<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
March 31, 1998 1-13640
SOUTHFIRST BANCSHARES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1121255
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
126 North Norton Avenue, Sylacauga, Alabama 35150
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 205-245-4365
- --------------------------------------------------------------------------------
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, par value $.01 per share
- -------------------------------------- 975,744 shares
Class Outstanding at May 1, 1998
Transitional Small Business Disclosure Format (check one):
Yes No X
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SOUTHFIRST BANCSHARES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition (Unaudited) at March 31, 1998
and September 30, 1997 ............................................................ 1
Consolidated Statements of Earnings (Unaudited) for the Six and Three Months Ended
March 31, 1998 and 1997 ........................................................... 2
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
March 31, 1998 and 1997 ........................................................... 3
Notes to Consolidated Financial Statements (Unaudited) ............................... 5
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations .................................................................... 8
PART II - OTHER INFORMATION .......................................................... 13
SIGNATURES ........................................................................... 15
</TABLE>
<PAGE> 3
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, 1998 (Unaudited) and September 30, 1997
<TABLE>
<CAPTION>
March 31, September 30,
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 16,694,979 2,448,123
Investment securities held to maturity at cost 1,058,402 162,448
Investment securities available for sale, at fair value 33,713,575 16,665,770
Loans receivable 102,654,448 71,966,579
Less allowance for loan losses (779,081) (284,324)
------------- -----------
Net loans 101,875,367 71,682,255
Loans held for sale at cost (which approximates fair value) 893,341 333,750
Premises and equipment, net 3,393,111 1,780,286
Foreclosed real estate, net 110,988 --
Accrued interest receivable 1,040,475 529,500
Investments in affiliates 149,168 192,560
Other assets 3,349,550 1,994,010
------------- -----------
Total assets $ 162,278,956 95,788,702
============= ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 2,473,916 1,255,745
Interest bearing 121,626,323 59,296,791
------------- -----------
Total deposits 124,100,239 60,552,536
Advances by borrowers for property taxes and insurance 329,842 388,918
Accrued interest payable 564,099 859,111
Borrowed funds 17,941,534 18,653,386
Accrued expenses and other liabilities 2,994,838 1,711,417
------------- -----------
Total liabilities 145,930,552 82,165,368
------------- -----------
Stockholders' equity:
Common stock, $.01 par value, 2,000,000 shares authorized; 991,344 shares
issued and 975,744 outstanding shares at March 31, 1997, and 863,200
shares issued and 847,600 outstanding shares at September 30, 1997 9,913 8,632
Additional paid-in capital 9,874,008 7,792,748
Treasury stock (198,392) (198,392)
Unearned compensation on common stock employee benefit plans (914,604) (914,604)
Retained earnings, substantially restricted 5,978,160 5,815,352
Unrealized gain on investment securities available for sale, net of tax 1,599,319 1,119,598
------------- -----------
Total stockholders' equity 16,348,404 13,623,334
------------- -----------
Total liabilities and stockholders' equity $ 162,278,956 95,788,702
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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Consolidated Statements of Earnings (Unaudited) for the
Six Months Ending March 31, 1998 and March 31, 1997 and
Three Months Ended March 31, 1998 and March 31, 1997
<TABLE>
<CAPTION>
Six months ended March 31, Three months ended March 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,009,485 2,749,944 2,133,015 1,384,246
Interest and dividend income on investments held to
maturity 409,903 4,308 205,304 2,154
Interest and dividend income on investments available
for sale 1,029,462 712,082 567,334 334,600
----------- ---------- ---------- ----------
Total interest and dividend income 5,448,850 3,466,333 2,905,653 1,721,000
----------- ---------- ---------- ----------
Interest expense:
Interest on deposits 2,420,883 1,429,455 1,465,015 697,251
Interest on borrowed funds 583,133 419,996 293,745 214,330
----------- ---------- ---------- ----------
Total interest expense 3,004,016 1,849,451 1,758,760 911,580
----------- ---------- ---------- ----------
Net interest income 2,444,834 1,616,882 1,146,893 809,420
Provision for loan losses 21,671 17,700 14,081 17,700
----------- ---------- ---------- ----------
Net interest income after provision for loan loss 2,423,163 1,599,182 1,132,812 791,720
----------- ---------- ---------- ----------
Other income:
Service charges and other fees 311,729 294,959 174,044 148,325
Employee benefit consulting fees 336,641 0 188,242 0
Gain on sale of loans 130,656 63,733 85,303 14,962
Insurance commissions (2,105) 0 3,028 0
Gain on sale of investment securities 0 1,433 0 3,180
Gain on sale of premises and equipment 2,565 0 2,803 0
Equity in loss of affiliate (21,728) (38,072) (16,400) (17,151)
Other 116,843 29,593 61,626 19,373
----------- ---------- ---------- ----------
Total other income 874,601 351,646 498,646 168,688
----------- ---------- ---------- ----------
Other expenses:
Compensation and benefits 1,622,700 903,439 866,916 443,442
Net occupancy expense 133,495 86,138 65,080 43,614
Furniture and fixtures 146,353 110,890 81,571 52,630
Data processing 117,309 83,929 83,486 42,384
Office supplies and expenses 172,197 89,778 91,069 45,864
Deposit insurance premiums 45,147 39,187 27,417 28,722
Other 362,123 227,722 129,769 105,718
----------- ---------- ---------- ----------
Total other expenses 2,599,324 1,541,083 1,345,308 762,374
----------- ---------- ---------- ----------
Income before taxes 698,440 409,745 286,150 198,034
Income tax expense 274,011 160,770 111,507 79,447
----------- ---------- ---------- ----------
Net income 424,429 248,975 174,643 118,587
=========== ========== ========== ==========
Basic earnings per common share 0.46 0.30 0.19 0.14
Diluted earnings per common share 0.45 0.30 0.18 0.14
Dividends per common share 0.30 0.25 0.15 0.13
Basic weighted average common shares outstanding 919,116 831,544 940,943 831,544
Diluted weighted average common shares outstanding 944,391 831,544 966,218 831,544
</TABLE>
See accompanying notes to consolidated financial statements.
2
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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income $ 424,429 $ 248,974
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 146,860 86,582
Provision for losses on foreclosed real estate 5,153 --
Provision for loan losses 21,671 17,700
Loss on sale of unconsolidated affiliate 6,564 --
Equity in loss of unconsolidated affiliates 21,728 38,072
Gain on sale of loans 130,656 63,733
Loss on sale of premises and equipment (2,565) --
Gain loss on sale of investment securities 366 --
Increase (decrease) in deferred loan origination fees (26,573) 13,414
Net amortization (accretion) of premium/discount
on investment securities (262,297) 69
Loans originated for sale (6,024,844) 2,098,610
Proceeds from sale of loans 5,334,597 1,898,423
Increase (decrease) in accrued interest receivable (150,870) 45,923
Increase in other assets (880,655) (783,019)
Decrease in accrued interest payable (548,584) (411,363)
Increase (decrease) in accrued expenses and other liabilities (1,066,606) 106,822
------------ -----------
Net cash used in operating activities $ (737,758) $ 3,388,541
------------ -----------
Investing activities:
Net cash paid in acquisition of subsidiary (145,672) --
Proceeds from sale of unconsolidated affiliate 90,100 --
Investment in unconsolidated affiliated companies (75,000) (50,000)
Purchase of investment securities held to maturity (900,846) --
Proceeds from sale of investments 14,864,820 3,821,770
Reinvestment of mutual fund dividend (20,425) (15,908)
Gain on sale of investment securities available for sale -- 15,706
Reinvestment of dividends/interest bearing dep in other inst. -- (75)
Purchase of investment securities available for sale -- (2,000,000)
Principal repayments and maturities of investment
securities available for sale 4,518,874 1,376,408
Net (increase) decrease in loans 1,715,823 (8,576,740)
Proceeds from sale of foreclosed real estate 38,866 --
Purchase of premises and equipment (698,314) (79,742)
------------ -----------
Net cash provided by (used in) investing activities $ 19,388,226 $(5,508,581)
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Financing activities:
Net decrease in deposits $ (1,426,572) $ (277,637)
Proceeds from borrowed funds 4,088,414 3,125,000
Cash dividends paid (155,671) (205,599)
Treasury stock purchased -- (34,606)
Repayment of borrowed funds (6,800,266) (947)
Decrease in advances by borrowers
for property taxes and insurance (109,517) (70,009)
------------ -----------
Net cash provided by financing activities (4,403,612) 2,536,202
------------ -----------
Increase in cash and amounts due from
depository institutions 14,246,856 451,561
Cash and amounts due from depository institutions
at beginning of period 2,448,123 2,625,561
------------ -----------
Cash and amounts due from depository institutions
at end of period $ 16,694,979 $ 3,077,122
============ ===========
Supplemental information on cash payments:
Interest paid $ 2,266,021 $ 1,429,455
============ ===========
Income taxes paid $ 274,246 $ 160,770
============ ===========
Supplemental information on non-cash transactions:
Acquisition of subsidiary-
Assets acquired:
Cash and amounts due from depository institutions $ 3,005,000 --
Investment securities 35,732,000 --
Loans receivable, net 31,904,000 --
Premises and equipment 1,059,000 --
Accrued interest receivable 361,000 --
Other assets 232,000 --
------------ -----------
Total assets $ 72,293,000 --
Liabilities assumed:
Deposits $ 64,974,000 --
Advances by borrowers for property taxes and insurance 51,000 --
Accrued interest payable 254,000 --
Borrowed funds 2,000,000 --
Other liabilities 179,000 --
------------
Total liabilities $ 67,458,000 --
Cash paid 3,151,000 --
Common stock issued 2,082,000 --
Goodwill recorded $ 398,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1998 and 1997
(1) BASIS OF PRESENTATION
Information filed on this Form 10-QSB as of and for the quarter ended
March 31, 1998, was derived from the financial records of SouthFirst
Bancshares, Inc. (the "Corporation") and its wholly-owned subsidiaries,
First Federal of the South (the "Bank" or "First Federal"), and Pension &
Benefit Financial Services, Inc. ("Pension & Benefit"), a Montgomery,
Alabama-based employee benefits consulting firm. Collectively, the
Corporation and its subsidiaries are referred to herein as the "Company."
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (none of which
are other than normal recurring accruals) necessary for a fair statement
of the financial position of the Company and the results of operations
for the six-month periods ended March 31, 1998 and 1997. The results
contained in these statements are not necessarily indicative of the
results which may be expected for the entire year.
(2) ACQUISITION
On October 31, 1997, the Company consummated the acquisition of First
Federal Savings and Loan Association of Chilton County ("Chilton
County"), a federally chartered stock savings and loan association based
in Clanton, Alabama. Chilton County was merged with and into the
Company's subsidiary, First Federal of the South. Pursuant to the terms
of the acquisition agreement, Chilton County shareholders received either
shares of common stock of the Company, cash, or a combination of common
stock and cash. The acquisition was accounted for as a purchase and the
results of operations since the acquisition date have been consolidated.
The total purchase price was $5.2 million, including the issuance of
128,144 shares valued at $2.1 million. The resulting goodwill of
approximately $406,000 will be amortized straight line over 15 years.
A summary of the net assets acquired follows:
<TABLE>
<CAPTION>
Assets acquired:
<S> <C>
Cash and amounts due from depository institutions $ 3,005,000
Investment securities 35,732,000
Loans receivable, net 31,904,000
Premises and equipment 1,059,000
Accrued interest receivable 361,000
Other assets 232,000
-----------
Total assets $72,293,000
</TABLE>
5
<PAGE> 8
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1998 and 1997
(2) ACQUISITION, CONTINUED
<TABLE>
<CAPTION>
Liabilities assumed:
<S> <C>
Deposits 64,974,000
Advances by borrowers for property taxes and insurance 51,000
Accrued interest payable 254,000
Borrowed funds 2,000,000
Other liabilities 179,000
-----------
Total liabilities 67,458,000
Net assets acquired 4,835,000
Total purchase price 5,233,000
-----------
Goodwill $ 398,000
===========
</TABLE>
The table below presents supplemental pro forma information for 1998 and
1997 as if the acquisition were made at the beginning of the periods at
the same purchase price as at the acquisition date:
<TABLE>
<CAPTION>
Six months ended March 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Total interest income $6,320,000 $6,208,000
Net interest income 2,682,000 2,426,000
Net income 252,000 243,000
Basic income per common share 0.27 0.25
</TABLE>
(3) NEW ACCOUNTING STANDARD
During the quarter ended December 31, 1997, the Bank adopted the
requirements of Statement of Financial Accounting Standard No. 128,
Earnings Per Share. This statement establishes standards for computing
and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This statement
replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if the Company's outstanding options
6
<PAGE> 9
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1998 and 1997
to acquire common stock were exercised. The exercise of these options
accounts for the difference between basic and diluted weighted average
share outstanding.
(4) SUBSEQUENT EVENTS
On April 15, 1998, the Company declared a regular dividend of $0.15 per
share, payable on May 15, 1998 to stockholders of record on May 1, 1998.
7
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVIEW OF RESULTS OF OPERATIONS
OVERVIEW
Net income for the six months ended March 31, 1998, increased $175,000 or 70%
when compared to the same period in fiscal 1997. Net interest income increased
$828,000 for the six-month period ended March 31, 1998, compared to the same
period in fiscal 1997. Other income increased $523,000 for the six-month period
ended March 31, 1998, compared to the same period in fiscal 1997, while other
expenses increased $1,058,000.
Substantially all of those increases are attributable to the acquisition of
First Federal Savings and Loan Association of Chilton County ("Chilton County")
on October 31, 1997. See Note 2 to "Notes to Financial Statements." Basic
earnings per common share, based on weighted average shares outstanding, was
$0.46 and $0.30 for the six months ended March 31, 1998 and 1997, respectively.
Further discussion of significant items affecting net earnings are discussed in
detail below.
NET INTEREST INCOME
Net interest income is the difference between the interest and fees earned on
loans, securities, and other interest-bearing assets (interest income) and the
interest paid on deposits and borrowed funds (interest expense). Higher net
interest income is a result of the relationship between the interest-earning
assets and the interest-bearing liabilities.
As of March 31, 1998, the interest rate spread increased 19 basis points as
rates earned on interest-earning assets decreased 3 basis points to 7.99% while
the cost of funds decreased 22 basis points to 4.62%. The decline in yields
earned and rates paid reflects the somewhat lower interest rate environment of
Chilton County's market area as well as the continuing downward trend of the
overall interest rate environment. Also, the acquisition of Chilton County was
largely responsible for the increase in the average balance of interest-earning
assets from $86.0 million to $136.4 million while the average balance of
interest-bearing liabilities increased from $76.4 million to $131.0 million. The
combined effect of the increases in average balances and the changes in rates
discussed above resulted in an increase in net interest income of $1,636,000, or
51.1%, and an increase in the interest rate spread from 3.18% to 3.37% for the
six months ended March 31, 1998, as compared to the comparable period in 1997.
OTHER INCOME
Total other income for the six months ended March 31, 1998, increased $523,000
to $875,000 as compared to $352,000 for the six months ended March 31, 1997. A
significant portion of the increase was attributable to employee benefit
consulting fees of $337,000 during the first six months of fiscal 1998 resulting
from the Corporation's acquisition of Pension & Benefit Financial Services, Inc.
("Pension & Benefit") on April 11, 1997. In addition, gains on sales of loans
increased $67,000 compared to the comparable period in fiscal 1997. The
acquisition of Chilton County accounted for substantially all remaining
increases.
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<PAGE> 11
For the three month period ended March 31, 1998, other income increased by
approximately $330,000 to $499,000 compared to the same period in fiscal 1997.
This increase was primarily a result of increases of $70,000 from gain on sales
of loans, an increase of $26,000 in income from service charges and fees
primarily as a result of the Chilton County acquisition, and an increase of
$188,000 in employee benefit consulting fees resulting from the acquisition of
Pension & Benefit in fiscal 1997. Other income increased approximately $42,000
for the three month period ended March 31, 1998 compared to the same period in
fiscal 1997, primarily due to the Chilton County acquisition.
OTHER EXPENSE
Total other expense for the six months ended March 31, 1998, increased by
$1,058,000 to $2,599,000 as compared to $1,541,000 for the six months ended
March 31, 1997. Most of the increase is due to increases in compensation expense
($719,000), office supplies ($82,000), data processing ($33,000), and other
($134,000). The increase in compensation expense is attributable to salary
increases and staff additions to handle the higher volume of transactions
resulting from the Chilton County acquisition, as well as the additional
compensation expense for the employees of Pension & Benefit and Chilton County.
Increases in office supplies and other is a result of the acquisitions of
Chilton County and Pension Benefit in early fiscal 1998 and fiscal 1997,
respectively. The increase in data processing is attributable to the conversion
of most of the Company's information technology systems in fiscal 1998, which
was undertaken in order to help ensure the Company's compliance with federal
regulations concerning the "year 2000" problem. The year 2000 problem arises
from the widespread use of computer programs that rely on two-digit date codes
to perform computations or decision-making functions. Many of these programs may
fail due to an inability to properly interpret date codes beginning January 1,
2000. For example, such programs may misinterpret "00" as the year 1900 rather
than 2000. In addition, some equipment, being controlled by microprocessor
chips, may not deal appropriately with the year "00." The Company believes that
its systems are currently year 2000 compliant and does not believe that the
expenditures to implement any further modifications (if necessary) will be
material. However, there can be no assurance that unforeseen difficulties or
costs will not arise.
For the three month period ended March 31, 1998 total other expense increased
$583,000 to $1,345,000 from $762,000 at March 31, 1997. Compensation expense
increased $423,000, data processing expense increased $41,000, and office supply
expense increased $45,000 as compared to fiscal 1997. The increases in these
costs are attributable to the acquisitions of Pension & Benefit and Chilton
County.
INCOME TAX EXPENSE
The Company's effective tax rate for the six-month periods ended March 31, 1998
and 1997, was 39.2%, compared to the federal statutory rate of 34.0%. The
Company's effective tax rate was higher than the statutory rate due primarily to
state income taxes. Income tax expense increased $113,000 or 70.4% to $274,000
for the six months ended March 31, 1998, as compared to $161,000 for the six
months ended March 31, 1997, due to the increase in pre-tax earnings.
9
<PAGE> 12
REVIEW OF FINANCIAL CONDITION
OVERVIEW
Management continuously monitors the financial condition of the Company in order
to protect depositors, increase retained earnings, and protect current and
future earnings.
Return on average stockholders' equity is one way of assessing the return the
Company has generated for its stockholders. The table below sets forth the
return on average stockholders' equity and other performance ratios of the
Company for the periods indicated.
<TABLE>
<CAPTION>
At or for the
six months ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Return on assets 0.55% 0.53%
Return on equity 5.30% 3.81%
Equity-to-assets ratio 10.39% 13.92%
Interest rate spread 3.37% 3.18%
Net interest margin 3.55% 3.72%
Total risk-based capital ratio 21.18% 22.05%
Nonperforming loans to loans 1.60% 0.47%
Allowance for loan losses to loans 0.79% 0.41%
Allowance for loan losses to nonperforming loans 49.50% 86.67%
Ratio of net charge-offs to average loans outstanding 0.01% 0.00%
Book value per common share outstanding $ 17.79 $ 15.62
</TABLE>
Significant factors affecting the Company's financial condition during the six
months ended March 31, 1998 are detailed below:
ASSETS
Total assets increased $66,490,000 or 69.4% from $95,789,000 at September 30,
1997, to $162,279,000 at March 31, 1998. The acquisition of Chilton County in
early fiscal 1998 was responsible for an increase of $72,293,000 in total
assets. Excluding the increases attributable to Chilton County, net loans
decreased $1,711,000 compared to September 30, 1997, primarily due to seasonal
changes in loan demand, particularly construction loans. The Company sold
approximately $14,000,000 of the investment securities acquired from Chilton
County and reinvested the proceeds therefrom primarily in short-term
held-to-maturity securities.
LIABILITIES
Total liabilities increased $63,766,000, or 77.6%, from $82,165,000 at September
30, 1997, to $145,931,000 at March 31, 1998. Approximately $67,458,000 of the
increase was attributable to the acquisition of Chilton County. Excluding
increases from the Chilton County acquisition, deposits decreased approximately
$1,427,000 during the period, borrowed funds decreased approximately $2,712,000,
while accrued expenses and other liabilities increased approximately $1,105,000
compared to September 30, 1997. The decrease in deposits is primarily a result
of customers seeking alternative
10
<PAGE> 13
investment options. The decrease in borrowed funds is due to a repayment of a
maturing note plus excess cash available due to the Chilton County acquisition.
The increase in accrued expenses is primarily the result of the Chilton County
acquisition.
LOAN QUALITY
A major key to long-term earnings growth is maintenance of a high-quality loan
portfolio. The Company's directive in this regard is carried out through its
policies and procedures for review of loans. The goal and result of these
policies and procedures is to provide a sound basis for new credit extensions
and an early recognition of problem assets to allow the most flexibility in
their timely disposition.
At March 31, 1998, the allowance for loan losses was $779,081, as compared to
$284,324 at September 30, 1997. The increase is due almost entirely to the
acquisition of Chilton County. The Company recorded provisions for loan losses
of $21,671 and $17,700 in the first six months of fiscal 1998 and 1997,
respectively, because charge-offs were insignificant during these periods.
Nonperforming loans at March 31, 1998, were approximately $1,574,000 as compared
to approximately $707,000 at September 30, 1997. At March 31, 1998 and September
30, 1997, the allowance for loan losses represented 0.76% and 0.40% of loans
outstanding, respectively. The provision for loan losses and the adequacy of the
allowance for loan losses is based upon management's continuing evaluation of
the collectibility of the loan portfolio under current economic conditions and
includes analyses of underlying collateral value and other factors which could
affect collectibility. Management considers the allowance for loan losses to be
adequate based upon the evaluations of specific loans, internal loan rating
systems and guidelines provided by the banking regulatory authorities governing
the Corporation's subsidiary, First Federal of the South ("First Federal").
Although loans have increased, management believes loan loss reserves are
adequate due to the fact it has not experienced significant loan charge-offs.
LIQUIDITY AND INTEREST SENSITIVITY
Liquidity is the ability of an organization to meet its financial commitments
and obligations on a timely basis. These commitments and obligations include
credit needs of customers, withdrawals by depositors, and payment of operating
expenses and dividends.
The Company is required under applicable federal regulations to maintain
specified levels of cash and "liquid" investments in qualifying types of United
States Treasury and Federal Agency securities, and other investments generally
having maturities of five years or less. Such investments serve as a source of
funds upon which the Company may rely to meet deposit withdrawals and other
short-term needs. The Company closely monitors its cash flow position to assure
necessary liquidity and to take advantage of market opportunities. Management
believes that the Company's liquidity is adequate to fund all outstanding
commitments and other cash needs.
Changes in interest rates will necessarily lead to changes in the net interest
margin. It is the Company's goal to minimize volatility in the net interest
margin by taking an active role in managing the level, mix and maturities of
assets and liabilities.
To reduce the adverse effect of changes in interest on its net interest margin,
the Company is pursuing various strategies to improve the rate sensitivity of
its assets and stabilize net interest income.
11
<PAGE> 14
CAPITAL ADEQUACY AND RESOURCES
Management is committed to maintaining First Federal's capital at a level
sufficient to protect depositors, provide for reasonable growth, and fully
comply with all regulatory requirements. Management's strategy to achieve this
goal is to retain sufficient earnings while providing a reasonable return on
equity.
The Office of Thrift Supervision has issued guidelines identifying minimum
regulatory "tangible" capital equal to 1.50% of adjusted total assets, a minimum
3.0% core capital ratio, and a minimum risk-based capital of 8.0% of
risk-weighted assets. First Federal has provided the majority of its capital
requirements through the retention of earnings.
As of March 31, 1998, First Federal has satisfied all regulatory capital
requirements. First Federal's compliance with the current standards is as
follows:
<TABLE>
<CAPTION>
Percent of
Amount asset base
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital $14,994,000 9.37%
Core Capital 14,994,000 9.37%
Risk-Based Capital 15,773,000 21.18%
</TABLE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements generally can be identified by
the use of forward-looking terminology, such as "may," "will," "expect,"
"estimate," "anticipate," "believe," "target," "plan," "project," or "continue"
or the negatives thereof or other variations thereon or similar terminology, and
are made on the basis of management's plans and current analyses of the Company,
its business and the industry as a whole. These forward-looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results to differ materially from those expressed or implied in such
forward-looking statements. The Company does not undertake to publicly update or
revise its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will not be
realized.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Stockholders of the Corporation (the "Annual
Meeting") was held on March 25, 1997. At the Annual Meeting, the following
persons were elected as directors of the Corporation to serve for a term of
three years and until their successors are elected and qualified: Bobby R. Cook,
H. David Foote, and John T. Robbs. In addition, J. Malcomb Massey, Jr. was
elected as a director of the Corporation to serve for a term of two years and
until his successor is elected and qualified.
The results of voting with respect to the election of directors were as follows:
<TABLE>
<CAPTION>
Votes Votes
FOR WITHHELD
--- --------
<S> <C> <C>
Bobby R. Cook 842,474 1,176
H. David Foote 843,650 0
John T. Robbs 842,150 1,500
J. Malcomb Massey 833,650 10,000
</TABLE>
Each of the following individuals, whose terms did not expire at the Annual
Meeting, continue to serve as directors of the Corporation: Donald C. Stroup,
Charles R. Vawter, Jr., Joe K. McArthur, and Allen Gray McMillan, III.
In addition, a proposal to adopt a 1998 Stock Option and Incentive Plan for the
Company (the "1998 Plan") was submitted to security holders at the Annual
Meeting. The 1998 Plan provides for the grant of incentive and nonqualified
stock options and stock appreciation rights. The purpose of the 1998 Plan is to
enable and encourage participating directors, officers and key employees to
remain in the employ of, and to give greater effort on behalf of, the Company.
The results of voting with respect to the 1998 Plan were as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
FOR AGAINST ABSTAINING NON-VOTES
--- ------- ---------- ---------
<S> <C> <C> <C>
505,198 100,074 4,800 233,278
</TABLE>
13
<PAGE> 16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. In connection with the consummation of the
acquisition of Chilton County, on January 16, 1998, the Company, under
Item 7 (Financial Statements, Pro Forma Financial Information and
Exhibits), filed Amendment No. 1 to its report on Form 8-K filed November
17, 1997.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHFIRST BANCSHARES, INC.
Date: May 1, 1998 By: /s/ Donald C. Stroup
-----------------------------------------------
Donald C. Stroup, President and
Chief Executive Officer
(principal executive officer)
Date: May 1, 1998 By: /s/ Joe K. McArthur
-----------------------------------------------
Joe K. McArthur, Executive Vice President
and Chief Financial Officer
(principal financial and accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHFIRST BANCSHARES INC. FOR THE SIX MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,695
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,714
<INVESTMENTS-CARRYING> 1,058
<INVESTMENTS-MARKET> 1,058
<LOANS> 102,654
<ALLOWANCE> 779
<TOTAL-ASSETS> 162,279
<DEPOSITS> 124,100
<SHORT-TERM> 12,254
<LIABILITIES-OTHER> 3,889
<LONG-TERM> 3,791
0
0
<COMMON> 0
<OTHER-SE> 16,348
<TOTAL-LIABILITIES-AND-EQUITY> 162,279
<INTEREST-LOAN> 4,009
<INTEREST-INVEST> 1,439
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,449
<INTEREST-DEPOSIT> 2,421
<INTEREST-EXPENSE> 3,004
<INTEREST-INCOME-NET> 2,445
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,599
<INCOME-PRETAX> 698
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 424
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
<YIELD-ACTUAL> 7.99
<LOANS-NON> 0
<LOANS-PAST> 1,574,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 788
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 779
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
