SouthFirst Bancshares (SZBI) 10QSB 2006 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: June 30, 2006

Commission File Number: 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)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 a shell company (as defined in Rule 12(b)-2 of the Exchange Act).

o Yes     þ No

State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Common Stock, par value $0.01 per share	708,671 shares
Class	Outstanding at July 28, 2006

Transitional Small Business Disclosure Formato Yes     þ No

SOUTHFIRST BANCSHARES, INC.

TABLEOFCONTENTS

PART I — FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)	1
Consolidated Statements of Financial Condition at June 30, 2006 (Unaudited) and September 30, 2005	1
Consolidated Statements of Operations (Unaudited) for the Nine and Three Months Ended June 30, 2006 and 2005	2
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended June 30, 2006	3
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended June 30, 2006 and 2005	4-5
Notes to Consolidated Financial Statements (Unaudited) — June 30, 2006 and 2005	6-10
Item 2: Management’s Discussion and Analysis or Plan of Operations	11-16
Item 3: Controls and Procedures	16
PART II — OTHER INFORMATION	17
Item 1: Legal Proceedings	17
Item 6: Exhibits	17-18
SIGNATURES	19
EXHIBIT INDEX	20-21
EX-10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT - SANDRA H. STEPHENS
EX-10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT - J. MALCOMB MASSEY
EX-10.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT - RUTH M. ROPER
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32 SECTION 906, CERTIFICATION OF THE CEO AND CFO

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

PART 1: FINANCIAL INFORMATION

Consolidated Statements of Financial Condition
June 30, 2006 (Unaudited) and September 30, 2005

	June 30,			September 30,
	2006			2005
	(Unaudited)
Assets
Cash and cash equivalents	$	4,310,231		$	5,042,170
Interest-bearing deposits in other financial institutions		1,180,852			871,801
Securities available-for-sale, at fair value		25,647,674			26,482,705
Loans receivable		101,914,736			95,907,301
Less allowance for loan losses		(621,941	)		(518,572	)
Net loans		101,292,795			95,388,729
Loans held for sale at cost (which approximates fair value)		604,400			948,250
Foreclosed assets, net		890,209			255,470
Premises and equipment, net		3,018,718			4,645,624
Federal Home Loan Bank stock, at cost		1,373,900			1,218,200
Goodwill		543,706			543,706
Accrued interest receivable		655,939			656,455
Other assets		2,651,450			3,084,414
Total Assets	$	142,169,874		$	139,137,524
Liabilities And Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	3,974,792		$	4,232,573
Interest bearing		100,766,167			96,892,239
Total deposits		104,740,959			101,124,812
Advances by borrowers for property taxes and insurance		162,978			237,052
Accrued interest payable		848,656			641,075
Borrowed funds		25,914,828			26,015,861
Accrued expenses and other liabilities		473,666			694,781
Total liabilities		132,141,087			128,713,581
Stockholders’ Equity:
Common stock, $.01 par value, 2,000,000 shares authorized, 990,241 shares issued and 708,671 shares outstanding at June 30, 2006; 990,241 shares issued and 708,971 shares outstanding at September 30, 2005;		9,996			9,996
Additional paid-in capital		9,839,851			9,839,851
Treasury stock, at cost ( 281,570 shares at June 30, 2006; 281,270 shares at September 30, 2005)		(3,896,213	)		(3,892,598	)
Deferred compensation on common stock employee benefit plans		(117,860	)		(135,675	)
Shares held in trust at cost (9,402 shares at June 30, 2006 and September 30, 2005)		(103,483	)		(103,483	)
Retained earnings		5,029,057			4,874,445
Accumulated comprehensive other income (loss)		(732,561	)		(168,593	)
Total stockholders’ equity		10,028,787			10,423,943
Total Liabilities and Stockholders’ Equity	$	142,169,874		$	139,137,524

See accompanying notes to consolidated financial statements.

1

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)
for the Nine and Three Months Ended June 30, 2006 and 2005

	Nine Months Ended						Three Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Interest and dividend income:
Interest and fees on loans	$	5,062,705		$	4,574,516		$	1,749,587		$	1,554,764
Interest income on deposits in other financial institutions		83,894			59,876			31,172			26,192
Interest and dividend income on securities available for sale		960,767			654,375			323,493			325,218
Interest income on securities held to maturity		—			428,364			—			—
Total interest and dividend income		6,107,366			5,717,131			2,104,252			1,906,174
Interest expense:
Interest on deposits		2,118,218			1,549,609			818,178			546,791
Interest on borrowed funds		1,075,723			899,371			354,030			315,761
Total interest expense		3,193,941			2,448,980			1,172,208			862,552
Net interest income before provision for loan losses		2,913,425			3,268,151			932,044			1,043,622
Provision (benefit) for loan losses		142,386			76,576			131,147			(28,270	)
Net interest income after provision for loan losses		2,771,039			3,191,575			800,897			1,071,892
Other income:
Service charges and other fees		419,490			348,216			145,382			119,421
Employee benefit trust and consulting fees		1,407,680			1,208,803			559,713			447,793
Gain on sale of loans		353,368			475,504			90,347			153,149
Gain (loss) on sale of foreclosed assets		(11,076	)		12,953			2,740			24,170
Gain (loss) on sale of premises and equipment		177,253			7,776			(5,326	)		1,949
Gain (loss) on sale of securities available-for-sale		—			47,407			—			47,407
Gain (loss) on sale of securities held-to-maturity		—			(701,099	)		—			—
Other		323,501			266,487			100,558			80,522
Total other income		2,670,216			1,666,047			893,414			874,411
Other expenses:
Compensation and benefits		2,728,091			2,804,824			827,503			842,221
Net occupancy expense		311,628			316,570			95,778			100,065
Furniture and fixtures		407,504			376,050			140,643			124,078
Data processing		214,746			249,962			71,451			81,506
Office supplies and expense		335,169			321,707			110,591			110,177
Deposit insurance premiums		58,064			81,881			14,263			27,960
Legal		81,730			142,560			31,738			36,960
Other professional services		177,520			186,416			60,883			50,114
Termination expense		—			140,941			—			—
Other		536,684			447,368			160,793			158,640
Total other expenses		4,851,136			5,068,279			1,513,643			1,531,721
Income (loss) before income taxes		590,119			(210,657	)		180,668			414,582
Income tax expense (benefit)		222,866			(80,069	)		67,478			157,520
Net income (loss)	$	367,253		$	(130,588	)	$	113,190		$	257,062
Earnings (loss) per share:
Basic		0.52			(0.18	)		0.16			0.36
Diluted		0.51			(0.18	)		0.16			0.36
Cash dividends declared		0.30			0.40			0.10			0.10
Weighted average shares outstanding:
Basic		708,800			709,273			708,671			709,006
Diluted		715,774			725,539			717,306			721,281

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, 2006

								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, 2005	$	9,996	$	9,839,851	$	(3,892,598	)	$	(135,675	)	$	(103,483	)	$	4,874,445		$	(168,593	)	$	10,423,943
Comprehensive income:
Net income															367,253						367,253
Change in net unrealized loss on available-for-sale securities, net of reclassification adjustments and income taxes of $345,658																		(563,968	)		(563,968	)
Total comprehensive income (loss)																					(196,715	)
Vesting of deferred compensation shares									17,815												17,815
Acquisition of Treasury stock						(3,615	)														(3,615	)
Cash dividends declared															(212,641	)					(212,641	)
Balance at June 30, 2006	$	9,996	$	9,839,851	$	(3,896,213	)	$	(117,860	)	$	(103,483	)	$	5,029,057		$	(732,561	)	$	10,028,787

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, 2006 and 2005

	2006			2005
Operating activities:
Net income (loss)	$	367,253		$	(130,588	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		142,386			76,576
Depreciation and amortization		283,459			291,884
Gain on sale of securities available-for-sale		—			(47,407	)
Loss on sale of securities held-to-maturity		—			701,099
Gain on sale of loans		(353,368	)		(475,504	)
Increase (decrease) in deferred loan origination fees		(9,559	)		2,545
Net amortization of premium/discount on investment securities		19,005			69,093
(Gain) loss on sale of other property owned		(177,253	)		(7,776	)
(Gain) loss on sale of foreclosed assets		11,076			(12,953	)
Loans originated for sale		(16,119,343	)		(16,766,771	)
Proceeds from sale of loans		16,816,561			18,017,644
(Increase) decrease in accrued interest receivable		516			84,380
(Increase) decrease in other assets		432,964			365,300
Deferred compensation expense		17,815			17,815
Increase (decrease) in accrued interest payable		207,581			124,310
Increase (decrease) in accrued expenses and other liabilities		124,543			(772,539	)
Net cash provided by operating activities		1,763,636			1,537,108
Investing activities:
Net change in interest-bearing deposits in other financial institutions		(309,051	)		75,994
Proceeds from calls and maturities of securities available-for-sale		2,081,850			1,564,978
Purchase of securities available-for-sale		(2,175,450	)		(34,365,257	)
Proceeds from sale of securities available-for-sale		—			19,092,405
Proceeds from sale of securities held-to-maturity		—			15,297,145
Purchase of Federal Home Loan Bank stock		(155,700	)		(101,200	)
Net increase in loans		(6,036,893	)		(490,384	)
Purchase of premises and equipment		(113,343	)		(165,802	)
Proceeds from sale of foreclosed assets		60,088			571,273
Proceeds from sale of other assets		1,634,043			12,354
Transfer from loans of real estate owned property		(635,987	)		(1,014,227	)
Transfer from loans of other repossessed assets		(69,916	)		(63,058	)
Net cash provided (used) by investing activities		(5,720,359	)		414,221

(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, 2006 and 2005

	2006			2005
Financing activities:
Increase in deposits	$	3,616,147		$	2,782,301
Proceeds from borrowed funds		53,208,828			70,673,955
Repayment of borrowed funds		(53,309,861	)		(74,154,405	)
Cash dividends paid		(212,641	)		(283,897	)
Acquisition of treasury stock		(3,615	)		(1,141	)
Decrease in advances by borrowers for property taxes and insurance		(74,074	)		(50,371	)
Net cash provided (used) by financing activities		3,224,784			(1,033,558	)
Increase (decrease) in cash and cash equivalents		(731,939	)		917,771
Cash and cash equivalents at beginning of period		5,042,170			5,015,108
Cash and cash equivalents at end of period	$	4,310,231		$	5,932,879
Supplemental information on cash payments:
Interest paid	$	2,986,360		$	2,324,670
Income taxes paid	$	29,289		$	36,000
Supplemental information on non-cash transactions:
Change in net unrealized gain on investment securities available-for-sale	$	(563,968	)	$	568,241
Real estate obtained through foreclosure	$	707,760		$	1,158,305

See accompanying notes to consolidated financial statements.

5

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006 and 2005

(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, 2006, was derived from the financial records of SouthFirst and its wholly-owned subsidiaries, SouthFirst Bank (“SouthFirst Bank”) and SouthFirst Financial Services, Inc. (“SouthFirst Financial”) and SouthFirst Bank’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 that may be expected for the entire year.
(2)	Stock Listing
	On February 21, 2006, the Company filed an application with the Securities & Exchange Commission to withdraw its common stock from listing and registration on the American Stock Exchange. The request was made primarily due to the limited number of stockholders, the limited volume of trading, and the cost associated with maintaining status as a listed company. The application was approved effective March 28, 2006. The Company has made arrangements with Howe Barnes Investments, Inc., an Illinois corporation, for it to act as a market maker for the Company’s common stock on the Over the Counter Bulletin Board (OTCBB).
(3)	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

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	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 use of 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) became effective for public entities that did not file as small business issuers as of the beginning of the first interim or annual reporting period that began after June 15, 2005, and for public entities that file as small business issuers as of the beginning of the first interim or annual reporting period of the registrant’s first fiscal year that begins after December 15, 2005. Accordingly, the Company will be required to account for its transactions involving the exchange of its equity instruments for goods and services beginning with the first interim report filed by the Company following September 30, 2006. The Company currently accounts for its stock options under APB No. 25, as further explained in Note 4, 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.
(4)	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, 2005		38,796	$	11.51		46,477	$	13.15
Exercised		—				—
Forfeited		—				920
Outstanding at June 30, 2006		38,796	$	11.51		45,557	$	13.14

Information pertaining to options outstanding at June 30, 2006, 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		15,547		1.35				15,547
$  9.92		9,000		5.47				7,200
$12.10		37,780		6.29				22,668
$15.75		22,026		1.58				22,026
Outstanding at June 30, 2006		84,353		4.06	$	12.39		67,441	$	12.52

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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,
	2006			2005			2006			2005
Net income (loss), as reported	$	367,253		$	(130,588	)	$	113,190		$	257,062
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,723	)		(1,739	)		(564	)		(559	)
Pro forma net income (loss)	$	365,530		$	(132,327	)	$	112,626		$	256,503
Earnings (loss) per share:
Basic — as reported	$	.52		$	(.18	)	$	.16		$	.36
Basic — pro forma		.52			(.18	)		.16			.36
Diluted — as reported		.51			(.18	)		.16			.36
Diluted — pro forma		.51			(.18	)		.16			.36

	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, 2006 or 2005.
(5)	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, 2006 and 2005. 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, 2006 and 2005, 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, 2006 and 2005:

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						Earnings
	Income			Shares		Per Share
For the Three Months Ended June 30, 2006:
Basic earnings	$	113,190			708,671	$	.16
Dilutive Securities:
Stock Option Plan shares		—			8,635
Dilutive earnings	$	113,190			717,306	$	.16
For the Three Months Ended June 30, 2005:
Basic earnings	$	257,062			709,006	$	.36
Dilutive Securities:
Stock Option Plan shares		—			2,275
Dilutive earnings (loss)	$	257,062			721,281	$	.36
For the Nine Months Ended June 30, 2006:
Basic earnings	$	367,253			708,800	$	.52
Dilutive Securities:
Stock Option Plan shares		—			6,974
Dilutive earnings	$	367,253			715,774	$	.51
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	)

	Options on 22,026 and 39,126 shares of common stock in 2006 and 2005 were not included in computing diluted earnings per share because their effects were anti-dilutive.
(6)	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.
(7)	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, 2006						Nine Months Ended June 30, 2005
			Employee							Employee
	Banking		Benefits				Banking			Benefits
	Activities		Activities		Total		Activities			Activities		Total
Interest and dividend income	$	6,077,099	$	30,267	$	6,107,366	$	5,693,816		$	23,315	$	5,717,131
Interest expenses		3,193,941		—		3,193,941		2,448,980			—		2,448,980
Net interest income		2,883,158		30,267		2,913,425		3,244,836			23,315		3,268,151
Provision for loan losses		142,386		—		142,386		76,576			—		76,576
Net interest income after provision for loan losses		2,740,772		30,267		2,771,039		3,168,260			23,315		3,191,575
Other income		1,247,415		1,422,801		2,670,216		445,855			1,220,192		1,666,047
Other expenses		3,593,074		1,258,062		4,851,136		3,958,197			1,110,082		5,068,279
Income (loss) before income taxes		395,113		195,006		590,119		(344,082	)		133,425		(210,657	)
Income taxes		148,764		74,102		222,866		(130,770	)		50,701		(80,069	)
Net income (loss)	$	246,349	$	120,904	$	367,253	$	(213,312	)	$	82,724	$	(130,588	)

	Three Months Ended June 30, 2006						Three Months Ended June 30, 2005
			Employee							Employee
	Banking		Benefits				Banking			Benefits
	Activities		Activities		Total		Activities			Activities		Total
Interest and dividend income	$	2,093,908	$	10,344	$	2,104,252	$	1,897,883		$	8,291	$	1,906,174
Interest expenses		1,172,208		—		1,172,208		862,552			—		862,552
Net interest income		921,700		10,344		932,044		1,035,331			8,291		1,043,622
Provision for loan losses		131,147		—		131,147		(28,270	)		—		(28,270	)
Net interest income after provision for loan losses		790,553		10,344		800,897		1,063,601			8,291		1,071,892
Other income		330,701		562,713		893,414		423,618			450,793		874,411
Other expenses		1,089,606		424,037		1,513,643		1,166,322			365,399		1,531,721
Income before income taxes		31,648		149,020		180,668		320,897			93,685		414,582
Income taxes		10,851		56,627		67,478		121,919			35,601		157,520
Net income	$	20,797	$	92,393	$	113,190	$	198,978		$	58,084	$	257,062

	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 24, 2006, the Company declared a regular $0.10 per share cash dividend on the Company’s outstanding stock, payable on August 18, 2006, to stockholders of record as of August 3, 2006.

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Item 2: Management’s Discussion and Analysis or Plan of Operations

REVIEW OF RESULTS OF OPERATIONS

Overview

Net income for the three months ended June 30, 2006, decreased $143,872, or 56.0%, and increased $497,841, or 381.2%, for the nine months ended June 30, 2006, compared to the same periods in fiscal 2005. Net interest income, after the provision for loan losses, decreased $270,995, or 25.3%, and decreased $420,536, or 13.2%, for the three and nine months ended June 30, 2006, respectively, when compared to the same period in fiscal 2005. This decrease in net interest income is partially attributable to an increase in the provision for loan losses of 159,417, or 563.9%, and $65,810, or 85.9%, for the three and nine months ended June 30, 2006, respectively, when compared to the same periods in fiscal 2005, all of which is discussed below under the heading “Provision for Loan Losses.” Non-interest income increased $19,003, or 2.2%, for the three month period ended June 30, 2006, and increased $1,004,169, or 60.3%, for the nine month period ended June 30, 2006, when compared to the same periods in fiscal 2005. Non-interest expense decreased $18,078, or 1.2%, for the three month period ended June 30, 2006, and decreased $217,143, or 4.3%, for the nine month period ended June 30, 2006, compared to the same periods in fiscal 2005.

Primary earnings (loss) per common share, based on weighted-average shares outstanding, was $0.16 and $0.36 for the three months ended June 30, 2006 and 2005, respectively, and $0.52 and ($0.18) for the nine months ended June 30, 2006 and 2005, 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, 2006, the interest rate spread decreased 45 basis points as rates earned on interest-earning assets increased 55 basis points to 6.59%, while the cost of funds increased 101 basis points to 3.75% compared to the same three-month period ending June 30, 2005. The change in the interest rate spread is the result of the increase in U.S. interest rates. The average balance of interest-earning assets increased approximately $1.4 million, or 1.1%, from $126.3 million to $127.6 million, while the average balance of interest-bearing liabilities decreased $1.0 million, or 0.8%, from $126.1 million to $125.1 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 3.30% to 2.85%, and a decrease in net interest income of $111,578, or 10.7%, and a decrease of $354,726, or 10.9%, for the three and nine months ended June 30, 2006, respectively, compared to the same periods in fiscal 2005.

Provision for Loan Losses

Provision for loan losses reflects an increase of $65,810, or 85.9%, for the nine month period ended June 30, 2006, when compared to the same period in fiscal 2005.

The current year to date provision of $142,386 includes appropriate reserve requirements associated with construction loans located in Birmingham. These loans represent six construction loans, having a total contract amount of $1,281,900 and a disbursed amount of $990,544. In addition, there are five lot loans having a total contract and disbursed amount of $160,000. Final foreclosure of these loans is set for July 2006. No significant losses are anticipated on any of these foreclosed properties.

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For the same period in fiscal 2005, the year to date provision of $76,576 also included appropriate reserve requirements associated with construction lending located in Birmingham. At the time of foreclosure in March 2005, there were five construction loans having a total contract amount of $554,829 and a disbursed amount of $525,132. In addition, there were three lot loans having a total contract amount of $275,000 and a disbursed amount of $69,260. Currently, three lot loans having a total book value of $82,574 and one construction loan in the amount of $149,600 remain outstanding. No significant losses occurred as a result of the sale of the other-mentioned assets.

At June 30, 2006, the allowance for loan losses to total average loans outstanding was 0.61% compared to 0.51% on the same date in 2005.

Other Income

Total other income for the nine months ended June 30, 2006, increased approximately $1,004,000 to $2,670,000, compared to $1,666,000 for the nine months ended June 30, 2005. A significant portion of the increase in non-interest income was attributable to a loss on the sale of investment securities held-to-maturity of approximately $701,000, which occurred in March 2005. During that period, 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 2005. Other increases in other income included service charges and other fees, employee benefit consulting fees and other income for approximately $71,000, $199,000 and $57,000, respectively. During the period ended March 31, 2006, the Company sold real estate that had been held in Hoover, Alabama, reflecting a pre-tax gain of approximately $193,000. This gain was partially offset by a loss of approximately $16,000 on the sale of other premises and equipment. These increases in other income are partially offset by decreases in income generated from the sale of loans, sale of foreclosed and other assets and sale of investment securities available for sale of approximately $122,000, $24,000 and 47,000, respectively, when compared to the same period in fiscal 2005.

For the three months ended June 30, 2006, total other income increased by approximately $19,000 to $893,000, compared to $874,000 for the same period in fiscal 2005. Increases occurred in service charges and other fees, employee benefit consulting fees and other income of approximately $26,000, $112,000 and $20,000, respectively. Offsetting these increases are decreases in income generated from the sale of loans, the sale of foreclosed and other assets, the sale of premises and equipment and the sale of investment securities available for sale of approximately $63,000, $21,000, $7,000 and 47,000, respectively, when compared to the same period in fiscal 2005.

Other Expenses

Total other expense for the nine months ended June 30, 2006, decreased by approximately $217,000 to $4,851,000, as compared to $5,068,000 for the nine months ended June 30, 2005. The changes in other non-interest expense is largely attributable to a decrease in termination expenses relative to the resignation, severance and general release agreement between Joe K. McArthur and SouthFirst Bank and SouthFirst, which was effective March 31, 2005. Mr. McArthur was paid a severance benefit in one lump sum of $228,361, as provided under his employment contract dated January 1, 2005. In addition to the severance benefits described above, SouthFirst 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 reductions in expenses occurred in compensation and benefits, net occupancy, data processing, deposit insurance premiums and legal of approximately $77,000, $5,000, $35,000, $24,000 and $61,000, respectively. Offsetting these decreases in expenses are increases in furniture and fixtures expense, office supplies and other expenses of approximately $31,000, $13,000 and $89,000, respectively, when compared to the same period in fiscal 2005. Other expenses increased primarily from increased fair value adjustments relative to foreclosed real estate and other associated fees.

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For the three months ended June 30, 2006, total other expenses decreased approximately $18,000 to $1,514,000 from $1,532,000 for the three months ended June 30, 2005. Decreases in other expenses occurred in compensation and benefits, net occupancy, data processing, deposit insurance premiums, and legal of approximately $15,000, $4,000, $10,000, $14,000 and $5,000, respectively. Offsetting these decreases in expenses are increases in furniture and fixtures expense and other professional services of approximately $17,000 and $11,000, respectively, when compared to the same period in fiscal 2005. During the comparable periods, expenses related to office supplies remained constant at approximately $110,000.

Income Taxes

The Company’s effective tax rate for the nine-month periods ended June 30, 2006 and 2005 was 37.8% and 38.0%, respectively, compared to the federal statutory rate of 34.0%. SouthFirst’s effective tax rate was higher than the statutory rate due primarily to state income taxes. Income tax expense (benefit) increased approximately $303,000 to $222,866 for the nine months ended June 30, 2006, as compared to $(80,069) for the nine months ended June 30, 2005, due to an 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,
		2006			2005
Return on assets			0.32	%		0.72	%
Return on equity			4.48	%		9.95	%
Equity to asset ratio			7.14	%		7.24	%
Interest rate spread			2.85	%		3.30	%
Net interest margin			2.92	%		3.31	%
Total risk-based capital			12.52	%		12.29	%
Non-performing loans to loans			1.49	%		0.53	%
Allowance for loan losses to loans			0.61	%		0.51	%
Allowance for loan losses to average non-performing loans			41.00	%		96.05	%
Ratio of net charge-offs to average loans outstanding	��		0.00	%		0.49	%
Book value per common share outstanding		$	14.15		$	14.77

Significant factors affecting SouthFirst’s financial condition during the nine months ended June 30, 2006, are detailed below:

Assets

Total assets increased approximately $3,032,000, or 2.2%, from $139,138,000 at September 30, 2005, to $142,170,000 at June 30, 2006. Net loans increased approximately 5,904,000, or 6.2%, which occurred primarily in business, construction and other types of residential mortgages. Investment securities available for sale decreased approximately $835,000, or 3.2%, which occurred primarily in mortgage-

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backed securities as a result of faster pre-payment speeds. Premises and equipment decreased approximately $1,627,000, or 35.0%, as a result of the sale of real estate located in Hoover, Alabama. The cash obtained from the decrease in investment securities available for sale and premises and equipment was used primarily to fund loan demand. Other increases in assets occurred in foreclosed and other repossessed assets, interest earning assets in other financial institutions and Federal Home Loan Bank stock of approximately $635,000, $309,000 and $156,000, respectively. During the quarter ended March 31, 2006, the Company purchased stock in the Alabama Bankers Bank in the amount of $350,000, which is included in securities available-for-sale. Other decreases in assets occurred in cash and cash equivalents, loans held for sale and other assets of approximately $732,000, $344,000 and $433,000, respectively.

Liabilities

Total liabilities increased approximately $3,428,000, or 2.7%, from $128,714,000 at September 30, 2005, to $132,141,000 at June 30, 2006. Deposits increased approximately $3,616,000, or 3.6%, during that nine month period, which represents an increase in retail certificates of deposit of approximately $1,657,000, an increase in brokered deposits of approximately $1,657,000, and an increase in checking and other savings accounts of approximately $302,000. During that nine month period, the Company purchased brokered deposits for approximately $9,845,000, with maturities ranging from 5 months to 20 months, and a weighted average interest rate of 4.91%. These funds were used primarily to repay Federal Home Loan Bank borrowings that had occurred to meet loan demand. These borrowed funds had a weighted average interest rate of 5.15%. Borrowed funds decreased slightly for the period from $26,016,000 at September 30, 2005, to $25,915,000 at June 30, 2006. Borrowed funds at June 30, 2006, consisted of $24,470,000 Federal Home Loan Bank advances and $1,444,828 in an existing line of credit with the Alabama Bankers Bank. Other changes in liabilities consisted of an increase in accrued interest payable of approximately $208,000, while decreases occurred in advances by borrowers for property taxes and insurance and accrued expenses and other liabilities of approximately $74,000 and $221,000, respectively.

Loan Quality

The 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, 2006, the allowance for loan losses was $621,941, compared to $518,572 at September 30, 2005, which represents an increase of approximately $104,000. Non-performing loans at June 30, 2006, were approximately $1,517,000 as compared to approximately $875,000 at September 30, 2005. At June 30, 2006, and September 30, 2005, the allowance for loan losses represented 0.61% and 0.53% 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 that could affect collectibility. Management considers the allowance for loan losses to be adequate based upon its evaluations of the averages of specific loans, internal loan rating systems, and guidelines provided by the banking regulatory authorities governing SouthFirst Bank.

Liquidity and Funding Sources

The Asset and Liability Committee of SouthFirst Bank’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, SouthFirst Bank is required to maintain sufficient liquidity to assure its safe and sound operation. The requirement to maintain a specific

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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, SouthFirst Bank 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 calendar 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, 2006, SouthFirst Bank’s average daily balance of liquid assets was approximately 25.0% of its March 31, 2006, liquidity base, far exceeding the 4% requirement set by the previous regulation. These liquid assets included approximately $5,465,000 in cash and cash equivalents and approximately $21,834,000 in other qualifying assets. In addition, as of June 30, 2006, the fair market value of the Company’s investment securities portfolio, which is held for sale, was approximately $25,298,000. 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, customer 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, 2006, the amount on deposit with the Company was $104,741,000, which represents an increase of $3,616,000 from the amount on deposit with the Company at September 30, 2005.

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, 2006, the Company had a line of credit, based on prime, with the Alabama Bankers Bank in the amount of $2,005,000, which presently is scheduled to mature in March 2007, and of which there is an outstanding balance at June 30, 2006, of approximately $1,445,000. At June 30, 2006, the Company had outstanding balances with the FHLBA of $24,470,000.

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 SouthFirst Bank’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, the primary federal regulatory of the Company, has issued guidelines for its regulated entities 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. SouthFirst Bank has satisfied its capital requirements primarily through the retention of earnings.

As of June 30, 2006, SouthFirst Bank has satisfied all regulatory capital requirements. SouthFirst Bank’s compliance with the current standards is as follows:

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			Percent of
	Amount		Asset Base
Tangible capital	$	11,803,000		8.28	%
Core capital		11,803,000		8.28	%
Tier-based capital		12,402,000		12.52	%

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 SouthFirst Bank 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 SouthFirst Bank’s financial condition.

Item 6: Exhibits

Exhibit No.		Description of Exhibit
	3.1	Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	3.2	Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	3.3	Amendment to Article III, Section 2 of the Bylaws (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2002).
	4	Form of Common Stock Certificate (Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	10.1	Form of Amended and Restated Employment Agreement effective as of January 1, 2006, between SouthFirst Bank and Sandra H. Stephens (Filed herewith).
	10.2	Form of Amended and Restated Employment Agreement effective as of January 1, 2006, between Pension and Benefit Financial Services, Inc. and J. Malcomb Massey (Filed herewith).
	10.3	Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., SouthFirst Bank, Pension & Benefit Financial Services, Inc. and J. Malcomb Massey (Incorporated by reference to Exhibit 10.4.2 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2001).
	10.4	Form of Amended and Restated Employment Agreement effective as of January 1, 2006, between Pension & Benefit Financial Services, Inc. and Ruth M. Roper (Filed herewith).
	10.5	Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., SouthFirst Bank, Pension & Benefit Financial Services, Inc. and Ruth M. Roper (Incorporated by reference to Exhibit 10.5.2 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2001).
	10.6	Form of Management Recognition Plan A (Incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	10.7	Form of Management Recognition Plan A, as amended (Incorporated by reference to Exhibit 10.8.2 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995).
	10.8	Management Recognition Plan A Restated and Continued (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 under the Securities Act, Reg. No. 333-4534).
	10.9	Form of Management Recognition Plan B (Incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730 filed 1994).

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Exhibit No.		Description of Exhibit
	10.10	Form of Management Recognition Plan B, as amended (Incorporated by reference to Exhibit 10.9.2 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995).
	10.11	Management Recognition Plan B, Restated and Continued (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on From S-8 under the Securities Act, Reg. No. 333-4536).
	10.12	Form of Stock Option and Incentive Plan (Incorporated by reference to Exhibit 10.10.1 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995).
	10.13	Form of Stock Option and Incentive Plan, as amended (Incorporated by reference to Exhibit 10.10.2 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995).
	10.14	From of Stock Option and Incentive Plan, Restated and Continued (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8, Reg. No. 333-4538).
	10.15	Form of Stock Option and Incentive Plan, as Amended (Incorporated by reference to Exhibit 10.10.4 to the Company’s Registration Statement on Form S-8, Reg. No. 333-85705).
	10.16	Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8, Reg. No. 333-4538).
	10.17	Form of Incentive Stock Option Agreement, as Amended (Incorporated by reference to Exhibit 10.10.6 to the Company’s Registration Statement on Form S-8, Reg. No. 333-85705).
	10.18	Form of SouthFirst Bancshares, Inc. Employee Stock Ownership Plan (Incorporated by reference to Exhibit 10.8 to the Company’s Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	10.19	Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership Plan executed as of September 29, 2001 (Incorporated by reference to Exhibit 10.11.2 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2001).
	10.20	Deferred Compensation Agreement between Pension & Benefit and Ruth M. Roper (Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2001).
	10.21	Stock Option Agreement between SouthFirst Bancshares, Inc. and Sandra H. Stephens (Incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-QSB for the period ended December 31, 2001).
	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 14, 2006 (Filed herewith).
	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 14, 2006 (Filed herewith).
	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 14, 2006 (Furnished herewith).

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 Securities and Exchange Act of 1934 (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.

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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: August 14, 2006	By:	/s/ Sandra H. Stephens
		Sandra H. Stephens
		Chief Executive Officer (principal executive officer)
Date: August 14, 2006	By:	/s/ Janice Browning
		Janice Browning
		Controller, Treasurer (principal accounting officer)

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EXHIBIT INDEX

Exhibit No.		Description of Exhibit
	3.1	Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	3.2	Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	3.3	Amendment to Article III, Section 2 of the Bylaws (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2002).
	4	Form of Common Stock Certificate (Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	10.1	Form of Amended and Restated Employment Agreement effective as of January 1, 2006, between SouthFirst Bank and Sandra H. Stephens (Filed herewith).
	10.2	Form of Amended and Restated Employment Agreement effective as of January 1, 2006, between Pension and Benefit Financial Services, Inc. and J. Malcomb Massey (Filed herewith).
	10.3	Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., SouthFirst Bank, Pension & Benefit Financial Services, Inc. and J. Malcomb Massey (Incorporated by reference to Exhibit 10.4.2 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2001).
	10.4	Form of Amended and Restated Employment Agreement effective as of January 1, 2006, between Pension & Benefit Financial Services, Inc. and Ruth M. Roper (Filed herewith).
	10.5	Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., SouthFirst Bank, Pension & Benefit Financial Services, Inc. and Ruth M. Roper (Incorporated by reference to Exhibit 10.5.2 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2001).
	10.6	Form of Management Recognition Plan A (Incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	10.7	Form of Management Recognition Plan A, as amended (Incorporated by reference to Exhibit 10.8.2 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995).
	10.8	Management Recognition Plan A Restated and Continued (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 under the Securities Act, Reg. No. 333-4534).
	10.9	Form of Management Recognition Plan B (Incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730 filed 1994).
	10.10	Form of Management Recognition Plan B, as amended (Incorporated by reference to Exhibit 10.9.2 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995).
	10.11	Management Recognition Plan B, Restated and Continued (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on From S-8 under the Securities Act, Reg. No. 333-4536).
	10.12	Form of Stock Option and Incentive Plan (Incorporated by reference to Exhibit 10.10.1 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995).
	10.13	Form of Stock Option and Incentive Plan, as amended (Incorporated by reference to Exhibit 10.10.2 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995).

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Exhibit No.		Description of Exhibit
	10.14	From of Stock Option and Incentive Plan, Restated and Continued (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8, Reg. No. 333-4538).
	10.15	Form of Stock Option and Incentive Plan, as Amended (Incorporated by reference to Exhibit 10.10.4 to the Company’s Registration Statement on Form S-8, Reg. No. 333-85705).
	10.16	Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8, Reg. No. 333-4538).
	10.17	Form of Incentive Stock Option Agreement, as Amended (Incorporated by reference to Exhibit 10.10.6 to the Company’s Registration Statement on Form S-8, Reg. No. 333-85705).
	10.18	Form of SouthFirst Bancshares, Inc. Employee Stock Ownership Plan (Incorporated by reference to Exhibit 10.8 to the Company’s Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 under the Securities Act, Reg. No. 33-80730).
	10.19	Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership Plan executed as of September 29, 2001 (Incorporated by reference to Exhibit 10.11.2 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2001).
	10.20	Deferred Compensation Agreement between Pension & Benefit and Ruth M. Roper (Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2001).
	10.21	Stock Option Agreement between SouthFirst Bancshares, Inc. and Sandra H. Stephens (Incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-QSB for the period ended December 31, 2001).
	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 14, 2006 (Filed herewith).
	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 14, 2006 (Filed herewith).
	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 14, 2006 (Furnished herewith).

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