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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
June 30, 1997 1-13640
SOUTHFIRST BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 63-1121255
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
126 North Norton Avenue, Sylacauga, Alabama 35150
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 205-245-4365
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Not applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, par value $.01 per share 847,600 shares
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Class Outstanding at July 31, 1997
The following item is amended:
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
REVIEW OF RESULTS OF OPERATIONS
OVERVIEW
Net income for the nine months ended June 30, 1997 decreased $9,115 or
2.46% when compared to the comparable period during fiscal 1996. Net interest
income increased $152,586 for the nine month period ending June 30, 1997
compared to the same period in fiscal 1996. Other income decreased $409,968 for
the nine month period ending June 30, 1997 compared to the same period in fiscal
1996. The decrease in other income was due to the $583,000 received in the first
nine months of fiscal 1996 as a settlement in the lawsuit with USF&G. See Note 2
to "Notes to Financial Statements." The decrease in other income for the nine
month period ending June 30, 1997 was offset by a decrease in other expenses of
approximately $280,000 compared to the comparable period during fiscal 1996. Net
income per common share, based on weighted average shares outstanding was $0.43
and $0.15 for the nine months and three months ending June 30, 1997
respectively.
Further discussion of significant items affecting net earnings are
discussed in detail below.
NET INTEREST INCOME
Net interest income is the difference between the interest and fees
earned on loans, securities, and other interest-bearing assets (interest income)
and the interest paid on deposits and borrowed funds (interest expense). Higher
net interest income is a result of the relationship between the interest-earning
assets and the interest-bearing liabilities.
There was a slight increase in interest rates in the nine months ended
June 30, 1997, as compared to the same period in fiscal 1996. As of June 30,
1997 net interest margin increased 126 basis points as rates earned on
interest-earning assets increased 279 basis points to 10.76%, while cost of
funds increased 153 basis points to 6.44%, when compared to the comparable
period during fiscal 1996. As a result, net interest income before provision for
loan losses increased by $187,851 or 8.2% to $2,475,430 in the first nine months
of fiscal 1997 compared to $2,287,579 for the first nine months of fiscal 1996.
OTHER INCOME
Other income for the nine months ended June 30, 1997 decreased by
$409,968 to $732,114 compared to $1,142,082 for the nine months ended June 30,
1996 primarily due to the Bank's fidelity bond claim settlement with USF&G which
resulted in approximately $583,000 being received during the nine months ended
June 30, 1996. See Note 2 to "Notes to Financial Statements."
For the three month period ended June 30, 1997, other income increased by
approximately $90,000 compared to the same period in fiscal 1996. This increase
was primarily the result of an increase of approximately $200,000 in fee income
earned by Benefit Financial. The increase in
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other income was offset by a decrease of approximately $32,000 from gain on sale
of loans and a decrease of $75,000 from the settlement of the lawsuit with USF&G
compared to the same period in fiscal 1996.
OTHER EXPENSE
Total other expense decreased from $2,834,477 for the nine months ended
June 30, 1996 to $2,554,449 for the nine months ended June 30, 1997. This
decrease of $280,028 was due to several factors, including reduced costs
associated with the implementation of employee benefit plans that were
previously incurred in the first quarter of fiscal 1996, as well as reductions
in other expenses which, during the nine months ended June 30, 1996, consisted
primarily of legal and accounting costs associated with the production of the
Corporation's first annual report on Form 10- K. The majority of these costs
were nonrecurring in nature and, therefore, were not incurred during the nine
months ended June 30, 1997.
For the three month period ended June 30, 1997, other expenses increased
by approximately $208,000 compared to the same period in fiscal 1996. This
increase was primarily due to costs associated with the recent acquisition of
Pension & Benefit Financial Services, Inc. by Benefit Financial, as well as
legal and accounting costs associated with the anticipated acquisition of First
Federal Savings & Loan Association of Chilton County by the Corporation in the
fourth quarter of 1997.
INCOME TAX EXPENSE
The Corporation's effective tax rate for the nine month period ended June
30, 1997 was 39.9% compared to the federal statutory rate of 34.0%. The
Corporation's effective tax rate was higher than the statutory rate due
primarily to state income taxes. Income tax expense increased $31,760 or 14.7%
to $246,541 for the nine months ended June 30, 1997, as compared to $214,781 for
the nine months ended June 30, 1996, due to the increase in pre-tax earnings.
REVIEW OF FINANCIAL CONDITION
OVERVIEW
Management continuously monitors the financial condition of the Company
in order to protect depositors, increase retained earnings, and protect current
and future earnings.
Return on average stockholders' equity is one way of assessing the return
the Corporation has generated for its stockholders. The table below sets forth
the return on average stockholders' equity and other performance ratios of the
Company for the periods indicated.
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<TABLE>
<CAPTION>
At or for the
Nine months ended
June 30,
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1997 1996
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<S> <C> <C>
Return on assets 0.70% 0.58%
Return on equity 5.05% 3.66%
Equity-to-assets ratio 13.90% 15.85%
Interest rate spread 4.32% 3.06%
Net interest margin 5.05% 3.66%
Total risk-based capital ratio 21.47% 22.23%
Nonperforming loans to loans 0.71% 0.77%
Allowance for loan losses to loans 0.56% 0.44%
Allowance for loan losses to nonperforming loans 78.94% 57.36%
Ratio of net charge-offs to average loans outstanding 0.00% 0.02%
Book value per common share outstanding $15.95 $15.28
</TABLE>
Significant factors affecting the Company's financial condition during
the nine months ended June 30, 1997 are detailed below:
ASSETS
Total assets increased $7,001,116 or 7.7% from $90,281,934 at September
30, 1996 to $97,283,049 at June 30, 1997. During this nine month period, net
loans receivable increased by $9,110,830 due to increased loan demand in
residential mortgages and in residential construction loans. Mortgage-backed
securities and collateralized mortgage obligations ("CMOs") decreased by
approximately $4.7 million with principal pay downs being used to fund the
residential mortgage and residential construction loans. Other assets increased
approximately $1.1 million primarily due to the purchase of Pension & Benefit
Financial Services, Inc. by Benefit Financial during the quarter.
LIABILITIES
Total liabilities increased $6,273,176 or 8.1% from $77,394,120 at
September 30, 1996 to $83,667,296 at June 30, 1997. This increase was primarily
due to advance borrowing from the Federal Home Loan Bank of Atlanta increasing
by approximately $7.5 million or 68.7% from September 30, 1996 to June 30, 1997.
This increase reflected the funding requirements as a result of increased
residential mortgage and construction loan demand. The increase in borrowing was
offset by a decrease in total deposits of approximately $1.5 million or 2.4 %
from $64,094,603 at September 30, 1996 to $62,541,714 at June 30, 1997. Accrued
interest payable decreased approximately $107,000 or 12.65% from $842,285 at
September 30, 1996 to $735,721 at June 30, 1997. In addition, income taxes
payable increased approximately $418,000 from $285,401 at September 30, 1996 to
$703,586 at June 30, 1997 primarily as a result from an increase in deferred
taxes due to unrealized gains on Federal Home Loan Mortgage Corporation
securities.
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LOAN QUALITY
A major key to long-term earnings growth is the maintenance of a
high-quality loan portfolio. The Bank's directive in this regard is carried out
through its policies and procedures for extending credit to the Bank's
customers. The goal and result of these policies and procedures is to provide a
sound basis for new credit extensions and an early recognition of problem assets
to allow the most flexibility in their timely disposition.
At June 30, 1997 the allowance for loan losses was $284,988, as compared
to $250,714 at September 30, 1996. The Bank recorded small provisions for loan
losses of $36,465 and $1,200 the first nine months of fiscal 1997 or 1996,
respectively, because charge-offs were insignificant during these periods.
Nonperforming loans at June 30, 1997 were approximately $361,000 as compared to
approximately $546,000 at September 30, 1996. Foreclosed real estate during the
nine months ended June 30, 1997 was $157,717. There was no foreclosed real
estate for the comparable time period in fiscal 1996. At June 30, 1997 and
September 30, 1996, the allowance for loan losses represented 0.56% and 0.44%,
respectively, of loans outstanding. The provision for loan losses and the
adequacy of the allowance for loan losses is based upon management's continuing
evaluation of the collectibility of the loan portfolio under current economic
conditions and includes analysis of underlying collateral value and other
factors which could affect the collectibility. Management considers the
allowance for loan losses to be adequate based upon the evaluations of specific
loans, internal loan rating systems and guidelines provided by the banking
regulatory authorities governing the Bank. Although loans have increased,
management believes loan loss reserves are adequate due to the fact it has not
experienced significant loan charge-offs.
LIQUIDITY AND INTEREST SENSITIVITY
Liquidity is the ability of an organization to meet its financial
commitments and obligations on a timely basis. These commitments and obligations
include credit needs of customers, withdrawals by depositors, and payment of
operating expenses and dividends.
The Bank is required under applicable federal regulations to maintain
specified levels of cash and "liquid" investments in qualifying types of United
States Treasury and Federal Agency securities, and other investments generally
having maturities of five years or less. Such investments serve as a source of
funds upon which the Bank may rely to meet deposit withdrawals and other
short-term needs. The required level of such investments is calculated based on
a "liquidity base" consisting of net withdrawable accounts plus borrowing
payable on demand or with maturities of one year or less. Management's
objectives continue to include maintaining liquidity in excess of the required
regulatory amount of 5.0% of net deposits and short-term borrowing in order to
provide greater flexibility and to better match maturities of the requirements
of normal operations, potential deposit outflows and loan demand. The Bank
closely monitors its cash flow position to assure necessary liquidity and to
take advantage of market opportunities. At September 30, 1996 and June 30, 1997,
the Bank's liquid assets represented 12.88% and 9.28%, respectively, of its
liquidity base. Management believes that the Bank's liquidity is adequate to
fund all outstanding commitments and other cash needs.
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Changes in interest rates will necessarily lead to changes in the net
interest margin. It is the Bank's goal to minimize volatility in the net
interest margin by taking an active role in managing the level, mix and
maturities of assets and liabilities.
To reduce the adverse effect of changes in interest on its net interest
margin, the Bank is pursuing various strategies to improve the rate sensitivity
of its assets and stabilize net interest income.
CAPITAL ADEQUACY AND RESOURCES
Management is committed to maintaining capital at a level sufficient to
protect depositors, provide for reasonable growth, and fully comply with all
regulatory requirements. Management's strategy to achieve this goal is to retain
sufficient earnings while providing a reasonable return on equity.
The Office of Thrift Supervision ("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. The Bank has provided the majority of
its capital requirements through the retention of earnings and issuance of
common stock in the Corporation's initial public offering.
At June 30, 1997, the Bank satisfied all regulatory capital requirements.
The Bank's compliance with the current standards is as follows:
<TABLE>
<CAPTION>
PERCENT OF
ASSET
AMOUNT BASE
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(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible Capital $13,616 14.00%
Core Capital 13,616 14.00
Risk-based Capital 13,331 23.27
</TABLE>
The OTS has proposed an amendment to its capital regulations establishing
a minimum core capital ratio of 3.0% for savings associations rated composite 1
under the OTS CAMEL rating system. For all other savings associations, the
minimum core capital ratio will be 3.0% plus at least an additional 100 to 200
basis points. In determining the amount of additional core capital, the OTS will
assess both the quality of risk management systems and the level of overall risk
in each individual savings association through the supervisory process on a
case-by-case basis.
The OTS also requires savings institutions with more than a normal level
of interest rate risk to maintain additional capital except institutions with
less than $300 million in assets and at least a 12 percent risk-based capital
ratio are not subject to this interest rate risk capital component ("IRR")
unless notified by the OTS. The Bank is not currently required to maintain
additional capital based on IRR.
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IMPACT OF ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings per
Share" and FAS No. 129, "Disclosure of Information About Capital Structure"
(collectively, the "Statements"). The Statements change the methods for
calculating and disclosing earnings per share and are effective for financial
statements issued for both interim and annual periods ending after December 15,
1997.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements relating to financial results and plans for future
business development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition and other
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHFIRST BANCSHARES, INC.
Date: September 8, 1997 By: /s/ Donald C. Stroup
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Donald C. Stroup, President and
Chief Executive Officer
(principal executive officer)
Date: September 8, 1997 By: /s/ Joe K. McArthur
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Joe K. McArthur, Executive Vice
President and Chief Financial Officer
(principal financial and accounting
officer)
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