<PAGE> 1
U.S. 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
<TABLE>
<S> <C>
For the quarterly period ended: March 31, 2000 Commission File Number: 1-13640
</TABLE>
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)
256-245-4365
------------
(Registrant's telephone number)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date:
Common Stock, par value $.01 per share 928,568 shares
- -------------------------------------- --------------
(Class) (Outstanding at May 14, 2000)
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x]
<PAGE> 2
SOUTHFIRST BANCSHARES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements................................................................. 1
Consolidated Statements of Financial Condition at March 31, 2000 (Unaudited)
and September 30, 1999 ............................................................... 1
Consolidated Statements of Earnings (Unaudited) for the Six Months Ended
March 31, 2000 and March 31, 1999 and Three Months Ended March 31, 2000
and March 31, 1999.................................................................... 2
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the
Six Months Ended March 31, 2000....................................................... 3
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
March 31, 2000 and 1999............................................................... 4
Notes to Consolidated Financial Statements (Unaudited)................................ 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 7
PART II - OTHER INFORMATION
Item 1: Legal Proceedings.................................................................. 12
Item 6: Exhibits and Reports on Form 8-K................................................... 12
SIGNATURES.................................................................................. 13
Index to Exhibits........................................................................... 14
</TABLE>
<PAGE> 3
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
March 31, 2000 (Unaudited) and September 30, 1999
<TABLE>
<CAPTION>
March 31, September 30,
Assets 2000 1999
------------- -------------
(Audited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 4,187,546 $ 4,969,578
Interest-bearing deposits in other financial institutions 1,173,896 993,708
Investment securities held to maturity at cost -- 28,783
Investment securities available for sale, at fair value 39,033,094 39,312,785
Loans receivable 112,157,837 107,164,396
Less allowance for loan losses (768,727) (851,915)
------------- -------------
Net loans 111,389,110 106,312,481
Loans held for sale at cost (which approximates fair value) 466,035 710,134
Premises and equipment, net 5,045,598 5,178,234
Foreclosed real estate, net 159,365 568,358
Other repossessed
assets 32,146 --
Accrued interest receivable 1,081,653 1,018,029
Investment in affiliates 16,464 16,464
Other assets 1,314,150 1,397,811
------------- -------------
Total assets $ 163,899,057 $ 160,506,365
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 3,299,263 3,838,290
Interest bearing 105,601,549 110,883,586
------------- -------------
Total deposits 108,900,812 114,721,876
Advances by borrowers for property taxes and insurance 334,448 441,180
Accrued interest payable 1,061,716 1,134,016
Borrowed funds 38,929,068 28,804,068
Accrued expenses and other liabilities 429,227 1,053,036
------------- -------------
Total liabilities 149,655,271 146,154,176
------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 2,000,000 shares authorized; 999,643 shares
issued and 904,822 outstanding shares at March 31, 2000 and
September 30, 1999 9,996 9,996
Additional paid-in capital 9,851,981 9,851,981
Treasury stock (1,129,738) (1,129,738)
Unearned compensation on common stock employee benefit plans (613,273) (623,224)
Retained earnings, substantially restricted 6,895,034 6,740,051
Accumulated other comprehensive income (loss) (770,214) (496,877)
------------- -------------
Total stockholders' equity 14,243,786 14,352,189
------------- -------------
Total liabilities and stockholders' equity $ 163,899,057 $ 160,506,365
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE> 4
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited) for the
Six Months Ended March 31, 2000 and March 31, 1999 and
Three Months Ended March 31, 2000 and March 31, 1999
<TABLE>
<CAPTION>
Six Months Ended March 31, Three Months Ended March 31,
2000 1999 2000 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans 4,554,735 4,154,932 2,074,405 2,332,385
59,846 109,203 32,642 32,688
Interest income on deposit in other financial institutions
Interest and dividend income on investment securities 1,197,417 964,628 604,173 468,837
--------- ---------- --------- ----------
Total interest and dividend income 5,811,998 5,228,763 2,969,200 2,575,930
--------- ---------- --------- ----------
Interest expense:
Interest on deposits 2,264,834 2,841,108 1,115,153 1,368,094
Interest on borrowed funds 1,141,453 449,294 623,498 226,265
--------- ---------- --------- ----------
Total interest expense 3,406,287 3,290,402 1,738,651 1,594,359
--------- ---------- --------- ----------
Net interest income 2,405,711 1,938,361 1,230,549 981,571
Provision for loan losses -- 61,932 -- 28,668
--------- ---------- --------- ----------
Net interest income after provision for loan losses 2,405,711 1,876,429 1,230,549 952,903
Non-interest income:
Service charges and other fees 442,502 392,016 234,187 211,433
Employee benefit consulting fees 489,672 520,563 284,822 307,486
Gain on sale of loans 173,319 222,776 72,942 105,243
Gain (Loss) on sale of foreclosed real estate 34,431 (4,041) 34,431 --
Gain (Loss) on sale of investment securities available for sale 1,937 43,735 1,937 22,485
Equity in net (loss) Income of affiliate -- 9,804 -- (3,328)
Other 96,621 101,700 53,751 74,843
--------- ---------- --------- ----------
Total non-interest income 1,238,482 1,286,553 682,070 718,162
--------- ---------- --------- ----------
Non-interest expense:
Compensation and benefits 1,717,486 1,816,640 853,137 898,831
Net occupancy expense 173,940 151,759 86,060 78,190
Furniture and fixtures 220,890 214,032 104,904 110,677
Data processing 158,489 172,536 77,298 85,839
Office supplies and expenses 183,920 179,900 87,942 93,391
Deposit insurance premiums 44,522 59,512 16,837 29,353
Goodwill expense 32,086 23,209 16,066 12,853
Other 404,154 203,303 231,026 131,603
--------- ---------- --------- ----------
Total non-interest expenses 2,935,487 2,820,891 1,473,270 1,440,737
--------- ---------- --------- ----------
Income before taxes 708,706 342,091 439,349 230,328
Income tax expense 274,999 135,145 171,404 90,520
--------- ---------- --------- ----------
Net income 433,707 206,946 267,945 139,808
========= ========== ========= ==========
Primary earnings per common share 0.48 0.23 0.29 0.16
Fully diluted earnings per common share 0.48 0.23 0.29 0.16
Dividends per common share 0.30 0.30 0.15 0.15
Primary weighted average common shares outstanding 904,822 902,605 904,822 900,994
Fully Diluted weighted average common shares outstanding 904,822 908,629 904,822 901,395
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE> 5
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2000
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred
Compensation Retained Accumulated
Additional on Common Earnings Comprehensive Total
Common Paid In Treasury Stock Employee Substantially Other Stockholders
Stock Capital Stock Benefit Plans Restricted Income (Loss) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 $ 9,996 $ 9,851,981 $(1,129,738) $(623,224) $6,740,051 $(496,877) $ 14,352,189
Comprehensive Income
Net Income 433,707 433,707
Other Comprehensive Income,
net of tax:
Change in unrealized gain on
securities available for sale,
net of deferred income taxes
of $167,528 (273,337) (273,337)
------------
Total Comprehensive Income 160,370
------------
Vesting of Deferred Compensation
Shares 9,951 9,951
Cash Dividends Declared
(278,724) (278,724)
--------- ----------- ----------- --------- ---------- --------- ------------
Balance at March 31,2000 $ 9,996 $ 9,851,981 $(1,129,738) $(613,273) $6,895,034 $(770,214) $ 14,243,786
========= =========== =========== ========= ========== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 6
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net income $ 433,707 $ 206,946
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses -- 21,000
Depreciation and amortization 177,442 169,276
Equity in loss (income) of unconsolidated affiliates -- (9,804)
(Gain) loss on sale of securities -- (43,735)
Gain (loss) on sale of loans (173,319) (222,776)
Increase (decrease) in deferred loan origination fees 15,729 (5,936)
Net amortization of premium
on investment securities held to maturity (936)
Net amortization of premium
on investment securities available for sale 10,316 (35,959)
Gain on sale of foreclosed real estate (34,431) 4,041
Loans originated for sale (8,048,352) (11,645,274)
Proceeds from sale of loans 8,465,769 11,528,900
(Increase) decrease in accrued interest receivable (63,624) 67,158
(Increase) in other assets 83,661 (17,550)
Deferred compensation expense 9,951 9,954
Increase (decrease) in accrued interest payable (72,300) (151,297)
Increase (decrease) in accrued expenses and other liabilities (456,281) 168,725
----------- ------------
Net cash used in operating activities $ 348,268 $ 42,733
----------- ------------
Investing activities:
Net change in interest-bearing deposits in institutions (200,000) (185,618)
Purchase of interest-bearing deposits in other institutions 20,000 --
Re-investment of interest-bearing deposits in other institutions (188) (1,557)
Proceeds from maturities and repayments of investments held to maturity 28,783 615,485
Proceeds from maturities and repayments of investments
available for sale 1,109,180 4,865,472
Purchase of investments available for sale (1,265,000) (11,716,968)
Purchase of discount of investments available for sale (10,000) 156,085
Proceeds from sale of investments available for sale -- 11,638,566
Re-investment of mutual fund dividend (5,670) (15,850)
Net (increase) decrease in loans (5,092,358) (2,637,541)
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 7
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Purchase of premises and equipment (44,806) (1,507,575)
Proceeds from sale of foreclosed real estate 727,004 36,000
Transfer from loans of real estate owned property (283,580) (769,448)
Transfer from loans to other repossessed assets (32,146) --
------------ ------------
Net cash provided by (used in) investing activities $ (5,048,781) $ 477,051
------------ ------------
Financing activities:
Net increase (decrease) in deposits $ (5,821,064) $ (3,495,922)
Proceeds from borrowed funds 17,900,000 26,351,593
Repayment of borrowed funds (7,775,000) (25,601,593)
Cash dividends paid (278,724) (288,308)
Treasury stock purchased -- (259,012)
Decrease in advances by borrowers
for property taxes and insurance (106,732) (10,877)
------------ ------------
Net cash provided by (used in) financing activities 3,918,480 (3,304,119)
------------ ------------
(Decrease) in cash and cash equivalents (782,033) (2,784,335)
Cash and cash equivalents at beginning of period 4,969,578 9,213,906
------------ ------------
Cash and cash equivalents at end of period $ 4,187,545 $ 6,429,571
============ ============
Supplemental information on cash payments:
Interest paid $ 2,264,834 $ 2,841,108
============ ============
Income taxes paid $ 814,050 $ --
============ ============
Supplemental information on noncash transactions:
Change in net unrealized gain on investment securities
available for sale $ (273,337) $ 136,756
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 8
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000 and 1999
(1) BASIS OF PRESENTATION
Information filed on this Form 10-QSB as of and for the quarter ended
March 31, 2000, was derived from the financial records of SouthFirst
Bancshares, Inc. ("SouthFirst") and its wholly-owned subsidiary, First
Federal of the South ("First Federal"), and First Federal's
wholly-owned subsidiary, Pension & Benefit Trust Company ("Pension &
Benefit"), a Montgomery, Alabama-based employee benefits consulting
firm. Collectively, SouthFirst 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, 2000 and 1999. The
results contained in these statements are not necessarily indicative of
the results which may be expected for the entire year.
(2) NEW ACCOUNTING STANDARD
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (the "Statement"). This Statement
establishes accounting and reporting standards for derivative
instruments embedded in other contracts (collectively referred to as
the "Derivatives") and for hedging activities. The Statement requires
that an entity recognize the Derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133 (the "Deferral
Statement"). The Deferral Statement encourages earlier application, but
delays the effective date of the Statement from fiscal quarters of all
fiscal years beginning after June 15, 1999 to fiscal quarters of all
fiscal years beginning after June 15, 2000. In accordance with the
Deferral Statement, the Company will continue to evaluate the impact
and defer implementation as the Deferral Statement allows.
(3) SUBSEQUENT EVENTS
On April 5, 2000, the Company declared a regular dividend of $0.15 per
share, payable on May 3, 2000 to stockholders of record on April 19,
2000.
-6-
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REVIEW OF RESULTS OF OPERATIONS
Overview
Net income for the three months and six months ended March 31, 2000
increased $128,137, or 91.7%, and $226,761, or 109.6%, respectively,
compared to the same periods in fiscal 1999. Net interest income for
the three months and six months ended March 31, 2000 increased
$277,646, or 29.1%, and $529,282, or 28.2%, respectively, compared to
the same periods in fiscal 1999. Non-interest income decreased $36,092,
or 5.0%, for the three month period ended March 31, 2000, and $48,071
or 3.7% for the six-month period ended March 31, 2000, when compared to
the same periods in fiscal 1999, while non-interest expense increased
$32,533, or 2.3%, and $114,596, or 4.1%, for the three month and six
month periods, respectively, ended March 31, 2000 compared to the same
periods in fiscal 1999.
Primary earnings per common share, based on weighted average shares
outstanding, was $.29 and $.16 for the three months ended March 31,
2000 and 1999, and $.48 and $.23 for the six months ended March 31,
2000 and 1999, respectively.
Those items significantly 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). Net interest income is directly related to the
interest rate spread, the difference between the interest rates on
interest-earning assets and interest-bearing liabilities.
As of March 31, 2000, the interest rate spread increased 64 basis
points as rates earned on interest-earning assets increased 71 basis
points to 7.82% while the cost of funds increased 7 basis points to
4.84%. The increase in rates paid and the increase in rates received
during this three month period interval reflects significantly higher
interest rates as a result of the continuing upward trend of the
overall interest rate environment. The cost of funds has been steadily
increasing over the past several months and interest rates on consumer
loans, construction loans and mortgages have increased, as well. The
average balance of interest-earning assets increased $8.7 million, or
6.1%, from $143.2 million to $151.9 million while the average balance
of interest-bearing liabilities increased $10.0 million, or 7.5%, from
$134.1 million to $144.1 million. The combined effect of the increases
in average balances and the changes in rates discussed was an increase
in the interest rate spread from 2.34% to 2.98% and an increase in net
interest income of $277,646, or 29.1% and $529,282, or 28.2% for the
three months and six months ended March 31, 2000, as compared to the
same period in 1999, respectively.
Non-interest Income
Total non-interest income for the six months ended March 31, 2000,
decreased $48,000, to approximately $1,238,000, as compared to the six
months ended March 31, 1999. A significant portion of the decrease in
total non-interest income was attributable to a reduction in employee
benefit consulting fees earned by
-7-
<PAGE> 10
Pension & Benefit during the first six months of fiscal 2000. This
decrease, from approximately $520,000 to $490,000, was largely due to
timing differences between production and receipt of consulting fees,
and not a decrease in actual fees generated, which are anticipated to
be received during the future months. In addition, gains on sales of
loans decreased approximately $49,000 and gains on sales of investments
decreased $42,000. However, gains on sales of foreclosed real estate
increased $38,000, and service charges and other fee income increased
by $50,000, as compared to the same period in fiscal 1999.
For the three-month period ended March 31, 2000, total non-interest
income decreased by approximately $36,000 to $682,000 compared to the
same period in fiscal 1999. This decrease was primarily the result of a
decrease of $32,000 from gains on sales of loans, a decrease of $23,000
in employee benefit consulting fees, and a decrease of $21,000 on gains
on sales of investments. However, service charges and other fee income
increased by $23,000, and gains on sales of foreclosed real estate
increased by $34,000, as compared to the same period in fiscal 1999.
Non-interest Expense
Total non-interest expense for the six months ended March 31, 2000
increased by approximately $115,000, to $2,935,000, compared to
$2,820,000 for the six months ended March 31, 1999. The increase is
primarily due to increases in occupancy expense of $22,000 and other
non-interest expense of $201,000. The increase in other non-interest
expense is comprised, primarily, of increases in legal expenses,
accounting expenses, and a reduction of expense credits from mortgage
origination fees as a result of a reduction in mortgage loans closed
for retention in the Company's mortgage loan portfolio. Compensation
and benefit expense decreased by approximately $99,000 for the six
months ended March 31, 2000, as compared to the six months ended March
31, 1999.
For the three-month period ended March 31, 2000, total non-interest
expense increased approximately $33,000, to $1,473,000, from $1,440,000
for the three-month period ended March 31, 1999. Other non-interest
expense increased approximately $99,000, primarily as a result of
increased legal expenses and a reduction of expense credits from
mortgage origination fees as a result of the reduction in mortgage
loans closed for retention in the Company's mortgage loan portfolio.
This reduction was partially offset by a reduction in compensation and
benefit expense, in the amount of approximately $46,000, and a combined
reduction of approximately $25,000 in furniture and fixtures expense,
net occupancy expense, data processing, and office supply expense.
Income Tax Expense
SouthFirst's effective tax rate for the six-month periods ended March
31, 2000 and 1999 was 38.8% and 39.5%, respectively, compared to the
federal statutory rate of 34.0%. SouthFirst's effective tax rate was
higher than the statutory rate due primarily to state income taxes.
Income tax expense increased approximately $140,000, or 103.5%, to
$275,000 for the six months ended March 31, 2000, as compared to
$135,000 for the six months ended March 31, 1999, due to the increase
in pre-tax earnings.
-8-
<PAGE> 11
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 SouthFirst has generated for its stockholders. The table below
sets forth the return on average stockholders' equity and other
performance ratios of SouthFirst for the periods indicated.
<TABLE>
<CAPTION>
At or for the
six months ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Return on assets 0.66% 0.36%
Return on equity 7.58% 3.60%
Equity-to-assets ratio 8.66% 9.99%
Interest rate spread 2.98% 2.34%
Net interest margin 3.23% 2.65%
Total risk-based capital ratio 17.34% 19.68%
Nonperforming loans to loans .68% .87%
Allowance for loan losses to loans 0.69% 0.58%
Allowance for loan losses to nonperforming loans 100.40% 66.66%
Ratio of net charge-offs to average loans outstanding 0.01% 0.01%
Book value per common share outstanding $ 15.77 $17.32
</TABLE>
Significant factors affecting the SouthFirst's financial condition
during the six months ended March 31, 2000 are detailed below:
Assets
Total assets increased $3,393,000, or 2.1%, from $160,506,000 at
September 30, 1999 to $163,899,000 at March 31, 2000. Net loans
increased $5,077,000, or 4.8%, compared to September 30, 1999,
primarily due to seasonal changes in mortgage loan demand and the
number of loans purchased. Investment securities held to maturity
decreased $29,000 while investment securities available for sale
decreased $280,000 for a total decrease of $309,000.
Liabilities
Total liabilities increased approximately $3,501,000, or 2.4%, from
$146,154,000 at September 30, 1999 to $149,655,000 at March 31, 2000.
Deposits decreased approximately $5,821,000 during the period, borrowed
funds increased $10,205,000, while accrued expenses and other
liabilities decreased approximately $704,000, compared to September 30,
1999. The decrease in deposits was primarily attributable to the
relatively low interest rate environment; many customers with savings
deposits have removed these accounts in search of higher yielding
alternatives. The increase in borrowed funds is the result of
purchasing long-term
-9-
<PAGE> 12
collateralized mortgage obligations that reprice on a monthly basis.
These mortgage obligations are funded by Federal Home Loan Bank advance
borrowings that also reprice monthly. The increase in accrued expenses
is primarily the result of fluctuations in accounts payable balances.
Loan Quality
A major key to long-term earnings growth is maintenance of a
high-quality loan portfolio. SouthFirst maintains a high-quality loan
portfolio by implementing and carrying out 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, 2000, the allowance for loan losses was $768,727, as
compared to $851,915 at September 30, 1999. The decrease is primarily
due to charging off loans which were acquired in the acquisition of
Chilton County. SouthFirst recorded provisions for loan losses of $0
and $61,932 in the first six months of fiscal 2000 and 1999,
respectively. Nonperforming loans at March 31, 2000 were approximately
$766,000 as compared to approximately $1,214,000 at September 30, 1999.
The reduction of non-performing loans is due to charge-offs and
foreclosure sales. At March 31, 2000 and September 30, 1999, the
allowance for loan losses represented 0.69% and 0.79% of loans
outstanding, respectively. The allowances for loan losses is based upon
management's continuing evaluation of the collectibility of the loan
portfolio under current economic conditions and includes analyses of
underlying collateral value and other factors which could affect
collectibility. Management considers the allowance for loan losses to
be adequate based upon the evaluations of specific loans, internal loan
rating systems and guidelines provided by the banking regulatory
authorities governing First Federal. Although loans have increased,
management believes loan loss reserves are adequate due to the fact
significant loan charge-offs have not been experienced.
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.
SouthFirst 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 rates on its net
interest margin, the Company is pursuing various strategies to improve
the rate sensitivity of its assets and stabilize net interest income.
-10-
<PAGE> 13
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 comply fully 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 4.0% core capital ratio, and a minimum risk-based
capital of 8.0% of risk-weighted assets. First Federal has satisfied
the majority of its capital requirements through the retention of
earnings.
As of March 31, 2000, 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 $14,127,000 8.44%
Core Capital 14,127,000 8.44%
Risk-Based Capital 14,834,000 17.34%
</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.
-11-
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On January 19, 2000, Bobby R. Cook, President of the Western Division
of First Federal and a member of the Board of Directors of SouthFirst
and First Federal, filed a lawsuit, in Chilton County, Alabama, against
First Federal, SouthFirst and Donald C. Stroup, alleging wrongful
termination of his employment, as President of the Western Division,
and other claims. On January 24, 2000, the employment of Mr. Cook, was
terminated for cause by the Board of Directors of First Federal,
pursuant to the provisions of Mr. Cook's employment agreement with
First Federal. Further, Mr. Cook, on January 25, 2000, was removed for
cause as a member of the Board of Directors of First Federal, upon the
unanimous written consent of SouthFirst, the sole shareholder of First
Federal. Management believes Mr. Cook's lawsuit to be without merit and
intends to vigorously defend the case. Furthermore, Management has
asserted appropriate counterclaims for damages to First Federal and
SouthFirst, against Mr. Cook in this litigation.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The Following Exhibit is filed with this report.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
27 Financial Data Schedule (for SEC use, only)
</TABLE>
(b) Reports on Form 8-K. No report on form 8-K was filed during
the quarter ended March 31, 2000.
-12-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHFIRST BANCSHARES, INC.
Date: May 12, 2000 By: /s/ Donald C. Stroup
---------------------------------------------
Donald C. Stroup, President and
Chief Executive Officer
(principal executive officer)
Date: May 12, 2000 By: /s/ Joe K. McArthur
--------------------------------------------
Joe K. McArthur, Executive Vice President
and Chief Financial Officer
(principal financial and accounting officer)
-13-
<PAGE> 16
INDEX TO EXHIBITS
Exhibit 27 Financial Date Schedule (for SEC use, only)
-14-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SOUTHFIRST BANCSHARES, INC. FOR THE SIX
MONTH PERIOD FROM OCTOBER 1, 1999 THROUGH MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 4,187,546
<INT-BEARING-DEPOSITS> 1,173,896
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,033,094
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 112,157,837
<ALLOWANCE> (768,727)
<TOTAL-ASSETS> 163,899,057
<DEPOSITS> 108,900,812
<SHORT-TERM> 0
<LIABILITIES-OTHER> 40,754,459
<LONG-TERM> 0
0
0
<COMMON> 9,996
<OTHER-SE> 14,233,790
<TOTAL-LIABILITIES-AND-EQUITY> 163,899,057
<INTEREST-LOAN> 4,554,735
<INTEREST-INVEST> 1,197,417
<INTEREST-OTHER> 59,846
<INTEREST-TOTAL> 5,811,998
<INTEREST-DEPOSIT> 2,264,834
<INTEREST-EXPENSE> 1,141,453
<INTEREST-INCOME-NET> 2,405,711
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 404,154
<INCOME-PRETAX> 708,706
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433,707
<EPS-BASIC> .48
<EPS-DILUTED> .48
<YIELD-ACTUAL> 0
<LOANS-NON> 766
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,986,515
<ALLOWANCE-OPEN> (768,727)
<CHARGE-OFFS> 141,850
<RECOVERIES> (6,191)
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
