1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
June 30, 1999 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 928,834 shares
- -------------------------------------
Class Outstanding at August 13, 1999
2
SOUTHFIRST BANCSHARES, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition (Unaudited) at June 30, 1999
and September 30, 1998 ............................................................................................. 1
Consolidated Statements of Earnings (Unaudited) for the Nine and Three Months Ended
June 30, 1999 and 1998............................................................................................... 2
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the
Nine Months Ended June 30, 1999..................................................................................... 3
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended
June 30, 1999 and 1998............................................................................................... 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............................................................................................... 13
SIGNATURES................................................................................................................ 13
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1999 (Unaudited) and September 30, 1998
June 30, September 30,
Assets 1999 1998
------ ---- ----
(Audited)
Cash and amounts due from depository institutions $ 5,445,147 $ 9,213,906
Investment securities held to maturity at cost 947,669 971,106
Investment securities available for sale, at fair value 29,782,278 36,823,772
Loans receivable 106,867,442 105,322,213
Less allowance for loan losses (636,674) (732,021)
------------ ------------
Net loans 106,230,768 104,590,192
Loans held for sale at cost (which approximates fair value) 331,970 92,750
Premises and equipment, net 5,225,413 3,903,308
Foreclosed real estate, net 729,407 --
Accrued interest receivable 901,908 1,044,978
Other assets 1,567,176 1,733,463
Investment in affiliates 134,983 144,617
------------ ------------
Total assets $151,296,719 $158,518,092
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 3,568,321 $ 3,435,519
Interest bearing 112,574,377 120,448,157
------------ ------------
Total deposits 116,142,698 123,883,676
Advances by borrowers for property taxes and insurance 367,715 327,126
Accrued interest payable 1,049,941 1,071,183
Borrowed funds 17,154,068 16,169,068
Accrued expenses and other liabilities 1,525,440 1,396,424
------------ ------------
Total liabilities 136,239,862 142,847,477
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, 2,000,000 shares authorized;
999,643 shares issued and 898,032 outstanding shares at
June 30, 1999 and 999,643 shares issued and 914,432
outstanding shares at September 30, 1998 9,996 9,996
Additional paid-in capital 9,810,963 9,810,963
Treasury stock (1,126,099) (867,087)
Unearned compensation on common stock employee benefit plans (763,582) (778,508)
Retained earnings, substantially restricted 5,886,359 5,953,346
Accumulated other comprehensive income 1,239,220 1,541,905
------------ ------------
Total stockholders' equity 15,056,857 15,670,615
------------ ------------
Total liabilities and stockholders' equity $151,296,719 $158,518,092
============ ===========
See accompanying notes to consolidated financial statements.
1
4
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited) for the
Nine Months Ended June 30, 1999 and June 30, 1998 and
Three Months Ended June 30, 1999 and June 30, 1998
Nine Months Ended June 30, Three Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 6,299,134 6,096,716 2,144,202 2,088,299
Interest and dividend income on investment securities 1,510,106 2,138,958 444,148 699,593
----------- --------- --------- ---------
Total interest and dividend income 7,809,240 8,235,674 2,588,350 2,787,892
----------- --------- --------- ---------
Interest expense:
Interest on deposits 4,142,750 3,881,926 1,301,642 1,484,011
Interest on borrowed funds 675,735 904,469 226,442 298,296
----------- --------- --------- ---------
Total interest expense 4,818,485 4,786,395 1,528,084 1,782,307
Net interest income 2,990,755 3,449,279 1,060,266 1,005,585
Provision for loan losses 108,847 41,352 70,123 19,682
----------- --------- --------- ---------
Net interest income after provision for loan loss losses 2,881,908 3,407,927 990,143 985,903
Other income:
Service charges and other fees 610,793 509,080 218,777 197,351
Employee benefit consulting fees 821,557 568,674 302,511 232,033
Gain on sale of loans 313,559 180,895 90,783 50,239
Gain (loss) on sale of foreclosed real estate (4,041) 864 -- 2,969
Gain (loss) on maturity of investment security AFS 137,586 1,140 85,978 --
Profit (loss) from sale of equipment (378) 2,565 (378) --
Equity in net (loss) Income of affiliate (9,634) (29,919) (19,437) (8,191)
Other 160,019 157,790 56,803 40,947
----------- --------- --------- ---------
Total other income 2,029,461 1,391,089 735,037 515,348
----------- --------- --------- ---------
Other expenses:
Compensation and benefits 2,701,335 2,485,963 884,695 863,261
Net occupancy expense 229,954 209,402 78,196 75,906
Furniture and fixtures 329,417 240,518 115,382 94,164
Data processing 255,048 205,197 82,511 87,887
Office supplies and expenses 282,802 264,824 102,902 92,627
Deposit insurance premiums 88,354 66,036 28,840 20,890
Other 422,587 476,791 172,874 114,671
----------- --------- --------- ---------
Total other expenses 4,309,497 3,948,731 1,465,400 1,349,406
----------- --------- --------- ---------
Income before taxes 601,872 850,285 259,780 151,845
Income tax expense 236,376 334,190 101,231 60,180
----------- --------- --------- ---------
Net income $ 365,496 516,095 158,549 91,665
=========== ========= ========= =========
Primary earnings per common share $ 0.41 0.56 0.18 0.10
Fully Diluted earnings per common share $ 0.41 0.55 0.18 0.10
Dividends per common share $ 0.45 0.45 0.15 0.15
Primary weighted average common shares outstanding 901,080 925,480 898,032 938,207
Fully Diluted weighted average common shares outstanding 901,381 946,091 898,032 958,818
See accompanying notes to the consolidated financial statements.
2
5
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended June 30, 1999
- -------------------------------------------------------------------------------
Deferred
Compensation Retained Accumulated
Additional on Common Earnings Other Total
Common Paid In Treasury Stock Employee Substantially Comprehensive Stockholders
Stock Capital Stock Benefit Plans Restricted Income Equity
------ --------- -------- -------------- ------------- ------------- -------------
Balance at September 30, 1998 $ 9,996 $ 9,810,963 $ (867,087) $(778,508) $5,953,346 $ 1,541,905 $ 1,670,615
Comprehensive Income
Net Income 365,496 365,49
Other Comprehensive Income,
net of tax:
Change in unrealized gain on
securities available-for-sale,
net of deferred income taxes of
$185,517 (302,685) (302,685)
-----------
Total Comprehensive Income 62,811
-----------
Purchase of Treasury Stock (259,012) (259,012)
Vesting of Deferred Compensation 14,926 14,926
Shares
Cash Dividends Declared (432,483) (432,483)
--------- ----------- ----------- --------- ---------- ----------- ------------
Balance at June 30,1999 $ 9,996 $ 9,810,963 $(1,126,099) $(763,582) $5,886,359 $ 1,239,220 $ 15,056,857
========= =========== =========== ========= ========== =========== ============
See accompanying notes to consolidated financial statements.
3
6
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended June 30, 1999 and June 30, 1998
1999 1998
---- ----
Operating activities:
Net income $ 365,496 $ 516,095
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 224,143 227,984
Provision for loan losses 108,847 (41,352)
Loss on sale of unconsolidated affiliate -- 6,564
Loss on Sale of premises and equipment 378 (2,565)
Equity in loss of unconsolidated affiliates 9,634 29,919
(Gain) on sale of loans (313,559) (180,895)
(Gain) loss on sale of investment securities (137,586) 1,140
Increase (decrease) in deferred loan origination fees 13,755 (17,469)
Net amortization of premium/discount
on investment securities held to maturity (1,066) 2,422
Net amortization of premium/discount
on investment securities available for sale (166,877) (161,621)
Gain on sale of foreclosed real estate 4,041 864
Loans originated for sale (17,089,411) (8,393,671)
Proceeds from sale of loans 17,163,750 8,250,175
(Increase) decrease in accrued interest receivable 143,070 (157,304)
(Increase) decrease in other assets 166,287 (1,097,917)
Increase (decrease) in accrued interest payable (21,242) (213,844)
Increase in income taxes payable -- 201,272
Deferred compensation expense 14,926
Increase in accrued expenses and other liabilities 129,016 1,008,402
------------ ---------
Net cash provided by (used in) operating activities $ 613,602 $ (21,801)
------------ ---------
Investing activities:
Net cash paid in acquisition of subsidiary -- (160,082)
Proceeds from sale of unconsolidated affiliate -- 90,100
Purchase of held to maturity securities -- (942,334)
Investment in unconsolidated affiliated companies -- (75,000)
(Sale) of interest-bearing deposits in other financial institutions (1,193,618) --
Re-Inv of Div.-Int-bearing deposits in other fin. institutions (6,716) --
Principal repayments and maturities of investment
securities held to maturity 1,753,231 24,054
See accompanying notes to consolidated financial statements.
4
7
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended June 30, 1999 and June 30, 1998
1999 1998
---- ----
Principal repayments and maturities of investment
securities available for sale 6,136,952 6,516,541
Purchase of investment securities available for sale (18,716,968) --
Purchase of discount of investments available for sale 306,172 --
Proceeds from sale of investments available for sale 18,812,444 14,619,018
Reinvestment of mutual fund dividend (23,722) (28,485)
Net (increase) decrease in loans (1,763,178) 4,151,797
Proceeds from sale of foreclosed real estate 36,000 84,114
Proceeds from sale of other assets 12,000 --
Transfer from loans of real estate owned property (769,448) --
Purchase of premises and equipment (1,558,626) (850,804)
------------ ------------
Net cash provided by (used in) investing activities $ 3,024,523 $ 23,428,919
------------ ------------
Financing activities:
Net increase (decrease) in deposits $ (7,740,978) (1,331,852)
Proceeds from borrowed funds 34,626,593 4,588,414
Cash dividends paid (432,483) (386,177)
Treasury stock purchased (259,012) (163,925)
Repayment of borrowed funds (33,641,593) (6,800,266)
Decrease in advances by borrowers
for property taxes and insurance 40,589 (100,244)
------------ ------------
Net cash provided by (used in) financing activities (7,406,884) (4,194,050)
------------ ------------
Increase (decrease) in cash and amounts due from
depository institutions (3,768,759) 19,213,068
Cash and amounts due from depository institutions
at beginning of period 9,213,906 2,448,123
------------ ------------
Cash and amounts due from depository institutions
at end of period $ 5,445,147 $ 21,661,191
============ ============
Supplemental information on cash payments:
Interest paid $ 4,826,248 $ 4,786,395
============ ============
Income taxes paid $ 4,950 $ 334,190
============ ============
Supplemental information on noncash transactions:
Transfers to investment securities available for sale from
investment securities held to maturity -- --
============ ============
Change in net unrealized gain on investment securities
available for sale $ (302,685) $ 393,522
============ ============
See accompanying notes to consolidated financial statements.
5
8
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Nine months ended June 30, 1999
(1) Basis of Presentation
Information filed on this Form 10-QSB as of and for the quarter ended
June 30, 1999, was derived from the financial records of SouthFirst
Bancshares, Inc. and its wholly-owned subsidiary, First Federal of the
South ("First Federal"), and First Federal's wholly owned subsidiary,
Pension & Benefit Financial Services, Inc., a Montgomery,
Alabama-based employee benefits consulting firm. SouthFirst and its
subsidiaries are collectively referred to herein as the "Company."
In the opinion of management of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments
(none of which are other than normal recurring accruals) necessary for
a fair statement of the financial position of the Company and the
results of operations for the nine-month periods ended June 30, 1999
and 1998. 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
As of October 1, 1998, SouthFirst adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the
adoption of SFAS No. 130 had no impact on net income or stockholders'
equity. SFAS No. 130 requires unrealized gains and losses from
available for sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirement of SFAS No. 130.
By September 30, 1999, SouthFirst will adopt Statement of Financial
Accounting Standards No. 131 (SFAS No. 131), "Disclosure About
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports. The adoption of SFAS
No. 131 will have no effect on the results of operations or financial
position of SouthFirst.
(3) Subsequent events
On July 21, 1999, the Company declared a regular dividend of $0.15 per
share, payable on August 16, 1999 to stockholders of record on August
2, 1999.
6
9
SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES
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 nine months ended June 30, 1999
increased $66,884, or 73%, and decreased $150,599, or 29.2%,
respectively, when compared to the same periods in fiscal 1998. Net
interest income for the three months and nine months ended June 30,
1999, increased $54,681, or 5.4%, and decreased $458,524, or 13.3%,
respectively, as compared to the same periods in fiscal 1998. Other
income increased $219,689, or 42.6%, for the three month period ended
June 30, 1999, and $638,372, or 45.9%, for the nine-month period ended
June 30, 1999, when compared to the same periods in fiscal 1998, while
other expenses increased $115,999, or 8.6%, and $360,766, or 9.1%, for
the three month and nine month periods, respectively, ended June 30,
1999 compared to the same periods in fiscal 1998.
A significant amount of the above increases or decreases are
attributable to the acquisition of First Federal Savings and Loan
Association of Chilton County ("Chilton County") on October 31, 1997.
Chilton County was merged with and into SouthFirst's wholly owned
subsidiary, First Federal of the South ("First Federal"). Net interest
income decreased as a result of acquiring a significantly higher cost
of funds base, as well as acquiring a consumer loan base requiring
significant charge offs. Primary earnings per common share, based on
weighted average shares outstanding, was $0.18 and $0.10 for the three
months ended June 30, 1999 and 1998, and $0.41 and $0.56 for the nine
months ended June 30, 1999 and 1998, 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.
For the three-month period ended June 30, 1999, net interest income
increased $54,681, or 5.4%, as compared to the same period in 1998.
The interest rate spread during the three month period ended June 30,
1999 increased 22 basis points as rates earned on interest-earning
assets increased 26 basis points to 7.37% while the cost of funds
increased 4 basis points to 4.81%. The increase in rates paid and the
increase in rates charged during this three month interval reflects
the recent increases in the overall interest rate environment.
For the nine months ended June 30, 1999, net interest income decreased
$458,524, or 13.3%, as compared to the same period in fiscal 1998. The
interest rate spread decreased 80 basis points, from 3.37% for the
nine months ended June 30, 1999 to 2.57% for the nine months ended
June 30, 1998. The average balance of interest-earning assets
decreased $1.7 million, or 1.2%, during the nine-month period ended
June 30,1999, from $143.2 million to $141.5 million, while the average
balance of interest-bearing liabilities decreased $.4 million, or .3%,
from $134.1 million to $133.7 million.
7
10
Other Income
Total other income for the nine months ended June 30, 1999 increased
$638,000, to $2,029,000, as compared to the nine months ended June 30,
1998. A significant portion of the increase in total other income was
attributable to approximately $253,000 in employee benefit consulting
fees earned by Pension & Benefit Financial Services Inc. ("Pension &
Benefit"), First Federal's wholly owned operating subsidiary, during
the first nine months of fiscal 1999. In addition, gains on sales of
loans increased approximately $133,000, gain on sales of investments
increased $136,000, and service charges and other fees increased
$102,000 compared to the same period in fiscal 1998. The acquisition
of Chilton County accounted for a portion of the service charge and
other fees increase while increased mortgage loans sold accounted for
the gain on sale of loans.
For the three month period ended June 30, 1999, total other income
increased by approximately $220,000, to $735,000, compared to the same
period in fiscal 1998. This increase was primarily the result of
increases of $41,000 from gains on sales of loans, $86,000 from gain
on sales of investments, an increase of $21,000 on income from service
charges and fees, an increase of $70,000 in employee benefit
consulting fees, and an increase of $16,000 in other income.
Other Expense
Total other expense for the nine months ended June 30, 1999, increased
by approximately $361,000, to $4,309,000, as compared to the nine
months ended June 30, 1998. The increase is primarily due to increases
in compensation expense of $215,000, data processing expense of
$50,000, and furniture and fixtures expense of $89,000. These expense
increases are primarily attributable to increased costs associated
with the Chilton County acquisition, as well as additional personnel
and other costs associated with the opening of the loan production
office in Dothan, Alabama. The increase in data processing expense is
primarily attributable to the increased data processing activity as a
result of the acquisition of Chilton County and the upgrading of its
information technology systems, which was undertaken as a result of
SouthFirst's recent acquisitions, and to ensure that the systems would
by Year 2000 compliant. (See discussion of Year 2000 below).
For the three month period ended June 30, 1999, total other expense
increased approximately $116,000 to $1,465,000 as compared to the same
period in fiscal 1998. Compensation expense increased $21,000,
furniture and fixtures expense increased $21,000, office supplies
expense increased $10,000, and other expense increased $58,000 as
compared to fiscal 1998.
Income Tax Expense
SouthFirst's effective tax rate for the nine-month periods ended June
30, 1999 and 1998 was 39.3%, 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 $98,000, or 29.3%, to $236,000 for the nine months ended
June 30, 1999, as compared to the nine months ended June 30, 1998, due
to the decrease in pre-tax earnings.
8
11
Year 2000
Many companies may face a potentially serious information systems
problem because their computer software applications and operational
programs may not properly recognize calendar dates beginning in the
year 2000. This problem could force computers to either shut down or
provide incorrect data or information. First Federal began the process
of identifying the changes required to its computer programs and
hardware in early 1997. Software upgrades designed to correct the year
2000 problem were completed during the early part of calendar year
1998. SouthFirst has also recently upgraded certain of it information
technology systems due to the recent acquisitions of Chilton County
and Pension & Benefit. Presently, First Federal is in the process of
testing all of its operating systems in order to be ready for year
2000. SouthFirst does not anticipate the cost of any future software
and hardware changes (if necessary) to have a material adverse impact
on its business, financial condition, or results of operation.
However, there can be no assurance that unforeseen difficulties or
costs will not arise. First Federal has issued certification requests
to the data processing and software companies on which its computer
programs rely and to all major vendors and customers seeking assurance
that they will be year 2000 compliant. The majority of the major
vendors have responded. All of the respondents have indicated that
they are year 2000 compliant now or will be well in advance of the
year 2000.
First Federal also recognizes the importance of determining that its
borrowers are facing the Year 2000 problem in a timely manner to avoid
deterioration of its loan portfolio solely due to this issue. All
material relations have been identified to assess the inherent risks.
First Federal plans to work on a one-on-one basis with any borrower
who has been identified as having high Year 2000 risk exposure.
First Federal's contingency plans relative to Year 2000 issues have
not been finalized. Management will develop and modify a "worst case
scenario" contingency plan which will, among other things, anticipate
that the First Federal's deposit customers will have increased demands
for cash in the latter part of 1999.
REVIEW OF FINANCIAL CONDITION
Overview
Management continuously monitors the financial condition of SouthFirst
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.
9
12
At or for the
nine months ended
June 30,
1999 1998
---- ----
Return on shareholders' equity 3.14% 4.28%
Return on assets 0.31% 0.44%
Equity-to-assets ratio 9.98% 10.26%
Interest rate spread 2.57% 3.43%
Net interest margin 2.83% 3.51%
Total risk-based capital ratio 18.41% 19.68%
Nonperforming loans to loans 1.28% 2.47%
Allowance for loan losses to loans 0.59% 0.76%
Allowance for loan losses to nonperforming loans 46.19% 30.80%
Ratio of net charge-offs to average loans outstanding 0.16% 0.05%
Book value per common share outstanding $ 16.71 $ 17.51
Significant factors affecting the SouthFirst's financial condition
during the nine months ended June 30, 1999 are detailed below:
Assets
Total assets decreased $7,221,000, or 4.6%, from $158,518,000 at
September 30, 1998 to $151,297,000 at June 30, 1999. Net loans
increased $1,641,000, or 1.6%, compared to September 30, 1998,
primarily due to seasonal changes in mortgage loan demand. Investment
securities held to maturity decreased $23,000 while investment
securities available for sale decreased $7,041,000 for a total
decrease of $7,064,000.
Liabilities
Total liabilities decreased $6,607,000, or 4.6%, from $142,847,000 at
September 30, 1998 to $136,240,000 at June 30, 1999. Deposits
decreased approximately $7,741,000 during the period, borrowed funds
increased $985,000 to $17,154,068 and accrued expenses and other
liabilities increased approximately $129,000. Deposit decreases were
primarily attributable to the relatively low interest rate environment
with savings deposits leaving in search of higher yields. 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's directive in this regard is
carried out through its policies and procedures for review of loans.
The goal and result of these policies and procedures is to provide a
sound basis for new credit extensions and an early recognition of
problem assets to allow the most flexibility in their timely
disposition.
At June 30, 1999, the allowance for loan losses was $636,674, as
compared to $732,021 at September 30, 1998. 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
$108,847 and $41,352 in the first nine months of fiscal 1999 and 1998,
respectively. Nonperforming loans at June 30, 1999 were approximately
$1,378,000 as compared to approximately $2,128,000 at September 30,
1998. The reduction of non-performing loans is due to charge-offs and
foreclosures. At June 30, 1999 and September 30, 1998, the allowance
for loan losses represented 0.59% and 0.70% 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
10
13
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.
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 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 June 30, 1999, First Federal has satisfied all regulatory
capital requirements. First Federal's compliance with the current
standards is as follows:
11
14
Percent of
Amount asset base
------ ----------
(Dollars in thousands)
Tangible Capital $ 14,229,000 9.34%
Core Capital $ 14,229,000 9.34%
Risk-Based Capital $ 13,782,000 18.41%
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
15
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is filed with this report.
Exhibit No. Description
27 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K. No report on form 8-K was filed during the
quarter ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SOUTHFIRST BANCSHARES, INC.
Date: August 12, 1999 By: /s/ Donald C. Stroup
--------------------------------------------
Donald C. Stroup, President and
Chief Executive Officer
(principal executive officer)
Date: August 12, 1999 By: /s/ Joe K. McArthur
--------------------------------------------
Joe K. McArthur, Executive Vice President
and Chief Financial Officer
(principal financial and accounting officer)
651709
13