<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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, 1998 1-13640
SOUTHFIRST BANCSHARES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1121255
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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
---- ----
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
- -------------------------------------- 967,444 shares
Class Outstanding at July 15, 1998
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SOUTHFIRST BANCSHARES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition (Unaudited) at June 30, 1998
and September 30, 1997 ............................................................................................ 1
Consolidated Statements of Earnings (Unaudited) for the Nine and Three Months Ended
June 30, 1998 and 1997............................................................................................. 2
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended
June 30, 1998 and 1997............................................................................................. 3
Notes to Consolidated Financial Statements (Unaudited)................................................................... 5
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................................................... 7
PART II - OTHER INFORMATION..............................................................................................12
SIGNATURES...............................................................................................................13
</TABLE>
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SOUTHFIRST BANCSHARES, INC.
Consolidated Statements of Financial Condition
June 30, 1998 (Unaudited) and September 30, 1997
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1998 1997
---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 21,661,191 2,448,123
Investment securities held to maturity at cost 1,078,306 162,448
Investment securities available for sale, at fair value 31,780,079 16,665,770
Loans receivable 100,250,488 71,966,579
Less allowance for loan losses (757,176) (284,324)
------------- -----------
Net loans 99,493,312 71,682,255
Loans held for sale at cost (which approximates fair value) 658,141 333,750
Premises and equipment, net 3,464,477 1,780,286
Foreclosed real estate, net 84,439 --
Accrued interest receivable 1,046,909 529,500
Investments in affiliates 140,977 192,560
Other assets 3,566,812 1,994,010
------------- -----------
Total assets $ 162,974,643 95,788,702
============= ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 3,392,951 1,255,745
Interest bearing 120,802,008 59,296,791
------------- -----------
Total deposits 124,194,959 60,552,536
Advances by borrowers for property taxes and insurance 339,115 388,918
Accrued interest payable 898,839 859,111
Borrowed funds 18,441,534 18,653,386
Accrued expenses and other liabilities 2,898,666 1,711,417
------------- -----------
Total liabilities 146,773,113 82,165,368
------------- -----------
Stockholders' equity:
Common stock, $.01 par value, 2,000,000 shares authorized; 991,344 shares
issued and 967,444 outstanding shares at June 30, 1998 and 863,200
shares issued and 847,600 outstanding shares at September 30, 1997 9,913 8,632
Additional paid-in capital 9,990,008 7,792,748
Treasury stock (362,317) (198,392)
Unearned compensation on common stock employee benefit plans (914,604) (914,604)
Retained earnings, substantially restricted 5,840,706 5,815,352
Unrealized gain on investment securities available for sale, net of tax 1,637,824 1,119,598
------------- -----------
Total stockholders' equity 16,201,530 13,623,334
------------- -----------
Total liabilities and stockholders' equity $ 162,974,643 95,788,702
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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Consolidated Statements of Earnings (Unaudited) for the
Nine Months Ending June 30, 1998 and June 30, 1997 and
Three Months Ended June 30, 1998 and June 30, 1997
<TABLE>
<CAPTION>
Nine months ended June 30, Three months ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $6,096,716 4,241,169 2,088,299 1,491,225
Interest and dividend income on investments held to 651,262 6,740 241,359 2,154
maturity
Interest and dividend income on investments available
for sale 1,487,696 1,023,258 458,234 311,177
---------- --------- --------- ---------
Total interest and dividend income 8,235,674 5,271,167 2,787,892 1,804,556
---------- --------- --------- ---------
Interest expense:
Interest on deposits 3,881,926 2,118,815 1,484,011 689,082
Interest on borrowed funds 904,469 676,922 298,296 256,927
---------- --------- --------- ---------
Total interest expense 4,786,395 2,795,738 1,782,307 946,009
---------- --------- --------- ---------
Net interest income 3,449,279 2,475,430 1,005,585 858,548
Provision for loan losses 41,352 36,465 19,682 18,765
---------- --------- --------- ---------
Net interest income after provision for loan loss 3,407,927 2,438,965 985,903 839,783
---------- --------- --------- ---------
Other income:
Service charges and other fees 509,080 441,754 197,351 146,795
Employee benefit consulting fees 568,674 210,942 232,033 210,942
Gain on sale of loans 180,895 81,983 50,239 18,250
Gain on sale of foreclosed real estate 864 0 2,969 0
Gain on sale of investment securities 1,140 0 0 0
Gain on sale of premises and equipment 2,565 0 0 0
Equity in loss of affiliate (29,919) (44,504) (8,191) (6,432)
Other 157,790 41,939 40,947 10,915
---------- --------- --------- ---------
Total other income 1,391,089 732,114 515,348 380,469
---------- --------- --------- ---------
Other expenses:
Compensation and benefits 2,485,963 1,557,764 863,261 603,070
Net occupancy expense 209,402 139,933 75,906 53,796
Furniture and fixtures 240,518 166,720 94,164 55,830
Data processing 205,197 130,516 87,887 46,587
Office supplies and expenses 264,824 150,439 92,627 60,661
Deposit insurance premiums 66,036 49,591 20,890 10,404
Other 476,791 359,486 114,671 179,907
---------- --------- --------- ---------
Total other expenses 3,948,731 2,554,449 1,349,406 1,010,253
---------- --------- --------- ---------
Income before taxes 850,285 616,630 151,845 209,998
Income tax expense 334,190 246,541 60,180 85,771
---------- --------- --------- ---------
Net income 516,095 370,089 91,665 124,227
========== ========= ========= =========
Basic earnings per common share 0.56 0.43 0.10 0.15
Diluted earnings per common share 0.55 0.43 0.10 0.15
Dividends per common share 0.45 0.38 0.15 0.13
Basic weighted average common shares outstanding 925,480 853,893 938,207 822,116
Diluted weighted average common shares outstanding 946,091 855,349 958,818 823,572
</TABLE>
See accompanying notes to consolidated financial statements.
2
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SOUTHFIRST BANCSHARES, INC
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income $ 516,095 $ 370,089
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 227,984 129,213
Gain on sale of foreclosed real estate 864
Provision for loan losses (41,352) (36,465)
Loss on sale of unconsolidated affiliate 6,564 --
Equity in loss of unconsolidated affiliates 29,919 44,504
Gain on sale of loans 180,895 81,983
Loss on sale of premises and equipment (2,565) --
(Gain) loss on sale of investment securities 1,140 --
Increase (decrease) in deferred loan origination fees (17,469) 25,138
Net amortization (accretion) of premium/discount
on investment securities (159,199) 1,540
Loans originated for sale (8,393,671) 2,655,470
Proceeds from sale of loans 7,888,385 2,454,964
Increase (decrease) in accrued interest receivable (157,304) (5,304)
Increase in other assets (1,097,917) (1,123,697)
Decrease in accrued interest payable (213,844) (106,564)
Increase (decrease) in accrued expenses and other liabilities 1,209,674 249,243
----------- ------------
Net cash used in operating activities $ (21,801) $ 4,740,114
----------- ------------
Investing activities:
Net cash paid in acquisition of subsidiary (160,082) --
Proceeds from sale of unconsolidated affiliate 90,100 --
Investment in unconsolidated affiliated companies (75,000) 319,309
Purchase of investment securities held to maturity (942,334) --
Proceeds from sale of investments 14,619,018 5,828,103
Reinvestment of mutual fund dividend (28,485) (24,086)
Gain on sale of investment securities available for sale -- 15,706
Reinvestment of dividends/interest bearing dep in other inst. -- (168)
Purchase of investment securities available for sale -- (2,000,000)
Principal repayments and maturities of investment
securities 6,540,595 1,360,817
Net (increase) decrease in loans 4,151,797 (14,391,467)
Proceeds from sale of foreclosed real estate 84,114 --
Purchase of premises and equipment (850,804) (153,268)
----------- ------------
Net cash provided by (used in) investing activities $23,428,919 $ (9,045,054)
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
SOUTHFIRST BANCSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Financing activities:
Net decrease in deposits $ (1,331,852) $(1,552,889)
Proceeds from borrowed funds 4,588,414 7,535,048
Cash dividends paid (386,177) (308,237)
Treasury stock purchased (163,925) (34,606)
Repayment of borrowed funds (6,800,266) (947)
Decrease in advances by borrowers
for property taxes and insurance (100,244) (50,755)
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Net cash provided by financing activities (4,194,050) 5,587,614
------------- -----------
Increase in cash and amounts due from
depository institutions 19,213,068 1,355,604
Cash and amounts due from depository institutions
at beginning of period 2,448,123 2,625,561
------------- -----------
Cash and amounts due from depository institutions
at end of period $ 21,661,191 $ 3,981,165
============= ===========
Supplemental information on cash payments:
Interest paid $ 4,786,395 $ 2,118,815
============= ===========
Income taxes paid $ 334,190 $ 246,561
============= ===========
Supplemental information on non-cash transactions:
Acquisition of subsidiary-
Assets acquired:
Cash and amounts due from depository institutions $ 3,005,000 --
Investment securities 35,732,000 --
Loans receivable, net 31,904,000 --
Premises and equipment 1,059,000 --
Accrued interest receivable 361,000 --
Other assets 232,000 --
------------- -----------
Total assets $ 72,293,000 --
Liabilities assumed:
Deposits $ 64,974,000 --
Advances by borrowers for property taxes and insurance 51,000 --
Accrued interest payable 254,000 --
Borrowed funds 2,000,000 --
Other liabilities 179,000 --
-------------
Total liabilities $ 67,458,000 --
Cash paid 3,151,000 --
Common stock issued 2,082,000 --
Goodwill recorded $ 398,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SOUTHFIRST BANCSHARES, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1998 and 1997
(1) BASIS OF PRESENTATION
Information filed on this Form 10-QSB as of and for the quarter ended
June 30, 1998, was derived from the financial records of SouthFirst
Bancshares, Inc. (the "Corporation") and its wholly-owned subsidiaries,
First Federal of the South (the "Bank" or "First Federal"), and Pension
& Benefit Financial Services, Inc. ("Pension & Benefit"), a Montgomery,
Alabama-based employee benefits consulting firm. Collectively, the
Corporation and its subsidiaries are referred to herein as the
"Company."
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (none of
which are other than normal recurring accruals) necessary for a fair
statement of the financial position of the Company and the results of
operations for the nine-month periods ended June 30, 1998 and 1997. The
results contained in these statements are not necessarily indicative of
the results which may be expected for the entire year.
(2) ACQUISITION
On October 31, 1997, the Company consummated the acquisition of First
Federal Savings and Loan Association of Chilton County ("Chilton
County"), a federally chartered stock savings and loan association
based in Clanton, Alabama. Chilton County was merged with and into
First Federal. Pursuant to the terms of the acquisition agreement,
Chilton County shareholders received either shares of common stock of
the Company, cash, or a combination of common stock and cash. The
acquisition was accounted for as a purchase and the results of
operations since the acquisition date have been consolidated. The total
purchase price was $5.2 million, including the issuance of 128,144
shares valued at $2.1 million. The resulting goodwill of approximately
$398,000 will be amortized straight line over 15 years.
A summary of the net assets acquired follows:
<TABLE>
<CAPTION>
Assets acquired:
<S> <C>
Cash and amounts due from depository institutions $ 3,005,000
Investment securities 35,732,000
Loans receivable, net 31,904,000
Premises and equipment 1,059,000
Accrued interest receivable 361,000
Other assets 232,000
-----------
Total assets $72,293,000
</TABLE>
5
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SOUTHFIRST BANCSHARES, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1998 and 1997
(2) ACQUISITION, CONTINUED
<TABLE>
<CAPTION>
Liabilities assumed:
<S> <C>
Deposits 64,974,000
Advances by borrowers for property taxes and insurance 51,000
Accrued interest payable 254,000
Borrowed funds 2,000,000
Other liabilities 179,000
-----------
Total liabilities 67,458,000
Net assets acquired 4,835,000
Total purchase price 5,233,000
-----------
Goodwill $ 398,000
===========
</TABLE>
The table below presents supplemental pro forma information for 1998
and 1997 as if the acquisition was made at the beginning of the periods
at the same purchase price as at the acquisition date:
<TABLE>
<CAPTION>
Nine months ended June 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Total interest income $ 9,542,000 $ 9,388,000
Net interest income 3,796,000 3,696,000
Net income 297,000 411,000
Basic income per common share 0.32 0.42
</TABLE>
(3) NEW ACCOUNTING STANDARD
During the quarter ended December 31, 1997, the Bank adopted the
requirements of Statement of Financial Accounting Standard No. 128,
Earnings Per Share. This statement establishes standards for computing
and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This statement
replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if the Company's outstanding
options to acquire common stock were exercised. The exercise of these
options accounts for the difference between basic and diluted weighted
average share outstanding.
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(4) SUBSEQUENT EVENTS
On July 15, 1998, the Company declared a regular dividend of $0.15 per
share, payable on August 17, 1998 to stockholders of record on August
3, 1998.
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, 1998, increased $146,000 or 39%
when compared to the same period in fiscal 1997. Net interest income increased
$974,000 for the nine-month period ended June 30, 1998, compared to the same
period in fiscal 1997. Other income increased $659,000 for the nine-month period
ended June 30, 1998, compared to the same period in fiscal 1997, while other
expenses increased $1,395,000.
Substantially all of the above increases are attributable to the acquisition of
First Federal Savings and Loan Association of Chilton County ("Chilton County")
on October 31, 1997. See Note 2 to "Notes to Financial Statements." Basic
earnings per common share, based on weighted average shares outstanding, was
$0.56 and $0.43 for the nine months ended June 30, 1998 and 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.
As of June 30, 1998, the interest rate spread increased 19 basis points as rates
earned on interest-earning assets increased one basis point to 8.08% while the
cost of funds decreased 18 basis points to 4.65%. The decline in yields earned
and rates paid reflects the somewhat lower interest rate environment of Chilton
County's market area as well as the continuing downward trend of the overall
interest rate environment. Also, the acquisition of Chilton County was largely
responsible for the increase in the average balance of interest-earning assets
from $87.0 million to $135.8 million while the average balance of
interest-bearing liabilities increased from $77.2 million to $133.6 million. The
combined effect of the increases in average balances and the changes in rates
discussed above resulted in an increase in net interest income of $1,467,000, or
44.4%, and an increase in the interest rate spread from 3.24% to 3.43% for the
nine months ended June 30, 1998, as compared to the same period in 1997.
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OTHER INCOME
Total other income for the nine months ended June 30, 1998, increased $659,000
to $1,391,000 as compared to $732,000 for the nine months ended June 30, 1997. A
significant portion of the increase in total other income was attributable to an
increase of $358,000 in employee benefit consulting fees during the first nine
months of fiscal 1998 resulting from the Corporation's acquisition of Pension &
Benefit Financial Services, Inc. ("Pension & Benefit") on April 11, 1997. In
addition, gains on sales of loans increased $99,000 compared to the same period
in fiscal 1997. The acquisition of Chilton County accounted for substantially
all remaining increases.
For the three month period ended June 30, 1998, total other income increased by
approximately $135,000 to $515,000 compared to the same period in fiscal 1997.
This increase was primarily a result of increases of $32,000 from the gain on
sales of loans, an increase of $51,000 from service charges and fees primarily
as a result of the Chilton County acquisition, and an increase of $21,000 in
employee benefit consulting fees resulting from the acquisition of Pension &
Benefit. Other income increased approximately $30,000 for the three month period
ended June 30, 1998 compared to the same period in fiscal 1997, primarily due to
the Chilton County acquisition.
OTHER EXPENSE
Total other expense for the nine months ended June 30, 1998, increased by
$1,395,000 to $3,949,000 as compared to $2,554,000 for the nine months ended
June 30, 1997. Most of the increase is due to increases in compensation expense
($928,000), office supplies ($115,000), data processing ($75,000), furniture and
fixtures ($74,000), and occupancy expense ($69,000). The increase in
compensation expense is attributable to salary increases and staff additions to
handle the higher volume of transactions resulting from the Chilton County
acquisition, as well as the additional compensation expense for the employees of
Pension & Benefit and Chilton County. Increases in office supplies, furniture
and fixtures, and occupancy expense is a result of the acquisitions of Chilton
County and Pension Benefit in early fiscal 1998 and fiscal 1997, respectively.
The increase in data processing is attributable to the conversion of most of the
Company's information technology systems in fiscal 1998, which was undertaken in
order to help ensure the Company's compliance with federal regulations
concerning the "year 2000" problem. The year 2000 problem arises from the
widespread use of computer programs that rely on two-digit date codes to perform
computations or decision-making functions. Many of these programs may fail due
to an inability to properly interpret date codes beginning January 1, 2000. For
example, such programs may misinterpret "00" as the year 1900 rather than 2000.
In addition, some equipment, being controlled by microprocessor chips, may not
deal appropriately with the year "00." The Company believes that its systems are
currently year 2000 compliant and does not believe that the expenditures to
implement any further modifications (if necessary) will be material. However,
there can be no assurance that unforeseen difficulties or costs will not arise.
See "-- Year 2000."
For the three month period ended June 30, 1998, total other expense increased
$339,000 to $1,350,000 from $1,010,000 at June 30, 1997. Compensation expense
increased $260,000, data processing expense increased $41,000, office supply
expense increased $32,000, and furniture and fixtures expense increased $38,000.
Increases in compensation expense, office supply expense, and furniture and
fixtures expenses are primarily due to the acquisition of Chilton County as
compared to the comparable period in fiscal 1997. The increase in data
processing costs is attributable to the conversion of most of the Company's
information technology systems. Other expense decreased $65,000 to $115,000 from
$180,000 as
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compared to fiscal 1997, primarily due to start up costs incurred from the
acquisition of Pension & Benfit Financial Services that were booked in the three
months ended June 30, 1997.
INCOME TAX EXPENSE
The Company's effective tax rate for the nine-month periods ended June 30, 1998
and 1997, was 39.3% and 39.9% respectively, compared to the federal statutory
rate of 34.0%. The Company's effective tax rate was higher than the statutory
rate due primarily to state income taxes. Income tax expense increased $88,000
or 35.6% to $334,000 for the nine months ended June 30, 1998, as compared to
$247,000 for the nine months ended June 30, 1997, 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
Company has generated for its stockholders. The table below sets forth the
return on average stockholders' equity and other performance ratios of the
Company for the periods indicated.
<TABLE>
<CAPTION>
At or for the
nine months ended
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
Return on assets 0.44% 0.53%
Return on equity 4.28% 3.79%
Equity-to-assets ratio 10.26% 13.90%
Interest rate spread 3.43% 3.24%
Net interest margin 3.51% 3.79%
Total risk-based capital ratio 19.68% 21.47%
Nonperforming loans to loans 2.47% 0.53%
Allowance for loan losses to loans 0.76% 0.42%
Allowance for loan losses to nonperforming loans 30.80% 78.94%
Ratio of net charge-offs to average loans outstanding 0.05% 0.00%
Book value per common share outstanding $17.51 $15.95
</TABLE>
Significant factors affecting the Company's financial condition during the nine
months ended June 30, 1998 are detailed below:
ASSETS
Total assets increased $67,186,000 or 70.1% from $95,789,000 at September 30,
1997, to $162,975,000 at June 30, 1998. The acquisition of Chilton County in
early fiscal 1998 was responsible for an increase of $72,293,000 in total
assets. Excluding the increases attributable to Chilton County, net loans
decreased $4,093,000 compared to September 30, 1997, primarily due to seasonal
changes in loan demand,
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<PAGE> 12
particularly construction loans. The Company sold approximately $14,000,000 of
the investment securities acquired from Chilton County and reinvested the
proceeds therefrom primarily in short-term securities.
LIABILITIES
Total liabilities increased $64,608,000, or 78.6%, from $82,165,000 at September
30, 1997, to $146,773,000 at June 30, 1998. Approximately $67,458,000 of the
increase was attributable to the acquisition of Chilton County. Excluding
increases from the Chilton County acquisition, deposits decreased approximately
$1,332,000 during the period, borrowed funds decreased approximately $2,212,000,
while accrued expenses and other liabilities increased approximately $1,008,000
compared to September 30, 1997. The decrease in deposits is primarily a result
of customers seeking alternative investment options. The decrease in borrowed
funds is due to the repayment of a maturing note plus excess cash available due
to the Chilton County acquisition. The increase in accrued expenses is primarily
the result of the Chilton County acquisition.
LOAN QUALITY
A major key to long-term earnings growth is maintenance of a high-quality loan
portfolio. The Company's directive in this regard is carried out through its
policies and procedures for review of loans. The goal and result of these
policies and procedures is to provide a sound basis for new credit extensions
and an early recognition of problem assets to allow the most flexibility in
their timely disposition.
At June 30, 1998, the allowance for loan losses was $757,176, as compared to
$284,324 at September 30, 1997. The increase is due almost entirely to the
acquisition of Chilton County. The Company recorded provisions for loan losses
of $41,352 and $36,465 in the first nine months of fiscal 1998 and 1997,
respectively, because charge-offs were insignificant during these periods.
Nonperforming loans at June 30, 1998, were approximately $2,458,000 as compared
to approximately $707,000 at September 30, 1997. At June 30, 1998 and September
30, 1997, the allowance for loan losses represented 0.76% and 0.40% of loans
outstanding, respectively. 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 analyses of underlying collateral value and other factors which could
affect 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
First Federal. 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 Company is required under applicable federal regulations to maintain
specified levels of cash and "liquid" investments in qualifying types of United
States Treasury and Federal Agency securities, and other investments generally
having maturities of five years or less. Such investments serve as a source of
funds upon which the Company may rely to meet deposit withdrawals and other
short-term needs. The Company closely monitors its cash flow position to assure
necessary liquidity and to take advantage of
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market opportunities. Management believes that the Company's liquidity is
adequate to fund all outstanding commitments and other cash needs.
Changes in interest rates will necessarily lead to changes in the net interest
margin. It is the Company's goal to minimize volatility in the net interest
margin by taking an active role in managing the level, mix and maturities of
assets and liabilities.
To reduce the adverse effect of changes in interest on its net interest margin,
the Company is pursuing various strategies to improve the rate sensitivity of
its assets and stabilize net interest income.
CAPITAL ADEQUACY AND RESOURCES
Management is committed to maintaining First Federal's capital at a level
sufficient to protect depositors, provide for reasonable growth, and fully
comply with all regulatory requirements. Management's strategy to achieve this
goal is to retain sufficient earnings while providing a reasonable return on
equity.
The Office of Thrift Supervision has issued guidelines identifying minimum
regulatory "tangible" capital equal to 1.50% of adjusted total assets, a minimum
3.0% core capital ratio, and a minimum risk-based capital of 8.0% of
risk-weighted assets. First Federal has provided the majority of its capital
requirements through the retention of earnings.
As of June 30, 1998, First Federal has satisfied all regulatory capital
requirements. First Federal's compliance with the current standards is as
follows:
<TABLE>
<CAPTION>
Percent of
Amount asset base
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital $ 14,482,000 9.00%
Core Capital 14,482,000 9.00%
Risk-Based Capital 13,725,000 19.68%
</TABLE>
YEAR 2000
In the next two years, many companies may face a potentially serious
information systems problem because their computer software applications and
operational programs may not properly recognize calendar dates beginning in the
year 2000. This problem could force computers to either shut down or provide
incorrect data or information. The Company began the process of identifying the
changes required to its computer programs and hardware in early 1997. Software
upgrades designed to correct the year 2000 problem were completed during the
early part of 1998. Accordingly, the Company believes that its operating systems
are year 2000 compliant, and, thus, does not presently anticipate the cost of
any future software and hardware changes (if necessary) to have a material
adverse impact on its business, financial condition, or results of operation.
However, there can be no assurance that unforeseen difficulties or costs will
not arise. The Company has issued certification requests to the data processing
and software companies on which its computer programs rely and to all major
vendors and customers seeking assurance that they will be year 2000 compliant.
Approximately
11
<PAGE> 14
50% of the questionnaires have been returned. All of the respondents have
indicated that they are year 2000 compliant now or will be well in advance of
the year 2000.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements generally can be identified by
the use of forward-looking terminology, such as "may," "will," "expect,"
"estimate," "anticipate," "believe," "target," "plan," "project," or "continue"
or the negatives thereof or other variations thereon or similar terminology, and
are made on the basis of management's plans and current analyses of the Company,
its business and the industry as a whole. These forward-looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results to differ materially from those expressed or implied in such
forward-looking statements. The Company does not undertake to publicly update or
revise its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will not be
realized.
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
Stockholders may submit proposals appropriate for stockholder action at
the Company's 1999 Annual Meeting, consistent with the regulations of the
Securities and Exchange Commission. Proposals by stockholders intended to be
presented at the 1999 Annual Meeting must be received by the Company no later
than November 5, 1998, in order to be included in the Company's proxy materials
for that meeting. With respect to any such proposals received by the Company
after January 19, 1999, the persons named in the form of proxy solicited by
management will vote the proxy in accordance with their judgment of what is in
the best interests of the Company. Proposals should be directed to SouthFirst
Bancshares, Inc., Attention: Corporate Secretary, 126 North Norton Avenue,
Sylacauga, Alabama 35150.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 - Financial Data Schedules (for SEC use only).
(b) Reports on Form 8-K. No report on form 8-K was filed during the quarter
ended June 30, 1998.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHFIRST BANCSHARES, INC.
Date: August 13, 1998 By: /s/ Donald C. Stroup
-------------------------------------
Donald C. Stroup, President and
Chief Executive Officer
(principal executive officer)
Date: August 13, 1998 By: /s/ Joe K. McArthur
-------------------------------------
Joe K. McArthur, Executive Vice
President and Chief Financial Officer
(principal financial and accounting
officer)
13
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHFIRST BANCSHARES INC, FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> JUN-30-1998
<CASH> 21,662
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,780
<INVESTMENTS-CARRYING> 1,078
<INVESTMENTS-MARKET> 1,078
<LOANS> 100,250
<ALLOWANCE> 757
<TOTAL-ASSETS> 162,925
<DEPOSITS> 124,195
<SHORT-TERM> 12,254
<LIABILITIES-OTHER> 4,137
<LONG-TERM> 3,791
0
0
<COMMON> 0
<OTHER-SE> 16,202
<TOTAL-LIABILITIES-AND-EQUITY> 162,925
<INTEREST-LOAN> 6,097
<INTEREST-INVEST> 2,139
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,236
<INTEREST-DEPOSIT> 3,882
<INTEREST-EXPENSE> 4,786
<INTEREST-INCOME-NET> 3,449
<LOAN-LOSSES> 41
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,949
<INCOME-PRETAX> 850
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
<YIELD-ACTUAL> 8.08
<LOANS-NON> 0
<LOANS-PAST> 2,458
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 779
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 757
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
