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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
For the quarterly period ended: March 31, 2001 Commission File Number: 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)
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, 2001)
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x]
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SOUTHFIRST BANCSHARES, INC.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements..................................................................................1
Consolidated Statements of Financial Condition at March 31, 2001 (Unaudited)
and September 30, 2000 ..................................................................................1
Consolidated Statements of Earnings (Unaudited) for the Six Months Ended
March 31, 2001 and March 31, 2000 and Three Months Ended March 31, 2001
and March 31, 2000.....................................................................................2
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the
Six Months Ended March 31, 2001..........................................................................3
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
March 31, 2001 and 2000..................................................................................4
Notes to Consolidated Financial Statements (Unaudited).................................................7
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.....................................................................................10
PART II - OTHER INFORMATION
Item 1: Legal Proceedings....................................................................................15
Item 6: Exhibits and Reports on Form 8-K.....................................................................15
SIGNATURES...................................................................................................16
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
March 31, 2001 (Unaudited) and September 30, 2000
March 31, 2001 September 30, 2000
-------------- ------------------
(Unaudited)
Assets
Cash and amounts due from depository institutions $ 13,010,363 $ 4,667,295
Interest-bearing deposits in other financial institutions 852,471 1,737,099
Investment securities available for sale, at fair value 33,327,562 38,326,808
Loans receivable 101,972,994 109,054,392
Less allowance for loan losses (685,036) (700,619)
------------- -------------
Net Loans 101,287,958 108,353,773
Loans held for sale at cost (which approximates fair value) 1,675,786 181,662
Premises and equipment, net 4,892,171 4,992,261
Foreclosed real estate, net 681,353 174,500
Other repossessed assets 16,640 1,000
Accrued interest receivable 1,002,566 1,183,485
Other assets 1,599,996 1,407,751
------------- -------------
TOTAL ASSETS $ 158,346,866 $ 161,025,634
============= =============
Liabilities and Stockholders Equity
Liabilities:
Deposits:
Non-interest bearing $ 2,540,427 $ 2,990,806
Interest bearing 101,787,548 102,372,295
------------- -------------
TOTAL DEPOSITS 104,327,975 105,363,101
Advances by borrowers for property taxes and insurance 291,247 297,004
Accrued interest payable 1,513,614 1,403,005
Borrowed funds 36,495,000 38,889,068
Accrued expenses and other liabilities 371,236 147,972
------------- -------------
TOTAL LIABILITIES 142,999,072 146,100,150
------------- -------------
Stockholders' equity:
Common stock, $01 par value, 2,000,000 shares authorized; 999,643 shares
issued and 928,568 outstanding
shares at March 31, 2001 and September 30, 2000 9,996 9,996
Additional paid-in capital 9,835,352 9,835,352
Treasury stock (1,140,781) (1,140,781)
Unearned compensation on common stock employee benefit plans (531,484) (482,325)
Retained earnings, substantially restricted 7,239,625 7,186,244
Accumulated other comprehensive income (loss) (64,914) (483,002)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 15,347,794 14,925,484
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 158,346,866 $ 161,025,634
============= =============
See accompanying notes to consolidated financial statements.
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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited) for the
Six Months Ended March 31, 2001 and March 31, 2000 and
Three Months Ended March 31, 2001 and March 31, 2000
Six Months Ended March 31, Three Months Ended March 31,
-------------------------- ----------------------------
2001 2000 2001 2000
---------- --------- ---------- ---------
Interest and dividend income:
Interest and fees on loans 4,488,194 4,554,735 2,159,925 2,332,385
Interest income on deposit in other financial institutions 159,623 59,846 105,908 32,642
Interest and dividend income on investment securities 1,151,562 1,197,417 544,010 604,173
---------- --------- ---------- ---------
Total interest and dividend income 5,799,379 5,811,998 2,809,843 2,969,200
---------- --------- ---------- ---------
Interest expense:
Interest on deposits 2,588,037 2,264,834 1,288,575 1,115,153
Interest on borrowed funds 1,153,257 1,141,453 531,768 623,498
---------- --------- ---------- ---------
Total interest expense 3,741,294 3,406,287 1,820,343 1,738,651
---------- --------- ---------- ---------
Net interest income 2,058,085 2,405,711 989,500 1,230,549
Provision for loan losses (benefit) (50,000) -- (50,000) --
---------- --------- ---------- ---------
Net interest income after provision for loan losses 2,108,085 2,405,711 1,039,500 1,230,549
Non-interest income:
Service charges and other fees 203,732 235,698 99,537 121,947
Employee benefit trust and consulting fees 575,165 489,672 283,120 284,822
Gain on sale of loans 177,265 173,319 101,562 72,942
Gain on sale of foreclosed real estate 2,136 34,431 -- 34,431
Gain on sale of investment securities available for sale 859 1,937 -- 1,937
Other 171,511 96,621 80,077 53,751
---------- --------- ---------- ---------
Total non-interest income 1,130,668 1,031,678 564,296 569,830
---------- --------- ---------- ---------
Non-interest expense:
Compensation and benefits 1,569,835 1,510,682 800,862 740,897
Net occupancy expense 176,475 173,940 88,580 86,060
Furniture and fixtures 231,817 220,890 120,603 104,904
Data processing 158,831 158,489 83,004 77,298
Office supplies and expense 217,677 183,920 109,566 87,942
Deposit insurance premiums 32,763 44,522 16,329 16,837
Goodwill expense 26,973 32,086 13,487 16,066
Other 280,526 404,154 119,016 231,026
---------- --------- ---------- ---------
Total non-interest expenses 2,694,897 2,728,683 1,351,447 1,361,030
---------- --------- ---------- ---------
Income before taxes 543,856 708,706 252,349 439,349
Income tax expense 211,801 274,999 98,461 171,404
---------- --------- ---------- ---------
Net income 332,055 433,707 153,888 267,945
========== ========= ========== =========
Primary earnings per common share 0.36 0.48 0.17 0.29
Fully diluted earnings per common share 0.36 0.48 0.17 0.29
Dividends per common share 0.30 0.30 0.15 0.15
Primary weighted average common shares outstanding 910,102 904,822 910,102 904,822
Fully Diluted weighted average common shares outstanding 912,858 904,822 911,160 904,822
See accompanying notes to consolidated financial statements.
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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2001
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
------ ---------- ----------- -------------- ------------- ------------- -----------
Balance at September 30, 2000 $9,996 $9,835,352 $(1,140,781) $(482,325) $7,186,244 $(483,002) $14,925,484
------ ---------- ----------- --------- ---------- --------- -----------
Comprehensive Income
Net Income 332,055 332,055
Other Comprehensive Income,
net of tax:
Change in unrealized gain/loss
on securities available for sale,
net of deferred income taxes of
$255,750 418,088 418,088
-----------
Total Comprehensive Income 750,143
-----------
Vesting of Deferred Compensation
Shares 51,601 51,601
Addition of Management
Recognition Plan Shares (100,760) (100,760)
Cash Dividends Declared (278,674) (278,674)
------ ---------- ----------- --------- ---------- --------- -----------
Balance at March 31, 2001 $9,996 $9,835,352 $(1,140,781) $(531,484) $7,239,625 $(64,914) $15,347,794
====== ========== =========== ========= ========== ======== ===========
See accompanying notes to consolidated financial statements.
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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended March 31, 2001 and 2000
2001 2000
----------- -----------
OPERATING ACTIVITIES:
NET INCOME $ 332,055 $ 433,707
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses (50,000) --
Depreciation and amortization 186,112 177,442
(Gain) Loss on sale of securities (859) --
(Gain) Loss on sale of loans (177,265) (173,319)
Increase (decrease) in deferred loan origination fees (4,931) 15,729
Net amortization of premium on investment securities available for
sale (92,047) 10,316
Gain on sale of foreclosed real estate (2,136) (34,431)
Loans originated for sale (9,384,790) (8,048,352)
Proceeds from sale of loans 8,067,931 8,465,769
(Increase) decrease in accrued interest receivable 180,919 (63,624)
Increase (decrease) in other assets (192,245) 83,661
Deferred compensation expense 51,601 9,951
Increase (decrease) in accrued interest payable 110,609 (72,300)
Increase (decrease) in accrued expenses and other liabilities (32,486) (456,281)
----------- -----------
Net Cash provided by (used in) operating activities (1,007,532) 348,268
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended March 31, 2001 and 2000
2001 2000
---------- ----------
INVESTING ACTIVITIES
Net change in interest bearing deposits in other financial institutions 884,628 (180,188)
Proceeds from maturity/repayment of investments held to maturity -- 28,783
Proceeds from maturity/repayment of investments available for sale 3,623,603 1,109,180
Purchase of investment securities available for sale (770,000) (1,265,000)
Proceeds from sale of investments available for sale 2,912,387 (10,000)
Reinvestment of mutual fund dividend -- (5,670)
Net (increase) decrease in loans 7,120,746 (5,092,358)
Purchase of premises & equipment (86,022) (44,806)
Proceeds from sale of foreclosed real estate 114,624 727,004
Transfer from loans of real estate owned property (619,341) (283,580)
Transfer from loans of other repossessed assets (15,640) (32,146)
---------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 13,164,985 (5,048,781)
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended March 31, 2001 and 2000
2001 2000
----------- -----------
FINANCING ACTIVITIES
Increase (decrease) in deposits (1,035,126) (5,821,064)
Proceeds from borrowed funds 13,200,000 17,900,000
Repayment of borrowed funds (15,594,068) (7,775,000)
Cash dividends paid (278,674) (278,724)
Acquisition of management recognition plan shares (100,760) --
Decrease in advances by borrowers for property taxes and insurance (5,757) (106,732)
----------- -----------
Net cash provided by (used in) financing activities (3,814,385) 3,918,480
----------- -----------
(Decrease) in cash and cash equivalents 8,343,068 (782,033)
Cash and cash equivalents at beginning of period 4,667,295 4,969,578
----------- -----------
Cash and cash equivalents at end of period 13,010,363 4,187,545
=========== ===========
Supplemental information on cash payments:
Interest paid 3,611,815 2,264,834
=========== ===========
Income taxes paid 243,509 814,050
=========== ===========
Supplemental information on noncash transactions
Change in net unrealized gain on investment securities
available for sale 418,088 (273,337)
=========== ===========
Real Estate obtained through foreclosure 619,341 --
See accompanying notes to consolidated financial statements.
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Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001 and 2000
(1) BASIS OF PRESENTATION
Information filed on this Form 10-QSB as of and for the quarter ended
March 31, 2001, was derived from the financial records of SouthFirst
Bancshares, Inc. ("SouthFirst") an its wholly-owned subsidiaries,
First Federal of the South ("First Federal"), and SouthFirst Financial
Services, Inc. ("SouthFirst Financial") and First Federal's wholly
owned subsidiaries, Pension and Benefit Trust Company ("Pension &
Benefit"), a Montgomery, Alabama-based employee benefits consulting
firm, and SouthFirst Mortgage, Inc., a Birmingham, Alabama based
residential construction loan and mortgage loan origination office.
Collectively, SouthFirst Bancshares, Inc. and its subsidiaries are
referred to herein as the "Company" and as "SouthFirst."
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, 2001
and 2000. 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
Statement establishes accounting and reporting standards for
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company adopted the provision of SFAS
No. 133 on October 1, 2000. However, base on the Company's current
operating activities, the adoption of this statement did not have a
material impact on the Company's financial condition or results of
operations.
In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. The statement revises the standards for accounting for
securitization and other transfers of financial assets and collateral,
and requires certain disclosures. This statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. This statement is
effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The statement is to be
applied prospectively with certain exceptions. Other than those
exceptions, earlier or retroactive application of its accounting
provisions is not permitted. Based on the Company's current operating
activities, management does not believe that future adoption
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of this statement will have a material impact on the presentation of
the Company's financial condition or results of operations.
(3) BUSINESS SEGMENT INFORMATION
The Company organized its business units into two reportable segments:
traditional banking activities and employee-benefit-plan trust and
consulting activities. The banking segment provides a full range of
banking services within its primary market areas of central Alabama.
Th employee benefit trust and consulting firm operates primarily in
the Montgomery, Alabama area. The Company reportable business segments
are strategic business units that offer different products and
services. Each segment is managed separately, because each unit is
subject to different marketing and regulatory environments.
The accounting policies used by each reportable segment are the same
as those discussed in Note 1 to the Consolidated Financial Statements
included under Item 7 of the Annual Report on Form 10-KSB. The
following table presents financial information for each reportable
segment:
Six Months Ended Six Months Ended
March 31, 2001 March 31, 2000
----------------------------------------- --------------------------------------
Employee Employee
Banking Benefits Banking Benefits
Activities Consulting Total Activities Consulting Total
----------- ---------- ----------- ---------- ---------- ----------
Interest dividend income $ 5,781,052 $ 18,327 $ 5,799,379 $5,794,739 $ 17,259 $5,811,998
Interest expenses
3,741,294 -- 3,741,294 3,406,287 -- 3,406,287
----------- ---------- ----------- ---------- ---------- ----------
Net interest income 2,039,758 18,327 2,058,085 2,388,452 17,259 2,405,711
Provision for loan losses (benefit) (50,000) -- (50,000) -- -- --
----------- ---------- ----------- ---------- ---------- ----------
Net interest income after
provision for loan losses 2,089,758 18,327 2,108,085 2,388,452 17,259 2,405,711
Other Income 549,503 581,165 1,130,668 535,877 495,801 1,031,678
Other Expenses 2,201,925 492,972 2,694,897 2,290,020 438,663 2,728,683
----------- ---------- ----------- ---------- ---------- ----------
Income before income taxes 437,336 106,520 543,856 634,309 74,397 708,706
Income Taxes 171,204 40,597 211,801 246,668 28,331 274,999
----------- ---------- ----------- ---------- ---------- ----------
Net Income $ 266,132 $ 65,923 $ 332,055 $ 387,641 $ 46,066 $ 433,707
=========== ========== =========== ========== ========== ==========
There have been no differences from the last annual report in th basis
of measuring segment profit or loss. There have been no material
changes in the amount of assets for any operating segment since the
last annual report.
(4) SUBSEQUENT EVENTS
On April 12, 2001, the Company declared a regular dividend of $0.15
per share, payable on May 15, 2001 to stockholders of record on May 1, 2001.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REVIEW OF RESULTS OF OPERATIONS
Overview
Net income for the three months and six months ended March 31, 2001 decreased
$114,057, or 42.6%, and $101,652, or 23.4%, respectively, compared to the same
periods in fiscal 2000. Net interest income for the three months and six months
ended March 31, 2001 decreased $191,049, or 15.5%, and $297,626, or 12.4%,
respectively, compared to the same periods in fiscal 2000. Non-interest income
decreased $5,534 or 0.9%, for the three month period ended March 31, 2001, and
increased 98,990 or 9.6% for the six-month period ended March 31, 2001, when
compared to the same periods in fiscal 2000, while non-interest expense
decreased $ 9,583 or 0.7%, and $33,786, or 1.2%, for the three month and six
month periods, respectively, ended March 31, 2001 compared to the same periods
in fiscal 2000.
Primary earnings per common share, based on weighted average shares
outstanding, was $.17 and $.29 for the three months ended March 31, 2001 and
2000, and $.36 and $.48 for the six months ended March 31, 2001 and 2000,
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, 2001, the interest-rate spread decreased 22 basis points, as
the weighted-average rates earned on interest-earning assets increased 23
basis points, to 8.05%, while the weighted-average cost of funds increased 45
basis points, to 5.29%, when compared to the same period in fiscal year 2000.
Although, the overall interest-rate environment, as a weighted average, has
increased since March 31, 2000, the recent rapid decline in interest rates,
since December 31, 2000, has created a temporary disparity in net-interest
income, by causing an immediate reduction in interest income, especially on
prime-rate-based assets, with an offsetting decline in the overall cost of
funds occurring at a slower pace. The average balance of interest-earning
assets decreased $12.1 million, or 8.0%, from $151.9 million to $139.8 million,
while the average balance of interest-bearing liabilities decreased $ 6.0
million, or 4.2%, from $144.1 million to $138.1 million. The combined effect of
the changes in average balances and the changes in interest rates discussed
resulted in a decrease in the interest-rate spread, from 2.98% to 2.76% ,and a
decrease in net-interest income of $191,049, or 15.5%, and $297,626, or 12.4%,
for the three months and six months, respectively, ended March 31, 2001, as
compared to the same periods in fiscal year 2000.
Non-interest Income
Total non-interest income for the six months ended March 31, 2001, increased
$99,000, to approximately $1,131,000, as compared to the six months ended March
31, 2000. Employee-benefit-plan trust and consulting fees increased
approximately 85,000 as a result of increased activities at Pension and Benefit
Trust Company. Other non-interest income also increased approximately $75,000
as compared to the same period in fiscal 2000. These increases were partially
offset by a decline in gains on sales of foreclosed real estate of $32,000.
For the three-month period ended March 31, 2001, total non-interest income
decreased by approximately $6,000 to $564,000, as compared to the same period
in fiscal year 2000. This decrease was primarily the result of a decrease of
$22,000 from service charges and other fees. However, gains on sales of
foreclosed real estate decreased by $34,000, while gain on sale of loans
increased $29,000 as compared to the same period in fiscal year 2000.
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Non-interest Expense
Total non-interest expense for the six months ended March 31, 2001, decreased
by approximately $34,000, to $2,695,000, compared to $2,729,000 for the six
months ended March 31, 2000. The decrease is primarily due to decreases in
other non-interest expense of $108,000. The decrease was partially offset by
an increase in office supplies and expenses of 34,000 as compared to the same
period of fiscal year 2000.
For the three-month period ended March 31, 2001, total non-interest expense
decreased approximately $10,000, to $1,351,000, from $1,361,000 for the
three-month period ended March 31, 2000. Other non-interest expense decreased
approximately $105,000, primarily from the reduction of expense credits from
mortgage origination fees resulting from the reduction in mortgage loans closed
for retention in the Company's mortgage loan portfolio. Compensation and
benefit expense increased approximately $60,000, while office supplies
increased approximately $22,000, with furniture and fixtures increasing by
approximately $16,000.
Income Tax Expense
SouthFirst's effective tax rate for the six-month periods ended March 31, 2001
and 2000 was 38.9% and 38.8%, 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 decreased
approximately $63,000, or 23%, to $212,000 for the six months ended March 31,
2001, as compared to $275,000 for the six months ended March 31, 2000, due to
the decrease in pre-tax earnings.
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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.
At or for the
three months ended
March 31,
-----------------------
2001 2000
------ ------
Return on assets 0.39% 10.66%
Return on equity 4.03% 7.58%
Equity-to-assets ratio 9.67% 8.66%
Interest rate spread 2.76% 2.98%
Net interest margin 2.83% 3.23%
Total risk-based capital ratio 17.29% 17.34%
Nonperforming loans to loans 1.11% .68%
Allowance for loan losses to loans 0.66% 0.69%
Allowance for loan losses to nonperforming loans 59.52% 100.40%
Ratio of net charge-offs to average loans outstanding 0.00% 0.01%
Book value per common share outstanding $16.78 $15.77
Significant factors affecting the SouthFirst's financial condition during the
six months ended March 31, 2001 are detailed below:
Assets
Total assets decreased $2,679,000, or 1.7%, from $161,026,000 at September 30,
2000 to $158,347,000 at March 31, 2001. Net loans decreased $7,066,000, or
6.5%, compared to September 30, 2000, primarily due to seasonal changes in
mortgage loan demand and the number of loans purchased. Investment securities
available for sale decreased $4,999,000, or 13.0% from $38,327,000 to
$33,328,000.
Liabilities
Total liabilities decreased approximately $3,101,000, or 2.1%, from
$146,100,000 at September 30, 2000 to $142,999,000 at March 31, 2001. Deposits
decreased approximately $1,035,000 during the period, borrowed funds decreased
$2,394,000, while accrued expenses and other liabilities increased
approximately $223,000, compared to September 30, 2000. 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 decrease in borrowed funds is
the result of the repayment of FHLB advances. The increase in accrued expenses
is primarily the result of fluctuations in accounts payable balances.
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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, 2001, the allowance for loan losses was $685,036, as compared to
$700,619 at September 30, 2000. 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 ($50,000) and $0 in the first six months
of fiscal 2001 and 2000, respectively. Nonperforming loans at March 31, 2001
were approximately $1,151,000 as compared to approximately $1,258,000 at
September 30, 2000. The reduction of non-performing loans is due to
charge-offs. At March 31, 2001 and September 30, 2000, the allowance for loan
losses represented 0.67% and 0.64% 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 may 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.
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.
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As of March 31, 2001, First Federal has satisfied all regulatory capital
requirements. First Federal's compliance with the current standards is as
follows:
Percent of
Amount asset base
----------- ----------
(Dollars in thousands)
Tangible Capital $15,227,000 9.72%
Core Capital 15,227,000 9.72%
Risk-Based Capital 15,832,000 17.29%
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.
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PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In the normal course of business, SouthFirst and First Federal from time to
time are involved in legal proceedings. Management believes that there are no
pending or threatened legal proceedings which, upon resolution, are expected to
have a material effect upon SouthFirst's or First Federal's financial
condition.
Further, 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, following
the approval of the Board of Directors of SouthFirst, 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 is vigorously defending the
case. Furthermore, Management, upon its review of the relevant files, has
asserted appropriate counterclaims against Mr. Cook in this litigation for
damages to First Federal and SouthFirst. Mr. Cook failed to receive a
nomination to stand for election as a member of the Board of Directors of
SouthFirst, and, therefore, was not re-elected by the shareholders of
SouthFirst at the annual meeting of stockholders held on April 11, 2001.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. No Exhibits are filed with this report.
(b) Reports on Form 8-K. No report on form 8-K was filed during the
quarter ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHFIRST BANCSHARES, INC.
Date: May 14, 2001 By: /s/ Donald C. Stroup
-------------------------------
Donald C. Stroup, President and
Chief Executive Officer
(principal executive officer)
Date: May 14, 2001 By: /s/ Joe K. McArthur
-------------------------------
Joe K. McArthur,
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
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