-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NpUq26+ADtqG6iy/jY+6wVXu77UkcqgL7OI3jzlBP84SqTqC+wrZ5rk+J3/JO6B7 3C7b21s4rw+qhk9oYyWMng== 0000950144-02-005575.txt : 20020515 0000950144-02-005575.hdr.sgml : 20020515 20020515141309 ACCESSION NUMBER: 0000950144-02-005575 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHFIRST BANCSHARES INC CENTRAL INDEX KEY: 0000925963 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 631121255 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13640 FILM NUMBER: 02650751 BUSINESS ADDRESS: STREET 1: 126 NORTH NORTON AVE CITY: SYLACAUGA STATE: AL ZIP: 35150 BUSINESS PHONE: 2052454365 MAIL ADDRESS: STREET 1: PO BOX 167 CITY: SYLACAUGA STATE: AL ZIP: 35150 10QSB 1 g76334e10qsb.txt SOUTHFIRST BANCSHARES, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended: Commission File Number March 31, 2002 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: 256-245-4365 - -------------------------------------------------------------------------------- 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 810,794 shares - -------------------------------------- Outstanding at May 10, 2002 Class SOUTHFIRST BANCSHARES, INC. TABLE OF CONTENTS
Page ---- PART I - FINANCIAL INFORMATION Item 1: Financial Statements ............................................................. 1 Consolidated Statements of Financial Condition at March 31, 2002 (Unaudited) and September 30, 2001 .............................................................. 1 Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended March 31, 2002 and 2001 ............................................................. 2 Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Six Months Ended March 31, 2002 ..................................................... 3 Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2002 and 2001 ............................................................. 4 Notes to Consolidated Financial Statements (Unaudited) .............................. 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................................... 8 PART II - OTHER INFORMATION .............................................................. 14 Item 1: Legal Proceedings ................................................................ 14 Item 6: Exhibits and Reports on Form 8-K ................................................. 14 SIGNATURES ............................................................................... 15
SOUTHFIRST BANCSHARES, INC. AND SUBSIDIARIES PART 1: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Consolidated Statements of Financial Condition March 31, 2002 (Unaudited) and September 30, 2001
March 31, September 30, 2002 2001 ------------- ------------- (Unaudited) Assets Cash and cash equivalents $ 8,659,943 $ 6,020,186 Interest-bearing deposits in other financial institutions 1,327,531 898,533 Investment securities available-for-sale, at fair value 32,361,472 33,052,826 Loans receivable 90,796,283 102,713,340 Less allowance for loan losses (1,612,733) (1,577,952) ------------- ------------- Net loans 89,183,550 101,135,388 Loans held for sale at cost (which approximates fair value) -- 272,350 Foreclosed real estate, net 180,887 251,183 Other repossessed assets 4,145 6,700 Premises and equipment, net 4,941,714 4,765,878 Federal Home Loan Bank stock, at cost 2,229,800 2,229,800 Accrued interest receivable 768,028 960,225 Other assets 3,155,001 1,601,146 ------------- ------------- Total Assets $ 142,812,071 $ 151,194,215 ============= ============= Liabilities And Stockholders' Equity Liabilities: Deposits: Non-interest bearing $ 4,088,802 $ 3,349,326 Interest bearing 96,148,890 95,706,254 ------------- ------------- Total deposits 100,237,692 99,055,580 ------------- ------------- Advances by borrowers for property taxes and insurance 213,957 404,515 Accrued interest payable 1,043,410 1,328,183 Borrowed funds 27,605,000 35,605,000 Accrued expenses and other liabilities 397,474 518,398 ------------- ------------- Total liabilities 129,497,533 136,911,676 ------------- ------------- Stockholders' Equity: Common stock, $.01 par value, 2,000,000 shares authorized, 989,868 shares issued and 799,824 shares outstanding at March 31, 2002; 988,118 shares issued and 861,130 shares outstanding at September 30, 2001 9,996 9,996 Additional paid-in capital 9,814,268 9,814,268 Treasury stock, at cost (179,074 shares at March 31, 2002; 116,018 shares at September 30, 2001) (2,349,039) (1,648,439) Deferred compensation on common stock employee benefit plans (354,731) (383,442) Shares held in trust at cost (9,775 shares at March 31, 2002; 11,525 shares at September 30, 2001) (107,161) (126,411) Retained earnings 6,241,334 6,249,938 Accumulated comprehensive other income 59,871 366,629 ------------- ------------- Total stockholders' equity 13,314,538 14,282,539 ------------- ------------- Total Liabilities and Stockholders' Equity $ 142,812,071 $ 151,194,215 ============= =============
See accompanying notes to consolidated financial statements. -1- SOUTHFIRST BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended March 31, 2002 and 2001
Six Months Ended Three Months Ended March 31, March 31, --------------------------- --------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Interest and dividend income: Interest and fees on loans $ 3,603,608 $ 4,488,194 $ 1,705,970 $ 2,159,925 Interest income on deposits in other financial institutions 53,186 159,623 29,726 105,908 Interest and dividend income on investment securities 734,902 1,151,562 334,616 544,010 ----------- ----------- ----------- ----------- Total interest and dividend income 4,391,696 5,799,379 2,070,312 2,809,843 ----------- ----------- ----------- ----------- Interest expense: Interest on deposits 1,936,191 2,588,037 894,855 1,288,575 Interest on borrowed funds 645,888 1,153,257 291,858 531,768 ----------- ----------- ----------- ----------- Total interest expense 2,582,079 3,741,294 1,186,713 1,820,343 ----------- ----------- ----------- ----------- Net interest income 1,809,617 2,058,085 883,599 989,500 Provision for loan losses (benefit) 25,096 (50,000) 25,096 (50,000) ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 1,784,521 2,108,085 858,503 1,039,500 ----------- ----------- ----------- ----------- Other income: Service charges and other fees 224,113 203,732 105,356 99,537 Employee benefit trust and consulting fees 558,848 575,165 261,487 283,120 Gain on sale of loans 222,314 177,265 93,926 101,562 Gain (loss) on sale of foreclosed real estate 4,174 2,136 4,174 -- Gain (loss) on sale of equipment (4,180) -- (4,541) -- Gain (loss) on sale of investment securities available-for-sale 170,180 859 170,180 -- Other 359,334 171,511 282,913 80,077 ----------- ----------- ----------- ----------- Total other income 1,534,783 1,130,668 913,495 564,296 ----------- ----------- ----------- ----------- Other expenses: Compensation and benefits 1,694,427 1,569,835 883,478 800,862 Net occupancy expense 173,241 176,475 89,804 88,580 Furniture and fixtures 224,853 231,817 113,024 120,603 Data processing 165,629 158,831 78,911 83,004 Office supplies and expense 198,777 217,677 100,641 109,566 Deposit insurance premiums 36,797 32,763 21,210 16,329 Goodwill amortization 26,974 26,973 13,487 13,487 Legal 91,184 55,652 45,884 8,852 Other 279,691 224,874 156,801 110,164 ----------- ----------- ----------- ----------- Total other expenses 2,891,573 2,694,897 1,503,240 1,351,447 ----------- ----------- ----------- ----------- Income before income taxes 427,731 543,856 268,758 252,349 Income tax expense 167,324 211,801 104,404 98,461 ----------- ----------- ----------- ----------- Net income $ 260,407 $ 332,055 $ 164,354 $ 153,888 =========== =========== =========== =========== Earnings per share: Basic 0.31 0.36 0.20 0.17 Diluted 0.31 0.36 0.20 0.17 Cash dividends declared 0.30 0.30 0.15 0.15 Weighted average shares outstanding: Basic 833,718 910,102 808,235 910,102 Diluted 835,768 912,858 811,600 911,160
See accompanying notes to consolidated financial statements. -2- SOUTHFIRST BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Six Months Ended March 31, 2002
Deferred Compensation on Common Additional Stock Shares Accumulated Total Common Paid-in Treasury Employee Held in Retained Comprehensive Stockholders' Stock Capital Stock Benefit Plans Trust Earnings Other Income Equity --------- ----------- ----------- -------------- --------- ---------- ------------- ------------- Balance at September 30, 2001 $ 9,996 $ 9,814,268 $(1,648,439) $(383,442) $(126,411) $6,249,938 $366,629 $14,282,539 ----------- Comprehensive income: Net income 260,407 260,407 Change in net unrealized gain (loss) on available- for-sale securities, net of reclassification adjustments and income taxes of $188,013 (306,758) (306,758) ----------- Total comprehensive income (loss) (46,351) ----------- Issuance of management recognition plan shares (19,250) 19,250 Vesting of deferred compensation shares 47,961 47,961 Acquisition of Treasury stock (700,600) (700,600) Cash dividends declared (269,011) (269,011) --------- ----------- ----------- --------- --------- ---------- -------- ----------- Balance at March 31, 2002 $ 9,996 $ 9,814,268 $(2,349,039) $(354,731) $(107,161) $6,241,334 $ 59,871 $13,314,538 ========= =========== =========== ========= ========= ========== ======== ===========
-3- SOUTHFIRST BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2002 and 2001
2002 2001 ------------ ------------ Operating activities: Net income $ 260,407 $ 332,055 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 25,096 (50,000) Depreciation and amortization 169,367 186,112 Gain on sale of securities (170,180) (859) Gain on sale of loans (222,314) (177,265) Decrease in deferred loan origination fees (35,623) (4,931) Net amortization of premium on investment securities available-for-sale 42,173 (92,047) (Gain) loss on sale of other property owned 4,180 -- (Gain) loss on sale of foreclosed real estate (4,174) (2,136) Loans originated for sale (9,334,716) (9,384,790) Proceeds from sale of loans 9,829,380 8,067,931 (Increase) decrease in accrued interest receivable 192,197 180,919 Increase in other assets (1,553,855) (192,245) Deferred compensation expense 47,961 51,601 Increase (decrease) in accrued interest payable (284,773) 110,609 Increase (decrease) in accrued expenses and other liabilities 67,089 (32,486) ------------ ------------ Net cash used in operating activities (967,785) (1,007,532) ------------ ------------ Investing activities: Net change in interest-bearing deposits in other financial institutions (428,998) 884,628 Proceeds from calls and maturities of investment securities available-for-sale 2,304,907 3,623,603 Purchase of investment securities available-for-sale (11,540,400) (770,000) Proceeds from sale of investment securities available-for-sale 9,560,083 2,912,387 Net decrease in loans 11,957,824 7,120,746 Purchase of premises and equipment (345,042) (86,022) Proceeds from sale of foreclosed real estate 119,741 114,624 Proceeds from sale of other assets 6,200 -- Transfer from loans of real estate owned property (45,271) (619,341) Transfer from loans of other repossessed assets (3,445) (15,640) ------------ ------------ Net cash provided by investing activities 11,585,599 13,164,985 ------------ ------------
(Continued) See accompanying notes to consolidated financial statements. -4- SOUTHFIRST BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2002 and 2001
2002 2001 ------------ ------------ Financing activities: Increase (decrease) in deposits $ 1,182,112 $ (1,035,126) Proceeds from borrowed funds 6,600,000 13,200,000 Repayment of borrowed funds (14,600,000) (15,594,068) Cash dividends paid (269,011) (278,674) Acquisition of management recognition plan shares -- (100,760) Acquisition of treasury stock (700,600) -- Decrease in advances by borrowers for property taxes and insurance (190,558) (5,757) ------------ ------------ Net cash used in financing activities (7,978,057) (3,814,385) ------------ ------------ Increase (decrease) in cash and cash equivalents 2,639,757 8,343,068 Cash and cash equivalents at beginning of period 6,020,186 4,667,295 ------------ ------------ Cash and cash equivalents at end of period $ 8,659,943 $ 13,010,363 ============ ============ Supplemental information on cash payments: Interest paid $ 2,866,852 $ 3,611,815 ============ ============ Income taxes paid $ 142,991 $ 243,509 ============ ============ Supplemental information on non-cash transactions: Change in net unrealized gain on investment securities available-for-sale $ (306,758) $ 418,088 ============ ============ Real estate obtained through foreclosure $ 45,271 $ 619,341 ============ ============
See accompanying notes to consolidated financial statements. -5- SOUTHFIRST BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) March 31, 2002 and 2001 (1) BASIS OF PRESENTATION Information filed on this Form 10-QSB, as of and for the quarter ended March 31, 2002, was derived from the financial records of SouthFirst Bancshares, Inc. ("SouthFirst") and 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 & 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 three and six month periods ended March 31, 2002 and 2001. The results contained in the statements herein are not necessarily indicative of the results which may be expected for the entire year. (2) NEW ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but, instead, an entity must perform an assessment of whether goodwill is impaired, as of the date of adoption, and test for impairment at least annually in accordance with the provisions of the Statement. The new standard will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS Nos. 142, 143 and 144 are required to be adopted October 1, 2002, with earlier application permitted. At this time, the impact of adopting these standards on the financial condition of the Company has not been determined. -6- (3) BUSINESS SEGMENT INFORMATION The Company organizes its business units into two reportable segments: traditional banking activities and employee benefits consulting and trust activities. The banking segment provides a full range of banking services within its primary market areas of central Alabama. The employee benefits trust company operates primarily in the state of Alabama. The Company's 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 found in Exhibit 99.1 of the Annual Report on Form 10-KSB. The following table presents financial information for each reportable segment:
Six Months Ended March 31, 2002 Six Months Ended March 31, 2001 ------------------------------------------ --------------------------------------------- Employee Employee Banking Benefits Banking Benefits Activities Activities Total Activities Activities Total ---------- ---------- ---------- ----------- ---------- ----------- Interest and dividend income $4,372,134 $ 19,562 $4,391,696 $ 5,781,052 $ 18,327 $ 5,799,379 Interest expenses 2,582,079 -- 2,582,079 3,741,294 -- 3,741,294 ---------- -------- ---------- ----------- -------- ----------- Net interest income 1,790,055 19,562 1,809,617 2,039,758 18,327 2,058,085 Provision for loan losses 25,096 -- 25,096 (50,000) -- (50,000) ---------- -------- ---------- ----------- -------- ----------- Net interest income after provision for loan losses 1,764,959 19,562 1,784,521 2,089,758 18,327 2,108,085 Other income 969,393 565,390 1,534,783 549,503 581,165 1,130,668 Other expenses 2,346,117 545,456 2,891,573 2,201,925 492,972 2,694,897 ---------- -------- ---------- ----------- -------- ----------- Income before income taxes 388,235 39,496 427,731 437,336 106,520 543,856 Income taxes 152,196 15,128 167,324 171,204 40,597 211,801 ---------- -------- ---------- ----------- -------- ----------- Net income $ 236,039 $ 24,368 $ 260,407 $ 266,132 $ 65,923 $ 332,055 ========== ======== ========== =========== ======== ===========
There have been no variations from the last annual report in the 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) SUPERVISORY AGREEMENT On March 22, 2002, First Federal entered into a Supervisory Agreement (the "Supervisory Agreement") with the Office of Thrift Supervision (the "OTS"). The Supervisory Agreement formalizes the current understanding of both First Federal and the OTS of the actions that First Federal and its board of directors must undertake to comply with the requirements of the OTS. Among other things, First Federal's board of directors must develop, adopt and implement certain policies and procedures to ensure appropriate monitoring of First Federal's internal audit and control functions, management, asset quality, and transactions with affiliates and insiders. Additionally, the OTS revoked the expanded, loans-to-one-borrower lending authority originally granted by the OTS on July 26, 1994. -7- (5) SUBSEQUENT EVENTS On April 15, 2002, First Federal was notified that the amount available under its credit line with the Federal Home Loan Bank of Atlanta had been changed from a variable amount, equal to 30% of total assets, or approximately $43,000,000 at March 31, 2002, to a fixed amount of $22,000,000. At March 31, 2002, First Federal owed the Federal Home Loan Bank of Atlanta $25,250,000 in outstanding advances. The Federal Home Loan Bank of Atlanta has notified First Federal that it will not require First Federal's existing borrowings to be reduced to the new fixed amount prior to the existing advance maturities, but that it will require that any additional borrowing by First Federal (in excess of $22,000,000 in the aggregate) be approved through application by First Federal to the Federal Home Loan Bank of Atlanta's Credit Committee. Management believes that this reduction in the amount available under this credit line, because of the existing liquidity and other funding sources available to SouthFirst and First Federal, will have no adverse impact on the operations of SouthFirst or First Federal (See "Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operation - Review of Financial Condition - Liquidity and Funding Sources," below). On April 17, 2002, the Company declared a regular dividend of $0.15 per share, payable on May 15, 2002 to stockholders of record on May 1, 2002. 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 ended March 31, 2002 increased $10,466, or 6.8%, and decreased for the six months ended March 31, 2002 by $71,648, or 21.6%, compared to the same periods in fiscal 2001. Net interest income, after the provision for loan losses for the three months and six months ended March 31, 2002, decreased $180,997, or 17.4%, and $323,564, or 15.3%, respectively, compared to the same periods in fiscal 2001. Non-interest income increased $349,199, or 61.9%, for the three month period ended March 31, 2002, and increased $404,115, or 35.7%, for the six-month period ended March 31, 2002, compared to the same periods in fiscal 2001. Non-interest expense increased $151,793, or 11.2%, for the three month period ended March 31, 2002, and increased $196,676, or 7.3%, for the six month period ended March 31, 2002, compared to the same periods in fiscal 2001. Primary earnings per common share, based on weighted average shares outstanding, was $.20 and $.17 for the three months ended March 31, 2002 and 2001, respectively, and $.31 and $.36 for the six months ended March 31, 2002 and 2001, 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, which is the difference between the interest rates on interest-earning assets and interest-bearing liabilities. As of March 31, 2002, the interest rate spread increased 1 basis point as rates earned on interest-earning assets decreased 148 basis points to 6.57%, while the cost of funds decreased 149 basis points to 3.80%, -8- compared to the same three month period in fiscal year 2001. The average balance of interest-earning assets decreased $13.8 million, or 9.8%, from $139.8 million to $126.0 million, while the average balance of interest-bearing liabilities decreased $13.2 million, or 9.5%, from $138.1 million to $124.9 million. The combined effect of the changes in average balances and the changes in these rates resulted in a decrease in the interest rate spread from 2.83% to 2.80%, and a decrease in net interest income of $105,901, or 10.7%, and $248,468, or 12.1%, for the three months and six months ended March 31, 2002, respectively, compared to the same period in 2001. NON-INTEREST INCOME For the six months ended March 31, 2002, total non-interest income increased $404,000 to approximately $1,535,000, compared to the six months ended March 31, 2001. Employee benefit consulting fees decreased approximately $16,000 as a result of decreased commission income from Pension and Benefit Trust Company. Other non-interest income increased approximately $420,000, compared to the same period in fiscal 2001. This increase in other income is a result of the net difference of approximately $197,000 between the cash value of life insurance and the present value of benefits at retirement date on deferred compensation agreements with certain key employees, and an increase in gains from the sale of investment securities of approximately $169,000, and an increase in the gain on sale of loans of approximately $45,000. For the three-month period ended March 31, 2002, total non-interest income increased by approximately $349,000 to $913,000, compared to the same period in fiscal 2001. This increase was primarily the result of an increase of $6,000 from service charges and other fees, an increase in gains from the sale of investment securities of approximately $170,000, and the net difference of approximately $197,000 between the cash value of life insurance and the present value of benefits at retirement date on deferred compensation agreements with certain key employees. However, employee benefit consulting fees decreased approximately $22,000, compared to the same period in fiscal 2001. NON-INTEREST EXPENSE Total non-interest expense, for the six months ended March 31, 2002, increased by approximately $197,000 to $2,892,000, compared to $2,695,000 for the six months ended March 31, 2001. The increase is primarily due to increases in compensation and benefits of $125,000, legal expenses of $36,000 and other expenses of approximately $55,000. These increases were partially offset by a decrease of $7,000 in expenses for fixed assets, and a decrease of approximately $20,000 in office supplies and expenses, compared to the same period in fiscal 2001. For the three month period ended March 31, 2002, total non-interest expense increased approximately $152,000 to $1,503,000, from $1,351,000 for the three-month period ended March 31, 2001. This increase resulted primarily from an increase in compensation and benefits of approximately $83,000 and an increase in legal expenses of approximately $37,000, while other expenses increased approximately $47,000. This increase encompasses an increase in fees of $10,000, with respect to home equity loans, an increase in insurance expenses of approximately $9,000, and an increase in miscellaneous operating expenses of approximately $15,000. INCOME TAXES The Company's effective tax rate for the three-month periods ended March 31, 2002 and 2001 was 39.1% and 38.8%, respectively, compared to the federal statutory rate of 34.0%. Income tax expense decreased approximately $44,000, or 20.9%, to $167,000, for the six months ended March 31, 2002, compared to $212,000 for the six months ended March 31, 2001, due to the decrease in pre-tax earnings. -9- 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.
At or for the three months ended March 31, --------------------------------- 2002 2001 ------ ------ Return on assets 0.46% 0.39% Return on equity 4.94% 4.03% Equity-to-assets ratio 9.28% 9.67% Interest rate spread 2.77% 2.76% Net interest margin 2.80% 2.83% Total risk-based capital ratio 17.96% 17.29% Non-performing loans to loans 1.71% 1.11% Allowance for loan losses to loans 1.68% 0.66% Allowance for loan losses to average non-performing loans 97.90% 59.52% Ratio of net charge-offs to average loans outstanding 0.00% 0.00% Book value per common share outstanding $16.64 $16.78
Significant factors affecting SouthFirst's financial condition during the six months ended March 31, 2002 are detailed below: ASSETS Total assets decreased $8,382,000, or 5.5%, from $151,194,000 at September 30, 2001 to $142,812,000 at March 31, 2002. Net loans decreased $11,952,000, or 11.8%, compared to September 30, 2001. This decrease was primarily due to the sale of loans to another financial institution in Dothan, Alabama, in the amount of $8,392,000, as a result of closing the Dothan loan production office as of February 28, 2002. Other decreases are due to seasonal changes in mortgage loan demand. LIABILITIES Total liabilities decreased approximately $7,414,000, or 5.4%, from $136,912,000 at September 30, 2001 to $129,498,000 at March 31, 2002. Deposits increased approximately $1,182,000 during the period, and borrowed funds decreased $8,000,000, while accrued expenses and other liabilities decreased approximately $121,000, compared to September 30, 2001. The increase in deposits was primarily attributable to a slowdown in deposit withdrawals as a result of favorable competitive rates offered. The decrease in borrowed funds is the result of the repayment of Federal Home Loan Bank advances in the amount of $7,000,000 and a repayment of $1,100,000 on an existing line of credit with Regions Bank. The decrease in accrued expenses is primarily the result of fluctuations in accounts payable balances. -10- LOAN QUALITY Key to long-term earnings growth is maintenance of a high-quality loan portfolio. SouthFirst's directives in this regard are carried out through appropriate policies and procedures with respect to reviewing loans. The purposes of such policies and procedures are to provide a sound basis for new credit extensions and to provide an early recognition of problem assets, to allow the greatest flexibility in their timely disposition. At March 31, 2002, the allowance for loan losses was $1,612,733, compared to $1,577,952 at September 30, 2001. This increase is primarily due to additional loan loss reserves recorded. SouthFirst recorded allowances for loan losses of $25,096 and $(50,000) in the six month periods ended March 31, 2002 and 2001, respectively. Non-performing loans at March 31, 2002 were approximately $1,647,000, compared to approximately $1,017,000 at September 30, 2001. At March 31, 2002 and September 30, 2001, the allowance for loan losses represented 1.62% and 1.52% of average loan balances, respectively. The allowances for loan losses are based upon management's continuing evaluation of the collectibility of the loan portfolio under current economic conditions, which includes analysis 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 the averages of specific loans, internal loan rating systems and guidelines provided by the banking regulatory authorities governing First Federal. INTEREST RATE SENSITIVITY Changes in interest rates will not necessarily lead to changes in the net interest margin. The Company's goal is 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. LIQUIDITY AND FUNDING SOURCES The Asset and Liability Committee of First Federal's board of directors monitors and manages the liquidity needs of the Company to ensure that there is sufficient cash flow to satisfy demand for credit and deposit withdrawals, to fund operations and to meet other Company obligations and commitments on a timely and cost effective basis. Under current regulations, First Federal is required to maintain sufficient liquidity to assure its safe and sound operation. The requirement to maintain a specific minimum amount of liquid assets, established by previous regulation, has been eliminated. Presently, there is no specific standard or guideline regarding the application of the current regulatory requirement. Under the previous regulation, First Federal was required to maintain an average daily balance of liquid assets, in each calendar quarter, of not less than 4% of (i) the amount of its liquidity base at the end of the preceding calendar quarter, or (ii) the average daily balance of its liquidity base during the preceding quarter. For purposes of this computation, liquid assets included specified short-term assets (e.g., cash, certain time deposits, certain banker's acceptances and short-term U.S. Government, state or federal agency obligations), and long-term assets (e.g., U. S. Government obligations of more than one and less than five years and state agency obligations maturing in two years or less). As of March 31, 2002, First Federal's average daily balance of liquid assets was approximately 36% of its December 31, 2001 liquidity base, far exceeding the 4% requirement set by the previous regulation. These liquid assets included approximately $8,600,000 in cash and cash equivalents, and approximately $27,500,000 in other qualifying assets. In addition, as of March 31, 2002, the fair market value of the -11- Company's investment securities portfolio, which is held for sale, was $32,361,472. The Company uses its investment securities portfolio to manage liquidity and interest rate risk, whereby liquidity is available through those securities that are not pledged. Further, cash flows from operations, resulting primarily from net income adjusted for certain items such as interest expense and provision for loan losses, are an additional source of liquidity for the Company. With respect to current funding sources, deposits provide a significant portion of the Company's cash flow needs and continue to provide a relatively stable, low cost source of funds. As of March 31, 2002, the amount of deposits was $100,237,692, which amount represented an increase of $1,182,112 from the amount of deposits at September 30, 2001. Other sources of funding used by the Company include commercial lines of credit and advances from the Federal Home Loan Bank of Atlanta (the "FHLBA"). As of March 31, 2002, the Company had a line of credit, based on prime, with Regions Bank in the amount of $4,000,000, which presently is scheduled to mature on June 1, 2002, and of which $2,355,000 has been borrowed and remains outstanding at this time. Further, as of April 15, 2002, First Federal's available line of credit from the FHLBA was changed from a variable amount, equal to 30% of total assets, or approximately $43,000,000 at March 31, 2002, to a fixed amount of $22,000,000. At March 31, 2002, First Federal owed the FHLBA $25,250,000 in outstanding advances. The FHLBA has notified First Federal that it will not require First Federal's existing borrowings to be reduced to the new fixed amount prior to the existing advance maturities, but that it will require that any additional borrowing by First Federal (in excess of $22,000,000 in the aggregate) be approved through application by First Federal to the FHLBA's Credit Committee. SouthFirst and First Federal currently are in discussions with other financial institutions with respect to obtaining additional funding sources for the Company. Management believes that the Company's significant liquidity and existing funding sources are more than adequate to ensure sufficient cash flow to satisfy demand for credit and any deposit withdrawals, to fund operations, and, otherwise, to meet other Company obligations and commitments on a timely and cost-effective basis. CAPITAL ADEQUACY AND RESOURCES Management is committed to maintaining First Federal's capital at a level that would be sufficient to protect depositors, provide for reasonable growth, and comply fully with all regulatory requirements. Management's strategy to meet this commitment 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, 2002, First Federal has satisfied all regulatory capital requirements. First Federal's compliance with the current standards is as follows:
Percent of Amount Asset Base ----------- ---------- Tangible capital $14,300,000 10.13% Core capital 14,300,000 10.13% Risk-based capital 15,149,000 17.96%
-12- 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. -13- SOUTHFIRST BANCSHARES, INC. AND SUBSIDIARIES 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. Nonetheless, a description of certain, previously-disclosed litigation against a former director follows: SouthFirst, in its earnings release on December 4, 2001, announced that First Federal had filed a complaint to recover the total amount of loss on a loan made to Vawter Properties and Resources, LP ("Vawter Properties"), an Alabama limited partnership whose general partner is Charles R. Vawter, Jr., a former director of SouthFirst and First Federal, and personal guarantor of the loan. SouthFirst previously disclosed the allegations contained in the complaint in its Form 8-K, as filed with the Securities and Exchange Commission on December 14, 2001. Mr. Vawter resigned his positions as director of, both, SouthFirst and First Federal, vice-chairman of the Board of First Federal and member of First Federal's loan committee, on August 13, 2001. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION 10.17 Supervisory Agreement dated March 22, 2002, by and between First Federal of the South and the Office of Thrift Supervision (hereby incorporated by Reference from the Company's Form 8-K, filed on March 29, 2002)
(b) Reports on Form 8-K. On March 29, 2002, the Company filed a report on Form 8-K to report, under Item 5 (Other Events), that First Federal had entered into a Supervisory Agreement with the Office of Thrift Supervision. The Supervisory Agreement and a related press release were filed with such report as Exhibit 99.1 and Exhibit 99.2, respectively. -14- 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, 2002 By: /s/ Joe K. McArthur ------------------------------------ Joe K. McArthur Chief Executive Officer (principal executive officer) Date: May 14, 2002 By: /s/ Janice Browning ------------------------------------ Janice Browning Controller, Treasurer (principal accounting officer) -15- -----END PRIVACY-ENHANCED MESSAGE-----