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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-13640
SOUTHFIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation
I.R.S. Employer Identification No. 63-1121255
126 North Norton Ave.
Sylacauga, Alabama 35150
(205) 245-4365
Securities Registered Pursuant to Section 12(b)
of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $ .01 par value American Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g)
of the Exchange Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB, or any
amendment to this Form 10-KSB. [x]
Issuer's Revenues for the fiscal year ended September 30, 1998:
$13,088,065
The aggregate market value of the common equity held by nonaffiliates
of the Registrant (674,210 shares), computed using the closing price as reported
on the American Stock Exchange for the Registrant's Common Stock on December 24,
1998, was $10,955,912. For the purposes of this response, officers, directors
and holders of 5% or more of the Registrant's Common Stock are considered the
affiliates of the Registrant.
The number of shares outstanding of the Registrant's Common Stock as of
December 24, 1998: 999,244 shares of $.01 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-KSB is, pursuant to
General Instruction E(3) of Form 10-KSB, incorporated by reference from the
Company's definitive proxy statement (the "Proxy Statement") to be filed
pursuant to Regulation 14A with the Commission not later than 120 days after the
end of the fiscal year covered by this form.
Transitional Small Business Disclosure Format: Yes No X
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Management has endeavored in its communications, in its Annual Report,
and in this Form 10-KSB to highlight the trends and factors that might have an
impact on SouthFirst Bancshares, Inc. ("SouthFirst") and the industry in which
SouthFirst competes. Any "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, are made on the basis of management's plans and current analyses of
SouthFirst, 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, SouthFirst's financial performance and
could cause actual results for fiscal 1999 and beyond to differ materially from
those expressed or implied in such forward-looking statements. SouthFirst 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 I
ITEM 1. BUSINESS
BUSINESS OF SOUTHFIRST
SouthFirst Bancshares, Inc. ("SouthFirst") was formed in April of 1994,
at the direction of the Board of Directors of First Federal of the South ("First
Federal"), a federally chartered savings association subject to the regulatory
oversight of the Office of Thrift Supervision ("OTS") for the purpose of
becoming a holding company to own all of the outstanding common stock of First
Federal. On February 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 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.
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.
At September 30, 1998, First Federal conducted business from four
full-service locations in Alabama. These locations included its main office in
Sylacauga and branches in Talladega, Clanton, and Centreville. In addition,
First Federal operates loan production offices in the Alabama cities
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of Hoover, Dothan and Rainbow City, the latter two of which were opened in April
of 1998, primarily to enhance First Federal's construction lending activities in
the fast growing "wire grass" region in the state as well as the strong
construction market in northwest Florida. The loan production office in Rainbow
City focuses primarily on real estate mortgage loans. Because of its close
proximity to Gadsden, Alabama, First Federal's loan production office in Rainbow
City is also able to serve the Gadsden market area, which is an area
experiencing significant increases in home construction. First Federal will also
pursue other types of loans such as consumer, commercial, and real estate
mortgage loans in the Dothan, Rainbow City and Gadsden market areas as demands
dictate.
On April 27, 1998 SouthFirst submitted an application with the Office
of Thrift Supervision, seeking approval to exercise limited trust powers and to
create an operating subsidiary to exercise limited trust powers. This proposed
subsidiary would provide limited trust services to the SouthFirst's wholly-
owned subsidiary, Pension & Benefit Financial Services, Inc. ("Pension &
Benefit"). As of September 30, 1998 this application had been deemed
substantially approved by the OTS, and SouthFirst was awaiting final approval.
See "PROPERTIES."
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-to-four family
mortgage loans, constructions loans, mortgage-backed securities, 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 mortgage-backed securities, 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, mortgage-backed securities, CMOs, FHLB advances 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, Chilton, and Bibb Counties
in 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 First Federal's lending officers' reputations and
their long-standing relationships with builders and developers in the market
areas they serve. See "-- Construction Lending."
First Federal offers its customers fixed rate and adjustable rate
mortgage loans, residential construction loans, as well as other 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. All
consumer loans are retained in First Federal's portfolio.
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
Talladega, Chilton and Bibb Counties in central Alabama. To a lesser extent,
First Federal's deposit gathering and lending area covers the adjoining Alabama
counties of Coosa, Shelby, Clay, Cleburne, Calhoun, St. Clair and Jefferson.
Talladega County has a population of approximately 77,000 based on 1996 census
data as published by the U.S. Bureau of Vital Statistics. Chilton County and
Bibb County had populations of approximately
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35,000 and 18,000, respectively, based on 1996 CACI, Inc. estimates. First
Federal's main office in Sylacauga is situated approximately 38 miles southeast
of Birmingham, the largest city in Alabama. First Federal's branch office in
Talladega is situated approximately 55 miles east of Birmingham. First Federal's
Clanton office is located approximately 55 miles north of Montgomery. First
Federal's Centreville office is located approximately 25 miles south of
Tuscaloosa. First Federal's loan production office in Hoover is situated within
the Birmingham metropolitan area. The Dothan loan production office is located
approximately 191 miles southeast of Birmingham. The Rainbow City loan
production is approximately 15 miles south of Gadsden and 62 miles northeast of
Birmingham.
First Federal is the largest financial institution headquartered in
Sylacauga and is the second largest in Talladega County. Talladega County 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, Blue Bell Ice Cream, Pursell Industries and Georgia Marble.
U.S. Alliance Corporation, a paper manufacturer, is a major employer in
Childersburg, Alabama, located 10 miles from Sylacauga in Talladega County.
Talladega's economy is based largely on major textile manufacturing
employers such as Brecon Knitting Mills, Wehadkee Yarn Mills, and Image
Industries, Inc. Georgia-Pacific Corporation also employs 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 individuals to
Talladega County primarily from the southeast region of the United States.
First Federal's Clanton office, in Chilton County, and Centreville
office, in Bibb County, were each acquired by First Federal on October 31, 1997.
Although Chilton and Bibb Counties are generally rural areas in which the
economy is largely based on the growth and harvesting of peaches, each of these
counties has been experiencing relatively higher growth rates than Talladega
County in terms of population and households. Chilton County's employers include
GulfStates Paper Corp., International Paper Corp. and Union Camp Corp. Both
counties are in close proximity to the Birmingham metropolitan area. Bibb County
is located near Tuscaloosa and the fast-growing town of Vance, the home of a new
Mercedes-Benz manufacturing plant.
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 September 30,
1998, First Federal had $77.4 million, 74% 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.
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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
September 30, 1998, First Federal held approximately $34.4 million ARMs, which
represented approximately 32.9% 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 95% 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 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 of Directors 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 enforce 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 secured by second mortgages on real
estate, such as home improvement and home equity loans. On September 30, 1998,
such loans amounted to $3,840,000. Second mortgage loans are extended for up to
80% of the appraised value of the property, less existing
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liens, at an adjustable or fixed interest rate. Home equity loans are extended
in amounts up to 100% of the appraised value of the property, with the
requirement that private mortgage insurance be obtained. First Federal generally
holds the first mortgage loans on the properties securing the second mortgages.
CONSTRUCTION LENDING
At September 30, 1998, committed construction loans secured by
single-family residential property totaled $20.8 million; of this amount,
approximately $6.1 million was not disbursed. First Federal makes construction
loans primarily to builders for the construction of single-family residences, on
both a pre-sold and speculative basis. First Federal also makes construction
loans on single-family residences to individuals who will ultimately be the
owner-occupant of the house.
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.
Construction loans are principally made to builders who have an
established credit history with First Federal, 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 converts many of its construction loans to
permanent loans 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.
Jimmy C. Maples, First Vice President of First Federal, manages the
Hoover loan production office. His primary responsibility is to manage the
construction lending portfolio of 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 the First Federal Board of Directors. Funds
are disbursed based upon percentage of completion as verified by on-site
inspections performed by Mr. Maples.
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
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construction loans out of the Hoover office in amounts 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 balances and
other related construction loan accounts are fairly stated. Over time, 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 of Directors on a quarterly basis.
At September 30, 1998, 13 borrowers had construction loan commitments
in excess of $500,000 with the largest commitment being $2,079,000. The majority
of loans in the construction loan portfolio were made on a speculative basis. As
previously discussed, construction loans are typically outstanding for a period
of 12 months or less. If the loan is not paid within the original 12 month
period, it is renewed for a six month period. All renewals are approved by First
Federal's Loan Committee. As of September 30, 1998, there were 22 such renewal
loans totaling $3,363,674.
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 limit
for these borrowers is 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.
COMMERCIAL LENDING
At September 30, 1998, commercial lending accounted for only 0.33%, or
$348,000, of First Federal's total loan portfolio. 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. Due to the growth in
commercial lending in recent years, First Federal has increased its commercial
loan portfolio.
CONSUMER LENDING AND OTHER LENDING
As a community-oriented financial institution, First Federal offers
certain consumer loans, including both unsecured loans and loans secured by
assets such as deposits, vehicles, and heavy equipment. At September 30, 1998,
consumer loans totaled $12.3 million, or 11.8% of First Federal's total loan
portfolio. This amount includes $2.0 million of loans secured by savings
accounts, $2.7 million of loans secured by vehicles, and $7.6 million in other
secured loans.
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 of Directors. 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 applicable to 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, 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.
COMPETITION
First Federal has significant competition for its residential real
estate mortgage loans, construction loans and other loans and deposits in
Talladega, Jefferson, Chilton and Bibb Counties. The cities of Sylacauga,
Talladega and Clanton 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.
Competition in the financial services industry has increased significantly
within the past several years as a result of federal and state legislation which
has, in several respects, deregulated financial institutions. The full impact of
this legislation and subsequent laws cannot be fully assessed or predicted.
First Federal's loan production offices also face significant
competition for originations of residential construction loans. First Federal's
competition for these loans comes principally from larger savings institutions
and commercial banks 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 the area.
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
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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 from its community orientation and
its long-standing relationship with many of its customers.
DATA PROCESSING
First Federal has entered into a data processing servicing agreement
with Kirchman Corp. This servicing agreement provides for First Federal to
receive a full range of data processing services, including an automated general
ledger, deposit accounting, commercial, real estate and installment lending data
processing, central information file and ATM processing and investment portfolio
accounting.
EMPLOYEES
First Federal presently employs 66 individuals on a full-time basis,
including 18 officers, and 7 individuals on a part-time basis. First Federal
will hire additional persons as needed, including additional tellers and
financial service representatives.
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. First Federal 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 calendar year 1998. Presently, First Federal is in the
process of testing all of its operating systems in order to be ready for year
2000. As of September 30, 1998, First Federal does not 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. First Federal 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 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.
First Federal also recognizes the importance of determining that its
borrowers are facing the Year 2000 problem in a timely manner to avoid
deterioration of its loan portfolio solely due to this issue. All material
relations have been identified to assess the inherent risks. First Federal plans
to work on a one-on-one basis with any borrower who has been identified as
having high Year 2000 risk exposure.
First Federal's contingency plans relative to Year 2000 issues have not
been finalized. Management will develop and modify a "worse case scenario"
contingency plan which will, among other things, anticipate that the First
Federal's deposit customers will have increased demands for cash in the latter
part of 1999.
FEE-FOR-SERVICE SUBSIDIARIES
At September 30, 1998, SouthFirst owned a 50% interest in Magnolia
Title Services, Inc. ("Magnolia"), a company which provides title insurance and
related services to borrowers and lenders. Magnolia has not been profitable
since its inception. Start-up losses at Magnolia have resulted in write-downs of
SouthFirst's investment of $245,000 to $144,617. As a consequence, SouthFirst
has undertaken programs to re-evaluate its investment in Magnolia. The results
of these re-evaluations may lead
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SouthFirst to make certain strategic changes, including further write-downs of
its investment, if certain performance-based goals are not met or as
circumstances may otherwise require.
In the first quarter of fiscal 1998, SouthFirst terminated its
relationship in the Meta Company ("Meta"), a financial planning and services
business. Start-up losses at Meta have resulted in write-downs of SouthFirst's
initial investment of $175,000 to $96,663 at the time of its dissolution.
SUPERVISION AND REGULATION
GENERAL
First Federal is chartered as a federal savings institution under the
Home Owners' Loan Act, as amended ("HOLA"), which is implemented by regulations
adopted and administered by the OTS. As a federal savings institution, First
Federal is subject to regulation, supervision and regular examination by the
OTS. Federal banking laws and regulations control, among other things, First
Federal's required reserves, investments, loans, mergers and consolidations,
payment of dividends and other aspects of First Federal's operations. The
deposits of First Federal are insured by the Savings Association Insurance Fund
(the "SAIF"), which is 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 Securities and Exchange Commission (the "Commission")
under the federal securities laws. Certain of the regulatory requirements
applicable to First Federal and to SouthFirst are referred to below or elsewhere
herein.
As a federally insured depository institution, First Federal is 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
and SouthFirst establishes a comprehensive framework for the operations of First
Federal and SouthFirst, and is intended primarily for the protection of the FDIC
and the depositors of First Federal. Changes in the regulatory framework could
have a material adverse effect on First Federal and its operations that, in
turn, could have a material adverse effect on SouthFirst. To the extent that the
following information describes certain 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.
PROPOSED LEGISLATION
The United States Congress recently considered legislation that would
have required all federal savings institutions (such as First Federal) 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). Although this legislation was not enacted, if similar legislation
were to be adopted in the future, 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. SouthFirst cannot predict whether similar
legislation may be enacted in the future.
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REGULATION OF SOUTHFIRST
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 rather than for
the benefit of shareholders of SouthFirst.
QUALIFIED THRIFT LENDER TEST
As a 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." 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 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 rebuttably 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
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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.
REGULATION OF FIRST FEDERAL
INSURANCE OF DEPOSIT ACCOUNTS
First Federal's 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.
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
management of First Federal is unaware of any practice, condition or violation
that might lead to termination of its 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 implemented by the
Economic Growth and Regulatory Paperwork Reduction Act (the "Economic Growth
Act") (see " -- Special FDIC Assessment"), 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, 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
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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.
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 is classified as
"well-capitalized" and has 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.
SPECIAL FDIC ASSESSMENT
On September 30, 1996, the Economic Growth Act was signed into law
pursuant to which the, FDIC imposed a one-time assessment on the deposits of all
depository institutions the accounts of which are insured by the SAIF. The
purpose of the assessment was to recapitalize the SAIF and resolve the current
premium disparity between the SAIF and Bank Insurance Fund ("BIF"). 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 a SAIF insured institution, First Federal was required to
pay approximately $430,000 in connection with this special assessment.
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 September 30, 1998, First
Federal was "well capitalized." Failure to maintain that status could result in
greater regulatory oversight or restrictions on First Federal's activities.
Core Capital and Tangible Capital. The OTS requires savings
institutions 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 4.0%. All other savings
associations are required to maintain minimum core capital of at least 4.0% of
total adjusted 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). At September 30, 1998,
First Federal's ratio of tangible and core capital to total adjusted assets was
7.7%.
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)
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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).
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 0.0% 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 September 30, 1998, First Federal's
ratio of total capital to total risk-weighted assets was 18.46%.
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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --
Capital Resources" for tables setting forth First Federal's compliance with its
regulatory capital requirements as of September 30, 1998.
PROMPT CORRECTIVE ACTION
FDICIA also established a system of prompt corrective action to resolve
the problems of undercapitalized institutions. Under this system, 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 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 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 4.0% or a leverage capital ratio that
is less than 4.0% and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 3.0%. 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 September 30, 1998, First Federal was
classified as a "well capitalized" institution.
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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 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. At September 30,
1998, First Federal was rated 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
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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 Action."
QUALIFIED THRIFT LENDER TEST
HOLA requires savings institutions to meet one of two Qualified Thrift
Lender ("QTL") tests, 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 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 HOLA's QTL test by maintaining at least 65% of
"portfolio assets" in certain "Qualified Thrift Investments." For purposes of
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
September 30, 1998, First Federal qualified as a QTL.
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.
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LOANS TO ONE BORROWER
Under HOLA, 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 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 limit for these borrowers is 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.
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. Within 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
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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
utilizing a four-tiered descriptive rating 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 June 30, 1998.
CONSUMER CREDIT REGULATION
First Federal'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.
17
<PAGE> 19
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 4.0%.
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. Monetary
penalties may be imposed upon associations for violations of liquidity
requirements.
The OTS has recently revised its liquidity regulations to decrease the
burden of compliance with such rules. Specifically, the OTS has (1) reduced the
liquidity base by excluding withdrawable accounts payable in more than one year
from the definition of "net withdrawable accounts," (2) reduced the liquidity
requirement from 5% of net withdrawable accounts and short-term borrowings to
4%, (3) removed a requirement that short-term liquid assets constitute at least
1% of an association's average daily balance of net withdrawable deposit
accounts and current borrowings, and (4) expanded the categories of liquid
assets that may count toward satisfaction of the liquidity requirements.
FEDERAL HOME LOAN BANK SYSTEM
General. First Federal is a member of the FHLB System, which consists
of twelve 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, as a member of the FHLB of Atlanta, is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of: (i) one percent of the aggregate outstanding
principal amount of its unpaid home mortgage loans, home purchase contracts and
similar obligations as of the beginning of each year or (ii) $500. First Federal
is in compliance with this requirement with an investment in stock of the FHLB
of Atlanta at September 30, 1998 of $1,375,000.
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 FHLB. Long term advances
may only be made for the purpose of providing funds for residential housing. At
September 30, 1998, First Federal had $16 million 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 dividends paid on FHLB stock
and could continue
18
<PAGE> 20
to do so in the future. For the years ended September 30, 1998 and September 30,
1997, dividends were paid by the FHLB to First Federal in the amount of $102,846
and $41,219, 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, while reserves equal to 3% must be maintained on the
next $49.3 million of transaction accounts, plus reserves equal to 10% of 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 reserve
requirement has the effect of reducing the amount of the institution's
interest-earning assets. At September 30, 1998, the total transaction accounts
of First Federal 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. First Federal did not have any such borrowings at September 30,
1998.
ITEM 2. PROPERTIES
First Federal conducts its business through its main office located in
Sylacauga, Alabama, branch offices located in Talladega, Clanton and
Centreville, Alabama, and loan production offices in Hoover, Dothan and Rainbow
City, Alabama. In addition, on November 24, 1998, First Federal purchased a
parcel of land in Birmingham, Alabama at a purchase price of $1,250,000. First
Federal is presently evaluating the costs of developing a new branch office at
this location. If it is determined that the site will be developed, construction
is expected to be completed in late 1999 or early 2000.
The following table sets forth information relating to the offices of
SouthFirst, First Federal and Pension & Benefit at September 30, 1998. The total
net book value of the land and buildings owned by SouthFirst and its
subsidiaries at September 30, 1998 was approximately $3,047,000.
19
<PAGE> 21
<TABLE>
<CAPTION>
NET BOOK VALUE DEPOSITS
LEASED AS OF AS OF
LOCATION OR OWNED DATE OPENED SEPT. 30, 1998 SEPT. 30, 1998
-------- -------- ----------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
SOUTHFIRST AND FIRST FEDERAL
MAIN OFFICE
126 North Norton Avenue Owned April 1966 $ 764 $ 46,957
Sylacauga, Alabama 35150
FIRST FEDERAL
BRANCH OFFICES
301 West North Street Owned April 1961 $ 221 $ 17,957
Talladega, Alabama 35160
102 Fifth Street North Owned November 1997 $ 1,492 $ 50,833
Clanton, Alabama 35045
125 Olan Heights Leased November 1997 -- $ 8,087
Shopping Center
Centreville, Alabama 35042
LOAN PRODUCTION OFFICES
3055 Lorna Road Leased March 1994 -- --
Birmingham, Alabama 35216
BrightLeaf Court Leased April 1998 -- --
Suite 20
25 Honeysuckle Rd.
Dothan, Alabama 36305
111 Hollinsworth Ave. Leased January 1998 -- --
Rainbow City, Alabama 35906
OFFICE/STORAGE BUILDING
North Norton Avenue Owned(1) November 1995 $ 248 --
Sylacauga, Alabama 35150
PENSION & BENEFIT
260 Commerce Street Owned April 1997 $ 322 --
Third Floor
Montgomery, Alabama 36101
TOTAL $3,047,000 $123,833
========== ========
</TABLE>
- -----------------
(1) 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. At September 30, 1998, one office was rented by SouthFirst's former
subsidiary, the Meta Company, and one office was rented to a local radio
station. The remaining two offices are utilized by First Federal's accounting
department. Meta and the station each remit a monthly amount of $750 to
SouthFirst.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, SouthFirst and First Federal from
time to time are involved in legal proceedings. In one such proceeding, First
Federal management believes that an adverse judgment is reasonably possible and
estimates the pretax loss could be in the range of $50,000 to $100,000.
SouthFirst and First Federal management believe there are no pending or
threatened legal proceedings
20
<PAGE> 22
which upon resolution are expected to have a material effect upon SouthFirst's
or First Federal's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter ended September 30,
1998 to a vote of security holders of SouthFirst.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of November 2, 1998, SouthFirst's Common Stock was held by
approximately 417 persons. SouthFirst's Common Stock trades on the American
Stock Exchange, under the symbol "SZB." The following data reflects, by fiscal
quarter, the high and low sales price as well as cash dividends declared for
each quarter from October 1, 1996 through September 30, 1998:
<TABLE>
<CAPTION>
Cash
----
Dividends
---------
High Sale Low Sale Declared(1)
--------- -------- ---------
<S> <C> <C> <C>
Fiscal Year Ended September 30, 1997
------------------------------------
First Quarter ended December 31, 1996 $13 1/4 $12 1/4 $102,962
Second Quarter ended March 31, 1997 14 1/2 12 7/8 102,962
Third Quarter ended June 30, 1997 16 13 7/8 102,638
Fourth Quarter ended September 30, 1997 18 1/4 15 7/8 102,950
Fiscal Year Ended September 30, 1998
------------------------------------
First Quarter ended December 31, 1997 $22 3/4 $18 3/8 $105,950
Second Quarter ended March 31, 1998 22 5/8 21 5/8 145,192
Third Quarter ended June 30, 1998 22 1/4 18 7/8 146,302
Fourth Quarter ended September 30, 1998 18 7/8 15 7/8 146,302
</TABLE>
- ------------
(1) Certain cash dividends associated with SouthFirst's Management Recognition
Plans and Employee Stock Option Plan shares are reflected as compensation
expense in the consolidated financial statements. See "EXECUTIVE
COMPENSATION -- Management Recognition Plans" and "-- Employee Stock
Ownership Plan."
Holders of SouthFirst Common Stock are entitled to receive such
dividends as may be declared by SouthFirst's Board of Directors. The amount and
frequency of cash dividends will be determined in the judgment of SouthFirst's
Board of Directors based upon a number of factors, including the company's
earnings, financial condition, capital requirements, and other relevant factors.
SouthFirst management presently intends to continue its present dividend
policies. See "BUSINESS -- Supervision and Regulation -- Regulation of First
Federal -- Dividends and Other Capital Distribution Limitations."
The amount of dividends payable by First Federal is limited by law and
regulation. The need for First Federal to maintain adequate capital also limits
dividends that may be paid to SouthFirst. Although Federal Reserve policy could
restrict future dividends on SouthFirst Common Stock, such policy places no
current restrictions on such dividends. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
21
<PAGE> 23
CONDITION AND RESULTS OF OPERATIONS -- Capital Resources" and "BUSINESS --
Supervision and Regulation -- Regulation of First Federal -- Dividends and Other
Capital Distribution Limitations."
ITEM 6. 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.
The purpose of this discussion is to focus on significant changes in
the financial condition and results of SouthFirst during the two year period
ended September 30, 1998. This discussion and analysis is intended to supplement
and highlight information contained in the accompanying consolidated financial
statements and the selected financial data presented elsewhere herein.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
An integral aspect of the funds management of First Federal is the
maintenance of 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,
the bank's 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 positive when the
amount of interest rate sensitive assets exceeds the amount of interest
sensitive liabilities, and is 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 Federa Board of
Directors recognize that achieving a perfectly matched gap position in any given
time frame would be extremely rare. At September 30, 1998, First Federal had a
negative one-year cumulative ratio of (0.82%) and a negative five-year
cumulative ratio of (2.55%), as a result of which its net interest income could
be negatively affected by rising interest rates and positively affected by
falling interest rates. At September 30, 1997, First Federal had a negative
one-year cumulative ratio of (6.86%) and a positive five-year cumulative ratio
of 0.76%. During the stable interest rate environment of 1998 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.
22
<PAGE> 24
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
included $34.4 million and $14.7 million (32% and 19% of First Federal's total
loan portfolio) of adjustable rate loans at September 30, 1998 and September 30,
1997, respectively. These loans have 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 September 30, 1998 and September
30, 1997. At a 400 basis point increase, First Federal's MVPE increased
approximately $133,000 and $107,000 at September 30, 1998 and September 30,
1997, respectively, and, at a 400 basis point decrease, First Federal's MVPE
decreased approximately $111,000 and $146,000 at September 30, 1998 and
September 30, 1997, 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 September 30, 1998 and September 30, 1997. 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.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE> 25
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gap
At September 30, 1998
--------------------------------------------------------------------------------------------
One Four to
year One to Two to Three to Five Over
or less two years three years four years years five years Total
------- --------- ----------- ---------- ----- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 56,758 $ 7,290 $ 6,890 $ 6,539 $ 5,012 $12,520 $ 95,009
All other loans 2,668 1,854 2,034 2,233 792 -- 9,581
Collateralized mortgage
obligations 4,171 160 -- -- -- -- 4,331
Mortgage-backed
securities 13,432 696 748 805 865 9,992 26,538
Investments(1) 4,052 -- -- -- 108 1,795 5,955
-------- -------- -------- -------- ------- ------- --------
Total interest
earning assets $ 81,081 $ 10,000 $ 9,672 $ 9,577 $ 6,777 $24,307 $141,414
======== ======== ======== ======== ======= ======= ========
Interest-bearing
liabilities:
Deposits 70,452 29,375 4,375 233 106 19,343 123,884
Borrowed funds 11,788 1,500 1,526 1,355 -- -- 16,169
-------- -------- -------- -------- ------- ------- --------
Total interest
bearing
liabilities $ 82,241 $ 30,874 $ 5,900 $ 1,589 $ 106 $19,343 $140,053
======== ======== ======== ======== ======= ======= ========
Interest
sensitivity gap $ (1,160) $ 20,874 $ 3,771 $ 7,988 $ 6,671 $ 4,964 $ 1,361
Cumulative interest
sensitivity gap $ (1,160) $(22,034) $(18,263) $(10,274) $(3,603) $ 1,361 $ 1,361
Ratio of cumulative
interest sensitivity gap
to total interest
earning assets (0.82)% (15.58)% (12.91)% (7.27)% (2.55)% 0.96% 0.96%
Ratio of cumulative
interest
sensitivity gap to
total assets of
$158,518 (0.73)% (13.90)% (11.52)% (6.48)% (2.27)% 0.86% 0.86%
<CAPTION>
Interest Rate Sensitivity Gap
At September 30, 1997
------------------------------------------------------------------------------------
One Four to
year One to Two to Three to five Over
or less two years three years four years years five years Total
------- --------- ----------- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 39,130 $ 5,301 $ 4,578 $ 3,949 $3,399 $12,649 $69,006
All other loans 676 744 817 439 -- -- 2,676
Collateralized mortgage
obligations 5,586 511 44 -- -- -- 6,141
Mortgage-backed
securities 3,264 209 225 241 259 553 4,731
Investments(1) 1,951 1,473 -- -- -- 2,353 5,777
-------- ------- ------- ------- ------ ------- -------
Total interest
earning assets $ 50,607 $ 8,228 $ 5,664 $ 4,629 $3,658 $15,555 $88,332
======== ======= ======= ======= ====== ======= =======
Interest-bearing
liabilities:
Deposits 39,585 5,640 5,636 1,300 1,300 7,092 60,553
Borrowed funds 17,081 662 318 303 289 -- 18,653
-------- ------- ------- ------- ------ ------- -------
Total interest
bearing
liabilities $ 56,666 $ 6,302 $ 5,954 $ 1,603 $1,589 $ 7,092 $79,206
======== ======= ======= ======= ====== ======= =======
Interest
sensitivity gap $ (6,059) $ 1,926 $ (290) $ 3,026 $2,069 $ 8,463 $ 9,135
Cumulative interest
sensitivity gap $ (6,059) $(4,133) $(4,423) $(1,397) $ 672 $ 9,135 $ 9,135
Ratio of cumulative
interest sensitivity gap
to total interest
earning assets (6.86)% (4.68)% (5.01)% (1.58)% 0.76% 10.34% 10.34%
Ratio of cumulative
interest
sensitivity gap to
total assets of
$158,518 (6.33)% (4.31)% (4.62)% (1.46)% 0.70% 9.54% 9.54%
</TABLE>
- ---------------------
(1) Includes investments in overnight deposits.
24
<PAGE> 26
The Morgan Keegan Analysis for 1998 and 1997 and the preceding table
were prepared based upon the 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 8%.
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 -- Business of
First Federal -- Residential Lending."
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 long term net interest income 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. The amount of loans in this
portfolio was equal to $10,047,000 at September 30, 1998 and $3,049,824 at
September 30, 1997. First Federal also sells a significant portion of its fixed
rate loan originations with maturities of greater than 15 years in the secondary
markets, and directs excess cash flow into short-term and adjustable rate
investment securities. Diversification into more interest-sensitive mortgage
loans and construction loans in the Birmingham area has also served to reduce
First Federal's interest rate risk exposure.
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
25
<PAGE> 27
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, 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.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
26
<PAGE> 28
<TABLE>
<CAPTION>
AVERAGE BALANCE, INTEREST, YIELDS AND RATES
Year ended September 30,
------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------- -----------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Total investment securities $ 36,608,820 $ 2,825,283 7.72% $18,766,230 $1,330,015 7.09%
Loans receivable 100,740,509 8,272,834 8.21% 68,847,596 5,763,382 8.37%
----------- ----------- ----- ---------- --------- ----
Total interest earning assets 137,349,329 11,098,117 8.08% 87,613,826 7,093,397 8.10%
Allowance for loan losses (761,418) (267,587)
Cash and amounts due from
depository institutions 13,521,914 3,314,123
Premises and equipment 3,243,193 1,803,898
Foreclosed real estate 79,991 52,572
Accrued interest receivable 992,932 536,705
Other assets 2,870,586 1,163,510
Investments in Affiliates 143,373 224,174
------------ ----------
Total assets $157,439,900 $ 94,463,22
============ ==========
Interest bearing liabilities:
Deposits:
NOW accounts $10,661,585 $281,676 2.66% $6,501,600 $ 194,669 2.99%
Money market demand 331,268 6,676 2.02% 460,120 10,049 2.18%
Passbook savings 14,163,764 327,840 2.31% 9,612,487 249,157 2.59%
Certificates of deposit, other
than Jumbos 89,379,909 4,741,697 5.31% 43,579,206 2,288,858 5.25%
Jumbos 2,155,655 58,240 2.70% 1,547,064 76,827 4.97%
----------- ---------- ---- ---------- --------- ----
<CAPTION>
---------------------------------------------
1996
---------------------------------------------
Average Yield/
Balance Interest Cost
------- -------- -----
<S> <C> <C> <C>
Interest earning assets:
Total investment securities $24,717,374 $1,732,093 7.01%
Loans receivable 58,902,758 4,888,183 8.30%
---------- ---------- ----
Total interest earning assets 83,620,132 6,620,276 7.92%
Allowance for loan losses (259,024)
Cash and amounts due from
depository institutions 1,752,025
Premises and equipment 1,686,613
Foreclosed real estate 26,479
Accrued interest receivable 478,798
Other assets 344,974
Investments in Affiliates 224,635
-----------
Total assets $87,882,937
==========
Interest bearing liabilities:
Deposits:
NOW accounts $ 6,634,502 $ 247,025 3.72%
Money market demand 474,725 5,152 1.09%
Passbook savings 9,724,844 279,365 2.87%
Certificates of deposit, other
than Jumbos 44,264,201 2,417,380 5.46%
Jumbos 1,319,337 57,115 4.33%
----------- ---------- ----
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
AVERAGE BALANCE, INTEREST, YIELDS AND RATES
Year ended September 30,
----------------------------------------------------------------------------------------
1998 1997
------------------------------------------ -----------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Total interest-bearing deposits $116,692,181 $5,416,128 4.64% $61,700,477 $2,819,560 4.57%
Borrowed funds 17,810,529 1,148,782 6.45% 15,838,355 981,737 6.20%
------------ ---------- ---- ----------- ---------- ----
Total interest-bearing liabilities 134,502,710 6,564,910 4.88% 77,538,832 3,801,297 4.90%
Non-interest bearing demand
deposits 3,183,937 1,364,221
Advances by borrowers for
property taxes 341,284 311,372
Accrued interest payable 813,599 650,236
Income taxes payable 1,366,979 656,951
Accrued expenses and other
liabilities 1,214,851 733,320
------------ -----------
Total liabilities 141,423,360 81,254,932
Stockholders' equity 16,016,540 13,208,290
------------ -----------
Total liabilities & stockholders'
equity $157,439,900 $94,463,221
============ ===========
Net interest income $4,533,207 $3,292,100
========== ==========
Interest rate spread 3.20% 3.19%
====== ======
Net yield on total interest earning
assets 3.30% 3.76%
====== ======
Average interest-earning assets to
average total interest-bearing
liabilities ratio 102.12% 112.99%
====== ======
<CAPTION>
------------------------------------------------
1996
------------------------------------------------
Average Yield/
Balance Interest Cost
--------- ---------- --------
<S> <C> <C> <C>
Total interest-bearing deposits $62,417,409 $3,006,037 4.82%
Borrowed funds 8,978,744 553,372 6.16%
----------- ---------- ----
Total interest-bearing liabilities 71,396,353 3,559,409 4.99%
Non-interest bearing demand
deposits 1,222,123
Advances by borrowers for
property taxes 328,858
Accrued interest payable 655,018
Income taxes payable 463,812
Accrued expenses and other
liabilities 238,643
-----------
Total liabilities 74,304,807
Stockholders' equity 13,578,131
-----------
Total liabilities & stockholders'
equity $87,882,937
===========
Net interest income $3,060,867
==========
Interest rate spread 2.93%
======
Net yield on total interest earning
assets 3.66%
======
Average interest-earning assets to
average total interest-bearing
liabilities ratio 117.12%
======
</TABLE>
28
<PAGE> 30
FINANCIAL CONDITION
INVESTMENT SECURITIES
Investment securities held to maturity were $971,000, $162,000 and
$154,000 at September 30, 1998, September 30, 1997 and September 30, 1996,
respectively. The increase of $809,000 in 1998 was due primarily to the
acquisition of First Federal Savings and Loan Association of Chilton County
during the first fiscal quarter. First Federal's portfolio of investment
securities available for sale totaled $36,824,000 and $16,666,000 at September
30, 1998 and September 30, 1997, respectively.
The composition of First Federal's total investment securities
portfolio reflects First Federal's former investment strategy of providing
acceptable levels of interest income from portfolio yields while maintaining
level of liquidity which would allow First Federal a degree of control over its
interest rate position. In previous years, First Federal invested primarily in
investment grade CMOs and mortgage-backed securities because of their liquidity,
credit quality and yield characteristics. The yields, values and duration of
such securities generally vary with 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 mortgage-backed securities amounting
to $204,000 in 1994.
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
mortgage-backed securities and utilize principal repayments on these securities
to fund construction loans. Accordingly, First Federal did not purchase any CMOs
or mortgage-backed securities from 1994 through 1997. However, in 1998 First
Federal acquired approximately $466,000 in CMOs and $16,101,000 in
mortgage-backed securities, as a result of First Federal's acquisition of
Chilton County in October 1998. In addition, as a result of the excess cash on
hand from the Chilton County acquisition, First Federal purchased approximately
$18,670,000 in mortgage-backed securities in 1998.
Principal repayments on both CMOs and mortgage-backed securities for
the years ended September 30, 1998, 1997, and 1996 were $15,292,000, $3,093,000,
and $7,247,000, respectively. As of September 30, 1998 First Federal had an
investment in FHLB agencies of $150,000 compared to $2,000,000 as of September
30, 1997. The decrease is due to approximately $2,000,000 in agencies being
called in fiscal 1998. At September 30, 1998, First Federal had investments of
approximately $4,854,000 in equity securities such as FHLB stock, FHLMC stock,
other common stock, and mutual funds.
The following table indicates the amortized cost of the portfolio of
investment securities held to maturity at September 30, 1998, September 30, 1997
and September 30, 1996:
29
<PAGE> 31
<TABLE>
<CAPTION>
Amortized Cost
September 30,
-----------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Investment Securities Held to Maturity:
U.S. Government agency............................... $499 $162 $154
Mortgage-backed securities........................... 90 -- --
Collateralized mortgage obligations.................. -- -- --
Other................................................ 382 -- --
---- ----- -----
Total investment securities
held to maturity............................ $ 971 $ 162 $ 154
===== ===== =====
</TABLE>
The following table indicates the fair value of the portfolio of
investment securities available for sale at September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Fair Value
September 30,
------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Investment Securities Available for Sale:
U.S. Government agency.................................. $1,101 $2,008 $4,697
Mortgage-backed securities.............................. 26,538 4,751 6,091
Collateralized mortgage obligations..................... 4,331 6,141 7,878
Other................................................... 4,854 3,766 3,127
-------- ----- -----
Total investment securities available for sale....... $36,824 $16,666 $21,793
======= ======= =======
</TABLE>
At September 30, 1998, First Federal owned CMOs totaling $4,331,000.
These securities were all backed by federal agency guaranteed mortgages except
for two issues, in the amount of $230,000, which are privately issued mortgage
pass-through certificates. One issue, totaling $417,000, bears a fixed rate of
interest; the remainder are variable rate instruments.
The mortgage-backed securities portfolio, totaling $26,538,000 at
September 30, 1998, consists of fixed rate mortgages in the amount of
$13,889,000 and ARMs in the amount of $12,649,000. At the time of purchase,
First Federal 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.
30
<PAGE> 32
The following table presents the contractual maturities and
weighted average yields of investment securities, other than equity securities,
available for sale at September 30, 1998:
<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.................... $ -- $350 $ 751 $ --
Mortgage-backed securities........................ -- 163 9,236 17,139
Collateralized mortgage obligations............... 417 -- 537 3,377
Other securities.................................. -- -- -- --
------- ----- -------- --------
Total investment securities
available for sale....................... $ 417 $ 513 $ 10,524 $ 20,516
======= ===== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Weighted Average Yields(1)
(Taxable equivalent basis)
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................. -- 7.20% 6.66% --
Mortgage-backed securities................... -- 7.66% 6.13% 5.55%
Collateralized mortgage obligations.......... 6.31% -- 5.24% 6.10%
Other securities............................. -- -- -- --
----- ----- -----
Total weighted average yield............. 6.31% 7.35% 6.12% 5.64%
===== ===== ===== =====
</TABLE>
- -------------------
(1) None of First Federal's investment securities are tax exempt.
Investment securities held to maturity at September 30, 1998 generally have
contractual maturities of one year or less.
The maturities for the CMOs and mortgage-backed securities 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 First Federal's CMOs and mortgage-backed securities
at September 30, 1998:
31
<PAGE> 33
<TABLE>
<CAPTION>
Principal payments expected during the fiscal
year ending September 30, At September 30, 1998
---------------------------------------------------------- ------------------------------
(Dollar amounts in thousands)
Weighted
Carrying Fair Average
1999 2000 2001 2002 2003 Thereafter Value Value Yield
---- ---- ---- ---- ---- ---------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Collateralized mortgage
obligations ............. $2,276 $ 187 $ 114 $ 65 $ 279 $1,404 $ 4,325 $ 4,331 6.02%
Mortgage-backed
securities .............. $6,160 $4,602 $3,409 $2,594 $1,991 $7,603 $26,359 $26,538 5.81%
Agencies ................... $ 828 -- -- -- $ 250 -- $ 1,078 $ 1,101 6.65%
</TABLE>
LOANS
Total loans of $105,322,000 at September 30, 1998 reflected an increase
of $33,356,000 (46.3%) compared to September 30, 1997. Total loans of
$71,966,000 at September 30, 1997 reflected an increase of 14.9% from total
loans of $62,653,000 at September 30, 1996. The increase from fiscal 1997 to
fiscal 1998 was largely due to the loans acquired in connection with the
purchase of Chilton County in October of 1997. First Federal has experienced
strong loan demand in its one-to-four family construction loan portfolio since
First Federal's purchase of the construction loan portfolio and the opening of a
loan production office in 1994. See "BUSINESS -- Business of First Federal --
Construction Lending."
One-to-four family real estate mortgage loans increased $6,257,000
(15%) from September 30, 1995 to September 30, 1996. The increase from September
30, 1996 to September 30, 1997 was $5,005,000 (10%). The increase from September
30, 1997 to September 30, 1998 was $24,601,000 (46.5%). First Federal
aggressively pursues real estate mortgage loans within its own market area. In
addition to originating mortgage loans for its own portfolio, First Federal also
actively originates residential mortgage loans which are sold in the secondary
market, with servicing released. First Federal 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 $11,743,000, $4,629,000 and $4,360,000 for
the years ended September 30, 1998, 1997, and 1996, respectively. See "FINANCIAL
STATEMENTS -- 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 1998 and 1997 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 years:
32
<PAGE> 34
<TABLE>
<CAPTION>
Loan Portfolio Composition (dollar
amounts in thousands)
At September 30,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
loans:
One-to-four family $73,239 70.02% $52,855 73.74% $47,981 76.89% $41,593 77.70% $39,989 79.82%
Multi-family and
commercial 1,837 1.76 390 0.54 485 0.78 535 1.00 585 1.17
Construction loans 20,833 19.92 22,880 31.92 17,717 28.39 13,495 25.21 10,715 21.39
Savings account loans 1,988 1.90 826 1.15 753 1.21 873 1.63 739 1.48
Installment loans 7,593 7.26 2,044 2.85 2,129 3.41 2,736 5.11 3,163 6.31
Second Mortgage Loans 6,216 5.94 -- -- -- -- -- -- -- --
-------- ------- ------- ------- -------
Total loans $111,706 $78,995 $69,065 $59,232 $55,191
======== ======= ======= ======= =======
Less:
Loans in process (6,102) (5.83) (6,778) (9.46) $(6,195) (9.93) $(5,243) (9.79) $(4,670) (9.32)
Discounts and
other, net (282) (0.27) (251) (0.35) (217) (0.35) (190) (0.35) (189) (0.38)
Allowance for loan
losses: (732) (0.70) (284) (0.40) (251) (0.40) (266) (0.50) (231) (0.46)
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans, net $104,590 100.00% $71,682 100.00% $62,402 100.00% $53,533 100.00% $50,101 100.00%
======== ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
The following table shows the maturity of First Federal's loan
portfolio at September 30, 1998, 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 twelve months ended September 30,
1998. The table below does not include an estimate of prepayments, the
occurrence of which would significantly shortens the average life of all
mortgage loans and cause First Federal's actual repayment to differ from that
shown below.
<TABLE>
<CAPTION>
Loan Maturities
Due during the year
ending Sept 30,
-------------------------------
Due after Due after Due After Due After
1999 2000 2001 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 $ 2,319 $ 953 $2,697 $5,911 $16,364 $22,743 $25,798 $ 76,785
Construction loans(1) 15,533 -- -- -- -- -- -- 15,533
All other loans 3,489 1,457 1,646 3,916 1,133 631 -- 12,272
------- ------ ------ ------ ------- ------- ------- --------
Total $21,341 $2,410 $4,343 $9,827 $17,497 $23,374 $25,798 $104,590
======= ====== ====== ====== ======= ======= ======= ========
</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 that the builder restructures the loan to provide
for principal reduction or arranges for permanent financing which will pay off
the construction loan.
33
<PAGE> 35
The following tables set forth, at September 30, 1998 and September 30,
1997, the dollar amount of loans due after September 30, 1998 and September 30,
1997, respectively, based upon whether such loans have fixed interest rates or
adjustable interest rates:
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------
Fixed Floating or
Rate Adjustable Rate Total
---- --------------- -----
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans.......... $ 57,595 $ 34,375 $ 91,970
Commercial loans.................... 348 -- 348
Savings and installments loans...... 12,272 -- 12,272
-------- -------- --------
Total............................ $ 70,215 $ 34,375 $104,590
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------------------------
Fixed Floating or
Rate Adjustable Rate Total
---- --------------- -----
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans.......... $ 53,806 $14,665 $68,471
Commercial loans.................... 390 -- 390
Savings and installments loans...... 2,821 -- 2,821
-------- ------- -------
Total............................ $ 57,017 $14,665 $71,682
======== ======= =======
</TABLE>
The following table sets forth First Federal's loan originations, sales and
principal repayments for the periods indicated.
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Loan Originations:
Real estate mortgage and construction loans .. $61,629 $53,227 $46,096
All other loans .............................. 7,820 3,483 1,125
------- ------- -------
Total ..................................... 69,449 56,710 47,221
======= ======= =======
Portfolio Loan Purchases:
Real estate mortgage loans ................... -- -- --
======= ======= =======
Portfolio Loan Sales Proceeds:
Real estate mortgage loans ................... 11,743 4,485 4,360
======= ======= =======
Principal Repayments:
Real estate mortgage and construction loans .. 43,040 35,751 34,928
All other loans .............................. 6,825 3,470 399
------- ------- -------
Total ........................................ $49,865 $39,221 $35,327
======= ======= =======
</TABLE>
34
<PAGE> 36
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 to ultimately 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. 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 September 30, 1998, September 30, 1997 and September 30, 1996,
loans accounted for on a nonaccrual basis were approximately $1,734,000,
$116,000, and $203,000, respectively, or 1.6%, 0.16%, and 0.32% 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 $394,000,
$591,000, and $343,000 at September 30, 1998, September 30, 1997 and September
30, 1996, 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 September 30, 1998, First Federal has not experienced any significant
losses 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 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.
35
<PAGE> 37
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; correspondingly, 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 $732,000 in allowance for loan losses at
September 30, 1998, 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 September 30,
1998, $155,000 of the allowance for loan losses was reserved for possible losses
on construction loans, $370,000 was reserved for possible losses on real estate
mortgage loans, and the remaining 207,000 was reserved for all other loan
classifications.
The following table summarizes the levels of the allowance for loan
losses at the end of the last five years:
36
<PAGE> 38
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $284 $251 $266 $231 $189
Clanton Balance at Acquisition 488 -- -- -- --
Charge-offs:
Real estate 16 -- 3 1 10
Installment 82 4 14 14 6
---- ---- ---- ---- ----
Total charge-offs 98 4 17 15 16
---- ---- ---- ---- ----
Recoveries:
Real estate mortgage 4 -- -- -- --
Installment 9 1 2 21 8
---- ---- ---- ---- ----
Total recoveries 13 1 2 21 8
---- ---- ---- ---- ----
Net loans (recovered) charged off 85 3 (15) (6) 8
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Provisions for loan losses 45 36 - 29 50
-------- ------ ------ ------ ------
Balance at end of period $ 732 $ 284 $ 251 $ 266 $ 231
======== ====== ====== ====== ======
Ratio of net charge-offs to total loans
outstanding net of unearned income 0.08% 0.00% (0.02%) (0.01%) 0.02%
======== ====== ====== ====== ======
Ratio of allowance for loan losses
to loans outstanding, net of
unearned income 0.66% 0.39% 0.40% 0.49% 0.46%
======== ====== ====== ====== ======
Total Loans Outstanding $104,590 71,967 62,653 53,799 50,332
</TABLE>
As indicated in the above table, First Federal substantially increased
its loan loss allowance in 1998 from the levels of the preceding four years.
This increase was primarily due to the acquisition of Chilton County in October
of 1997.
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,
--------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ---------------------------- --------------------------
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>
Real estate mortgage
loans 510 69.67% 217 82.75% 171 68.13%
All other loans 222 30.33% 67 17.25% 80 31.87%
---- ----- ---- ----- ---- -----
Total allowance
for loan losses $732 100% $284 100% $251 100%
==== ===== ==== ===== ==== =====
</TABLE>
On October 1, 1994, First Federal 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 September
30, 1998, the total recorded investment in impaired loans, all of which had
allowances determined in accordance with SFAS No. 114 and No. 118 was
approximately $221,000. The average recorded investment in impaired loans
amounted to approximately $227,000 for the year ended September 30, 1998. The
allowance for loan losses related to impaired loans was approximately $221,000
for fiscal 1998. Interest income on impaired loans of approximately $1,000 was
booked in 1998. No loans were considered impaired at September 30, 1997.
37
<PAGE> 39
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.
First Federal'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 $2,128,000, $707,000, and $546,000 at
September 30, 1998, September 30, 1997, and September 30, 1996, respectively.
The increase in 1998 was due to the acquisition of Chilton County. The increases
in the levels of non-performing assets from 1996 to 1997 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 First Federal's conservative lending policies.
An analysis of the components of nonperforming assets at September 30,
1998, September 30, 1997 and September 30, 1996 is presented in the following
table:
38
<PAGE> 40
<TABLE>
<CAPTION>
At September 30,
------------------------------------
1998 1997 1996
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate mortgage loans $ 756 $ 80 $ 147
All other loans 978 36 56
-------- ------- -------
Total $ 1,734 $ 116 $ 203
-------- ------- -------
Accruing loans which are past due 90 days or more:
Real estate mortgage loans $ 394 $ 577 $ 342
All other loans 0 14 1
-------- ------- -------
Total $ 394 $ 591 $ 343
-------- ------- -------
Total of non-accrual and 90 days past
due loans $ 2,128 $ 707 $ 546
Foreclosed real estate (net of related
loss provisions) -- -- --
-------- ------- -------
Total non-performing assets $ 2,128 $ 707 $ 546
======== ======= =======
Nonaccrual and 90 days past due loans
as a % of total loans 2.03% 0.98% 0.87%
======== ======= =======
Nonperforming assets as a % of total
loans 2.03% 0.98% 0.87%
======== ======= =======
Total Loans Outstanding $104,590 $71,967 $62,653
======== ======= =======
</TABLE>
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.
DEPOSITS
Total deposits increased in fiscal 1998 by $63,331,000
(104.6%) to $123,883,000. In fiscal 1997, total deposits decreased 5.5%,from
$64,095,000 to $60,552,000. Non-interest-bearing demand deposits were
$3,436,000, $1,256,000, and $1,131,000, while total interest-bearing deposits
were $120,447,000, $59,348,000, and $63,008,000 at September 30, 1998, September
30, 1997, and September 30, 1996, respectively.
First Federal's deposit mix at September 30, 1998 increased
compared to year-end 1997. NOW accounts increased $5,679,000 (100.0%), while
money market demand accounts decreased $77,000 (19.4%). 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"),
increased $48,632,000 (115.6%). Non-interest-bearing demand deposits increased
$2,180,000 (173.6%). During 1998, certificates of deposit, excluding Jumbos,
comprised approximately 73.1% of total deposits while low cost funds, including
NOW accounts, money market demand accounts, and passbook savings accounts, made
39
<PAGE> 41
up 24.2% of First Federal's total deposits. Jumbos comprised 2.7% of total
deposits at September 30, 1998.
The composition of total deposits for the last three fiscal years is
presented in the following table:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------- -------------------------
(Dollar amounts in thousands)
Percent Percent Percent
change change change
from prior from prior from prior
Amount year-end Amount year-end Amount year-end
--------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Non-Interest bearing
Demand deposits $ 3,436 173.57% $ 1,256 15.73% $ 1,131 (28.30)%
Interest bearing deposits:
NOW accounts 11,354 100.00 5,675 (15.80) 6,697 (6.93)
Money market demand 324 (19.40) 401 (13.39) 463 (7.95)
Passbook savings 14,769 57.45 9,380 (4.88) 9,861 1.63
Certificates of deposit other
than Jumbos 90,698 115.60 42,066 (5.24) 44,395 3.17
Jumbos 3,302 86.55 1,770 14.34 1,548 85.17
--------- ------ --------- ----- -------- ----
Total interest bearing deposits 120,447 103.13 59,348 (5.81) 62,964 2.76
--------- ------ --------- ----- -------- ----
Total deposits $ 123,883 104.59% $ 60,552 (5.53)% $ 64,095 2.01%
========= ====== ========= ===== ======== ====
</TABLE>
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:
40
<PAGE> 42
<TABLE>
<CAPTION>
At September 30, 1998
-----------------------------------------------------
Percentage
of
Interest total
Rate Term Category Minimum Balance Balances
- -------- ---- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands except minimum balance)
0.00% None Non-interest bearing demand $ 50 $ 3,436 2.77%
2.55% None NOW accounts 250 11,286 9.11
2.13% None Non-profit 100 68 .05
2.13% None Money market checking 2,500 324 0.26
2.58% None Passbook savings 50 11,286 10.46
2.55% None Statement savings 100 1,811 1.46
4.75% 3 months Fixed-term fixed rate certificate 2,500 591 0.48
5.38% 6 months Fixed-term fixed rate certificate 2,500 13,207 10.66
5.58% 12months Fixed-term fixed rate certificate 500 18,950 15.30
5.73% 18 months Fixed-term fixed rate certificate 500 5,050 4.08
5.68% IRA Fixed-term fixed rate certificate 250 19,198 15.50
5.96% 30 months Fixed-term fixed rate certificate 500 28,382 22.91
5.87% 1 month Fixed-term fixed rate certificate 100,000 3,302 2.67
6.59% 4 year Fixed-term fixed rate certificate 1,500 3,464 2.80
6.65% 5 year Fixed-term fixed rate certificate 1,500 1,856 1.50
6.25% IRA Fixed-term fixed rate certificate 250 -- --
-------- ------
$123,883 100.00%
======== ======
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998
-----------------------------------------------------
Percentage
of
Interest total
Rate Term Category Minimum Balance Balances
- -------- ---- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands except minimum balance)
0.00% None Non-interest bearing demand $ 50 $ 1,258 2.08%
2.13% None NOW accounts 250 5,676 9.37
2.13% None Money market checking 2,500 401 0.66
2.13% None Passbook savings 50 9,380 15.49
4.75% 3 months Fixed-term fixed rate certificate 2,500 327 0.54
5.38% 6 months Fixed-term fixed rate certificate 2,500 9,955 16.44
5.50% 12months Fixed-term fixed rate certificate 500 8,643 14.27
5.75% 18 months Fixed-term fixed rate certificate 500 2,916 4.82
5.50% IRA Fixed-term fixed rate certificate 250 8,024 13.25
6.25% 30 months Fixed-term fixed rate certificate 500 9,882 16.32
5.63% 1 month Fixed-term fixed rate certificate 100,000 1,770 2.92
6.25% 4 year Fixed-term fixed rate certificate 1,500 759 1.25
6.25% 5 year Fixed-term fixed rate certificate 1,500 1,562 2.58
6.25% IRA Fixed-term fixed rate certificate 250 -- --
-------- -------
$ 60,552 100.00%
======== =======
</TABLE>
41
<PAGE> 43
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 September 30,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ -------------------------
(Dollar amounts in thousands)
Interest Interest Interest
bearing bearing bearing
demand Time demand Time demand Time
deposits deposits deposits deposits deposits deposits
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Average balance $25,157 $91,536 $16,574 $45,126 $16,835 $45,583
Average rate 2.46% 5.24% 2.74% 5.24% 3.15% 5.43%
</TABLE>
The following table presents changes in deposits for the periods
indicated:
<TABLE>
<CAPTION>
For the year ended September 30,
-----------------------------------------------------------------
1998 1997 1996 1995
======= ====== ====== ======
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Opening balance 60,552 64,095 62,832 64,774
Deposits Acquired through Acquisition 64,608
Net deposits (withdrawals) (4,331) (5,364) (626) (3,901)
Interest credited on deposits 3,055 1,821 1,889 1,959
Ending balance 123,884 60,552 64,095 62,832
======= ====== ====== ======
To decrease (increase) in deposits 63,332 (3,543) 1,263 (1,942)
======= ====== ====== ======
Percentage decrease (increase) 104.59% (5.53)% 2.01% (3.00)%
======= ====== ====== ======
</TABLE>
42
<PAGE> 44
The following table presents, by various interest rate
categories, the amount of certificate accounts outstanding at the end of the
last three fiscal years:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------------
1998 1997 1996
--------- --------- --------
(In thousands)
Interest Rate
- -------------
<S> <C> <C> <C>
2.00-2.99% $ -- $ 106 $ 119
3.00.-3.99% -- -- 276
4.00-4.99% 591 450 1,507
5.00.-5.99% 64,168 37,276 38,106
6.00-6.99% 26,693 4,927 4,889
7.00.-7.99% 2,548 1,079 1,046
--------- --------- --------
Total $ 94,000 $ 43,838 $ 45,943
========= ========= ========
</TABLE>
There were no certificates of deposit bearing an interest rate less than
4.0% at September 30, 1998. At September 30, 1998, First Federal had outstanding
approximately $94.0 million in certificate accounts that mature as follows:
<TABLE>
<CAPTION>
Amount due
-------------------------------------------------------------------------
Less One Two Three Four
than one to two to three to four to five
year years years years years Thereafter Total
-------- ------ -------- ------- ------- ---------- -----
(In thousands)
Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C>
2.00-2.99% $ -- $ -- $ -- $ -- $ -- $-- $ --
3.00.-3.99% -- -- -- -- -- -- --
4.00-4.99% 591 -- -- -- -- -- 591
5.00.-5.99% 47,437 13,567 2,851 169 145 -- 64,169
6.00-6.99% 16,045 9,123 1,219 183 122 -- 26,692
7.00.-7.99% 2,507 41 -- -- -- -- 2,548
------- ------- ------ ---- ---- --- -------
Total $66,580 $22,731 $4,070 $352 $267 $-- $94,000
======= ======= ====== ==== ==== === =======
</TABLE>
43
<PAGE> 45
Certificates of deposit of $100,000 or more, other than Jumbos, mature
as follows as of September 30, 1998:
<TABLE>
<CAPTION>
Amount due
-------------------------------------------------------------------------------
Less One Two Three Four
than one to two to three to four to five
year years years years years Thereafter Total
-------- ------ -------- ------- ------- ---------- ------
(In thousands)
Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C>
2.00-2.99% $ -- $ -- $ -- $ -- $-- $-- $ --
3.00.-3.99% -- -- -- -- -- -- --
4.00-4.99% 222 -- -- -- -- -- 222
5.00.-5.99% 2,345 1,197 201 -- -- -- 3,743
6.00-6.99% 5,055 2,067 422 100 -- -- 7,644
7.00.-7.99% 959 -- -- -- -- -- 959
------ ------ ---- ---- --- -- ------
Total $8,581 $3,264 $623 $100 $-- $-- 12,568
====== ====== ==== ==== === == ======
</TABLE>
Jumbos mature as follows as of September 30, 1998:
<TABLE>
<CAPTION>
Amount due
-------------------------------------------------------------------------------
Less One Two Three Four
than one to two to three to four to five
year years years years years Thereafter Total
-------- ------ -------- ------- ------- ---------- ------
(In thousands)
Interest Rate
- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
2.00-2.99% $ -- -- $ -- $ -- $ -- $-- $ --
3.00.-3.99% -- -- -- -- -- --
4.00-4.99% -- -- -- -- -- -- --
5.00.-5.99% 906 -- -- -- -- -- 906
6.00-6.99% 1,990 406 -- -- -- -- 2,396
7.00.-7.99% -- -- -- -- -- -- --
------ --- -------- ------- ------ --- ------
Total 2,896 406 $ -- $ -- $ -- -- $3,302
====== === ======== ======= ====== === ======
</TABLE>
44
<PAGE> 46
The following table presents the maturities of certificates of deposit
as of September 30, 1998, September 30, 1997 and September 30, 1996:
<TABLE>
<CAPTION>
Maturities of Time Deposits
September 30,
-----------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Three months or less $ 2,433 $ 9,189 $ 8,099
After three within six months 12,417 10,799 10,655
After six within twelve months 51,730 15,138 15,302
One year to two years 22,731 5,385 8,115
Two years to three years 4,070 2,991 2,372
Three years to four years 352 314 1,106
Four years to five years 267 22 294
------- ------- -------
Total $94,000 $48,838 $45,943
======= ======= =======
Weighted average rate on all
certificates of deposit
at period-end 5.73% 5.58% 5.53%
======= ======= =======
</TABLE>
SHORT-TERM BORROWINGS
First Federal has a line of credit of up to $4,000,000 which bears
interest at the prime lending rate plus 1%. The line of credit requires monthly
interest payments and payments of the outstanding balance in October 1998. The
prime lending rate was 8.50% at September 30, 1998 and the outstanding balance
on the line of credit was $5,000.
Borrowings also include borrowings from the FHLB of Atlanta (See "--
Liquidity"). The balances outstanding at September 30, 1998, and September 30,
1997 were $16,044,000 and $17,058,000, respectively. These balances included
advances with both fixed and variable interest rates, which averaged 5.86% and
5.99% at September 30, 1998 and September 30, 1997, respectively.
CAPITAL RESOURCES
STOCKHOLDERS EQUITY
SouthFirst's consolidated shareholders' equity was $15,671,000 and
$13,623,000 at September 30, 1998 and September 30, 1997, respectively. The 1998
increase was primarily due to the acquisition of Chilton County during the year.
During 1998, cash dividends of $543,746, or $0.575 per share, were
declared on SouthFirst Common Stock. During 1997, cash dividends of $414,188, or
$0.50 per share were declared. 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
45
<PAGE> 47
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 First Federal
and provides a foundation for future growth as well as promoting depositor and
investor confidence in the institution.
Certain financial ratios for First Federal as of the end of the most
recent three fiscal years and presented in the following table:
<TABLE>
<CAPTION>
Equity and Assets Ratio
September 30,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average assets 0.40% 0.52% (0.02)%
Return on average stockholder's equity 3.96% 3.75% (0.12)%
Common dividend payout ratio 85.65% 83.59% (11,513)%
Average shareholders' equity to average 10.17% 13.98% 15.45%
assets
</TABLE>
FIRREA and the implementing regulations of the OTS, which became
effective on December 7, 1989, changed the capital requirements applicable to
thrifts, including First Federal, 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 below, First Federal was in compliance with these regulatory capital
requirements at September 30, 1998 and September 30, 1997.
46
<PAGE> 48
<TABLE>
<CAPTION>
At September 30, 1998 At September 30, 1997
------------------------------------------------- ------------------------------------------------
Tangible Core Risk-based Tangible Core Risk-based
Capital Capital Capital Capital Capital Capital
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Capital $ 13,878,000 $ 13,878,000 $13,878,000 $12,785,000 $ 12,785,000 $12,501,000
Adjustments
General valuation
allowance -- -- 747,000 -- -- 284,000
Goodwill (356,000) (356,000) (356,000) -- -- --
Unrealized gains (1,453,000) (1,453,000) (1,453,000) -- -- --
Regulatory capital 12,069,000 12,069,000 12,816,000 12,785,000 12,785,000 12,785,000
Regulatory asset base 156,440,000 156,440,000 75,044,000 94,950,000 94,950,000 57,500,000
Capital ratio 7.71% 7.71% 17.08% 13.46% 13.46% 22.23%
Minimum required ratio 1.50% 4.00% 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 a bank'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 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 September 30, 1998,
First Federal had credit available, net of advances drawn down, of approximately
$6 million. First Federal has drawn down such advances in the amount of
approximately $16 million at September 30, 1998, 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 in
fiscal 1998 was $1,107,023, a $1,282,000 increase from 1997. The $12,947,000 in
net cash provided by investing activities during 1998 consisted primarily of a
$13,855,000 increase in proceeds from calls and maturities of investment
securities held to maturity. Proceeds from sales of investment securities
available for sale increased to $20,206,000 from $541,000 in 1997. The
$7,289,000 in net cash used by financing activities resulted from a decrease of
$3,433,000 in certificates of deposits, coupled with
47
<PAGE> 49
a net repayment of $4,484,000 in borrowed funds, payment of $496,800 in common
stock dividends, and acquisition of treasury stock in the amount of $669,000.
First Federal's liquidity ratio at September 30, 1998 was 8.32% and
at September 30, 1997 was 9.28%. 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 or 1996. In 1998, First Federal paid
$2,893,000 to SouthFirst in order to purchase Treasury Stock and partially repay
a revolving line of credit with Regions Bank.
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 --
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 a 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, which has been used, in
part, to pay dividends to Shareholders. See " -- Financial Condition --
Short-Term Borrowings."
RESULTS OF OPERATIONS
NET INCOME
For the fiscal year ended September 30, 1998, net income increased
$139,375, to $634,874. Earnings per common share was $0.68 for the fiscal year
ended September 30, 1998. The primary increase in net income in fiscal 1998 was
due to an increase of $2,512,000 in interest earned on loans, an increase of
$1,492,000 in interest income on investment securities, an increase of $889,000
in other income, an increase of $2,764,000 in interest expense, and an increase
of $1,897,000 in total other expenses. The large incremental changes in these
areas relative to fiscal 1997 is largely explained by the acquisition of Chilton
County in the first quarter of fiscal 1998.
For the year ended September 30, 1997, net income increased $512,155
to $495,499 or $0.62 per share. The primary reason for the increase in net
income was due to an increase of approximately $873,000 in interest income on
loans. This increase in interest income on loans was offset, however, by a
decrease of $366,000, in interest income on investments available for sale a
decrease of $189,000 in other income, and an increase of $428,000 in interest
expense for borrowed funds. In addition, for the year ended September 30, 1997,
net income was positively affected by a decrease of $374,000 in compensation and
benefits, which was primarily associated with the $2.00 per share special
dividend and a $430,000 decrease in other expenses, which was incurred in 1996
as a result of the special SAIF assessment in fiscal 1996.
48
<PAGE> 50
Weighted average shares outstanding in 1998 and 1997 reflects shares
outstanding for the entire year.
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 $4,533,000 for
the twelve months ended September 30, 1998. This increase of $1,241,000 (37.7%)
over the comparable twelve months of 1997 is primarily the result of the effect
the acquisition of Chilton County. The acquisition of Chilton County was largely
responsible for the increase in the average balance of interest earning assets
from $87.6 million to $137.3 million while the average balance of
interest-bearing liabilities increased from $77.6 million to $134.5 million. The
net interest rate spread remained the same as rates on interest-earning assets
decreased two basis points to 8.08%, while cost of funds decreased two basis
points to 4.88%. The combined effect of the increases in average balances and
the changes in rates above resulted in an increase in net interest income.
Net interest income was $3,292,000 for the twelve months ended
September 30, 1997. This increase of $231,000 (7.5%) over the comparable period
in 1996 was primarily the result of an increase in the net yield on total
interest-earning assets. The net interest rate spread on total interest-earning
assets increased 27 basis points as rates on interest-earning assets increased
18 basis points to 8.10%, while cost of funds decreased 9 basis points to 4.90%
when compared to September 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 interest rate spread 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.
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.
RATE/VOLUME VARIANCE ANALYSIS
The following table sets forth information regarding the extent to
which changes in interest rates, changes in volume of interest assets, and
changes in volume of interest related assets and liabilities have affected First
Federal'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
49
<PAGE> 51
volume). Changes in rate/volume have been allocated proportionately between
changes in volume and changes in rates.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Increase (Decrease) Increase (Decrease)
------------------- ------------------- -------------------
Due to Due to Due to
------------------------------ ----------------------------- --------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
-------- ------ ------- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollar amounts in thousands)
Interest income:
Investment securities $ 1,265 231 $ 1,496 $(417) 15 $(402) $(306) 128 $(178)
Loans receivable 2,669 (161) 2,508 825 48 874 666 (71) 595
------- ---- ------- ----- ---- ----- ----- ---- -----
Total interest income 3,934 69 4,004 408 63 472 360 57 417
======= ==== ======= ===== ==== ===== ===== ==== =====
Interest expense:
NOW accounts 124 (35) 89 (5) (47) (52) (7) 11 4
Money market demand (3) - (3) - 5 5 (1) (1) (2)
Passbook savings 117 (40) 78 (3) (27) (30) (39) 18 (21)
Certificates of deposit
other than Jumbos 2,404 54 2,458 (37) (92) (129) 35 217 252
Jumbos 30 (49) (19) 10 10 20 6 3 9
Borrowed funds 122 45 167 423 6 429 229 (11) 218
------- ---- ------- ----- ---- ----- ----- ---- -----
Total interest expense 2,797 (26) 2,770 387 (145) 242 223 237 460
======= ==== ======= ===== ==== ===== ===== ==== =====
Change in net interest
income 1,137 95 1,234 21 208 230 137 (180) (43)
======= ==== ======= ===== ==== ===== ===== ==== =====
</TABLE>
INTEREST INCOME
Interest income is a function of the volume of interest earning
assets and their related yields. Interest income was $11,098,000, $7,093,000,
and $6,620,000 for the twelve months ended September 30, 1998, September 30,
1997, and September 30, 1996, respectively. Average interest earning assets
increased $49,735,000 (56.7%) during 1998, and $3,994,000 (4.8%) during 1997,
following an increase of $3,090,000 (3.8%) in 1996. The 1998, 1997 and 1996
yield remained relatively constant, reflecting the relative stability of the
interest rate environment during that period. Interest and fees on loans were
$8,273,000, $5,761,000, and $4,888,000 for the twelve months ended September 30,
1998, September 30, 1997, and September 30, 1996, respectively. Interest and
fees on loans during 1998 increased $2,512,000 (43.6%) compared to 1997.
Interest and fees on loans during fiscal 1997 increased $873,000 (17.9%), as
compared to fiscal 1996. The increase in average loans receivable in 1998 was
largely due to the acquisition of Chilton county plus the strong loan demand in
1998 as a result of lower interest rates. 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.
Interest income on total investment securities, including those held
to maturity and those available for sale, increased $1,493,000 (112.1%) to
$2,825,000 in 1998. The average balance outstanding of investment securities,
including those held to maturity and those available for sale, increased
$17,843,000 (95.1%) to $36,609,000 in 1998 from $18,766,000 in 1997. The yields
on total investment securities were
50
<PAGE> 52
7.72% in 1998 and 7.09% in 1997. The increase in interest income in 1998 was
largely due to the volume of investment securities acquired in connection with
the purchase of Chilton County.
INTEREST EXPENSE
Total average interest-bearing liabilities were $134,503,000,
$77,539,000, and $71,396,000 for fiscal years 1998, 1997 and 1996, respectively.
Interest bearing liabilities increased by $56,964,000 (73.5%), $6,143,000
(8.61%), and $2,834,000(4.1%) for 1998, 1997, and 1996, respectively. The rates
paid on these liabilities decreased 2 basis points to 4.88% in 1998, decreased 9
basis points to 4.90% during 1997, and increased 47 basis points to 4.99% in
1996. Total interest expense was $6,565,000 for 1998, $3,801,000 for 1997, and
$3,559,000 for 1996, which represented an increase of $2,764,000 (72.7%),
$242,000 (6.8%) and $266,000 (9.4%) during 1998, 1997 and 1996, respectively.
The increase in 1998 resulted from the additional interest-bearing liabilities
associated with the acquisition of the Chilton County and an increase in the
cost funds. The increase in 1997 resulted from an increase in the cost of funds.
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.
Interest on deposits, the primary component of total interest
expense, increased to $5,416,000 in 1998 from $2,820,000 in 1997. Interest
expense on total deposits for 1996 was $3,006,000. The average balance of
interest bearing deposits increased to $116,692,000 in 1998, primarily as a
result of the Chilton county acquisition. 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. 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.
Interest expense on borrowed funds, including both short-term and
other borrowed funds, was $1,149,000 and $982,000 for fiscal 1998 and 1997,
respectively. Interest expense on borrowed funds was $553,000 in fiscal 1996.
The increase in 1998 was due to the Chilton County acquisition as well as FHLB
advances to fund loan growth during the year. The increase in 1997 was 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
$16,379,738 for 1998 and $15,403,351 for 1997. The average balance of borrowed
funds outstanding was $17,810,000 for 1998 and $15,838,000 for 1997.
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 $45,000, $36,000, and $1,200 during
1998, 1997, and 1996, 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.
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
51
<PAGE> 53
construction lending area in 1994 by purchasing the portfolio of another Alabama
thrift and hiring the loan officer who originated and managed the portfolio. A
significant portion of First Federal's residential construction loans were
originated in Hoover, Alabama, a suburb of Birmingham and one of the most
affluent areas of the state. See "INFORMATION 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, averaged approximately $6,000 from 1994 through
1997. In 1998, net charge-offs increased to $85,000 due primarily to loans
acquired in the Chilton County purchase. Management believes the allowances for
loan losses at September 30, 1998 to be at an adequate level 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 upon an analysis of information
available at the time of their review. See "Management's DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- Allowance for Loan Losses and
Risk Elements."
OTHER INCOME
Other income increased $889,000 (80.7%) to $1,990,00 in 1998 from
$1,101,000 in 1997. Other income decreased $189,000 (14.6%) to $1,101,000 in
1997 from $1,290,000 in 1996. The increase in 1998 was largely due to an
increase of $373,000 in employee benefit consulting fees as a result of the
acquisition of Chilton County and Pension & Benefit. The decrease in 1997
resulted primarily from the $583,000 settlement in 1996 of SouthFirst's lawsuit
against USF&G. See "INFORMATION REGARDING SOUTHFIRST -- Business of First
Federal -- Legal Proceedings."
Service charges and other fees were $712,000, $577,000, and $563,000
in fiscal 1998, 1997, and 1996, respectively. The increase in 1998 was largely
due to additional service charge and fee income derived from the Chilton County
purchase. The fluctuations in 1997 and 1996 were due almost entirely to
increases in income from charges for nonsufficient funds and overdraft charges.
Gain on sale of loans increased $94,000 (64.8%) in 1998 and $18,000
in 1997. These increases were due to the increased volume of loans sold relative
to prior years. Proceeds from sales of loans increased by $7,113,000 (153.6%) to
$11,743,000 in 1998 and by $125,000 to $14,630,000 in 1997.
OTHER EXPENSE
Total other expense was $5,455,000 for 1998, $3,558,000 for 1997 and
$4,274,000 for 1996. The increase in 1998 was $1,897,000 (53.3%) compared to a
decrease in 1997 of $716,000 (16.7%), and an increase of $1,614,000 (60.6%) in
1996.
Compensation and benefits totaled $3,373,000, $2,095,000, and
$2,469,000 for 1998, 1997, and 1996, respectively. These levels reflect an
increase of $1,278,000 (61.0%) in 1998, a decrease of $374,000 (15.2%) in 1997,
and an increase of $990,000 (66.9%) in 1996. The increase in 1998 was primarily
a result of the increased number of First Federal employees following the
acquisition of Chilton
52
<PAGE> 54
County and Pension & Benefit. The increase in 1998 can also be attributed to
merit and cost-of-living raises and the cost of benefits association with such
increases. The decrease in 1997 was primarily due to additional compensation
awarded to select employees under SouthFirst's two Management Recognition Plans
in 1996 including 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 or 1998.
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 $695,000, $599,000, and $520,000 for
1998, 1997 and 1996, respectively. These levels correspond to increases of
16.0%, 15.2%, and 40.9% in each of these years. The increase in 1998 was due to
increased costs in other operating expenses as a result of the acquisition of
Chilton County. The decrease in 1997 was primarily due to decreased costs
associated with legal, accounting, and various other operating expenses. The
increase in 1996 was due primarily to increased costs associated with legal and
accounting expenses.
INCOME TAX EXPENSE
Income tax expense was $389,000, $303,000, and $92,000 for fiscal
years 1998, 1997, and 1996, respectively. These levels represent an effective
tax rate on pre-tax earnings of 38% for the years ended September 30, 1998 and
September 30, 1997, and a 122% for the year ended September 30, 1996. The
unusually high 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 1998 and 1997, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which establishes standards for computing and presenting
earnings per share. This new accounting standard applied to entities with
publicly held common stock or potential common stock, such as the Company. SFAS
No. 128 simplifies the standards for computing earnings per share previously
found in other accounting standards, requires dual presentation of basic and
diluted earnings per share on the face of the income statement for entities with
complex capital structures such as the Company, and requires a reconciliation of
the numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share computation. The
Company adopted this new accounting standard at December 31, 1997 and restated
all prior period earnings per share data presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available-for-sale is
53
<PAGE> 55
expected to be disclosed as an additional component of the Company's income
under the requirements of SFAS No. 130. This statement is effective for fiscal
years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which changes the way public
companies report information about segments of their business on their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. It also requires entity wise
disclosures about the products and service an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which revises
employers' disclosures about pension and other post-retirement benefit plans.
The statement does not change the measurement or recognition of those plans, but
requires additional information on changes in benefits obligations and fair
values of plan assets, and eliminates certain disclosures previously required by
SFAS Nos. 87, 88 and 106. This statement is effective for fiscal years beginning
after December 15, 1997.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed with this report:
Independent Auditors' Report
Consolidated Statements of Financial Condition as of
September 30, 1998 and 1997.
Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements
54
<PAGE> 56
SOUTHFIRST BANCSHARES, INC.
SYLACAUGA, ALABAMA
SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT 57
FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition 58
Consolidated Statements of Operations 59-60
Consolidated Statements of Stockholders' Equity 61-62
Consolidated Statements of Cash Flows 63-65
Notes to Consolidated Financial Statements 66-90
</TABLE>
55
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
November 10, 1998
Board of Directors
SouthFirst Bancshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of SouthFirst Bancshares, Inc. and subsidiaries (the Company) as of September
30, 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. 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 audit. The financial
statements of SouthFirst Bancshares, Inc. as of September 30, 1997 and 1996 were
audited by other auditors whose report dated November 21, 1997 expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of SouthFirst
Bancshares, Inc. and subsidiaries as of September 30, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Jones & Kirkpatrick, P.C.
Certified Public Accountants
56
<PAGE> 58
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 (the Company) as of September 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1997. 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. and subsidiary as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Birmingham, Alabama
November 21, 1997
57
<PAGE> 59
58
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
1998 1997
---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 9,213,906 $ 2,448,123
Investment securities held to maturity, at cost 971,106 162,448
Investment securities available for sale, at fair value 36,823,772 16,665,770
Loans receivable, net of allowance for loan losses of
$732,021 in 1998 and $284,324 in 1997 104,590,192 71,682,255
Loans held for sale at cost (which approximates fair value) 92,750 333,750
Premises and equipment, net 3,903,308 1,780,286
Accrued interest receivable 1,044,978 529,500
Investments in affiliates 144,617 192,560
Other assets 1,733,463 1,994,010
------------- ------------
Total Assets $ 158,518,092 $ 95,788,702
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1998 1997
---- ----
Liabilities:
Deposits:
Non-interest bearing $ 3,435,519 $ 1,255,745
Interest bearing 120,448,157 59,296,791
------------- ------------
Total deposits 123,883,676 60,552,536
Advances by borrowers for property taxes and insurance 327,126 388,918
Accrued interest payable 1,071,183 859,111
Borrowed funds 16,169,068 18,653,386
Accrued expenses and other liabilities 1,396,424 1,711,417
------------- ------------
Total liabilities 142,847,477 82,165,368
------------- ------------
Stockholders' equity:
Common stock, $.01 par value, 2,000,000 shares authorized;
999,643 shares issued and 914,432 shares outstanding in 1998;
863,200 shares issued and 812,799 shares outstanding in 1997 9,996 8,632
Additional paid-in capital 9,810,963 7,792,748
Treasury stock, at cost (54,410 shares in 1998; 15,600 shares in 1997) (867,087) (198,392)
Deferred compensation on common stock employee benefit plans (778,508) (914,604)
Retained earnings, substantially restricted 5,953,346 5,815,352
Unrealized gain on investment securities available-for-sale, net of tax 1,541,905 1,119,598
------------- ------------
Total stockholders' equity 15,670,615 13,623,334
------------- ------------
Commitments and contingencies (Note 14) - -
------------- ------------
Total liabilities and stockholders' equity $ 158,518,092 $ 95,788,702
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 60
59
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 8,272,834 $ 5,761,018 $ 4,888,183
Interest and dividend income on investment securities 2,825,283 1,332,378 1,732,093
------------ ----------- -----------
Total interest and dividend income 11,098,117 7,093,396 6,620,276
------------ ----------- -----------
Interest expense:
Interest on deposits 5,416,128 2,819,560 3,006,037
Interest on borrowed funds 1,148,782 981,737 553,372
------------ ----------- -----------
Total interest expense 6,564,910 3,801,297 3,559,409
------------ ----------- -----------
Net interest income 4,533,207 3,292,099 3,060,867
Provision for loan losses 44,744 36,465 1,200
------------ ----------- -----------
Net interest income after provision for loan losses 4,488,463 3,255,634 3,059,667
------------ ----------- -----------
Other income:
Service charges and other fees 711,603 577,344 563,235
Employee benefit consulting fees 758,835 386,090 -
Gain on sale of loans 238,907 144,621 127,386
Gain on sale of foreclosed real estate - - 10,233
Gain on sales and calls of investment
securities available-for-sale 123,736 15,705 21,203
Gain (loss) on sale of premises and equipment 2,565 - (7,543)
Equity in net loss of affiliates (26,279) (61,977) (66,773)
Other 180,581 39,305 642,259
------------ ----------- -----------
Total other income 1,989,948 1,101,088 1,290,000
------------ ----------- -----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
<PAGE> 61
60
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
Years Ended September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Other expenses:
Compensation and benefits $3,373,157 $2,094,824 $ 2,468,570
Net occupancy expense 282,015 204,682 154,208
Furniture and fixtures 331,505 226,515 168,600
Data processing 293,820 176,780 171,692
Office supplies and expenses 359,713 196,700 185,953
Deposit insurance premiums 119,330 59,617 175,542
Special SAIF assessment - - 430,230
Other 695,368 599,040 519,606
---------- ---------- -----------
Total other expenses 5,454,908 3,558,158 4,274,401
---------- ---------- -----------
Income before income taxes 1,023,503 798,564 75,266
Income tax expense 388,629 303,065 91,922
---------- ---------- -----------
Net income (loss) $ 634,874 $ 495,499 $ (16,656)
========== ========== ===========
Primary earnings (loss) per share $ 0.68 $ 0.62 $ (0.02)
Fully diluted earnings (loss) per share $ 0.67 $ 0.62 $ (0.02)
Weighted average shares outstanding:
Primary 931,195 795,479 810,997
Fully diluted 950,833 797,722 810,997
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 62
61
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<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, 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 ESOP 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
Acquisition of Treasury stock - - - - (500,802) - (500,802)
Cash dividends declared ($2.50/share) - - (1,917,558) - - - (1,917,558)
Increase in unrealized holding gain on
available-for-sale securities - - - - - 234,232 234,232
------ ---------- ----------- --------- -------- -------- ------------
Balance - September 30, 1996 8,632 7,704,856 5,690,301 (744,710) (500,802) 729,537 12,887,814
Net income 1997 - - 495,499 - - - 495,499
Release of unallocated ESOP shares - 34,129 - 77,391 - - 111,520
Acquisition of ESOP shares - - - (16,806) - - (16,806)
Vesting of shares on Management
Recognition Plans - 26,354 - 59,760 - - 86,114
Issuance of deferred compensation shares - 27,409 - (298,532) 271,123 - 0
Vesting of deferred compensation shares - - - 8,293 - - 8,293
Acquisition of Treasury stock - - - - (34,606) - (34,606)
Sale of Treasury shares - - - - 65,893 - 65,893
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
<PAGE> 63
62
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Continued)
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Deferred unrealized
compensation holding
Retained on common gain on
Additional earnings- stock available- Total
Common paid-in substantially employee Treasury for-sale stockholders'
stock capital restricted benefit plans stock securities equity
----- ------- ---------- ------------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash dividends declared ($.50/share) $ - $ - $ (370,448) $ - $ - $ - $ (370,448)
Increase in unrealized holding gain on
available-for-sale securities - - - - - 390,061 390,061
------ ---------- ----------- --------- --------- ---------- ------------
Balance - September 30, 1997 8,632 7,792,748 5,815,352 (914,604) (198,392) 1,119,598 13,623,334
Net income 1998 - - 634,874 - - - 634,874
Release of unallocated ESOP shares - 37,600 - 40,000 - - 77,600
Vesting of shares on Management
Recognition Plans - 39,740 - 76,194 - - 115,934
Vesting of deferred compensation shares - - - 19,902 - - 19,902
Acquisition of Treasury stock - - - - (668,695) - (668,695)
Issuance of common stock 1,364 1,940,875 - - - - 1,942,239
Increase in unrealized holding gain on
available-for-sale securities - - - - - 422,307 422,307
Cash dividends declared ($.575/share) - - (496,880) - - - (496,880)
------ ---------- ----------- --------- --------- ---------- ------------
Balance - September 30, 1998 $9,996 $9,810,963 $ 5,953,346 $(778,508) $(867,087) $1,541,905 $ 15,670,615
====== ========== =========== ========= ========= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 64
63
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 634,874 $ 495,499 $ (16,656)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses 44,744 36,465 1,200
Depreciation and amortization 345,844 170,896 137,545
Equity in loss of unconsolidated affiliates 26,279 61,977 66,773
Proceeds from sales of loans 11,743,414 4,629,621 4,359,996
Loans originated for sale (11,263,507) (4,687,650) (4,490,996)
Gain on sale of loans (238,907) (144,621) (127,386)
(Gain) loss on sale of premises and equipment (2,565) - 7,543
Increase in deferred loan origination fees - - 18,012
Compensation expense on ESOP and MRPs 213,436 205,927 318,012
Gain on sale of investment securities available-for-sale (123,736) (15,705) (21,203)
Net amortization of premium on investment securities (73,995) 1,683 11,015
Gain on sale of foreclosed real estate - - (10,233)
(Increase) decrease in accrued interest receivable 26,377 24,106 (20,087)
(Increase) decrease in other assets 794,629 (1,358,108) (221,022)
Increase (decrease) in accrued interest payable (41,500) 16,826 18,400
Increase (decrease) in accrued expenses
and other liabilities (977,764) 388,866 363,206
------------ ----------- -----------
Net cash provided (used) by operating activities 1,107,623 (174,218) 394,119
------------ ----------- -----------
INVESTING ACTIVITIES
Net cash paid for acquisition (536,430) - -
Investment in affiliated companies (75,000) (70,000) (175,000)
Proceeds from calls and maturities of investment
securities held-to-maturity 13,855,491 153,853 1,039,115
Proceeds from calls and maturities of investment
securities available-for-sale 100,281 8,706,873 7,335,328
Proceeds from sales of investment securities
available-for-sale 20,206,296 541,176 -
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
<PAGE> 65
64
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INVESTING ACTIVITIES (Continued)
- -------------------
Purchase of investment securities held-to-maturity $ - $ (162,448) $ (403,853)
Purchase of investment securities available-for-sale (18,813,395) (3,500,000) (4,540,770)
Net increase in loans (936,336) (9,316,679) (8,761,092)
Proceeds from sale of premises and equipment 11,106 - 28,835
Purchase of premises and equipment (864,793) (148,700) (519,732)
Proceeds from sale of foreclosed real estate - - 39,119
------------ ------------ -----------
Net cash provided (used) by investing activities 12,947,220 (3,795,925) (5,958,050)
------------ ------------ -----------
FINANCING ACTIVITIES
- --------------------
Net increase (decrease) in demand accounts
and savings accounts 1,790,205 (1,436,968) (813,552)
Net increase (decrease) in certificates of deposit (3,433,339) (2,105,099) 2,075,997
Proceeds from borrowed funds 10,629,505 39,315,658 7,267,811
Repayment of borrowed funds (15,113,823) (31,621,557) (2,378,378)
Net proceeds from issuance of common stock 116,200 65,893 -
Cash dividends paid (496,880) (370,448) (1,917,558)
Acquisition of employee stock ownership plan shares - (16,806) -
Acquisition of treasury stock (668,695) (34,606) (500,802)
Decrease in advances by borrowers
for property taxes and insurance (112,233) (3,362) (8,125)
------------ ------------ -----------
Net cash provided (used) by financing activities (7,289,060) 3,792,705 3,725,393
------------ ------------ -----------
Increase (decrease) in cash and amounts due from
depository institutions 6,765,783 (177,438) (1,838,538)
Cash and amounts due from depository institutions
at beginning of year 2,448,123 2,625,561 4,464,099
------------ ------------ -----------
Cash and amounts due from depository institutions
at end of year $ 9,213,906 $ 2,448,123 $ 2,625,561
============ ============ ===========
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
<PAGE> 66
65
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental information on cash payments:
- ------------------------------------------
Interest paid $ 6,352,838 $3,784,471 $3,541,009
=========== ========== ==========
Income taxes paid $ 426,888 $ 93,575 $ 344,757
=========== ========== ==========
Supplemental information on non-cash transactions:
- --------------------------------------------------
Change in net unrealized gain on investment
securities available-for-sale $ 681,154 $ 606,945 $ 400,536
=========== ========== ==========
Disposition of investment in affiliate by issuance of loan $ 96,664 $ - $ -
=========== ========== ==========
Acquisition of company through business combination accounted for as purchase:
Assets acquired:
Cash and amounts due from depository institutions $ 2,787,484
Investment securities 35,436,448
Loans receivable, net 31,919,681
Premises and equipment 1,558,213
Accrued interest receivable 541,855
Other assets 215,684
-----------
Total assets 72,459,365
-----------
Liabilities assumed:
Deposits 64,974,274
Advances by borrowers for property taxes and insurance 50,441
Accrued interest payable 253,572
Borrowed funds 2,000,000
Accrued expenses and other liabilities 403,924
-----------
Total liabilities 67,682,211
-----------
Net assets acquired 4,777,154
-----------
Consideration paid:
Cash 3,323,914
Common stock 1,826,039
-----------
Total paid 5,149,953
-----------
Goodwill recorded $ 372,799
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 67
66
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The accompanying consolidated financial statements include
the accounts of SouthFirst Bancshares, Inc. (the Corporation) and its
wholly-owned subsidiaries, First Federal of the South (the Bank, formerly
First Federal Savings & Loan Association of Sylacauga) and Pension &
Benefit Financial Services, Inc. (an employee benefit consulting company),
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 the 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 or transaction
with an FDIC insured institution, in which the Bank is not the
(Continued)
<PAGE> 68
67
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
surviving insured institution, would not be considered to be a
"liquidation" under which any distribution of the liquidation account would
be made. In such a transaction, the liquidation account would be assumed by
the surviving institution. The creation and maintenance of the liquidation
account would not restrict the use or application of any of the capital
accounts of the Bank, except that the Bank may not declare or pay a cash
dividend to, or repurchase any of its capital stock from, 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,
Clanton, Talladega and Centreville in the state of Alabama, and provides
lending services in Birmingham, Rainbow City and Dothan, 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.
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 the 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, 1998, 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, 1998, seven
borrowers had construction loan commitments in excess of $500,000 with the
largest
(Continued)
<PAGE> 69
68
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
commitment being $2,079,044. 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.
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.
Investment Securities - The Company classifies its investments 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 non-interest income in
the consolidated statements of operations. No securities were classified as
trading account securities as of September 30, 1998 or 1997.
(Continued)
<PAGE> 70
69
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
During the period from November 15, 1995 to December 31, 1995, the
Financial Accounting Standards Board allowed companies to reassess the
appropriateness of the classifications of all securities held at that time
and account for any resulting reclassifications at fair value.
Reclassifications from the held-to-maturity category that result from this
one-time reassessment do not call into question the intent of an entity to
hold other debt securities to maturity in the future. 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.
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.
Cash Equivalents - For purposes of presentation in the consolidated
statements of cash flows, cash and cash equivalents are defined as those
amounts included in the statement of financial condition caption "cash and
amounts due from depository institutions".
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.
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.
(Continued)
<PAGE> 71
70
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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.
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, 1998.
Income Taxes - The Company provides for income taxes based upon pretax
income, adjusted for permanent differences between reported and taxable
earnings. 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.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the period that includes the enactment date.
(Continued)
<PAGE> 72
71
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Advertising - Advertising costs are charged to operations when incurred.
Advertising expense was $51,150, $29,267 and $26,895 for the years ended
September 30, 1998, 1997 and 1996, respectively.
Earnings per Share - Primary earnings per share of common stock has been
computed on the basis of the weighted-average number of shares of common
stock outstanding. Fully diluted earnings per share 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
differences between primary and diluted weighted average shares
outstanding. Options on 67,511 shares in 1998 and 78,850 shares in 1996 of
common stock were not included in computed diluted earnings per share
because their effects were antidilutive.
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 stockholders' equity or net income during the periods
involved.
2. INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated
statements of financial condition according to management's intent. The
carrying amount of securities and their approximate fair value at September
30 were as follows:
(Continued)
<PAGE> 73
72
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity Securities Cost Gains Losses Fair Value
--------------------------- ---- ----- ------ ----------
<S> <C> <C> <C> <C>
September 30, 1998:
U.S. Government and
agency securities $ 499,385 $ 290 $ 0 $ 499,675
Mortgage-backed securities 90,205 759 0 90,964
Other securities 381,516 0 0 381,516
----------- ---------- ---------- ------------
$ 971,106 $ 1,049 $ 0 $ 972,155
=========== ========== ========== ============
September 30, 1997:
Other securities $ 162,448 $ 0 $ 0 $ 162,448
=========== ========== ========== ============
Available-for-Sale Securities
September 30, 1998:
FHLB agency notes $ 1,078,128 $ 22,533 $ 0 $ 1,100,661
Investment in FHLB stock 1,375,400 0 0 1,375,400
FHLMC stock 43,005 2,136,525 0 2,179,530
Other common stock 570,385 143,053 0 713,438
Collateral mortgage
obligations (CMO's) 4,325,101 8,275 2,057 4,331,319
AMF mutual fund 585,502 0 0 585,502
Mortgage-backed securities 26,359,313 210,453 31,844 26,537,922
----------- ---------- ---------- ------------
$34,336,834 $2,520,839 $ 33,901 $ 36,823,772
=========== ========== ========== ============
September 30, 1997:
FHLB agency notes $ 1,994,524 $ 13,277 $ 0 $ 2,007,801
Investment in FHLB stock 853,000 0 0 853,000
FHLMC stock 43,005 1,482,967 0 1,525,972
Other common stock 585,385 245,240 0 830,625
Collateral mortgage
obligations (CMO's) 6,217,005 32,004 108,247 6,140,762
AMF mutual fund 556,191 0 0 556,191
Mortgage-backed securities 4,610,874 145,055 4,510 4,751,419
----------- ---------- ---------- ------------
$14,859,984 $1,918,543 $ 112,757 $ 16,665,770
=========== ========== ========== ============
</TABLE>
(Continued)
<PAGE> 74
73
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES (Continued)
The Company sold securities available-for-sale for total proceeds of
$20,206,296 and $541,176, resulting in gross realized gains of $123,736 and
$15,705 in 1998 and 1997, respectively. There were no sales of investment
securities available-for-sale in 1996.
The scheduled maturities of securities held-to-maturity and securities
(other than equity securities) available for sale by contractual maturity
are shown below. Expected maturities will differ from contractual
maturities because borrower may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
----------------------- -----------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Due in one year or less $880,901 $881,191 $ 414,749 $ 417,140
Due from one to five years 90,205 90,964 501,725 513,522
Due from five to ten years 0 0 10,443,239 10,523,348
Due after ten years 0 0 20,402,829 20,515,892
-------- -------- ----------- -----------
$971,106 $972,155 $31,762,542 $31,969,902
======== ======== =========== ===========
</TABLE>
Investment securities available-for-sale with a carrying amount of
approximately $993,606 and $1,220,969 at September 30, 1998 and 1997,
respectively, were pledged to secure public deposits as required by law and
for other purposes required or permitted by law.
<PAGE> 75
74
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
3. LOANS
Loans consisted of the following at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Real estate mortgage loans:
First mortgage loans:
Single-family residential $ 73,239,327 $51,809,438
Multi-family and commercial real estate 1,837,214 390,186
Second mortgage loans 6,215,903 1,046,212
1-4 family construction loans 20,833,431 22,879,956
Savings account loans 1,987,742 825,910
Installment loans 7,592,696 2,044,140
------------ -----------
Total 111,706,313 78,995,842
------------ -----------
Deduct:
Deferred loan fees and unearned credit
life premiums 281,615 251,215
Undisbursed portion of loans in process 6,102,485 6,778,048
Allowance for loan losses 732,021 284,324
------------ -----------
Total deductions 7,116,121 7,313,587
------------ -----------
Total loans receivable, net $104,590,192 $71,682,255
============ ===========
</TABLE>
Activity in the allowance for loan losses was as follows for the years
ended September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Beginning balance $284,324 $250,714 $265,759
Addition from business combination 487,611 0 0
Provision charged to income 44,744 36,465 1,200
Recovery of amounts charged off in
prior years 13,200 1,068 4,799
Loans charged off (97,858) (3,923) (21,044)
-------- -------- --------
Ending balance $732,021 $284,324 $250,714
======== ======== ========
</TABLE>
(Continued)
<PAGE> 76
75
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
3. LOANS (Continued)
At September 30, 1998, the total recorded investment in impaired loans, all
of which had allowances determined in accordance with SFAS No. 114 and No.
118 amount to approximately $221,000. The average recorded investment in
impaired loans amounted to approximately $227,000 for the year ended
September 30, 1998. The allowance for loan losses related to impaired loans
amounted to approximately $221,000 at September 30, 1998. Interest income
on impaired loans of approximately $1,000 was recognized in 1998. No loans
were considered impaired at September 30, 1997.
The Company is not committed to lend additional funds to debtors whose
loans have been modified.
4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at September 30, 1998 and
1997:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Land $ 410,966 $ 235,966
Buildings and improvements 3,285,914 1,621,319
Furniture, fixtures and equipment 1,079,267 1,116,371
Automobiles 182,671 143,698
----------- -----------
4,958,818 3,117,354
Less: Accumulated depreciation (1,055,510) (1,337,068)
----------- -----------
Premises and equipment, net $ 3,903,308 $ 1,780,286
=========== ===========
</TABLE>
Depreciation expense charged to operations was $291,443, $178,315 and
$137,545 in 1998, 1997 and 1996, respectively.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at September 30, 1998
and 1997:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Loans $ 807,713 $493,510
Investment securities held-to-maturity 11,650 1,968
Investment securities available-for-sale 225,615 102,652
Allowance for uncollected interest 0 (68,630)
---------- --------
Total accrued interest receivable $1,044,978 $529,500
========== ========
</TABLE>
<PAGE> 77
76
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
6. INVESTMENTS IN AFFILIATES
In March 1995, the Company obtained a 50% 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% ownership interest in Meta Company (Meta) for an investment of
$175,000. Meta is engaged in the financial planning business. In December
1997, the Company sold its investment in Meta at no gain or loss. The
Company financed the sale through a loan of approximately $96,000. The
Company accounts for these investments under the equity method.
7. LEASES
The Company leases certain real estate and office equipment under operating
leases expiring in various years through 2002. Minimum future rental
payments under non-cancellable operating leases having remaining terms in
excess of one year as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30, Amount
<S> <C>
1999 $51,046
2000 33,768
2001 4,912
2002 360
-------
$90,086
=======
</TABLE>
8. BUSINESS ACQUISITION
On October 31, 1997, the Company acquired First Federal Savings & Loan
Association of Chilton County ("Chilton County") in a business combination
accounted for as a purchase. Chilton County was primarily engaged in
banking services in Chilton County, Alabama. The results of operations of
Chilton County are included in the accompanying financial statements since
the date of acquisition. The total cost of the acquisition was
approximately $5.2 million, which consisted of 128,143 shares of common
stock issued at $14.25 per share and approximately $3.3 million in cash.
The cost exceeded the fair value of the net assets of Chilton County by
approximately $373,000, which is being amortized on the straight-line
method over 15 years.
(Continued)
<PAGE> 78
77
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
8. BUSINESS ACQUISITION (Continued)
In connection with the acquisition, approximately $665,000 of the purchase
price was allocated to premiums on loans purchased. These amounts are being
amortized on the straight-line method over various periods ranging from 20
to 35 months, of which approximately $235,000 has been amortized during the
current period. Additionally, approximately $61,000 was allocated as a
premium on deposits which is being amortized over approximately 12 months.
The combined effects of the goodwill and premium amortization was to reduce
income before taxes by approximately $202,000.
9. DEPOSITS
An analysis of deposit accounts, including the contractual interest rates
at the end of the period, is as follows at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Demand accounts:
Non interest bearing checking accounts $ 3,435,519 $ 1,255,745
Interest bearing:
NOW accounts 11,354,173 5,676,548
Money market demand 324,380 402,249
------------ -----------
Total demand accounts 15,114,072 7,334,542
Passbook savings accounts 14,769,304 9,380,308
Certificate accounts 94,000,300 43,837,686
------------ -----------
Total $123,883,676 $60,552,536
============ ===========
</TABLE>
Certificate accounts greater than or equal to $100,000 were $3,301,654 at
September 30, 1998 and $2,174,000 at September 30, 1997.
Scheduled maturities of certificate accounts were as follows at September
30, 1998 and 1997:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Less than one year $66,580,505 $35,148,913
One year to two years 22,731,066 5,385,165
Two years to three years 4,069,474 2,990,190
Three years to four years 352,587 313,418
Four years to five years 266,668 0
----------- -----------
Total $94,000,300 $43,837,686
=========== ===========
</TABLE>
(Continued)
<PAGE> 79
78
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
9. DEPOSITS (Continued)
Interest expense on deposits for the years ended September 30, 1998, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Demand accounts $ 288,352 $ 204,718 $ 252,178
Passbook savings accounts 327,840 249,157 279,365
Certificate accounts 4,799,936 2,365,685 2,474,494
---------- ---------- ----------
Total $5,416,128 $2,819,560 $3,006,037
========== ========== ==========
</TABLE>
10. BORROWED FUNDS
The Company was liable to the Federal Home Loan Bank of Atlanta on the
following advances at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Maturity Date Interest Rate 1 9 9 8 1 9 9 7
------------- ------------- ------- -------
<S> <C> <C> <C>
October 1997 6.17% $ 0 $ 2,000,000
October 1997 5.76% 0 4,014,017
March 1998 8.54% 0 629,505
May 1998 5.64% 0 5,000,000
October 1998 5.89% 3,000,000 0
March 1999 6.00% 7,629,505 0
March 1999 8.58% 286,044 286,044
March 2000 8.62% 271,080 271,080
March 2001 8.68% 257,439 257,439
September 2002 5.66% 4,600,000 4,600,000
----------- -----------
Total (weighted average rate of
5.86% in 1998 and 5.99% in 1997) $16,044,068 $17,058,085
=========== ===========
</TABLE>
At September 30, 1998 and 1997, the advances were collateralized by
first-mortgage residential loans with carrying values of approximately
$72,288,000 and $22,745,000, respectively.
The Company has a line-of-credit of up to $4,000,000 which bears interest
at the prime lending rate plus one percent. The line-of-credit requires
monthly interest payments and payment of the outstanding balance in October
1998. At September 30, 1998, the prime lending rate was 8.5%. The
outstanding balance on the line-of-credit was $5,000 and $1,435,301 at
September 30, 1998 and 1997, respectively. The note is secured by the
Company's stock in its subsidiary, First Federal of the South.
(Continued)
<PAGE> 80
79
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
10. BORROWED FUNDS (Continued)
The Company has a note payable to an individual in the amount of $120,000
and $160,000 at September 30, 1998 and 1997, respectively, payable in
equal installments over five years.
11. INCOME TAX EXPENSE
Income tax expense (benefit) for the years ended September 30, 1998, 1997
and 1996 consists of the following:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7 1 9 9 6
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current $ 329,558 $ 207,767 $ 42,250
Deferred 30,099 32,590 73,736
----------- ----------- -----------
359,657 240,357 115,986
----------- ----------- -----------
State:
Current 26,399 31,666 (12,455)
Deferred 2,213 31,042 (11,609)
----------- ----------- -----------
28,612 62,708 (24,064)
----------- ----------- -----------
Total $ 388,269 $ 303,065 $ 91,922
=========== =========== ===========
</TABLE>
Income tax expense includes taxes related to investment security gains in
the amount of $47,020 in 1998.
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% to income before income taxes as follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7 1 9 9 6
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax expense $ 347,991 $ 271,511 $ 25,590
Increase (reduction) in income tax resulting
from:
Compensation expense for ESOP 0 0 57,240
Management Recognition Plan 0 0 24,539
State tax, net of federal income tax benefit 24,663 41,387 (15,882)
FHLMC stock 0 0 (4,628)
Other 15,615 (9,833) 5,063
----------- ---------- ----------
Total $ 388,269 $ 303,065 $ 91,922
=========== ========== ==========
Effective tax rate 38% 38% 122%
=========== ========== ==========
</TABLE>
(Continued)
<PAGE> 81
80
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
11. INCOME TAX EXPENSE
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
----------- -----------
<S> <C> <C>
Deferred tax assets:
Bad debts $ 175,786 $ 0
Deferred compensation 41,665 41,665
Investment in equity of affiliate 66,624 57,033
Other 13,130 0
----------- -----------
Total deferred tax assets 297,205 98,698
----------- -----------
Deferred tax liabilities:
Unrealized gain on investment securities
available-for-sale 945,037 659,112
Bad debt expense 0 6,941
Management Recognition Plan 99,373 99,373
FHLB stock 237,138 132,218
Depreciation 213,662 0
Prepaid expenses 45,122 20,797
Foreclosed real estate gain 12,708 13,172
Federal/state tax deduction on a cash basis 5,985 5,985
Other 0 941
------------ -----------
Total deferred tax liabilities 1,559,025 938,539
----------- -----------
Net deferred tax liability $ 1,261,820 $ 839,841
=========== ===========
</TABLE>
There was no valuation allowance at September 30, 1998 or 1997.
12. EMPLOYEE BENEFIT PLANS
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.
(Continued)
<PAGE> 82
81
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
12. EMPLOYEE BENEFIT PLANS (Continued)
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 $52,258,
$116,075 and $222,834 were made to the ESOP in 1998, 1997 and 1996,
respectively. During 1997, the Trustee distributed cash of $16,806 in
lieu of shares to retiring participants.
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, 1998, 1997 and 1996 were $72,653, $101,632 and $222,834,
respectively. The interest rate and principal outstanding at September
30, 1998 were 8.50% and $336,348, respectively. These payments resulted
in the commitment to release 4,000 shares in 1998, 7,739 shares in 1997,
and the release and allocation to participants of 16,729 shares in 1996.
The Company has recognized compensation expense, equal to the fair value
of the committed-to-be released shares of $77,600, $111,520 and $209,112
in 1998, 1997 and 1996, respectively. Excluding committed-to-be released
shares, suspense shares at September 30, 1998 and 1997 equaled 30,800 and
34,801, respectively. The fair value of the suspense shares at September
30, 1998, was $502,440. 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. In 1998, 8,300 of these options were exercised and 4,150 had
expired.
During 1998, the Company adopted the 1998 Stock Option & Incentive Plan
for directors and key employees of the Company. Under the 1998 plan,
options to acquire 67,511 shares had been granted at an exercise price of
$21 per share. None of the 1998 options had been exercised at September
30, 1998. The term of the options are ten years and they vest equally
over five years. The Company applies APB Opinion 25 in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized
for the plan in 1998. Had compensation cost been determined on the basis
of fair value pursuant to SFAS No. 123, net income and earnings per share
would have been reduced as follows:
(Continued)
<PAGE> 83
82
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
12. EMPLOYEE BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
1 9 9 8
---------
<S> <C>
Net income:
As reported $ 634,874
Pro forma 602,059
Primary earnings per share:
As reported .68
Pro forma .64
Fully diluted earnings per share:
As reported .67
Pro forma .64
</TABLE>
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 1998, 1997 and 1996 plus the
fair value of 3,320 shares for which vesting was accelerated in 1996. In
addition, the dividends paid on unvested shares are also reflected as
compensation expense. Total compensation expense attributable to the
MRP's in 1998, 1997 and 1996 was $115,934, $86,114 and $176,130,
respectively.
The Company also has a 401(k) plan that covers all employees who meet
minimum age and service requirements. The plan provides for elective
employee salary deferrals and currently the Company makes no matching
contribution to the plan.
The Company has entered into deferred compensation agreements with three
of its senior officers, pursuant to which each officer will receive from
the Company certain retirement benefits at age 65. Such benefits will be
payable for 15 years to each officer 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. The annual benefits under these arrangements range from
$30,000 to $65,000.
(Continued)
<PAGE> 84
83
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
12. EMPLOYEE BENEFIT PLANS (Continued)
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 $70,689 in 1998,
$57,075 in 1997 and $51,045 in 1996.
In addition to the deferred compensation arrangements discussed above,
the Company entered into arrangements with two officers in April 1997,
under which the Company issued a total of 21,135 shares of common stock
to these officers. The shares vest ratably over the 15 year term of their
employment contracts. The Company has recognized compensation expense
equal to the fair value of the vested shares of $19,902 and $8,293 in
1998 and 1997, respectively.
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, 1998 and
1997 amounted to $1,200,556 and $1,319,687, respectively. The change from
1997 to 1998 reflects payments of $228,431 and advances of $109,300.
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 $1,320,340 and $2,282,925 at September
30, 1998 and 1997, 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 $1,320,340 and $2,282,925 at September 30,
1998 and 1997, respectively. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on
balance-sheet instruments.
(Continued)
<PAGE> 85
84
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES (Continued)
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.
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 and punitive damages.
Following a jury award in 1995, the Bank and USF&G entered into a
settlement agreement in 1996 under which the Bank received $583,257, net
of legal fees. This settlement is included in other income in 1996.
The Company is involved in various legal actions arising in the normal
course of business. In one such proceeding, management believes that an
adverse judgment is reasonably possible and estimates that the pretax
loss could be in the range of $50,000 to $100,000. In the opinion of
management, based upon consultation with legal counsel, the ultimate
resolution of all other proceedings will not have a material adverse
effect upon the financial position or operations of the Company.
15. RETAINED EARNINGS AND REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
(Continued)
<PAGE> 86
85
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
15. RETAINED EARNINGS AND REGULATORY CAPITAL (Continued)
Quantitative measures established by regulations to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital to risk-weighted
assets, and of Tier I capital to average assets. Management believes, as
of September 30, 1998, that the Bank meets all capital adequacy
requirements and meets the requirements to be classified as "well
capitalized."
<TABLE>
<CAPTION>
For Capital Well
Actual Adequacy Purposes Capitalized
------ ----------------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total capital
(to risk weighted assets) $ 13,878,000 18.5% >$ 6,004,000 >8.0% >$ 7,504,000 >10.0%
- - - -
Tier I capital
(to risk weighted assets) 12,069,000 16.1% >$ 3,002,000 >4.0% >$ 4,503,000 > 6.0%
- - - -
Tier I capital
(to average assets) 12,069,000 7.7% >$ 6,258,000 >4.0% >$ 7,822,000 > 5.0%
- - - -
As of September 30, 1997:
Total capital
(to risk weighted assets) $ 13,289,000 23.9% >$ 4,448,000 >8.0% >$ 5,561,000 >10.0%
- - - -
Tier I capital
(to risk weighted assets) 12,321,000 22.2% >$ 2,224,000 >4.0% >$ 3,336,000 > 6.0%
- - - -
Tier I capital
(to average assets) 12,321,000 13.0% >$ 3,786,000 >4.0% >$ 4,733,000 > 5.0%
- - - -
</TABLE>
Savings institutions with more than a "normal" level of interest rate
risk are required to maintain additional total capital. A savings
institution with a greater than normal interest rate risk is required to
deduct specified amounts from total capital, for purposes of determining
its compliance with risk-based capital requirements. Management believes
that the Bank was in compliance with capital standards at September 30,
1998 and 1997.
Retained earnings at September 30, 1998 and 1997, include approximately
$2,400,000 for which no provision for income tax has been made. This
amount represents allocations of income to bad debt deductions for tax
computation purposes. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb tax bad debt
losses, income taxes may be imposed at the then applicable rates.
Retained earnings is also restricted at September 30, 1998, as a result
of the liquidation account established upon conversion to a stock
company. No dividends may be paid to stockholders if such dividends would
reduce the net worth of the Bank below the amount required by the
liquidation account.
<PAGE> 87
86
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
16. SHAREHOLDERS' RIGHTS PLAN
In December 1997, the Company adopted a Stock Purchase Rights Plan that
provides rights to holders of the Company's common stock to receive
common stock rights under certain circumstances. The rights will become
exercisable ten days after a person or group acquires 15% or more of the
company's shares. If, after the rights become exercisable, the Company
becomes involved in a merger, each right then outstanding (other than
those held by the 15% holder) would entitle its holder to buy common
stock of the Company worth twice the exercise price of each right. The
rights expire in November 2007.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table provides fair values of the Company's financial
instruments at September 30, 1998 and 1997. Fair value estimates are made
at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates. Fair value estimates are based on existing on and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates. The assumptions used in the
estimation of the fair value of the Company's financial instruments are
explained below. Where quoted market prices are not available, fair
values are based on estimates using discounted cash flow and other
valuation techniques. Discounted cash flows can be significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. The following fair value estimates cannot be
substantiated by comparison to independent markets and should not be
considered representative of the liquidation value of the Company's
financial instruments, but rather a good-faith estimate of the fair value
of financial instruments held by the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
(Continued)
<PAGE> 88
87
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Cash and Amounts Due from Depository Institutions - Fair value equals the
carrying value of such assets due to their nature.
Investment Securities and Accrued Interest Receivable - The fair value of
investments is based on quoted market prices. The carrying amount of
related accrued interest receivable approximates its fair value.
Loans Receivable - The fair value of loans is calculated using discounted
cash flows. The discount rate used to determine the present value of the
loan portfolio is an estimated market discount rate that reflects the
credit and interest rate risk inherent in the loan portfolio. The
estimated maturity is based on the Company's historical experience with
repayments adjusted to estimate the effect of current market conditions.
The carrying amount of related accrued interest receivable approximates
its fair value.
Deposits - Fair values for certificates of deposit have been determined
using discounted cash flows. The discount rate used is based on estimated
market rates for deposits of similar remaining maturities. The carrying
amount of all other deposits, due to their short-term nature, approximate
their fair values. The carrying amount of related accrued interest
payable approximates its fair value.
Borrowed Funds - Fair value for the fixed-rate borrowings has been
determined using discounted cash flows. The discount rate used is based
on estimated current rates for advances with similar maturities. The
carrying amount of the variable rate borrowings, due to the short
repricing periods, approximate their fair value.
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash amounts due from
depository institutions $ 9,213,906 $ 9,213,906 $2,448,123 $2,448,123
Investments securities 37,794,878 37,795,927 16,828,218 16,828,218
Loans receivable, net 104,590,192 111,129,000 71,682,225 74,730,000
Accrued interest receivable 1,044,978 1,044,978 529,500 529,500
Financial Liabilities:
Deposits 123,883,676 124,882,000 60,552,536 60,693,000
Borrowed funds 16,169,068 16,031,000 18,653,386 18,690,000
Accrued interest payable 1,071,183 1,071,183 859,111 859,111
</TABLE>
<PAGE> 89
88
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
18. PARENT COMPANY
The condensed financial information for SouthFirst Bancshares, Inc.
(Parent Company) is presented below:
Parent Company
Condensed Balance Sheets
September 30, 1998 and 1997
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------------ ------------
ASSETS
<S> <C> <C>
Cash and amounts due from depository institutions $ 25,061 $ 80,701
Investment securities available for sale 713,438 815,625
Investment in financial institution subsidiary 13,878,031 13,340,727
Investment in other subsidiaries 401,854 --
Investment in affiliates 144,617 192,560
Other assets 1,866,749 1,707,253
------------ ------------
Total Assets $ 17,029,750 $ 16,136,866
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowed funds (including $1,000,000 from financial
institution in 1998) $ 1,005,000 $ 1,595,301
Other liabilities 354,135 918,231
------------ ------------
Total liabilities 1,359,135 2,513,532
------------ ------------
Stockholders' equity:
Common stock, $ .01 par value, 2,000,000 shares authorized; 999,643
shares issued and 914,432 shares outstanding in 1998;
863,200 shares issued and 812,799 shares outstanding in 1997 9,996 8,632
Additional paid-in capital 9,810,963 7,792,748
Treasury stock (867,087) (198,392)
Deferred compensation on common stock employee benefit plans (778,508) (914,604)
Retained earnings 5,953,346 5,815,352
Unrealized gain on investment securities available-for-sale,
net of tax 1,541,905 1,119,598
------------ ------------
Total stockholders' equity 15,670,615 13,623,334
------------ ------------
Total Liabilities and Stockholders' Equity $ 17,029,750 $ 16,136,866
============ ============
</TABLE>
(Continued)
<PAGE> 90
89
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
18. PARENT COMPANY (Continued)
Parent Company
Condensed Statements of Operations
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7 1 9 9 6
----------- --------- ---------
<S> <C> <C> <C>
Cash dividends from financial institution subsidiary $ 2,892,976 $ -- $ --
Interest and dividend income 53,688 73,225 99,603
----------- --------- ---------
Total income 2,946,664 73,225 99,603
----------- --------- ---------
Expenses:
Interest on borrowed funds 225,485 109,277 21,682
Equity in loss of affiliates 26,279 61,977 66,773
Compensation and benefits 28,500 25,000 11,250
Management fee 90,000 90,000 90,000
Other 153,249 99,005 259,515
----------- --------- ---------
523,513 385,259 449,220
----------- --------- ---------
Income (loss) before income taxes 2,423,151 (312,034) (349,617)
Income tax benefit 166,269 107,509 128,198
----------- --------- ---------
Income (loss) before equity in undistributed
earnings of subsidiaries 2,589,420 (204,525) (221,419)
----------- --------- ---------
Equity in undistributed earnings of subsidiaries
(dividends in excess of earnings):
Financial institution (1,978,410) 696,346 204,763
Other 23,864 3,678 --
----------- --------- ---------
(1,954,546) 700,024 204,763
----------- --------- ---------
Net income (loss) $ 634,874 $ 495,499 $ (16,656)
=========== ========= =========
</TABLE>
(Continued)
<PAGE> 91
90
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
18. PARENT COMPANY (Continued)
Parent Company
Condensed Statements of Cash Flows
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7 1 9 9 6
----------- ----------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 634,874 $ 495,499 $ (16,656)
Adjustments to reconcile net income (loss) to
cash from operating activities:
Equity in undistributed earnings of subsidiaries (938,430) (696,346) (204,763)
Compensation expense on ESOP and MRP 213,436 205,927 318,012
Equity in losses of unconsolidated affiliates 26,279 61,977 66,773
(Increase) decrease in other assets 159,496 (1,072,639) (510,437)
Increase (decrease) in other liabilities (564,096) 767,141 13,242
----------- ----------- ----------
Net cash used in operating activities (468,441) (238,441) (333,829)
----------- ----------- ----------
Investing Activities:
Purchase of investment securities -- -- (270,385)
Proceeds from sale of investment securities 102,187 -- --
Investment in subsidiaries, net of dividends received 1,928,626 -- --
Investment in affiliates, net of sale proceeds 21,664 (70,000) (175,000)
----------- ----------- ----------
Net cash provided (used) by investing activities 2,052,477 (70,000) (445,385)
----------- ----------- ----------
Financing Activities:
Issuance of common stock 116,200 65,893 --
Acquisition of ESOP shares -- (16,806) --
Proceeds from borrowed funds -- 695,048 900,253
Repayment on borrowed funds (590,301) -- --
Cash dividends paid (496,880) (370,448) (1,917,558)
Acquisition of treasury stock (668,695) (34,606) (500,802)
----------- ----------- ----------
Net cash provided (used) by financing activities (1,639,676) 339,081 (1,518,107)
----------- ----------- ----------
Net increase (decrease) in cash and amounts due from
depository institutions (55,640) 30,640 (2,297,321)
Cash and amounts due from depository institutions at
beginning of year 80,701 50,061 2,347,382
----------- ----------- ----------
Cash and amounts due from depository institutions
at end of year $ 25,061 $ 80,701 $ 50,061
=========== =========== ==========
</TABLE>
<PAGE> 92
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 20, 1998, SouthFirst dismissed its independent auditors,
KPMG Peat Marwick LLP ("KPMG"), and on the same date engaged the firm of Jones &
Kirkpatrick, P.C. ("Jones & Kirkpatrick") as its independent auditors for the
fiscal year ending September 30, 1998. Each of these actions was approved by the
audit committee of the Board of Directors of SouthFirst.
The report of KPMG on the financial statements of the Company for
the fiscal years ended September 30, 1997 and 1996 did not contain any adverse
opinion or a disclaimer of opinion, nor was it qualified or modified as to audit
scope or accounting principles.
In connection with the audit of the fiscal years ended September 30,
1997 and 1996 and for the unaudited interim period through August 20, 1998,
there were no disagreements with KPMG on any matter of accounting principle or
practice, financial statement disclosure, or audit procedure or scope which
disagreement, if not resolved to the satisfaction of KPMG, would have caused it
to make reference to the subject matter of the disagreement in its report.
KPMG has furnished the Company with a letter addressed to the
Securities and Exchange Commission stating that it does not disagree with any of
the above statements, a copy of which has been filed as an exhibit to the
Current Report on Form 8-K dated August 20, 1998.
PART III
The information required by Part III of Form 10-KSB is, pursuant to
General Instruction E(3) of Form 10-KSB, incorporated by reference from the
Company's definitive proxy statement (the "Proxy Statement") to be filed
pursuant to Regulation 14A with the Commission not later than 120 days after the
end of the fiscal year covered by this form.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information responsive to this item is incorporated by reference
from the section entitled "Election of Directors" contained in the Proxy
Statement.
ITEM 10. EXECUTIVE COMPENSATION.
The information responsive to this item is incorporated by reference
from the section entitled "Executive Compensation" contained in the Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information responsive to this item is incorporated by reference
from the section entitled "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
91
<PAGE> 93
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No directors, executive officers, or immediate family members of
such individuals were engaged in transactions with SouthFirst or First Federal
(other than loans) involving more than $60,000 during fiscal year ended
September 30, 1998. 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 a
majority of the disinterested directors. At September 30, 1998, the aggregate of
all loans by First Federal to its officers, directors, and related interests was
$1,021,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A). EXHIBITS.
The following exhibits are filed with or incorporated by reference
into this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference, from
SouthFirst's: Registration Statement on Form S-1 under the Securities Act of
1933 Registration No. 33-80730 ("1994 S-1"); Registration Statement on From S-8
under the Securities Act of 1933, Registration No. 333-4534 ("Plan "A" S-8");
Registration Statement on From S-8 under the Securities Act of 1933,
Registration No. 333-4536 ("Plan "B" S-8"); Registration Statement on From S-8,
Registration No. 333-4538 ("Option Plan S-8"); Annual Report on Form 10-K for
the year ended September 30, 1995 ("1995 10-K"); or Annual Report on Form 10-K
for the year ended September 30, 1997. Unless otherwise indicated, the exhibit
number corresponds to the exhibit number in the referenced document.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- -----------------------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation
(1994 S-1).
3.2* Bylaws (1994 S-1, Exhibit 3.2).
4* Form of Common Stock Certificate (1994 S-1).
10.1* Employment Agreement dated as of October 1,
1997 between SouthFirst Bancshares, Inc. and
Donald C. Stroup (1997 Form 10-K).
10.2* Employment Agreement dated as of October 1,
1997 between SouthFirst Bancshares, Inc. and
Joe K. McArthur (1997 Form 10-K).
10.3* Employment Agreement dated as of October 1, 1997
between First Federal of the South and Donald C.
Stroup (1997 Form 10-K).
</TABLE>
92
<PAGE> 94
<TABLE>
<S> <C>
10.4* Employment Agreement dated as of October 1, 1997
between First Federal of the South and Joe K.
McArthur (1997 Form 10-K).
10.5 Employment Agreement dated as of October 31,
1997 between First Federal of the South and
Bobby R. Cook (1997 Form 10-K).
10.5.1* Form of Management Recognition Plan A (1994 S-1,
Exhibit 10.5).
10.5.2* Form of Management Recognition Plan A, as amended
(1995 Form 10-K).
10.5.3* Management Recognition Plan A Restated and Continued
(Plan "A" S-8, Exhibit 4.1).
10.6.1* Form of Management Recognition Plan B (1994 S-1,
Exhibit 10.6).
10.6.2* Form of Management Recognition Plan B, as amended
(1995 Form 10-K).
10.6.3* Management Recognition Plan B, Restated and Continued
(Plan "B" S-8, Exhibit 4.1).
10.7.1* Form of Stock Option and Incentive Plan (1994 S-1,
Exhibit 10.7) (1995 Form 10-K.)
10.7.2* Form of Stock Option and Incentive Plan, as amended
(1995 Form 10-K).
10.7.3* Stock Option and Incentive Plan, Restated and
Continued (Option Plan S-8, Exhibit 4.1).
10.7.4* Form of Incentive Stock Option Agreement (Option Plan
S-8, Exhibit 4.2).
10.8* Form of SouthFirst Bancshares, Inc. Employee Stock
Ownership Plan (1994 S-1, Exhibit 10.8).
10.9* Deferred Compensation Agreement between First Federal
of the South and Joe K. McArthur (1995 Form 10-K).
10.10* Deferred Compensation Agreement between First Federal
of the South and Donald C. Stroup (1995 Form 10-K).
10.11 Employment Agreement dated as of January 1, 1998
between First Federal of the South and Jimmy C.
Maples.
11 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of Registrant.
23.1 Consent of Jones and Kirkpatrick, P.C.
</TABLE>
93
<PAGE> 95
<TABLE>
<S> <C>
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (for SEC use only)
</TABLE>
(B) REPORTS ON FORM 8-K
SouthFirst filed one report on Form 8-K during the last quarter of
the fiscal year ended September 30, 1998, on August 20, 1998, reporting its
dismissal of KPMG Peat Marwick LLP as its independent auditors and engagement of
Jones & Kirkpatrick, P.C. as independent auditors.
94
<PAGE> 96
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Sylacauga, State of Alabama, on the
29th day of December, 1998.
SOUTHFIRST BANCSHARES, INC.
By: /s/ Donald C. Stroup
-------------------------------------
Donald C. Stroup
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Donald C. Stroup
---------------------------- Chairman, President and
Donald C. Stroup Chief Executive Officer
(principal executive officer) December 29, 1998
/s/ Joe K. McArthur
---------------------------- Executive Vice President,
Joe K. McArthur Chief Operating Officer,
Chief Financial Officer,
Secretary/Treasurer and director
(principal accounting officer) December 29, 1998
/s/ Bobby R. Cook
---------------------------- Director December 29, 1998
Bobby R. Cook
/s/ H. David Foote, Jr.
---------------------------- Director December 29, 1998
H. David Foote, Jr.
/s/ J. Malcomb Massey
---------------------------- Director December 29, 1998
J. Malcomb Massey
/s/ Allen Gray McMillan, III
---------------------------- Director December 29, 1998
Allen Gray McMillan, III
/s/ John T. Robbs
---------------------------- Director December 29, 1998
John T. Robbs
/s/ Charles R. Vawter, Jr.
---------------------------- Director December 29, 1998
Charles R. Vawter, Jr.
</TABLE>
95
<PAGE> 97
SOUTHFIRST BANCSHARES, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------
<S> <C>
10.5 Employment Agreement dated as of January 1, 1998 between First Federal of the
South and Bobby R. Cook.
10.11 Employment Agreement dated as of January 1, 1998 between First Federal of the
South and Jimmy C. Maples.
11 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of Registrant.
23.1 Consent of Jones and Kirkpatrick, P.C.
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule. (for SEC use only).
</TABLE>
96
<PAGE> 1
EXHIBIT 10.5
FIRST FEDERAL OF THE SOUTH
EMPLOYMENT AGREEMENT
JANUARY 1, 1998
(BOBBY R. COOK)
THIS AGREEMENT is entered into as of the 1st day of January, 1998 (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 $90,000 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.
61
<PAGE> 2
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
commen surate 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.
62
<PAGE> 3
8. Vacation, Sick Leave and Annual Physical Examination.
(a) 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:
(i) 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.
(ii) 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.
(iii) 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.
(iv) In addition, the Employee shall be entitled to an annual
sick leave benefit as established by the Board.
(b) The Employee, at least once during each 12-month period,
beginning on the Effective Date and each anniversary thereof, shall schedule and
submit to a full physical examination by a licensed medical physician and, if
requested, shall submit the findings of such examination to the Board of
Directors.
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
63
<PAGE> 4
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 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
64
<PAGE> 5
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.
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
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<PAGE> 6
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 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.
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<PAGE> 7
(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
(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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<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
ATTEST: FIRST FEDERAL OF THE SOUTH
/s/ Joe K. McArthur /s/ Donald C. Stroup
- ------------------- -------------------------------------
Secretary President and Chief Executive Officer
WITNESS:
/s/ Bobby R. Cook
- ------------------- -------------------------------------
Bobby R. Cook ("Employee")
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<PAGE> 1
EXHIBIT 10.11
FIRST FEDERAL OF THE SOUTH
EMPLOYMENT AGREEMENT
JANUARY 1, 1998
(JIMMY C. MAPLES)
THIS AGREEMENT is entered into as of the 1st day of January, 1998 (the
"Effective Date"), by and between First Federal of the South (the "Association")
and Jimmy C. Maples (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Association
as First Vice President and is responsible for all aspects of the construction
lending activities of the Association; 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 First Vice President
of the Association. In such capacity, the Employee shall, among his other
duties, manage and direct the construction lending activities of the
Association, all within the framework of the approved annual budgets, 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 such committees as the Board
designates, and shall regularly attend the meetings of any such 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 $75,600 per annum, payable in
cash not less frequently than monthly. Further, the employee shall, during the
term of Agreement and at least one time in each fiscal year of the Association,
be considered by the senior management officials of the Association for receipt
of a bonus amount, such amount to be based upon, among other factors, the
performance of the Employee in his management and direction of the construction
lending activities of the Association, all in the sole discretion of said senior
management officials. 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 also be eligible to
participate 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
be considered by the Board for participation in such discretionary bonuses.
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<PAGE> 2
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.
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<PAGE> 3
8. Vacation, Sick Leave and Annual Physical Examination.
(a) 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:
(i) 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.
(ii) 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.
(iii) 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.
(iv) In addition, the Employee shall be entitled to an annual
sick leave benefit as established by the Board.
(b) The Employee, at least once during each 12-month period,
beginning on the Effective Date and each anniversary thereof, shall schedule and
submit to a full physical examination by a licensed medical physician and, if
requested, shall submit the findings of such examination to the Board of
Directors.
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
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<PAGE> 4
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 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
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<PAGE> 5
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.
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.
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<PAGE> 6
(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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<PAGE> 7
(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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<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
ATTEST: FIRST FEDERAL OF THE SOUTH
/s/ Joe K. McArthur BY: /s/ Donald C. Stroup
- -------------------------- -------------------------------------
Secretary President and Chief Executive Officer
WITNESS:
/s/ Jimmy C. Maples
- -------------------------- -----------------------------------------
Jimmy C. Maples ("Employee")
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<PAGE> 1
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
SouthFirst Bancshares, Inc.
Computation of Per Share Earnings (Loss)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average outstanding shares ... 931,195 795,479 810,997
Net income (loss) ..................... 634,874 $495,499 $ (16,656)
Net income (loss) per common share .... $ 0.67 $ 0.62 $ (0.02)
</TABLE>
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EXHIBIT 21
Subsidiaries of the Registrant
1. First Federal of the South (federally chartered stock savings bank)
2. Magnolia Title Services, Inc. (title insurance and related services)
78
<PAGE> 1
EXHIBIT 23.1
Consent of Jones and Kirkpatrick, P.C., Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-4534, 333-4536 and 333-4538) on Form S-8 of SouthFirst Bancshares,
Inc. of our report dated November 10, 1998, with respect to the consolidated
financial statements of SouthFirst Bancshares, Inc. included in the Annual
Report (Form 10-K) for the year ended September 30, 1998.
/s/ Jones and Kirkpatrick, P.C.
Birmingham, Alabama
December 28, 1998
<PAGE> 1
EXHIBIT 23.2
Consent of KPMG Peat Marwick LLP, Independent Auditors
The Board of Directors
SouthFirst Bancshares, Inc.
We consent to the incorporation by reference in the registration statements
(Nos. 333-4534, 333-4536 and 333-4538) on Form S-8 of SouthFirst Bancshares,
Inc. of our report dated November 21, 1997, relating to the consolidated balance
sheets of SouthFirst Bancshares, Inc. and its subsidiary as of September 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the two-year period
ended September 30, 1997, which report appears in the September 30, 1998 annual
report on Form 10-KSB of SouthFirst Bancshares, Inc.
/s/ KPMG Peat Marwick LLP
Birmingham, Alabama
December 29, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHFIRST BANCSHARES, INC. FOR THE 12 MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1997
<CASH> 9,214
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,824
<INVESTMENTS-CARRYING> 971
<INVESTMENTS-MARKET> 971
<LOANS> 105,322
<ALLOWANCE> 732
<TOTAL-ASSETS> 158,518
<DEPOSITS> 123,884
<SHORT-TERM> 12,254
<LIABILITIES-OTHER> 2,794
<LONG-TERM> 3,791
0
0
<COMMON> 0
<OTHER-SE> 15,671
<TOTAL-LIABILITIES-AND-EQUITY> 158,518
<INTEREST-LOAN> 8,273
<INTEREST-INVEST> 2,825
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,098
<INTEREST-DEPOSIT> 5,416
<INTEREST-EXPENSE> 6,565
<INTEREST-INCOME-NET> 4,533
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 124
<EXPENSE-OTHER> 5,455
<INCOME-PRETAX> 1,024
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.67
<YIELD-ACTUAL> 8.08
<LOANS-NON> 2,128
<LOANS-PAST> 394
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 284
<CHARGE-OFFS> 98
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 732
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
