SouthFirst Bancshares (SZBI) 10QSB 2005 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 Number
June 30, 2005	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.

     þ Yes                              o No

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

     o Yes                              þ 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	708,996 shares
Class	Outstanding at July 29, 2005

Transitional Small Business Disclosure Formato Yesþ No

SOUTHFIRST BANCSHARES, INC.

TABLEOFCONTENTS

PART I — FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)	1
Consolidated Statements of Financial Condition at June 30, 2005 (Unaudited) and September 30, 2004	1
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended June 30, 2005 and 2004	2
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended June 30, 2005	3
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended June 30, 2005 and 2004	4-5
Notes to Consolidated Financial Statements (Unaudited) — June 30, 2005 and 2004	6-10
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-16
Item 3: Controls and Procedures	16
PART II — OTHER INFORMATION	17
Item 1: Legal Proceedings	17
Item 6: Exhibits and Reports on Form 8-K	17
SIGNATURES	18
EXHIBIT INDEX	19
CERTIFICATIONS	20-22
EX-31.1 SECTION 302 CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER
EX-31.2 SECTION 302 CERTIFICATE OF THE CHIEF FINANCIAL OFFICER
EX-32 SECTION 906 CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

PART 1: FINANCIAL INFORMATION

Consolidated Statements of Financial Condition

June 30, 2005 (Unaudited) and September 30, 2004

	June 30,			September 30,
	2005			2004
	(Unaudited)
Assets
Cash and cash equivalents	$	5,932,879		$	5,015,108
Interest-bearing deposits in other financial institutions		637,813			713,807
Securities available-for-sale, at fair value		27,775,952			14,180,243
Securities held-to-maturity at amortized cost, fair value of $15,674,973		—			15,081,723
Loans receivable		95,476,398			95,486,200
Less allowance for loan losses		(490,899	)		(911,964	)
Net loans		94,985,499			94,574,236
Loans held for sale at cost (which approximates fair value)		317,250			1,092,619
Foreclosed assets, net		533,472			514,507
Premises and equipment, net		4,665,730			4,796,390
Real estate held for investment		500,000			—
Federal Home Loan Bank stock, at cost		1,218,200			1,117,000
Goodwill		543,706			543,706
Accrued interest receivable		541,259			625,639
Other assets		2,912,879			3,278,179
Total Assets	$	140,564,639		$	141,533,157
Liabilities And Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	4,643,278		$	4,003,251
Interest bearing		95,931,849			93,789,575
Total deposits		100,575,127			97,792,826
Advances by borrowers for property taxes and insurance		209,056			259,427
Accrued interest payable		582,327			458,017
Borrowed funds		28,108,323			31,588,773
Accrued expenses and other liabilities		619,867			1,078,510
Total liabilities		130,094,700			131,177,553
Stockholders’ Equity:
Common stock, $.01 par value, 2,000,000 shares authorized, 990,241 shares issued and 708,996 shares outstanding at June 30, 2005; 990,241 shares issued and 709,406 shares outstanding at September 30, 2004;		9,996			9,996
Additional paid-in capital		9,838,965			9,838,965
Treasury stock, at cost ( 281,245 shares at June 30, 2005; 280,835 shares at September 30, 2004)		(3,892,296	)		(3,891,155	)
Deferred compensation on common stock employee benefit plans		(141,612	)		(159,427	)
Shares held in trust at cost (9,402 shares at June 30, 2005 and September 30, 2004)		(103,483	)		(103,483	)
Retained earnings		4,780,676			5,195,161
Accumulated comprehensive other income (loss)		(22,307	)		(534,453	)
Total stockholders’ equity		10,469,939			10,355,604
Total Liabilities and Stockholders’ Equity	$	140,564,639		$	141,533,157

See accompanying notes to consolidated financial statements.

1

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

for the Three and Nine Months Ended June 30, 2005 and 2004

	Nine Months Ended						Three Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Interest and dividend income:
Interest and fees on loans	$	4,574,516		$	4,040,405		$	1,554,764		$	1,350,769
Interest income on deposits in other financial institutions		59,876			27,184			26,192			8,172
Interest and dividend income on securities available for sale		654,375			1,129,723			325,218			265,699
Interest income on securities held to maturity		428,364			131,724			—			131,724
Total interest and dividend income		5,717,131			5,329,036			1,906,174			1,756,364
Interest expense:
Interest on deposits		1,549,609			1,294,193			546,791			422,000
Interest on borrowed funds		899,371			801,279			315,761			265,347
Total interest expense		2,448,980			2,095,472			862,552			687,347
Net interest income before provision for loan losses		3,268,151			3,233,564			1,043,622			1,069,017
Provision (benefit) for loan losses		76,576			1,244,958			(28,270	)		9,268
Net interest income after provision for loan losses		3,191,575			1,988,606			1,071,892			1,059,749
Other income:
Service charges and other fees		348,216			412,140			119,421			147,965
Employee benefit trust and consulting fees		1,208,803			1,152,793			447,793			443,132
Gain on sale of loans		475,504			560,333			153,149			266,729
Gain (loss) on sale of foreclosed assets		12,953			1,868			24,170			3,404
Gain (loss) on sale of equipment		7,776			927			1,949			—
Gain (loss) on sale of securities available-for-sale		47,407			79,024			47,407			(78,906	)
Gain (loss) on sale of securities held-to-maturity		(701,099	)		—			—			—
Other		266,487			243,375			80,522			71,464
Total other income		1,666,047			2,450,460			874,411			853,788
Other expenses:
Compensation and benefits		2,804,824			3,355,748			842,221			1,228,274
Net occupancy expense		316,570			297,077			100,065			104,552
Furniture and fixtures		376,050			356,319			124,078			129,587
Data processing		249,962			288,048			81,506			117,761
Office supplies and expense		321,707			327,857			110,177			114,683
Deposit insurance premiums		81,881			76,233			27,960			26,539
Legal		142,560			126,250			36,960			48,750
Termination expense		140,941			—			—			—
Other		633,784			515,252			208,754			158,178
Total other expenses		5,068,279			5,342,784			1,531,721			1,928,324
Income (loss) before income taxes		(210,657	)		(903,718	)		414,582			(14,787	)
Income tax expense (benefit)		(80,069	)		(342,029	)		157,520			(4,345	)
Net income (loss)	$	(130,588	)	$	(561,689	)	$	257,062		$	(10,442	)
Earnings (loss) per share:
Basic		(0.18	)		(0.79	)		0.36			(0.01	)
Diluted		(0.18	)		(0.76	)		0.36			(0.01	)
Cash dividends declared		0.40			0.45			0.10			0.15
Weighted average shares outstanding:
Basic		709,273			709,131			709,006			709,070
Diluted		725,539			739,481			721,281			739,107

See accompanying notes to consolidated financial statements.

2

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

for the Nine Months Ended June 30, 2005

								Deferred
								Compensation
								on Common									Accumulated
			Additional					Stock			Shares						Comprehensive			Total
	Common		Paid-in		Treasury			Employee			Held in			Retained			Other Income			Stockholders’
	Stock		Capital		Stock			Benefit Plans			Trust			Earnings			(Loss)			Equity
Balance at September 30, 2004	$	9,996	$	9,838,965	$	(3,891,155	)	$	(159,427	)	$	(103,483	)	$	5,195,161		$	(534,453	)	$	10,355,604
Comprehensive income:
Net income (loss)															(130,588	)					(130,588	)
Change in net unrealized gain on available-for-sale securities, net of reclassi-fication adjustments and income taxes of $313,896																		512,146			512,146
Total comprehensive income																					381,558
Vesting of deferred compensation shares									17,815												17,815
Acquisition of Treasury stock						(1,141	)														(1,141	)
Cash dividends declared															(283,897	)					(283,897	)
Balance at June 30, 2005	$	9,996	$	9,838,965	$	(3,892,296	)	$	(141,612	)	$	(103,483	)	$	4,780,676		$	(22,307	)	$	10,469,939

See accompanying notes to consolidated financial statements.

3

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

for the Nine Months Ended June 30, 2005 and 2004

	2005			2004
Operating activities:
Net income (loss)	$	(130,588	)	$	(561,689	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		76,576			1,244,958
Depreciation and amortization		291,884			265,891
Gain on sale of securities available-for-sale		(47,407	)		(79,024	)
Loss on sale of securities held-to-maturity		701,099
Gain on sale of loans		(475,504	)		(560,333	)
Increase (decrease) in deferred loan origination fees		2,545			(5,032	)
Net amortization of premium/discount on investment securities		69,093			(537	)
(Gain) loss on sale of other property owned		(7,776	)		(927	)
(Gain) loss on sale of foreclosed assets		(12,953	)		(1,868	)
Loans originated for sale		(16,766,771	)		(24,122,621	)
Proceeds from sale of loans		18,017,644			24,987,039
(Increase) decrease in accrued interest receivable		84,380			(54,717	)
(Increase) decrease in other assets		365,300			(1,028,336	)
Deferred compensation expense		17,815			17,815
Increase (decrease) in accrued interest payable		124,310			(83,034	)
Increase (decrease) in accrued expenses and other liabilities		(772,539	)		542,623
Net cash provided by operating activities		1,537,108			560,208
Investing activities:
Net change in interest-bearing deposits in other financial institutions		75,994			(104,239	)
Proceeds from calls and maturities of securities available-for-sale		1,564,978			2,468,580
Purchase of securities available-for-sale		(34,365,257	)		(8,503,846	)
Proceeds from sale of securities available-for-sale		19,092,405			8,538,610
Proceeds from sale of securities held-to-maturity		15,297,145			—
Purchase of Federal Home Loan Bank stock		(101,200	)		—
Net (increase) decrease in loans		(490,384	)		(6,108,153	)
Purchase of premises and equipment		(165,802	)		(635,056	)
Proceeds from sale of foreclosed assets		571,273			81,185
Proceeds from sale of other assets		12,354			10,376
Transfer from loans of real estate owned property		(1,014,227	)		(508,605	)
Transfer from loans of other repossessed assets		(63,058	)		(54,456	)
Net cash provided (used) by investing activities		414,221			(4,815,604	)

(Continued)

See accompanying notes to consolidated financial statements.

4

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended June 30, 2005 and 2004

	2005			2004
Financing activities:
Increase (decrease) in deposits	$	2,782,301		$	4,492,161
Proceeds from borrowed funds		70,673,955			49,168,299
Repayment of borrowed funds		(74,154,405	)		(47,148,149	)
Cash dividends paid		(283,897	)		(319,243	)
Acquisition of treasury stock		(1,141	)		(84,543	)
Proceeds from exercise of stock options		—			6,905
Decrease in advances by borrowers for property taxes and insurance		(50,371	)		(8,260	)
Net cash provided (used) by financing activities		(1,033,558	)		6,107,170
Increase (decrease) in cash and cash equivalents		917,771			1,851,774
Cash and cash equivalents at beginning of period		5,015,108			6,049,325
Cash and cash equivalents at end of period	$	5,932,879		$	7,901,099
Supplemental information on cash payments:
Interest paid	$	2,324,670		$	2,178,506
Income taxes paid	$	36,000		$	124,917
Supplemental information on non-cash transactions:
Change in net unrealized gain on investment securities available-for-sale	$	568,241		$	33,178
Real estate obtained through foreclosure	$	1,158,305		$	508,605

See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)
June 30, 2005 and 2004

(1)	Basis of Presentation
	The accounting and reporting policies of SouthFirst Bancshares, Inc. (“SouthFirst”) 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 June 30, 2005, was derived from the financial records of 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. (“SouthFirst Mortgage”), 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)	New Accounting Pronouncements
	In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004)Share-Based Payment(“SFAS No. 123(R)”). SFAS No. 123(R) is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation.SFAS No. 123(R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS No. 123(R) eliminates the alternative to use APB Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. SFAS No. 123(R) requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123(R) is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005, and for public entities that file as small business issuers as of the beginning of

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	the first interim or annual reporting period that begins after December 15, 2005. The Company currently accounts for its stock options under APB No. 25, as further explained in Note 3, and is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its statement of condition and results of operations.
(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 the 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 have been granted. The term of the options range from seven to ten years, and the options vest equally over periods ranging in length 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, 2004		73,700		$	12.40		60,299		$	13.38
Exercised		—			—		—			—
Forfeited		(18,304	)	$	12.83		(13,822	)	$	14.14
Outstanding at June 30, 2005		55,396		$	12.26		46,477		$	13.15

Information pertaining to options outstanding at June 30, 2005 is as follows:

			Options Outstanding			Options Exercisable
			Weighted
			Average					Weighted
			Remaining	Weighted Average				Average
	Number		Contractual	Exercise		Number		Exercise
Exercise Price	Outstanding		Life	Price		Exercisable		Price
$  9.75		15,547	2.35 years				15,547
$  9.92		9,000	6.42 years				5,400
$12.10		38,200	7.29 years				15,280
$14.00		16,600	.18 years				16,600
$15.75		22,526	2.58 years				22,526
Outstanding at June 30, 2005		101,873	4.26 years	$	12.67		75,353	$	12.97

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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.

	Nine Months Ended						Three Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income (loss), as reported	$	(130,588	)	$	(561,689	)	$	257,062		$	(10,442	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,739	)		(2,094	)		(559	)		(649	)
Pro forma net income (loss)	$	(132,327	)	$	(563,783	)	$	256,503		$	(11,091	)
Earnings (loss) per share:
Basic — as reported	$	(.18	)	$	(.79	)	$	.36		$	(.01	)
Basic — pro forma		(.19	)		(.80	)		.36			(.02	)
Diluted — as reported		(.18	)		(.76	)		.36			(.01	)
Diluted — pro forma		(.18	)		(.76	)		.36			(.02	)

	The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its statement of condition and results of operations once such standards become effective with respect to the Company. Because the SFAS No. 123 method of accounting (and related disclosures) 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.
	There were no options granted during the nine months ended June 30, 2005 or 2004.
(4)	Earnings Per Share
	Basic earnings per share were computed by dividing net income by the weighted average number of             shares of common stock outstanding during the nine and three month periods ended June 30, 2005 and 2004. Common stock outstanding consists of issued shares less treasury stock and shares owned by the Management Recognition Plan and Stock Option plan trusts. Diluted earnings per share for the nine and three month periods ended June 30, 2005 and 2004, were computed by dividing net income by the weighted average number of shares of common stock and the dilutive effects of the shares awarded under the Stock Option plan, based on the treasury stock method using an average fair market value of the stock during the respective periods.
	The following table represents the earnings per share calculations for the three and nine months ended June 30, 2005 and 2004:

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						Earnings
	Income			Shares		Per Share
For the Three Months Ended June 30, 2005:
Basic earnings	$	257,062			709,006	$	.36
Dilutive Securities:
Stock Option Plan shares		—			12,275
Dilutive earnings	$	257,062			721,281	$	.36
For the Three Months Ended June 30, 2004:
Basic earnings (loss)	$	(10,442	)		709,070	$	(.01	)
Dilutive Securities:
Stock Option Plan shares		—			30,037
Dilutive earnings (loss)	$	(10,442	)		739,107	$	(.01	)
For the Nine Months Ended June 30, 2005:
Basic earnings (loss)	$	(130,588	)		709,273	$	(.18	)
Dilutive Securities:
Stock Option Plan shares		—			16,266
Dilutive earnings (loss)	$	(130,588	)		725,539	$	(.18	)
For the Nine Months Ended June 30, 2004:
Basic earnings (loss)	$	(561,689	)		709,131	$	(.79	)
Dilutive Securities:
Stock Option Plan shares		—			30,350
Dilutive earnings (loss)	$	(561,689	)		739,481	$	(.76	)

(5)	Investment Securities
	During 2005, the Company transferred all of its securities in the held-to-maturity category to the available-for-sale category and immediately sold those securities. The amortized cost of the sold securities was $15,998,287, resulting in a realized loss of $701,099. The decision to transfer the securities was based on a change in investment strategy and to improve overall liquidity and interest rate risk.
(6)	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:

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	Nine Months Ended June 30, 2005								Nine Months Ended June 30, 2004
				Employee								Employee
	Banking			Benefits					Banking			Benefits
	Activities			Activities		Total			Activities			Activities		Total
Interest and dividend income	$	5,693,816		$	23,315	$	5,717,131		$	5,311,161		$	17,875	$	5,329,036
Interest expenses		2,448,980			—		2,448,980			2,095,472			—		2,095,472
Net interest income		3,244,836			23,315		3,268,151			3,215,689			17,875		3,233,564
Provision for loan losses		76,576			—		76,576			1,244,958			—		1,244,958
Net interest income after provision for loan losses		3,168,260			23,315		3,191,575			1,970,731			17,875		1,988,606
Other income		445,855			1,220,192		1,666,047			1,285,041			1,165,419		2,450,460
Other expenses		3,958,197			1,110,082		5,068,279			4,366,321			976,463		5,342,784
Income (loss) before income taxes		(344,082	)		133,425		(210,657	)		(1,110,549	)		206,831		(903,718	)
Income taxes		(130,770	)		50,701		(80,069	)		(420,789	)		78,760		(342,029	)
Net income (loss)	$	(213,312	)	$	82,724	$	(130,588	)	$	(689,760	)	$	128,071	$	(561,689	)

	Three Months Ended June 30, 2005								Three Months Ended June 30, 2004
				Employee								Employee
	Banking			Benefits					Banking			Benefits
	Activities			Activities		Total			Activities			Activities		Total
Interest and dividend income	$	1,897,883		$	8,291	$	1,906,174		$	1,749,801		$	6,563	$	1,756,364
Interest expenses		862,552			—		862,552			687,347			—		687,347
Net interest income		1,035,331			8,291		1,043,622			1,062,454			6,563		1,069,017
Provision for loan losses		(28,270	)		—		(28,270	)		9,268			—		9,268
Net interest income after provision for loan losses		1,063,601			8,291		1,071,892			1,053,186			6,563		1,059,749
Other income		423,618			450,793		874,411			407,656			446,132		853,788
Other expenses		1,166,322			365,399		1,531,721			1,589,148			339,176		1,928,324
Income (loss) before income taxes		320,897			93,685		414,582			(128,306	)		113,519		(14,787	)
Income taxes		(121,919	)		35,601		157,520			(47,565	)		43,220		(4,345	)
Net income (loss)	$	198,978		$	58,084	$	257,062		$	(80,741	)	$	70,299	$	(10,442	)

	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.
(7)	Subsequent Event
	On July 27, 2005, the Company declared a regular $0.10 per share cash dividend on the Company’s outstanding stock, payable on August 22, 2005, to stockholders of record as of August 7, 2005.

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

REVIEW OF RESULTS OF OPERATIONS

Overview

Net income for the three months ended June 30, 2005, increased $267,504 and the net loss decreased for the nine months ended June 30, 2005, by $431,101, or 76.8%, compared to the same periods in fiscal 2004. Net interest income, after the provision for loan losses for the three months ended June 30, 2005, increased $12,143, or 1.1%, and increased $1,202,969, or 60.5%, for the nine month period ended June 30, 2005, compared to the same period in fiscal 2004. This increase is attributable primarily to a reduction in the provision for loan losses of $1,168,382, which is discussed below under the heading “Provision for Loan Losses.” Non-interest income increased $20,623, or 2.4%, for the three month period ended June 30, 2005, and decreased $784,413, or 32.0%, for the nine month period ended June 30, 2005, when compared to the same periods in fiscal 2004. Non-interest expense decreased $396,603, or 20.6%, for the three month period ended June 30, 2005, and decreased $274,505, or 5.1%, for the nine month period ended June 30, 2005, compared to the same periods in fiscal 2004.

Primary earnings per common share, based on weighted-average shares outstanding, was $.36 and ($.01) for the three months ended June 30, 2005 and 2004, respectively, and ($.18) and ($.79) for the nine months ended June 30, 2005 and 2004, 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, 2005, the interest rate spread decreased 18 basis points as rates earned on interest-earning assets increased 33 basis points to 6.04% while the cost of funds increased 51 basis points to 2.74% compared to the same three-month period ending June 30, 2004. The change in the interest rate spread is the result of the increase in interest rates. The average balance of interest-earning assets increased approximately $3.2 million, or 2.6%, from $123.1 million to $126.3 million, while the average balance of interest-bearing liabilities increased $2.7 million, or 2.2%, from $123.4 million to $126.1 million. The combined effect of the changes in average balances and the changes in rates discussed above resulted in a decrease in the interest rate spread from 3.48% to 3.30%, and a decrease in net interest income of $25,395, or 2.4%, and an increase of $34,587, or 1.1%, for the three and nine months ended June 30, 2005, respectively, compared to the same periods in fiscal 2004.

Provision for Loan Losses

Provision for loan losses reflects a decrease of $1,168.382, or 93.8%, for the nine month period ended June 30, 2005, when compared to the same period in fiscal 2005.

The current year to date provision of $76,576 includes approximately $26,000 to cover reserve requirements associated with two construction loans located in Birmingham, Alabama, having an aggregate contract and disbursed amount of $256,000. In addition, three lot loans having an aggregate contract amount of $275,000 and a disbursed amount of approximately $96,000 required a provision for loan loss. These loans were foreclosed upon in March 2005. No significant losses are anticipated on any

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of these foreclosed properties.

During the quarter ended June 30, 2005, there was an additional reserve required in the amount of approximately $56,000, which represents reserves needed to cover a non-performing business loan that was collateralized by used automobiles. Presently, the company is in the process of repossessing all collateral associated with this loan.

At June 30, 2005, the allowance for loan losses to total average loans outstanding was 0.51%, compared to 0.90% for the same period ended June 30, 2004. This decrease in the allowance for loan losses is primarily the result of the charge off of a commercial loan to a used automobile dealership for approximately $430,000. At the time of the charge-off, the balance on this loan was fully reserved.

For the same period in fiscal 2004, the provision for loan losses of approximately $1,245,000 represented approximately $1,035,000 for the write-down of an acquisition and development loan that was foreclosed on in January 2004. At the date of foreclosure, this loan had a disbursed balance of approximately $1,948,000, with previously recognized allowances of approximately $525,000. At the time of foreclosure, the fair value of the property was estimated to be $500,000. The provision also included $200,000 of additional general loan loss to increase the balance in the allowance for loan losses to an appropriate level.

Other Income

Total other income for the nine months ended June 30, 2005, decreased approximately $784,000 to $1,666,000, compared to $2,450,000 for the nine months ended June 30, 2004. A significant portion of the decrease in non-interest income was attributable to a loss on the sale of investment securities held-to-maturity of approximately $701,000. Management made a decision to sell the entire portfolio of held-to-maturity investments of $16,000,000 after the reclassification from available-for-sale to held-to-maturity during the June quarter of fiscal 2004. Other reductions in other income included a reduction in service charges and other fees, gain from sales of loans and gains from the sale of investment securities available for sale in the amounts of approximately $64,000, $85,000 and $32,000, respectively. These reductions in other income are partially offset by increases in income generated by employee benefit consulting fees, gains from the sale of foreclosed and other assets and other income in the amounts of approximately $56,000, $18,000 and $23,000, respectively, when compared to the same period in fiscal 2004.

For the three months ended June 30, 2005, total other income increased by approximately $21,000 to $874,000, compared to $854,000 for the same period in fiscal 2004. Increases occurred in gains from the sale of investment securities available for sale, gains from the sale of foreclosed and other assets and other income in the amounts of approximately $126,000, $23,000 and $9,000, respectively. Decreases in other income occurred in service charges and other fees and gains from the sale of loans in the amounts of approximately $28,000 and $114,000, respectively. Fees generated from employee benefit consulting fees remained approximately the same between the two periods.

Other Expenses

Total other expense for the nine months ended June 30, 2005, decreased by approximately $275,000 to $5,068,000, as compared to $5,343,000 for the nine months ended June 30, 2004. The changes in other non-interest expense are primarily attributable to a decrease in compensation and benefits of approximately $551,000 as a result of the re-structuring of SouthFirst Mortgage and certain other areas within the company. Other decreases in expenses occurred in data processing costs and office supplies expense in the amounts of approximately $38,000 and $6,000, respectively. Offsetting these decreases in expenses, increases occurred in termination expenses relative to the resignation, severance and general release agreement between Joe K. McArthur and First Federal of the South and SouthFirst Bancshares, Inc., which was effective March 31, 2005. Mr. McArthur was paid a severance benefit in one lump sum

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of $228,361, as provided under his employment contract dated January 1, 2005. In addition to the severance benefits described above, SouthFirst Bancshares also paid to Mr. McArthur $10,000 for the surrender of all stock options that Mr. McArthur possessed at the time of his resignation. This expense was offset by the reduction of certain deferred compensation benefits payable to Mr. McArthur that were adjusted due to his termination prior to normal retirement age. Other increases in expenses occurred in net occupancy, furniture and fixtures expense, deposit insurance premiums, legal and other expense of approximately $19,000, $20,000, $6,000, $16,000 and $119,000, respectively, when compared to the same period ended June 30, 2004. Other expenses increased primarily from increased fees for check processing and debit card expenses as a result of the Company outsourcing its proof operations.

For the three months ended June 30, 2005, total other expenses decreased approximately $397,000 to $1,532,000 from $1,928,000 for the three months ended June 30, 2004. This decrease resulted primarily from a decrease in compensation and benefits of approximately $386,000, as a result of the restructuring of SouthFirst Mortgage and certain other areas within the company, as mentioned in the proceeding paragraph. Other decreases in expenses occurred in data processing and legal of approximately $36,000 and $12,000, respectively. These reductions in expenses were partially offset by increases in other expenses of approximately $51,000 due to increased check processing and debit card expenses as discussed previously. Expenses related to net occupancy, furniture and fixtures, office supplies and deposit insurance premiums remained approximately the same at $100,000, $124,000, 110,000 and $28,000, respectively, when compared to the same period ended June 30, 2004.

Income Taxes

     The Company’s effective tax rate for the nine-month periods ended June 30, 2005 and 2004, was 38.0% and 37.8%, 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 benefit decreased approximately $262,000 to $(80,069) for the nine months ended June 30, 2005, as compared to $(342,029) for the nine months ended June 30, 2004, 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 June 30,
	2005			2004
Return on assets		0.72	%		(0.03	%)
Return on equity		9.95	%		(0.40	%)
Equity to asset ratio		7.24	%		7.47	%
Interest rate spread		3.30	%		3.48	%
Net interest margin		3.31	%		3.48	%
Total risk-based capital		12.29	%		15.32	%
Non-performing loans to loans		0.53	%		0.88	%
Allowance for loan losses to loans		0.51	%		0.90	%

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	At or for the three
	months ended June 30,
	2005			2004
Allowance for loan losses to average non-performing loans		96.05	%		101.43	%
Ratio of net charge-offs to average loans outstanding		0.49	%		0.02	%
Book value per common share outstanding	$	14.77		$	14.36

Significant factors affecting the SouthFirst’s financial condition during the nine months ended June 30, 2005 are detailed below:

Assets

Total assets decreased approximately $968,000, or .7%, from $141,533,000 at September 30, 2004, to $140,565,000 at June 30, 2005. Net loans increased approximately $411,000, or .4%, which occurred primarily in business and other types of residential mortgages. Cash and amounts due from banks increased approximately $918,000 as a result of new deposit growth during the period. Investment securities available for sale increased approximately $13,596,000, net of principal reduction, as a result of the purchase of $15,000,000 in mortgage-backed securities. This purchase was the result of the transfer and sale of investment securities held-to-maturity in the amount of $16,000,000 which occurred in March 2005. Management made the decision to transfer and sell the entire portfolio of held-to-maturity investments due to a change in investment strategy and to improve overall liquidity and interest rate risk. The sale resulted in an overall increase in equity of approximately $113,000 and an increase in eligible liquidity of approximately $15,000,000. Other significant changes in assets were decreases in loans held for sale, premises and equipment, accrued interest receivable and other assets of approximately $775,000, $131,000, $84,000 and $365,000, respectively, while Federal Home Loan Bank stock increased approximately $101,000 during the period. During the quarter ended June 30, 2005, one parcel of foreclosed real estate with a carrying value of $500,000 was transferred to real estate held-for-investment. Foreclosed real estate (after such transfer) and other repossessed assets remained approximately the same at $533,000.

Liabilities

Total liabilities decreased approximately $1,083,000, or .8%, from $131,178,000 at September 30, 2004, to $130,095,000 at June 30, 2005. Deposits increased approximately $2,782,000, or 2.8%, during the period, which represents an increase in certificates of deposit of approximately $3,130,000 and a decrease in checking and other savings accounts of approximately $348,000. This increase in deposits was used primarily to repay borrowed funds, which decreased approximately $3,480,000, from $31,589,000 at September 30, 2004, to $28,108,000 at June 30, 2005. Borrowed funds at June 30, 2005, consisted of $20,670,000 Federal Home Loan Bank advances, $6,060,463 in short-term reverse repurchase agreements with Morgan Keegan and $1,377,860 in an existing line of credit with First Commercial Bank.

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, 2005, the allowance for loan losses was $490,899, compared to $911,964 at September 30, 2004, which represents a decrease of approximately $421,000. Non-performing loans at June 30, 2005, were approximately $511,000 as compared to approximately $1,194,000 at September 30, 2004. At June 30, 2005, and September 30, 2004, the allowance for loan losses represented 0.51% and 0.96% 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

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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, 2005, First Federal’s average daily balance of liquid assets was approximately 22.0% of its March 31, 2005, liquidity base, far exceeding the 4% requirement set by the previous regulation. These liquid assets included approximately $6,310,000 in cash and cash equivalents, and approximately $18,732,000 in other qualifying assets. In addition, as of June 30, 2005, the fair market value of the company’s investment securities portfolio, which is held for sale, was approximately $27,776,000. 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, 2005, the amount of deposits was $100,575,000, which represents an increase of $2,782,000 from the amount of deposits at September 30, 2004.

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, 2005, the Company had a line of credit, based on prime, with First Commercial Bank in the amount of $2,500,000, which matures on June 1, 2006, and of which there is an outstanding balance at June 30, 2005, of approximately $1,378,000. At June 30, 2005, the Company had outstanding balances with the FHLBA of $20,670,000.

First Federal also has short-term borrowings through reverse repurchase agreements with Morgan Keegan & Co. As of June 30, 2005, the balance outstanding on these was approximately $6,060,000.

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

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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 1.5% 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 June 30, 2005, 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	$	10,884,000		7.80	%
Core capital		10,884,000		7.80	%
Tier-based capital		11,292,000		12.29	%

Cautionary Statement Concerning Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-QSB contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “target,” “plan,” “project,” or “continue” or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of management’s plans and current analyses of the Company, its business and the industry as a whole. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases, have affected, and in the future could affect the Company’s financial performance and could cause actual results to differ materially from those expressed or implied in such forward-looking statements. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

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 15, 2005.
	31.2	Certificate of the equivalent 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 15, 2005.
	32	Certificate of the Chief Executive Officer and the equivalent of 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 15, 2005.

	The certificate listed as Exhibit 32 is being furnished pursuant to the final rule issued by the Securities and Exchange Commission in Release No. 33-8238 to accompany this quarterly report and shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of such section or Section 11 of the Securities Act of 1933 (the “Securities Act”), nor shall such certificates be deemed incorporated by reference in any filing under the Securities Act 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 July 7, 2005, SouthFirst filed Form 8-K announcing the appointment of Sandra H. Stephens as Chief Executive Officer of SouthFirst Bancshares, Inc., effective July 1, 2005.

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SIGNATURES

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

	SOUTHFIRST BANCSHARES, INC.
Date: August 15, 2005	By:	/s/ Sandra H. Stephens
		Sandra H. Stephens
		Chief Executive Officer
		(principal executive officer)
Date: August 15, 2005	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 August 15, 2005.
31.2	Certificate of the equivalent 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 15, 2005.
32	Certificate of the Chief Executive Officer and the equivalent of 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 15, 2005.

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