SouthFirst Bancshares (SZBI) 10QSB 2003 Q3 Quarterly report (small business)

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 umber
June 30, 2003	1-13640

SOUTHFIRST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Delaware	63-1121255
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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       

State 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	716,044 shares
Class	Outstanding at July 31, 2003

Transitional Small Business Disclosure Format:    Yes           No   X   

SOUTHFIRST BANCSHARES, INC.

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)			1
	Consolidated Statements of Financial Condition at June 30, 2003 (Unaudited) and September 30, 2002		1
	Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended June 30, 2003 and 2002		2
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended June 30, 2003		3
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended June 30, 2003 and 2002		4-5
	Notes to Consolidated Financial Statements (Unaudited) — June 30, 2003 and 2002		6-9
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			10-15
Item 3: Controls and Procedures			15
PART II — OTHER INFORMATION			16
Item 1: Legal Proceedings			16
Item 6: Exhibits and Reports on Form 8-K			16
SIGNATURES			16
CERTIFICATIONS			17-18

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

PART 1: FINANCIAL INFORMATION

Item 1: Financial Statements

Consolidated Statements of Financial Condition
June 30, 2003 (Unaudited) and September 30, 2002

					June 30,			September 30,
					2003			2002
					(Unaudited)
Assets
Cash and cash equivalents					$	7,024,079		$	8,122,898
Interest-bearing deposits in other financial institutions						524,277			883,262
Investment securities available-for-sale, at fair value						29,344,262			26,768,039
Loans receivable						91,036,022			93,838,835
Less allowance for loan losses						(947,637	)		(854,013	)
	Net loans					90,088,385			92,984,822
Loans held for sale at cost (which approximates fair value)						4,050,920			2,292,400
Foreclosed assets, net						595,759			79,983
Premises and equipment, net						4,343,986			4,867,235
Federal Home Loan Bank stock, at cost						1,117,000			2,229,800
Accrued interest receivable						609,897			734,168
Other assets						2,628,431			2,652,237
	Total Assets				$	140,326,996		$	141,614,844
Liabilities And Stockholders’ Equity
Liabilities:
	Deposits:
		Non-interest bearing			$	5,114,702		$	2,849,970
		Interest bearing				95,135,675			93,633,292
				Total deposits		100,250,377			96,483,262
	Advances by borrowers for property taxes and insurance					214,320			276,909
	Accrued interest payable					745,690			825,850
	Borrowed funds					25,657,861			29,057,611
	Accrued expenses and other liabilities					958,708			1,092,829
			Total liabilities			127,826,956			127,736,461
Stockholders’ Equity:
	Common stock, $.01 par value, 2,000,000 shares authorized, 989,868 shares issued and 710,711shares outstanding at June 30, 2003; 989,868 shares issued and 800,911 shares outstanding at September 30, 2002					9,996			9,996
	Additional paid-in capital					9,819,676			9,819,676
	Treasury stock, at cost (273,774 shares at June 30, 2003; 183,574 shares at September 30, 2002)					(3,719,761	)		(2,407,231	)
	Deferred compensation on common stock employee benefit plans					(252,156	)		(324,060	)
	Shares held in trust at cost (9,775 shares at June 30, 2003 and September 30, 2002)					(107,161	)		(107,161	)
	Retained earnings					6,314,799			6,457,443
	Accumulated comprehensive other income					434,647			429,720
			Total stockholders’ equity			12,500,040			13,878,383
			Total Liabilities and Stockholders’ Equity		$	140,326,996		$	141,614,844

See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended June 30, 2003 and 2002

				Nine Months Ended					Three Months Ended
				June 30,					June 30,
				2003		2002			2003		2002
Interest and dividend income:
	Interest and fees on loans			$	4,496,951	$	5,181,512		$	1,451,490	$	1,577,904
	Interest income on deposits in other financial institutions				77,650		76,810			20,372		23,624
	Interest and dividend income on investment securities				984,759		1,198,086			341,068		463,184
			Total interest and dividend income		5,559,360		6,456,408			1,812,930		2,064,712
Interest expense:
	Interest on deposits				1,999,088		2,732,073			610,036		795,882
	Interest on borrowed funds				759,978		959,185			254,281		313,297
		Total interest expense			2,759,066		3,691,258			864,317		1,109,179
		Net interest income			2,800,294		2,765,150			948,613		955,533
Provision for loan losses (benefit)					118,451		(363,266	)		29,488		(388,362	)
		Net interest income after provision for loan losses			2,681,843		3,128,416			919,125		1,343,895
Other income:
	Service charges and other fees				405,890		320,873			149,536		96,760
	Employee benefit trust and consulting fees				866,438		869,731			326,225		310,883
	Gain on sale of loans				872,409		343,398			329,291		121,084
	Gain (loss) on sale of foreclosed assets				5,700		(14,606	)		22,595		(18,780	)
	Gain (loss) on sale of equipment				13,890		(4,180	)		2,725		—
	Gain (loss) on sale of investment securities available-for-sale				236,150		163,757			2,412		(6,423	)
	Other				268,981		483,257			94,840		123,923
		Total other income			2,669,458		2,162,230			927,624		627,447
Other expenses:
	Compensation and benefits				3,138,281		2,641,554			1,056,364		947,127
	Net occupancy expense				295,654		261,955			95,139		88,714
	Furniture and fixtures				340,043		340,348			109,426		115,495
	Data processing				202,165		241,338			58,380		75,709
	Office supplies and expense				328,303		301,735			113,430		102,958
	Deposit insurance premiums				82,028		57,866			27,163		21,069
	Goodwill amortization				—		40,459			—		13,485
	Legal				126,350		309,067			66,350		217,883
	Other				510,772		444,144			195,378		164,453
		Total other expenses			5,023,596		4,638,466			1,721,630		1,746,893
		Income before income taxes			327,705		652,180			125,119		224,449
Income tax expense					124,597		248,295			47,485		80,971
		Net income		$	203,108	$	403,885		$	77,634	$	143,478
Earnings per share:
	Basic				0.27		0.49			0.11		0.18
	Diluted				0.26		0.49			0.11		0.18
Cash dividends declared					0.45		0.45			0.15		0.15
Weighted average shares outstanding:
	Basic				752,700		822,420			711,819		799,824
	Diluted				767,263		825,397			727,766		805,971

See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
for the Nine Months Ended June 30, 2003

									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, 2002		$	9,996	$	9,819,676	$	(2,407,231	)	$	(324,060	)	$	(107,161	)	$	6,457,443		$	429,720	$	13,878,383
Comprehensive income:
	Net income															203,108					203,108
Change in net unrealized gain on available-for-sale securities, net of reclassi- fication adjustments and income taxes of $3,019																			4,927		4,927
Total comprehensive income (loss)																					208,035
Vesting of deferred compensation shares										71,904											71,904
Acquisition of Treasury stock							(1,312,530	)													(1,312,530	)
Cash dividends declared																(345,752	)				(345,752	)
Balance at June 30, 2003		$	9,996	$	9,819,676	$	(3,719,761	)	$	(252,156	)	$	(107,161	)	$	6,314,799		$	434,647	$	12,500,040

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended June 30, 2003 and 2002

				2003			2002
Operating activities:
	Net income			$	203,108		$	403,885
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses			118,451			(363,266	)
		Depreciation and amortization			255,712			259,911
		Gain on sale of securities			(236,150	)		(163,757	)
		Gain on sale of loans			(872,409	)		(343,398	)
		Decrease in deferred loan origination fees			(2,125	)		(42,604	)
		Net amortization of premium on investment securities available-for-sale			(9,818	)		(80,301	)
		(Gain) loss on sale of other property owned			(13,890	)		4,180
		(Gain) loss on sale of foreclosed assets			(5,700	)		14,606
		Loans originated for sale			(41,732,909	)		(15,926,891	)
		Proceeds from sale of loans			40,846,799			15,529,219
		Decrease in accrued interest receivable			124,271			182,675
		(Increase) decrease in other assets			23,806			(987,897	)
		Deferred compensation expense			71,904			71,942
		Decrease in accrued interest payable			(80,160	)		(338,886	)
		Increase (decrease) in accrued expenses and other liabilities			(137,140	)		309,538
			Net cash used in operating activities		(1,446,250	)		(1,471,044	)
Investing activities:
	Net change in interest-bearing deposits in other financial institutions				358,985			(126,191	)
	Proceeds from calls and maturities of investment securities available-for-sale				14,981,500			2,628,272
	Purchase of investment securities available-for-sale				(23,713,384	)		(14,642,587	)
	Proceeds from sale of investment securities available-for-sale				6,409,574			13,789,733
	Proceeds from sale of Federal Home Loan Bank stock				1,112,800			—
	Net decrease in loans				2,780,111			11,146,364
	Purchase of premises and equipment				(170,631	)		(376,863	)
	Proceeds from sale of foreclosed real estate				267,386			214,413
	Proceeds from sale of other assets				452,059			6,200
	Transfer from loans of real estate owned property				(780,364	)		(356,416	)
	Transfer from loans of other repossessed assets				2,901			(19,878	)
		Net cash provided by investment activities			1,700,937			12,263,047

(Continued)

See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended June 30, 2003 and 2002

			2003			2002
Financing activities:
	Increase (decrease) in deposits		$	3,767,115		$	(1,111,895	)
	Proceeds from borrowed funds			4,589,000			16,923,861
	Repayment of borrowed funds			(7,988,750	)		(26,115,000	)
	Cash dividends paid			(345,752	)		(375,595	)
	Acquisition of treasury stock			(1,312,530	)		(700,600	)
	Increase (decrease) in advances by borrowers for property taxes and insurance			(62,589	)		(136,612	)
		Net cash used in financing activities		(1,353,506	)		(11,515,841	)
Increase (decrease) in cash and cash equivalents				(1,098,819	)		(723,838	)
Cash and cash equivalents at beginning of period				8,122,898			6,020,186
Cash and cash equivalents at end of period			$	7,024,079		$	5,296,348
Supplemental information on cash payments:
	Interest paid		$	2,839,226		$	4,030,144
	Income taxes paid		$	185,375		$	130,719
Supplemental information on non-cash transactions:
	Change in net unrealized gain on investment securities available-for-sale		$	4,927		$	49,857
	Real estate obtained through foreclosure		$	780,364		$	356,416

     See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)
June 30, 2003 and 2002

(1)	Basis of Presentation
	Information filed on this Form 10-QSB as of and for the quarter ended June 30, 2003, 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 nine month periods ended June 30, 2003 and 2002. 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 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS 142),Goodwill and Other Intangible Assets. Statement 142 provides guidance for the amortization of goodwill arising from the use of the purchase method to account for business combinations. Goodwill arising from purchase business combinations completed after June 30, 2001 will not be amortized. The accounting for goodwill and other intangible assets required under Statement 142 is effective for the fiscal year beginning October 1, 2002.
	The following table illustrates the impact of the adoption of SFAS 142:

		Nine Months Ended				Three Months Ended
		June 30,				June 30,
		2003		2002		2003		2002
Net income		$	203,108	$	403,885	$	77,634	$	143,478
Add back: excess purchase price amortization (net of taxes of $15,374 for 9 months and $5,124 for 3 months)			—		25,085		—		8,361
Net income as adjusted for the adoption of SFAS 142		$	203,108	$	428,970	$	77,634	$	151,839
Per share:
	Net income		.27		.49		.11		.18
	Net income — diluted		.26		.49		.11		.18
	Net income, as adjusted for the adoption of SFAS 142		.27		.52		.11		.19
	Net income — diluted, as adjusted for the adoption of SFAS 142		.26		.52		.11		.19

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(3)	Stock-Based Compensation Plans
	During 1995, the Company adopted a Stock Option and Incentive Plan for directors and key employees of the Company. The exercise price cannot be less than the market price on the grant date and number of shares available for options cannot exceed 83,000. Stock appreciation rights may also be granted under the plan. During 1998, the Company adopted the 1998 Stock Option & Incentive Plan for directors and key employees of the Company. Under the 1998 plan, options to acquire 63,361 shares had been granted. The term of the options range from seven to ten years and they vest equally over periods from three to five years.
	Following is a summary of the status of the 1995 and 1998 plans:

	1995 Plan				1998 Plan
	Number		Weighted Average		Number			Weighted Average
	of Shares		Exercise Price		of Shares			Exercise Price
Outstanding at September 30, 2002		45,311	$	12.59		47,088		$	13.69
Granted		28,389		12.10		16,211			12.10
Forfeited		—		—		(1,328	)		9.75
Outstanding at June 30, 2003		73,700	$	12.40		61,971		$	13.36

Information pertaining to options outstanding at June 30, 2003 is as follows:

					Options Outstanding			Options Exercisable
					Weighted Average
					Remaining	Weighted Average				Weighted Average
Exercise Price			Number Outstanding		Contractual Life	Exercise Price		Number Exercisable		Exercise Price
		$9.75		21,237	4.35 years				14,159
		$9.92		9,000	8.42 years				1,800
	$12.10			44,600	9.30 years				—
	$14.00			29,880	2.18 years				29,880
	$15.75			30,954	4.58 years				30,954
Outstanding at June 30, 2003				135,671	5.82 years	$	12.84		76,793	$	13.83

The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation.

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		Nine Months Ended						Three Months Ended
		June 30,						June 30,
		2003			2002			2003			2002
Net income, as reported		$	203,108		$	403,885		$	77,634		$	143,478
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(6,104	)		(8,114	)		(2,035	)		(2,705	)
Pro forma net income		$	197,004		$	395,771		$	75,599		$	140,773
Earnings per share:
	Basic — as reported		.27			.49			.11			.18
	Basic — pro forma		.26			.48			.11			.18
	Diluted — as reported		.26			.49			.11			.18
	Diluted — pro forma		.26			.48			.10			.17

Because the SFAS No. 123 method of accounting has not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation costs may not be representative of that to be expected in future years.

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2003
Dividend yield		5.10
Expected life		8.90
Expected volatility		8.16
Risk-free interest rate		4.89

(4)	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 included under Exhibit 99.1 of the Annual Report on Form 10-KSB. The following table presents financial information for each reportable segment:

-8-

	Nine Months Ended June 30, 2003						Nine Months Ended June 30, 2002
			Employee							Employee
	Banking		Benefits				Banking			Benefits
	Activities		Activities		Total		Activities			Activities		Total
Interest and dividend income	$	5,543,858	$	15,502	$	5,559,360	$	6,422,751		$	33,657	$	6,456,408
Interest expenses		2,759,066		—		2,759,066		3,691,258			—		3,691,258
Net interest income		2,784,792		15,502		2,800,294		2,731,493			33,657		2,765,150
Provision for loan losses (benefit)		118,451		—		118,451		(363,266	)		—		(363,266	)
Net interest income after provision for loan losses		2,666,341		15,502		2,681,843		3,094,759			33,657		3,128,416
Other income		1,794,020		875,438		2,669,458		1,293,378			868,852		2,162,230
Other expenses		4,212,629		810,967		5,023,596		3,821,998			816,468		4,638,466
Income before income taxes		247,732		79,973		327,705		566,139			86,041		652,180
Income taxes		94,199		30,398		124,597		215,420			32,875		248,295
Net income	$	153,533	$	49,575	$	203,108	$	350,719		$	53,166	$	403,885

	There have been no differences 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.
(5)	Contingencies and Subsequent Event
	On July 31, 2003, the Company declared a regular $0.15 per share cash dividend on the Company’s outstanding stock, payable on August 15, 2003, to stockholders of record as of August 6, 2003.
	On June 4, 2003, the Company entered into an agreement with First Financial Bank of Bessemer, Alabama to sell certain assets and certain related liabilities of its Centreville, Alabama branch. The transaction is subject to regulatory approvals and is expected to occur in September 2003. The closing of the transaction is expected to result in an estimated pre-tax gain of approximately $260,000. The transaction will include the sale of approximately $8.7 million of deposits and approximately $6.2 million in commercial, mortgage and consumer loans.

-9-

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

REVIEW OF RESULTS OF OPERATIONS

Overview

Net income for the three months ended June 30, 2003 decreased $65,844, or 45.9%, and decreased for the nine months ended June 30, 2003 by $200,777, or 49.7%, compared to the same periods in fiscal 2002. Net interest income, after the provision for loan losses for the three months ended June 30, 2003 decreased $424,770, or 31.6%, and decreased $446,573, or 14.3%, for the nine-month period ended June 30, 2003 compared to the same periods in fiscal 2002. Non interest income increased $300,177, or 47.8%, for the three-month period ended June 30, 2003, and increased $507,228, or 23.5%, for the nine-month period ended June 30, 2003, when compared to the same periods in fiscal 2002. Non-interest expense decreased $25,263, or 1.4%, for the three-month period ended June 30, 2003 and increased $385,130, or 8.3%, for the nine-month period ended June 30, 2003, compared to the same periods in fiscal 2002.

Primary earnings per common share, based on weighted average shares outstanding was $.11 and $.18 for the three months ended June 30, 2003 and 2002, respectively, and $.27 and $.49 for the nine months ended June 30, 2003 and 2002, 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 June 30, 2003, the interest rate spread increased 10 basis points as rates earned on interest-earning assets decreased 64 basis points to 5.89% while the cost of funds decreased 74 basis points to 2.87% compared to the same three-month period ending June 30, 2002. The decrease in rates paid and the decrease in rates received during this three-month interval reflects the downward trend in the repricing of higher yielding certificates of deposit, as well as a downward trend of the overall interest rate environment. While the cost of funds has been steadily decreasing over the past several months, interest rates on consumer loans, construction loans and mortgages have also decreased. The average balance of interest-earning assets decreased $3.2 million, or 2.5%, from $126.4 million to $123.2 million while the average balance of interest-bearing liabilities decreased $2.2 million, or 1.8%, from $122.8 million to $120.6 million. The combined effect of the decreases in average balances and the changes in rates discussed above resulted in a decrease in net interest income of approximately $6,920, or 0.7%, and an increase in the interest rate spread from 2.92% to 3.02% for the three months ended June 30, 2003, respectively, compared to the same period in 2002.

Provision for Loan Losses

The provision for loan losses reflects an expense in the amount of $118,451 for the nine-month period ending June 30, 2003. This increase is the result of additional reserves required to cover certain asset quality concerns within the construction loan portfolio. The provision for 2002 reflects a benefit resulting from the reclassification of a loan from “loss” to “doubtful” related to a settlement agreement reached with a former director as previously disclosed.

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Other Income

Total other income for the nine months ended June 30, 2003, increased approximately $507,000 to $2,669,000 compared to $2,162,000 for the nine months ended June 30, 2002. A portion of the increase in total non-interest income was attributable to an increase of approximately $529,000 in gains on sales of loans, an increase of approximately $72,000 in gains on sale of investment securities available-for-sale, and an increase in service charges and other fees of approximately $85,000 during the first nine months of fiscal 2003. These increases are partially offset by a decrease in other income which is the result of recording a one-time gain 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 during March 2002. Fee income generated from employee benefit trust and consulting remained approximately the same at $870,000 between the two periods. The gain from the sale of repossessed assets increased approximately $20,000 during the nine-month period ending June 30, 2003.

For the three-month period ended June 30, 2003, total non-interest income increased by approximately $300,000 to $927,000, compared to the same period in fiscal 2002. This increase was primarily the result of an increase of approximately $208,000 in gains on sales of loans, an increase of approximately $53,000 in service charges and other fees, an increase in fee income generated from employee benefit trust and consulting of approximately $15,000 and an increase in the gain from sale of repossessed assets of approximately $42,000. These increases are partially offset by a decrease in other income of approximately $29,000.

Other Expense

Total other expense for the nine months ended June 30, 2003, increased by approximately $386,000 to $5,024,000 as compared to $4,638,000 for the nine months ended June 30, 2002. The changes in other non-interest expense is attributable to an increase in compensation and benefits of approximately $497,000, and an increase in other occupancy expenses of approximately $34,000. Increases also occurred in deposit insurance premiums, office supplies and expenses, and other expenses of approximately $24,000, $27,000 and $67,000, respectively. These increases in expenses are partially offset by a decrease in data processing fees, goodwill amortization expenses and legal expenses of $39,000, $40,000 and $183,000, respectively, as compared to the nine-month period ending June 30, 2002.

For the three-month period ended June 30, 2003, total non-interest expense decreased approximately $25,000 to $1,722,000 from $1,747,000 for the three-month period ended June 30, 2002. This decrease resulted primarily from a decrease in legal expenses of approximately $152,000, a decrease in data processing fees of approximately $17,000, and a decrease in goodwill amortization expenses of approximately $13,000. These decreases in expenses are partially offset by increases in compensation and benefit expense, office supplies and expenses, deposit insurance premiums and other expenses of approximately $109,000, $10,000, $6,000 and $31,000, respectively.

Income Taxes

The Company’s effective tax rate for the nine-month periods ended June 30, 2003 and 2002 was 38.0% and 38.1%, 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 $124,000, or 49.8%, to $124,000 for the nine months ended June 30, 2003, as compared to $248,000 for the nine months ended June 30, 2002, due to the decrease in pre-tax earnings.

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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 June 30,
	2003			2002
Return on Assets		0.22	%		0.41	%
Return on Equity		2.48	%		4.25	%
Equity to Asset Ratio		8.99	%		9.54	%
Interest Rate Spread		3.02	%		2.92	%
Net interest margin		3.08	%		3.02	%
Total Risk based capital		15.90	%		16.62	%
Non-Performing Loans to Loans		0.49	%		1.45	%
Allowance for Loan Losses to Loans		1.00	%		1.33	%
Allowance for Loan Losses to average non-performing loans		205.20	%		92.10	%
Ratio of Net charge offs to average loans outstanding		0.03	%		(0.29	)%
Book value per common share outstanding	$	17.59		$	16.87

Significant factors affecting SouthFirst’s financial condition during the three months ended June 30, 2003 are detailed below:

Assets

Total assets decreased approximately $1,288,000, or 0.9%, from $141,615,000 at September 30, 2002 to $140,327,000 at June 30, 2003. Net loans decreased approximately $2,896,000, or 3.1%. This decrease occurred primarily in residential construction loans, which is a result of the limitations placed on construction lending by the Office of Thrift Supervision (OTS), as outlined in the Supervisory Agreement entered into between OTS and the Bank as of March 22, 2002. Other significant changes in assets occurring included a decrease in cash and amounts due from banks of approximately $1,099,000, and a decrease in Federal Home Loan Bank stock of approximately $1,113,000. Investment securities held for sale increased approximately $2,576,000, while loans held for sale and foreclosed assets increased approximately $1,758,000 and $516,000, respectively.

Liabilities

Total liabilities increased approximately $90,000, or .07%, from just over $127,736,000 at September 30, 2002 to just under $127,827,000 at June 30, 2003. Deposits increased approximately $3,767,000 during the period, which represents an increase in certificates of deposit of approximately $0.5 million and an increase in checking and other savings accounts of approximately $3.3 million. Borrowed funds decreased approximately $3,400,000, which represents the repayment of short-term daily rate credit advances with the Federal Home Loan Bank (FHLB) of $2.0 million, and the repayment of short-term reverse repurchase agreements with Morgan Keegan and Company of approximately $2.5 million. The decrease in borrowed funds is partially offset by an increase in the balance in an existing line of credit with First Commercial Bank of approximately $1,100,000.

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Loan Quality

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 greatest flexibility in their timely disposition.

At June 30, 2003, the allowance for loan losses was $947,637, compared to $854,013 at September 30, 2002. This increase is due primarily to an additional provision in the amount of $118,451. (See “Allowance for Loan Losses”, above). Non-performing loans at June 30, 2003 were approximately $462,000 as compared to approximately $764,000 at September 30, 2002. At June 30, 2003 and September 30, 2002, the allowance for loan losses represented 1.00% and 0.88% of average loan balances, respectively. The allowance for loan losses is based upon management’s continuing evaluation of the collectibility of the loan portfolio under current economic conditions and includes 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.

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 June 30, 2003, First Federal’s average daily balance of liquid assets was approximately 28% of its March 31, 2003 liquidity base, far exceeding the 4% requirement set by the previous regulation. These liquid assets included approximately $6,513,000 in cash and cash equivalents, and approximately $27,810,000 in other qualifying assets. In addition, as of June 30, 2003, the fair market value of the company’s investment securities portfolio, which is held for sale, was $29,344,000. 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 loss, 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 June 30, 2003, the amount of deposits was $100,250,000, which represents an increase of 3,767,000 from the amount of deposits at September 30, 2002.

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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 June 30, 2003, the Company had a line of credit, based on prime, with First Commercial Bank in the amount of $2,500,000, which presently is scheduled to mature on June 1, 2004, and of which there is an outstanding balance at June 30, 2003 of approximately $1,818,000. At June 30, 2003, the Company had outstanding balances with the FHLBA of approximately $22,340,000 in the aggregate.

First Federal also has short-term borrowings through reverse repurchase agreements with Morgan Keegan & Co. As of June 30, 2003, the balance outstanding was $1,500,000.

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 core capital of 4.0% of adjusted total assets, and a minimum risk-based capital of 8.0% of risk-weighted assets. First Federal has satisfied its capital requirements primarily through the retention of earnings.

As of June 30, 2003, 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	$	13,335,000		9.60	%
Core capital		13,335,000		9.60	%
Tier-based capital		13,966,000		15.90	%

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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Item 3: Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Controller (principal financial officer) evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report). Based on such evaluation, the Company’s Chief Executive Officer and Controller have concluded that , as of the end of such period, the Company’s disclosure controls and procedures are effective.

There have not been any significant changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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.

Item 6: Exhibits and Reports on Form 8-K

(a)  Exhibits. The Following Exhibits are filed with this report.

Exhibit Number	Description
31.1	Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2003.
31.2	Certificate of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2003.
32.1	Certificate of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 13, 2003.

     The certificate listed as Exhibit 32.1 is being furnished pursuant to interim guidance issued by the Securities and Exchange Commission in Release No. 33-8212 and shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liability of such section, nor shall such certificates be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of the general incorporation language of such filings, except as shall be expressly set forth by specific reference in such filing.

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 13, 2003	By: /s/ Joe K. McArthur
	Joe K. McArthur, President and Chief Executive Officer
	(principal executive officer)
Date: August 13, 2003	By: /s/ Janice Browning
	Janice Browning
	Controller and Treasurer
	(principal accounting officer)

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Exhibit Index

Exhibit No.	Description of Exhibit
31.1	Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2003.
31.2	Certificate of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2003.
32.1	Certificate of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 13, 2003.

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