SouthFirst Bancshares (SZBI) 10QSB 2004 Q1 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
	Number
December 31, 2003	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.

[X] Yes [  ] No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Exchange Act).

[  ] 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	709,083 shares
	Outstanding at February 2, 2003
Class

Transitional Small Business Disclosure Format [  ] Yes [X] No

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
	Item 1: Financial Statements
		Consolidated Statements of Financial Condition
		Consolidated Statements of Operations
		Consolidated Statements of Changes in Stockholders’ Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3: Controls and Procedures
PART II. OTHER INFORMATION
	Item 1: Legal Proceedings
	Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO & CFO

SOUTHFIRST BANCSHARES, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)		1
	Consolidated Statements of Financial Condition at December 31, 2003 (Unaudited) and September 30, 2002	1
	Consolidated Statements of Operations (Unaudited) for the Three Months Ended December 31, 2003 and 2002	2
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended December 31, 2003	3
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended December 31, 2003 and 2002	4-5
	Notes to Consolidated Financial Statements (Unaudited) - December 31, 2003	6-8
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		9-13
Item 3: Controls and Procedures		13
PART II - OTHER INFORMATION		14
Item 1: Legal Proceedings		14
Item 6: Exhibits and Reports on Form 8-K		14
SIGNATURES		15
CERTIFICATIONS		16-19

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Consolidated Statements of Financial Condition
December 31, 2003 (Unaudited) and September 30, 2003

					December 30,			September 30,
					2003			2003
					(Unaudited)
				Assets
Cash and cash equivalents					$	3,794,964		$	6,049,325
Interest-bearing deposits in other financial institutions						546,519			533,003
Investment securities available-for-sale, at fair value						31,525,658			32,599,988
Loans receivable						88,813,323			85,573,736
Less allowance for loan losses						(1,194,196	)		(1,191,033	)
	Net loans					87,619,127			84,382,703
Loans held for sale at cost (which approximates fair value)						749,240			1,107,805
Foreclosed assets, net						50,156			77,680
Premises and equipment, net						4,445,138			4,298,889
Federal Home Loan Bank stock, at cost						1,117,000			1,117,000
Goodwill						543,706			543,706
Accrued interest receivable						771,827			679,402
Other assets						2,014,449			2,264,952
	Total Assets				$	133,177,784		$	133,654,453
				Liabilities And Stockholders’ Equity
Liabilities:
	Deposits:
		Non-interest bearing			$	3,195,937		$	3,657,079
		Interest bearing				87,413,800			89,900,902
				Total deposits		90,609,737			93,557,981
	Advances by borrowers for property taxes and insurance					119,730			213,042
	Accrued interest payable					542,305			576,676
	Borrowed funds					29,708,261			27,000,861
	Accrued expenses and other liabilities					534,235			628,522
				Total liabilities		121,514,268			121,977,082
Stockholders’ Equity:
	Common stock, $.01 par value, 2,000,000 shares authorized, 990,284 shares issued and 709,122 shares outstanding at December 31, 2003; 989,868 shares issued and 713,944 shares outstanding at September 30, 2003					10,000			9,996
	Additional paid-in capital					9,843,959			9,837,058
	Treasury stock, at cost (281,162 shares at December 31, 2003; 275,924 shares at September 30, 2003)					(3,892,879	)		(3,809,839	)
	Deferred compensation on common stock employee benefit plans					(177,241	)		(183,179	)
	Shares held in trust at cost (9,775 shares at December 31, 2003 and September 30, 2003)					(107,161	)		(107,161	)
	Retained earnings					6,145,582			6,148,255
	Accumulated comprehensive other income (loss)					(158,744	)		(217,759	)
			Total stockholders’ equity			11,663,516			11,677,371
			Total Liabilities and Stockholders’ Equity		$	133,177,784		$	133,654,453

See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)
for the Three Months Ended December 31, 2003 and 2002

			2003			2002
Interest and dividend income:
	Interest and fees on loans		$	1,339,578		$	1,554,040
	Interest income on deposits in other financial institutions			7,455			30,128
	Interest and dividend income on investment securities			439,030			337,649
		Total interest and dividend income		1,786,063			1,921,817
Interest expense:
	Interest on deposits			430,658			744,685
	Interest on borrowed funds			268,993			256,625
		Total interest expense		699,651			1,001,310
		Net interest income		1,086,412			920,507
Provision for loan losses				—			75,000
		Net interest income after provision for loan losses		1,086,412			845,507
Other income:
	Service charges and other fees			130,584			134,440
	Employee benefit trust and consulting fees			329,013			285,591
	Gain on sale of loans			136,869			295,536
	Gain (loss) on sale of foreclosed assets			(1,535	)		(1,895	)
	Gain (loss) on sale of equipment			927			11,165
	Gain (loss) on sale of investment securities available-for-sale			—			131,644
	Other			91,706			56,214
		Total other income		687,564			912,695
Other expenses:
	Compensation and benefits			1,015,464			1,032,977
	Net occupancy expense			89,794			92,236
	Furniture and fixtures			111,294			119,232
	Data processing			57,376			75,846
	Office supplies and expense			101,746			104,033
	Deposit insurance premiums			24,394			27,555
	Legal			33,750			30,000
	Other			173,011			134,422
		Total other expenses		1,606,829			1,616,301
		Income before income taxes		167,147			141,901
Income tax expense				63,578			54,407
		Net income	$	103,569		$	87,494
Earnings per share:
	Basic			0.15			0.11
	Diluted			0.14			0.11
Cash dividends declared				0.15			0.15
Weighted average shares outstanding:
	Basic			709,234			799,533
	Diluted			739,521			807,215

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 Three Months Ended December 31, 2003

									Deferred
									Compensation
									on Common									Accumulated
				Additional					Stock			Shares						Other			Total
		Common		Paid-in		Treasury			Employee			Held in			Retained			Comprehensive			Stockholders’
		Stock		Capital		Stock			Benefit Plans			Trust			Earnings			Income (Loss)			Equity
Balance at September 30, 2003		$	9,996	$	9,837,058	$	(3,809,839	)	$	(183,179	)	$	(107,161	)	$	6,148,255		$	(217,759	)	$	11,677,371
Comprehensive income:
	Net income															103,569						103,569
Change in net unrealized gain on available-for-sale securities, net of reclassification adjustments and income taxes of $36,173																			59,015			59,015
Total comprehensive income																						162,584
Vesting of deferred compensation shares										5,938												5,938
Acquisition of treasury stock							(83,040	)														(83,040	)
Stock options exercised			4		6,901																	6,905
Cash dividends declared																(106,242	)					(106,242	)
Balance at December 31, 2003		$	10,000	$	9,843,959	$	(3,892,879	)	$	(177,241	)	$	(107,161	)	$	6,145,582		$	(158,744	)	$	11,663,516

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended December 31, 2003 and 2002

				2003			2002
Operating activities:
	Net income			$	103,569		$	87,494
	Adjustments to reconcile net income to net cash provided (used) by operating activities:
		Provision for loan losses			—			75,000
		Depreciation and amortization			75,589			91,138
		Gain on sale of securities			—			(131,644	)
		Gain on sale of loans			(136,869	)		(295,536	)
		Increase (decrease) in deferred loan origination fees			7,372			(42,604	)
		Net amortization of premium/discount on investment securities available-for-sale			2,684			(9,125	)
		Loss on sale of foreclosed assets			1,535			1,895
		Gain on sale of premises and equipment			(927	)		(11,165	)
		Loans originated for sale			(6,153,127	)		(14,047,780	)
		Proceeds from sale of loans			6,648,561			13,563,544
		(Increase) decrease in accrued interest receivable			(92,425	)		126,298
		(Increase) decrease in other assets			250,503			263,146
		Deferred compensation expense			5,938			23,939
		Increase (decrease) in accrued interest payable			(34,371	)		(4,546	)
		Increase (decrease) in accrued expenses and other liabilities			(130,466	)		(100,044	)
			Net cash provided (used) by operating activities		547,566			(409,990	)
Investing activities:
	Net change in interest-bearing deposits in other financial institutions				(13,516	)		8,179
	Proceeds from calls and maturities of investment securities available-for-sale				1,266,840			2,629,011
	Purchase of investment securities available-for-sale				(100,000	)		(5,544,884	)
	Proceeds from sale of investments available-for-sale				—			3,438,105
	Proceeds from sale of Federal Home Loan Bank stock				—			862,800
	Net (increase) decrease in loans				(3,243,796	)		1,671,453
	Purchase of premises and equipment				(231,287	)		(20,522	)
	Proceeds from sale of foreclosed assets				37,282			2,249
	Proceeds from sale of other assets				10,376			193,118
	Transfer from loans of repossessed assets				(11,293	)		(437,791	)
			Net cash provided (used) by investing activities		(2,285,394	)		2,801,718

(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 Three Months Ended December 31, 2003 and 2002

			2003			2002
Financing activities:
	Increase (decrease) in deposits		$	(2,948,244	)	$	1,607,497
	Decrease in advances by borrowers for property taxes and insurance			(93,312	)		(105,915	)
	Proceeds from borrowed funds			18,416,689			125,000
	Repayment of borrowed funds			(15,709,289	)		(6,018,750	)
	Cash dividends paid			(106,242	)		(121,075	)
	Proceeds from exercise of stock options			6,905			—
	Acquisition of Treasury shares			(83,040	)		(37,560	)
		Net cash used in financing activities		(516,533	)		(4,550,803	)
Increase (decrease) in cash and cash equivalents				(2,254,361	)		(2,159,075	)
Cash and cash equivalents at beginning of period				6,049,325			8,122,898
Cash and cash equivalents at end of period			$	3,794,964		$	5,963,823
Supplemental information on cash payments:
	Interest paid		$	734,022		$	1,005,856
	Income taxes paid		$	37,600		$	18,500
Supplemental information on non-cash transactions:
	Real estate obtained through foreclosure		$	—		$	432,834

See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)
December 31, 2003 and 2002

(1)	Basis of Presentation
	The accounting and reporting policies of SouthFirst Bancshares, Inc. conform with accounting principles generally accepted in the United States and with general financial services industry practices.
	Information filed on this Form 10-QSB as of and for the quarter ended December 31, 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.”
	The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. For a summary of significant accounting policies that have been consistently followed, see Note 1 to the consolidated financial statements included under Item 7 on Form 10-KSB. It is management’s opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included. The results contained in these statements are not necessarily indicative of the results which may be expected for the entire year.
(2)	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
			Weighted					Weighted
			Average					Average
	Number		Exercise		Number			Exercise
	of Shares		Price		of Shares			Price
Outstanding at September 30, 2003		73,700	$	12.40		61,971		$	13.36
Exercised		—		—		(416	)		10.22
Forfeited		—		—		(1,256	)		13.55
Outstanding at December 31, 2003		73,700	$	12.40		60,299		$	13.38

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Information pertaining to options outstanding at December 31, 2003 is as follows:

			Options Outstanding			Options Exercisable
			Weighted
			Average	Weighted				Weighted
			Remaining	Average				Average
	Number		Contractual	Exercise		Number		Exercise
Exercise Price	Outstanding		Life	Price		Exercisable		Price
$ 9.75		20,905	3.84 years				20,905
$ 9.92		9,000	7.92 years				3,600
$12.10		43,760	8.79 years				8,752
$14.00		29,880	1.68 years				29,880
$15.75		30,454	4.07 years				30,454
Outstanding at December 31, 2003		133,999	5.30 years	$	12.84		93,591	$	13.29

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.

		Three Months Ended
		December 31,
		2003			2002
Net income, as reported		$	103,569		$	87,494
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(801	)		(1,770	)
Pro forma net income		$	102,768		$	85,724
Earnings per share:
	Basic - as reported		.15			.11
	Basic - pro forma		.14			.11
	Diluted - as reported		.14			.11
	Diluted - pro forma		.14			.11

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 weighted average fair value of options granted during the three months ended December 31, 2003 and 2002 was $0 and $12.10, respectively. The fair value of each grant is estimated on the date of grant using the Black-Sholes option pricing model with the following assumptions used for grants in 2002: expected dividend yield of 4.96%; expected option life of 10 years; expected volatility of 7.21%; and a risk-free interest rate of 4.03%.

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(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 included under Item 13 of the Annual Report on Form 10-KSB. The following table presents financial information for each reportable segment:

	Three Months Ended December 31, 2003							Three Months Ended December 31, 2002
			Employee						Employee
	Banking		Benefits				Banking		Benefits
	Activities		Activities		Total		Activities		Activities		Total
Interest and dividend income	$	1,780,963	$	5,100	$	1,786,063	$	1,916,119	$	5,698	$	1,921,817
Interest expenses		699,651		—		699,651		1,001,310		—		1,001,310
Net interest income		1,081,312		5,100		1,086,412		914,809		5,698		920,507
Provision for loan losses		—		—		—		75,000		—		75,000
Net interest income after provision for loan losses		1,081,312		5,100		1,086,412		839,809		5,698		845,507
Other income		355,551		332,013		687,564		624,104		288,591		912,695
Other expenses		1,287,695		319,134		1,606,829		1,341,078		275,223		1,616,301
Income before income taxes		149,168		17,979		167,147		122,835		19,066		141,901
Income taxes		56,686		6,892		63,578		47,038		7,369		54,407
Net income	$	92,482	$	11,087	$	103,569	$	75,797	$	11,697	$	87,494

	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.
(4)	Subsequent Event
	On January 28, 2004, the Company declared a regular $0.15 per share cash dividend on the Company’s outstanding stock, payable on February 17, 2004, to stockholders of record as of February 10, 2004.

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

REVIEW OF RESULTS OF OPERATIONS

Overview

Net income for the first quarter of fiscal 2004, which ended December 31, 2003, increased $16,075, or 18.4%, to $103,569, when compared to the same period in fiscal 2003. Net interest income increased $165,905, or 18.0%, for the three-month period ended December 31, 2003, compared to the same period in fiscal 2003. Non-interest income decreased $225,131, or 24.7%, for the three-month period ended December 31, 2003 compared to the same period in fiscal 2003, while non-interest expense decreased $9,472, or .06%.

Primary earnings per common share, based on weighted average shares outstanding was $.15 and $.11 for the three months ended December 31, 2003 and December 31, 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 December 31, 2003, the interest rate spread increased 50 basis points as rates earned on interest-earning assets decreased 43 basis points to 5.91% while the cost of funds decreased 94 basis points to 2.39% compared to the same three-month period ending December 31, 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 million, or .25%, from $121.3 million to $121.0 million while the average balance of interest-bearing liabilities decreased $3.4 million, or 2.8%, from $120.3 million to $116.9 million. The combined effect of the decreases in average balances and the changes in rates discussed above resulted in an increase in net interest income of approximately $166,000, or 18.0%, and an increase in the interest rate spread from 3.01% to 3.51% for the three months ended December 31, 2003, respectively, compared to the same period in 2002.

Provision for Loan Losses

Provision for Loan Losses reflects a decrease in the amount of $75,000 for the three- month period ending December 31, 2003, when compared to the same period in fiscal 2003.

Other Income

For the three-month period ended December 31, 2003, total non-interest income decreased by approximately $225,000 to $688,000, compared to the same period in fiscal 2003. This decrease was primarily the result of a decrease of approximately $159,000 in gains on sales of loans, and a decrease of approximately $132,000 in gains on sale of investment securities available for sale. The decreases in non-

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interest income are partially offset by an increase in employee benefit consulting fees and an increase in other income of approximately $43,000 and $35,000, respectively, when compared to the same period in fiscal 2003.

Other Expense

For the three-month period ended December 31, 2003, total non-interest expense decreased approximately $9,000 to $1,607,000 from $1,616,000 for the three-month period ended December 31, 2003. This decrease resulted primarily from a decrease in compensation and benefits of approximately $17,000, a decrease in occupancy and depreciation expense of approximately $10,000 and a decrease in data processing fees of approximately $18,000. These decreases in expenses are partially offset by an increase in other expenses of approximately $38,000.

Income Taxes

The Company’s effective tax rate for the three-month periods ended December 31, 2003 and 2002 was 38.0% and 38.0%, respectively, compared to the federal statutory rate of 34.0%. SouthFirst’s effective tax rate was higher then the statutory rate due primarily to state income taxes. Income tax expense increased approximately $9,000 or 16.9% to $63,000 for the three months ended December 31 2003, as compared to $54,000 for the three months ended December 31, 2002, due to the increase in pre-tax earnings.

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 December 31,
	2003			2002
Return on assets		0.31	%		0.25	%
Return on equity		3.58	%		2.54	%
Equity to asset ratio		8.66	%		9.99	%
Interest rate spread		3.51	%		3.01	%
Net interest margin		3.59	%		3.04	%
Total risk-based capital		16.15	%		16.44	%
Non-performing loans to loans		2.94	%		0.75	%
Allowance for loan losses to loans		1.34	%		0.98	%
Allowance for loan losses to average non-performing loans		45.71	%		130.42	%
Ratio of net charge-offs to average loans outstanding		0.00	%		0.01	%
Book value per common share outstanding	$	16.45		$	17.23

Significant factors affecting the SouthFirst’s financial condition during the three months ended December 31, 2003 are detailed below:

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Assets

Total assets decreased approximately $476,000, or .4%, from $133,654,000 at September 30, 2003 to $133,178,000 at December 31, 2003. Cash and amounts due from banks decreased approximately $2,254,000, or 37.3%, which was used primarily for the purpose of funding new loans during the first quarter of fiscal 2004. Net loans increased approximately $3,236,000, or 3.8%. These increase occurred primarily in business and residential construction loans. Other significant changes in assets occurring during the period was decreases in investment securities available for sale, loans held for sale and other assets for approximately $1,074,000, $359,000 and $251,000, respectively.

Liabilities

Total liabilities decreased approximately $463,000, or .4%, from $121,977,000 at September 30, 2003 to $121,514,000 at December 31, 2003. Deposits decreased approximately $2,948,000, or 3.2%, during the period, which represents a decrease in certificates of deposit of approximately $2,700,000 and a decrease in checking and other savings accounts of approximately $250,000. Borrowed funds increased approximately $2,708,000, which represents an increase of approximately $2,473,000 in short-term reverse repurchase agreements with Morgan Keegan and an increase in the balance of an existing line of credit with First Commercial Bank of $235,000. The increase in borrowed funds was used primarily for the purpose of meeting deposit demand.

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 December 31, 2003, the allowance for loan losses was $1,194,196, compared to $1,191,033 at September 30, 2003, which represents an increase of approximately $3,000. Non-performing loans at December 31, 2003 were approximately $2,612,000 as compared to approximately $2,299,000 at September 30, 2003. At December 31, 2003 and September 30, 2003, the allowance for loan losses represented 1.34% and 1.39% 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,

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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 December 31, 2003, First Federal’s average daily balance of liquid assets was approximately 37% of its September 30, 2003 liquidity base, far exceeding the 4% requirement set by the previous regulation. These liquid assets included approximately $6,324,000 in cash and cash equivalents, and approximately $28,166,000 in other qualifying assets. In addition, as of December 31, 2003, the fair market value of the company’s investment securities portfolio, which is held for sale, was $31,525,000. 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 December 31, 2003, the amount of deposits was $90,610,000, which represents a decrease of 2,948,000 from the amount of deposits at September 30, 2003.

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 December 31, 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 December 31, 2003 for approximately $2,153,000. At December 31, 2003, the Company had outstanding balances with the FHLBA of $22,340,000.

First Federal also has short-term borrowings through reverse repurchase agreements with Morgan Keegan & Co. As of December 31, 2003, the balance outstanding on these was approximately $5,215,000.

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 of 4.0% core capital ratio, 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 December 31, 2003, First Federal has satisfied all regulatory capital requirements. First Federal’s compliance with the current standards is as follows:

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			Percent
	Amount		of Asset Base
Tangible capital	$	13,450,000		10.13	%
Core capital		13,450,000		10.13	%
Tier-based capital		13,748,000		16.15	%

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.

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 February 13, 2004.
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 February 13, 2004.
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 February 13, 2004.

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.

(b) Reports on Form 8-K.

On January 9, 2004, SouthFirst filed Form 8-K announcing the acquisition of the assets of Walton Mortgage pursuant to an asset purchase agreement.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SOUTHFIRST BANCSHARES, INC.
Date: February 13, 2004	By:	/s/ Joe K. McArthur
		Joe K. McArthur
		Chief Executive Officer
		(principal executive officer)
Date: February 13, 2004	By:	/s/ Janice Browning
		Janice Browning
		Controller, 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 February 13, 2004.
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 February 13, 2004.
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 February 13, 2004.

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