to June
30, 1995. Although Chilton County pursues real estate mortgage loans within
its own market area, it also originates residential mortgage loans which are
sold in the secondary market, with servicing released. Proceeds from loan
sales were $1,379,000, $3,859,000, and $1,903,000, for the fiscal years ended
June 30, 1997, 1996, and 1995, respectively.
-129-
<PAGE> 137
Consumer installment loans decreased $430,000, or 5.8%, from June 30,
1996 to June 30, 1997. The increase from June 30, 1995 to June 30, 1996 was
$2,219,000, or 43.4%, and the increase from June 30, 1994 to June 30, 1995 was
$1,020,000, or 24.9%.
The following table presents the composition of Chilton County's loan
portfolio as of June 30, 1997, 1996, 1995, 1994, and 1993:
-130-
<PAGE> 138
<TABLE>
<CAPTION>
June 30, 1997
------------------------------
Percent
Amount of Total
------ --------
(Dollar amounts in thousands)
<S> <C> <C>
Real estate mortgage loans:
One to four family . . . . . . . . . . . . . . . . . . . . . . $20,953 61.91%
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . 4,180 12.35
Construction loans . . . . . . . . . . . . . . . . . . . . . . . 1,090 3.22
Savings account loans . . . . . . . . . . . . . . . . . . . . . . 1,712 5.06
Installment loans . . . . . . . . . . . . . . . . . . . . . . . . 6,906 20.41
-------
Total loans . . . . . . . . . . . . . . . . . . . . . . . . 34,841
Less:
Loans in process . . . . . . . . . . . . . . . . . . . . . . . (193) (.57)
Discounts and other, net . . . . . . . . . . . . . . . . . . . (540) (1.60)
Allowance for loan losses . . . . . . . . . . . . . . . . . (265) (.78)
------- ------
Total loans, net . . . . . . . . . . . . . . . . . . . . . . . . $33,843 100.00%
======= ======
</TABLE>
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
1996 1995
--------------------------- ------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans:
One to four family . . . . . . . . . . . . $22,467 65.37% $21,554 73.75%
Commercial . . . . . . . . . . . . . . . . 1,381 4.02 1,054 3.61
Construction loans . . . . . . . . . . . . . 3,967 11.54 1,338 4.58
Savings account loans . . . . . . . . . . . . 1,758 5.12 1,424 4.87
Installment loans . . . . . . . . . . . . . . 7,336 21.34 5,117 17.51
------- -------
Total loans . . . . . . . . . . . . . . 36,909 30,487
Less:
Loans in process . . . . . . . . . . . . . (1,640) (4.78) (552) (1.89)
Discounts and other, net . . . . . . . . . (633) (1.84) (481) (1.65)
Allowance for loan losses . . . . . . . (267) (.77) (228) (.78)
------- ------ ------- ------
Total loans, net . . . . . . . . . . . . . . $34,369 100.00% $29,226 100.00%
======= ====== ======= ======
</TABLE>
-131-
<PAGE> 139
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1994 1993
----------------------- ------------------------
Percent Percent
Amount of Total Amount of Total
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans:
One to four family............................. $23,561 78.96% $26,224 84.02%
Commercial..................................... 494 1.66 217 .70
Construction loans............................. 1,427 4.78 285 .91
Savings account loans.......................... 1,344 4.50 1,423 4.56
Installment loans.............................. 4,097 13.73 3,701 11.85
------- -------
Total loans................................ 30,923 31,850
Less:
Loans in process............................... (398) (1.33) -- --
Discounts and other, net....................... (408) (1.37) (416) (1.33)
Allowance for loan losses.................. (278) (.93) (222) (.71)
------- ------ ------- ------
Total loans, net................................. $29,839 100.00% $31,212 100.00%
======= ====== ======= ======
</TABLE>
The following table shows the maturity of Chilton County's loan
portfolio at June 30, 1997, based upon contractual maturity dates. Demand
loans, loans having no schedule of repayment and no stated maturity, and
overdrafts are reflected as due during the year ended June 30, 1997. The table
below does not include an estimate of prepayments, which significantly shortens
the average life of all mortgage loans and will cause Chilton County's actual
repayment to differ from that shown below.
<TABLE>
<CAPTION>
Due during the year ending
June 30,
---------------------------------
Due after Due after Due after Due after
1998 1999 2000 3-5 years 5-10 years 10-15 years 15 years Total
---- ---- ---- --------- ---------- ----------- -------- -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans....... $ 795 $1,038 $1,224 $3,727 $7,213 $6,628 $4,408 $25,033
Construction loans............... 897 -- -- -- -- -- -- 897
All other loans.................. 3,405 475 1,062 1,587 1,331 318 -- 8,178
------- ------ ------ ------ ------ ------ ------ -------
Total................... $ 5,097 $1,513 $2,286 $5,314 $8,544 $6,946 $4,408 $34,108
======= ====== ====== ====== ====== ====== ====== =======
</TABLE>
-132-
<PAGE> 140
The following table sets forth at June 30, 1997, the dollar amount of
loans due after June 30, 1997, based upon whether such loans have fixed or
adjustable interest rates:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------
Floating or
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans ...................... $ 15,471 $ 6,573 $ 22,044
Commercial loans................................. 3,143 1,036 4,179
Savings and installments loans................... 8,618 -- 8,618
-------- ------- --------
Total................................... $ 27,232 $ 7,609 $ 34,841
======== ======= ========
</TABLE>
The following table sets forth Chilton County's loan originations,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loan originations:
Real estate-mortgage loans................. $ 8,668 $ 14,902 $ 6,812
All other loans............................ 8,431 8,931 6,069
--------- --------- ---------
Total...................................... $ 17,099 $ 23,833 $ 12,881
========= ========= =========
Portfolio loan purchases:
Real estate mortgage loans................. $ -- $ -- $ --
========= ========= =========
Portfolio loan sales proceeds:
Real estate mortgage loans................. $ 1,379 $ 3,859 $ 1,903
========= ========= =========
Principal repayments:
Real estate mortgage loans................. $ 8,881 $ 8,262 $ 6,599
All other loans............................ 8,907 6,378 4,969
--------- --------- ---------
Total................................. $ 17,788 $ 14,640 $ 11,568
========= ========= =========
</TABLE>
ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS
The performance of loans is evaluated primarily on the basis of a
review of each customer relationship over a period of time and the judgment of
lending officers as to the ability of borrowers to meet the repayment terms of
loans. If there is reasonable doubt as to the repayment of a loan in accordance
with the agreed terms, the loan may be placed on a nonaccrual basis pending the
sale of any collateral or a determination as to whether
-133-
<PAGE> 141
sources of repayment exists. Generally, delinquency of 90 days or more creates
reasonable doubt as to repayment. This action may be taken even though the
financial condition of the borrower or the collateral may be sufficient
ultimately to reduce or satisfy the obligation. Generally, when a loan is
placed on a nonaccrual basis, all payments are applied to reduce principal to
the extent necessary to eliminate doubt as to the repayment of the loan. Any
interest income on a nonaccrual loan is recognized only on a cash basis. See
"-- Nonperforming Assets."
At June 30, 1997, 1996, and 1995, loans accounted for on a nonaccrual
basis were $223,000, $219,000 and $25,000, respectively, or 0.64%, 0.63%, and
0.08% of the total loans outstanding, net of unearned income. The balance of
accruing loans past due 90 days or more as to principal and interest payments
were $-0-, $126,000, and $60,000 at June 30, 1997, 1996 and 1995, respectively.
The allowance for loan losses represents management's assessment of
the risk associated with extending credit and its evaluation of the quality of
the loan portfolio. Management analyzes the loan portfolio to determine the
adequacy for loan losses and the appropriate provision required to maintain a
level considered adequate to absorb anticipated loan losses. In assessing the
adequacy of the allowance, management reviews the size, quality and risk of
loans in the portfolio. Management also considers such factors as Chilton
County's historical loan loss experience, the level, severity, and trend of
criticized assets, the distribution of loans by risk class, and various
qualitative factors such as current and anticipated economic conditions.
While it is Chilton County's policy to charge off loans in the period
in which a loss is considered probable, there are additional risks of future
losses which cannot be quantified precisely or attributed to particular loans
or classes of loans. Because these risks include the state of the economy,
management's' judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged off
and to assess the risk characteristics of the portfolio in the aggregate. This
review takes into consideration the judgments of the responsible lending
officers, senior management and those of regulatory agencies that review the
loan portfolio as part of Chilton County's examination process. Specific
percentages are allocated to each loan type. Management recognizes that there
is more risk traditionally associated with commercial and consumer lending as
compared to real estate mortgage lending; as such, a greater allocation is made
for commercial and consumer loans than real estate mortgage loans. While all
information available is used by management to recognize losses in the loan
portfolio, there can be no assurances that future additions to the allowance
will not be necessary. Chilton County's Board of Directors reviews the
assessments of management in determining the adequacy of the allowance for loan
losses. Generally, the only loans, including construction loans, which are
classified are loans which are greater than 90 days delinquent. However, the
Board of Directors may also classify loans less than 90 days delinquent should
such classification be considered necessary.
Chilton County's allowance for loan losses is also subject to
regulatory examinations and determinations as to adequacy, which may take into
account such factors as the methodology used to calculate the allowance for
loan loss reserves and the size of the loan loss reserve in comparison to a
group of peer banks identified by the regulators. During its routine
examinations of savings institutions, the OTS has, from
-134-
<PAGE> 142
time-to-time, required additions to provisions for loan losses and allowances
for loan losses as the regulators' credit evaluations and allowance for loan
loss methodology have differed from those of management. Such regulatory
examinations have focused on loan quality, particularly that of real estate
loans. Chilton County attempts to reduce the risks of real estate lending
through maximum loan-to-value requirements as well as systematic cash flow and
initial customer credit history analyses. See "Supervision and Regulation."
Management considers the $265,000 allowance for loan losses adequate
to absorb known risks in the portfolio. At June 30, 1997, $131,000 of the
allowance for loan losses was reserved for possible losses on real estate
mortgage loans, $1,000 was reserved for possible losses on construction loans,
and the remaining $133,000 was reserved for all other loan classifications. At
June 30, 1997, the ratio of the allowance for loan losses to loans outstanding,
net of unearned income, was 0.77%.
The following table summarizes the levels of the allowance for loan
losses at the end of the last five years.
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollar amounts in thousands)
<S> <S> <C> <C> <C> <C>
Balance at beginning of period $ 267 $ 228 $ 278 $ 222 $ 450
Charge-offs:
Real estate.................. 7 1 41 4 129
Installment.................. 81 59 72 36 31
------ ----- ------ ------ ------
Total charge-offs.... 88 60 113 40 160
------ ----- ------ ------ ------
Recoveries:
Real estate.................. 1 7 1 4 7
Installment.................. 21 7 9 16 15
------ ----- ------ ------ ------
Total recoveries..... 22 14 10 20 22
------ ----- ------ ------ ------
Net loans (recovered) charged off..... 66 46 103 20 138
Provisions for loan losses............ 64 85 53 76 (90)
------ ----- ------ ------ ------
Balance at end of period.............. $ 265 $ 267 $ 228 $ 278 $ 222
====== ===== ====== ====== ======
Ratio of net charge-offs to total
loans outstanding net of
unearned income..................... 0.19% 0.13% 0.35% 0.07% 0.44%
====== ===== ====== ====== ======
Ratio of allowance for loan
losses to loans outstanding, net of
unearned income.................... 0.77% 0.74% 0.77% 0.92% 0.71%
====== ===== ====== ====== ======
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily an indication
of future losses and does not restrict the use of the allowance to absorb
losses in any category.
-135-
<PAGE> 143
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996 June 30, 1995
------------------------------ -------------------------------- -----------------------
Percent of
Percent of loans in Percent of loans in loans in each
each category each category category
Amount to total loans Amount to total loans Amount to total loans
------ -------------- ------ -------------- ------ --------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Construction loans $ 1 1% $ 4 1% $ 1 1%
Real estate mortgage loans 131 49 132 50 172 75
All other loans 133 50 131 49 55 24
----- --- ------ --- ----- ---
Total allowance for loan losses $ 265 100% $ 267 100% $ 228 100%
===== === ====== === ===== ===
</TABLE>
On July 1, 1995, Chilton County adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS 118. SFAS 114
requires that impaired loans within the scope of the statement be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. SFAS 118 allows a creditor to use existing methods
for recognizing interest income on an impaired loan. The adoption of SFAS
114 and 118 had an immaterial effect on the financial statements of Chilton
County.
NONPERFORMING ASSETS
Chilton County has policies, procedures and underwriting guidelines
intended to assist in maintaining the overall quality of its loan
portfolio. Chilton County monitors its delinquency levels for any adverse
trends. Non-Performing assets consist of loans on nonaccrual status,
accruing loans which are past due 90 days or more, and foreclosed real
estate.
Chilton County's policy generally is to place a loan on nonaccrual
status when there is reasonable doubt as to the repayment of the loan in
accordance with the agreed terms. Generally, delinquency of 90 days or more
creates reasonable doubt as to repayment. At the time a loan is placed on
nonaccrual status, interest previously accrued but not collected is
reversed and charged against current earnings. Income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower is able to make periodic interest and
principal payments and the loan is no longer delinquent and is returned to
accrual status.
Nonperforming assets were $478,000, $417,000, and $159,000, at June
30, 1997, 1996, and 1995 respectively. These levels represent an increase
of $61,000, or 14.63%, between June 30, 1997 and June 30, 1996, and an
increase of $258,000, or 162%, between June 30, 1996 and 1995. Management
believes that such increases were primarily attributable to increased
consumer lending.
An analysis of the components of nonperforming assets at the end of
the periods shown below is presented in the following table:
-136-
<PAGE> 144
<TABLE>
<CAPTION>
Nonperforming Assets
June 30,
--------------------------------------------
1997 1996 1995
---- ---- ----
(Dollar amounts in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate mortgage loans......................... $ 223 $ 219 $ 25
All other loans.................................... 195 -- --
--------- -------- --------
Total......................................... $ 418 $ 219 $ 25
--------- -------- --------
Accruing loans which are past due 90 days or more:
Real estate mortgage loans......................... -- -- --
--------- -------- --------
All other loans.................................... -- 126 60
--------- -------- --------
Total......................................... $ -- $ 126 $ 60
--------- -------- --------
Total of non-accrual and 90 days past due loans.......... 418 345 85
Foreclosed real estate (net of related loss provisions).. $ 60 $ 72 $ 74
--------- -------- --------
Total non-performing assets........................ $ 478 $ 417 $ 159
========= ======== ========
Non-accrual and 90 days past due loans as a % of total
loans.................................................... 1.23% 1.00% 0.29%
========= ======== ========
Non-performing assets as a % of total loans.............. 1.40% 1.20% 0.54%
========= ======== ========
Total loans outstanding.................................. $ 34,108 $ 34,636 $ 29,454
========= ======== ========
</TABLE>
DEPOSITS
Total deposits decreased $1,373,000 to $68,152,000 at June 30, 1997
and increased $2,126,000, or 3.15%, to $69,525,000 at June 30, 1996 from
$67,399,000 at June 30, 1995. Non-interest-bearing deposits have remained
at moderate levels of $139,000, $89,000, and $42,000, while
interest-bearing deposits were $68,013,000, $69,436,00, and $67,357,000 at
June 30, 1997, 1996, and 1995, respectively.
Chilton County's deposit mix at June 30, 1997 remained fairly
constant compared to June 30, 1996. There was a slight decrease in NOW
accounts of $230,000, or 4.35%, and a slight increase in passbook savings
of $59,000, or 0.93%. Certificates of deposit, other than "jumbos" (i.e.,
certificates of deposit of $100,000 or more) decreased $1,592,000, or
3.56%, while jumbos increased $340,000, or 2.58%. At June 30, 1997
certificates of deposit comprised approximately 83% of total deposits,
while lower cost funds, including NOW accounts and passbooks savings, made
up approximately 17% of total deposits.
-137-
<PAGE> 145
The composition of total deposits as of the periods indicated below is
presented as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------------------- -----------------------------------
Percent change Percent change
from from
Amount Prior Year End Amount prior year-end
------ -------------- ------ --------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Demand deposits . . . . . . . . . . . . . $ 139 56.18% $ 89 1.12%
---------- ---------
Interest-bearing deposits:
NOW accounts . . . . . . . . . . . . 5,056 (4.35) 5,286 4.28
Passbook savings . . . . . . . . . . 6,376 .93 6,317 (9.28)
Certificate of deposit other
than jumbos . . . . . . . . . . . . 43,085 (3.56) 44,677 .96
Jumbos . . . . . . . . . . . . . . . 13,496 2.58 13,156 18.79
-------- --------
Total interest-bearing deposits . . . . . 68,013 (2.04) 69,436 3.09
------- --------
Total deposits . . . . . . . . . . . . . $ 68,152 (1.97)% $ 69,525 3.15%
======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995
----------------------------------------------------------
Percent change
from
Amount prior year-end
------ --------------
(Dollar amounts in thousands)
<S> <C> <C>
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . $ 42 (50.59)%
----------
Interest-bearing deposits:
NOW accounts . . . . . . . . . . . . . . . . . . . . . . 5,069 (29.09)
Passbook savings . . . . . . . . . . . . . . . . . . . . 6,963 (40.21)
Certificate of deposit other
than jumbos . . . . . . . . . . . . . . . . . . . . . . 44,250 15.82
Jumbos . . . . . . . . . . . . . . . . . . . . . . . . . 11,075 17.57
---------
Total interest-bearing deposits . . . . . . . . . . . . . . . 67,357 1.41
---------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . $ 67,399 1.35%
=========
</TABLE>
-138-
<PAGE> 146
The following tables set forth the distribution of Chilton County's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented based on average daily
balances:
<TABLE>
<CAPTION>
June 30, 1997
-------------
Minimum
Interest ------- Percentage
rate Term Category Balance Balances of Total
---- ---- -------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
-- % None Non-interest-bearing demand $ 300 $ 139 .20%
2.91 None NOW accounts 300 5,056 7.42
3.25 None Passbook savings 50 6,377 9.36
4.49 6 months Fixed-term Fixed-rate Certificate 2,500 4,510 6.62
6.09 9 months Fixed-term Fixed-rate Certificate 2,500 442 .65
5.28 12 months Fixed-term Fixed-rate Certificate 1,000 10,077 14.78
5.48 15 months Fixed-term Fixed-rate Certificate 1,000 2,430 3.57
5.45 18 months Fixed-term Fixed-rate Certificate 1,000 1,687 2.48
5.75 IRA Fixed-term Fixed-rate Certificate 1,000 13,054 19.15
5.51 21 months Fixed-term Fixed-rate Certificate 1,000 344 .50
6.38 30 months Fixed-term Fixed-rate Certificate 1,000 20,424 29.97
6.24 4 years Fixed-term Fixed-rate Certificate 1,000 3,432 5.04
5.78 4 years Fixed-term Adjustable-rate 1,000 180 .26
Certificate -------- ------
$ 68,152 100.00%
======== ======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
-------------
Interest Minimum
------- Percentage
rate Term Category Balance Balances of Total
---- ---- -------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
-- % None Non-interest-bearing demand $ 300 $ 89 .14%
2.90 None NOW accounts 300 5,286 7.60
3.25 None Passbook savings 50 6,317 9.09
5.00 6 months Fixed-term Fixed-rate Certificate 2,500 6,627 9.53
5.02 9 months Fixed-term Fixed-rate Certificate 2,500 170 .24
5.49 12 months Fixed-term Fixed-rate Certificate 1,000 14,707 21.15
5.46 15 months Fixed-term Fixed-rate Certificate 1,000 361 .52
6.31 18 months Fixed-term Fixed-rate Certificate 1,000 2,980 4.29
6.33 IRA Fixed-term Fixed-rate Certificate 1,000 13,099 18.84
5.25 21 months Fixed-term Fixed-rate Certificate 1,000 15 .02
6.42 30 months Fixed-term Fixed-rate Certificate 1,000 15,578 22.41
6.22 4 years Fixed-term Fixed-rate Certificate 1,000 4,132 5.94
5.78 4 years Fixed-term Adjustable-rate 1,000 163 .23
Certificate
7.75 6 years Fixed-term Fixed-rate Certificate 1,000 1 --
-------- ------
$ 69,525 100.00%
======== ======
</TABLE>
-139-
<PAGE> 147
<TABLE>
<CAPTION>
June 30, 1995
-------------
Interest Minimum Percentage
rate Term Category Balance Balances of Total
---- ---- -------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
-- % None Non-interest-bearing demand $ 300 $ 42 .06%
2.88 None NOW accounts 300 5,069 7.52
3.25 None Passbook savings 50 6,963 10.33
5.69 6 months Fixed-term Fixed-rate Certificate 2,500 7,327 10.87
5.90 12 months Fixed-term Fixed-rate Certificate 1,000 13,011 19.31
5.66 18 months Fixed-term Fixed-rate Certificate 1,000 3,565 5.29
6.32 IRA Fixed-term Fixed-rate Certificate 1,000 11,593 17.20
6.15 30 months Fixed-term Fixed-rate Certificate 1,000 15,388 22.83
6.35 4 years Fixed-term Fixed-rate Certificate 1,000 4,284 6.36
6.30 4 years Fixed-term Adjustable-rate 1,000 156 .23
Certificate
7.75 6 years Fixed-term Fixed-rate Certificate 1,000 1 --
-------- ------
$ 67,399 100.00%
======== ======
</TABLE>
Information about the average balances of interest-bearing demand
deposits and time deposits for the periods indicated based upon average
balances is provided below:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------- ---------------------------
Interest- Interest- Interest-
bearing bearing bearing
demand Time demand Time demand Time
deposits deposits deposits deposits deposits deposits
-------- -------- -------- -------- -------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance . . . . $11,824 $57,381 $11,969 $56,596 $15,342 $50,337
Average rate . . . . . 3.06% 5.86% 3.08% 6.12% 3.18% 5.32%
</TABLE>
The following table presents changes in deposits for the periods
indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollar amounts in thousands)
<S> <C> <C> <C>
Opening balance . . . . . . . . . . . . $ 69,525 $ 67,399 $ 66,503
Net deposits (withdrawals) . . . . . . (4,333) (934) (1,579)
Interest credited on deposits . . . . . 2,960 3,060 2,475
--------- -------- ------------
Ending balance . . . . . . . . . . . . $ 68,152 $ 69,525 $ 67,399
========= ======== ============
$ (1,373) $ 2,126 $ 896
========= ======== ============
Percentage increase (decrease) . . . . (1.97)% 3.15% $ 1.35%
========= ======== ============
</TABLE>
-140-
<PAGE> 148
The following table presents, by various interest rate categories, the
amount of certificate accounts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
June 30, 1997
-------------
(In thousands)
Interest Rate
-------------
<S> <C>
4.00 - 4.99% . . . . . . . . $ 3,289
5.00 - 5.99% . . . . . . . . 31,950
6.00 - 6.99% . . . . . . . . 13,055
7.00 - 7.99% . . . . . . . . 8,287
-------
Total . . . . . . . . . . . . $56,581
=======
</TABLE>
At June 30, 1997, Chilton County had outstanding approximately $56.6
million in certificate accounts that mature as follows:
<TABLE>
<CAPTION>
Amount due
-------------------------------------------------------------------------------------------------
Less than One to Two to Three to four Four to There
one year two years three years years five years after Total
-------- --------- ----------- ----- ---------- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
-------------
4.00 - 4.99% . . . . . $ 3,289 $ -- $ -- $ -- $ -- $ $ 3,289
--
5.00 - 5.99% . . . . . 24,435 6,170 1,264 81 -- -- 31,950
6.00 - 6.99% . . . . . 4,716 4,108 4,175 56 -- -- 13,055
7.00 - 7.99% . . . . . 7,290 997 -- -- -- -- 8,287
------- ------ -------- ------- ---------- ---------- --------
Total . . . . . . . . . $39,730 $11,275 $ 5,439 $ 137 $ -- $ -- $ 56,581
======= ======= ======== ======= ========== ========== ========
</TABLE>
Certificates of deposit of $100,000 or more mature as follows as of
June 30, 1997:
<TABLE>
<CAPTION>
Amount due
-------------------------------------------------------------------------------------------------
Less than One to Two to Three to Four to There
one year two years three years four years five years after Total
-------- --------- ----------- ---------- ---------- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
-------------
$ -
4.00 - 4.99% . . . . . - $ -- $ -- $ -- $ -- $ -- $ --
5.00 - 5.99% . . . . . 4,109 902 259 -- -- -- 5,270
6.00 - 6.99% . . . . . 2,011 1,691 1,123 -- -- -- 4,825
7.00 - 7.99% . . . . . 2,956 445 -- -- -- -- 3,401
--------- ------- --------- ---------- ---------- -------- -------
Total . . . . . . . . . $ 9,076 $ 3,038 $ 1,382 $ $ $ -- $13,496
========= ======= ========= ========== ========== ======== =======
</TABLE>
- 141-
<PAGE> 149
The following table presents the maturities of certificates of deposit at
June 30, 1997, and at June 30, 1996 and June 30, 1995:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Three months or less . . . . . . . . . . . . . . $ 11,656 $ 9,802 $ 10,158
After three within six months . . . . . . . . . . 12,831 11,606 9,494
After six within twelve months . . . . . . . . . 15,243 15,899 14,907
One year to two years . . . . . . . . . . . . . . 11,275 16,684 10,661
Two years to three years . . . . . . . . . . . . 5,439 3,240 8,496
Three years to four years . . . . . . . . . . . . 137 602 1,609
--------------- ------------ ------------
Total . . . . . . . . . . . . . . . . . . . $ 56,581 $ 57,833 $ 55,325
=============== ============ ============
Weighted average rate on all certificates of
deposit at period-end . . . . . . . . . . . . . . 5.81% 5.97% 6.05%
=============== ============ ============
</TABLE>
BORROWED FUNDS
Borrowed funds consist of advances from the FHLB of Atlanta. The balances
outstanding at June 30, 1997 and June 30, 1995 were $2,000,000 and $1,000,000
respectively. At June 30, 1996, Chilton County had no advances from the FHLB
of Atlanta. The advances at June 30, 1995, carried an interest rate which
resets quarterly based on the three month LIBOR rate, and interest payments are
due quarterly. The advances at June 30, 1997, carried a fixed rate of 6.21%
and are due at August 5, 1998. See Note 8 of Notes to Financial Statements.
CAPITAL RESOURCES
STOCKHOLDERS' EQUITY
Chilton County's stockholders' equity was $4,376,000, $4,119,000 and
$4,573,000 at June 30,1997, 1996 and 1995, respectively. For the year ended
June 30, 1997, the increase was $257,000, or 6.24%, while the years ended June
30, 1996 and 1995 showed a decrease of $454,000, or 9.9%, and an increase of
$215,000, or 4.9%, respectively. The increase in the year ended June 30, 1997,
was limited by a special SAIF assessment of $430,000 in September 1996. The
decrease in 1996 was due primarily to an increase of $513,000 in the net
unrealized losses on available for sale investment securities. The increase in
1995 was due primarily to higher earnings and a decrease in the net unrealized
losses on available for sale investment securities. Dividends of $47,000,
$47,000 and $49,000 also decreased equity for the years ended June 30, 1997,
1996 and 1995, respectively.
-142-
<PAGE> 150
Certain financial ratios for Chilton County at the end of the periods
indicated are presented in the following table:
<TABLE>
<CAPTION>
Equity and Assets Ratio
-----------------------
June 30,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on average assets . . . . . . . . . . . . . . (.03)% .15 % .21 %
Return on average stockholders' equity . . . . . . . (.47) 2.26 3.96
Common dividend payout ratio . . . . . . . . . . . . -- 44.4 31.87
Average stockholders' equity to average assets . . . 5.71 % 6.43 % 5.42 %
</TABLE>
FIRREA and the implementing regulations of the OTS, which became effective
on December 7, 1989, changed the capital requirements applicable to thrifts,
including Chilton County, and the consequences for failing to comply with such
standards. The capital standards include (i) a core capital requirement, (ii)
a tangible capital requirement, and (iii) a risk-based capital requirement.
FIRREA specifies such capital requirements and states that such standards shall
be no less stringent than the capital standards applicable to national banks.
The OTS 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. See "SUPERVISION
AND REGULATION -- Regulation of First Federal and Chilton County -- Capital
Adequacy Requirement." Chilton County was in compliance with these regulatory
capital requirements at June 30, 1997, 1996, and 1995. Chilton County's
compliance with these regulatory capital requirements at June 30, 1997 and June
30, 1996 is illustrated in the following table:
<TABLE>
<CAPTION>
At June 30, 1997 At June 30, 1996
----------------------------------- -----------------------------------
Tangible Core Risk-based Tangible Core Risk-based
Capital Capital Capital Capital Capital Capital
------- ------- ------- ------- ------- -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity $ 4,376 $ 4,376 $ 4,376 $ 4,119 $ 4,119 $ 4,119
Unrealized losses on debt
securities 92 92 92 394 394 394
General valuation allowance -- -- 216 -- -- 255
------- ------- ------- ------- ------- -------
Regulatory capital 4,468 4,468 4,684 4,513 4,513 4,768
======= ======= ======= ======= ======= =======
Regulatory asset base 74,753 74,753 33,141 73,915 73,915 34,291
Capital ratio 5.98% 5.98% 14.13% 6.11% 6.11% 13.90%
Minimum required capital 1.50% 3.00% 8.00% 1.50% 3.00% 8.00%
Capital ratio required for "well-
capitalized" designation --% 5.00% 10.00% --% 5.00% 10.00%
</TABLE>
-143-
<PAGE> 151
LIQUIDITY
The goal of liquidity management is to ensure the availability of an
adequate level of funds to meet the loan demand and the deposit withdrawal
needs of Chilton County's customers. In a banking environment, both assets and
liabilities are considered sources of liquidity funding and both are,
therefore, managed on an active basis.
The asset portion of the statement of financial condition provides
liquidity primarily through loan principal repayments, maturities of investment
securities and sales of investment securities available for sale. Loans that
mature in one year or less amounted to $5,097,000, or 14.94%, of the total loan
portfolio at June 30, 1997. Other short-term investment such as federal funds
sold and maturing interest-bearing deposits with other banks are additional
sources of funding.
The liability portion of the statement of financial condition provides
liquidity through various customers' interest-bearing and non-interest-bearing
deposit accounts. Additionally, Chilton County has funding available through
various loan programs with varying maturities and terms from the FHLB of
Atlanta.
Net cash provided by operating activities increased from $59,000 at June
30, 1996 to $240,000 at June 30, 1997. Net cash provided by investing
activities was $6,163,000 for the year ended June 30, 1997 and consisted
primarily of sales and maturities of investment securities of $13,355,000,
offset partially by purchases of securities of $4,305,000 plus mortgage-backed
securities of $4,772,000. Net cash from financing activities was provided
primarily by an increase in FHLB advances of $2,000,000 and time deposits of
$593,000 and offset by a decrease in deposit accounts of $1,966,000.
Net cash provided by operating activities decreased $296,000, or 83.4%, to
$59,000 at June 30, 1996, from $355,000 at June 30, 1995. Net cash used in
investing activities was $1,540,000 during 1996 which consisted of net loans
originated of $5,383,000, purchases of investment securities and MBS of
$9,033,000, and net proceeds from sales, maturities and repayments of
investment securities and mortgage backed securities of $12,903,000. Net cash
provided by financing activities resulted from an increase in deposit accounts
of $2,126,000, which was offset by a repayment of FHLB advances of $1,000,000.
Chilton County's liquidity ratio was 32.79% at June 30, 1997, compared to
14.62% at June 30, 1996, 16.60% at June 30, 1995 and 10.98% on June 30, 1994.
These liquidity ratios exceed the applicable liquidity measures prescribed by
the OTS. Included in Chilton County's regulatory liquidity are cash, time
deposits, federal funds sold, certain investment securities and accrued
interest on investments. The liquidity base includes deposits, less loans
secured by deposit accounts.
-144-
<PAGE> 152
RESULTS OF OPERATIONS
GENERAL
Net loss was $20,000 for the year ended June 30, 1997 compared to net
income of $107,000 for the year ended June 30, 1996. The decrease in income is
attributable primarily to a on-time SAIF assessment of $430,000, offset by an
increase in consumer loan interest income of $194,000.
Net income for the year ended June 30, 1996 decreased $48,000, or 31.0%,
for a net income of $107,000 when compared to $155,000 in 1995. A decline in
net interest income of $338,000 was partially offset by a decline in expenses
related to a lawsuit settlement of $346,000 and increases in gains on the sale
of investments of $35,000.
Total assets were $73,915,000 at June 30, 1996, compared to $73,516,000 at
June 30, 1995. This growth was funded through increases in deposit accounts.
The items discussed in the preceding paragraphs are discussed more fully
below.
NET INTEREST INCOME
Net interest income is the principal component of a financial
institution's income stream and represents the differences or spreads between
interest income generated from earning assets and the interest expense paid on
deposits and borrowed funds. For the year ended June 30, 1997 net interest
income was $1,674,000, compared to $1,373,000 for the year ended June 30, 1996.
The $301,000, or 21.9%, increase was primarily due to an increased volume of
consumer loans, while the cost of funds decreased 21 basis points to an average
cost of 5.40% at June 30, 1997, compared to 5.61% at June 30, 1996.
Net interest income was $1,373,000 for the year ended June 30, 1996, which
was a decrease of $338,000, or 20.0%, from 1995. The decrease resulted
primarily from an increase in interest on deposits. The average rate paid on
certificates of deposit increased to 6.12% in 1996 from 5.32% in 1995. The
increase in the cost of funds was partially offset by an increase in interest
income from consumer loans of $210,000.
Chilton County performs a gap analysis in order to monitor its yields on
interest-earning assets and the rate paid on interest-bearing liabilities. See
"Interest Rate Sensitivity Management" and "Average Balances, Interest
Income/Expense and Yield/Rates" tables appearing elsewhere herein and the
"Rate/Volume Variance Analysis" table immediately following.
-145-
<PAGE> 153
RATE/VOLUME VARIANCE ANALYSIS
The following table analyzes net interest income in terms of changes in
the volume of interest-earning assets and interest-bearing liabilities and
changes in yields and rates. The table reflects the extent to which changes in
the interest income and interest expense are attributable to changes in volume
(changes in volume multiplied by prior year rate) and changes in rate (changes
in rate multiplied by prior year volume). Changes attributable to the combined
impact of volume and rate have been allocated proportionately to changes due to
volume and changes due to rate.
-146-
<PAGE> 154
<TABLE>
<CAPTION>
Year ended June 30, Year ended June 30,
--------------------------------- ---------------------------------
1997 vs. 1996 Increase (Decrease) 1996 vs. 1995 Increase (Decrease)
due to due to
--------------------------------- ---------------------------------
--------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest income: (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities . . . . . . $ (31) $ 67 $ 36 $ (50) $ 24 $ (26)
Loans receivable . . . . . . . . . 199 36 235 224 73 297
--------- --------- --------- --------- --------- ---------
Total interest income . . . . . . . . . 168 103 271 174 97 271
--------- --------- --------- --------- --------- ---------
Interest expense:
NOW accounts . . . . . . . . . . . 1 (1) -- (18) (14) (32)
Passbook savings . . . . . . . . . (6) (1) (7) (90) 3 (87)
Certificates of deposit . . . . . 48 (150) (102) 356 433 789
Borrowed funds . . . . . . . . . . 88 (10) 78 (78) 17 (61)
--------- --------- --------- --------- --------- ---------
Total interest expense . . . . . . . . 131 (162) (31) 170 439 609
--------- --------- --------- --------- --------- ---------
Change in net interest income . . . . . $ 37 $ 265 $ 302 $ 4 $ (342) $ (338)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------
1997 vs. 1996 Increase (Decrease)
due to
---------------------------------
Volume Rate Total
------ ---- -----
(In thousands)
Interest income:
<S> <C> <C> <C>
Investment securities . . . . . . $ 166 $ 19 $ 185
Loans receivable . . . . . . . . . (82) 62 (20)
--------- --------- ---------
Total interest income . . . . . . . . . 84 81 165
--------- --------- ---------
Interest expense:
NOW accounts . . . . . . . . . . . (36) (19) (55)
Passbook savings . . . . . . . . . (79) (26) (105)
Certificates of deposit . . . . . 197 163 360
Borrowed funds . . . . . . . . . . 94 -- 94
--------- --------- ---------
Total interest expense . . . . . . . . 176 118 294
--------- --------- ---------
Change in net interest income . . . . . $ (92) $ (37) $ (129)
========= ========= =========
</TABLE>
-147-
<PAGE> 155
INTEREST INCOME
Interest income is a combination of the volume of interest-earning assets
and their related yields. Interest income was $5,510,000 $5,240,000, and
$4,969,000 for the years ended June 30, 1997, 1996, and 1995, respectively.
Interest income for the year ended June 30, 1997 grew as a result of a $199,000
increased in the volume of loans receivable and an increase of 20 basis points
in the average interest rate earned. Interest income from loans increased
$297,000 from 1995 to 1996 as the average loans receivable increased
$2,577,000, or 8.7%.
Interest income on total investment securities, including those held to
maturity and those available for sale, increased $36,000, or 1.5%, to
$2,474,000 for the year ended June 30, 1997 as compared to the same period in
1996. The average balance outstanding of all investment securities was
$38,981,000 and $39,479,000 for the years ended June 30, 1997 and 1996
respectively. The average yield on investment securities was 6.35% in 1997 and
6.18% in 1996. The decline in average balances was primarily due to a decrease
in investments available for sale.
Interest income on total investment securities decreased $25,000, or 1.0%,
to $2,438,000 for the year ended June 30, 1996, compared to $2,463,000 for the
year ended June 30, 1995. The average balance outstanding of investment
securities, including those held to maturity and those available for sale,
decreased, $807,000, or 2.0%, to $39,479,000 in 1996 from $40,286,000 in 1995.
The yields on the average balances of investment securities were 6.18%, and
6.11%, for the years ended June 30, 1996, and 1995, respectively. The interest
income on investment securities remained relatively constant from 1995 to 1996.
INTEREST EXPENSE
Total average interest-bearing liabilities were $71,017,000 and
$68,978,000 for the year ended June 30, 1997 and 1996, respectively, which
represented an increase of $2,039,000, or 3.0%. The rates paid on these
liabilities were 5.40% for 1997, compared to 5.61% for 1996. Total interest
expense was $3,836,000 for 1997, compared to $3,867,000 for 1996, a decrease of
$31,000, or 0.80%. The decrease in 1997 resulted from a decrease in the
average rates, which was partially offset by an increase in average volume.
Interest expense on deposits decreased from $3,833,000 for the year ended
June 30, 1996 to $3,724,000 in 1997. Although the average volume of
interest-bearing deposits increased $642,000 in 1997, the increase was offset
by a decrease in the average rate paid of 21 basis points from 1996 to 1997.
Interest expense on borrowed funds increased to $112,000 in 1997 from
$34,000 in 1996. The increase was due primarily to an increase in the volume
of borrowings from the FHLB of Atlanta in 1997.
Total average interest-bearing liabilities were $68,978,000 and
$67,075,000 for the years ended June 30, 1996, and 1995, respectively.
Interest-bearing liabilities reflected an increase of $1,668,000, or 2.6%, and
$1,903,000, or 2.8%, for fiscal 1995, and 1996, respectively. The rates paid
on those liabilities were 4.86%, and 5.61%, respectively. Total interest
expense was $3,867,000 for 1996 and $3,258,000 for 1995. The increase in 1996
of $609,000, or 18.67%, was caused primarily by an increase in the rates paid,
-148-
<PAGE> 156
and, to a lesser extent, an increase in volume. The increase in 1995 of
$296,000, or 10.0%, was also caused by a combination of increased volume and
the rates paid.
Interest on deposits, the primary component of total interest expense, was
$3,833,000 and $3,163,000 for the years ended June 30, 1996 and 1995. This
represented increases of $670,000, or 21.2% and $200,000, or 6.8%, for the same
periods. This increase in interest on deposits was primarily attributable to
an increase in the average balances outstanding of interest-bearing deposits in
1996 and 1995 along with an increase in rates paid on those deposits for the
same period.
Chilton County had a limited amount of borrowing activity during 1996 and
1995. Interest expense on borrowed funds was $34,000 and $94,000 for the years
ended June 30,1996 and 1995, respectively.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the annual cost of providing an allowance
or reserve for anticipated future losses on loans. The amount for each year is
dependent upon many factors including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment
of loan portfolio quality, the value of collateral and general economic
factors. The provision for loan losses was $64,000, $85,000, $53,000, and
$76,000 for the years ended June 30, 1997, 1996, 1995 and 1994, respectively.
As previously discussed, the loan portfolio is comprised primarily of
one-to-four family residential mortgage loans which are originated primarily in
Chilton County's primary market area.
As Chilton County has increased the size of its consumer loan portfolio,
charge-offs associated with such loans have similarly increased. Net
charge-offs for consumer loans were $60,000, $52,000, $63,000 and $20,000 for
the years ended June 30, 1997, 1996, 1995 and 1994, respectively. Net
charge-offs (recoveries) for real estate loans were $6,000, ($6,000), $40,000,
and $-0- for the years ended June 30, 1997, 1996, 1995 and 1994, respectively.
Various regulatory agencies periodically review Chilton County's allowance
for loan losses and may require Chilton County to recognize additions to the
allowance based on judgments about information available to them at the time of
their review. The provisions for loan losses reflect amounts management
considered necessary to maintain an acceptable level of loan loss allowance
relative to the total loan portfolio and relative to nonperforming loans.
OTHER INCOME
Other income decreased $29,000 or 11.3% to $228,000 for the year ended
June 30, 1997 from $257,000 for the same period in 1996. Gains on the sale of
MBS decreased from a gain of $21,000 in 1996 to a loss of $10,000 in 1997.
Fees and miscellaneous charges on loans decreased from $93,000 in 1996 to
$82,000 in 1997. These declines were partially offset by an increase in
returned check charges from $59,000 in 1996 to $64,000 in 1997.
Other income increased $62,000, or 31.8%, to $257,000 for the year ended
June 30, 1996, compared to a decrease of $83,000, or 29.9%, from the 1994
amount of $278,000. Gains on the sale of investment
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securities and mortgage-backed securities increased in 1996 compared to 1995,
while there were decreases in 1995 compared to 1994.
Fees and miscellaneous charges on loans were $77,000, and $140,000 for the
years ended June 30, 1995 and 1994, respectively. In 1994, Chilton County
originated and sold a large amount of new loans. Since that time, Chilton
County has attempted to maintain loans in its portfolio through increased
levels of consumer and construction lending.
OTHER EXPENSE
Total other expenses increased $535,000 to $1,910,000 for the year ended
June 30, 1997 from $1,375,000 in 1996. The increase was due primarily to a
special one-time SAIF assessment in the amount of $430,000 in September 1996.
This expenditure, in connection with the federal insurance of accounts, was
assessed on an industry wide basis.
Salaries and employee benefits were $588,000 and $558,000 for the years
ended June 30, 1997 and 1996, respectively, an increase of $30,000, or 5.4%.
This increase was composed primarily of cost of living raises for employees and
the addition of select management positions in 1997.
Legal and professional fees increased $60,000, or 56.0%, to $168,000 for
the year ended June 30, 1997, from $108,000 in 1996. The increase was due
primarily to increased consulting fees related to the development of various
strategic plans for Chilton County.
Total other expenses were $1,375,000, and $1,618,000 for the years ended
June 30, 1996 and 1995, respectively. The decrease in 1996 was $243,000, or
15.0%, compared to an increase of $387,000, or 31.0%, in 1995.
Salaries and employee benefits were $558,000 and $527,000 for fiscal 1996
and 1995, respectively. These levels reflect increases of $31,000, or 5.9% and
$22,000, or 4.4% for 1996 and 1995, respectively. These increases related
primarily to cost of living adjustments for employees and increases in health
insurance and retirement plan expenses.
Other expenses in 1995 included $275,000 paid in settlement of a lawsuit
related to the sale of certain real estate in prior years. Legal expenses
increased to $116,000 in 1995, from $38,000 in 1994, and were primarily related
to the lawsuit.
Other operating expenses were $242,000, and $228,000 in fiscal 1996 and
1995, respectively.
INCOME TAX EXPENSE
Income tax expense was a benefit of $52,000 for the year ended June 30,
1997, compared to an expense of $63,000 for 1996. Income tax expense was
$63,000 and $80,000 for the years ended June 30, 1996 and 1995, respectively.
The difference in the effective rate and the statutory rate was due to state
income taxes, certain non-deductible expenses and the receipt of certain
tax-free interest.
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SUPERVISION AND REGULATION
GENERAL
First Federal and Chilton County are chartered as federal savings
institutions under the Home Owners' Loan Act, as amended (the "HOLA"), which is
implemented by regulations adopted and administered by the OTS. As federal
savings institutions, First Federal and Chilton County are subject to
regulation, supervision and regular examination by the OTS. Federal banking
laws and regulations control, among other things, First Federal's and Chilton
County's required reserves, investments, loans, mergers and consolidations,
payment of dividends and other aspects of First Federal and Chilton County'
operations. The deposits of First Federal and Chilton County are insured by
the Savings Association Insurance Fund (the "SAIF") administered by the FDIC
to the maximum extent provided by law ($100,000 for each depositor). In
addition, the FDIC has certain regulatory and examination authority over
OTS-regulated savings institutions and may recommend enforcement actions
against savings institutions to the OTS. SouthFirst, as a savings and loan
holding company, is also required to file certain reports with, and otherwise
comply with the rules and regulations of the OTS and of the Commission under
the federal securities laws. Certain of the regulatory requirements applicable
to First Federal and Chilton County and to SouthFirst are referred to below or
elsewhere herein.
As federally insured depository institutions, First Federal and Chilton
County are subject to various regulations promulgated by the Federal Reserve
Board, including Regulation B (Equal Credit Opportunity), Regulation D (Reserve
Requirements), Regulation E (Electronic Fund Transfers), Regulation Z (Truth in
Lending), Regulation CC (Availability of Funds and Collection of Checks) and
Regulation DD (Truth in Savings).
The system of regulation and supervision applicable to First Federal,
Chilton County and SouthFirst establishes a comprehensive framework for the
operations of First Federal, Chilton County and SouthFirst and is intended
primarily for the protection of the FDIC and the depositors of First Federal
and Chilton County. Changes in the regulatory framework could have an adverse
material effect on First Federal and Chilton County and their operations that,
in turn, could have a material adverse effect on SouthFirst. To the extent
that the following information describes statutory and regulatory provisions,
it is qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material effect on the business and prospects of SouthFirst.
RECENT LEGISLATION
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act (the "Economic Growth Act") was signed into law. Pursuant to the
Economic Growth Act, and in order to recapitalize the SAIF, the FDIC imposed a
one- time assessment on the deposits of all depository institutions the
accounts of which are insured by the SAIF. See " -- Regulation of First
Federal and Chilton County -- Insurance of Deposit Accounts." The purpose of
the assessment was to resolve the current premium disparity between the SAIF
and Bank Insurance Fund ("BIF"). In addition, the Economic Growth Act calls
for the merger of the two Funds on January 1, 1999, provided that no insured
depository institution is a savings association on such date. In this regard,
the Economic Growth Act requires the Treasury Department to
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conduct a study of all issues related to the development of a common charter
for all depository institutions and to submit a report and recommendation by
June 30, 1997. The special assessment required a payment from each insured
depository institution in an amount equal to .657% of the SAIF-assessable
deposits held by it on June 30, 1995. The special assessment was due, and the
SAIF became fully capitalized, as of October 1, 1996. As SAIF insured
institutions, First Federal and Chilton County were required to pay
approximately $430,000 each in connection with this special assessment.
PROPOSED LEGISLATION
The United States Congress currently is considering legislation that
would, if enacted, require all federal savings institutions (such as First
Federal and Chilton County) to convert to a national bank or a state bank or
savings bank charter. In addition, the proposed legislation would cause
SouthFirst to be regulated not as a savings and loan holding company, but
rather as a bank holding company or "financial services" holding company (a new
regulatory classification created by the legislation). If the pending
legislation where to be adopted in its current form, it would eliminate certain
advantages now enjoyed by federal savings institutions, such as unrestricted
interstate branching and the absence of restrictions on the business activities
of unitary savings and loan holding companies. However, holding companies that
were formerly savings and loan holding companies would not be subject to any
additional activity restrictions so long as their banking subsidiaries
continued to comply with certain lending restrictions currently applicable to
federal savings institutions and were not acquired by another company. As the
proposed legislation is in its early states, neither SouthFirst nor Chilton
County can predict whether or in what form the legislation will be enacted.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
GENERAL
As the owner of all of the stock of First Federal, SouthFirst is a unitary
savings and loan holding company subject to regulatory oversight by the OTS and
the Commission. As such, SouthFirst is required to register and file reports
with the OTS and the Commission and is subject to regulation and examination by
the OTS. In addition, the OTS' enforcement authority over SouthFirst and its
non-savings association subsidiaries permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of First Federal and not for the benefit of
shareholders of SouthFirst.
QUALIFIED THRIFT LENDER TEST
As a unitary savings and loan holding company owning only one savings
institution, SouthFirst generally is allowed to engage and invest in a broad
range of business activities not permitted to commercial bank holding companies
or multiple savings and loans holding companies, provided that First Federal
continues to qualify as a "qualified thrift lender." See "-- Regulation of
First Federal and Chilton County -- Qualified Thrift Lender Test" herein. In
the event SouthFirst acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of SouthFirst and any of its subsidiaries (other
than First Federal or any other SAIF-insured savings
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association) would become subject to restrictions applicable to bank holding
companies unless such other associations each also qualify as a Qualified
Thrift Lender and were acquired in a supervisory acquisition.
RESTRICTIONS ON ACQUISITIONS
SouthFirst must obtain approval from the OTS before acquiring control of
any other SAIF-insured association or savings and loan holding company.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally insured savings
institution without giving at least 60 days' written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. Such
acquisition of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Control of a savings institution or a savings and loan
holding company is conclusively presumed to exist if, among other things, a
person or group of persons acting in concert, directly or indirectly, acquires
more than 25.0% of any class of voting stock of the institution or holding
company or controls in any manner the election of a majority of the directors
of the insured institution or the holding company. Control is rebuttable
presumed to exist if, among other things, a person acquires 10.0% or more of
any class of voting stock (or 25.0% of any class of stock) and is subject to
any of certain specified "control factors."
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") amended provisions of the Bank Holding Company Act of 1956 (the
"BHCA") to specifically authorize the Federal Reserve Board to approve an
application by a bank holding company to acquire control of a savings
association. FIRREA also authorized a bank holding company that controls a
savings association to merge or consolidate the assets and liabilities of the
savings association with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. The Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") further amended the BHCA to permit
federal savings associations to acquire or be acquired by any insured
depository institution. As a result of these provisions, there have been a
number of acquisitions of savings associations by bank holding companies and
other financial institutions in recent years.
FEDERAL SECURITIES LAWS
Common stock held by persons who are affiliates (generally officers,
directors and principal shareholders) of SouthFirst may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
SouthFirst meets specified current public information requirements, however,
each affiliate of SouthFirst is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
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REGULATION OF FIRST FEDERAL AND CHILTON COUNTY
INSURANCE OF DEPOSIT ACCOUNTS
The deposit accounts are insured by the SAIF to a maximum of $100,000 for
each insured member (as defined by law and regulation). Insured institutions
are members of either the SAIF or the BIF. Pursuant to FIRREA, an insured
institution may not convert from one insurance fund to the other without the
advance approval of the FDIC; however, the Economic Growth Act contemplates a
merger of SAIF and BIF on January 1, 1999, if, at that time, there are no
existing insured depository institutions which are savings associations, such
as First Federal and Chilton County. Further the Economic Growth Act requires
the Treasury Department to conduct a study of all issues related to the
development of a common charter for all depository institutions and to submit a
report and recommendations to Congress.
Under FIRREA, the FDIC is 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.
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
managements of First Federal and Chilton County are unaware of any practice,
condition or violation that might lead to termination of their deposit
insurance.
As an insurer, the FDIC issues regulations, conducts examinations and
generally supervises the operations of its insured members. FDICIA directed
the FDIC to establish a risk-based premium system under which the FDIC is
directed to charge an annual assessment for the insurance of deposits based on
the risk a particular institution poses to its deposit insurance fund. Under
the FDIC's risk-related insurance regulations, an institution is classified
according to capital and supervisory factors. Institutions are assigned to one
of three capital groups: "well capitalized," "adequately capitalized" or
"undercapitalized." Within each capital group, institutions are assigned to
one of three supervisory subgroups. There are nine combinations of groups and
subgroups (or assessment risk classifications) to which varying assessment
rates are applicable.
As a result of the recapitalization of the SAIF by the Economic Growth
Act, the FDIC reduced the insurance assessment rate for SAIF-assessable
deposits for periods beginning on October 1, 1996. For the first half of 1997,
the FDIC set the effective insurance assessment rates for SAIF-insured
institutions, such as First Federal and Chilton County, at zero to 27 basis
points. In addition, SAIF-insured institutions will be required, until
December 31, 1999, to pay assessments to the FDIC at an annual rate of between
6.0 and 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO"), an agency of the federal government
established to recapitalize the predecessor to the SAIF. During this period,
BIF member banks will be assessed for payment of the FICO obligations at
one-fifth the annual rate applicable to SAIF member institutions. After
December 31, 1999, BIF and SAIF members will be assessed at the same rate for
FICO obligations.
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The Economic Growth Act also provides that the FDIC may not assess regular
insurance assessments for the SAIF unless required to maintain or to achieve
the designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. First Federal and Chilton County are classified as
"well-capitalized" and have not been found by the OTS to have such supervisory
weaknesses.
OTS SUPERVISORY ASSESSMENTS
In addition to federal deposit insurance premiums, savings institutions
like First Federal are required by OTS regulations to pay assessments to the
OTS to fund the operations of the OTS. The general assessment is paid on
either a semi-annual or quarterly basis, as determined by the OTS on an annual
basis, and is computed based on total assets of the institution, including
subsidiaries.
REGULATORY CAPITAL REQUIREMENTS
General. The OTS has adopted capital regulations which establish capital
standards applicable to all savings institutions, including a core capital
requirement, a tangible capital requirement and a risk-based capital
requirement. The OTS also has established pursuant to FDICIA five
classifications for institutions based upon the capital requirements: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically under capitalized. At June 30, 1997, First
Federal and Chilton County were "well capitalized." Failure to maintain that
status could result in greater regulatory oversight or restrictions on First
Federal's and Chilton County's activities.
Core Capital and Tangible Capital. The OTS requires a savings institution
to maintain "core capital" in an amount not less than 3.0% of the savings
institution's adjusted total assets. "Core capital" includes, generally, (i)
common shareholders' equity (including retained earnings), (ii) noncumulative
perpetual preferred stock and related surplus, (iii) nonwithdrawable accounts
and certain pledged deposits of mutual savings associations, and (iv) minority
interests in fully-consolidated subsidiaries, less a savings institution's (A)
investments in certain "non-includable" subsidiaries (as determined by
regulation) and (B) intangible assets (with limited exceptions for purchased
mortgage servicing rights, purchased credit card relationships and certain
intangible assets arising from prior regulatory accounting practices).
The "tangible capital" requirement requires a savings institution to
maintain tangible capital in an amount not less than 1.5% of its adjusted total
assets. "Tangible capital" means (i) common shareholders' equity (including
retained earnings), (ii) noncumulative perpetual preferred stock and related
earnings, (iii) nonwithdrawable accounts and pledged deposits that qualify as
core capital and (iv) minority interests in equity accounts of
fully-consolidated subsidiaries, less any intangible assets (except for
purchased mortgage servicing rights and purchased credit card relationships
included in core capital).
Under OTS regulations, those savings associations receiving a composite
examination rating of "1," the best possible rating under the CAMELS
examination rating system, are required to maintain a ratio of core capital to
adjusted total assets of 3.0%. All other savings associations are required to
maintain minimum core capital of at least 4.0% of total adjusted assets, with a
maximum core capital ratio requirement of 5.0%. In
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determining the required minimum core capital ratio, the OTS assesses the
quality of risk management and the level of risk in each savings association on
a case-by-case basis. At June 30, 1997, First Federal's and Chilton County's
ratios of tangible and core capital to total adjusted assets were 14.0% and
5.98%, respectively.
Risk-Based Capital. The risk-based capital standard for savings
institutions requires the maintenance of total regulatory capital (which is
defined as core capital plus supplementary capital) of 8.0% of risk-weighted
assets. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock and the
general allowance for credit losses. The portion of the allowance for credit
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, supplementary capital is limited to 100.0% of
core capital. In determining total risk-weighted assets for purposes of the
risk-based capital requirements, (i) each off-balance sheet item must be
converted to an on-balance sheet credit equivalent amount by multiplying the
face amount of such item by a credit conversion factor ranging from 00.0% to
100.0% (depending upon the nature of the item); (ii) the credit equivalent
amount of each off-balance sheet item and each on-balance sheet asset must be
multiplied by a risk factor ranging from 0% to 100.0% (again depending on the
nature of the item); and (iii) the resulting amounts are added together and
constitute total risk-weighted assets. As of June 30, 1997, First Federal's
and Chilton County's ratios of total capital to total risk-weighted assets were
23.27% and 14.13%, respectively.
The OTS risk-based capital regulation also includes an interest rate risk
("IRR") component that requires savings institutions that have greater than
normal IRR, when determining compliance with the risk-based capital
requirements, to maintain additional total capital. The OTS has, however,
indefinitely deferred enforcement of its IRR requirements.
See "SOUTHFIRST -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION -- Capital Resources" and "CHILTON COUNTY -- MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Capital
Resources" for tables setting forth First Federal's and Chilton County's
compliance with their regulatory capital requirements as of June 30, 1997.
PROMPT CORRECTIVE ACTION
FDICIA also established a system of prompt corrective action to resolve
the problems of undercapitalized institutions. Under this system, the banking
regulators are required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the OTS final rule implementing
the prompt corrective action provisions of the FDICIA, an institution shall be
deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0%
or more, has a Tier 1 risk-based capital ratio (core or leverage capital to
risk-weighted assets) of 6.0% or more, has a leverage capital ratio of 5.0% or
more and is not subject to any order, capital directive or prompt correction
action directive 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 1 risk-based ratio of 4.0% or more and a 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
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that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than
4.0% or a leverage capital ratio that is less than 4.0% (3.0% in certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a 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%. In addition, under certain
circumstances, a federal banking agency may 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 (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized). At June 30, 1997, First Federal and Chilton County were
classified as "well capitalized" institutions.
STANDARDS FOR SAFETY AND SOUNDNESS
Under FDICIA, as amended by the Riegle Community Development and
Regulatory Improvements Act of 1994, the federal banking agencies were required
to establish safety and soundness standards for institutions under its
authority. The federal banking agencies, including the OTS, have adopted
Interagency Guidelines Establishing Standards for Safety and Soundness and
final rules establishing deadlines for submission and review of safety and
soundness compliance plans. The guidelines require savings institutions to
maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business. The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth. The guidelines further provide that savings institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. Additionally, the OTS guidelines require savings
institutions to maintain internal controls over their asset quality and
earnings. Under the guidelines, a savings institution should maintain systems,
commensurate with its size and the nature and scope of its operations, to
identify problem assets and prevent deterioration in those assets as well as to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. If the OTS determines that a savings
institution is not in compliance with the safety and soundness guidelines, it
may require the institution to submit an acceptable plan to achieve compliance
with the guidelines. A savings institution must submit an acceptable
compliance plan to the OTS within 30 days of receipt of a request for such a
plan. Failure to submit or implement a compliance plan may subject the
institution to regulatory sanctions.
DIVIDENDS AND OTHER CAPITAL DISTRIBUTION LIMITATIONS
OTS regulations require First Federal to give the OTS 30 days' advance
notice of any proposed declaration of dividends to SouthFirst, and the OTS has
the authority under its supervisory powers to prohibit the payment of dividends
to SouthFirst. In addition, a savings institution may not declare or pay a
cash dividend on its capital stock if the effect thereof would be to reduce its
regulatory capital below the amount required for the liquidation account
established at the time of the institution's conversion from mutual to stock
form. First Federal's ability to pay dividends to SouthFirst is subject to the
financial performance of First Federal which is dependent upon, among other
things the local economy, the success of First Federal's lending
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activities, compliance of First Federal with applicable regulations, investment
performance and the ability to generate fee income.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution
in a cash-out merger and other distributions charged against capital. The
regulations establish three tiers of institutions, based primarily on an
institution's capital level. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution (Tier 1
institution) and has not been advised by the OTS that it is in need of more
than normal supervision can, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year equal to the greater of
(i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the percentage by
which an association's capital-to-assets ratio exceeds the ratio of its fully
phased-in capital requirement to its assets) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. A Tier
2 association is an association that has capital equal to or in excess of its
minimum capital requirements but does not meet the fully phased-in capital
requirement both before and after the proposed distribution. A Tier 3
association is defined as an association that has capital less than its minimum
capital requirement before or after the proposed distribution. As of June 30,
1997, First Federal was a Tier 1 institution. In the event First Federal's
capital falls below its fully phased-in requirement or the OTS notifies it that
it is in need of more than normal supervision, First Federal's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit
a proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Finally, under FDICIA, a savings
association is prohibited from making a capital distribution if, after making
the distribution, the savings association would be "undercapitalized" (i.e.,
not meet any one of its minimum regulatory capital requirements).
The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings institutions. Under the
proposed rule, the approval of the OTS would be required only for capital
distributions by an institution that is deemed to be in troubled condition or
that is undercapitalized or would be undercapitalized after the capital
distribution. A savings institution would be able to make a capital
distribution without notice to or approval of the OTS if it is not held by a
savings and loan holding company, is not deemed to be in troubled condition,
has received either of the two highest composite supervisory ratings and would
continue to be adequately capitalized after such distribution. Notice would
have to be given to the OTS by an institution that is held by a savings and
loan holding company or that had received a composite supervisory rating below
the highest two composite supervisory ratings. An institution's capital rating
would be determined under the prompt corrective action regulations. See " --
Prompt Corrective Regulatory Action."
QUALIFIED THRIFT LENDER TEST
The Home Owners' Loan Act ("HOLA"), as amended, requires savings
institutions to meet one of two Qualified Thrift Lender ("QTL") test, or suffer
a number of regulatory sanctions, including restrictions on business activities
and on FHLB advances. To qualify as a QTL, a savings institution must either
(i) be deemed a "domestic building and loan association" under the Internal
Revenue Code (the "Code") by
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maintaining at least 60% of its total assets in specified types of assets,
including cash, certain government securities, loans secured by and other
assets related to residential real property, educational loans, and investments
in premises of the institution or (ii) satisfy the HOLA's QTL test by
maintaining at least 65% of "portfolio assets" in certain "Qualified Thrift
Investments." For purposes of the HOLA's QTL test, portfolio assets are
defined as total assets less intangible assets, property used by a savings
institution in its business and liquidity investments in an amount not
exceeding 20% of assets. "Qualified Thrift Investments," as further defined by
the Economic Growth Act (See --"Recent Legislation"), generally include (i)
loans made to purchase, refinance, construct, improve or repair domestic
residential or manufactured housing, (ii) home equity loans, (iii) securities
backed by or representing interest in mortgages or domestic residential or
manufactured housing, (iv) obligations issued by the federal deposit insurance
agencies, (v) small business loans, (vi) credit card loans, (vii) education
loans and (viii) shares in the FNMA, FHLMC and FHLB owned by the savings
institution. In addition, subject to a 20% of portfolio assets limit, savings
institutions are able to treat as Qualified Thrift Investments 200% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small business in "credit needy" areas. At June 30, 1997, First
Federal and Chilton County both qualified as QTLs. It is expected that First
Federal will remain in compliance with the QTL test following the Merger.
A savings association that does not maintain its status as a QTL in at
least nine out of every 12 months must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the savings
association may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank and for a savings association; (ii) the branching powers of the
savings association are restricted to those of a national bank; (iii) the
savings association is not eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the savings association are subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of
three years from the date the savings association ceases to be a QTL, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances as promptly as can be
prudently done consistent with the safe and sound operation of the savings
association.
LOANS-TO-ONE BORROWER
Under the HOLA, as amended, savings institutions are subject to the
national bank limits on loans-to-one borrower. Generally, a savings
association may not make a loan or extend credit to a single or related group
of borrowers in excess of 15.0% of Chilton County's unimpaired capital and
surplus. An additional amount may be lent, equal to 10.0% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain securities and bullion, but generally does
not include real estate. First Federal has received permission from the OTS to
increase its loan-to-one borrower limits for single-family residential
builders, as permitted under applicable federal law and regulations. The
increased limits for these borrowers are 30.0% of unimpaired capital and
surplus of First Federal, with an aggregate limit to all such borrowers equal
to 150.0% of First Federal's unimpaired capital and surplus.
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<PAGE> 167
LENDING GUIDELINES
All financial institutions must adopt and maintain comprehensive written
real estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies adopted by the federal
banking agencies (the "Guidelines"). The Guidelines set forth, pursuant to the
mandates of FDICIA, uniform regulations prescribing standards for real estate
lending. Real estate lending is defined as the extension of credit secured by
liens on interests in real estate or made for the purpose of financing the
construction of a building or other improvements to real estate, regardless of
whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in the
Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also
be appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being
the total amount of credit to be extended divided by the appraised value of the
property securing or being improved by the extension of credit plus the amount
of readily-marketable collateral or other acceptable collateral, must be
established for each category of real estate loans. If not a first lien, the
lender must combine all senior liens when calculating this ratio. The
Guidelines, among other things, establish the following supervisory LTV limits:
raw land (65.0%); land development (75.0%); construction (commercial,
multifamily and nonresidential) (80.0%); improved property (85.0%) and
one-to-four family residential (owner occupied) (no maximum ratio, however, any
LTV ratio in excess of 90.0% should require appropriate credit enhancement in
the form of either mortgage insurance or readily marketable collateral).
Certain institutions can make real estate loans that do not conform with
the established LTV ratio limits up to 100.0% of the institutions total
capital. With this aggregate limit, total loans for all commercial,
agricultural, multi-family and other non-one-to-four family residential
properties should not exceed 30.0% of total capital. An institution will come
under increased supervisory scrutiny as the total of such loans approaches
these levels. Certain loans are also exempt from the LTV ratios such as loans
guaranteed by a government agency, loans to facilitate the sale of real estate
owned, and loans renewed, refinanced or restructured by the original lender(s)
to the same borrower(s) where there is no advancement of new funds.
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act of 1977 ("CRA"), as implemented by
OTS regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. FIRREA amended the CRA to require public disclosure of an
institution's CRA rating and require the OTS to provide a written evaluation of
an institution's CRA performance utlizing a four-tiered descriptive rating
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<PAGE> 168
system in lieu of the existing five-tiered numerical rating system. First
Federal received a satisfactory rating as a result of its latest evaluation on
March 10, 1997, and Chilton County received a satisfactory rating as a result
of its most recent evaluation on February 3, 1997.
CONSUMER CREDIT REGULATION
First Federal's and Chilton County's mortgage lending activities are
subject to the provisions of various federal and state statutes, including,
among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the
Real Estate Settlement Procedures Act, the Fair Housing Act, and the
regulations promulgated thereunder. These statutes and regulations, among
other provisions, prohibit discrimination, prohibit unfair and deceptive trade
practices, require the disclosure of certain basic information to mortgage
borrowers concerning credit terms and settlement costs, and otherwise regulate
terms and conditions of credit and the procedures by which credit is offered
and administered. Many of the above regulatory requirements are designed to
protect the interests of consumers, while others protect the owners or insurers
of mortgage loans. Failure to comply with these requirements can lead to
administrative enforcement actions, class action lawsuits and demands for
restitution or loan rescission.
TRANSACTIONS WITH AFFILIATES
Generally, statutory restrictions on transactions with affiliates require
that transactions between a savings institution or its subsidiaries and its
affiliates be on terms as favorable to the institution as comparable
transactions with non-affiliates. In addition, extensions of credit and
certain other transactions with affiliates are restricted to an aggregate
percentage of a savings institution's capital, and collateral in specified
amounts must usually be provided by affiliates to receive loans from the
institution. Affiliates of First Federal include, among other things,
SouthFirst and any company which would be under common control with First
Federal. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of any affiliate which is not a subsidiary. The OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a
case-by-case basis.
A savings institution's authority to extend credit to its officers,
directors and 10% shareholders, as well as to entities that such persons
control, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O promulgated by the Federal Reserve Board. Among other things,
these regulations require such loans to be made on terms substantially similar
to those offered to unaffiliated individuals, place limits on the amount of
loans a savings institution may make to such persons based, in part, on the
institution's capital position, and require certain approval procedures to be
followed. OTS regulations, with minor variations, apply Regulation O to
savings institutions.
BRANCHING BY FEDERAL ASSOCIATIONS
The OTS's Policy Statement on Branching by Federal Savings Associations
permits interstate branching to the full extent permitted by statute (which is
essentially unlimited). This permits federal savings associations with
interstate networks to diversify their loan portfolios and lines of business.
The Policy Statement specifically states that OTS authority preempts any state
law purporting to regulate branching by federal associations. However,
recently proposed federal legislation would, if enacted, restrict the First
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<PAGE> 169
Federal's and Chilton County's ability to open branches in states other than
Alabama. See "-- Proposed Legislation."
LIQUIDITY REQUIREMENTS
All savings associations are required to maintain an average daily balance
of liquid assets equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement may vary from time to time (between 4.0%
and 10.0%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the required liquid asset ratio is 5.0%.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term U.S. Government obligations), and long-term assets (e.g., U. S.
Government obligations of more than one and less than five years and state
agency obligations maturing in two years or less). The regulations governing
liquidity requirements include, within the definition of liquid assets, debt
securities hedged with forward commitments to purchase the obligation obtained
from (including a commitment represented by a repurchase agreement) members of
Bank of Primary Dealers in United States Government Securities or banks whose
accounts are insured by the FDIC, debt securities directly hedged with a short
financial future position, debt securities with a long put option and debt
securities that provide the holder with a right to redeem the security at the
stated or par value, regardless of the stated maturities of the securities.
FIRREA also authorized the OTS to designate as liquid assets certain
mortgage-related securities with less than one year to maturity. Short-term
liquid assets currently must constitute at least 1% of an association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Monetary penalties may be imposed upon associations for violations of liquidity
requirements.
The OTS has proposed to revise its liquidity regulations to decrease the
burden of compliance with such rules. Specifically, the OTS proposal would (1)
reduce the liquidity base by excluding withdrawable accounts payable in more
than one year from the definition of "net withdrawable accounts," (2) reduce
the liquidity requirement from 5% of net withdrawable accounts and short-term
borrowings to 4%, (3) remove the 1% short-term liquidity requirement, and (4)
expand the categories of liquid assets that may count toward satisfaction of
the liquidity requirements.
FEDERAL HOME LOAN BANK SYSTEM
General. First Federal and Chilton County are members of the FHLB System,
which consists of 12 regional FHLBs subject to supervision and regulation by
the Federal Housing Finance Board (the "FHFB"). The FHLBs maintain central
credit facilities primarily for member institutions.
First Federal and Chilton County, as members of the FHLB of Atlanta, are
required to acquire and hold shares of capital stock in the FHLB of Atlanta in
an amount at least equal to 1% of the greater of: (i) the aggregate outstanding
principal amount of their unpaid home mortgage loans, home purchase contracts
and similar obligations as of the beginning of each year or (ii) $500. First
Federal and Chilton County are in compliance with this requirement with an
investment in stock of the FHLB of Atlanta at June 30, 1997 of $849,300 and
$621,500, respectively.
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<PAGE> 170
Advances from Federal Home Loan Bank. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances (i.e., loans) to members in accordance with policies and
procedures established by the Board of Directors of the FHFB. Long term
advances may only be made for the purpose of providing funds for residential
housing. At June 30, 1997, First Federal and Chilton County had $17 million
and $2 million, respectively, of advances outstanding from the FHLB.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances
targeted for community investment and low and moderate income housing projects.
These contributions have adversely affected the level of FHLB stock dividends
paid and could continue to do so in the future. For the year ended September
30, 1996, stock dividends were paid by the FHLB to First Federal and Chilton
County in the amount of $41,219 and $33,763, respectively.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their deposit
transaction accounts (e.g., primarily checking, NOW and Super NOW checking
accounts) and non-personal time deposits. Under current Federal Reserve Board
regulations, no reserves are required to be maintained on the first $4.4
million of transaction accounts, and reserves equal to 3% must be maintained on
the next $49.3 million of transaction accounts, plus reserves equal to 10% on
the remainder. Because required reserves must be maintained in the form of
vault cash or in a non-interest bearing account at a Federal Reserve Bank, the
effect of the reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of June 30, 1997, the total transaction accounts
of each of First Federal and Chilton County were below the minimum level for
which the Federal Reserve Board requires a reserve.
Savings associations have authority to borrow from the Federal Reserve
Bank's "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. Neither First Federal nor Chilton County has any such
borrowings at June 30, 1997.
LEGAL OPINIONS
The legality of the shares of SouthFirst Common Stock to be issued in
connection with the Merger is being passed upon by Smith, Gambrell & Russell,
LLP, Atlanta, Georgia. Smith, Gambrell & Russell, LLP has also rendered an
opinion as to certain federal income tax consequences of the Merger.
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<PAGE> 171
EXPERTS
The consolidated financial statements of SouthFirst as of September 30,
1996 and 1995 and for each of the years in the three-year period ended
September 30, 1996 have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, included herein and in the Registration Statement and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Chilton County as of June 30, 1997 and 1996
and for each of the three years in the period ended June 30, 1997, included
herein have been so included in reliance on the report of Jones & Kirkpatrick,
P.C., certified public accountants, given on the authority of such firm as
experts in accounting and auditing.
Representatives of KPMG Peat Marwick LLP and of Jones & Kirkpatrick, P.C.
are expected to be present at the Special Meetings and will have the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
PROPOSALS BY SOUTHFIRST SHAREHOLDERS
Shareholders of SouthFirst may submit proposals to be considered for
shareholder action at the 1998 Annual Meeting of Shareholders of SouthFirst if
they do so in accordance with applicable regulations of the Commission. Any
such proposals must be submitted to the Secretary of SouthFirst no later than
October 31, 1997 in order to be considered for inclusion in SouthFirst's 1998
proxy materials. As of October __, 1997 SouthFirst had received no such
shareholder proposals.
OTHER MATTERS
The SouthFirst and Chilton County Boards are not aware of any matter to be
presented for action at the Special Meetings other than the approval and
adoption of the Merger Agreement. If any other matter comes before the Special
Meetings, it is the intention of the persons named in the accompanying proxy to
vote on such matter in accordance with their best judgment unless authority
therefor is withheld on the enclosed proxy card. Such discretionary matters
may include motions to adjourn the meeting for the purpose of further
soliciting proxies in favor of the Merger.
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<PAGE> 172
INDEX TO
SOUTHFIRST CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of KPMG Peat Marwick LLP, Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Financial Condition as of September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended September 30, 1996, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
UNAUDITED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as of June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . F-31
Consolidated Statements of Earnings for the Nine Months ending June 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
Consolidated Statements of Cash Flows for the Nine Months ending June 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-33
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-35
</TABLE>
INDEX TO
CHILTON COUNTY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Jones & Kirkpatrick, P.C., Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36
Statements of Financial Condition as of June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . F-37
Statements of Income (Loss) for the years ended June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . F-39
Statements of Stockholders' Equity for the years ended June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . F-41
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . F-42
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-45
</TABLE>
F-1
<PAGE> 173
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SouthFirst Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial
condition of SouthFirst Bancshares, Inc. and subsidiary (collectively, the
Company) as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the
three years ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of
SouthFirst Bancshares, Inc. as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for the three years ended
September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1994 to adopt
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Also,
as discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities at October 1, 1994.
/s/ KPMG Peat Marwick LLP
Birmingham, Alabama
October 30, 1996
F-2
<PAGE> 174
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,625,561 4,464,099
Investment securities held to maturity at cost (market value of
$153,853 in 1996 and $13,375,240 in 1995) 153,853 13,266,095
Investment securities available for sale, at market value 21,792,852 11,721,696
Loans receivable 62,652,755 53,798,634
Less allowance for loan losses (250,714) (265,759)
------------- --------------
Net loans 62,402,041 53,532,875
Loans held for sale (market value of $138,000 in 1996) 131,100 --
Premises and equipment, net 1,802,482 1,456,673
Foreclosed real estate, net -- 28,886
Accrued interest receivable 553,606 533,519
Investments in affiliates 184,537 76,310
Other assets 635,902 414,880
------------- --------------
Total assets $ 90,281,934 85,495,033
============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 1,087,042 1,516,160
Interest bearing 63,007,561 61,315,998
------------- --------------
Total deposits 64,094,603 62,832,158
Advances by borrowers for property taxes and insurance 392,280 400,405
Accrued interest payable 842,285 823,885
Borrowed funds 10,959,285 6,069,852
Income taxes payable 285,401 396,577
Accrued expenses and other liabilities 820,266 201,570
------------- --------------
Total liabilities 77,394,120 70,724,447
------------- --------------
Stockholders' equity:
Common stock, $.01 par value, authorized 2,000,000
shares, issued and outstanding 863,200 shares in 1996 and
830,000 shares in 1995 8,632 8,300
Additional paid-in capital 7,704,856 7,240,066
Treasury stock (500,802) --
Deferred compensation on common stock employee benefit plans (744,710) (597,600)
Retained earnings, substantially restricted 5,690,301 7,624,515
Unrealized gain on investment securities
available for sale, net of tax 729,537 495,305
------------- --------------
Total stockholders' equity 12,887,814 14,770,586
Commitments and contingencies
------------- --------------
Total liabilities and stockholders' equity $ 90,281,934 85,495,033
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 175
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,888,183 4,291,653 3,982,406
Interest and dividend income on investment
securities held to maturity 44,251 884,940 1,688,142
Interest and dividend income on investment
securities available for sale 1,687,842 1,024,874 --
------------ ----------- -----------
Total interest and dividend income 6,620,276 6,201,467 5,670,548
Interest expense:
Interest on deposits 3,006,037 2,760,390 2,415,524
Interest on borrowed funds 553,372 337,375 416,806
------------ ----------- -----------
Total interest expense 3,559,409 3,097,765 2,832,330
------------ ----------- -----------
Net interest income 3,060,867 3,103,702 2,838,218
Provision for loan losses 1,200 28,730 50,000
----------- ----------- -----------
Net interest income after provision for
loan losses 3,059,667 3,074,972 2,788,218
------------ ----------- -----------
Other income:
Service charges and other fees 563,235 474,195 432,250
Gain on sale of loans 127,386 70,822 93,714
Gain on sale of foreclosed real estate 10,233 14,770 21,318
Gain (loss) on maturity of investment security
available for sale 21,203 (480) --
Loss on sale of premises and equipment (7,543) (7,020) --
Insurance commissions 2,529 (1,555) 27,677
Equity in net loss of affiliates (66,773) (23,690) --
Other 639,730 31,729 17,693
------------ ----------- -----------
Total other income 1,290,000 558,771 592,652
------------ ----------- -----------
Other expenses:
Compensation and benefits 2,468,570 1,478,874 1,364,834
Net occupancy expense 154,208 142,267 136,212
Furniture and fixtures 168,600 155,613 145,210
Data processing 171,692 158,155 155,303
Office supplies and expenses 185,953 177,203 140,308
Deposit insurance premiums 175,542 179,496 180,024
Special SAIF assessment 430,230 -- --
Other 519,606 368,548 644,928
------------ ----------- -----------
Total other expenses 4,274,401 2,660,156 2,766,819
------------ ----------- -----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 176
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Operations, Continued
Years Ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income before income taxes and cumulative
effect of a change in accounting method 75,266 973,587 614,051
Income tax expense 91,922 362,202 235,498
------------ ----------- -----------
Income (loss) before cumulative effect of
a change in accounting method (16,656) 611,385 378,553
Cumulative effect of a change in accounting
method -- -- 17,968
------------ ----------- -----------
Net income (loss) $ (16,656) 611,385 360,585
============ =========== ===========
Net income (loss) per common share $ (0.02) 1.17 --
Weighted average common shares outstanding 810,997 520,740 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 177
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Net
Deferred unrealized
compensation holding
Retained on common gain on
Additional earnings- stock available- Total
Common paid-in substantially employee Treasury for-sale stockholders'
stock capital restricted benefit plans stock securities equity
----- ------- ---------- ------------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1993 $ -- -- 6,901,545 -- -- -- 6,901,545
Net income 1994 -- -- 360,585 -- -- -- 360,585
------ --------- ---------- --------- ------- -------- -----------
Balance September 30, 1994 -- -- 7,262,130 -- -- -- 7,262,130
Net income 1995 -- -- 611,385 -- -- -- 611,385
Effect of adoption of FAS 115-
Accounting for Certain Investments
in Debt and Equity Securities on
October 1, 1994 -- -- -- -- 368,832 368,832
Issuance of common stock 8,300 7,240,066 -- -- -- -- 7,248,366
Establishment of Employee Stock
Ownership Plan -- -- -- (664,000) -- -- (664,000)
Release of unallocated Employee
Stock Ownership Plan shares -- -- -- 66,400 -- -- 66,400
Cash dividends declared ($.10 per share) -- -- (249,000) -- -- -- (249,000)
Increase in net unrealized holding gain
on available-for-sale securities -- -- -- -- -- 126,473 126,473
------ --------- ---------- --------- ------- ------- -----------
Balance September 30, 1995 8,300 7,240,066 7,624,515 (597,600) -- 495,305 14,770,586
Net loss 1996 -- -- (16,656) -- -- -- (16,656)
Release of unallocated Employee Stock
Ownership Plan shares -- 41,822 -- 167,290 -- -- 209,112
Issuance of common stock - Management
Recognition Plans 332 422,968 -- (423,300) -- -- --
Vesting of shares on Management
Recognition Plans -- -- -- 108,900 -- -- 108,900
Cash dividends declared ($2.50 per share) -- -- (1,917,558) -- -- -- (1,917,558)
Acquisition of treasury stock -- -- -- -- (500,802) -- (500,802)
Increase in unrealized holding gain on
available-for-sale securities -- -- -- -- -- 234,232 234,232
------ --------- ---------- --------- ------- -------- -----------
Balance September 30, 1996 $ 8,632 7,704,856 5,690,301 (744,710) (500,802) 729,537 12,887,814
====== ========= ========== ========= ======== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 178
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (16,656) 611,385 360,585
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,200 28,730 50,000
Provision for foreclosed real estate losses -- (28,730) 30,000
Depreciation and amortization 137,545 137,935 110,290
Equity in loss of unconsolidated affiliates 66,773 23,690 --
Proceeds from sales of loans 4,359,996 1,034,494 1,593,481
Loans originated for sale (4,490,996) (868,308) (1,617,667)
Gain on sale of loans (127,386) (70,822) (93,714)
Loss on sale of premises and equipment 7,543 7,020 --
Increase (decrease) in deferred loan origination fees 18,012 (1,357) (3,369)
Compensation expense on ESOP and MRPs 318,012 66,400 --
Gain on sale of investment securities held to
maturity -- -- (4,021)
Net (accretion) amortization of premium/discount
on investment securities 11,015 12,815 87,957
Gain on sale of foreclosed real estate (10,233) (14,770) (21,318)
Stock dividend on Federal Home Loan
Bank (FHLB) stock -- -- (20,900)
(Increase) decrease in accrued interest receivable (20,087) (96,509) (3,706)
(Increase) decrease in other assets (221,022) (28,333) 175,339
Increase in accrued interest payable 18,400 263,444 378,687
Decrease in income taxes payable
and deferred taxes (255,490) (19,316) (35,395)
Increase (decrease) in accrued expenses and
other liabilities 618,696 42,762 (68,987)
------------ ------------- -----------
Net cash provided by operating activities 415,322 1,139,162 917,262
------------ ------------- -----------
Investing activities:
Investment in affiliated companies (175,000) (100,000) --
Proceeds from calls and maturities of investment
securities held to maturity -- 600,000 500,000
Proceeds from calls and maturities of investment
securities available for sale -- 1,000,000 --
Purchase of investment securities held to maturity (403,853) (1,107,000) (3,533,006)
Purchase of investment security available for sale (4,540,770) (1,803,000) --
Principal repayments on investment securities
held to maturity 1,039,115 983,580 7,110,186
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 179
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Investing activities, continued:
Principal repayments on investment securities
available for sale 7,314,125 1,822,703 --
Proceeds from sale of investment securities
held to maturity -- -- 105,228
Purchase of loans -- (1,349,380) (5,360,000)
Net increase in loans (8,761,092) (2,067,819) (382,612)
Proceeds from sale of premises and equipment 28,835 5,195 12,823
Purchase of premises and equipment (519,732) (263,722) (129,149)
Proceeds from sale of foreclosed real estate 39,119 77,438 100,806
------------- ------------- -------------
Net cash used in investing activities (5,979,253) (2,202,005) (1,535,724)
------------- ------------- -------------
Financing activities:
Net (decrease) increase in NOW accounts
and savings accounts (813,552) (1,276,629) 900,433
Net (increase) decrease in certificates of deposit 2,075,997 (665,361) (2,666,786)
Proceeds from borrowed funds 7,267,811 2,000,000 4,000,000
Repayment of borrowed funds (2,378,378) (5,065,636) (1,008,685)
Net proceeds from issuance of common stock -- 7,248,366 --
Cash dividends paid (1,917,558) (249,000) --
Establishment of employee stock ownership plan -- (664,000) --
Acquisition of treasury stock (500,802) -- --
Decrease in advances by borrowers
for property taxes and insurance (8,125) (40,437) (11,691)
------------- ------------- -------------
Net cash provided by financing activities 3,725,393 1,287,303 1,213,271
------------- ------------- -------------
Increase (decrease) in cash and amounts due from
depository institutions (1,838,538) 224,460 594,809
Cash and amounts due from depository institutions
at beginning of year 4,464,099 4,239,639 3,644,830
------------- ------------- -------------
Cash and amounts due from depository institutions
at end of year $ 2,625,561 4,464,099 4,239,639
============ ============= =============
Supplemental information on cash payments:
Interest paid $ 3,541,009 2,834,321 2,453,643
============ ============= =============
Income taxes paid $ 344,757 165,599 148,651
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 180
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental information on noncash transactions:
Transfers to foreclosed real estate $ -- 28,886 89,744
============ ============= ============
Transfer to investment securities available for sale
from investment securities held to maturity $ -- 11,958,543 --
============ ============= ============
Effect of adoption of FAS 115, Accounting for
Certain Investments in Debt and Equity
Securities, on October 1, 1994 $ -- 368,832 --
============ ============= ============
Change in net unrealized gain
on investment securities available for sale $ 400,536 126,473 --
============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 181
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1996, 1995, and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
The accompanying consolidated financial statements include the
accounts 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. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
On February 13, 1995, the Bank was converted from a mutual to
stock form of ownership (the Conversion) whereupon the
Corporation, approved by the OTS as a thrift holding company,
acquired all of the issued and outstanding shares of the Bank.
The Corporation, simultaneously with the Conversion, issued
830,000 shares in the initial public offering of its common
stock, par value $.01 per share, at $10.00 per share, for a
gross offering proceeds of $8,300,000. The net offering
proceeds to the Corporation, after deduction of all expenses and
fees associated with the offering, was $7,248,366. Fifty
percent (50%) of the net proceeds, or $3,624,183, was
distributed to the Bank, as additional capital, in exchange for
all of the issued and outstanding shares of capital stock of the
Bank. The Corporation also loaned $664,000 of the net offering
proceeds to the trustee of the SouthFirst Bancshares, Inc.,
Employee Stock Ownership Plan (the ESOP), who purchased, on
behalf of the trust for the ESOP, 66,400 shares (or 8%) of the
shares sold by the Corporation in the public offering. The loan
will be repaid from contributions made by the Bank pursuant to
ESOP; and, as the loan is repaid, shares will be released to the
accounts of the employees eligible to participate therein.
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
(Continued)
F-10
<PAGE> 182
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(A) ORGANIZATION, CONTINUED
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, the Corporation, 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.
The Company provides a full range of banking services to
individual and corporate customers in its primary market area of
the cities of Sylacauga, and Talladega in the state of Alabama
and provides lending services in Birmingham, Alabama. The
Company is subject to competition from other financial
institutions. The Company is subject to the regulations of
certain federal agencies and undergoes periodic examinations by
those regulatory authorities.
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION
Due to the conversion, the 1995 financial statements reflect the
combination of the historical cost bases of the Corporation and
the Bank as if the pooling of interest method were utilized.
The accounting principles and reporting policies of the Company,
and the methods of applying these principles, conform with
generally accepted accounting principles and with general
practice within the savings and loan industry. In preparing the
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination
of the allowance for loan losses. In connection with the
determination of the allowance for loan losses, management
obtains independent appraisals for properties collateralizing
significant troubled loans.
A substantial portion of Company's loans are secured by real
estate in the Company's primary market area. Accordingly, the
ultimate collectibility of a substantial portion of the
Company's loan portfolio is susceptible to changes in market
conditions in the Company's primary market area.
The Bank began construction lending activities in March of 1994.
As of September 30, 1996, the Bank has not experienced
significant loss on the construction loan portfolio. Since
these lending activities are fairly new to the Bank, the Bank
does not have the same historical data available for
construction loans as for other loans. As of September 30,
1996, seven borrowers had construction loan commitments in
excess of $700,000 with the largest commitment being $2,700,000.
Due to this concentration of loans, a default by certain
construction loan borrowers or other financial difficulty could
result in a significant addition to the allowance for loan
losses.
(Continued)
F-11
<PAGE> 183
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION, CONTINUED
Management believes that the allowances for losses on loans and
foreclosed real estate are adequate. While management uses
available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may
be necessary based on changes in economic conditions,
particularly in the Company's primary market area. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Company's
allowances for loan losses and foreclosed real estate. Such
agencies may require the Company to recognize additions to the
allowances based on their judgments about information available
to them at the time of their examination.
The principles which significantly affect the determination of
financial position, results of operations and cash flows are
summarized below.
(C) INVESTMENT SECURITIES
On October 1, 1994, the Company adopted Financial Accounting
Statement No. 115, Accounting for Certain Investments in Debt
and Equity Securities (FAS 115) which requires that investments
be classified in one of the following three categories: (i)
held-to-maturity securities, (ii) securities available for sale,
and (iii) trading account securities. Investment securities
held to maturity represent securities which management has the
intent and ability to hold to maturity. These securities are
reported at cost adjusted for amortization of premiums and
accretion of discounts using the interest method. Investment
securities available for sale represent securities which
management may decide to sell prior to maturity for liquidity,
tax planning or other valid business purposes.
Available-for-sale securities are reported at fair value with
any unrealized gains or losses excluded from earnings and
reflected as a net amount in a separate component of
stockholders' equity until realized. Trading account securities
represent securities which management has purchased and is
holding principally for the purpose of selling in the near term.
Trading account securities are reported at fair value with any
unrealized gains or losses included in earnings.
Declines in fair value of investment securities (available for
sale or held to maturity) that are considered other than
temporary are charged to securities losses, reducing the
carrying value of such securities. Gains or losses on the sale
of investment securities are computed using the specific
identification method and are shown separately in noninterest
income in the consolidated statements of earnings. No
securities were classified as trading account securities as of
September 30, 1996 or 1995.
(Continued)
F-12
<PAGE> 184
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(C) INVESTMENT SECURITIES, CONTINUED
Upon adoption of FAS 115, the Company transferred, effective
October 1, 1994, investment securities securities with a total
amortized cost of $11,958,543 and market value of $12,517,380
from held to maturity to available for sale. The unrealized net
holding gains on those available-for-sale securities at October
1, 1994 totaled approximately $559,000 and was included as a
separate component of stockholdersG equity, net of income taxes
of $190,000 upon the Company's adoption of FAS 115.
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. Entities were allowed a
one-time reclassification during the period from November 15,
1995, to December 31, 1995. Reclassifications from the held-to-
maturity category that result from this one-time reassessment
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 Company 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.
During all periods prior to the date of adoption, the Company
reported securities available for sale at the lower-of-cost or
market with any valuation adjustment reflected in earnings as
required by generally accepted accounting principles at that
time.
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. The Federal Home Loan Bank will
purchase the stock at its cost basis from the Company in the
event the Company ceases to utilize the services of the Federal
Home Loan Bank.
(D) PREMISES AND EQUIPMENT
Land is stated at cost. Premises and equipment are carried at
cost less accumulated depreciation. Depreciation is provided by
the straight-line method at rates intended to distribute the
cost of buildings and improvements and furniture, fixtures, and
equipment over their estimated service lives of 40 years and 3
to 12 years, respectively.
(Continued)
F-13
<PAGE> 185
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(E) FORECLOSED REAL ESTATE
For real estate acquired through foreclosure, 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. Fair value for significant properties is determined
through outside appraisal of the collateral. 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 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.
(F) LOANS RECEIVABLE, LOANS HELD FOR SALE, AND INTEREST INCOME
Loans receivable are stated at principal amounts outstanding
less the undisbursed portion of loans, unearned interest income,
deferred loan fees, and the allowance for loan losses. Interest
income on loans is credited to income based on the principal
amount outstanding at the respective rate of interest except for
add on installment loans for which interest is recognized on a
method approximating the interest method. It is the general
policy of the Company to discontinue the accrual of interest
when principal or interest payments are delinquent and the
ultimate collection of either is in doubt.
Loans held for sale are carried at the lower of cost or market,
determined on an aggregate basis.
(G) ALLOWANCE FOR LOAN LOSSES
Additions to the allowance for loan losses are based on
management's evaluation of the loan portfolio under current
economic conditions, including such factors as the volume and
character of loans outstanding, past loss experience, general
economic conditions, and such other factors which, in
management's judgment, deserve recognition in estimating loan
losses. Loans are charged to the allowance when, in the opinion
of management, such loans are deemed to be uncollectible.
Provisions for loan losses and recoveries of loans previously
charged to the allowance are added to the allowance.
(H) LOAN ORIGINATION FEES, PREMIUMS AND DISCOUNTS ON LOANS,
MORTGAGE-BACKED SECURITIES, AND COLLATERALIZED MORTGAGE
OBLIGATIONS
Loan origination fees and certain direct loan origination costs
are deferred and recognized over the lives of the related loans
as an adjustment of the loan yields using the interest method.
(Continued)
F-14
<PAGE> 186
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(H) LOAN ORIGINATION FEES, PREMIUMS AND DISCOUNTS ON LOANS,
MORTGAGE-BACKED SECURITIES, AND COLLATERALIZED MORTGAGE
OBLIGATIONS
Premiums or discounts on loans, mortgage-backed securities, and
collateralized mortgage obligations are amortized over the
estimated lives of the related mortgage loans, adjusted for
prepayments, using a method approximating the interest method.
Premiums and discounts on loans, mortgage-backed securities, and
collateralized mortgage obligations were insignificant at
September 30, 1996.
(I) INCOME TAXES
The Company provides for income tax expense based upon reported
earnings, adjusted for permanent differences, if any, between
reported and taxable earnings. Certain items of income and
expense are recognized in different periods for income tax
purposes than for financial reporting purposes and a provision
for deferred taxes is made in recognition of these temporary
differences.
On October 1, 1993, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (FAS 109). FAS 109
requires a change from the deferred method of accounting for
income taxes of Accounting Principles Board Opinion No. 11,
Accounting for Income Taxes (APB Opinion 11), which the Company
followed prior to the period ended September 30, 1993, to the
asset and liability method of accounting for income taxes.
Under the asset and liability method of FAS 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. Under FAS
109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes
the enactment date.
Upon adoption in 1993, the Company applied the provisions of FAS
109 without restating prior years' financial statements. The
cumulative effect of the change in the method of accounting for
income taxes was reported separately in the 1994 financial
statements.
(J) LOAN SALES
Gains or losses on loan sales are recognized at the time of sale
and are determined by the difference between net sales proceeds
and the carrying value of the loans sold.
(Continued)
F-15
<PAGE> 187
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(K) NET INCOME PER COMMON SHARE
For purposes of computing net income per common share, the
weighted average number of common shares included in the 1995
calculation is based on the issuance date of the initial public
offering on February 13, 1995.
(L) RECLASSIFICATION
Certain amounts in the financial statements presented have been
reclassified from amounts previously reported in order to be
comparable between years. These reclassifications have no
effect on previously reported shareholders' equity or net income
during the periods involved.
(2) INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and approximate fair value of investment securities
held to maturity at September 30, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Federal Home Loan Bank
time deposits $ 153,853 -- -- 153,853
========= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Federal Home Loan Bank
time deposits $ 507,000 -- -- 507,000
Collateralized mortgage obligations 12,759,095 156,301 (47,156) 12,868,240
---------- ------- -------- ----------
$ 13,266,095 156,301 (47,156) 13,375,240
========== ========= ======== ==========
</TABLE>
The Federal Home Loan Bank time deposits have contractual maturities
of less than one year.
Proceeds from sales of investment securities classified as held to
maturity were $105,228 in 1994 with gross gains of $4,021. No sales
occurred in 1996 or 1995.
(Continued)
F-16
<PAGE> 188
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and approximate fair value of investment securities
available for sale at September 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
FHLB agency notes $ 4,697,387 -- 901 4,696,486
Investment in FHLB stock 849,300 -- -- 849,300
FHLMC stock 43,005 1,037,153 -- 1,080,158
Other common stock 588,385 86,797 -- 675,182
CMO's 7,887,577 -- 9,086 7,878,491
AMF mutual fund 500,000 21,990 -- 521,990
Mortgage-backed securities 6,028,357 62,888 -- 6,091,245
------------ ----------- ------ -----------
$ 20,594,011 1,208,828 9,987 21,792,852
============ =========== ====== ===========
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
FHLB agency note $ 1,500,000 2,115 -- 1,502,115
Investment in FHLB stock 849,300 -- -- 849,300
FHLMC stock 43,005 715,988 -- 758,993
Other common stock 318,000 -- -- 318,000
Mortgage-backed securities 8,213,086 119,684 39,482 8,293,288
------------ ---------- -------- -----------
$ 10,923,391 837,787 39,482 11,721,696
============ ========== ======== ===========
</TABLE>
The contractual maturities of the FHLB agency notes at September 30,
1996, are summarized below:
<TABLE>
<CAPTION>
Amortized Fair
cost value
---- -----
<S> <C> <C>
1997 $ 1,500,000 1,498,016
2000 2,167,387 3,198,470
----------- ----------
$ 3,667,387 4,696,486
=========== ==========
</TABLE>
No maturity breakdown is presented for mortgage-backed securities
because of the unpredictability as to the timing and amount of
principal repayments on these securities.
(Continued)
F-17
<PAGE> 189
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE, CONTINUED
Investment securities available for sale with amortized cost of
approximately $1,103,288 and $1,943,719 at September 30, 1996 and
1995, respectively, were pledged to secure public deposits as required
by law and for other purposes.
There were no sales of investment securities available for sale in
1996 or 1995.
(4) LOANS
Loans consist of the following at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Real estate mortgage loans:
First mortgage loans:
Single-family residential $ 46,841,421 40,538,860
Multi-family and commercial real estate 484,984 534,555
Second mortgage loans 1,008,128 1,054,012
1-4 family construction loans 17,716,993 13,495,112
Savings account loans 753,416 873,021
Installment loans 2,129,302 2,736,067
----------- ------------
Total 68,934,244 59,231,627
----------- ------------
Deduct:
Deferred loan fees and unearned
credit life premiums 216,786 190,165
Undisbursed portion of loans in process 6,064,703 5,242,828
Allowance for loan losses 250,714 265,759
----------- ------------
Total deductions 6,532,203 5,698,752
----------- ------------
Total loans receivable, net $ 62,402,041 53,532,875
=========== ============
</TABLE>
Activity in the allowance for loan losses was as follows for the years
ended September 30, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 265,759 230,753 189,193
Provision charged to income 1,200 28,730 50,000
Recovery of amounts charged-off in prior years 4,799 21,231 7,948
Loans charged-off (21,044) (14,955) (16,388)
--------- ---------- --------
Ending balance $ 250,714 265,759 230,753
========= ========== ========
</TABLE>
Nonaccrual loans at September 30, 1996 and 1995 totaled $203,000 and
$82,000, respectively.
Foregone interest on nonaccrual loans was $14,192 in 1996, $11,023 in
1995, and $11,089 in 1994.
No loans were considered to be impaired at September 30, 1996 or 1995.
(Continued)
F-18
<PAGE> 190
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at September 30, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 235,966 235,966
Buildings and improvements 1,548,520 1,421,156
Furniture, fixtures, and equipment 952,781 574,611
Automobiles 72,296 101,261
----------- ----------
Total 2,809,563 2,332,994
Less accumulated depreciation (1,007,081) (876,321)
----------- ----------
Premises and equipment, net $ 1,802,482 1,456,673
============ ==========
</TABLE>
(6) FORECLOSED REAL ESTATE
A summary of transactions in foreclosed real estate for the years
ended September 30,1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Foreclosed real estate - beginning of year $ 28,886 62,668
Foreclosures -- 28,886
Sales of foreclosed real estate (28,886) (62,668)
--------- --------
Foreclosed real estate - end of year $ -- 28,886
========= ========
</TABLE>
A summary of the transactions in the allowance for losses or other
real estate for the years ended September 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ -- 28,730 --
Provision charged to earnings -- (28,730) 30,000
Charge-offs -- -- (1,270)
------- --------- -------
Balance at end of year $ -- -- 28,730
======= ========= =======
</TABLE>
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at September 30,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans $ 396,611 389,360
Investment securities held to maturity 1,542 53,457
Investment securities available for sale 214,230 140,011
Allowance for uncollected interest (58,777) (49,309)
--------- --------
Total accrued interest receivable $ 553,606 533,519
========= ========
</TABLE>
(Continued)
F-19
<PAGE> 191
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) INVESTMENTS IN AFFILIATES
In March 1995, the Company obtained a 50 percent ownership interest in
Magnolia Title Services, Inc. (Magnolia) for an investment of
$100,000. Magnolia provides title insurance and related services to
various borrowers and lenders in the state of Alabama. In October
1995 the Company obtained a 50 percent ownership interest in Meta
Company (Meta) for an investment of $175,000. Meta is engaged in the
financial planning business. The Company accounts for these
investments under the equity method.
(9) DEPOSITS
An analysis of deposit accounts, including the contractual interest
rates at the end of the period, is as follows at September 30, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand accounts:
Non interest bearing checking accounts $ 1,130,665 1,516,160
Interest bearing:
NOW accounts (2.50% for 1996 and 1995) 6,697,090 7,243,664
Money market demand (2.50% for 1996 and 1995) 462,717 502,843
----------- ------------
Total demand accounts 8,290,472 9,262,667
Passbook savings accounts (2.50% for 1996 and 1995) 9,861,346 9,702,703
Certificate accounts:
Up to 4.00% 394,643 1,162,747
Over 4.00% to 6.00% 39,613,433 28,234,400
Over 6.00% to 8.00% 5,934,709 14,469,641
----------- ------------
Total certificate accounts 45,942,785 43,866,788
----------- ------------
Total $ 64,094,603 62,832,158
=========== ============
</TABLE>
Weighted average interest rates on deposit accounts were as follows at
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand accounts:
NOW accounts 2.50% 2.50%
Money market demand 2.50% 2.50%
Passbook savings accounts 2.50% 2.50%
Certificate accounts 5.53% 5.59%
Total deposit accounts 4.56% 4.62%
</TABLE>
Certificate accounts greater than or equal to $100,000, which are not
Federal Deposit Insurance Corporation (FDIC) insured, were $4,011,345
at September 30, 1996 and $2,741,495 at September 30, 1995.
(Continued)
F-20
<PAGE> 192
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) DEPOSITS, CONTINUED
Scheduled maturities of certificate accounts were as follows at
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Less than one year $ 34,056,433 25,930,307
One year to two years 8,115,104 5,234,988
Two years to three years 2,372,263 2,959,168
Three years to four years 1,105,688 8,858,227
Four years to five years 293,297 884,098
----------- -----------
Total $ 45,942,785 43,866,788
=========== ===========
</TABLE>
Interest expense on deposits for the years ended September 30, 1996,
1995, and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Demand accounts $ 252,178 248,182 242,968
Passbook savings accounts 279,365 300,705 300,496
Certificate accounts 2,474,494 2,211,503 1,872,060
----------- ----------- ----------
Total $ 3,006,037 2,760,390 2,415,524
=========== =========== ==========
</TABLE>
(10) BORROWED FUNDS
The Company was liable to the Federal Home Loan Bank of Atlanta on the
following advances at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Maturity date Interest rate 1996 1995
------------- ------------- ---- ----
<S> <C> <C> <C>
March 1995 8.02% $ -- --
March 1995 4.67% -- --
October 1995 7.00% -- 2,000,000
March 1996 8.28% -- 367,540
January 1997 5.25% 2,000,000 346,477
March 1997 8.42% 346,477 346,477
March 1997 5.25% 367,540 1,900,000
May 1997 5.06% 1,900,000 1,900,000
October 1997 6.17% 2,000,000
April 1997 5.25% 2,000,000
March 1998 8.54% 629,505 629,505
March 1999 8.58% 286,044 286,044
March 2000 8.62% 271,080 271,080
March 2001 8.68% 257,439 257,439
----------- ----------
Total (weighted average rate of
5.99 in 1996 and 6.93% in 1995) $ 10,058,085 6,058,085
=========== ==========
</TABLE>
(Continued)
F-21
<PAGE> 193
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) BORROWED FUNDS, CONTINUED
At September 30, 1996 and 1995, the advances were collateralized by
first-mortgage residential loans with carrying values of $10,058,085
and $8,077,000, respectively.
The Company has a line of credit of up to $1,500,000 which bears
interest at prime lending rate plus one percent. The line of credit
requires monthly interest payments and payment of the outstanding
balance on May 20, 1997. At September 30, 1996, the prime lending
rate was 8.25 percent and the outstanding balance on the line of
credit was $900,253.
The Company has a note payable to an individual in the amount of $947
at SeptemberE30, 1996 and $11,767 at SeptemberE30, 1995. The note,
which bears an interest rate of 11.00 percent, requires monthly
payments of $964 and matures in 1997.
(11) INCOME TAX EXPENSE
Income tax expense for the years ended September 30, 1996, 1995, and
1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ 42,250 296,710 325,939
Deferred 73,736 36,169 (102,232)
--------- -------- ---------
115,986 335,879 223,707
--------- -------- ---------
State:
Current (12,455) 25,277 28,951
Deferred (11,609) 1,046 (17,160)
--------- -------- ---------
(24,064) 26,323 11,791
--------- -------- ---------
Total $ 91,922 362,202 235,498
========= ======== =========
</TABLE>
The actual income tax expense differs from the "expected" income tax
expense computed by applying the U.S. federal corporate income tax
rate of 34 percent to income before income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax expense $ 25,590 331,020 208,777
Increase (reduction) in income tax resulting from:
Compensation expense for ESOP 57,240 -- --
Management Recognition Plan 24,539 -- --
Offering cost -- 12,871 --
State tax, net of federal income tax benefit (5,290) 17,374 7,783
State income tax refund -- 2,369
FHLMC stock (4,628) (3,136) (2,308)
Other (5,529) 4,078 18,877
---------- --------- --------
$ 91,922 362,202 235,498
========== ========== ========
Effective tax rate 122% 37% 38%
========== ========= ========
</TABLE>
(Continued)
F-22
<PAGE> 194
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) INCOME TAX EXPENSE, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 98,230 97,792
Allowance for insurance claim receivable -- 220,948
SAIF assessment 157,034 --
Deferred compensation 41,665 --
Allowance for losses on foreclosed real estate 464 464
Investment in equity of affiliate 34,410 8,647
Organizational costs 1,036 1,015
Net operating loss carryforward 79,347 --
Nonaccrual interest 2,441 2,441
Other 1,542 1,525
--------- ---------
Total deferred tax assets 416,169 332,832
--------- ---------
Deferred tax liabilities:
Unrealized gain on investment
securities available for sale 414,219 303,000
Bad debt expense 119,527 111,693
Management Recognition Plan 129,904 --
FHLB stock 132,218 132,218
Prepaid expenses 50,625 40,161
Foreclosed real estate gain 13,172 13,172
Accrual, principally due to federal/state
tax deduction on a cash basis 2,050 4,718
Other -- 70
--------- ---------
Total deferred tax liabilities 861,715 605,032
--------- ---------
Net deferred tax liability $ (445,546) (272,200)
========= =========
</TABLE>
There was no valuation allowance at September 30, 1996 or 1995, or any
change in the valuation allowance during the periods ended September
30, 1996 or 1995.
(12) EMPLOYEE BENEFIT PLANS
The Company sponsors a contributory profit-sharing retirement plan
which is available to all employees who have met certain age and
service requirements. Contributions to the plan are determined by
management, based on a percentage of the total payroll and certain
limitations as to the deductibility for tax purposes. Effective
October 1, 1994, the board of directors suspended any matching
contributions by the Company due to the establishment of the Employee
Stock Ownership Plan (ESOP). The plan expense for the years ended
September 30, 1996, 1995, and 1994 was $98, $3,971, and $49,567,
respectively.
(Continued)
F-23
<PAGE> 195
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
Effective October 1, 1994, the Bank established the SouthFirst
Bancshares, Inc. Employee Stock Ownership Plan (ESOP). The ESOP is
available to all employees who have met certain age and service
requirements. Contributions to the plan are determined by the board
of directors and may be in cash or in common stock. The Corporation
loaned $664,000 to the trustee of the ESOP, who purchased, on behalf
of the trust of the ESOP, 66,400 shares of the shares sold by the
Corporation in the public offering.
The common stock of the Corporation acquired for the ESOP is held as
collateral for the loan and is released for allocation to the ESOP
participants as principal payments are made on the loan. The Bank
makes contributions to the ESOP in amounts sufficient to make loan
interest and principal payments and may make additional discretionary
contributions. Contributions, which include dividends on ESOP shares,
of $222,834 and $104,248 were made to the ESOP in 1996 and 1995,
respectively.
The ESOP's loan is repayable in ten annual installments of principal
and interest. The interest rate is adjusted annually and is equal to
the prime rate on each October 1st, beginning with October 1, 1995,
until the note is paid in full. Principal and interest for the years
ended September 30, 1996 and 1995 were $222,834 and $104,248,
respectively. The interest rate and principal outstanding at
September 30, 1996 were 8.75 percent and $427,056, respectively.
These payments resulted in the commitment to release 16,729 shares in
1996 and the release and allocation to participants of 7,131 shares in
1995. The Company has recognized compensation expense, equal to the
fair value of the committed-to-be released shares of $209,112 and
$71,310 in 1996 and 1995, respectively. Excluding committed-to-be
released shares, suspense shares at September 30, 1996 and 1995
equaled 42,540 and 59,269, respectively. These suspense shares are
excluded from weighted average shares in determining earnings per
share.
During 1996, the Company adopted a Stock Option and Incentive Plan for
directors and key employees of the Company. The exercise price cannot
be less than the market price on the grant date and number of shares
available for options cannot exceed 83,000. Stock appreciation rights
may also be granted under the plan. As of September 30, 1996, options
to acquire 83,000 shares had been granted at an exercise price of $14
per share. No options have been exercised.
On November 15, 1995, the Company issued 33,200 shares of common stock
(Initial Shares) to key employees under the terms of the Company's
Management Recognition Plans (MRP's). These shareholders receive
dividends on the shares and have voting rights. However, the sale or
transferability of the shares is subject to the vesting requirements
of the plan. These vesting requirements provide for the removal of
the transferability restrictions upon the performance of employment
services. The restrictions will be removed on 20 percent of the
Initial Shares on each November 15 through the year 2000.
Participants who terminate employment prior to satisfying the vesting
requirements must forfeit the unvested shares and the accumulated
dividends on the forfeited shares. The Company has recorded
compensation expense equal to the fair value of the portion of vested
shares attributable to 1996 plus the fair value of 3,320 shares for
which vesting was accelerated. In addition, the dividends paid on
unvested shares are also reflected as compensation expense. Total
compensation expense attributable to the MRP's in 1996 was $176,130.
(Continued)
F-24
<PAGE> 196
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
The Bank has entered into a deferred compensation agreement with its
president and executive vice president, pursuant to which each officer
will receive from the Bank certain retirement benefits at age 65.
Such benefits will be payable for 15 years to the president and
executive vice president or, in the event of death, to such officer's
respective beneficiary. A portion of the retirement benefits will
accrue each year until age 65 or, if sooner, until termination of
employment. If the president remains in the employment of the Bank
until age 65, his annual benefit will be $65,000. If the executive
vice president remains in the employment of the Bank until age 65, his
annual benefit will be $45,000. If either of these officers die prior
to age 65, while in the employment of the Bank, the full retirement
benefits available under the deferred compensation agreements will
accrue and will, thereupon, be payable to their respective
beneficiaries. The retirement benefits available under the deferred
compensation agreements are unfunded. However, the Bank has purchased
life insurance policies on the lives of these officers that will be
available to the company and the Bank to provide, both, for retirement
benefits and for key man insurance. The costs of these arrangements
was $51,045, in 1996 and 1995, and was $28,522 in 1994.
(13) RELATED PARTY TRANSACTIONS
Certain directors and officers of the Company are loan customers of
the Bank. Total loans outstanding to these persons at September 30,
1996 and 1995 amounted to $1,161,848 and $1,037,485, respectively.
The change from 1995 to 1996 reflects payments of $47,837 and advances
of $172,200 and the change from 1994 to 1995 reflects payments of
$135,541. Management believes that such loans are made in the
ordinary course of business at normal credit terms, including interest
rate and collateral requirements, and do not represent more than a
normal credit risk.
(14) COMMITMENTS AND CONTINGENCIES
Outstanding loan commitments, all of which were fixed-rate
single-family residential mortgage loans, were $958,584 and $731,000
at September 30, 1996 and 1995, respectively.
These financial instruments are not reflected on the accompanying
statements of financial condition, but do expose the Company to credit
risk. 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 is represented by the contractual amount
of these instruments which was $958,584 and $731,000 at September 30,
1996 and 1995, respectively. The Company uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
These 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
some of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements.
(Continued)
F-25
<PAGE> 197
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(14) COMMITMENTS AND CONTINGENCIES, CONTINUED
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. 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 $619,487 of this jury award and paid
therefrom $111,230 in legal fees. The punitive damages and certain of
the compensatory damages, in the aggregate amount of approximately
$200,000, were then appealed by USF&G.
On or about March 8, 1996, 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. On May
23, 1996, the Bank entered into a final settlement agreement with
USF&G under which USF&G dropped its appeal and subrogation actions and
the Bank received $75,000, net of legal fees.
The Company is involved in various legal actions arising in the normal
course of business. In the opinion of management, based upon
consultation with legal counsel, the ultimate resolution of the
proceedings will not have a material adverse effect upon the financial
position of the Company.
(15) RETAINED EARNINGS AND REGULATORY CAPITAL
The Financial Institutions Reform, Recovery and Enforcement Act of
1989 (FIRREA) and the implementing regulations of the OTS, which
became effective on December 7, 1989, changed the capital requirements
applicable to thrifts, including the Company, and the consequences for
failing to comply with such standards. The capital standards include
(i) a core capital requirement, (ii) a tangible capital requirement,
and (iii) a risk-based capital requirement. FIRREA specifies such
capital requirements, and states that such standards shall be no less
stringent than the capital standards applicable to national banks.
In December 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) was enacted. This act recapitalized
the Savings Association Insurance Fund and substantially revised
statutory provisions, including capital standards. Among other
things, FDICIA requires the federal banking agencies to take "prompt
corrective action" with respect to thrifts and banks that do not meet
minimum capital requirements.
(Continued)
F-26
<PAGE> 198
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(15) RETAINED EARNINGS AND REGULATORY CAPITAL, CONTINUED
If a depository institution fails to meet regulatory capital
requirements, the regulatory agencies can require submission and
funding of a capital restoration plan by the institution, place limits
on its activities, require the raising of additional capital and,
ultimately, require the appointment of a conservator or receiver for
the institution. At September 30, 1996 the Company was in compliance
with the capital standards.
At September 30, 1996 and 1995, approximately $2,700,000 of Company's
retained earnings represents allocations of bad debt reserves for tax
computational purposes. If, in the future, this portion of retained
earnings is used for purposes other than to absorb bad debt losses,
income taxes will be imposed at the then applicable rate.
(Continued)
F-27
<PAGE> 199
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(16) PARENT COMPANY
The condensed financial information for SouthFirst Bancshares, Inc.
(Parent Company) is presented below:
Parent Company
Condensed Balance Sheet
September 30, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash $ 147 --
Amounts due from depository institutions 49,914 2,347,382
Investment securities available for sale 660,182 303,000
Investment in subsidiary savings and loan 4,414,705 4,209,943
Investment in affiliates 184,537 76,310
Other assets 635,112 124,675
----------- ----------
$ 5,944,597 7,061,310
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Borrowed funds $ 900,253 --
Other liabilities 94,494 48,159
---------- ----------
Total liabilities 994,747 48,159
Stockholders' equity:
Common stock, $.01 per value, authorized 2,000,000
shares, issued and outstanding 863,200 shares in
1996 and 830,000 shares in 1995 8,632 8,300
Additional paid-in capital 7,704,856 7,240,066
Treasury stock (500,802) --
Deferred compensation on common stock employee
benefit plans (744,710) (597,600)
Retained earnings (1,571,828) 362,385
Unrealized gain on investment securities
available for sale, net of tax 53,702 --
----------- ----------
Total stockholders' equity 4,949,850 7,013,151
----------- ----------
Total liabilities and stockholders' equity $ 5,944,597 7,061,310
=========== ==========
</TABLE>
(Continued)
F-28
<PAGE> 200
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(16) PARENT COMPANY, CONTINUED
Parent Company
Condensed Statements of Operations
Year Ended September 30, 1996 and the
Period from February 13, 1995 (inception)
to September 30, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income $ 99,603 140,138
---------- -------
Expenses:
Interest on borrowed funds 21,682 --
Equity in loss of affiliates 66,773 23,690
Compensation and benefits 11,250 5,250
Management fee 90,000 --
Other 259,515 48,837
---------- ------
449,220 77,777
---------- ------
Net income (loss) before income taxes (349,617) 62,381
Income tax (expense) benefit 128,198 (36,755)
---------- -------
Net income (loss) before equity in
undistributed earnings of subsidiary (221,419) 25,626
Equity in undistributed earnings of subsidiary 204,763 585,759
---------- -------
Net income (loss) $ (16,656) 611,385
========== =======
</TABLE>
(Continued)
F-29
<PAGE> 201
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(16) PARENT COMPANY, CONTINUED
Parent Company
Condensed Statements of Cash Flows
Year Ended September 30, 1996 and the Period
from February 13, 1995 (inception) to September 30, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $ (16,656) 611,385
Adjustments to reconcile net income to cash
provided by (used in ) operating activities:
Equity in undistributed earnings of subsidiary (204,763) (585,759)
Compensation expense on ESOP and MRP 318,012 66,400
Equity in losses of unconsolidated affiliates 66,773 23,690
Increase in other assets (510,437) (124,675)
Increase (decrease) in other liabilities 13,242 48,158
----------- -----------
Net cash provided by (used in) operating activities (333,829) 39,199
----------- -----------
Investing activities:
(Increase) decrease in amounts due from depository
institutions 2,297,468 (2,347,382)
Purchase of investment securities (270,385) (303,000)
Investment in subsidiary -- (3,624,183)
Investment in affiliates (175,000) (100,000)
----------- -----------
Net cash used in investing activities 1,852,083 (6,374,565)
----------- -----------
Financing activities:
Issuance of common stock -- 6,584,366
Proceeds from borrowed funds 900,253 --
Cash dividends paid (1,917558) (249,000)
Acquisition of treasury stock (500,802) --
----------- -----------
Net cash provided by (used in) financing activities (1,518,107) 6,335,366
----------- -----------
Net increase in cash 147 --
Cash at beginning of year -- --
----------- -----------
Cash at end of year $ 147 --
=========== ===========
</TABLE>
F-30
<PAGE> 202
SouthFirst Bancshares, Inc.
Statements of Financial Condition
June 30, 1997 (Unaudited) and September 30, 1996
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1997 SEPTEMBER 30, 1996
- ------ ------------- ------------------
(AUDITED)
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,981,164 $ 2,625,561
Interest - bearing deposits in other financial
institutions 3,350 --
Investment securities held to maturity at cost (fair
value of $153,853 at June 30, 1997 and $153,853 at
Sept. 30, 1996 153,853 153,853
Investment securities available for sale at fair value 17,134,015 21,792,852
Loans receivable 71,797,859 62,652,755
Less allowance for loan losses (284,988) (250,714)
------------ ------------
Net loans 71,512,871 62,402,041
Loans held for sale at fair value -- 131,100
Premises and equipment, net 1,826,537 1,802,482
Foreclosed real estate, net 157,717 --
Accrued interest receivable 558,910 553,606
Other assets 1,759,599 635,902
Investments in affiliates 195,033 184,537
------------ ------------
Total assets $ 97,283,049 $ 90,281,934
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 1,424,325 $ 1,087,042
Interest bearing 61,117,389 63,007,561
------------ ------------
Total deposits 62,541,714 64,094,603
------------ ------------
Advances by borrowers for property taxes and
insurance 341,525 392,280
Accrued interest payable 735,721 842,285
Borrowed funds 18,493,386 10,959,285
Income taxes payable 703,586 285,401
Accrued expenses and other liabilities 851,364 820,266
------------ ------------
Total liabilities $ 83,667,296 $ 77,394,120
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 2,000,000 shares
authorized, 863,200 shares issued, 847,600 and
823,700 shares outstanding in 1997 and 1996
respectively 8,632 8,632
Treasury stock, 15,600 shares and 39,500 shares in
1997 and 1996 respectively at cost (198,392) (500,802)
Additional paid in capital 7,909,443 7,704,856
Retained earnings, substantially restricted 5,752,152 5,690,301
Unrealized gain on investment securities available for
sale, net of tax 1,055,918 729,537
Deferred compensation (912,000) (744,710)
Total stockholders' equity $ 13,615,753 $ 12,887,814
------------ ------------
Total liabilities and stockholders' equity $ 97,283,049 $ 90,281,934
============ ============
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 203
SouthFirst Bancshares, Inc.
Statements of Earnings (Unaudited) for the
Nine Months Ending June 30, 1997 and June 30, 1996
And For The Three Months Ending June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
Nine months ended June 30, Three months ended June 30,
-------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans $ 4,241,169 $ 3,587,803 $ 1,491,225 $ 1,261,842
Interest and dividend income on investment
securities held to maturity 6,740 9,254 2,154 1,879
Interest and dividend income on securities 311,177 419,980
----------- -----------
available for sale 1,023,258 1,290,538
----------- ----------- ----------- -----------
Total interest and dividend income 5,271,167 4,887,595 1,804,556 1,683,701
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 2,118,815 2,219,431 689,082 740,858
Interest on borrowed funds 676,922 380,585 256,927 157,328
----------- ----------- ----------- -----------
Total interest expense 2,795,738 2,600,016 946,009 898,186
----------- ----------- ----------- -----------
Net interest income 2,475,430 2,287,579 858,548 785,515
Provision for loan losses 36,465 1,200 18,765 --
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 2,438,965 2,286,379 839,783 785,515
Other income:
Settlement of lawsuit (note 2) -- 583,000 -- 75,000
Service charges and other fees 441,754 427,117 146,795 137,620
Gain on sale of loans 81,983 104,925 18,250 50,307
Insurance commissions 859 1,348 (573) 182
Profit(loss) from sale of equipment -- (7,543) -- (7,543)
Equity in loss of affiliates (44,504) (18,016) (6,432) 12,097
Other 252,022 51,251 222,430 22,428
----------- ----------- ----------- -----------
Total other income 732,114 1,142,082 380,469 290,091
Other expenses:
Compensation and benefits 1,469,938 1,650,182 563,387 473,793
Insurance expense 87,826 109,810 39,683 42,883
Net occupancy expense 139,933 115,393 53,796 37,781
Furniture and fixtures 166,720 118,076 55,830 36,794
Data processing 130,516 127,785 46,587 43,511
Office supplies and expenses 150,439 144,175 60,661 49,361
Deposit insurance premiums 49,591 132,146 10,404 43,785
Other 359,486 436,910 179,907 74,053
----------- ----------- ----------- -----------
Total other expenses 2,554,449 2,834,477 1,010,253 801,961
----------- ----------- ----------- -----------
Income before taxes 616,630 593,984 209,998 273,645
Income tax expense 246,541 214,781 85,771 85,265
----------- ----------- ----------- -----------
Net income $ 370,089 $ 379,204 $ 124,227 $ 188,380
=========== =========== =========== ===========
Net income per common share $ 0.43 $ 0.44 $ 0.15 $ 0.22
Weighted average common shares outstanding 853,893 856,822 822,116 864,005
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 204
SouthFirst Bancshares, Inc.
Statements of Cash Flows (Unaudited) for the
Nine Months Ending June 30, 1997 and 1996
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996
------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 370,089 $ 379,204
Adjustments to reconcile net income to net cash
Cash provided by operating activities:
Depreciation and amortization 129,213 83,056
Equity in loss of unconsolidated affiliate 44,504 18,016
Gain on sale of loans 81,983 (104,925)
Loss on sale of premises and equipment -- 7,543
Increase (decrease) in deferred loan origination fees 25,138 28,696
Net amortization of premium on investment securities
available for sale 1,540 4,669
Provision for loan losses (36,465) --
Loans originated for sale 2,655,470 (3,525,404)
Proceeds from sale of loans 2,454,964 3,589,602
Decrease in accrued interest receivable (5,304) 50,915
Decrease(increase) in other assets (1,123,697) 220,005
Increase in accrued interest payable (106,564) (137,105)
Increase(decrease) in income taxes payable 218,143 (74,337)
Increase (decrease) in accrued expenses and other liabilities 31,100 27,201
------------ ------------
Net cash provided by operating activities 4,740,114 567,136
------------ ------------
Investing activities:
Investment in affiliated company $ (55,000) $ (175,000)
Investment in subsidiary 374,309 --
Maturities on interest bearing deposits in other financial institutions -- 300,000
Reinvestment of dividends/interest bearing deposits in other
financial institutions (168) (182)
Proceeds from maturity of investment securities held to maturity -- 357,000
Purchase of investment securities available for sale -- (4,070,385)
Purchase of discount on investments available for sale -- 2,813
Proceeds from sale of investments 5,828,103 3,640,274
Purchases of FHLB time deposits held to maturity -- --
Purchase of FHLB agency note available for sale (2,000,000) --
Reinvestment of mutual fund dividend (24,086) (14,238)
Gain on sale of investment securities available for sale 15,706 23,842
Principal repayments of MBS available for sale 598,055 2,403,595
Principal repayments of CMO's available for sale 762,762 280,451
Net increase in loans (14,318,537) (8,592,180)
Purchase of premises and equipment (153,268) (426,246)
------------ ------------
Net cash used in investing activities (8,972,124) (6,270,256)
------------ ------------
Financing activities:
Net (decrease) increase in NOW accounts and savings accounts $ 21,533 $ (16,367)
Net increase (decrease) in certificates of deposits (1,574,422) 2,473,936
Proceeds from borrowed funds 7,535,048 6,817,594
Cash dividends paid (308,237) (2,045,951)
Treasury stock purchased (34,606) (178,925)
Repayment of borrowed funds (947) (2,375,537)
Decrease in advances by borrowers for property taxes and
insurance (50,755) (25,110)
------------ ------------
Net cash provided by financing activities $ 5,587,614 $ 4,649,640
============ ============
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 205
SouthFirst Bancshares, Inc.
Statements of Cash Flows (Unaudited) for the
Nine Months Ending June 30, 1997 and 1996
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996
------------- -------------
<S> <C> <C>
Increase (decrease) in cash and amounts due from depository
institutions $ 1,355,604 $ (1,053,480)
Cash and amounts due from depository institutions beginning
of year $ 2,625,561 $ 4,464,099
------------ ------------
Cash and amounts due from depository institutions end of year 3,981,165 3,410,619
============ ============
Supplemental information on cash payments:
Interest $ 2,118,815 $ 2,737,121
Income taxes 246,561 211,778
Supplemental information on non cash transactions:
Transfers to investment securities available for sale $ - $ 12,476,980
Change in net unrealized gain on investment available
for sale $ 326,382 $ 125,253
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 206
SOUTHFIRST BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
Information filed for the quarter ended June 30, 1997 was derived
from the financial records of SouthFirst Bancshares, Inc. (the "Corporation")
and its wholly-owned subsidiaries, First Federal of the South (the "Bank") and
Benefit Financial Services, Inc. ("Benefit Financial"), a Montgomery,
Alabama-based employee benefits consulting firm. Collectively, the Corporation
and its subsidiaries are referred to herein as the "Company." On February 13,
1995, the Bank converted from a mutual to a stock form of ownership, whereby
all 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
three month and nine month periods ended June 30, 1997. The results contained in
these statements are not necessarily indicative of the results which may be
expected for the entire year.
(2) SETTLEMENT OF LAWSUIT
On May 23, 1996 the Bank entered into a final settlement agreement
with United States Fidelity & Guaranty Company ("USF&G"), under which litigation
between the Bank and USF&G was ended. Over the course of the litigation, the
Bank received, net of legal fees, $619,000. The litigation arose from a claim
filed by the Bank alleging, among other things, that USF&G had breached its
contractual obligations under a fidelity bond the Bank held with USF&G.
In the normal course of its business, the Company from time to time
is involved in legal proceedings. The Company believes there are no pending or
threatened legal proceedings which upon resolution are expected to have a
material effect upon the Company's financial condition.
F-35
<PAGE> 207
[JONES & KIRKPATRICK, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
August 27, 1997, except for Note 16, as
to which the date is September 17, 1997
Board of Directors
First Federal Savings and Loan
Association of Chilton County
Clanton, Alabama
We have audited the accompanying statements of financial condition of First
Federal Savings and Loan Association of Chilton County as of June 30, 1997 and
1996, and the related statements of operations, stockholders' equity and cash
flows for the three years ended June 30, 1997. These financial statements are
the responsibility of the Association's management. Our responsibility is to
express an opinion on these 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 financial position of First Federal Savings and Loan
Association of Chilton County as of June 30, 1997 and 1996, the results of its
operations and its cash flows for the three years ended June 30, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective July 1, 1994 the
Association changed its method of accounting for investment securities.
/s/ Jones & Kirkpatrick, P.C.
Certified Public Accountants
F-36
<PAGE> 208
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------------ ------------
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 968,422 $ 1,080,835
Interest-bearing deposits in other banks 227,996 132,891
Federal funds sold 7,500,000 500,000
----------- -----------
Total cash and cash equivalents 8,696,418 1,713,726
Certificate of deposit 100,000 101,311
Investment securities, held-to-maturity (Note 2) 8,731,284 9,312,638
Investment securities, available-for-sale (Note 2) 20,885,335 25,413,850
Loans receivable - net (Note 3) 33,842,696 34,369,238
Accrued interest receivable (Note 4) 502,445 619,997
Federal Home Loan Bank stock, at cost 621,500 621,500
Real estate acquired in settlement of loans (Note 6) 59,925 71,869
Office properties and equipment, at cost, less
accumulated depreciation (Note 5) 1,080,167 1,147,272
Prepaid expenses and other assets 168,770 285,249
Deferred income taxes (Note 12) 64,530 258,536
----------- -----------
TOTAL ASSETS $74,753,070 $73,915,186
=========== ===========
</TABLE>
F-37
See notes to financial statements.
<PAGE> 209
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------------ ------------
<S> <C> <C>
Liabilities:
Deposit accounts (Note 7) $ 68,152,460 $ 69,525,183
Advances from Federal Home Loan Bank (Note 8) 2,000,000 0
Accounts payable and accrued expenses 147,763 193,660
Accrued interest 72,053 68,664
Accrued income taxes - current 4,935 8,687
------------ ------------
Total Liabilities 70,377,211 69,796,194
------------ ------------
Commitments and Contingencies (Note 16)
Stockholders' Equity (Note 10):
Serial preferred stock, 5,000,000 shares
authorized and unissued 0 0
Common stock, $ .01 par value, 15,000,000
shares authorized, 173,822 shares issued
and 169,222 shares outstanding (Note 9) 1,738 1,738
Additional paid-in capital 1,520,870 1,520,870
Retained earnings - substantially restricted 3,490,941 3,558,485
Net unrealized losses of available-for-sale
securities (net of tax benefit of $61,197
and $262,579 in 1997 and 1996, respectively)
(Note 1) (587,090) (911,501)
Treasury stock, 4,600 shares at cost (50,600) (50,600)
------------ ------------
Total Stockholders' Equity 4,375,859 4,118,992
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,753,070 $ 73,915,186
============ ============
</TABLE>
F-38
See notes to financial statements.
<PAGE> 210
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
----------- ---------- ----------
<S> <C> <C> <C>
Interest Income:
Interest on mortgage loans $ 2,160,971 $2,120,921 $2,034,147
Interest and dividends on investments-
taxable 1,639,682 1,583,588 1,553,935
Interest and dividends on investments-
non-taxable 90,162 96,456 87,575
Interest on mortgage-backed securities 744,353 757,972 821,716
Interest on other loans 875,103 680,857 471,238
----------- ---------- ----------
Total Interest Income 5,510,271 5,239,794 4,968,611
----------- ---------- ----------
Interest Expense:
Interest on deposit accounts (Note 7) 3,724,099 3,833,197 3,163,178
Interest on borrowed funds (Note 8) 112,152 34,081 94,482
----------- ---------- ----------
Total Interest Expense 3,836,251 3,867,278 3,257,660
----------- ---------- ----------
Net Interest Income 1,674,020 1,372,516 1,710,951
Loss Provision on Loans 63,767 84,645 52,643
----------- ---------- ----------
Net Interest Income After
Provision for Losses on Loans 1,610,253 1,287,871 1,658,308
----------- ---------- ----------
Other Income:
Gain (loss) on sale of mortgage-backed
securities (10,022) 20,516 3,604
Gain on sale of investment securities 40,621 19,645 1,207
Fees/miscellaneous charges on loans 81,670 93,128 77,094
Returned check charges 64,128 59,047 46,220
Miscellaneous other income 52,024 64,491 67,198
----------- ---------- ----------
Total Other Income 228,421 256,827 195,323
----------- ---------- ----------
</TABLE>
(Continued)
F-39
See notes to financial statements.
<PAGE> 211
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
STATEMENTS OF OPERATIONS (Continued)
For the Years Ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
----------- ----------- -----------
<S> <C> <C> <C>
Other Expenses:
Salaries and employee benefits $ 588,428 $ 558,435 $ 527,296
Office building and equipment expense 161,652 159,593 157,332
Deposit insurance expense 113,920 154,320 150,336
Legal and professional fees 168,335 108,001 181,014
Data processing expense 123,815 117,671 108,608
(Income) loss on foreclosed real estate 9,909 35,209 (9,020)
Loss on other foreclosed assets 58,484 0 0
Settlement of lawsuit 0 0 275,000
Special SAIF assessment 430,132 0 0
Other operating expenses 256,041 241,618 227,917
----------- ----------- -----------
Total Other Expenses 1,910,716 1,374,847 1,618,483
----------- ----------- -----------
Income (Loss) Before Income Taxes (72,042) 169,851 235,148
----------- ----------- -----------
Provision for Income Tax Expense
(Benefit) (Note 12):
Current (44,504) 71,589 33,403
Deferred (7,376) (9,076) 47,119
----------- ----------- -----------
Total Income Tax Expense (Benefit) (51,880) 62,513 80,522
----------- ----------- -----------
Net Income (Loss) $ (20,162) $ 107,338 $ 154,626
=========== =========== ===========
Earnings Per Share
- ------------------
Net Earnings (Loss) Per Share (Note 14) $ (.12) $ .63 $ .91
=========== =========== ===========
</TABLE>
F-40
See notes to financial statements.
<PAGE> 212
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
------------------- Additional Total
Number of $ .01 Paid In Retained Valuation Treasury Stockholders'
Shares Par Value Capital Earnings Reserve Stock Equity
--------- --------- ---------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 173,822 $ 1,738 $1,520,870 $3,392,977 $(506,740) $(50,600) $4,358,245
Adjustment to beginning balance for
change in accounting principle, net of
income tax benefit of $52,535 (Note 1) (78,803) (78,803)
Net income for year ended June 30, 1995 154,626 154,626
Cash dividends, $ .29 per share (49,074) (49,074)
Net change in unrealized gain (loss) of
available-for-sale securities, net of
income tax expense of $76,559 187,581 187,581
-------- --------- ---------- ---------- --------- -------- ----------
Balance at June 30, 1995 173,822 1,738 1,520,870 3,498,529 (397,962) (50,600) 4,572,575
Net income for year ended June 30, 1996 107,338 107,338
Cash dividends, $ .28 per share (47,382) (47,382)
Net change in unrealized gain (loss) of
available-for-sale securities net of
income tax benefit of $286,603 (513,539) (513,539)
-------- --------- ---------- ---------- --------- -------- ----------
Balance at June 30, 1996 173,822 1,738 1,520,870 3,558,485 (911,501) (50,600) 4,118,992
Net income (loss) for year ended June 30, 1997 (20,162) (20,162)
Cash dividends, $ .28 per share (47,382) (47,382)
Net change in unrealized gain (loss) of
available-for-sale securities net of
income tax expense of $201,382 324,411 324,411
-------- --------- ---------- ---------- --------- -------- ----------
Balance at June 30, 1997 173,822 $ 1,738 $1,520,870 $3,490,941 $(587,090) $(50,600) $4,375,859
======== ========= ========== ========== ========= ======== ==========
</TABLE>
F-41
See notes to financial statements.
<PAGE> 213
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (20,162) $ 107,338 $ 154,626
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Accretion (amortization) of:
Discounts and premiums on loans,
mortgage-backed securities and
investment securities 13,853 (6,833) 768
Deferred loan origination fees 6,866 28,214 50,527
Provision for losses on loans and
real estate owned 71,710 90,676 56,197
Net (gain) loss on sales of:
Mortgage-backed securities 10,022 (20,516) (3,604)
Investment securities (40,621) (19,645) (1,207)
Foreclosed real estate 1,964 0 (9,307)
Depreciation 76,906 78,723 76,274
(Increase) decrease in other assets:
Prepaid and other assets 116,479 (97,099) (123,621)
Accrued interest receivable 117,552 (42,074) (22,943)
Increase (decrease) in other liabilities:
Unearned discounts (61,029) 186,292 87,080
Accrued interest payable 3,388 (23,884) 39,291
Accrued income taxes (3,752) 8,687 (278,256)
Deferred income taxes (7,376) (9,076) 47,119
Accounts payable and other
expenses (45,899) (221,763) 282,525
--------- --------- ---------
Net Cash Provided by Operating
Activities 239,901 59,040 355,469
--------- --------- ---------
</TABLE>
(Continued)
F-42
See notes to financial statements.
<PAGE> 214
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
<S> <C> <C> <C>
(Increase) decrease in certificate
of deposit $ 1,311 $ (1,311) $ 0
Loan originations, net of loan
repayments 555,170 (5,382,611) 442,619
Purchases of mortgage-backed
securities, available-for-sale (4,771,776) (5,989,559) (282,549)
Purchases of mortgage-backed
securities, held-to-maturity 0 0 (2,479,394)
Principal payments on mortgage-backed
securities 1,335,326 1,416,416 1,078,902
Proceeds from sales of mortgage-backed
securities, available-for-sale 4,250,535 5,523,659 0
Proceeds of sales of mortgage-backed
securities, held-to-maturity 0 0 2,762,511
Purchases of investment securities,
available-for-sale (4,304,511) (3,043,660) (2,033,067)
Purchases of investment securities,
held-to-maturity 0 0 (866,522)
Proceeds from sales of investment
securities, available-for-sale 6,304,605 2,362,650 251,406
Proceeds from maturities of investment
securities, available-for-sale 2,500,000 2,850,000 100,000
Proceeds from maturities of investment
securities, held-to-maturity 300,000 750,000 300,000
Proceeds from sales of foreclosed
real estate 74,251 0 49,574
Purchases of properties and equipment (9,801) (23,961) (15,238)
Net expenditures on foreclosed real
estate (72,215) (1,438) 0
----------- ----------- -----------
Net Cash Provided (Used) by
Investing Activities 6,162,895 (1,539,815) (691,758)
----------- ----------- -----------
</TABLE>
(Continued)
F-43
See notes to financial statements.
<PAGE> 215
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net increase (decrease) in non-interest
bearing demand, savings and NOW
deposit accounts $(1,965,597) $ (911,902) $(6,944,194)
Net increase in time deposits 592,875 3,038,325 7,840,270
Proceeds from FHLB advances and
other borrowings 2,000,000 0 4,000,000
Repayment of borrowings 0 (1,000,000) (3,000,000)
Dividends paid (47,382) (47,382) (49,074)
----------- ----------- -----------
Net Cash Provided by Financing
Activities 579,896 1,079,041 1,847,002
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 6,982,692 (401,734) 1,510,713
Cash and Cash Equivalents -
Beginning of Year 1,713,726 2,115,460 604,747
----------- ----------- -----------
Cash and Cash Equivalents -
End of Year $ 8,696,418 $ 1,713,726 $ 2,115,460
=========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES
<TABLE>
<S> <C> <C> <C>
Cash paid during the year for interest $3,832,862 $3,891,162 $3,218,369
Cash paid during the year for income
taxes 8,687 104,966 399,281
Loans transferred to foreclosed real
estate during year 75,361 57,936 48,483
Proceeds from sales of foreclosed real
estate financed through loans 24,000 65,000 0
Total increase in unrealized gain (loss)
on securities available-for-sale 525,793 (800,142) 264,140
</TABLE>
F-44
See notes to financial statements.
<PAGE> 216
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The Association provides a variety of financial
services to individuals and corporate customers through its two branches
in Clanton and Centreville, Alabama. The Association's primary deposit
products are interest-bearing checking accounts and certificates of
deposit. Its primary lending products are single-family residential loans.
The Association is subject to competition from other financial
institutions. The Association is also subject to the regulations of
certain federal agencies and undergoes period examinations by those
regulatory authorities.
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.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.
A majority of the Association's loan portfolio consists of single-family
residential loans in the Clanton, Alabama area. Accordingly, the ultimate
collectibility of a substantial portion of the Association's loan
portfolio and the recovery of a substantial portion of the carrying amount
of foreclosed real estate are susceptible to changes in local market
conditions.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowances for losses on loans on
foreclosed real estate. Such agencies may require the Association to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination. Because of
these factors, it is reasonably possible that the allowances for losses on
loans and foreclosed real estate may change materially in the near term.
However, the amount of the change that is reasonably possible cannot be
estimated.
(Continued)
F-45
<PAGE> 217
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities - On July 1, 1994, the Association adopted the
provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS
No. 115). In accordance with SFAS No. 115, prior period financial
statements have not been restated to reflect the change in accounting
principle. For purposes of adopting SFAS No. 115, the Association has
classified all of its investments as either held-to-maturity, trading, or
available-for-sale securities, based on the following criteria:
Trading Securities - Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair
values. Realized and unrealized gains and losses on trading account
securities are included in other income. The Association had no
securities classified as trading account securities at June 30, 1997 or
1996.
Securities Held-to-Maturity - Government, Federal agency, and corporate
debt securities that management has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts that are recognized in interest
income using methods approximating the interest method over the period
to maturity. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and
serviced by issuers of the securities. Mortgage-backed securities are
carried at unpaid principal balances, adjusted for unamortized premiums
and unearned discounts. Premiums and discounts are amortized using
methods approximating the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
Securities Available-for-Sale - Available-for-sale securities consist
of investment securities not classified as trading securities nor as
held-to-maturity securities. Unrealized holding gains and losses, net
of tax, on available-for-sale securities are reported as a net amount
in a separate component of stockholders' equity until realized. Gains
and losses on the sale of available-for-sale securities are determined
using the specific-identification method. The amortization of premiums
and the accretion of discounts are recognized in interest income using
methods approximating the interest method over the period of maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their
fair value. The related write-downs are included in earnings as
realized losses.
(Continued)
F-46
<PAGE> 218
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans - Loans are stated at unpaid principal balances, less the allowance
for loan losses and net deferred loan fees and unearned discounts.
Unearned discounts on installment loans are recognized as income over the
term of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain direct
origination costs, are deferred and amortized as a yield adjustment over
the lives of the related loans using the interest method. Amortization of
deferred loan fees is discontinued when a loan is placed on nonaccrual
status.
Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance. Interest income on other impaired loans is recognized only to the
extent of interest payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, economic conditions and other risks
inherent in the portfolio. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated
cash flows. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of
recoveries.
Foreclosed Real Estate - Foreclosed real estate includes both formally
foreclosed property and in-substance foreclosed property. In-substance
foreclosed properties are those properties for which the institution has
taken physical possession, regardless of whether formal foreclosure
proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the
lower of the Association's cost or the asset's fair value, less estimated
costs to sell, which becomes the property's new basis. Any write-downs
based on the asset's fair value at date of acquisition are charged to the
allowance for loan losses. After foreclosure, these assets are carried at
the lower of their new cost basis or fair value less cost to sell. Costs
incurred in maintaining foreclosed real estate and subsequent write-downs
to reflect declines in the fair value of the property are included in
income (loss) on foreclosed real estate.
(Continued)
F-47
<PAGE> 219
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment - Land is carried at cost. Other premises and
equipment are recorded at cost and are depreciated on the straight-line
method. Depreciation and amortization are provided over the estimated
useful lives of the respective assets.
Income Taxes - Income taxes are provided for the tax effects of the
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between
the basis of available-for-sale securities, allowance for loan losses,
stock dividends received, certain loan fees, and accumulated depreciation
for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets and
liabilities are reflected at income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized
or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
Statements of Cash Flows - The Association considers all cash and amounts
due from depository institutions, interest-bearing deposits in other
banks, and federal funds sold to be cash equivalents for purposes of the
statements of cash flows.
Fair Values of Financial Instruments - Statement of Financial Accounting
Standards No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. In
cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain
financial instruments and all non-financial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Association.
The following methods and assumptions were used by the Association in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
Certificate of deposits: Fair values for time deposits are estimated
using a discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of aggregated
contractual maturities on such time deposits.
(Continued)
F-48
<PAGE> 220
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments (Continued)
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and
commercial and industrial loans) are estimated using discounted cash
flow analysis, based on interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Loan
fair value estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of accrued
interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits.
The carrying amount of accrued interest payable approximates fair
value.
Short-term borrowings and notes payable: The carrying amounts of
short-term borrowings and notes payable approximate their fair values.
Advance payments by borrowers for taxes and insurance (escrows): The
carrying amount of escrow accounts approximate fair value.
Loan commitments: Commitments to extend credit were evaluated and fair
value was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
Reclassifications - Certain amounts in the financial statements presented
have been reclassified from amounts previously reported in order to be
comparable between years. These reclassifications have no effect on
previously reported shareholders' equity or net income during the period
involved.
F-49
<PAGE> 221
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
Investment securities have been classified according to management's
intent. The amortized cost of securities and their approximate fair values
are as follows:
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Investment securities, held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
Government Corporations
and agencies $ 5,956,464 $ 0 $ (165,139) $ 5,791,325
Mortgage-backed
securities 133,994 0 (1,805) 132,189
Corporate securities 2,640,826 13,740 (21,212) 2,633,354
----------- -------- ----------- -----------
$ 8,731,284 $ 13,740 $ (188,156) $ 8,556,868
=========== ======== =========== ===========
Investment securities, available-for-sale:
U.S. Treasury securities
and obligations of U.S.
Government Corporations
and agencies $ 5,350,339 $ 2,651 $ (135,336) $ 5,217,654
Obligations of state and
political subdivisions 55,182 0 (378) 54,804
Mortgage-backed
securities 10,169,518 112,556 (65,542) 10,216,532
Corporate securities 1,441,887 0 (37,359) 1,404,528
Collateralized
mortgage obligations 1,000,605 0 (29,583) 971,022
Equity securities 3,387,962 0 (495,295) 2,892,667
Other investments 128,128 0 0 128,128
----------- --------- ----------- -----------
$21,533,621 $ 115,207 $ (763,493) $20,885,335
=========== ========= =========== ===========
</TABLE>
(Continued)
F-50
<PAGE> 222
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Investment securities, held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
Government Corporations
and agencies $ 5,960,132 $ 0 $ (347,167) $ 5,612,965
Mortgage-backed
securities 402,363 45 (7,915) 394,493
Corporate securities 2,950,143 8,304 (57,017) 2,901,430
----------- ---------- ----------- -----------
$ 9,312,638 $ 8,349 $ (412,099) $ 8,908,888
=========== ========== ============ ===========
Investment securities, available-for-sale:
U.S. Treasury securities
and obligations of U.S.
Government Corporations
and agencies $ 7,653,613 $ 0 $ (358,850) $ 7,294,763
Obligations of state and
political subdivisions 1,680,294 58,713 (5,028) 1,733,979
Mortgage-backed
securities 10,752,277 64,970 (297,851) 10,519,396
Corporate securities 1,520,535 0 (76,589) 1,443,946
Collateralized
mortgage obligations 1,001,180 0 (41,812) 959,368
Equity securities 3,886,712 0 (517,633) 3,369,079
Other investments 93,319 0 0 93,319
----------- --------- ----------- -----------
$26,587,930 $ 123,683 $(1,297,763) $25,413,850
=========== ========= =========== ===========
</TABLE>
(Continued)
F-51
<PAGE> 223
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
held-to-maturity and available-for-sale at June 30, 1997, by contractual
maturity, are shown below. Actual maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Securities
Held-to-Maturity Available-for-Sale
---------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $3,651,776 $ 3,558,515 $ 0 $ 0
Due after one year
through five years 5,079,508 4,998,353 1,550,821 1,524,613
Due after five years
through ten years 0 0 5,296,587 5,152,373
Due after ten years 0 0 11,170,123 11,187,554
---------- ----------- ----------- -----------
Total debt securities 8,731,284 8,556,868 18,017,531 17,864,540
Equity securities and
other investments
having no specified
due date 0 0 3,516,090 3,020,795
---------- ----------- ----------- -----------
$8,731,284 $ 8,556,868 $21,533,621 $20,885,335
========== =========== =========== ===========
</TABLE>
During 1997 the Association sold securities available-for-sale for total
proceeds of $10,555,140, resulting in gross realized gains of $82,477
and gross realized losses of $51,878. During 1996 the Association sold
securities available-for-sale for total proceeds of $7,886,309,
resulting in gross realized gains of $62,249 and gross realized losses
of $22,088. During 1995 the Association sold securities
available-for-sale for total proceeds of $251,406, resulting in gross
realized gains of $4,811.
During 1996 the Association transferred securities from the
held-to-maturity category to the available-for-sale category. The
amortized costs of the transferred securities was $17,252,348, and the
related unrealized gain was $14,205. During 1996 the Association also
transferred securities from the available-for-sale category to the
held-to-maturity category. The market value of the transferred
securities was $771,758 and the related unrealized gain was $1,987. The
decision to transfer the securities was based on guidance provided under
A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities as issued by the Financial
Accounting Standards Board.
(Continued)
F-52
<PAGE> 224
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES (Continued)
At June 30, 1997, investment securities with an amortized cost of $63,895
were pledged as security for various demand deposits.
At June 30, 1997, the Association had entered into a commitment to purchase
certain investment securities for a total price of approximately
$4,800,000. The investments are mortgage backed securities scheduled to be
issued and settled in July 1997.
3. LOANS RECEIVABLE
A summary of loans receivable is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Mortgage Loans:
Conventional loans:
1-4 family dwellings $ 20,925,017 $ 22,409,017
Commercial real estate 4,179,813 1,381,148
Construction loans 1,090,106 3,967,463
Participation investment in loans purchased 27,697 57,644
------------ ------------
26,222,633 27,815,272
Deduct:
Undisbursed portion of construction loans (192,627) (1,640,414)
Allowance for losses (132,125) (135,696)
Unearned loan origination fees (99,646) (131,012)
------------ ------------
25,798,235 25,908,150
------------ ------------
Other Loans:
Consumer loans 6,905,863 7,335,889
Loans to depositors, secured by savings 1,712,388 1,758,364
------------ ------------
8,618,251 9,094,253
Deduct:
Unearned discounts (440,934) (501,964)
Allowance for losses (132,856) (131,201)
------------ ------------
8,044,461 8,461,088
------------ ------------
Total Loans $ 33,842,696 $ 34,369,238
============ ============
</TABLE>
At June 30, 1997 and 1996, the total recorded investment in impaired
loans, all of which had allowances determined in accordance with SFAS
No. 114 and No. 118, amounted to approximately $521,000 and $16,500,
respectively. The average recorded investment in impaired loans
amounted to approximately $80,000 and $23,000 for the years ended June
30, 1997 and 1996, respectively. The allowance for loan losses related
to impaired loans amounted to approximately $59,000 and $14,500 at June
30, 1997 and 1996, respectively. Interest income of approximately
$5,800 and $600 on impaired loans was recognized for cash payments
received in 1997 and 1996, respectively.
(Continued)
F-53
<PAGE> 225
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE (Continued)
Also, at June 30, 1997 and 1996, the Association had other non-accrual
loans of approximately $223,000 and $219,000, respectively, for which
impairment had not been recognized. If interest on these loans had been
recognized at the original interest rates, interest income would have
increased approximately $13,000 and $9,600, respectively.
The Association has no commitments to loan additional funds to the
borrowers of impaired or non-accrual loans.
The weighted average interest rate on all loans was 8.78% and 8.67% at
June 30, 1997 and 1996, respectively.
In the ordinary course of business, the Association makes loans to
directors, officers and employees of the Association. In the opinion of
management, related party loans are made on substantially the same
terms, including interest rates and collateral, as comparable
transactions with unrelated parties, and do not include more than the
normal risks of collectability. The amount of such related party loans
was $344,996 and $260,008 at June 30, 1997 and 1996, respectively.
Activity in related party loans is summarized below:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Balance at beginning of year $ 260,008 $ 103,683
New loans 140,241 232,565
Repayments (55,253) (76,240)
--------- ---------
Balance at end of year $ 344,996 $ 260,008
========= =========
</TABLE>
During the years ended June 30, 1997 and 1996 the Association
renegotiated certain past due loans in the approximate amounts of
$221,510 and $482,500, respectively. The effect of the transaction was
to capitalize accrued interest on the various loans and to continue
payments under the same interest rates and maturities. The monthly
installment payments are normally increased to cover the capitalized
interest.
(Continued)
F-54
<PAGE> 226
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE (Continued)
The following is a reconciliation of the allowance for loan losses:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Mortgage Loans:
Balance at beginning of period $ 135,696 $ 173,060 $ 238,500
Provision for losses 58,508 8,803 8,842
Loans charged off and
recoveries, net (5,434) 5,574 (65,423)
Transfers to REO reserves 0 2,574 (8,859)
Transfers to other reserves (56,645) (54,315) 0
--------- --------- ---------
Balance at End of Period $ 132,125 $ 135,696 $ 173,060
========= ========= =========
Other Loans:
Balance at beginning of period $ 131,201 $ 54,904 $ 39,214
Provision for losses 5,259 75,842 43,801
Loans charged off and
recoveries, net (60,249) (53,860) (28,111)
Transfers from other
reserves 56,645 54,315 0
--------- --------- ---------
Balance at End of Period $ 132,856 $ 131,201 $ 54,904
========= ========= =========
</TABLE>
4. INTEREST RECEIVABLE
A summary of interest receivable is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Accrued interest receivable on loans $266,290 $284,270
Accrued interest receivable on
mortgage-backed securities 51,518 70,625
Accrued interest on investments 184,637 265,102
-------- --------
$502,445 $619,997
======== ========
</TABLE>
F-55
<PAGE> 227
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification
as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Office buildings - land $ 140,559 $ 140,559
Buildings 1,376,548 1,376,548
Furniture and equipment 447,405 437,604
---------- ----------
1,964,512 1,954,711
Less: Accumulated depreciation 884,345 807,439
---------- ----------
Net Office Properties and Equipment $1,080,167 $1,147,272
========== ==========
</TABLE>
Depreciation in the amount of $76,906, $78,723 and $76,274 is included
in the statements of operations for the years ended June 30, 1997, 1996
and 1995, respectively.
6. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
The following is a reconciliation of allowances for losses on real
estate acquired in settlement of loans:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Balance at beginning of period $ 7,985 $ 8,859 $ 0
Provision for losses and
transfers from loan reserves 7,944 3,457 12,413
Charge-offs 0 0 0
Offset against asset basis (9,271) (4,331) (3,554)
------- ------- --------
Balance at end of period $ 6,658 $ 7,985 $ 8,859
======= ======= ========
</TABLE>
F-56
<PAGE> 228
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
7. DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
Type of Account Stated Rate 1997 1996
--------------- ----------- ---------- ----------
<S> <C> <C> <C>
Transaction Accounts:
NOW and Super NOW with
weighted average rates of
2.91% and 2.90% at June 30,
1997 and 1996, respectively $ 5,195,083 $ 5,374,617
----------- -----------
Passbook Accounts, with rate
of 3.25% at June 30, 1997
and 1996 6,376,662 6,316,575
----------- -----------
Certificate Accounts:
Fixed rates 7.75 0 1,272
Variable rate with weighted
average rates of 5.90% and
6.10% at June 30, 1997 and
1996, respectively 51,629,023 51,034,876
Money market with weighted
average rates of 4.96% and
5.01% at June 30, 1997 and
1996, respectively 4,951,692 6,797,843
----------- -----------
Total Certificate Accounts 56,580,715 57,833,991
----------- -----------
$68,152,460 $69,525,183
=========== ===========
Weighted average cost of deposit accounts 5.35% 5.48%
=========== ===========
</TABLE>
The aggregate amount of deposit accounts over $100,000 was approximately
$13,827,000 and $13,155,000 at June 30, 1997 and 1996, respectively.
NOW accounts include non-interest bearing deposits of $139,325 and
$88,565 at June 30, 1997 and 1996, respectively.
(Continued)
F-57
<PAGE> 229
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
7. DEPOSIT ACCOUNTS (Continued)
Certificate accounts by maturities are as follows:
<TABLE>
<CAPTION>
Type of Account 1997 1996
--------------- ----------- ----------
<S> <C> <C>
12 months or less $39,730,290 $37,307,875
12 months to 24 months 11,274,727 16,684,544
24 months to 36 months 5,438,964 3,239,616
36 months to 48 months 136,734 601,956
----------- -----------
$56,580,715 $57,833,991
=========== ===========
</TABLE>
Interest expense on deposit accounts consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NOW accounts $ 154,413 $ 154,388 $ 186,598
Certificates of deposit 3,362,366 3,464,621 2,675,926
Passbook accounts 207,320 214,188 300,654
---------- ---------- ----------
$3,724,099 $3,833,197 $3,163,178
========== ========== ==========
</TABLE>
Deposit accounts of officers, directors and employees of the Association
were $3,443,480 and $3,244,205 at June 30, 1997 and 1996, respectively.
In the opinion of management, such deposits are taken on substantially
the same terms as comparable transactions with unrelated parties.
Income of $6,883, $10,657 and $12,453 from early withdrawal penalties is
included in other income for the years ended June 30, 1997, 1996 and
1995, respectively.
8. ADVANCES FROM THE FEDERAL HOME LOAN BANK
At June 30, 1997, the Association had outstanding advances of $2,000,000
from the Federal Home Loan Bank. The advances bear a fixed interest rate
of 6.21%, payable monthly and maturing August 5, 1998. The advances are
secured by a blanket lien on all qualifying first mortgage loans.
F-58
<PAGE> 230
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
9. STOCK OPTION AND STOCK PURCHASE PLANS
The Association has adopted a stock option plan which, under its terms,
options to purchase shares of the Association's stock were granted to
certain directors and employees at a price equal to the market price of
the stock at the date of grant ($10.00). As of June 30, 1997, none of the
options had been exercised; 7,215 of the options expire in 1998, and
5,716 of the options expire in 1999.
The Association also has approved an employees' stock ownership plan,
which may purchase up to 1% of the common stock issued during the
conversion from a mutual association to a stock association in 1988. In
April 1997, the plan was no longer authorized to purchase stock by the
Board of Directors.
10. REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a
direct material affect on the Association and the financial statements.
Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet
specific capital guidelines involving quantitative measures of the
Association's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Association's
capital amounts and classification under the prompt corrective action
guidelines are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
of: total risk-based capital and Tier I capital to risk-weighted assets
(as defined in the regulations), Tier I capital to adjusted total assets
(as defined), and tangible capital to adjusted total assets (as defined).
As discussed in greater detail below, as of June 30, 1997, the
Association meets all of the capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent notification from the OTS, the
Association was categorized as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, the Association must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as disclosed in the table below.
There are no conditions or events since the most recent notification that
management believes have changed the Association's prompt corrective
action category.
(Continued)
F-59
<PAGE> 231
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
10. REGULATORY MATTERS (Continued)
The Association's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provision
------ ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
At June 30, 1997:
Total Risk-based capital (to $ 4,684,074 14.13% $ 2,651,280 >= 8.00% $ 3,314,100 >= 10.00%
risk-weighted assets)
Tier I capital (to risk- 4,467,654 13.48% 1,325,640 >= 4.00% 1,988,460 >= 6.00%
weighted assets)
Tier I capital (to adjusted 4,467,654 5.98% 2,990,123 >= 4.00% 3,737,654 >= 5.00%
total assets)
Tangible capital (to 4,467,654 5.98% 1,121,296 >= 1.50% 1,121,296 >= 1.50%
adjusted total assets)
At June 30, 1996:
Total risk-based capital (to 4,767,329 13.90% 2,743,280 >= 8.00% 3,429,100 >= 10.00%
risk-weighted assets)
Tier I capital (to risk- 4,512,861 13.16% 1,371,640 >= 4.00% 2,057,460 >= 6.00%
weighted assets)
Tier I capital (to adjusted 4,512,861 6.11% 2,956,607 >= 4.00% 3,695,759 >= 5.00%
total assets)
Tangible capital (to 4,512,861 6.11% 1,108,728 >= 1.50% 1,108,728 >= 1.50%
adjusted total assets)
</TABLE>
F-60
<PAGE> 232
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
11. PROFIT-SHARING PLAN
The Association has a profit-sharing plan that covers all employees with
six months of service, and who are twenty-one years of age. Contributions
to the plan are at the discretion of the Board of Directors, within
maximum limits prescribed by the Internal Revenue Code. Expense charged
to operations was $38,729, $34,778 and $43,387 for the years ended June
30, 1997, 1996 and 1995, respectively.
12. INCOME TAXES
The provision for income taxes for each of the three years in the period
ended June 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $(48,762) $ 62,832 $ 33,403
State 4,258 8,757 0
-------- -------- --------
(44,504) 71,589 33,403
-------- -------- --------
Deferred:
Federal (3,649) (11,848) 41,176
State (3,727) 2,772 5,943
-------- -------- --------
(7,376) (9,076) 47,119
-------- -------- --------
Total $(51,880) $ 62,513 $ 80,522
======== ======== ========
</TABLE>
(Continued)
F-61
<PAGE> 233
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
12. INCOME TAXES (Continued)
A summary of deferred tax assets and liabilities at June 30, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------
Deferred Deferred Tax
Tax Assets Liabilities Net
----------- ------------ --------------
<S> <C> <C> <C>
Federal $ 162,151 $ (108,213) $ 53,938
State 32,789 (22,197) 10,592
----------- ---------- ----------
194,940 (130,410) 64,530
Valuation allowance 0 0 0
----------- ---------- -----------
Net $ 194,940 $ (130,410) $ 64,530
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------
Deferred Deferred Tax
Tax Assets Liabilities Net
----------- ------------ -----------
<S> <C> <C> <C>
Federal $ 340,283 $ (118,819) $ 221,464
State 60,211 (23,139) 37,072
----------- ----------- -----------
400,494 (141,958) 258,536
Valuation allowance 0 0 0
----------- ---------- -----------
Net $ 400,494 $ (141,958) $ 258,536
=========== =========== ===========
</TABLE>
(Continued)
F-62
<PAGE> 234
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
12. INCOME TAXES (Continued)
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that gave rise to significant
portions of the deferred tax asset (liability) at June 30, 1997 and 1996
relate to the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Investment securities recorded for financial
reporting purposes in excess of amount allowed
for income tax purposes $ 61,197 $ 262,579
Loan loss reserves recorded for financial
reporting purposes in excess of such
amounts allowed for income tax purposes 108,655 109,953
Stock dividends from FHLB recognized for
financial reporting purposes and not for
income tax purposes (104,920) (104,920)
Loan fees recognized for income tax purposes
and deferred for financial reporting purposes 17,042 23,360
Accrued interest on certain loans recognized
on cash basis for income tax purposes (4,955) (7,972)
Depreciation for income tax purposes
recognized in excess of amounts for
financial reporting purposes (17,610) (26,538)
Others, net 5,121 2,074
----------- -----------
$ 64,530 $ 258,536
=========== ===========
</TABLE>
Retained earnings at June 30, 1997 include earnings of approximately
$814,000 representing bad debt deductions for which no provision for
income taxes has been made. If, in the future, the portion of retained
earnings is used for purposes other than to absorb bad debt losses,
income taxes will be imposed at the then applicable rate. As provided
under FASB Statement No. 109, no deferred tax liability has been
recognized on the amount of the reserve which arose in tax years
beginning prior to December 31, 1987. The amount of such liability would
be approximately $326,000 if recorded.
(Continued)
F-63
<PAGE> 235
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
12. INCOME TAXES (Continued)
The provision for income taxes differs from the amounts computed by
applying the federal statutory rate to income before income taxes and
extraordinary items as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision at statutory rate $ (24,494) $ 57,727 $ 79,950
Increase (decrease) resulting from:
Surtax exemption 0 10,996 (9,169)
Non-deductible expenses 3,221 3,624 3,158
Tax exempt interest (25,319) (23,769) (21,444)
State income taxes (net of
related federal tax benefit) (917) 8,575 5,943
Other - net (4,371) 5,360 22,084
----------- ----------- -----------
$ (51,880) $ 62,513 $ 80,522
=========== =========== ===========
</TABLE>
13. LEASES
The Association leases part of its office facilities under an operating
lease which expired in 1994. The lease is now on a month-to-month basis.
Lease expense under this arrangement charged to operations was $7,200
for each of the years ended June 30, 1997, 1996 and 1995.
14. EARNINGS PER SHARE
Earnings per share for the current period is computed by dividing
earnings by the weighted average number of shares outstanding during the
period.
Fully diluted earnings per share amounts are not presented for 1997,
1996 or 1995 because they are not materially dilutive.
15. EMPLOYMENT CONTRACT
The Association has entered into an employment contract with its
President through 1998 that provides for a minimum annual salary,
adjusted annually by the Board of Directors. The current annual
compensation under the contract is $66,000. The agreement also provides
for certain payments to be made to the President in the event of
involuntary termination in connection with certain changes in control of
the Association. Such required payments approximate three times the
annual salary of the employee.
F-64
<PAGE> 236
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
16. COMMITMENTS AND CONTINGENCIES
The Association has entered into an Amended and Restated Agreement and
Plan of Merger, dated as of September 17, 1997 (the "Merger Agreement"),
by and among the Association, SouthFirst Bancshares, Inc., a Delaware
corporation ("SouthFirst"), and First Federal of the South, a federal
stock savings bank and a wholly-owned subsidiary of SouthFirst ("First
Federal"). The Merger Agreement supersedes an Agreement and Plan of
Merger by and among the parties dated as of April 14, 1997. Pursuant to
the Merger Agreement, the Association will be merged with and into First
Federal, which will be the surviving savings association. Consummation
of the merger is subject to, among other things, approval of the
shareholders of both the Association and SouthFirst, and to required
regulatory filings and approvals. The merger is expected to be completed
in the fourth quarter of 1997 and will be accounted for as a purchase
transaction. Under the terms of the Merger Agreement, each share of the
Association's issued and outstanding common stock (excluding shares held
by shareholders who perfect dissenters' rights, if any) shall cease to
be outstanding and shall be converted at the option of the shareholder
into the right to receive either (i) $31.50 per share (the "Cash Price
Per Share"), (ii) the "Stock Price Per Share" (as defined below), or
(iii) any combination of the Cash Price Per Share and the Stock Price
Per Share. The Stock Price Per Share shall be determined by multiplying
the "Average Closing Price", which is defined as the average closing
price per share of SouthFirst common stock on the American Stock
Exchange, by the "Exchange Ratio", which is defined for each share of
the Association's common stock as the number of shares of SouthFirst
common stock equal to the quotient obtained by dividing $31.50 by the
Average Closing Price. Notwithstanding the foregoing, the total
consideration to be paid to the Association's shareholders shall consist
of 50% cash and 50% shares of SouthFirst common stock. The transaction
is expected to have an aggregate value of approximately $5.6 million, or
approximately $31.50 per share of the Association's common stock, which
is approximately 124% of the Association's fully diluted book value at
June 30, 1997.
The Association is involved in various legal actions arising in the
normal course of business. In the opinion of management, based upon
consultation with legal counsel, the ultimate resolution of the
proceedings will not have a material adverse effect upon the financial
position of the Association.
F-65
<PAGE> 237
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association 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.
Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statement
of financial position. The contract or notional amounts of those
instruments reflect the extent of involvement the Association has in
particular classes of financial instruments.
The Association'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 is represented by the contractual notional
amount of those instruments. The Association uses the same credit
policies in making commitments and conditional obligations 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.
A summary of such instruments at June 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
Contract of Notional Amount
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Financial instruments whose contract amounts represent credit
risk:
Commitments to extend credit $ 192,627 $ 1,640,414
=========== ===========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Association evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained
if deemed necessary by the Association upon extension of credit is
based on management's credit evaluation of the counter-party.
Collateral held varies but may include residential property,
automobiles and income-producing commercial properties.
Letters of credit and financial guarantees written are conditional
commitments issued by the Association to guarantee the performance of
a customer to a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
F-66
<PAGE> 238
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Association's financial instruments are
as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,696 $ 8,696 $ 1,714 $ 1,714
Certificate of deposit 100 100 101 101
Investment securities 29,617 29,442 34,726 34,323
Loans, net of allowance 33,843 33,950 34,369 34,147
Accrued interest receivable 502 502 620 620
Financial liabilities:
Deposits (68,152) (68,042) (69,525) (69,999)
Advances from Federal Home
Loan Bank (2,000) (1,996) 0 0
</TABLE>
The carrying amounts in the preceding table are included in the
statement of financial condition under the applicable captions.
19. FINANCIAL ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS No. 125). SFAS No. 125 establishes, among other
things, new criteria for determining whether a transfer of financial
assets in exchange for cash or other consideration should be accounted
for as a sale or as a pledge of collateral in a secured borrowing. It
also establishes new accounting requirements for pledged collateral.
Generally those criteria are based on a consistent application of a
financial components approach, that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No.
125 was originally intended to be effective for transactions occurring
after December 31, 1996. SFAS No. 127 defers the effective date of SFAS
No. 125 for one year as it relates to secured borrowings and collateral
and to repurchase agreements, dollar-role, securities lending and
similar transactions of SFAS No. 125. The Association has not yet
determined the impact, if any, the adoption of SFAS No. 125, as amended
by SFAS No. 127, will have on the financial statements.
(Continued)
F-67
<PAGE> 239
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY
Clanton, Alabama
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
19. FINANCIAL ACCOUNTING DEVELOPMENTS (Continued)
In February 1997, FASB issued SFAS No. 128, Earnings per Share, and
SFAS No. 129, Disclosure of Information About Capital Structure. The
Statements change the methods for calculating and disclosing earnings
per share and are effective for financial statements issued ending
after December 15, 1997.
In June 1997, FASB issued SFAS 130, Reporting Comprehensive Income. The
Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. The Statement is effective for fiscal
years beginning after December 15, 1997.
In June 1997, FASB also issued SFAS No. 131, Disclosure About Segments
of an Enterprise and Related Information. The Statement requires that a
public business enterprise report financial and descriptive information
about its reportable operating segments. The Statement is effective for
financial statements for periods beginning after December 15, 1997.
F-68
<PAGE> 240
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SOUTHFIRST BANCSHARES, INC.
FIRST FEDERAL OF THE SOUTH
AND
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF CHILTON COUNTY
DATED AS OF SEPTEMBER 17, 1997
(i)
<PAGE> 241
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AGREEMENT AND PLAN OF MERGER
...........................................................................................................1
PREAMBLE..........................................................................................................1
ARTICLE 1
TERMS OF MERGER.............................................................................................1
1.1 Merger...........................................................................................1
1.2 Time and Place of Closing........................................................................1
1.3 Effective Time...................................................................................2
ARTICLE 2
TERMS OF MERGER.............................................................................................2
2.1 Federal Stock Charter............................................................................2
2.2 Bylaws...........................................................................................2
2.3 Governance; Name.................................................................................2
ARTICLE 3
MANNER OF CONVERTING SHARES ................................................................................2
3.1 Conversion of Shares.............................................................................2
3.2 Anti-Dilution Provisions.........................................................................5
3.3 Shares Held by Chilton County or SouthFirst......................................................5
3.4 Fractional Shares................................................................................5
3.5 Conversion of Stock Options, Warrants, and Other Rights..........................................5
ARTICLE 4
EXCHANGE OF SHARES..........................................................................................6
4.1 Exchange Procedures..............................................................................6
4.2 Dissenting Shareholders..........................................................................6
4.3 Rights of Former Chilton County Shareholders.....................................................6
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF CHILTON COUNTY............................................................7
5.1 Organization, Standing, and Power................................................................7
5.2 Authority; No Breach by Agreement................................................................7
5.3 Capital Stock....................................................................................8
5.4 Chilton County Subsidiaries......................................................................8
5.5 Financial Statements.............................................................................8
5.6 Absence of Certain Changes or Events.............................................................9
5.7 Tax Matters......................................................................................9
5.8 Allowance for Possible Loan Losses..............................................................10
5.9 Assets..........................................................................................10
5.10 Environmental Matters...........................................................................10
5.11 Compliance with Laws............................................................................11
5.12 Labor Relations.................................................................................11
</TABLE>
(ii)
<PAGE> 242
<TABLE>
<S> <C>
5.13 Employee Benefit Plans..........................................................................11
5.14 Material Contracts..............................................................................12
5.15 Legal Proceedings...............................................................................12
5.16 Reports.........................................................................................13
5.17 Statements True and Correct.....................................................................13
5.18 Accounting, Tax and Regulatory Matters..........................................................13
5.19 Federal Stock Charter Provisions................................................................13
5.20 Derivatives Contracts...........................................................................14
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF SOUTHFIRST AND FIRST FEDERAL.............................................14
6.1 Organization, Standing, and Power...............................................................14
6.2 Authority; No Breach By Agreement...............................................................14
6.3 Capital Stock...................................................................................15
6.4 SouthFirst Subsidiaries.........................................................................15
6.5 SEC Filings; Financial Statements...............................................................16
6.6 Absence of Certain Changes or Events............................................................16
6.7 Tax Matters.....................................................................................17
6.8 Allowance for Possible Loan Losses..............................................................17
6.9 Assets..........................................................................................17
6.10 Environmental Matters...........................................................................18
6.11 Compliance With Laws............................................................................18
6.12 Labor Relations.................................................................................19
6.13 Employee Benefit Plans..........................................................................19
6.14 Material Contracts..............................................................................20
6.15 Legal Proceedings...............................................................................21
6.16 Reports.........................................................................................21
6.17 Statements True and Correct.....................................................................21
6.18 Accounting, Tax and Regulatory Matters..........................................................21
6.19 Derivatives Contracts...........................................................................22
ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION...................................................................22
7.1 Affirmative Covenants of Chilton County.........................................................22
7.2 Negative Covenants of Chilton County............................................................22
7.3 Covenants of SouthFirst.........................................................................23
7.4 Adverse Changes In Condition....................................................................24
7.5 Reports.........................................................................................24
7.6 Control of Chilton County by SouthFirst.........................................................24
ARTICLE 8
ADDITIONAL AGREEMENTS......................................................................................24
8.1 Registration Statement; Prospectus/Joint Proxy Statement; Shareholder Approvals.................24
8.2 Applications....................................................................................25
8.3 Filings With State Offices......................................................................25
8.4 Agreement As To Efforts To Consummate...........................................................25
8.5 Access to Information; Confidentiality..........................................................25
8.6 Dividend Payment................................................................................26
8.7 Current Information.............................................................................26
8.8 Other Actions...................................................................................26
</TABLE>
(iii)
<PAGE> 243
<TABLE>
<S> <C>
8.9 Press Releases..................................................................................26
8.10 Affiliates......................................................................................26
8.11 Employee Benefits...............................................................................27
8.12 Indemnification.................................................................................27
8.13 No Solicitation.................................................................................28
8.14 Listing of Shares on the American Stock Exchange................................................29
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE..........................................................30
9.1 Conditions to Obligations of Each Party.........................................................30
9.2 Conditions to Obligations of SouthFirst.........................................................31
9.3 Conditions to Obligations of Chilton County.....................................................32
ARTICLE 10
TERMINATION................................................................................................33
10.1 Termination.....................................................................................33
ARTICLE 11
MISCELLANEOUS..............................................................................................35
11.1 Definitions.....................................................................................35
11.2 Fees and Expenses...............................................................................42
11.3 Brokers and Finders.............................................................................44
11.4 Entire Agreement................................................................................44
11.5 Amendments......................................................................................44
11.6 Obligations of SouthFirst.......................................................................44
11.7 Waivers.........................................................................................45
11.8 Assignment......................................................................................45
11.9 Notices.........................................................................................45
11.10 Counterparts....................................................................................46
11.11 Captions........................................................................................46
11.12 Enforcement of Agreement........................................................................46
11.13 Survival........................................................................................46
11.14 Severability....................................................................................47
11.15 Governing Law...................................................................................47
11.16 Liquidation Account.............................................................................47
</TABLE>
(iv)
<PAGE> 244
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
1 ELECTION FORM FOR HOLDERS OF CHILTON
COUNTY COMMON STOCK
2 EMPLOYMENT AGREEMENT DATED SEPTEMBER __,
1997 BETWEEN BOBBY R. COOK AND THE
SURVIVING BANK
3 ADDRESSES AND TERMS OF THE DIRECTORS OF THE
SURVIVING BANK AND SOUTHFIRST
</TABLE>
(v)
<PAGE> 245
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement")
is made and entered into as of September 17, 1997, by and among SOUTHFIRST
BANCSHARES, INC. ("SouthFirst"), a Delaware corporation having its principal
office located in Sylacauga, Alabama; FIRST FEDERAL OF THE SOUTH ("First
Federal"), a federally chartered stock savings bank having its principal office
located in Sylacauga, Alabama, which is a wholly owned subsidiary of SouthFirst;
and FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHILTON COUNTY ("Chilton
County"), a federally chartered stock savings and loan association having its
principal office located in Clanton, Alabama. Unless expressly stated otherwise
herein, this Agreement shall be deemed to supersede all prior warranties,
representations, covenants and agreements between the Parties hereto.
PREAMBLE
The Boards of Directors of Chilton County, First Federal and SouthFirst
are of the opinion that the acquisition described herein is in the best
interests of the parties and their respective shareholders. This Agreement
provides for the acquisition of Chilton County by SouthFirst pursuant to the
merger of Chilton County with and into First Federal (the "Merger"). At the
effective time of such Merger, the outstanding shares of the capital stock of
Chilton County shall be converted into the right to receive shares of the common
stock of SouthFirst and cash (except as provided herein). As a result, certain
of the shareholders of Chilton County shall become shareholders of SouthFirst.
The transactions described in this Agreement are subject to the approvals of the
shareholders of SouthFirst and Chilton County, the Office of Thrift Supervision,
the Federal Deposit Insurance Corporation, and the satisfaction of certain other
conditions described in this Agreement. It is the intention of the parties to
this Agreement that the Merger (as hereinafter defined) for federal income tax
purposes shall qualify as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code.
Certain terms used in this Agreement are defined in Section 11.1 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants, and agreements set forth herein, the Parties agree
as follows:
ARTICLE 1
TERMS OF MERGER
1.1 MERGER. Subject to the terms and conditions of this Agreement, at the
Effective Time, Chilton County shall be merged with and into First Federal in
accordance with the applicable provisions of the regulations of the Office of
Thrift Supervision ("OTS"). The separate corporate existence of Chilton County
shall thereupon cease, and First Federal shall be the Surviving Bank resulting
from the Merger. The Merger shall be consummated pursuant to the terms of this
Agreement, which has been approved and adopted by the respective Boards of
Directors of Chilton County, First Federal and SouthFirst.
1.2 TIME AND PLACE OF CLOSING. The Parties shall use their reasonable
efforts to cause the closing of the transactions contemplated by this Agreement
to take place at 9:00 A.M. on or before October 31, 1997, or at such other time
as the Parties, acting through their chief executive officers or chief financial
officers, may mutually agree, provided that such closing shall not occur prior
to the Effective Time (as defined in Section 1.3 hereof). The place of closing
shall be at such location as may be mutually agreed upon by the Parties.
A-1
<PAGE> 246
1.3 EFFECTIVE TIME. The Merger and other transactions contemplated by this
Agreement shall become effective on the date and at the time all necessary
consents have been issued with respect to the Merger and the conditions of
Sections 9.1 and 9.2 of this Agreement have been satisfied (or, if applicable,
waived) by the appropriate Party (the "Effective Time"). Subject to the terms
and conditions hereof, unless otherwise mutually agreed upon in writing by each
Party, the Effective Time shall occur on the last to occur of (i) the effective
date (including expiration of any applicable waiting period) of the last
required Consent of any Regulatory Authority having authority over and approving
or exempting the Merger if such action is required, and (ii) the date on which
the shareholders of each of Chilton County, First Federal and SouthFirst approve
this Agreement, to the extent such approval is required by applicable Law.
Notwithstanding the preceding sentence, the Merger shall not be effective unless
and until the Merger receives necessary approval from the OTS pursuant to 12
C.F.R. Section 563.22(a).
ARTICLE 2
TERMS OF MERGER
2.1 FEDERAL STOCK CHARTER. Pursuant to the Merger, the Federal Stock
Charter of First Federal in effect at the Effective Time shall be the Federal
Stock Charter of the Surviving Bank until otherwise amended or repealed.
2.2 BYLAWS. Pursuant to the Merger, the Bylaws of First Federal in effect
at the Effective Time shall be the Bylaws of the Surviving Bank until otherwise
amended or repealed.
2.3 GOVERNANCE; NAME.
(a) Upon the Effective Time, the directors of First Federal
shall continue as the directors of the Surviving Bank, provided that three
of the current directors of Chilton County shall, on or before the
Effective Time, be elected as directors of the Surviving Bank, to serve
until the next annual meeting of the shareholders of the Surviving Bank;
and further provided that one of said three directors shall be elected as
a director of SouthFirst to serve until the next annual meeting of the
shareholders of SouthFirst. Attached hereto as Exhibit 3 are the number,
names, residence addresses and terms of the directors of the Surviving
Bank and SouthFirst.
(b) The name of the Surviving Bank shall be First Federal of
the South.
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 CONVERSION OF SHARES. Subject to the provisions of this Article
3, at the Effective Time, by virtue of the Merger and without any action on the
part of Chilton County, First Federal or SouthFirst or the shareholders of any
of the foregoing, the shares of the parties shall be converted as follows:
(a) Each share of SouthFirst Common Stock, and each Right of
SouthFirst, issued and outstanding immediately prior to the Effective Time,
shall remain issued and outstanding from and after the Effective Time.
(b) Each share of Chilton County Common Stock outstanding
immediately prior to the Effective Time, other than shares held by a shareholder
who exercises dissenters' rights under the applicable provisions of 12 C.F.R.
Section 552.14 (the "Dissenter Provisions") and shares which shall be canceled
without
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consideration at the Effective Time pursuant to Section 3.3 of this Agreement
shall, based on the election of the holders thereof, be exchanged for and
converted into, upon surrender of the certificates theretofore representing such
Chilton County Common Stock, the right to receive either (i) $31.50 per share,
the "Cash Price Per Share," (ii) the "Stock Price Per Share" (as determined
below) or (iii) any combination of the Cash Price Per Share and the Stock Price
Per Share; subject to the provisions of paragraph (e) hereof and provided that
no single share of Chilton County Common Stock may be converted into a
combination of the Cash Price Per Share or the Stock Price Per Share.
(c) The election to exchange shares of Chilton County Common
Stock for the Cash Price Per Share or the Stock Price Per Share, or a
combination thereof, shall be made by Chilton County Stockholders no later than
the time and date of the Chilton County Shareholders' Meeting by submission to
SouthFirst of the Form of Election, provided herein as Exhibit 1, which shall
be provided by SouthFirst to each of the Chilton County Stockholders along with
the Prospectus/Joint Proxy Statement prior to the Effective Time (provided that
SouthFirst may, in its discretion, extend the time period during which Chilton
County Stockholders must submit the Form of Election, but not beyond the
Effective Time). In the event that any Chilton County Stockholder fails to
submit the Form of Election to SouthFirst within the prescribed time period (as
may be extended), then SouthFirst, in its sole discretion, and with the
intention of preserving the "reorganization" status of the Merger under Section
368(a) of the Code, shall determine the form of the conversion and exchange of
the Chilton County Common Stock of such Chilton County Stockholder.
(d) The Stock Price Per Share shall be determined by
multiplying the Average Closing Price by the exchange ratio. The exchange ratio
for each share of Chilton County Common Stock shall be that number of shares of
SouthFirst Common Stock equal to the quotient obtained by dividing $31.50 by the
Average Closing Price (the "Exchange Ratio"). The Average Closing Price shall
mean the average of the closing sale price per share of SouthFirst Common Stock
on the American Stock Exchange (as reported in The Wall Street Journal, or if
not reported thereby, any other authoritative source as mutually determined by
SouthFirst and Chilton County) for each of the 10 Trading Days immediately
preceding the 5 consecutive Business Days immediately preceding the Effective
Time. A "Trading Day" shall mean any day in which the American Stock Exchange is
open and no less than 100 shares of SouthFirst Common Stock are traded. A
"Business Day" shall mean any day, except Saturdays, Sundays and Federal
Holidays, in which First Federal is open.
(e) Notwithstanding the provisions of Sections 3.1(b) and (c)
hereof, the Total Merger Consideration shall consist of cash and shares of
SouthFirst Common Stock; provided that (A) 50% of the Total Merger Consideration
shall be paid in the form of cash at the Cash Price Per Share (the "Threshold
Cash Amount"), and (B) 50% of the Total Merger Consideration shall be paid in
the form of SouthFirst Common Stock at the Stock Price Per Share. If the
Aggregate Cash Amount (as defined below) is more or less than the Threshold Cash
Amount, the number of shares of SouthFirst Common Stock and the amount of cash
paid to each electing holder of Chilton County Common Stock shall be determined
as follows:
(i) In the event that the aggregate amount of cash
elected by the holders of Chilton County Common Stock
at the Cash Price Per Share, including the cash paid
for (1) the Chilton County Options, (2) any
dissenters' rights (estimated for purposes of the
pro-rata allocations required hereunder at $31.50 per
share) and (3) fractional shares (collectively, the
"Aggregate Cash Amount") will be less than the
Threshold Cash Amount, then certain of those shares
of Chilton County Common Stock for which the holders
have elected conversion into shares of SouthFirst
Common Stock (the "Stock Election Shares") shall,
instead, be converted into those shares of Chilton
County Common Stock which carry the right to convert
into the Cash Price Per Share (the "Cash Election
Shares"), which Cash Election Shares shall be
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allocated by SouthFirst to each holder of Stock
Election Shares, pro-rata, on the basis of the
following formula:
Formula For Pro-Rata Allocation When Cash Is
Undersubscribed (and Stock is Oversubscribed):
A. Stock Election Shares: (1) Divide the
Threshold Cash Amount by the Stock Price Per
Share. (2) Divide that quotient amount by
the Stock Election Shares of all electing
holders. (3) Multiply that quotient amount
by the total number of shares of Chilton
County Common Stock owned by the electing
holder. (4) Multiply that product amount by
the Exchange Ratio.
B. Cash Election Shares: (1) Subtract the
product amount obtained in step A(3) above
from the total number of shares of Chilton
County Common Stock owned by the electing
holder. (2) Add that difference to any
fractional share of SouthFirst Common Stock
that would be issued pursuant to step A(4)
above.
(ii) In the event that the Aggregate Cash Amount will be
greater than the Threshold Cash Amount, then the Cash
Election Shares shall, instead, be converted into
Stock Election Shares, which SouthFirst shall
allocate to each holder of Cash Election Shares,
pro-rata, on the basis of the following formula:
Formula For Pro-Rata Distribution When Cash Is
Oversubscribed (and Stock is Undersubscribed):
A. Cash Election Shares: (1) Subtract the cash
paid for (i) the Chilton County Options,
(ii) any dissenters' rights and (iii)
fractional shares from the Threshold Cash
Amount. (2) Divide that difference by the
Cash Price Per Share. (3) Divide that
quotient amount by the Cash Election Shares
of all holders. (4) Multiply that quotient
amount by the total number of shares of
Chilton County Common Stock owned by the
electing holder. (5) Add that product to any
fractional share of SouthFirst Common Stock
that may be issued pursuant to step B(2)
below.
B. Stock Election Shares: (1) Subtract the
product amount obtained in step A(4) above
from the total number of shares of Chilton
County Common Stock owned by the electing
holder. (2) Multiply that difference by the
Exchange Ratio.
(f) Notwithstanding the provisions of Sections 3.1(e)
hereof, SouthFirst:
(i) Shall convert Cash Election Shares to Stock Election
Shares or Cash Election Shares to Stock Election
Shares, as the case may be, pro-rata, to the extent
necessary for 50% of the Total Merger Consideration
(determined as of the Effective Time) to be paid in
the form of cash and 50% of the Total Merger
Consideration (determined as of the Effective Time)
in the form of SouthFirst Common Stock at the Stock
Price Per Share;
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(ii) May, at SouthFirst's sole discretion, waive the
maintenance of the Threshold Cash Amount if the
difference between the Threshold Cash Amount and the
Aggregate Cash Amount is less than 10% of the
Threshold Cash Amount; or
(iii) May, at SouthFirst's sole discretion, determine the
form of consideration to be received under this
Article 3 after the Effective Time by a dissenting
shareholder of Chilton County who fails to perfect,
or effectively withdraws or loses, his right to
appraisal and payment of his shares subsequent to the
Effective Time.
3.2 ANTI-DILUTION PROVISIONS. Prior to the Effective Time, Chilton County
and SouthFirst each hereby represent and warrant not to change the number of
shares of Chilton County Common Stock or SouthFirst Common Stock, respectively,
issued and outstanding prior to the Effective Time as a result of a stock split,
stock dividend, recapitalization, reclassification or similar transaction.
3.3 SHARES HELD BY CHILTON COUNTY OR SOUTHFIRST. Each share of Chilton
County Common Stock held by Chilton County or by any SouthFirst Company, in each
case other than those shares of Chilton County Common Stock held in a fiduciary
capacity or as a result of debts previously contracted, shall be canceled and
retired at the Effective Time and no consideration shall be issued in exchange
therefor.
3.4 FRACTIONAL SHARES. Notwithstanding any other provision of this
Agreement, each holder of shares of Chilton County Common Stock exchanged
pursuant to the Merger who would otherwise have been entitled to receive a
fraction of a share of SouthFirst Common Stock (after taking into account all
certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to the Average Closing Price of such
fractional part of a share of SouthFirst Common Stock at the Effective Time. No
such holder will be entitled to dividends, voting rights, or any other rights as
a shareholder in respect of any fractional shares.
3.5 CONVERSION OF STOCK OPTIONS, WARRANTS, AND OTHER RIGHTS. At the
Effective Time, each award, option, warrant, or other right to purchase or
acquire shares of Chilton County Common Stock pursuant to stock awards, stock
options, warrant agreements, or stock appreciation rights ("Chilton County
Options") granted by Chilton County under the Chilton County Stock Plans or
otherwise (including, without limitation, those options issued to certain
officers and directors of Chilton County), which are outstanding at the
Effective Time and as were previously listed and described in Section 3.5 of
the Chilton County Disclosure Memorandum shall be canceled and all rights in
respect thereof will cease to exist except as set forth herein. As
consideration for the cancellation of all of the Chilton County Options, each
holder thereof shall receive cash in an amount equal to (i) the aggregate
number of Option Shares which each holder of Chilton County Options could have
been converted into immediately prior to the Effective Time, multiplied by (ii)
the difference between (A) the Cash Price Per Share (i.e., $31.50) and (B) the
exercise price for each Chilton County Option.
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ARTICLE 4
EXCHANGE OF SHARES
4.1 EXCHANGE PROCEDURES
(a) From and after the Effective Time, each holder of an outstanding
certificate which immediately prior to the Effective Time represented shares of
Chilton County Common Stock (each a "Chilton County Certificate") shall be
entitled to receive in exchange therefor upon surrender thereof to SouthFirst, a
certificate or certificates representing the number of whole shares of
SouthFirst Common Stock, or, as applicable, cash, to which such holder is
entitled pursuant to Sections 3.1 and 3.4. Notwithstanding the other provisions
of this Agreement (i) until holders of Chilton County Certificates have
surrendered them for exchange as provided herein, no dividends or other
distributions shall be paid by SouthFirst with respect to any shares represented
by such Chilton County Certificates and no payment for shares or fractional
shares shall be made, and (ii) without regard to when such Chilton County
Certificates are surrendered for exchange as provided herein, no interest shall
be paid on any dividends or other distributions or any cash payments for whole
or fractional shares. If any certificate for shares of SouthFirst Common Stock
is to be issued in a name other than that in which the Certificate surrendered
in exchange therefor is registered, it shall be a condition of such exchange
that the person requesting such exchange shall pay any transfer or other taxes
similar-type required by reason of the issuance of certificates for such shares
of SouthFirst Common Stock in a name other than that of the registered holder of
the Chilton County Certificate surrendered, or shall establish to the
satisfaction of SouthFirst that such tax has been paid or is not applicable.
(b) SouthFirst (or its Exchange Agent) shall provide each holder of record
of a Chilton County Certificate a letter of transmittal containing the Form of
Election attached hereto as Exhibit 1 which shall specify that delivery shall be
effected, and risk of loss and title to the Chilton County Certificates shall
pass, only upon actual delivery of the Chilton County Certificates to
SouthFirst. Upon surrender of Chilton County Certificates to SouthFirst for
cancellation, together with a duly executed letter of transmittal and such other
documents as SouthFirst shall reasonably require, the holder of such Chilton
County Certificates shall be entitled to receive in exchange therefor one or
more certificates representing that number of whole shares of SouthFirst Common
Stock, or, as applicable, cash into which the shares of Chilton County
Certificates Stock theretofore represented by the Chilton County Certificates so
surrendered shall have been converted pursuant to the provisions of Sections 3.1
and 3.4, and the Chilton County Certificates so surrendered shall forthwith be
canceled.
4.2 DISSENTING SHAREHOLDERS. Any holder of shares of Chilton County Common
Stock who perfects his dissenters' rights in accordance with, and as
contemplated by, the Dissenter Provisions shall be entitled to receive the value
of cash as determined pursuant to the provisions thereof; provided, that no such
payment shall be made to any dissenting shareholder unless and until such
dissenting shareholder has complied with the Dissenter Provisions and
surrendered the certificate or certificates representing the shares for which
payment is being made. In the event that after the Effective Time a dissenting
shareholder of Chilton County fails to perfect, or effectively withdraws or
loses, his right to appraisal and of payment for his shares, SouthFirst shall
determine the form of the consideration to which such holder of shares of
Chilton County Common Stock is entitled under Section 3.1 and issue and deliver
such consideration pursuant to Sections 3.1 and 3.4 (without interest) upon
surrender by such holder of the certificate or certificates representing shares
of Chilton County Common Stock held by him.
4.3 RIGHTS OF FORMER CHILTON COUNTY SHAREHOLDERS. At the Effective Time,
the stock transfer books of Chilton County shall be closed as to holders of
shares of Chilton County Common Stock immediately prior to the Effective Time
and no transfer of shares of Chilton County Common Stock by any
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such holder shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 4.1 of this Agreement,
each certificate theretofore representing shares of Chilton County Common Stock
(other than shares to be canceled pursuant to Section 3.3 of this Agreement)
shall from and after the Effective Time represent for all purposes only the
right to receive the consideration provided in Sections 3.1 and 3.4 of this
Agreement in exchange therefor, subject, however, to SouthFirst's obligation to
pay any dividends or make any other distributions with a record date prior to
the Effective Time which have been declared or made by Chilton County in respect
of such shares of Chilton County Common Stock in accordance with the terms of
this Agreement and which remain unpaid at the Effective Time. Whenever a
dividend or other distribution is declared by SouthFirst on the SouthFirst
Common Stock, the record date for which is at or after the Effective Time, the
declaration shall include dividends or other distributions on all shares
issuable pursuant to this Agreement, but beginning 60 days after the Effective
Time no dividend or other distribution payable to the holders of record of
SouthFirst Common Stock as of any time subsequent to the Effective Time shall be
delivered to the holder of any certificate representing shares of Chilton County
Common Stock issued and outstanding at the Effective Time until such holder
surrenders such certificate for exchange as provided in Section 4.1 of this
Agreement. However, upon surrender of such shares of Chilton County Common Stock
certificate, both the SouthFirst Common Stock certificate (together with all
such undelivered dividends or other distributions without interest) and any
undelivered dividends and cash payments to be paid for fractional share
interests (without interest) shall be delivered and paid with respect to each
share represented by such certificate. Any portion of the consideration
(including the proceeds of any investments thereof) which had been made
available to the Exchange Agent pursuant to Section 4.1 of this Agreement that
remain unclaimed by the shareholders of Chilton County for six months after the
Effective Time shall be paid to SouthFirst. Any shareholders of Chilton County
who have not theretofore complied with this Article 4 shall thereafter look only
to SouthFirst for payment of their shares of SouthFirst Common Stock, cash in
lieu of fractional shares, and unpaid dividends and distributions on the
SouthFirst Common Stock deliverable in respect of each Chilton County Common
Share such shareholder holds as determined pursuant to this Agreement, in each
case, without any interest thereon.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF CHILTON COUNTY
Chilton County hereby represents and warrants to SouthFirst as follows:
5.1 ORGANIZATION, STANDING, AND POWER. Chilton County is a federal savings
association duly incorporated, validly existing, and in good standing under the
Laws of the United States, and has the corporate power and authority to carry on
its business as now conducted and to own, lease, and operate its Material
Assets. The State of Alabama is the only jurisdiction in which Chilton County's
business is conducted.
5.2 AUTHORITY; NO BREACH BY AGREEMENT.
(a) Chilton County has the power and authority necessary to execute and
deliver this Agreement, and, subject to the approval and adoption of this
Agreement by the shareholders of Chilton County, to perform its obligations
under this Agreement and consummate the transactions contemplated hereby. The
execution, delivery, and performance of this Agreement by Chilton County and the
consummation by Chilton County of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of Chilton County, subject to
the approval of this Agreement by its shareholders as contemplated by Section
8.1 hereof. Subject to such requisite shareholder approval (and assuming due
authorization, execution, and delivery by SouthFirst and Surviving Bank), this
Agreement represents a legal, valid, and binding obligation of Chilton County,
enforceable against
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Chilton County in accordance with its terms (except in all cases as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought). The affirmative vote
of the holders of two-thirds (66 2/3%) of the outstanding shares of Chilton
County Common Stock is the only shareholder vote necessary to approve this
Agreement and the transactions contemplated hereby.
(b) Except as disclosed in Section 5.2(b) of the Chilton County Disclosure
Memorandum, neither the execution and delivery of this Agreement by Chilton
County, nor the consummation by Chilton County of the transactions contemplated
hereby, nor compliance by Chilton County with any of the provisions hereof, will
(i) conflict with or result in a breach of any provision of Chilton County's
Federal Stock Charter or Bylaws, or, (ii) constitute or result in a default
under, or result in the creation of any Lien on any Material Asset of Chilton
County under, or require any consent pursuant to, any Contract or Permit of
Chilton County, where such default or Lien, or any failure to obtain such
Consent, is reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Chilton County, or, (iii) subject to receipt of the
requisite Consents referred to in Sections 9.1(a), (b) and (c) of this
Agreement, violate any Order or, to its knowledge, any Law applicable to Chilton
County or any of its Material Assets which will have a Material Adverse Effect
on Chilton County.
(c) Other than Consents required from Regulatory Authorities, no notice
to, filing with, or Consent of, any public body or authority is necessary for
the consummation by Chilton County of the Merger and the other transactions
contemplated in this Agreement.
5.3 CAPITAL STOCK.
(a) The authorized capital stock of Chilton County consists of (i)
15,000,000 shares of Chilton County Common Stock, of which 169,222 shares will
be issued and outstanding as of the date of this Agreement, except for shares of
Chilton County Common Stock which may be issued to employees upon the exercise
of Chilton County Options prior to the Effective Time, and (ii) 5,000,000
preferred shares, none of which are issued and outstanding. All of the issued
and outstanding shares of Chilton County Common Stock are duly and validly
issued and outstanding and are fully paid and nonassessable. None of the
outstanding shares of Chilton County Common Stock have been issued in violation
of any preemptive rights. Chilton County has reserved 17,382 shares of Chilton
County Common Stock for issuance under the Chilton County Stock Plans, pursuant
to which options and warrants to purchase not more than 12,931 shares of Chilton
County Common Stock are outstanding.
(b) Except as set forth in Section 5.3(a) of this Agreement, there are no
shares of capital stock or other equity securities of Chilton County outstanding
and no outstanding Rights relating to the capital stock of Chilton County.
5.4 CHILTON COUNTY SUBSIDIARIES. Chilton County has no subsidiaries.
5.5 FINANCIAL STATEMENTS.
(a) Chilton County has made available to SouthFirst a copy of its balance
sheets and its related consolidated statements of income, consolidated
statements of changes in shareholders' equity and consolidated statements of
cash flows (including related notes and schedules) as of and for the three-year
period ended June 30, 1996.
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(b) Each of the Chilton County Financial Statements for interim periods
ended after the date of this Agreement until the Effective Time, will be
prepared on a consistent basis throughout the periods involved (except as may be
indicated therein or in the notes to such financial statements) and will present
fairly the financial position of Chilton County at the respective dates and the
consolidated results of its operations and cash flows at and for the periods
indicated, except that the unaudited interim financial statements are subject to
normal and recurring year-end adjustments which were not or are not expected to
be Material in amount, and except for the absence of certain footnote
information in the unaudited statements.
5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in Section
5.6 of the Chilton County Disclosure Memorandum since June 30, 1996, (i) there
have been no events, changes, or occurrences which have had or, to the Knowledge
of Chilton County, are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Chilton County, or (ii) Chilton County
has not taken any action, or failed to take any action, prior to the date of
this Agreement, which action or failure, if taken after the date of this
Agreement, would represent or result in a Material breach or violation of any of
the covenants and agreements of Chilton County provided in Article 7 or 8 of
this Agreement, or which action or failure, if taken after the date of this
Agreement, would result in a Material Adverse Effect on Chilton County.
5.7 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of any of Chilton
County has been timely filed or requests for extensions have been timely filed,
granted, and have not expired for periods ended on or before December 31, 1993,
except to the extent that all such failures to file, taken together, are not
reasonably likely to have a Material Adverse Effect on Chilton County, and to
the Knowledge of Chilton County, all Tax Returns filed are complete and accurate
in all Material respects. All Taxes shown on filed Tax Returns have been paid.
There is no audit examination, deficiency, or refund Litigation with respect to
any Taxes that is reasonably likely to result in a determination that would
have, individually or in the aggregate, a Material Adverse Effect on Chilton
County, except as reserved against in the Chilton County Financial Statements
delivered prior to the date of this Agreement or as disclosed in Section 5.7(a)
of the Chilton County Disclosure Memorandum. All Taxes and other liabilities due
with respect to completed and settled examinations or concluded Litigation have
been paid, accrued or provided for as disclosed in Section 5.7(a) of the Chilton
County Disclosure Memorandum.
(b) Except as disclosed in Section 5.7(b) of the Chilton County Disclosure
Memorandum, Chilton County has not executed an extension or waiver of any
statute of limitations on the assessment or collection of any Material Tax due
that is currently in effect.
(c) Except as disclosed in Section 5.7(c) of the Chilton County Disclosure
Memorandum, adequate provision for any Taxes due or to become due for Chilton
County for the period or periods through and including the date of the
respective Chilton County Financial Statements has been made and is reflected on
such Chilton County Financial Statements.
(d) Deferred Taxes of Chilton County and related valuation allowance have
been adequately provided for in the Chilton County Financial Statements in
accordance with GAAP. Effective July 1, 1991, Chilton County adopted Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes."
(e) To the Knowledge of Chilton County, Chilton County is in compliance
with, and its records contain all information and documents (including properly
completed Internal Revenue Service Forms W-9) necessary to comply with, all
applicable information reporting and Tax withholding requirements under federal,
state, and local Tax Laws, and such records identify with specificity all
accounts subject to backup
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withholding under Section 3406 of the Internal Revenue Code, except for such
instances of noncompliance and such omissions as are not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Chilton
County.
(f) There are no Liens with respect to Taxes upon any of the assets of
Chilton County except for loans on the Subsidiaries' books generated in the
normal course of business.
(g) All Material elections with respect to Taxes affecting Chilton County
as of the date of this Agreement have been or will be timely made as set forth
in Section 5.7(g) of the Chilton County Disclosure Memorandum. After the date
hereof, other than as set forth in Section 5.7(g) of the Chilton County
Disclosure Memorandum, no election with respect to Taxes will be made without
the prior written consent of SouthFirst, which consent will not be unreasonably
withheld.
5.8 ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan or
credit losses (the "Allowance") shown on the balance sheet of Chilton County
included in the most recent Chilton County Financial Statements dated prior to
the date of this Agreement was, and the Allowance shown on the consolidated
balance sheet of Chilton County included in the Chilton County Financial
Statements as of the dates subsequent thereto will be, as of the dates thereof,
adequate (within the meaning of GAAP and applicable regulatory requirements or
guidelines) to provide for losses relating to or inherent in the loan and lease
portfolios (including accrued interest receivables) of Chilton County and other
extensions of credit (including letters of credit and commitments to make loans
or extend credit) by Chilton County as of the dates thereof, except where the
failure of such Allowance to be so adequate is not reasonably likely to have a
Material Adverse Effect on Chilton County.
5.9 ASSETS. Except as disclosed in Section 5.9 of the Chilton County
Disclosure Memorandum, Chilton County has good and marketable title, free and
clear of all Liens (except for those Liens which are not likely to have a
Material Adverse Effect on Chilton County) to all of its respective Material
Assets, reflected in Chilton County Financial Statements as being owned by
Chilton County as of the date hereof. All Material tangible properties used in
the business of Chilton County are in good condition, reasonable wear and tear
excepted, and are usable in the ordinary course of business consistent with
Chilton County's past practices. All Assets which are Material to Chilton
County's business are held under valid Contracts enforceable in accordance with
their respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other Laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be brought), and
each such Contract is in full force and effect. Chilton County currently
maintains insurance in amounts, scope, and coverage as disclosed in Section 5.9
of the Chilton County Disclosure Memorandum. Chilton County has not received
written notice from any insurance carrier that (i) such insurance will be
canceled or that coverage thereunder will be reduced or eliminated, or (ii)
premium costs with respect to such policies of insurance will be substantially
increased. Except as disclosed in Section 5.9 of the Chilton County Disclosure
Memorandum, to the Knowledge of Chilton County there are presently no
occurrences giving rise to a claim under such policies of insurance and no
notices have been given by Chilton County under such policies.
5.10 ENVIRONMENTAL MATTERS. To the Knowledge of Chilton County, none of
the assets of Chilton County (defined for purposes of this Section 5.10 as the
real property and tangible personal property owned or leased by Chilton County
as of the date of this Agreement and as of the Effective Time) contain any
hazardous materials (defined as any substance whose nature and/or quantity or
existence, use, manufacture or effect render it subject to federal, state or
local regulation as potentially injurious to public health or welfare
("Hazardous Materials") other than in such quantities which are incidental and
customary for the maintenance of such assets (e.g., cleaning fluids) or not
otherwise reasonably likely, in the aggregate, to have
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a Material Adverse Effect on Chilton County ("Incidental Quantities"). Except as
disclosed in Section 5.10 of the Chilton County Disclosure Memorandum, to the
Knowledge of Chilton County without inquiry, no collateral securing any loan
made by Chilton County, as of the date of this Agreement and as of the Effective
Time, contains any Hazardous Materials, other than in Incidental Quantities.
5.11 COMPLIANCE WITH LAWS. Chilton County is duly chartered as a federal
stock savings and loan association and is an "insured institution" as defined in
the Federal Deposit Insurance Act and applicable regulations thereunder, and the
deposits in which are insured by the Savings Association Insurance Fund. Chilton
County has in effect all Permits necessary for it to own, lease, or operate its
Material Assets and to carry on its business as now conducted, except for those
Permits the absence of which are not reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on Chilton County, and there has
occurred no Default under any such Permit, other than Defaults which are not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Chilton County. Except as disclosed in Section 5.11 of the Chilton
County Disclosure Memorandum, Chilton County:
(a) is not in violation of any Laws, Orders, or Permits applicable to
its business or employees conducting its business, except for violations which
are not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Chilton County; and
(b) has not received any notification or communication from any agency
or department of federal, state, or local government or any Regulatory
Authority or the staff thereof (i) asserting that Chilton County is not in
compliance with any of the Laws or Orders which such governmental authority or
Regulatory Authority enforces, where such noncompliance is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Chilton
County, (ii) threatening to revoke any Permits, the revocation of which is
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Chilton County, or (iii) requiring Chilton County to enter into or
consent to the issuance of a cease and desist order, formal agreement,
directive, commitment, or memorandum of understanding, or to adopt any Board
resolution or similar undertaking, which restricts Materially the conduct of
its business, or in any manner relates to its capital adequacy, its credit or
reserve policies, its management, or the payment of dividends.
5.12 LABOR RELATIONS. Chilton County is not the subject of any Litigation
asserting that it has committed an unfair labor practice (within the meaning of
the National Labor Relations Act or comparable state law) or seeking to compel
it to bargain with any labor organization as to wages or conditions of
employment, nor is there any strike or other labor dispute involving Chilton
County, pending or to the Knowledge of Chilton County threatened, nor is there
any activity involving Chilton County's employees seeking to certify a
collective bargaining unit or engaging in any other organization activity.
5.13 EMPLOYEE BENEFIT PLANS.
(a) Chilton County has disclosed in Section 5.13(a) of the Chilton County
Disclosure Memorandum, and has delivered or made available to SouthFirst prior
to the execution of this Agreement copies or summaries in each case of, all
Material pension, retirement, profit-sharing, deferred compensation, stock
option, employee stock ownership, severance pay, vacation, bonus, or other
incentive plan, all other written employee programs, arrangements, or
agreements, all medical, vision, dental, or other health plans, all life
insurance plans, and all other employee benefit plans or fringe benefit plans,
including "employee benefit plans" (as that term is defined in Section 3(3) of
ERISA), currently adopted, maintained by, sponsored in whole or in part by, or
contributed to by Chilton County for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
and under which employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries are eligible to participate (collectively,
the "Chilton County Benefit Plans"). Any of the Chilton County Benefit Plans
which is an
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"employee pension benefit plan" (as that term is defined in Section 3(2) of
ERISA) is referred to herein as a "Chilton County ERISA Plan." No Chilton County
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA.
(b) Except as disclosed in Section 5.13(b) of the Chilton County
Disclosure Memorandum, all Chilton County Benefit Plans are in compliance in all
Material respects with the applicable terms of ERISA, the Internal Revenue Code,
and any other applicable Laws, the breach or violation of which are reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Chilton County.
(c) Except as disclosed in Section 5.13(c) of the Chilton County
Disclosure Memorandum, no Chilton County ERISA Plan which is a "defined benefit
pension plan" (as defined in Section 4140 of the Internal Revenue Code) has any
"unfunded current Liability" (as that term is defined in Section 302(d)(8)(A) of
ERISA) and the present fair market value of the assets of any such plan exceeds
the plan's "benefit liabilities" (as that term is defined in Section 4001(a)(16)
of ERISA) when determined under actuarial factors that would apply if the plan
terminated in accordance with all applicable legal requirements.
(d) Except as disclosed in Section 5.13(d) of the Chilton County
Disclosure Memorandum or otherwise provided by this Agreement, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of Chilton County, (ii)
increase any benefits otherwise payable under any Chilton County Benefit Plan or
(iii) result in any acceleration of the time of payment or vesting of any such
benefits, where such payment, increase, or acceleration is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Chilton
County.
5.14 MATERIAL CONTRACTS. Except as disclosed in Section 5.14 of the
Chilton County Disclosure Memorandum, Chilton County is not a party to or
subject to the following: (i) any employment, severance, termination,
consulting, or retirement Contract providing for aggregate payments to any
Person in any calendar year in excess of $25,000, (ii) any Contract relating to
the borrowing of money by Chilton County or the guarantee by Chilton County of
any such obligation (other than Contracts evidencing deposit liabilities,
purchases of federal funds, fully-secured repurchase agreements, and Federal
Reserve Bank and Federal Home Loan Bank advances, trade payables, and Contracts
relating to borrowings or guarantees made in the ordinary course of business),
(iii) any lease of real property, or (iv) any other Contract involving payments
by Chilton County of $25,000 or more per year which is not terminable by Chilton
County on 90 days or less notice without Liability (together with all Contracts
referred to in Sections 5.9 and 5.13(a) of this Agreement, the "Chilton County
Contracts"). With respect to each of the Chilton County Contracts and except as
disclosed in Section 5.14 of the Chilton County Disclosure Memorandum: (i) each
of the Chilton County Contracts is in full force and effect; (ii) Chilton County
is not in default thereunder, other than defaults which are not reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Chilton County; (iii) Chilton County has not repudiated or waived any Material
provision of any of such Chilton County Contracts; and (iv) no other party to
any such Contract is, to the Knowledge of Chilton County, in default in any
Material respect, other than defaults which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Chilton County,
or has repudiated or waived any Material provision thereunder. Except for
Federal Home Loan Bank advances, all of the indebtedness of Chilton County for
money borrowed is prepayable at any time by Chilton County without penalty or
premium.
5.15 LEGAL PROCEEDINGS. Except as disclosed in Section 5.15 of the Chilton
County Disclosure Memorandum, there is no Litigation instituted or pending, or,
to the Knowledge of Chilton County, threatened (or unasserted but considered
probable of assertion and which if asserted would have at least a reasonable
probability of an unfavorable outcome) against Chilton County, or against any
Asset, employee
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benefit plan, interest, or right of any of them, that is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Chilton
County, nor are there any Orders of any Regulatory Authorities, other
governmental authorities, or arbitrators outstanding against Chilton County,
that are reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Chilton County. Section 5.15 of the Chilton County Disclosure
Memorandum includes a summary report of all Litigation as of the date of this
Agreement to which Chilton County is a party and which names Chilton County as a
defendant or cross-defendant.
5.16 REPORTS. Since July 1, 1993, Chilton County has timely filed all
reports and statements, together with any amendments required to be made with
respect thereto, that it was required to file with (i) the OTS, (ii) other
Regulatory Authorities, and (iii) any applicable state securities or banking
authorities (except, in the case of state securities authorities, failures to
file which are not reasonably likely to have, individually or in the aggregate,
a Material Adverse Effect on Chilton County). As of their respective dates, each
of such reports and documents, including the financial statements, exhibits, and
schedules thereto, complied in all Material respects with all applicable Laws.
As of its respective date, each such report and document did not, in all
Material respects, contain any untrue statement of a Material fact or omit to
state a Material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
5.17 STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by Chilton County for inclusion in the Registration Statement to be
filed by SouthFirst with the SEC will, when the Registration Statement becomes
effective, be false or misleading with respect to any Material fact, or omit to
state any Material fact necessary to make the statements therein not misleading.
None of the information to be mailed to Chilton County's shareholders in
connection with the Chilton County Shareholders' Meeting, and any other
documents to be filed by Chilton County or any Affiliate thereof with any other
Regulatory Authority in connection with the transactions contemplated hereby,
will, at the respective time such documents are filed, and with respect to the
Prospectus/Joint Proxy Statement, when first mailed to the shareholders of
Chilton County, be false or misleading with respect to any Material fact, or
omit to state any Material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or, in
the case of the Prospectus/Joint Proxy Statement or any amendment thereof or
supplement thereto, at the time of the Chilton County Shareholders' Meeting, be
false or misleading with respect to any Material fact, or omit to state any
Material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of any proxy for the Chilton County
Shareholders' Meeting.
5.18 ACCOUNTING, TAX AND REGULATORY MATTERS. To the Knowledge of Chilton
County, Chilton County has not taken or agreed to take any action which would,
or has any Knowledge of any fact or circumstance that is reasonably likely to
(i) prevent the transactions contemplated hereby, including the Merger, from
qualifying as a reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(D) of the Internal Revenue Code, or (ii) Materially impede or delay
receipt of any Consents of Regulatory Authorities referred to in Section 9.1(b)
of this Agreement or result in the imposition of a condition or restriction of
the type referred to in the last sentence of such Section.
5.19 FEDERAL STOCK CHARTER PROVISIONS. Chilton County has taken all action
so that the entering into this Agreement and the consummation of the Merger and
the other transactions contemplated by this Agreement do not and will not result
in any super-majority voting requirement or the grant of any rights to any
Person under the Federal Stock Charter, Bylaws, or other governing instruments
of any Chilton County or restrict or impair the ability of SouthFirst or any of
its Subsidiaries to vote, or otherwise to exercise the rights of a shareholder
with respect to, shares of Chilton County that may be directly or indirectly
acquired or controlled by it.
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5.20 DERIVATIVES CONTRACTS. Except as disclosed in Section 5.20 of the
Chilton County Disclosure Memorandum, Chilton County is not a party to or has
agreed to enter into an exchange-traded or over-the-counter swap, forward,
future, option, cap, floor, or collar financial contract, or any other interest
rate or foreign currency protection contract not included on its balance sheet
which is a financial derivative contract (including various combinations
thereof) (each a "Derivatives Contract").
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF SOUTHFIRST AND FIRST FEDERAL
SouthFirst and First Federal hereby represent and warrant to Chilton
County as follows:
6.1 ORGANIZATION, STANDING, AND POWER.
(a) SouthFirst is a corporation duly organized, validly existing, and in
good standing under the Laws of the State of Delaware, and has the corporate
power and authority to carry on its business as now conducted and to own, lease,
and operate its Material Assets. SouthFirst is duly qualified or licensed to
transact business as a foreign corporation in good standing in the States of the
United States and foreign jurisdictions where the character of its Assets or the
nature or conduct of its business requires it to be so qualified or licensed,
except for such jurisdictions in which the failure to be so qualified or
licensed is not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on SouthFirst.
(b) First Federal is a federally chartered stock savings bank having its
principal office in Sylacauga, Alabama, and has the power and authority to carry
on its business as now conducted and to own, lease, and operate its Material
Assets. First Federal is duly qualified or licensed to transact business as a
foreign corporation in good standing in the States of the United States and
foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on First Federal. First Federal is a member in good standing of the
Federal Home Loan Bank of Atlanta and all eligible accounts issued by First
Federal are insured by the Savings Association Insurance Fund to the maximum
extent permitted under federal law.
6.2 AUTHORITY; NO BREACH BY AGREEMENT.
(a) Each of SouthFirst and First Federal has the power and authority
necessary to execute, deliver, and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby. The execution, delivery,
and performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly authorized
by all necessary corporate action in respect thereof on the part of SouthFirst
and First Federal. This Agreement represents a legal, valid, and binding
obligation of SouthFirst and First Federal, enforceable against SouthFirst and
First Federal in accordance with its terms (except in all cases as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by SouthFirst or
First Federal, nor the consummation by SouthFirst or First Federal of the
transactions contemplated hereby, nor compliance by SouthFirst or First Federal
with any of the provisions hereof, will (i) conflict with or result in a breach
of any provision of SouthFirst's Certificate of Incorporation or Bylaws, or
First Federal's Federal Stock Charter or
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Bylaws, or (ii) constitute or result in a Default under, or require any Consent
pursuant to, or result in the creation of any Lien on any Asset of any of the
SouthFirst Companies or First Federal under any Contract or Permit of any of the
SouthFirst Companies or First Federal, where such Default or Lien, or any
failure to obtain such Consent, is reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on SouthFirst or First Federal, or,
(iii) subject to receipt of the requisite Consents referred to in Sections
9.1(a), (b) and (c) of this Agreement, violate any Order or, to its knowledged,
Law applicable to any of the SouthFirst Companies or First Federal or any of
their respective Material Assets which will have a Material Adverse Effect on
SouthFirst or First Federal.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the American Stock Exchange, and other than Consents required from Regulatory
Authorities, and other than notices to or filings with the Internal Revenue
Service or the Pension Benefit Guaranty Corporation with respect to any employee
benefit plans, and other than Consents, filings, or notifications which, if not
obtained or made, are not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on SouthFirst and First Federal, no notice
to, filing with, or Consent of, any public body or authority is necessary for
the consummation by SouthFirst and First Federal of the Merger and the other
transactions contemplated in this Agreement.
6.3 CAPITAL STOCK.
(a) The authorized capital stock of SouthFirst consists of (i) 2,000,000
shares of SouthFirst Common Stock, of which 847,600 shares will be issued and
outstanding as of the date of this Agreement, not including those 15,600 shares
of SouthFirst Common Stock currently held by SouthFirst as treasury shares, and
(ii) 500,000 preferred shares, par value $.01 per share, none of which are
issued and outstanding. SouthFirst shall not otherwise issue or repurchase
additional shares of capital stock prior to the Effective Time. All of the
issued and outstanding shares of SouthFirst Common Stock are, and all of the
SouthFirst Common Stock to be issued in exchange for shares of Chilton County
Common Stock upon consummation of the Merger, will be authorized and reserved
for issuance prior to the Effective Time and, when issued in accordance with the
terms of this Agreement, will be, duly and validly issued and outstanding and
fully paid and nonassessable. None of the outstanding shares of SouthFirst
Common Stock have been, and none of the shares of SouthFirst Common Stock to be
issued in exchange for shares of Chilton County Common Stock upon consummation
of the Merger will be, issued in violation of any preemptive rights of the
current or past shareholders of SouthFirst. SouthFirst has reserved 83,000
shares of SouthFirst Common Stock for issuance under the SouthFirst Stock Plans,
as listed and described in Section 6.3 of the SouthFirst Disclosure Memorandum,
pursuant to which options to purchase not more than 83,000 shares of SouthFirst
Common Stock are outstanding.
(b) Except as set forth in Section 6.3(a) of this Agreement, there are no
shares of capital stock or other equity securities of SouthFirst outstanding and
no outstanding rights relating to the capital stock of SouthFirst.
6.4 SOUTHFIRST SUBSIDIARIES. Except as disclosed in Section 6.4 of the
SouthFirst Disclosure Memorandum, the list of Subsidiaries of SouthFirst filed
by SouthFirst with the SouthFirst Annual Report on Form 10-K for the fiscal year
ended September 30, 1996 is a true and complete list of all of the SouthFirst
Subsidiaries as of the date of this Agreement. Except as disclosed in Section
6.4 of the SouthFirst Disclosure Memorandum, SouthFirst or one of its
Subsidiaries owns all of the issued and outstanding shares of capital stock of
each SouthFirst Subsidiary. No equity securities of any SouthFirst Subsidiary
are or may become required to be issued (other than one of the other SouthFirst
Companies) by reason of any Rights, and there are no Contracts by which any
SouthFirst Subsidiary is bound to issue (other than to one of the other
SouthFirst Companies) additional shares of its capital stock or Rights or by
which any of the SouthFirst
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Companies is or may be bound to transfer any shares of the capital stock of any
SouthFirst Subsidiary (other than to one of the other SouthFirst Companies).
There are no Contracts relating to the rights of any of the SouthFirst Companies
to vote or to dispose of any shares of the capital stock of any SouthFirst
Subsidiary. All of the shares of capital stock of each SouthFirst Subsidiary
held by any of the SouthFirst Companies are fully paid and nonassessable under
the applicable corporation Law of the jurisdiction in which such Subsidiary is
incorporated or organized, and are owned and clear of any Lien. Each SouthFirst
Subsidiary is either a bank or a corporation, and is duly organized, validly
existing, and in good standing under the Laws of the jurisdiction in which it is
incorporated or organized, and has the corporate power and authority necessary
for it to own, lease, and operate its Assets and to carry on its business as now
conducted. Each SouthFirst Subsidiary is duly qualified or licensed to transact
business as a foreign corporation and is in good standing in each jurisdiction
where the character of its Assets or the nature or conduct of its business
requires it to be so qualified or licensed, except for such jurisdictions in
which the failure to be so qualified or licensed is not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on SouthFirst
and its Subsidiaries taken as a whole. Each SouthFirst Subsidiary that is a
depository institution is an "insured institution" as defined in the Federal
Deposit Insurance Act and applicable regulations thereunder, and the deposits in
which are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund.
6.5 SEC FILINGS; FINANCIAL STATEMENTS.
(a) SouthFirst has filed and made available to Chilton County all forms,
reports, and documents required to be filed by SouthFirst with the SEC since
October 1, 1994 (collectively, the "SouthFirst SEC Reports"). The SouthFirst SEC
Reports (i) at the time filed, complied in all Material respects with the
applicable requirements of the 1933 Act and the 1934 Act, as the case may be,
and (ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a Material fact or omit to state a Material fact
required to be stated in such SouthFirst SEC Reports or necessary in order to
make the statements in such SouthFirst SEC Reports, in light of the
circumstances under which they were made, not misleading.
(b) Each of the SouthFirst Financial Statements (including, in each case,
any related notes) contained in the SouthFirst SEC Reports, including any
SouthFirst SEC Reports filed after the date of this Agreement until the
Effective Time, complied and will comply as to form in all Material respects
with the applicable published rules and regulations of the SEC with respect
thereto, was prepared and will be prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes to such financial statements or, in the case of unaudited statements,
as permitted in Quarterly Reports on Form 10-Q by the SEC), and fairly presented
the consolidated financial position of SouthFirst and its Subsidiaries as at the
respective dates and the consolidated results of its operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be Material in amount.
6.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
SouthFirst Financial Statements delivered prior to the date of this Agreement,
since December 31, 1996, (i) there have been no events, changes or occurrences
which have had or, to the Knowledge of SouthFirst, are reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on SouthFirst,
or (ii) the SouthFirst Companies have not taken any action, or failed to take
any action, prior to the date of this Agreement, which action or failure, if
taken after the date of this Agreement, would represent or result in a Material
breach or violation of any of the covenants and agreements of SouthFirst
provided in Articles 7 or 8 of this Agreement, or which action or failure, if
taken after the date of this Agreement, would result in a Material Adverse
Effect on SouthFirst.
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6.7 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of each of the
SouthFirst Companies have been timely filed or requests for extensions have been
timely filed, granted, and have not expired for periods ended on or before
December 31, 1993, and on or before the date of the most recent fiscal year end
immediately preceding the Effective Time, except to the extent that all such
failures to file, taken together, are not reasonably likely to have a Material
Adverse Effect on SouthFirst, and all Tax Returns filed are complete and
accurate in all Material respects. All Taxes shown on filed Tax Returns have
been paid. There is no audit examination, deficiency, or refund Litigation with
respect to any Taxes that is reasonably likely to result in a determination that
would have, individually or in the aggregate, a Material Adverse Effect on the
SouthFirst Companies, except as reserved against in the SouthFirst Financial
Statements delivered prior to the date of this Agreement. All Taxes and other
liabilities due with respect to completed and settled examinations or concluded
Litigation have been paid.
(b) Adequate provision for any Taxes due or to become due for any of the
SouthFirst Companies for the period or periods through and including the date of
the respective SouthFirst Financial Statements has been made and is reflected on
such SouthFirst Financial Statements.
(c) Deferred Taxes of the SouthFirst Companies have been adequately
provided for in accordance with GAAP. Effective October 1, 1993, SouthFirst
adopted Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes."
(d) To the Knowledge of SouthFirst, each of the SouthFirst Companies is in
compliance with, and its records contain all information and documents
(including properly completed Internal Revenue Service Forms W-9) necessary to
comply with, all applicable information reporting and Tax withholding
requirements under federal, state, and local Tax Laws, and such records identify
with specificity all accounts subject to backup withholding under Section 3406
of the Internal Revenue Code, except for such instances of noncompliance and
such omissions as are not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on SouthFirst.
6.8 ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan or
credit losses (the "Allowance") shown on the consolidated balance sheet of
SouthFirst included in the most recent SouthFirst Financial Statements dated
prior to the date of this Agreement was, and the Allowance shown on the
consolidated balance sheet of SouthFirst included in the SouthFirst Financial
Statements as of the dates subsequent thereto will be, as of the dates thereof,
adequate (within the meaning of GAAP and applicable regulatory requirements or
guidelines) to provide for losses relating to or inherent in the loan and lease
portfolios (including accrued interest receivables) of SouthFirst and other
extensions of credit (including letters of credit and commitments to make loans
or extend credit) by SouthFirst as of the dates thereof, except where the
failure of such Allowance to be so adequate is not reasonably likely to have a
Material Adverse Effect on SouthFirst.
6.9 ASSETS. Except as disclosed in Section 6.9 of the SouthFirst
Disclosure Memorandum, each of the SouthFirst Companies has good and marketable
title, free and clear of all Liens (except for those Liens which are not likely
to have a Material Adverse Effect on SouthFirst or its Subsidiaries taken as a
whole), to all of their respective Material Assets, reflected in SouthFirst
Financial Statements as being owned by SouthFirst as of the date hereof. All
Material tangible properties used in the businesses of the SouthFirst Companies
are in good condition, reasonable wear and tear excepted, and are usable in the
ordinary course of business consistent with SouthFirst's past practices. All
Assets which are Material to SouthFirst's business on a consolidated basis, are
held under valid Contracts enforceable in accordance with their respective terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium,
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or other Laws affecting the enforcement of creditors' rights generally and
except that the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceedings may be brought), and each such Contract is in full force and effect.
The SouthFirst Companies currently maintain insurance in amounts, scope, and
coverage as disclosed in Section 6.9 of the SouthFirst Disclosure Memorandum.
None of the SouthFirst Companies has received written notice from any insurance
carrier that (i) such insurance will be canceled or that coverage thereunder
will be reduced or eliminated, or (ii) premium costs with respect to such
policies of insurance will be substantially increased. Except as disclosed in
Section 6.9 of the SouthFirst Disclosure Memorandum, to the Knowledge of
SouthFirst there are presently no occurrences giving rise to a claim under such
policies of insurance and no notices have been given by any SouthFirst Company
under such policies.
6.10 ENVIRONMENTAL MATTERS.
To the Knowledge of SouthFirst, none of the assets of SouthFirst (defined
for purposes of this Section 6.10 as the real property and tangible personal
property owned or leased by SouthFirst as of the date of this Agreement and as
of the Effective Time) contain any hazardous materials (defined as any substance
whose nature and/or quantity or existence, use, manufacture or effect render it
subject to federal, state or local regulation as potentially injurious to public
health or welfare ("Hazardous Materials") other than in such quantities which
are incidental and customary for the maintenance of such assets (e.g., cleaning
fluids) or not otherwise reasonably likely, in the aggregate, to have a Material
Adverse Effect on SouthFirst ("Incidental Quantities"). Except as disclosed in
Section 6.10 of the SouthFirst Disclosure Memorandum, to the Knowledge of
SouthFirst, without inquiry, no collateral securing any loan made by SouthFirst,
as of the date of this Agreement and as of the Effective Time, contains any
Hazardous Materials, other than in Incidental Quantities.
6.11 COMPLIANCE WITH LAWS. SouthFirst is duly registered as a thrift
holding company under the applicable regulations of the OTS. Each of the
SouthFirst Companies has in effect all Permits necessary for it to own, lease,
or operate its Material Assets and to carry on its business as now conducted,
except for those Permits the absence of which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on SouthFirst. None
of the SouthFirst Companies is presently in Default under or in violation of any
such Permit, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on SouthFirst. None
of the SouthFirst Companies:
(a) is in violation of any Laws, Orders, or Permits applicable
to its business or employees conducting its business, except for violations
which are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on SouthFirst; and
(b) has received any notification or communication from any
agency or department of federal, state, or local government or any Regulatory
Authority or the staff thereof (i) asserting that any SouthFirst Company is not
in compliance with any of the Laws or Orders which such governmental authority
or Regulatory Authority enforces, where such noncompliance is reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect on
SouthFirst, (ii) threatening to revoke any Permits, the revocation of which is
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on SouthFirst, or (iii) requiring any SouthFirst Company to enter into or
consent to the issuance of a cease and desist order, formal agreement,
directive, commitment, or memorandum of understanding, or to adopt any board
resolution or similar undertaking, which restricts Materially the conduct of its
business, or in any manner relates to its capital adequacy, its credit or
reserve policies, its management or the payment of dividends.
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6.12 LABOR RELATIONS. SouthFirst is not the subject of any Litigation
asserting that it or any other SouthFirst Company has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other SouthFirst Company to bargain
with any labor organization as to wages or conditions of employment, nor is
there any strike or other labor dispute involving any SouthFirst Company,
pending or to the Knowledge of SouthFirst threatened, nor is there any activity
involving any SouthFirst Company's employees seeking to certify a collective
bargaining unit or engaging in any other organization activity.
6.13 EMPLOYEE BENEFIT PLANS.
(a) SouthFirst has made available to First Federal prior to the Effective
Time copies in each case of all pension, retirement, profit-sharing, deferred
compensation, stock option, employee stock ownership, severance pay, vacation,
bonus, or other incentive plan, all other written employee programs,
arrangements, or agreements, all medical, vision, dental, or other health plans,
all life insurance plans, and all other employee benefit plans or fringe benefit
plans, including "employee benefit plans" as that term is defined in Section
3(3) of ERISA, currently adopted, maintained by, sponsored in whole or in part
by, or contributed to by any SouthFirst Company or Affiliate thereof for the
benefit of employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
are eligible to participate (collectively, the "SouthFirst Benefit Plans"). Any
of the SouthFirst Benefit Plans which is an "employee pension benefit plan," as
that term is defined in Section 3(2) of ERISA, is referred to herein as a
"SouthFirst ERISA Plan." Each SouthFirst ERISA Plan which is also a "defined
benefit plan" (as defined in Section 4140 of the Internal Revenue Code) is
referred to herein as a "SouthFirst Pension Plan." No SouthFirst Pension Plan is
or has been a multiemployer plan within the meaning of Section 3(37) of ERISA.
(b) All SouthFirst Benefit Plans are in compliance with the applicable
terms of ERISA, the Internal Revenue Code, and any other applicable Laws the
breach or violation of which are reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on SouthFirst. Each SouthFirst ERISA
Plan which is intended to be qualified under Section 401(a) of the Internal
Revenue Code has received a favorable determination letter from the Internal
Revenue Service, and SouthFirst is not aware of any circumstances likely to
result in revocation of any such favorable determination letter. No SouthFirst
Company has engaged in a transaction with respect to any SouthFirst Benefit Plan
that, assuming the taxable period of such transaction expired as of the date
hereof, would subject any SouthFirst Company to a tax or penalty imposed by
either Section 4975 of the Internal Revenue Code or Section 502(i) of ERISA.
(c) No SouthFirst Pension Plan has any "unfunded current Liability," as
that term is defined in Section 302(d)(8)(A) of ERISA, and the fair market value
of the assets of any such plan exceeds the plan's "benefit liabilities," as that
term is defined in Section 4001(a)(16) of ERISA, when determined under actuarial
factors that would apply if the plan terminated in accordance with all
applicable legal requirements. Since the date of the most recent actuarial
valuation, there has been (i) no Material change in the financial position of
any SouthFirst Pension Plan, (ii) no change in the actuarial assumptions with
respect to any SouthFirst Pension Plan, and (iii) no increase in benefits under
any SouthFirst Pension Plan as a result of plan amendments or changes in
applicable Law which is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on SouthFirst or Materially adversely
affect the funding status of any such plan. Neither any SouthFirst Pension Plan
nor any "single-employer plan," within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by any SouthFirst Company, or the
single-employer plan of any entity which is considered one employer with
SouthFirst under Section 4001 of ERISA or Section 414 of the Internal Revenue
Code or Section 302 of ERISA (whether or not waived) (an "ERISA Affiliate") has
an "accumulated funding deficiency" within the meaning of Section 412 of the
Internal Revenue Code or Section 302 of ERISA. No SouthFirst Company has
provided, or is required to provide,
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security to a SouthFirst Pension Plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401(a)(29) of the Code.
(d) No Liability under Subtitle C or D of Title IV of ERISA has been or is
expected to be incurred by any SouthFirst Company with respect to any ongoing,
frozen, or terminated single-employer plan or the single-employer plan of any
ERISA Affiliate, which Liability is reasonably likely to have a Material Adverse
Effect on SouthFirst. No SouthFirst Company has incurred any withdrawal
Liability with respect to a multiemployer plan under Subtitle B of Title IV of
ERISA (regardless of whether based on contributions of an ERISA Affiliate),
which Liability is reasonably likely to have a Material Adverse Effect on
SouthFirst. No notice of a "reportable event," within the meaning of Section
4043 of ERISA for which the 30-day reporting requirement has not been waived,
has been required to be filed for any SouthFirst Pension Plan or by any ERISA
Affiliate within the 12-month period ending on the date hereof.
(e) Except as disclosed in Section 6.13(e) of the SouthFirst Disclosure
Memorandum, no SouthFirst Company has any Liability for retiree health and life
benefits under any of the SouthFirst Benefit Plans and there are no restrictions
on the rights of such SouthFirst Company to amend or terminate any such Plan
without incurring any Liability thereunder.
(f) Except as disclosed in Section 6.13(f) of the SouthFirst Disclosure
Memorandum, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any a director or any employee of any SouthFirst
Company from any SouthFirst Company under any SouthFirst Benefit Plan or
otherwise, (ii) increase any benefits otherwise payable under any SouthFirst
Benefit Plan, or (iii) result in any acceleration of the time of payment or
vesting of any such benefit.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any SouthFirst Company and their respective beneficiaries, other
than entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
have been fully reflected on the SouthFirst Financial Statements to the extent
required by and in accordance with GAAP.
6.14 MATERIAL CONTRACTS. Except as disclosed in Section 6.14 of the
SouthFirst Disclosure Memorandum or otherwise reflected in the SouthFirst
Financial Statements, none of the SouthFirst Companies, nor any of their
respective Assets, businesses, or operations, is a party to, or is bound or
affected by, or receives benefits under, (i) any employment, severance,
termination, consulting, or retirement Contract providing for aggregate payments
to any Person in any calendar year in excess of $25,000, (ii) any Contract
relating to the borrowing of money by any SouthFirst Company or the guarantee by
any SouthFirst Company of any such obligation (other than Contracts evidencing
deposit liabilities, purchases of federal funds, fully-secured repurchase
agreements, and Federal Reserve Bank and Federal Home Loan Bank advances of
depository institution Subsidiaries, trade payables, and Contracts relating to
borrowings or guarantees made in the ordinary course of business), (iii) any
Contracts between or among SouthFirst Companies, (iv) any lease of real
property, or (v) any other Contract involving payments by a SouthFirst Company
of $25,000 or more per year which is not terminable by such SouthFirst Company
on 90 days or less notice without Liability (together with all Contracts
referred to in Sections 6.9 and 6.13(a) of this Agreement, the "SouthFirst
Contracts"). None of the SouthFirst Companies is in Default under any SouthFirst
Contract, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on SouthFirst. All
of the indebtedness of any SouthFirst Company for money borrowed is prepayable
at any time by such SouthFirst Company without penalty or premium.
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6.15 LEGAL PROCEEDINGS. Except as disclosed in Section 6.15 of the
SouthFirst Disclosure Memorandum, there is no Litigation instituted or pending,
or, to the Knowledge of SouthFirst, threatened (or unasserted but considered
probable of assertion and which if asserted would have at least a reasonable
probability of an unfavorable outcome) against any SouthFirst Company, or
against any Asset, interest, or right of any of them, that is reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect on
SouthFirst, nor are there any Orders of any Regulatory Authorities, other
governmental authorities, or arbitrators outstanding against any SouthFirst
Company, that are reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on SouthFirst.
6.16 REPORTS. Since January 1, 1990, or the date of organization if later,
each SouthFirst Company has filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities (except, in the case of state securities
authorities, failures to file which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on SouthFirst). As
of their respective dates, each of such reports and documents, including the
financial statements, exhibits, and schedules thereto, complied in all Material
respects with all applicable Laws. As of its respective date, each such report
and document did not, in all Material respects, contain any untrue statement of
a Material fact or omit to state a Material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
6.17 STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by any of the SouthFirst Companies or any Affiliate thereof for
inclusion in the Registration Statement to be filed by SouthFirst with the SEC,
will, when the Registration Statement becomes effective, be false or misleading
with respect to any Material fact, or omit to state any Material fact necessary
to make the statements therein not misleading. None of the information supplied
or to be supplied by any of the SouthFirst Companies or any Affiliate thereof
for inclusion in the Prospectus/Joint Proxy Statement to be mailed to Chilton
County's shareholders in connection with the Chilton County Shareholders'
Meeting, and any other documents to be filed by any of the SouthFirst Companies
or any Affiliate thereof with the SEC or any other Regulatory Authority in
connection with the transactions contemplated hereby, will, at the respective
time such documents are filed, and with respect to the Prospectus/Joint Proxy
Statement, when first mailed to the shareholders of Chilton County, be false or
misleading with respect to any Material fact, or omit to state any Material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or, in the case of the Prospectus/Joint
Proxy Statement or any amendment thereof or supplement thereto, at the time of
the Chilton County Shareholders' Meeting, be false or misleading with respect to
any Material fact, or omit to state any Material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Shareholders' Meeting. All documents that any of the SouthFirst
Companies or any Affiliate thereof is responsible for filing with any Regulatory
Authority in connection with the transactions contemplated hereby will comply as
to form in all Material respects with the provisions of applicable Law.
6.18 ACCOUNTING, TAX AND REGULATORY MATTERS. None of the SouthFirst
Companies or any Affiliate thereof has taken or agreed to take any action or has
any Knowledge of any fact or circumstance that is reasonably likely to (i)
prevent the transactions contemplated hereby, including the Merger, from
qualifying as a reorganization within the meaning of Sections 368 (a)(1)(A) and
368(a)(2)(D) of the Internal Revenue Code, or (ii) Materially impede or delay
receipt of any Consents of Regulatory Authorities referred to in Section 9.1(b)
of this Agreement or result in the imposition of a condition or restriction of
the type referred to in the last sentence of such Section.
6.19 DERIVATIVES CONTRACTS. Neither SouthFirst nor any of its
Subsidiaries is a party to or has agreed to enter into a Derivatives Contract,
except for those Derivatives Contracts set forth in Section 6.19 of the
SouthFirst Disclosure Memorandum.
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ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION
7.1 AFFIRMATIVE COVENANTS OF CHILTON COUNTY. Unless the prior written
consent of SouthFirst shall have been obtained, and except as otherwise
expressly contemplated herein, Chilton County shall (i) operate its business
only in the usual, regular, and ordinary course, (ii) use its reasonable best
efforts to preserve intact its business organization and Assets and maintain its
rights and franchises, (iii) use its reasonable efforts to maintain its current
employee relationships, and (iv) take no action which would adversely affect the
ability of any Party to obtain any Consents of Regulatory Authorities required
for the transactions contemplated hereby without imposition of a condition or
restriction of the type referred to in the last sentence of Section 9.1(b) of
this Agreement.
7.2 NEGATIVE COVENANTS OF CHILTON COUNTY. Except as described in Section
7.2 of the Chilton County Disclosure Memorandum, from the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement,
Chilton County covenants and agrees that it will not do or agree or commit to
do, any of the following without the prior written consent of the chief
executive officer, chief financial officer of SouthFirst (and, with respect to
clauses (c) and (e), of the Board of Directors of SouthFirst), which consent
shall not be unreasonably withheld:
(a) amend the Federal Stock Charter, Bylaws or other
governing instruments of Chilton County, except as may be necessary to
consummate the Merger; or
(b) incur any additional debt obligation or other
obligation for borrowed money in excess of an aggregate of $100,000 except in
the ordinary course of the business of Chilton County consistent with past
practices (which shall include creation of deposit liabilities, purchases of
federal funds, advances from the Federal Reserve Bank or Federal Home Loan Bank,
and entry into repurchase agreements fully secured by U.S. government or agency
securities), or impose, or suffer the imposition, on any Asset of Chilton County
of any Lien or permit any such Lien to exist (other than in connection with
deposits, repurchase agreements, bankers acceptances, "treasury tax and loan"
accounts established in the ordinary course of business, the satisfaction of
legal requirements in the exercise of trust powers, and Liens in effect as of
the date hereof that are disclosed in the Chilton County Disclosure Memorandum);
or
(c) repurchase, redeem, or otherwise acquire or exchange
(other than exchanges in the ordinary course under employee benefit plans),
directly or indirectly, any shares, or any securities convertible into any
shares, of the capital stock of Chilton County, or, except as permitted in
Section 8.6 of this Agreement, declare or pay any dividend or make any other
distribution in respect of Chilton County's capital stock; or
(d) except for this Agreement, or pursuant to the
exercise of Chilton County Options granted to Chilton County employees and
outstanding as of the date hereof and pursuant to the terms thereof in existence
on the date hereof and as disclosed in Section 7.2(d) of the Chilton County
Disclosure Memorandum, issue, sell, pledge, encumber, authorize the issuance of,
enter into any Contract to issue, sell, pledge, encumber, or authorize the
issuance of, or otherwise permit to become outstanding, any additional shares of
Chilton County Common Stock, or any Right to acquire any such stock; or
(e) adjust, split, combine or reclassify any capital
stock of Chilton County or issue or authorize the issuance of any other
securities in respect of or in substitution for shares of Chilton County Common
Stock, or sell, lease, mortgage or otherwise dispose of or otherwise encumber
any Asset (other than
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loan participations) having a book value in excess of $25,000 other than in the
ordinary course of business for reasonable and adequate consideration; or
(f) except for purchases of U.S. Treasury securities or
U.S. Government agency securities, which in either case have maturities of five
years or less, purchase any securities, specifically including but not limited
to, derivative securities as such term is defined by the Regulatory Authorities,
or make any Material investment, either by purchase of stock of securities,
contributions to capital, Asset transfers, or purchase of any Assets, in any
Person, or otherwise acquire direct or indirect control over any Person, other
than in connection with (i) foreclosures in the ordinary course of business, or
(ii) acquisitions of control in its fiduciary capacity; or
(g) grant any increase in compensation or benefits to the
employees or officers of Chilton County except in accordance with past practice
disclosed in Section 7.2(g) of the Chilton County Disclosure Memorandum or as
required by Law; pay any severance or termination pay or any bonus other than
pursuant to written policies or written Contracts in effect on the date of this
Agreement and disclosed in Section 7.2(g) of the Chilton County Disclosure
Memorandum; enter into or amend any severance agreements with officers of
Chilton County; grant any Material increase in fees or other increases in
compensation or other benefits to directors of Chilton County except in
accordance with past practice disclosed in Section 7.2(g) of the Chilton County
Disclosure Memorandum; or voluntarily accelerate the vesting of any Chilton
County Options or other stock-based compensation or employee benefits; or
(h) enter into or amend any employment Contract between
Chilton County and any Person (unless such amendment is required by Law) that
Chilton County does not have the unconditional right to terminate without
Liability (other than Liability for services already rendered), at any time on
or after the Effective Time; or
(i) adopt any new employee benefit plan of Chilton County
or make any Material change in or to any existing employee benefit plans of
Chilton County other than any such change that is required by Law or that, in
the opinion of counsel, is necessary or advisable to maintain the tax qualified
status of any such plan; or
(j) make any significant change in any Tax or accounting
methods or systems of internal accounting controls, except as may be appropriate
to conform to changes in Tax Laws or regulatory accounting requirements or GAAP;
or
(k) commence any Litigation other than in accordance with
past practice, settle any Litigation involving any Liability of Chilton County
for Material money damages or restrictions upon the operations of Chilton
County; or
(l) except in the ordinary course of business, modify,
amend or terminate any Material Contract or waive, release, compromise or assign
any Material rights or claims.
7.3 COVENANTS OF SOUTHFIRST. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement,
SouthFirst covenants and agrees that it shall (i) continue to conduct its
business and the business of its Subsidiaries in a manner designed in its
reasonable judgment, to enhance the long-term value of the SouthFirst Common
Stock and the business prospects of the SouthFirst Companies; and (ii) take no
action which would (a) Materially adversely affect the ability of any Party to
obtain any Consents required for the transactions contemplated hereby without
imposition of a condition or restriction of the type referred to in the last
sentence of Section 9.1(b) of this Agreement, or (b) Materially adversely affect
the ability of any Party to perform its covenants and agreements under this
Agreement;
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provided, that the foregoing shall not prevent any SouthFirst Company from
discontinuing or disposing of any of its Assets or business if such action is,
in the judgment of SouthFirst, desirable in the conduct of the business of
SouthFirst and its Subsidiaries; and (iii) adjust, split, combine or reclassify
any SouthFirst Capital Stock or issue or authorize the issuance of any other
securities in respect of or in substitution for SouthFirst Common Stock.
SouthFirst further covenants and agrees that it will not, without the prior
written consent of the Chief Executive Officer of Chilton County, which consent
shall not be unreasonably withheld, amend the Certificate of Incorporation or
Bylaws of SouthFirst, in each case in any manner adverse to the holders of
shares of Chilton County Common Stock.
7.4 ADVERSE CHANGES IN CONDITION. Each Party agrees to give
written notice promptly to the other Party upon becoming aware of the occurrence
or impending occurrence of any event or circumstance which (i) is reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
it or (ii) would cause or constitute a Material breach of any of its
representations, warranties, or covenants contained herein, and to use its
reasonable efforts to prevent or promptly to remedy the same.
7.5 REPORTS. Each Party shall file all reports required to be
filed by each of them with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other Party copies of
all such reports promptly after the same are filed. If financial statements are
contained in any such reports filed by SouthFirst with the SEC, such financial
statements will fairly present the consolidated financial position of the entity
filing such statements as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity, and cash flows for the periods then
ended in accordance with GAAP (subject in the case of interim financial
statements to normal recurring year-end adjustments that are not Material and
except for the absence of certain footnote information in the unaudited
financial statements). As of their respective dates, such reports filed with the
SEC will comply in all Material respects with the Securities Laws and will not
contain any untrue statement of a Material fact or omit to state a Material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statements contained in any other reports to another
Regulatory Authority shall be prepared in accordance with Laws applicable to
such reports.
7.6 CONTROL OF CHILTON COUNTY BY SOUTHFIRST. Notwithstanding any
other provision of this Agreement, until the Effective Time, the authority to
establish and implement the business policies of Chilton County shall continue
to reside solely in Chilton County's officers and Board of Directors.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 REGISTRATION STATEMENT; PROSPECTUS/JOINT PROXY STATEMENT;
SHAREHOLDER APPROVALS.
(a) As soon as practicable after execution of this Agreement,
SouthFirst shall (i) file the Registration Statement with the SEC and shall use
its best efforts to cause the Registration Statement, including the
Prospectus/Joint Proxy Statement, to become effective under the 1933 Act, and
(ii) take any action required to be taken under applicable state securities or
"blue sky" laws in connection with the issuance of shares of SouthFirst Common
Stock upon consummation of the Merger. Chilton County shall promptly furnish
all information concerning it and the holders of its capital stock as
SouthFirst may reasonably request in connection with such action.
(b) Chilton County shall call the Chilton County Shareholders'
Meeting and SouthFirst shall call the SouthFirst Shareholders' Meeting, each to
be held on a date or dates as soon as practicable after the Registration
Statement is declared effective by the SEC.
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(c) The Boards of Directors of each of Chilton County and
SouthFirst shall (subject to compliance with their fiduciary duties as advised
by counsel and receipt of their respective fairness opinions pursuant to this
Agreement) (i) recommend to their shareholders approval of this Agreement and
(ii) use their reasonable efforts to obtain such shareholders' approvals.
8.2 APPLICATIONS. SouthFirst shall promptly prepare and file,
and Chilton County shall cooperate in the preparation and, where appropriate,
filing of, applications with all Regulatory Authorities having jurisdiction over
the transactions contemplated by this Agreement seeking the requisite Consents
necessary to consummate the transactions contemplated by this Agreement and
thereafter use its reasonable best efforts to cause the Merger to be consummated
as expeditiously as possible.
8.3 FILINGS WITH STATE OFFICES. Upon the terms and subject to the
conditions of this Agreement, SouthFirst shall execute and make any applicable
filings with state regulatory authorities in connection with the Closing.
8.4 AGREEMENT AS TO EFFORTS TO CONSUMMATE. Subject to the terms and
conditions of this Agreement, each Party agrees to use, its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper, or advisable under applicable Laws to
consummate and make effective, as soon as practicable after the date of this
Agreement, the transactions contemplated by this Agreement, including the use of
their respective reasonable best efforts to lift or rescind any Order adversely
affecting its ability to consummate the transactions contemplated herein and to
cause to be satisfied the conditions referred to in Article 9 of this Agreement;
provided, that nothing herein shall preclude either Party from exercising its
rights under this Agreement. Each Party shall use, and SouthFirst shall cause
each of its Subsidiaries to use, its reasonable efforts to obtain all Permits
and Consents of all third parties and Regulatory Authorities necessary or
desirable for the consummation of the transactions contemplated by this
Agreement.
8.5 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Prior to the Effective Time, SouthFirst, First Federal and
Chilton County will keep one another advised of all Material developments
relevant to its business and to consummation of the Merger and shall permit each
other to make or cause to be made such investigation of their business and
properties and of their respective financial and legal conditions as the other
Party reasonably requests, provided that such investigation shall be reasonably
related to the transactions contemplated hereby and shall not interfere
unnecessarily with normal operations.
(b) Except as may be required by applicable Law or legal process,
and except for such disclosure to those of its directors, officers, employees
and representatives as may be appropriate or required in connection with the
transactions contemplated hereby, SouthFirst, First Federal and Chilton County
shall hold in confidence all nonpublic information obtained from each other
(including work papers and other Material derived therefrom) as a result of this
Agreement or in connection with the transactions contemplated hereby (whether so
obtained before or after the execution hereof) until such time as the Party
providing such information consents so its disclosure or such information
becomes otherwise publicly available. Promptly following any termination of this
Agreement, SouthFirst, First Federal and Chilton County agree to use their best
efforts to cause their respective directors, officers, employees and
representatives to destroy or return to the providing Party all such nonpublic
information (including work papers and other Material retrieved therefrom),
including all copies thereof. SouthFirst, First Federal and Chilton County
shall, and shall cause its advisers and agents to, maintain the confidentiality
of all confidential information furnished to it by the other Party concerning
its businesses, operations, and financial positions and shall not use such
information for any purpose except in furtherance of the transactions
contemplated by this Agreement. If this Agreement
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is terminated prior to the Effective Time, SouthFirst, First Federal and Chilton
County shall promptly return all documents and copies thereof and all work
papers containing confidential information received from the other Party, except
one copy of certain Materials that can be retained for legal files.
(c) Each Party agrees to give the other Party notice as soon as
practicable after any determination by it of any fact or occurrence relating to
the other Party which it has discovered through the course of its investigation
and which represents, or is reasonably likely to represent, either a Material
breach of any representation, warranty, covenant or agreement of the other Party
or which has had or is reasonably likely to have a Material Adverse Effect on
the other Party.
8.6 DIVIDEND PAYMENT. Prior to the date of this Agreement,
Chilton County may have declared and paid an annual dividend not in excess of
$.28 per share to holders of Chilton County Common Stock.
8.7 CURRENT INFORMATION. During the period from the date of this
Agreement until the Effective Time or the termination of this Agreement, each of
Chilton County and SouthFirst shall, and shall cause its representatives to,
confer on a regular and frequent basis with representatives of the other. Each
of Chilton County and SouthFirst shall promptly notify the other of (i) any
Material change in its business or operations, (ii) any Material complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) of any Regulatory Authority, (iii) the institution or the threats
of Material litigation involving such party, or (iv) the occurrence, or
nonoccurrence, of any event or condition the occurrence, or nonoccurrence, of
which would reasonably be expected to cause any of such party's representations
or warranties set forth herein that are qualified as to materiality to become
untrue or inaccurate in any respect as of the Effective Time, and in each case
shall keep the other fully informed with respect thereto.
8.8 OTHER ACTIONS. No Party shall take any action, except in every
case as may be required by applicable Law, that would or is intended to result
in (i) any of its representations and warranties set forth in this Agreement
that are qualified as to materiality being or becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in any
Material manner having a Material Adverse Effect, (iii) any of the conditions
set forth in this Agreement not being satisfied or in a violation of any
provision of this Agreement, or (iv) adversely affecting the ability of any of
them to obtain any of the Consents or Permits from the Regulatory Authorities
(unless such action is required by sound banking practice).
8.9 PRESS RELEASES. Prior to the Effective Time, Chilton County and
SouthFirst shall consult with each other as to the form and substance of any
press release or other public disclosure Materially related to this Agreement or
any other transaction contemplated hereby; provided, that nothing in this
Section 8.9 shall be deemed to prohibit any Party from making any disclosure
which its counsel deems necessary or advisable in order to satisfy such Party's
disclosure obligations imposed by Law.
8.10 AFFILIATES. Chilton County has disclosed in Section 8.10 of the
Chilton County Disclosure Memorandum all Persons whom it reasonably believes are
"affiliates" of Chilton County for purposes of Rule 145 under the 1933 Act.
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8.11 EMPLOYEE BENEFITS.
(a) Following the Effective Time, SouthFirst shall provide
generally to officers and employees of Chilton County, employee benefits under
employee benefit plans (other than stock option or other plans involving the
potential issuance of SouthFirst Common Stock), on terms and conditions which
when taken as a whole are no less favorable than those currently provided by
Chilton County or those currently provided by the SouthFirst Companies to their
similarly situated officers and employees; provided, that, for a period of 12
months after the Effective Time, SouthFirst shall provide generally to officers
and employees of Chilton County severance benefits in accordance with the
policies of First Federal. For purposes of eligibility, participation and
vesting (but not benefit accrual under any employee benefit plans of SouthFirst
and its subsidiaries other than the Chilton County Benefit Plans) under such
employee benefit plans, and for receiving other employee benefits including, but
not limited to, vacation and sick pay, the service of the employees of Chilton
County prior to the Effective Time shall be treated as service with First
Federal.
(b) Chilton County will terminate Chilton County's Profit Sharing
Plan prior to the Effective Time and employees of Chilton County who are
participants in such Plan and who become employees of SouthFirst or the
Surviving Bank as of the Effective Time may have their account balances
transferred to the 401(k) Plan maintained by First Federal.
8.12 INDEMNIFICATION.
(a) SouthFirst shall, and shall cause the Surviving Bank to,
indemnify, defend and hold harmless the present and former directors, officers,
employees and agents of Chilton County (the "Indemnified Party") against all
Liabilities arising out of actions or omissions occurring at or prior to the
Effective Time (including the actions contemplated by this Agreement) to the
full extent permitted under applicable Law and by the Federal Stock Charter and
Bylaws of Chilton County as in effect on the date hereof, including provisions
relating to advances of expenses incurred in the defense of any Litigation.
SouthFirst or the Surviving Bank shall pay expenses in advance of the final
disposition of any such claim to such Indemnified Party to the full extent
permitted by law upon receipt of any undertaking required by Law. Without
limiting the foregoing, in any case in which approval by the Surviving Bank is
required to effectuate any indemnification, SouthFirst shall cause the Surviving
Bank to direct, at the election of the Indemnified Party, that the determination
of any such approval shall be made, at SouthFirst's expense, by independent
counsel mutually agreed upon between SouthFirst and the Indemnified Party.
(b) Any Indemnified Party wishing to claim indemnification under
paragraph (a) of this Section 8.12, upon learning of any such Liability or
Litigation, shall promptly notify SouthFirst thereof. In the event of any such
Litigation (whether arising before or after the Effective Time), (i) SouthFirst
or the Surviving Bank shall have the right to assume the defense thereof and
SouthFirst shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof except that if
SouthFirst or the Surviving Bank elects not to assume such defense or counsel
for the Indemnified Parties advises that there are substantive issues which
raise conflicts of interest between SouthFirst or the Surviving Bank and the
Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to
them, and SouthFirst or the Surviving Bank shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; provided, that SouthFirst shall be obligated pursuant to
this paragraph (c) to pay for only one firm of counsel for all Indemnified
Parties in any jurisdiction, (ii) the Indemnified Parties will cooperate in the
defense of any such Litigation, and (iii) SouthFirst shall not be liable for any
settlement effected without its prior written consent; and provided further that
the Surviving Bank shall not have any obligation hereunder to any Indemnified
Party when and if a court of competent jurisdiction shall determine,
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and such determination shall have become final, that the indemnification of such
Indemnified Party in the manner contemplated hereby is prohibited by applicable
Law.
(c) SouthFirst shall, or shall cause the Surviving Bank to, (and
First Federal shall cooperate prior to the Effective Time in these efforts) to
maintain in effect, for a period of three years after the Effective Time, First
Federal's existing directors' and officers' Liability insurance policy (provided
that SouthFirst may substitute therefor its own or other policies of at least
the same coverage and amounts containing terms and conditions which are
substantially no less advantageous) with respect to claims arising from facts or
events which occurred prior to the Effective Time and covering persons who are
currently covered by such insurance; provided, however, that neither SouthFirst
nor the Surviving Bank shall be obligated to make premium payments for such
three-year period in respect of such policy (or coverage replacing such policy)
which exceed, for the portion related to First Federal's directors and officers,
200% of the annual premium payments on First Federal's current policy in effect
as of the date of this Agreement (the "Maximum Amount"). If the amount of the
premiums necessary to maintain or procure such insurance coverage exceeds the
Maximum Amount, SouthFirst shall maintain the most advantageous policies of
directors' and officers' Liability insurance obtainable for a premium equal to
the Maximum Amount.
(d) If the Surviving Bank or any of its successors or assigns shall
consolidate with or merge into any other Person and shall not be the continuing
or surviving Person of such consolidation or merger or shall transfer all or
substantially all of its assets to any Person, then and in each case, proper
provision shall be made so that the successors and assigns of the Surviving Bank
shall assume the obligations set forth in this Section 8.12.
8.13 NO SOLICITATION.
(a) Chilton County shall not, nor shall it authorize or permit any
officer of, director of, employee of, or any investment banker, attorney or
other advisor or representative of, Chilton County to (i) solicit or initiate,
or encourage the submission of, any takeover proposal or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any information
with respect to, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Competing Transaction or superior proposal (as hereinafter defined);
provided, however, that, if in the opinion of its Board of Directors, after
consultation with counsel, such failure to act would be inconsistent with its
fiduciary duties to shareholders under applicable law, Chilton County may, in
response to an unsolicited takeover proposal, and subject to compliance with
subparagraph (c) below, (A) furnish information with respect to Chilton County
to any Person pursuant to a confidentiality agreement and (B) participate in
negotiations regarding such takeover proposal. Without limiting the foregoing,
it is understood that any violation of the restrictions set forth in the
immediately preceding sentence by any executive officer of Chilton County or any
investment banker, attorney or other advisor or representative of Chilton
County, whether or not such person is purporting to act on behalf of Chilton
County or otherwise, shall be deemed to be a breach of this Section 8.13 by
Chilton County. For purposes of this Agreement, "takeover proposal" means an
inquiry, proposal or acquisition or purchase of a substantial amount of assets
of Chilton County (other than investors in the ordinary course of business) or
of over 20% of any class of equity securities of Chilton County or any tender
offer or exchange offer that if consummated would result in any Person
beneficially owning 20% or more of any class of equity securities of Chilton
County, or any merger, consolidation, business combination, sale of
substantially all assets, recapitalization, liquidation, dissolution or similar
transaction involving Chilton County other than the transactions contemplated by
this Agreement, or any other transaction the consummation of which would
reasonably be expected to impede, interfere with, prevent or Materially delay
the Merger or which would reasonably be expected to dilute Materially the
benefits to SouthFirst of the transactions contemplated hereby.
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(b) Except as set forth herein, neither the Board of Directors of
Chilton County nor any committee thereof shall (i) withdraw or modify, or
propose to withdraw or modify, in a manner adverse to SouthFirst, the approval
or recommendation of such Board of Directors or any such committee of this
Agreement or the Merger, (ii) approve or recommend, or propose to approve or
recommend, any takeover proposal or (iii) enter into any agreement with respect
to any takeover proposal. Notwithstanding the foregoing, if in the opinion of
the Chilton County Board of Directors, after consultation with counsel, failure
to do so would be inconsistent with its fiduciary duties to Chilton County
shareholders under applicable law, then, prior to the Shareholders' Meeting, the
Chilton County Board of Directors may (subject to the terms of this and the
following sentences) withdraw or modify its approval or recommendation of this
Agreement or the Merger, approve or recommend a superior proposal, or enter into
an agreement with respect to a superior proposal, in each case at any time after
the second business day following SouthFirst's receipt of written notice (a
"Notice of Superior Proposal") advising SouthFirst that the Chilton County Board
of Directors has received a superior proposal, specifying the Material terms and
conditions of such superior proposal and identifying the Person making such
superior proposal; provided that Chilton County shall not enter into an
agreement with respect to a superior proposal unless Chilton County shall have
furnished SouthFirst with written notice no later than 12:00 noon one day in
advance of any date that it intends to enter into such agreement. In addition,
if Chilton County proposes to enter into an agreement with respect to any
takeover proposal, it shall concurrently with entering into such agreement pay,
or cause to be paid, to SouthFirst the Termination Fee (as defined in Section
11.2(b)). For purposes of this Agreement, a "superior proposal" means any bona
fide takeover proposal to acquire, directly or indirectly, for consideration
consisting of cash and/or securities, more than 50% of the shares of Chilton
County Common Stock then outstanding or all or substantially all of the assets
of Chilton County and otherwise on terms which the Chilton County Board of
Directors determines in good faith judgment (based on the advice of a financial
advisor of national reputation) to be more favorable to its shareholders than
the terms of this Agreement.
(c) In addition to the obligations of Chilton County set forth in
paragraph (b) above, Chilton County shall immediately advise SouthFirst orally
and in writing of any request for information or of any takeover proposal, the
Material terms and conditions of such request, takeover proposal or inquiry, and
the identity of the person making any takeover proposal or inquiry. Chilton
County shall keep SouthFirst fully informed of the status and details (including
amendments or proposed amendments) of any such request, takeover proposal or
inquiry.
(d) Nothing contained in this Section 8.13 shall prohibit Chilton
County from making any disclosure to Chilton County's shareholders if, in the
opinion of the Chilton County Board of Directors, after consultation with
counsel, failure to so disclose would be inconsistent with its fiduciary duties
to its shareholders under applicable law; provided that Chilton County does not,
except as permitted by subparagraph (b) above, withdraw or modify, or propose to
withdraw or modify, its position with respect to the Merger or approve or
recommend, or propose to approve or recommend, a takeover proposal.
8.14 LISTING OF SHARES ON THE AMERICAN STOCK EXCHANGE. SouthFirst
undertakes, prior to the Effective Time, to cause the shares of SouthFirst
Common Stock to be issued pursuant to the Merger to be listed on the American
Stock Exchange.
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ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
9.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective
obligations of each Party to perform this Agreement and consummate the Merger
and the other transactions contemplated hereby are subject to the satisfaction
of the following conditions, unless waived by both Parties pursuant to Section
11.7 of this Agreement:
(a) SHAREHOLDER APPROVALS. The shareholders of Chilton
County, First Federal and SouthFirst shall have approved this Agreement, and the
consummation of the transactions contemplated hereby, including the Merger, as
and to the extent required by Law and the rules and regulations of the American
Stock Exchange.
(b) REGULATORY APPROVALS. All Consents of, filings and
registrations with, and notifications to, all Regulatory Authorities required
for consummation of the Merger shall have been obtained or made and shall be in
full force and effect and all waiting periods required by Law shall have
expired. No Consent obtained from any Regulatory Authority which is necessary to
consummate the transactions contemplated hereby shall be conditioned or
restricted in a manner (including requirements relating to the raising of
additional capital or the disposition of Assets) which in the reasonable
judgment of the Board of Directors of either Party would so Materially adversely
impact the economic or business benefits of the transactions contemplated by
this Agreement that, had such condition or requirement been known, such Party
would not, in its reasonable judgment, have entered into this Agreement.
(c) CONSENTS AND APPROVALS. Each Party shall have
obtained any and all Consents required for consummation of the Merger (other
than those referred to in Section 9.1(b) of this Agreement or listed in Section
9.1(c) of the Chilton County Disclosure Memorandum) or for the preventing of any
default under any Contract of such Party which, if not obtained or made, is
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on such Party.
(d) LEGAL PROCEEDINGS. No court or governmental or
regulatory authority of competent jurisdiction shall have enacted, issued,
promulgated, enforced, or entered any Law or Order (whether temporary,
preliminary, or permanent) or taken any other action which prohibits, restricts,
or makes illegal consummation of the transactions contemplated by this
Agreement.
(e) REGISTRATION STATEMENT. The Registration Statement
shall have been declared effective under the 1933 Act, and no stop orders
suspending the effectiveness of the Registration Statement shall have been
issued, and no action, suit, proceeding, or investigation by the SEC to suspend
the effectiveness thereof shall have been initiated and be continuing, and all
necessary approvals under state securities Laws or the 1933 Act or 1934 Act
relating to the issuance or trading of the shares of SouthFirst Common Stock
issuable pursuant to the Merger shall have been received.
(f) TAX MATTERS. Each Party shall have received a written
opinion or opinions from Smith, Gambrell & Russell, LLP, counsel to SouthFirst,
in a form reasonably satisfactory to such Parties (the "Tax Opinion"), to the
effect that (i) the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code and (ii) the exchange in the
Merger of shares of Chilton County Common Stock for SouthFirst Common Stock will
not give rise to gain or loss to the shareholders of Chilton County with respect
to such exchange (except to the extent of any cash received). In rendering such
Tax
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Opinion, such counsel shall be entitled to rely upon representations of officers
of Chilton County and SouthFirst reasonably satisfactory in form and substance
to such counsel.
9.2 CONDITIONS TO OBLIGATIONS OF SOUTHFIRST. The obligations of
SouthFirst to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by SouthFirst pursuant to Section 11.7(a) of
this Agreement:
(a) REPRESENTATIONS AND WARRANTIES. For purposes of this
Section 9.2(a), the accuracy of the representations and warranties of Chilton
County set forth in this Agreement shall be assessed as of the date of this
Agreement and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective Time
(provided that representations and warranties which are confined to a specified
date shall speak only as of such date). The representations and warranties of
Chilton County set forth in Section 5.3 of this Agreement shall be true and
correct (except for inaccuracies which are de minimus in amount, i.e., less than
$5,000). The representations and warranties of Chilton County set forth in
Sections 5.18, 5.19 and 5.20 of this Agreement shall be true and correct in all
Material respects. There shall not exist inaccuracies in the representations and
warranties of Chilton County set forth in this Agreement (including the
representations and warranties set forth in Sections 5.3, 5.18, 5.19, and 5.20)
such that the aggregate effect of such inaccuracies has, or is reasonably likely
to have, a Material Adverse Effect on Chilton County; provided that, for
purposes of this sentence only, those representations and warranties which are
qualified by references to "Material" or "Material Adverse Effect" shall be
deemed not to include such qualifications.
(b) PERFORMANCE OF AGREEMENTS AND COVENANTS. Each and all
of the agreements and covenants of Chilton County to be performed and complied
with pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied with in
all Material respects.
(c) CERTIFICATES. Chilton County shall have delivered to
SouthFirst (i) a certificate, dated as of the Effective Time and signed on its
behalf by its chief executive officer and its chief financial officer, to the
effect that the conditions of its obligations set forth in Section 9.2(a) and
9.2(b) of this Agreement have been satisfied, and (ii) certified copies of
resolutions duly adopted by Chilton County's Board of Directors and shareholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery, and performance of this Agreement, and the consummation of
the transactions contemplated hereby, all in such reasonable detail as
SouthFirst and its counsel shall request.
(d) LOAN LOSS RESERVES. Prior to the Effective Time,
the loan loss reserves of Chilton County shall be not less than $260,000.
(e) SALE OF CERTAIN SECURITIES. Prior to the Effective
Time, Chilton County shall cause to be sold or shall have placed binding and
confirmed orders to sell, as requested by SouthFirst, any of the investment
securities held in the "available for sale" investment portfolio of Chilton
County. Chilton County shall provide to SouthFirst evidence reasonably
satisfactory to SouthFirst that such sales have been effected or binding orders
for sale have been placed and confirmed on or before such date and time.
(f) LOSS ON INVESTMENT SECURITIES. Prior to the
Effective Time, the unrealized loss on investment securities held in the "held
to maturity" investment portfolio of Chilton County shall not exceed $500,000.
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(g) OPINION OF COUNSEL. SouthFirst shall have received a
written opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
("Reinhart Boerner"), special counsel to Chilton County, dated as of the
Effective Time, with respect to such matters and in such form as shall be agreed
upon between such firm and SouthFirst. As to matters involving the application
of laws of any jurisdiction other than the United States, and to the extent
reasonably satisfactory in form and scope to SouthFirst, Reinhart Boerner may
rely upon the opinions of other counsel, provided that copies of such opinions
are delivered to SouthFirst.
(h) FAIRNESS OPINION. SouthFirst shall have received from
Trident Financial Corporation a letter, dated not more than five Business Days
prior to the date of the Prospectus/Joint Proxy Statement, to the effect that,
in the opinion of such firm, the Exchange Ratio and the Cash Price Per Share are
fair, from a financial point of view, to the holders of SouthFirst Common Stock,
and such opinion shall not be withdrawn prior to the SouthFirst Shareholders'
meeting.
(i) EMPLOYMENT CONTRACT OF CERTAIN OFFICER OF CHILTON
COUNTY. SouthFirst shall provide Mr. Bobby R. Cook ("Cook"), and Cook shall
enter into, the new First Federal employment contract (attached hereto as
Exhibit 2) in exchange for the cancellation by Cook of his existing Chilton
County employment contract and corresponding change of control and severance pay
agreements.
(j) LIMITATION ON DISSENTING SHAREHOLDERS. The holders of
not more than 10% of all of the issued and outstanding shares of Chilton County
Common Stock shall have filed written notice of intent to demand payment for
their shares and voted against the Merger pursuant to the Dissenter Provisions.
9.3 CONDITIONS TO OBLIGATIONS OF CHILTON COUNTY. The obligations of
Chilton County to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by Chilton County pursuant to Section
11.7(b) of this Agreement:
(a) REPRESENTATIONS AND WARRANTIES. For purposes of this
Section 9.3(a), the accuracy of the representations and warranties of SouthFirst
set forth in this Agreement shall be assessed as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective Time
(provided that representations and warranties which are confined to a specified
date shall speak only as of such date). The representations and warranties of
SouthFirst set forth in Section 6.3 of this Agreement shall be true and correct
(except for inaccuracies which are de minimus in amount, i.e., less than
$5,000). The representations and warranties of SouthFirst set forth in Section
6.11 of this Agreement shall be true and correct in all Material respects. There
shall not exist inaccuracies in the representations and warranties of SouthFirst
set forth in this Agreement (including the representations and warranties set
forth in Sections 6.3 and 6.11) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a Material Adverse Effect on
SouthFirst; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by references to "Material"
or "Material Adverse Effect" shall be deemed not to include such qualifications.
(b) PERFORMANCE OF AGREEMENTS AND COVENANTS. Each and all
of the agreements and covenants of SouthFirst to be performed and complied with
pursuant to this Agreement and the other agreements contemplated hereby prior to
the Effective Time shall have been duly performed and complied with in all
Material respects.
(c) CERTIFICATES. SouthFirst shall have delivered to
Chilton County (i) a certificate, dated as of the Effective Time and signed on
its behalf by its chief executive officer and its chief financial officer, to
the effect that the conditions of its obligations set forth in Section 9.3(a)
and 9.3(b) of this Agreement have
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been satisfied, and (ii) certified copies of resolutions duly adopted by
SouthFirst's Board of Directors and shareholders evidencing the taking of all
corporate action necessary to authorize the execution, delivery, and performance
of this Agreement, and the consummation of the transactions contemplated hereby,
all in such reasonable detail as First Federal and its counsel shall request.
(d) FAIRNESS OPINION. Chilton County shall have received
from Professional Bank Services, Inc. a letter, dated not more than five
Business Days prior to the date of the Prospectus/Joint Proxy Statement, to the
effect that, in the opinion of such firm, the Exchange Ratio and the Cash Price
Per Share are fair, from a financial point of view, to the holders of Chilton
County Common Stock, and such opinion shall not be withdrawn prior to the
Chilton County Shareholders' Meeting.
(e) PAYMENT OF CONSIDERATION. SouthFirst shall have
delivered to Exchange Agent the consideration to be paid to holders of the
shares of Chilton County Common Stock pursuant to Sections 3.1 and 3.4 of this
Agreement.
(f) OPINION OF COUNSEL. Chilton County shall have
received a written opinion of Smith, Gambrell & Russell, LLP, counsel to
SouthFirst, dated as of the Effective Time, with respect to such matters and in
such form as shall be agreed upon between such firm and Chilton County.
ARTICLE 10
TERMINATION
10.1 TERMINATION. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement by the
shareholders of Chilton County, this Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time:
(a) By mutual written consent of SouthFirst and Chilton
County; or
(b) By either SouthFirst or Chilton County if (i) the
Merger shall not have been consummated on or before October 31, 1997 (the
"Termination Date") provided the terminating party shall not have breached in
any material respect its obligations under this Agreement in a manner that
proximately contributed to the failure to consummate the Merger by such date,
(ii) any governmental or regulatory body, the consent of which is a condition to
the obligations of SouthFirst and Chilton County to consummate the transactions
contemplated hereby, shall have determined not to grant its consent and all
appeals of such determination shall have been taken and have been unsuccessful,
or (iii) any court of competent jurisdiction in the United States or any State
shall have issued an order, judgment or decree (other than a temporary
restraining order) restraining, enjoining or otherwise prohibiting the Merger
and such order, judgment or decree shall have become final and nonappealable.
(c) By SouthFirst:
(i) if any event shall have occurred as a result of which
any condition set forth in Sections 9.1 or 9.2 is no
longer capable of being satisfied; or
(ii) if there has been a breach by Chilton County of any
representation or warranty contained in this
Agreement which would have or would be reasonably
likely to have a Material Adverse Effect on the
assets, liabilities, financial condition, results of
operations, business or prospects of Chilton County,
or there has been a Material breach of any of the
covenants or agreements set forth in this Agreement
on the part
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of Chilton County, which breach is not curable, or,
if curable, is not cured within 20 days after written
notice of such breach is given by SouthFirst to
Chilton County; or
(iii) if Chilton County (or its Board of Directors) shall
have authorized, recommended, proposed or publicly
announced its intention to enter into a superior
proposal (as defined in Section 8.13(b)) or a
Competing Transaction (as hereinafter defined) which
has not been consented to in writing by SouthFirst;
or
(iv) if the Board of Directors of Chilton County shall
have withdrawn or materially modified its
authorization, approval or recommendation to the
holders of Chilton County Common Stock with respect
to the Merger or this Agreement in a manner adverse
to SouthFirst, unless the fairness opinion pursuant
to Section 9.3(d) shall have been withdrawn or, after
receipt of a fairness opinion pursuant to Section
9.3(d), shall have failed to make the favorable
recommendation required by Section 8.1(c).
(d) By Chilton County:
(i) if any event shall have occurred as a result of which
any condition set forth in Sections 9.1 or 9.3 is no
longer capable of being satisfied; or
(ii) if there has been a breach by SouthFirst of any
representation or warranty contained in this
Agreement which would have or would be reasonably
likely to have a Material Adverse Effect on the
assets, liabilities, financial condition, results of
operations, business or prospects of SouthFirst and
its Subsidiaries taken as a whole, or there has been
a Material breach of any of the covenants or
agreements set forth in this Agreement on the part of
SouthFirst which breach is not curable or, if
curable, is not cured within 20 days after written
notice of such breach is given by Chilton County to
SouthFirst; or
(iii) if the Board of Directors of SouthFirst shall have
withdrawn or materially modified its authorization,
approval or recommendation to the holders of
SouthFirst Common Stock with respect to the Merger or
this Agreement in a manner adverse to Chilton County,
unless the fairness opinion pursuant to Section
9.2(h) shall have been withdrawn or, after receipt of
a fairness opinion pursuant to Section 9.2(h), shall
have failed to make the favorable recommendation
required by Section 8.1(c).
For purposes of this Agreement, the term "Competing Transaction" means any of
the following involving Chilton County (other than the transactions contemplated
by this Agreement): (1) any merger, consolidation, share exchange, business
combination, or other similar transaction; (2) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 15% or more of the assets of
Chilton County in a single transaction or series of transactions to the same
person, entity or group; or (3) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
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ARTICLE 11
MISCELLANEOUS
11.1 DEFINITIONS.
(a) Except as otherwise provided herein, the capitalized terms set
forth below shall have the following meanings:
"1933 ACT" shall mean the Securities Act of 1933, as amended.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"ACQUISITION PROPOSAL" with respect to a Party shall mean any
tender offer or exchange offer or any proposal for a merger, acquisition of all
of the stock or assets of, or other business combination involving such Party or
any of its Subsidiaries or any proposal or offer to acquire in any manner a
substantial equity interest in, or a substantial portion of the assets of, such
Party or any of its Subsidiaries (other than the transactions contemplated or
permitted by this Agreement).
"AFFILIATE" of a Person shall mean: (i) any other Person
directly, or indirectly through one or more intermediaries, controlling,
controlled by or under common control with such Person or (ii) any officer,
director, partner, employer, or direct or indirect owner of any 10% or greater
equity or voting interest of such Person.
"AGGREGATE CASH AMOUNT" shall have the meaning set forth in
Section 3.1(e) hereof.
"AGREEMENT" shall mean this Amended and Restated Agreement and
Plan of Merger, including the Exhibits delivered pursuant hereto and
incorporated herein by reference.
"ALLOWANCE" shall have the meaning set forth in Sections 5.8
and 6.8 hereof.
"ASSETS" of a Person shall mean all of the assets, properties,
businesses, and rights of such Person of every kind, nature, character, and
description, whether real, personal, or mixed, tangible or intangible, accrued
or contingent, or otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not carried on the books
and records of such Person, and whether or not owned in the name of such Person
or any Affiliate of such Person and wherever located.
"AVERAGE CLOSING PRICE" shall have the meaning set forth in
Section 3.1(d) hereof.
"BUSINESS DAY(S)" shall have the meaning set forth in Section
3.1(d) hereof.
"CASH ELECTION SHARES" shall have the meaning set forth in
Section 3.1(e) hereof.
"CHILTON COUNTY" shall have the meaning set forth in the first
paragraph hereof.
"CHILTON COUNTY BENEFITS PLANS" shall have the meaning set
forth in Section 5.13(a) hereof.
"CHILTON COUNTY COMMON STOCK" shall mean the $.01 par value
common shares of Chilton County.
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"CHILTON COUNTY CONTRACT" shall have the meaning set forth in
Section 5.14 hereof.
"CHILTON COUNTY DISCLOSURE MEMORANDUM" shall mean the written
information entitled "Chilton County Disclosure Memorandum" delivered prior to
the date of the Agreement and Plan of Merger by and among SouthFirst, First
Federal and Chilton County dated April 14, 1997, which describes in reasonable
detail to SouthFirst the matters contained therein and, with respect to each
disclosure made therein, specifically referencing each Section of this Agreement
under which such disclosure is being made. Information disclosed with respect to
one Section shall not be deemed to be disclosed for purposes of any other
Section not specifically referenced with respect thereto.
"CHILTON COUNTY ERISA PLAN" shall have the meaning set forth in
Section 5.13(a) hereof.
"CHILTON COUNTY FINANCIAL STATEMENTS" shall mean the balance
sheets (including related notes and schedules, if any) of Chilton County as of
June 30, 1997, 1996 and 1995, and the related statements of income, changes in
shareholders' equity, and cash flows (including related notes and schedules, if
any) for each of the three fiscal years ended June 30, 1997, 1996 and 1995.
"CHILTON COUNTY OPTIONS" shall have the meaning set forth in
Section 3.5 hereof.
"CHILTON COUNTY SHAREHOLDERS' MEETING" shall mean the meeting
of the shareholders of Chilton County to be held pursuant to Section 8.1 of this
Agreement, including any adjournment or adjournments thereof.
"CHILTON COUNTY STOCK PLANS" shall mean the existing stock
option and other stock-based compensation plans and warrant instruments of
Chilton County set forth in Section 3.5 of the Chilton County Disclosure
Memorandum.
"CLOSING" shall mean the closing of the transactions
contemplated hereby, as described in Section 1.2 of this Agreement.
"CLOSING DATE" shall mean the date on which the Closing occurs.
"COMPETING TRANSACTION" shall have the meaning set forth in
Section 10.1 hereof.
"CONSENT" shall mean any consent, approval, authorization,
clearance, exemption, waiver, or similar affirmation by any Person.
"CONTRACT" shall mean any written: agreement, commitment,
contract, note, bond, mortgage, indenture, instrument, lease, obligation,
license, plan, of any kind or character, or other written document to which any
Person is a party or that is binding on any Person or its capital stock or
Assets.
"DEFAULT" shall mean (i) any breach or violation of or default
under any Contract, or (ii) any occurrence of any event that with the passage of
time or the giving of notice or both would constitute a breach or violation of
or default under any Contract, or (iii) any occurrence of any event that with or
without the passage of time or the giving of notice would give rise to a right
to terminate or revoke, change the current terms of, or renegotiate, or to
accelerate, increase, or impose any Liability under, any Contract, Order, where,
in any such event, such default is reasonably likely to have a Material Adverse
Effect on a Party.
"DERIVATIVES CONTRACT" shall have the meaning set forth in
Section 5.20 hereof.
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"DISSENTER PROVISIONS" shall have the meaning set forth in
Section 3.1(b) hereof.
"EFFECTIVE TIME" shall have the meaning set forth in Section
1.3 hereof.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"EXCHANGE AGENT" shall mean a bank or trust company selected by
SouthFirst to act as exchange agent to effectuate the delivery of the Merger
consideration to holders of Chilton County Common Stock pursuant to Section 4.1
hereof.
"EXCHANGE RATIO" shall have the meaning set forth in Section
3.1(d) hereof.
"EXHIBITS" 1 through 3, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be referred to
in this Agreement and any other related instrument or document without being
attached hereto.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"FIRST FEDERAL" shall have the meaning set forth in the first
paragraph hereof.
"GAAP" shall mean generally accepted accounting principles in
the United States consistently applied during the periods involved applicable to
banks or bank holding companies, as the case may be.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section
8.13(a) hereof.
"INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of
1986, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the Internal Revenue Service.
"KNOWLEDGE" as used with respect to a Person (including
references to such Person being aware of a particular matter) shall mean the
personal knowledge of the chairman, president, chief financial officer, chief
accounting officer, chief credit officer, general counsel, any assistant or
deputy general counsel, or any senior or executive vice president of such Person
and the knowledge of any such persons obtained or which would have been obtained
from a reasonable investigation.
"LAW" shall mean any code, law, ordinance, regulation,
reporting or licensing requirement, rule, or statute applicable to a Person or
its Assets, Liabilities, or business, including those promulgated, interpreted,
or enforced by any Regulatory Authority.
"LIABILITY" shall mean any direct or indirect, primary or
secondary, liability, indebtedness, obligation, penalty, cost or expense
(including costs of investigation, collection and defense), claim, deficiency,
guaranty or endorsement of or by any Person (other than endorsement of notes,
bills, checks, and drafts presented for collection or deposit in the ordinary
course of business) of any type, whether accrued, absolute or contingent,
liquidated or unliquidated, matured or unmatured, or otherwise.
"LIEN" with respect to any Asset shall mean any conditional
sale agreement, default of title, easement, encroachment, encumbrance,
hypothecation, infringement, lien, mortgage, pledge,
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reservation, restriction, security interest, title retention, or other security
arrangement, or any adverse right or interest, charge, or claim of any nature
whatsoever of, on, or with respect to any property or property interest, other
than (i) Liens for current property Taxes not yet due and payable,(ii) for
Chilton County or First Federal, pledges to secure deposits, and (iii) other
Liens incurred in the ordinary course of the banking business.
"LITIGATION" shall mean any action, arbitration, cause of
action, claim, complaint, criminal prosecution, demand letter, governmental or
other examination or investigation, hearing, inquiry, administrative or other
proceeding, or notice by any Person alleging potential Liability.
"LOAN PROPERTY" shall mean any property owned, leased, or
operated by the Party in question or by any of its Subsidiaries or in which such
Party or its Subsidiary holds a security or other interest (including an
interest in a fiduciary capacity) where required by the context, includes the
owner or operator of such property, but only with respect to such property.
"MATERIAL" shall be determined in light of the facts and
circumstances of the matter in question; provided that any specific monetary
amount stated in this Agreement shall determine materiality in that instance.
"MATERIAL ADVERSE EFFECT" on a Party shall mean an event,
change, or occurrence which, individually or together with any other event,
change, or occurrence, has a Material adverse impact on (i) the financial
position, business, or results of operations of such Party and its Subsidiaries,
taken as a whole, or (ii) the ability of such Party to perform its obligations
under this Agreement or to consummate the Merger or the other transactions
contemplated by this Agreement, provided that "Material Adverse Effect" shall
not be deemed to include the impact of (a) changes in banking and similar Laws
of general applicability or interpretations thereof by courts or governmental
authorities, (b) changes in GAAP or regulatory accounting principles generally
applicable to banks and their holding companies, (c) actions and omissions of a
Party (or any of its Subsidiaries) taken with the prior informed consent of the
other Party in contemplation of the transactions contemplated hereby, (d)
circumstances affecting regional bank holding companies generally, and (e) the
Merger and compliance with the provisions of this Agreement on the operating
performance of the Parties.
"MERGER" shall mean the merger of Chilton County with and into
First Federal referred to in the Preamble hereof.
"OTS" shall mean the Office of Thrift Supervision.
"ORDER" shall mean any decree, injunction, judgment, order,
decision or award, ruling, or writ of any federal, state, local, or foreign or
other court, arbitrator, mediator, tribunal, administrative agency, or
Regulatory Authority.
"PARTICIPATION FACILITY" shall mean any facility or property in
which the Party in question or any of its Subsidiaries participates in the
management and, where required by the context, said term means the owner or
operator of such facility or property, but only with respect to such facility or
property.
"PARTY" shall mean either Chilton County, First Federal or
SouthFirst, and "Parties" shall mean Chilton County, First Federal and
SouthFirst.
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"PERMIT" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing, franchise,
license, notice, permit, or right to which any Person is a party or that is or
may be binding upon or inure to the benefit of any Person.
"PERSON" shall mean a natural person or any legal, commercial,
or governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited Liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"PROSPECTUS/JOINT PROXY STATEMENT" shall mean both the
prospectus used by SouthFirst to offer and sell shares of SouthFirst Common
Stock to holders of Chilton County Common Stock and the proxy statement used by
each of Chilton County and SouthFirst to solicit the approval of their
shareholders of the transactions contemplated by this Agreement.
"REGISTRATION STATEMENT" shall mean the Registration Statement
on Form S-4, or other appropriate form, including any pre-effective or
post-effective amendments or supplements thereto, filed with the SEC by
SouthFirst under the 1933 Act with respect to the shares of SouthFirst Common
Stock to be issued to the shareholders of Chilton County in connection with the
transactions contemplated by this Agreement.
"REGULATORY AUTHORITIES" shall mean, collectively, the Federal
Trade Commission, the United States Department of Justice, the Board of the
Governors of the Federal Reserve System, the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the SEC, the American Stock Exchange and all state regulatory
agencies having jurisdiction over the Parties and their respective Subsidiaries.
"RIGHT(S)" shall mean all calls, commitments, options, rights
to subscribe to, scrip, understandings, warrants, or other binding obligations
of any character whatsoever relating to, or securities or rights convertible
into or exchangeable for, shares of the capital stock of a Person or by which a
Person is or any contracts, commitments, or other arrangements may be bound to
issue additional shares of its capital stock, or options, warrants, rights to
purchase or acquire any additional shares of the capital stock.
"SEC DOCUMENTS" shall mean all forms, proxy statements,
registration statements, reports, schedules, and other documents filed, or
required to be filed, by a Party or any of its Subsidiaries with any Regulatory
Authority pursuant to the Securities Laws.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES LAWS" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Trust Indenture Act of 1939, as
amended, and the rules and regulations of any Regulatory Authority promulgated
thereunder.
"SOUTHFIRST" shall have the meaning set forth in the first
paragraph hereof.
"SOUTHFIRST CAPITAL STOCK" shall mean, collectively, the
SouthFirst Common Stock, the SouthFirst preferred stock, and any other class or
series of capital stock of SouthFirst.
"SOUTHFIRST COMMON STOCK" shall mean the $.01 par value common
stock of SouthFirst.
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"SOUTHFIRST COMPANIES" shall mean, collectively, SouthFirst and
all SouthFirst Subsidiaries.
"SOUTHFIRST DISCLOSURE MEMORANDUM" shall mean the written
information entitled "SouthFirst Disclosure Memorandum" delivered prior to the
date of the Agreement and Plan of Merger by and among SouthFirst, First Federal
and Chilton County dated April 14, 1997, which describes in reasonable detail to
Chilton County the matters contained therein and, with respect to each
disclosure made therein, specifically referencing each Section of this Agreement
under which such disclosure is being made.
"SOUTHFIRST FINANCIAL STATEMENTS" shall mean (i) the
consolidated statements of condition (including related notes and schedules, if
any) as of June 30, 1997 and as of September 31, 1996, 1995 and 1994, and the
related statements of income, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) for the 9 months ended June 30,
1997, and for each of the three years ended September 31, 1996, 1995 and 1994,
as filed by SouthFirst in SEC Documents, and (ii) the consolidated statements of
condition of SouthFirst (including related notes and schedules, if any) and
related statements of income, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) included in SEC Documents filed
with respect to periods ended subsequent to June 30, 1997.
"SOUTHFIRST SEC REPORTS" shall have the meaning set forth in
Section 6.5(a) hereof.
"SOUTHFIRST SHAREHOLDERS' MEETING" shall mean the meeting of
the shareholders of SouthFirst to be held pursuant to Section 8.1 of this
Agreement, including any adjournment or adjournments thereof.
"SOUTHFIRST STOCK PLANS" shall mean existing stock option and
other stock-based compensation plans and warrant instruments of SouthFirst set
forth in Section 6.3(a) of the SouthFirst Disclosure Memorandum.
"SOUTHFIRST SUBSIDIARIES" shall mean the Subsidiaries of
SouthFirst, which shall include any corporation, bank, savings association, or
other organization acquired as a Subsidiary of SouthFirst in the future and
owned by SouthFirst at the Effective Time.
"SUBSIDIARIES" shall mean all those corporations, banks,
associations, or other entities of which the entity in question owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent; provided, there
shall not be included any such entity acquired through foreclosure or any such
entity the equity securities of which are owned or controlled in a fiduciary
capacity.
"SURVIVING BANK" shall mean First Federal as the surviving
savings association resulting from the Merger.
"TAX OPINION" shall have the meaning set forth in Section 9.1
(f) hereof.
"TAX RETURN" shall mean any report, return, information return,
or other information required to be supplied to a taxing authority in connection
with Taxes, including any return of an affiliated or combined or unitary group
that includes a Party or Subsidiaries of SouthFirst.
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"TAX(ES)" shall mean all federal, state, local, and foreign
taxes, charges, fees, levies, imposts, duties, or other assessments, including
income, gross receipts, excise, employment, sales, use, transfer, license,
payroll, franchise, severance, stamp, occupation, windfall profits,
environmental, federal highway use, commercial rent, customs duties, capital
stock, paid-up capital, profits, withholding, Social Security, single business
and unemployment, disability, real property, personal property, registration, ad
valorem, value added, alternative or add-on minimum, estimated, or other tax or
governmental fee of any kind whatsoever, imposed or required to be withheld by
the United States or any state, local, foreign government or subdivision or
agency thereof, including any interest, penalties or additions thereto.
"TAXABLE PERIOD" shall mean any period prescribed by any
governmental authority, including the United States or any state, local, foreign
government or subdivision or agency thereof for which a Tax Return is required
to be filed or Tax is required to be paid.
"TERMINATION FEE" shall have the meaning set forth in Section
11.2(b) hereof.
"THRESHOLD CASH AMOUNT" shall have the meaning set forth in
Section 3.1(e) hereof.
"THRESHOLD STOCK AMOUNT" shall have the meaning set forth in
Section 3.1(e) hereof.
"TOTAL MERGER CONSIDERATION" shall equal the sum of (1)(a) the
Cash Price Per Share divided by the sum of the Cash Price Per Share and the
Stock Price Per Share, (b) multiplied by the product of the Chilton County
Options multiplied by 2/3 (the "Fully Diluted Share Equivalents"), (c)
multiplied by the Stock Price Per Share and (2)(a) the Stock Price Per Share
divided by the sum of the Cash Price Per Share and the Stock Price Per Share,
(b) multiplied by the Fully Diluted Share Equivalents, (c) multiplied by the
Cash Price Per Share.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fully- Fully-
Cash Diluted Stock Stock Price Diluted Cash
Total ---- -----------
Merger = Price X Share X Price + Cash + X Share X Price
Considera ----- Equivalents Stock
tion CashStock Price Price Equivalents
PricePrice
</TABLE>
(b) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes," or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 FEES AND EXPENSES.
(a) Except as otherwise provided in this Section 11.2, each of SouthFirst
and Chilton County shall bear and pay all direct costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated hereunder,
including filing, registration, and application fees, printing fees, and fees
and expenses of its own financial or other consultants, investment bankers,
accountants, and
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counsel, except that each of SouthFirst and Chilton County shall bear and pay
one-half (1/2) of the printing costs incurred in connection with the printing of
the Prospectus/Joint Proxy Statement.
(b) Chilton County acknowledges that SouthFirst has spent, and will be
required to spend, substantial time and effort in examining the business,
properties, affairs, financial condition and prospects of Chilton County, has
incurred, and will continue to incur, substantial fees and expenses in
connection with such examination, the preparation of this Agreement and the
accomplishment of the transactions contemplated hereunder, and will be unable to
evaluate and, possibly, make investments in or acquire other entities due to the
limited number of personnel available for such purpose and the constraints of
time. Therefore, to induce SouthFirst to enter this Agreement,
(i) If SouthFirst terminates this Agreement pursuant to:
(a) Section 10.1(c)(i) or (c)(ii) by reason of the
failure to meet any condition contained in Section
9.2(a), which was not previously waived by
SouthFirst, or in Section 9.2(b) due to Chilton
County's knowing and intentional misrepresentation or
knowing and intentional breach of warranty or breach
of any covenant or agreement and at the time of such
knowing and intentional misrepresentation or breach,
Chilton County, had or had previously had between the
date hereof and such time, directly or indirectly,
through any officer, director, employee, agent,
investment banker, financial consultant, attorney,
accountant or other representative of Chilton County,
verbal or written contact, dialogue or discussions
with any third party regarding a Competing
Transaction;
(b) Section 10.1(c)(iv);
(c) Section 10.1(c)(iii) and within nine months from the
Termination Date a superior proposal (as defined in
Section 8.13(b)) or a Competing Transaction is
consummated or Chilton County shall have entered into
an agreement which if consummated would constitute a
Competing Transaction; or
(ii) If Chilton County terminates this Agreement pursuant
to Section 10.1(d) because this Agreement did not
receive the requisite vote of the holders of Chilton
County Common Stock and within nine months from the
Termination Date a superior proposal (as defined in
Section 8.13(b)) or a Competing Transaction is
consummated or Chilton County shall have entered into
an agreement which if consummated would constitute a
Competing Transaction;
then Chilton County shall pay to SouthFirst a fee in the amount
of $270,000 in addition to all reasonable out-of-pocket
expenses and fees (including, without limitation, fees and
expenses payable to all investment banking firms and their
respective agents and counsel, and all fees of counsel,
accountants, experts and consultants to SouthFirst) actually
incurred by SouthFirst or on its behalf in connection with the
Merger and all transactions contemplated by this Agreement (the
"Termination Fee"). Upon payment of the Termination Fee, which
shall be considered full and complete liquidated damages,
Chilton County shall have no further liability to SouthFirst at
law or equity. The Termination Fee shall be payable to
SouthFirst notwithstanding that any action taken by the Board
of Directors of Chilton County which may give rise to the
obligation to pay the Termination Fee may have been taken in
accordance with the fiduciary duties of the
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Board of Directors. Any payment required pursuant to this
Section 11.2 shall be made as promptly as practicable, but in
no event later than two Business Days after the date due and
shall be made by wire transfer of immediately available funds
to an account designated by SouthFirst. In the event that
SouthFirst is entitled to the Termination Fee, Chilton County
shall also pay to SouthFirst interest at a simple interest rate
per annum equal to the highest "prime rate" of interest
published from time to time in the "Money Rates" section of the
Wall Street Journal on any amounts that are not paid when due,
plus all costs and expenses in connection with or arising out
of the enforcement of the obligation of Chilton County to pay
the Termination Fee or such interest.
(iii) In the event that SouthFirst terminates this
Agreement pursuant to Section 10.1(c) by reason of
the failure to meet the conditions contained in
Section 9.1(a) or Sections 9.2(a), which were not
previously waived by SouthFirst or (b) due to Chilton
County's knowing or intentional misrepresentation or
knowing and intentional breach of warranty or breach
of any covenant or agreement, and Chilton County is
not obligated to pay the Termination Fee either at
such time or in the future, then Chilton County shall
pay (but not as liquidated damages and Chilton County
shall not be relieved or released from any other
damages or liabilities hereunder) SouthFirst on
demand, in same day funds, all reasonable
out-of-pocket expenses and fees (including, without
limitation, fees and expenses payable to all
investment banking firms and their respective agents
and counsel, and all fees of counsel, accountants,
experts and consultants to SouthFirst) actually
incurred by SouthFirst or on its behalf in connection
with the Merger and all transactions contemplated by
this Agreement but in no event more than $300,000;
(iv) In the event that Chilton County terminates this
Agreement pursuant to Section 10.1(d) by reason of
the failure to meet any condition contained in
Section 9.1(a) or Sections 9.3(a), which were not
previously waived by Chilton County or (b) due to
SouthFirst's knowing and intentional
misrepresentation or knowing and intentional breach
of warranty or breach of any covenant or agreement,
then SouthFirst shall pay (but not as liquidated
damages and SouthFirst shall not be relieved or
released from any other damages or liabilities
hereunder) Chilton County on demand, in same day
funds, all reasonable out-of-pocket expenses and fees
(including, without limitation, fees and expenses
payable to all investment banking firms and their
respective agents and counsel, and all fees of
counsel, accountants, experts and consultants of
Chilton County) actually incurred by Chilton County
or on its behalf in connection with the Merger and
all transactions contemplated by this Agreement, but
in no event more than $300,000;
11.3 BROKERS AND FINDERS. Except for Professional Bank Services, Inc. as
to Chilton County and except for Trident Financial Corporation as to SouthFirst,
each of the Parties represents and warrants that neither it nor any of its
officers, directors, employees, or Affiliates has employed any broker or finder
in connection with this Agreement or the transactions contemplated hereby. In
the event of a claim by any broker or finder based upon his or its representing
or being retained by or allegedly representing or being retained by Chilton
County or SouthFirst, each of Chilton County and SouthFirst, as the case may be,
agrees to indemnify and hold the other Party harmless of and from any Liability
in respect of any such claim.
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11.4 ENTIRE AGREEMENT. Except as otherwise expressly provided herein, this
Agreement constitutes the entire agreement between the Parties with respect to
the transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. Nothing in this Agreement
expressed or implied, is intended to confer upon any Person, other than the
Parties or their respective successors, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
11.5 AMENDMENTS. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of the Boards of Directors of each of the Parties, whether before or after
shareholder approval of this Agreement has been obtained; provided, that after
any such approval by the holders of shares of Chilton County Common Stock, there
shall be made no amendment that reduces or modifies in any Material respect the
consideration to be received by holders of shares of Chilton County Common Stock
without the further approval of such shareholders.
11.6 OBLIGATIONS OF SOUTHFIRST. Whenever this Agreement requires
SouthFirst (including the Surviving Bank) to take any action, such requirement
shall be deemed to include an undertaking by SouthFirst to cause the SouthFirst
Subsidiaries to take such action.
11.7 WAIVERS.
(a) Prior to or at the Effective Time, SouthFirst, acting through its
Board of Directors, chief executive officer, president or other authorized
officer, shall have the right to waive any default in the performance of any
term of this Agreement by Chilton County, to waive or extend the time for the
compliance or fulfillment by Chilton County of any and all of its obligations
under this Agreement, and to waive any or all of the conditions precedent to the
obligations of SouthFirst under this Agreement, except any condition which, if
not satisfied, would result in the violation of any Law. No such waiver shall be
effective unless in writing signed by a duly authorized officer of SouthFirst.
(b) Prior to or at the Effective Time, Chilton County, acting through its
Board of Directors, chief executive officer, president or other authorized
officer, shall have the right to waive any default in the performance of any
term of this Agreement by SouthFirst, to waive or extend the time for the
compliance or fulfillment by SouthFirst of any and all of its obligations under
this Agreement, and to waive any or all of the conditions precedent to the
obligations of Chilton County under this Agreement, except any condition which,
if not satisfied, would result in the violation of any Law. No such waiver shall
be effective unless in writing signed by a duly authorized officer of Chilton
County.
(c) The failure of any Party at any time or times to require performance
of any provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any condition or of the breach of any term contained in this Agreement
in one or more instances shall be deemed to be or construed as a further or
continuing waiver of such condition or breach or a waiver of any other condition
or of the breach of any other term of this Agreement.
11.8 ASSIGNMENT. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by the Parties and their respective successors and assigns.
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11.9 NOTICES. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other address as may be provided hereunder), and shall be deemed to
have been delivered as of the date so delivered:
Chilton County: 102 5th Street North
Clanton, Alabama 35046
Telecopy Number: 205-755-3960
Attention: Bobby R. Cook
President and Chief Executive Officer
Copy to Counsel Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
601 Pennsylvania Avenue, N.W.
North Building - Suite 750
Washington, D.C. 20004-2612
Telecopy Number: 202-393-0796
Attention: Edward B. Crosland, Jr.
SouthFirst 126 North Norton Avenue
and First Federal: Sylacauga, Alabama 35150
Telecopy Number: 205-245-6341
Attention: Donald C. Stroup
President and Chief Executive Officer
Copy to: Joe K. McArthur, Vice President and
Chief Financial Officer
Copy to Counsel: Smith, Gambrell & Russell, LLP
3343 Peachtree Road, NE
Suite 1800
Atlanta, Georgia 30326
Telecopy Number: 404-264-2652
Attention: W. Thomas King
11.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 CAPTIONS. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
11.12 ENFORCEMENT OF AGREEMENT. The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms
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and provisions hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
11.13 SURVIVAL. The respective representations, warranties, obligations,
covenants and agreements of the Parties shall not survive the Effective Time or
the termination and abandonment of this Agreement, except that (i) Articles Two,
Three and Eleven and Sections 8.5(b), 8.11, 8.12 and 9.1(f) of this Agreement
shall survive the Effective Time; and (ii) Sections 8.5(b), 8.13, 10.1, 11.2,
11.13 and 11.14 shall survive the termination and abandonment of this Agreement;
provided, however, that the foregoing shall not relieve any Party for liability
for fraud, deception or intentional misrepresentation.
11.14 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
11.15 GOVERNING LAW. This Agreement and the legal relations between the
Parties shall be governed by and construed in accordance with the laws of
Alabama without taking into account a provision regarding choice of law, except
to the extent certain matters may be governed by federal law by reason of
preemption.
11.16 LIQUIDATION ACCOUNT. Upon consummation of the Merger, the
liquidation account for the benefit of certain savings account holders of
Chilton County shall be assumed and maintained by the Surviving Bank pursuant to
applicable rules and regulations of the OTS, and such account holders shall have
no further right, title or interest in the Chilton County liquidation account.
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IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto as of the day and year first above written.
SOUTHFIRST BANCSHARES, INC.
By: /s/ Paul A. Brown
-------------------------------------------
Name: Paul A. Brown
Title: Chairman
By: /s/ Donald C. Stroup
-------------------------------------------
Name: Donald C. Stroup
Title: President and Chief Executive Officer
FIRST FEDERAL OF THE SOUTH
By: /s/ Paul A. Brown
-------------------------------------------
Name: Paul A. Brown
Title: Chairman
By: /s/ Donald C. Stroup
-------------------------------------------
Name: Donald C. Stroup
Title: President and Chief Executive Officer
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHILTON COUNTY
By: /s/ L. Neal Bice
-------------------------------------------
Name: L. Neal Bice
Title: Chairman
By: /s/ Bobby R. Cook
-------------------------------------------
Name: Bobby R. Cook
Title: President and Chief Executive Officer
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EXHIBIT 1
ELECTION FORM
In connection with the Amended and Restated Agreement and Plan of Merger (the
"Agreement") by and among First Federal Savings and Loan Association of Chilton
County ("Chilton County"), First Federal of the South ("First Federal") and
SouthFirst Bancshares, Inc. ("SouthFirst"), holders of Chilton County Common
Stock have the right to elect and receive either (i) cash at the Cash Price Per
Share (i.e., $31.50), (ii) shares of SouthFirst Common Stock or (iii) any
combination of cash and shares of Southfirst Common Stock for each share of
Chilton County Common Stock held by such holder (subject to certain limitations
summarized below which are detailed more fully in the Prospectus/Joint Proxy
Statement).
Pursuant to the Merger Agreement, 50% of the Total Merger Consideration shall
be paid in the form of cash at the Cash Price Per Share and 50% of the Total
Merger Consideration shall be paid in the form of SouthFirst Common Stock at
the Stock Price Per Share. As a result of the foregoing limitations, a holder
of Chilton County Common Stock cannot be guaranteed that he will receive the
form of consideration consistent with his or her election (i.e., all cash, all
stock or a particular combination of cash and stock). As soon as practicable
after the Effective Time, SouthFirst will send to the holders of Chilton County
Common Stock a letter of transmittal informing them of the form(s) of
consideration they shall be receiving and providing instructions for exchanging
their shares of Chilton Common Stock for cash and/or shares of SouthFirst
Common Stock, as appropriate.
The above summary is not intended to be complete and is qualified in all
respects by reference to the more detailed information contained elsewhere in
the Joint Proxy Statement/Prospectus. All capitalized terms used herein (unless
otherwise provided herein) are defined in the Joint Proxy Statement/Prospectus.
Please indicate your election:
________ I hereby elect to receive cash at the Cash Price Per Share in
exchange for ______ of my shares of Chilton County Common Stock.
________ I hereby elect to receive Southfirst Common Stock at the Stock
Price Per Share in exchange for ______ of my shares of Chilton
County Common Stock.
Please mark this election card above and then date and sign this election card
below exactly as your name appears hereon. When shares are held jointly, both
holders should sign. When signing as attorney, executor, administrator, trustee,
custodian or guardian, please give your full title. If the holder is a
corporation or partnership, the full corporate or partnership name should be
signed by a duly authorized officer.
---------------------------------------
Signature
---------------------------------------
Signature, if shares held jointly
Date: _______________
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS ELECTION
CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IN THE EVENT YOU DO NOT COMPLETE THIS ELECTION FORM PRIOR TO 4:00 P.M. ON
OCTOBER 28, 1997, YOU WILL RECEIVE CASH AT THE CASH PRICE PER SHARE IN EXCHANGE
FOR ALL OF YOUR SHARES OF CHILTON COUNTY COMMON STOCK.
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EXHIBIT 2
FIRST FEDERAL OF THE SOUTH
EMPLOYMENT AGREEMENT
_____________ ___, 1997
(BOBBY R. COOK)
THIS AGREEMENT is entered into as of the ___ day of __________,
1997 (the "Effective Date"), by and between First Federal of the South (the
"Association") and Bobby R. Cook (the "Employee").
WHEREAS, the Employee has heretofore been employed by First Federal
Savings and Loan Association of Chilton County as President and Chief Executive
Officer and is experienced in all phases of the business of banking; and
WHEREAS, the parties desire by this writing to establish and to set
forth the employment relationship between the Association and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is hereby employed as President of the
Western Division of the Association. In such capacity, the Employee shall
operate and manage the Association's branch locations situated in and
surrounding Chilton County, Alabama, within the framework of the approved annual
budgets, and with a sound system of internal controls, and in compliance with
the policies of the Board of Directors of the Association (the "Board"), and all
applicable laws and regulations. The Employee shall also serve on the Loan
Committee of the Board, and such other committees as the Board designates, and
shall regularly attend such meetings of the committee(s) held at the
Association's principal executive offices in Sylacauga, Alabama. Further, the
Employee shall promote, by entertainment or otherwise, and to the extent
permitted by law, the business of the Association. The Employee's other duties
shall be such as the Chief Executive Officer of the Association may from time to
time reasonably direct, including the rendering of such administrative and
management services for the Association as are customarily performed by persons
situated in a similar executive capacity or with similar managerial experience.
2. Base Compensation. The Association agrees to pay the Employee
during the term of this Agreement a salary at the rate of $66,000 per annum,
payable in cash not less frequently than monthly. The Board shall review, not
less often than annually, the rate of the Employee's salary, and in its sole
discretion may decide to increase his salary.
3. Discretionary Bonuses. The Employee shall participate in an
equitable manner with all other senior management employees of the Association
in discretionary bonuses that the Board may award from time to time to the
Association's senior management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
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4. (a) Participation in Retirement, Medical and Other
Plans. The Employee shall participate in any plan that the Association maintains
for the benefit of its employees if the plan relates to (i) pension,
profit-sharing, or other retirement benefits, (ii) medical insurance or the
reimbursement of medical or dependent care expenses, or (iii) other group
benefits, including disability and life insurance plans.
(b) Employee Benefits; Expenses. The Employee shall
participate in any fringe benefits which are or may become available to the
Association's senior management employees, including for example: any stock
option or incentive compensation plans, club memberships, and any other benefits
which are commensurate with the responsibilities and functions to be performed
by the Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-pocket business expenses which he shall incur in connection
with his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Association.
5. Term. The Association hereby employs the Employee, and
the Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective Date and ending 36 months thereafter (or such
earlier date as is determined in accordance with Section 9 of this Agreement).
Additionally, on each annual anniversary date from the Effective Date, this
Agreement and the Employee's term of employment shall be extended for an
additional one-year period beyond the then effective expiration date, provided
the Board determines in a duly adopted resolution that the performance of the
Employee has met the Board's requirements and standards, and that this Agreement
shall be extended.
6. Loyalty; Full Time and Attention.
(a) During the period of his employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall devote all his full business time, attention, skill,
and efforts to the faithful performance of his duties hereunder; provided,
however, from time to time, Employee may serve on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which
will not present any conflict of interest with the Association or any of its
subsidiaries or affiliates, or unfavorably affect the performance of Employee's
duties pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his employment under this Agreement, the Employee shall not
engage in any business or activity contrary to the business affairs or interests
of the Association, or be gainfully employed in any other position or job other
than as provided above.
(b) Nothing contained in this Section 6 shall be
deemed to prevent or limit the Employee's right to invest in the capital stock
or other securities of any business dissimilar from that of the Association, or,
solely as a passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under
this Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Association will provide Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.
8. Vacation and Sick Leave. The Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
duties under this Agreement in accordance with the terms set forth below, all
such voluntary absences to count as vacation time; provided that:
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(a) The Employee shall be entitled to an annual
vacation in accordance with the policies that the Board periodically establishes
for senior management employees of the Association.
(b) The Employee shall not receive any additional
compensation from the Association on account of his failure to take a vacation,
and the Employee shall not accumulate unused vacation from one fiscal year to
the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the
Employee shall be entitled without loss of pay, to absent himself voluntarily
from the performance of his employment obligations with the Association for such
additional periods of time and for such valid and legitimate reasons as the
Board may in its discretion approve. Further, the Board may grant to the
Employee a leave or leaves of absence, with or without pay, at such time or
times and upon such terms and conditions as the Board in its discretion may
determine.
(d) In addition, the Employee shall be entitled to an
annual sick leave benefit as established by the Board.
9. Termination and Termination Pay. Subject to the
provisions of Section 11 of this Agreement, the Employee's employment hereunder
may be terminated under the following circumstances:
(a) Death. The Employee's employment under this
Agreement shall terminate upon his death during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month in which his death
occurred.
(b) Disability. The Association may terminate the
Employee's employment after having established, through a determination by the
Board, the Employee's Disability. For purposes of this Agreement, "Disability"
means a physical or mental infirmity which impairs the Employee's ability to
substantially perform his duties under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits under the
Association's long-term disability plan (or, if the Association has no such plan
in effect, which impairs the Employee's ability to substantially perform his
duties under this Agreement for a period of one hundred eighty (180) consecutive
days). The Employee shall be entitled to the compensation and benefits provided
for under this Agreement for (i) any period during the term of this Agreement
and prior to the establishment of the Employee's Disability during which the
Employee is unable to work due to the physical or mental infirmity, or (ii) any
period of Disability which is prior to the Executive's termination of employment
pursuant to this Section 9(b).
(c) For Cause. The Board may, by written notice to
the Employee, immediately terminate his employment at any time, for Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Cause. Termination for "Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Cause unless there
shall have been delivered to the Employee a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board (excluding the Employee if a member of the Board) at a meeting of the
Board called and held for the purpose (after reasonable notice to the Employee
and an opportunity for the Employee to be heard before
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the Board), finding that in the good faith opinion of the Board the Employee was
guilty of conduct set forth above in the second sentence of this Subsection (c)
and specifying the particulars thereof in detail.
(d) Without Cause. Subject to the provisions of
Section 11 hereof, the Board may, by written notice to the Employee, immediately
terminate his employment at any time for any reason; provided that if such
termination is for any reason other than pursuant to Sections 9 (a) (b) or (c)
above, the Employee shall be entitled to receive the following compensation and
benefits: (i) the salary provided pursuant to Section 2 hereof, up to the date
of expiration of the term (including any renewal term then in effect) of this
Agreement (the "Termination Date"), plus said salary for an additional 12-month
period, and (ii) the cost to the Employee of obtaining all health, life,
disability and other benefits (excluding any bonus, stock option or other
compensation benefits) which the Employee would have been eligible to
participate in through the Termination Date based upon the benefit levels
substantially equal to those that the Association provided for the Employee at
the date of termination of employment. Said sum shall be paid, at the option of
the Employee, either (I) in periodic payments over the remaining term of this
Agreement, as if the Employee's employment had not been terminated, or (II) in
one lump sum within 10 days of such termination; provided, however, that the
amount to be paid by the Association to the Employee hereunder shall not exceed
3 times the Employee's "average annual compensation". The Employee's "annual
average compensation" shall be the average of the total annual "compensation"
acquired by the Employee during each of the 5 fiscal years (or the number of
full fiscal years of employment, if the Employee's employment is less than 5
years at the termination thereof) immediately preceding the date of termination.
The term "compensation" shall mean any payment of money or provision of any
other thing of value in consideration of employment, including, without
limitation, base compensation, bonuses, pension and profit sharing plans,
directors fees or committees fees, fringe benefits and deferred compensation
accruals.
(e) Constructive Discharge. Notwithstanding Section
9(f) hereof, if the Employee voluntarily terminates his employment with the
Association during the term of this Agreement, within 60 days following the
occurrence of any of the following events, which has not been consented to in
advance by the Employee in writing, the Employee shall be entitled to receive
the compensation and benefits set forth in Section 9(d) hereof: (i) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than 35 miles from his primary office
(except for any trips to the principal executive offices of the Association in
connection with the performance of the Employee's duties pursuant to this
Agreement); (ii) a material reduction without reasonable cause in the Employee's
Base Compensation; (iii) the failure by the Association to continue to provide
the Employee with compensation and benefits provided for under this Agreement,
as the same may be increased from time to time, or with benefits substantially
similar to those provided to him under any of the employee benefit plans in
which the Employee now or hereafter becomes a participant, or the taking of any
action by the Association or the Company which would directly or indirectly
reduce any of such benefits or deprive the Employee of any material fringe
benefit enjoyed by him; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position as referenced at Section 1; (v) a material diminution of reduction in
the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Association; or
(vi) a material reduction in the secretarial or other administrative support of
the Employee.
(f) Voluntary Termination by Employee. Subject to
the provisions of Section 11 hereof, the Employee may voluntarily terminate
employment with the Association during the term of this Agreement, upon at least
60 days' prior written notice to the Board of Directors, in which case the
Employee shall receive only his compensation, vested rights and employee
benefits accrued up to the date of his termination.
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10. No Mitigation. The Employee shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise, and no such payment shall be offset or reduced by
the amount of any compensation or benefits provided to the Employee in any
subsequent employment.
11. Change in Control.
(a) Notwithstanding any provision herein to the contrary, if the
Employee's employment under this Agreement is terminated by the Association,
without the Employee's prior written consent and for a reason other than for
Cause, death or disability in connection with or within 24 months after any
change in control of the Association or SouthFirst Bancshares, Inc. (the
"Corporation"), the Employee shall be paid an amount equal to the difference
between (i) the product of 2.99 times his "base amount" as defined in Section
28OG(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and
regulations promulgated thereunder, and (ii) the sum of any other "parachute
payments" (as defined under Section 28OG(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid in one lump
sum within 10 days of such termination. The term "change in control" shall mean
(1) a change in the ownership, holding or power to vote more than 25% of the
Association's or corporation's voting stock, (2) a change in the ownership or
possession of the ability to control the election of a majority of the
Association's or Corporation's directors, (3) a change in the ownership or
possession of the ability to exercise a controlling influence over the
management or policies of the Association or the Corporation by any person or by
persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934) (except in the case of (1), (2) and (3) hereof,
ownership or control of the Association or its directors by the Corporation
itself shall not constitute a ("change in control"), or (4) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Corporation or the Association (the
"Company Board") (the "Continuing Directors") cease for any reason to constitute
at least two-thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was approved by a vote
of at least two-thirds of the Continuing Directors then in office shall be
considered a Continuing Director. The term "person" means an individual other
than the Employee, or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated organization or
any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, the Employee may voluntarily terminate his employment under this
Agreement within 12 months following a change in control of the Association or
the Corporation, and the Employee shall thereupon be entitled to receive the
payment described in Section 11(a) of this Agreement, upon the occurrence of any
of the following events, or within 90 days thereafter, which have not been
consented to in advance by the Employee in writing: (i) the requirement that the
Employee move his personal residence, or perform his principal executive
functions, more than 35 miles from his primary office as of the date of the
change in control; (ii) a material reduction in the Employee's base compensation
as in effect on the date of the change in control, as the same may be increased
from time to time; (iii) the failure by the Association to continue to provide
the Employee with compensation and benefits provided for under this Agreement,
as the same may be increased from time to time, or with benefits substantially
similar to those provided to him under any of the employee benefit plans in
which the Employee now or hereafter becomes a participant, or the taking of any
action by the Association which would directly or indirectly reduce any of such
benefits or deprive the Employee of any material fringe benefit enjoyed by him
at the time of the change in control; (iv) the assignment to the Employee of
duties and responsibilities materially different from those normally associated
with his position as referenced at Section 1; (v) a failure to elect or reelect
the Employee to the Board of Directors of the Association if the Employee is
serving on such Board on the date of the change in control; or (vi) a material
diminution or reduction in the Employee's
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responsibilities or authority (including reporting responsibilities) in
connection with his employment with the Association.
(c) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(d) In the event that any dispute arises between the Employee
and the Association as to the terms or interpretation of this Agreement,
including this Section 11, whether instituted by formal legal proceedings or
otherwise, including an, action that the Employee takes to enforce the terms of
this Section 11 or to defend against any action taken by the Association, the
Employee shall be reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, provided
that the Employee shall have obtained a final judgement by a court of competent
jurisdiction in favor of the Employee. Such reimbursement shall be paid within
10 days of Employee's furnishing to the Association written evidence, which may
be in the form, among other things, of a canceled check or receipt, of any costs
or expenses incurred by the Employee.
12. Requirements of Applicable Regulations of OTS
(a) The Association's board of directors may terminate the
Employee's employment at any time, but any termination by the Association's
board of directors, other than termination for cause, shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for cause (as defined in Section 9(c) of this
Agreement).
(b) If the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Association's affairs by a notice
served under section 8(e)(3) or (g)(1) of Federal Deposit Insurance Act (12
U.S.C. 1818 (e)(3) and (g)(1)), the Association's obligations under this
Agreement shall be suspended as of the date of service unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations were suspended, and (ii) reinstate
(in whole or in part) any of its obligations which were suspended.
(c) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Association's affairs by an order
issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12
U.S.C. 1818 (e)(4) or (g)(1)), all obligations of the Association under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Association is in default (as defined in section
3(x)(1) of the Federal Deposit Insurance Act), all obligations under this
Agreement shall terminate as of the date of default, but this Section 12(d)
shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated,
except to the extent determined that the continuation of this Agreement is
necessary of the continued operation of the Association:
(i) By the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Association under the
authority contained in 13(c) of the Federal Deposit Insurance Act; or
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(ii) By the Director or his or her designee, at the
time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the Association or when the Association
is determined by the Director to be in an unsafe or unsound condition.
Any rights of the Employee that have already vested, however, shall
not be affected by such action.
(f) Should any provision of this Agreement give rise to a
discrepancy or conflict with respect to any applicable law or regulation, then
the applicable law or regulation shall control the relevant construction and
operation of this Agreement.
13. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and
be binding upon any corporate or other successor of the Association which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association.
(b) Since the Association is contracting for the
unique and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Association.
14. Amendments. No amendments or additions to this Agreement
shall be binding unless made in writing and signed by all of the parties, except
as herein otherwise specifically provided.
15. Applicable Law. Except to the extent preempted by Federal
law, the laws of the State of Alabama shall govern this Agreement in all
respects, whether as to its validity, construction, capacity, performance or
otherwise.
16. Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions of this
Agreement.
17. Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first hereinabove written.
ATTEST: FIRST FEDERAL OF THE SOUTH
BY:
- ------------------------- ----------------------------------
Secretary President and Chief Executive Officer
WITNESS:
- ------------------------- -------------------------------------
Bobby R. Cook ("Employee")
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EXHIBIT 3
GOVERNANCE
<TABLE>
<CAPTION>
Year of
Directors of Surviving Bank Expiration of Term
--------------------------- ------------------
<S> <C> <C>
1. Paul A. Brown 1997
210 South Elm Avenue
Sylacauga, Alabama 35150
2. L. Neal Bice 1997
P.O. Box 326
Clanton, Alabama 35046
3. Bobby R. Cook 1997
P.O. Box 1194
Clanton, Alabama 35046
4. Hobert Cook(1) --
9 Huntingdon Drive
Sylacauga, Alabama 35150
5. Kenneth E. Easterling 1997
4141 County Road 85
Clanton, Alabama 35046
6. J. David Foote, Jr. 1997
2517 Overhill Road
Sylacauga, Alabama 35150
7. Joe K. McArthur 1998
1940 Pleasant Ridge Loop
Sylacauga, Alabama 35150
8. Allen G. McMillian, III 1998
One Gunston Drive
Talladega, Alabama 35160
9. John T. Robbs 1997
1003 Cloverdale Circle
Talladega, Alabama 35160
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
10. Donald C. Stroup 1999
131 Stone Ridge Drive
Sylacauga, Alabama 35150
11. Charles R. Vawter 1999
108 Stone Ridge Drive
Sylacauga, Alabama 35150
- -----------------
(1) Director Emeritus
</TABLE>
<TABLE>
<CAPTION>
Year of
Directors of SouthFirst Expiration of Term
----------------------- ------------------
<S> <C> <C>
1. Paul A. Brown 1999
210 South Elm Avenue
Sylacauga, Alabama 35150
2. Bobby R. Cook 1997
P.O. Box 1194
Clanton, Alabama 35046
3. Hobert Cook(1) --
9 Huntingdon Drive
Sylacauga, Alabama 35150
4. J. David Foote, Jr. 1997
2517 Overhill Road
Sylacauga, Alabama 35150
5. Joe K. McArthur 1998
1940 Pleasant Ridge Loop
Sylacauga, Alabama 35150
7. Allen G. McMillian, III 1998
One Gunston Drive
Talladega, Alabama 35160
8. John T. Robbs 1997
1003 Cloverdale Circle
Talladega, Alabama 35160
9. Donald C. Stroup 1999
131 Stone Ridge Drive
Sylacauga, Alabama 35150
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
10. Charles R. Vawter 1999
108 Stone Ridge Drive
Sylacauga, Alabama 35150
</TABLE>
- -----------------
(1) Director Emeritus
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APPENDIX B
[TRIDENT FINANCIAL CORPORATION LETTERHEAD]
September 26, 1997
Board of Directors
SouthFirst Bancshares, Inc.
126 North Norton Avenue
Sylacauga, Alabama 35150
Gentlemen:
You have requested our opinion as to the fairness, from a financial
point of view, to the holders of shares of common stock (the "SouthFirst Common
Stock"), of SouthFirst Bancshares, Inc. ("SouthFirst") of the consideration to
be paid by SouthFirst in the proposed merger (the "Merger") with First Federal
Savings and Loan Association of Chilton County, Clanton, Alabama ("Chilton
County"), pursuant to the Amended and Restated Agreement and Plan of Merger
(the "Merger Agreement") dated September 17, 1997. Unless otherwise noted, all
terms used herein shall have the same meaning as defined in the Merger
Agreement.
As more specifically set forth in the Merger Agreement, and subject to
a number of conditions and procedures described in the Merger Agreement, in the
Merger each of the issued and outstanding shares of Chilton County Common Stock
shall be exchanged for either (i) $31.50 of cash or (ii) shares of SouthFirst
Common Stock based on the Exchange Ratio. The Exchange Ratio will be determined
by dividing $31.50 by the average closing price for SouthFirst Common Stock on
the American Stock Exchange during the ten trading days immediately preceding
the five consecutive business days prior to the Effective Time (the "Average
Closing Price"). Chilton County Stockholders may elect to receive cash, stock
or a combination of cash and stock, provided that 50% of the Total Merger
Consideration (including consideration for options, dissenter's shares, and
fractional shares) shall consist of cash. Each outstanding option to purchase
Chilton County Common Stock shall be exchanged for $21.50 cash.
Trident Financial Corporation ("Trident") is a financial consulting
and investment banking firm experienced in the valuation of business
enterprises with considerable experience in the valuation of financial
institutions. Trident is not affiliated with SouthFirst or Chilton County, nor
has Trident been retained on a contingent fee basis.
In connection with rendering our opinion, we have reviewed and
analyzed, among other things, the following (i) the First Agreement and the
Merger Agreement; (ii) the Joint Proxy
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Statement/Prospectus; (iii) certain publicly available information concerning
SouthFirst, including the audited financial statements of SouthFirst for each
of the years in the three year period ended September 30, 1996 and unaudited
financial statements of SouthFirst for the nine months ended June 30, 1997;
(iv) certain publicly available information concerning Chilton County,
including the audited financial statements of Chilton County for each of the
years in the three year period ended June 30, 1997; (v) certain other internal
information, primarily financial in nature, concerning the business and
operations of SouthFirst and Chilton County furnished to us by SouthFirst and
Chilton County for purposes of our analysis; (vi) certain publicly available
information with respect to other companies that we believe to be comparable to
Chilton County; and (vii) certain publicly available information concerning the
nature and terms of other transactions that we consider relevant. We have also
spoken with certain officers and employees of SouthFirst, to discuss the
foregoing as well as other matters we believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to us or publicly available and have not
attempted independently to verify any such information. We did not perform a
review of the loan portfolio, and we did not assess the adequacy of Chilton
County's loan loss reserves. We have not conducted a physical inspection of
the properties or facilities of Chilton County, nor have we made or obtained
any independent evaluations or appraisals of any of such properties or
facilities.
In conducting our analysis and arriving at our opinion as expressed
herein, we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following:
(i) the historical and current financial condition and results of operations of
SouthFirst and Chilton County, including interest income, interest expense, net
interest income, net interest margin, interest sensitivity, non-interest income
and expense, earnings, dividends, book value, return on assets, return on
equity, capitalization, the amount and type of non-performing assets and the
reserve for loan losses; (ii) the business prospects of SouthFirst and Chilton
County; (iii) the economy of SouthFirst's and Chilton County's market areas,
and (iv) the nature and terms of certain other merger transactions that we
believe to be relevant. We have also taken into account our assessment of
general economic, market, financial and regulatory conditions and trends, as
well as our knowledge of the financial services industry, our experience in
connection with similar transactions, and our knowledge of securities valuation
generally. Our opinion necessarily is based upon conditions as they exist and
can be evaluated on the date hereof. Our opinion is, in any event, limited to
the fairness, from a financial point of view, of the consideration to be paid
by SouthFirst in the Merger and does not address SouthFirst's underlying
business decision to effect the Merger.
Based upon and subject to the foregoing, we are of the opinion that
the consideration to be paid by SouthFirst in the Merger is fair, as of the
date hereof, from a financial point of view, to the shareholders of SouthFirst.
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This opinion is being delivered to the Board of Directors of
SouthFirst for its use and is not to be reproduced, disseminated or delivered
to any third party without the express written consent of Trident Financial
Corporation, except as required by law.
Very truly yours,
TRIDENT FINANCIAL CORPORATION
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APPENDIX C
[PROFESSIONAL BANK SERVICES, INC. LETTERHEAD]
October 1, 1997
Board of Directors
First Federal Savings & Loan Association
of Chilton County
102 5th Street North
Clanton, Alabama 35045
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial perspective, to the common shareholders of First Federal Savings &
Loan Association of Chilton County, Clanton, Alabama (the "Company") of the
proposed merger of The Company with SouthFirst Bancshares, Inc., Sylacauga,
Alabama ("SouthFirst"). In the Proposed merger, Company shareholders will
receive $31.50 per common share in cash or SouthFirst common stock. The
composition of the total market value of the consideration to be paid will
equal 50 percent cash and 50 percent stock. The financial terms of the merger
are more fully defined in the Amended and Restated Agreement and Plan of Merger
by and among SouthFirst and the Company dated September 17, 1997 (the
"Agreement").
Professional Bank Services, Inc. ("PBS") is a bank consulting firm and as part
of its investment banking business is continually engaged in reviewing the
fairness, from a financial perspective, of bank acquisition transactions and in
the valuation of banks and other business and their securities in connection
with mergers, acquisitions, estate settlements and other purposes. We are
independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS performed a review and analysis of the
historic performance of the Company contained in: (i) Audited Financial
Statements as of June 30, 1993, 1994, 1995, 1996 and 1997; (ii) September 30,
1996 and December 31, 1996 Thrift Financial Reports filed with the OTS by the
Company; and (iii) common stock trading activity of the Company. We have
reviewed and tabulated statistical data regarding the loan portfolio,
securities portfolio and other performance ratios and statistics. Financial
projections were prepared and analyzed as well as other financial
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Board of Directors
First Federal Savings & Loan Association
of Chilton County
October 1, 1997
Page 2
studies, analyses and investigations as deemed relevant for the purposes of
this opinion. In review of the aforementioned information, we have taken into
account our assessment of general market and financial conditions, our
experience in other transactions, and our knowledge of the banking industry
generally.
We have not compiled, reviewed or audited the financial statements of the
Company or SouthFirst, nor have we independently verified any of the
information reviewed; we have relied upon such information as being complete
and accurate in all material respects. We have not made independent evaluation
of the assets of the Company or SouthFirst.
Based on the foregoing and all other factors deemed relevant, it is our opinion
as investment bankers, that, as of the date hereof, the consideration proposed
to be received by the shareholders of the Company under the Agreement is fair
and equitable from a financial perspective.
Very truly yours,
/s/ Christopher L. Hargrove
Professional Bank Services, Inc.
Christopher L. Hargrove
President
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APPENDIX D
TEXT OF TITLE 12, SECTION 552.14 OF THE CODE OF FEDERAL REGULATIONS
DISSENTER AND APPRAISAL RIGHTS
(a) Right to demand payment of fair or appraised value.
Except as provided in paragraph (b) of this section, any stockholder of a
Federal stock association combining in accordance with # 552.13 of this part
shall have the right to demand payment of the fair or appraised value of his
stock: Provided, That such stockholder has not voted in favor of the
combination and complies with the provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only
qualified consideration for his or her stock shall have the right under this
section to demand payment of the stock s fair or appraised value, if such
stock was listed on a national securities exchange or quoted on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") on the date of the meeting at which the combination was acted upon
or stockholder action is not required for a combination made pursuant to #
552.13(h)(2) of this part. "Qualified consideration" means cash, shares of
stock of any association or corporation which at the effective date of the
combination will be listed on a national securities exchange or quoted on
NASDAQ, or any combination of such shares of stock and cash.
(c) Procedure.
(1) Notice. Each constituent Federal stock association
shall notify all stockholders entitled to rights under this section, not less
than twenty days prior to the meeting at which the combination agreement is to
be submitted for stockholder approval, of the right to demand payment of
appraised value of shares, and shall include in such notice a copy of this
section. Such written notice shall be mailed to stockholders of record and may
be part of management s proxy solicitation for such meeting.
(2) Demand for appraisal and payment. Each stockholder
electing to make a demand under this section shall deliver to the Federal stock
association, before voting on the combination, a writing identifying himself or
herself and stating his or her intention thereby to demand appraisal of and
payment for his or her shares. Such demand must be in addition to and separate
from any proxy or vote against the combination by the stockholder.
(3) Notification of effective date and written offer.
Within ten days after the effective date of the combination, the resulting
association shall:
i. Give written notice by mail to stockholders of
constituent Federal stock associations who have
complied with the provisions of paragraph (c)(2) of
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this section and have not voted in favor of the
combination, of the effective date of the combination;
ii. Make a written offer to each stockholder to pay for
dissenting shares at a specified price deemed by the
resulting association to be the fair value thereof;
and
iii. Inform them that, within sixty days of such date, the
respective requirements of paragraphs (c)(5) and (c)
(6) of this section (set out in the notice) must be
satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
(4) Acceptance of offer. If within sixty days of the
effective date of the combination the fair value is agreed upon between the
resulting association and any stockholder who has complied with the provisions
of paragraph (c)(2) of this section, payment therefor shall be made within
ninety days of the effective date of the combination.
(5) Petition to be filed if offer not accepted. If
within sixty days of the effective date of the combination the resulting
association and any stockholder who has complied with the provisions of
paragraph (c)(2) of this section do not agree as to the fair value, then any
such stockholder may file a petition with the Office [of Thrift Supervision
(the "Office")], with a copy by registered or certified mail to the resulting
association, demanding a determination of the fair market value of the stock of
all such stockholders. A stockholder entitled to file a petition under this
section who fails to file such petition within sixty days of the effective date
of the combination shall be deemed to have accepted the terms offered under the
combination.
(6) Stock certificates to be noted. Within sixty days of
the effective date of the combination, each stockholder demanding appraisal and
payment under this section shall submit to the transfer agent his certificates
of stock for notation thereon that an appraisal and payment have been demanded
with respect to such stock and that appraisal proceedings are pending. Any
stockholder who fails to submit his or her stock certificates for such notation
shall no longer be entitled to appraisal rights under this section and shall be
deemed to have accepted the terms offered under the combination.
(7) Withdrawal of demand. Notwithstanding the foregoing,
at any time within sixty days after the effective date of the combination, any
stockholder shall have the right to withdraw his or her demand for appraisal
and to accept the terms offered upon the combination.
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(8) Valuation and payment. The Director [of the Office
of Thrift Supervision (the "Director")] shall, as he or she may elect, either
appoint one or more independent persons or direct appropriate staff of the
Office to appraise the shares to determine their fair market value, as of the
effective date of the combination, exclusive of any element of value arising
from the accomplishment or expectation of the combination. Appropriate staff
of the Office shall review and provide an opinion on appraisals prepared by
independent persons as to the suitability of the appraisal methodology and the
adequacy of the analysis and supportive data. The Director after consideration
of the appraisal report and the advice of the appropriate staff shall, if he or
she concurs in the valuation of the shares, direct payment by the resulting
association of the appraised fair market value of the shares, upon surrender of
the certificates representing such stock. Payment shall be made, together with
interest from the effective date of the combination, at a rate deemed equitable
by the Director.
(9) Costs and expenses. The costs and expenses of any
proceeding under this section may be apportioned and assessed by the Director
as he or she may deem equitable against all or some of the parties. In making
this determination the Director shall consider whether any party has acted
arbitrarily, vexatiously, or not in good faith in respect to the rights
provided by this section.
(10) Voting and distribution. Any stockholder who has
demanded appraisal rights as provided in paragraph (c)(2) of this section shall
thereafter neither be entitled to vote such stock for any purpose nor be
entitled to the payment of dividends or other distributions on the stock
(except dividends or other distribution payable to, or a vote to be taken by
stockholders of record at a date which is on or prior to, the effective date of
the combination): Provided, That if any stockholder becomes unentitled to
appraisal and payment of appraised value with respect to such stock and accepts
or is deemed to have accepted the terms offered upon the combination, such
stockholder shall thereupon be entitled to vote and receive the distributions
described above.
(11) Status. Shares of the resulting association into
which shares of the stockholders demanding appraisal rights would have been
converted or exchanged, had they assented to the combination, shall have the
status of authorized and unissued shares of the resulting association.
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