##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-KSB
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended September 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 1-13640
 SOUTHFIRST BANCSHARES, INC.
  
 
 Name of Each ExchangeTitle of Each Class
    
    on Which RegisteredCommon Stock, $.01 par value
    
    American Stock Exchange, Inc.
 
 o þ
 o þ
 o
 . þ o
 
    o þ




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##### 



SOUTHFIRST BANCSHARES, INC.
 FORM 10-KSB
 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
 Index
  
 PART IItem 1.
    
    BusinessItem 2.
    
    PropertyItem 3.
    
    Legal ProceedingsItem 4.
    
    Submission of Matters to a Vote of Security HoldersPART IIItem 5.
    
    Market for Common Equity and Related Stockholder MattersItem 6.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7.
    
    Financial StatementsItem 8.
    
    Changes In and Disagreements with Accountants on Accounting and Financial DisclosureItem 8A.
    
    Controls and ProceduresPART IIIItem 9.
    
    Directors, Executive Officers and Control Persons of the RegistrantItem 10.
    
    Executive CompensationItem 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12.
    
    Certain Relationships and Related TransactionsItem 13.
    
    Exhibits and Reports on Form 8-KItem 14
    
    Principal Accountant Fees and ServicesEX-11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGSEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF JONES & KIRKPATRICK, P.C.EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICEREX-31.2 CERTIFICATION OF THE CONTROLLER (CHIEF FINANCIAL OFFICER)EX-32.1 WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICEREX-32.2 WRITTEN STATEMENT OF THE CHIEF FINANCIAL OFFICER




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Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
  
 PART I
 
 ITEM 1. BUSINESS
 Business of SouthFirst
 General
   1




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Business of SouthFirst Bank
 General
         2




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Market Area
      Residential Lending
 General
  3




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4




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Residential Lending  Birmingham Market Area
  Construction Lending
 SouthFirst Mortgage, Inc.
    5




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Supervisory Agreement
  Commercial Lending
   Consumer Lending and Other Lending
   6




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Loan Approval
  Loan Origination, Commitment and Other Fees and Commissions
  Competition
   Data Processing
  7




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Employees
  Business of Subsidiaries
 SouthFirst Mortgage, Inc.
 SouthFirst
Mortgage, Inc.
 Pension & Benefit Trust Company
  :
 Actuarial Services
  Administrative Services
  Trust Services
  8




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SouthFirst Financial Services, Inc.
  Supervision and Regulation
 General
  Regulation of SouthFirst
 General
  Qualified Thrift Lender Test
  Restrictions on Acquisitions
  9




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Federal Securities Laws
  Regulation of SouthFirst Bank
   10




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Insurance of Deposit Accounts
       OTS Supervisory Assessments
  11




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Regulatory Capital Requirements
 General
  Core Capital and Tangible Capital
  Risk-Based Capital
 12




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Prompt Corrective Action
  13




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Standards for Safety and Soundness
  Dividends and Other Capital Distribution Limitations
  14




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Qualified Thrift Lender Test
   Loans to One Borrower
  15




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Lending Guidelines
    Community Reinvestment
  Consumer Credit Regulation
  16




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Transactions with Affiliates
   Branching by Federal Associations
  Liquidity Requirements
   17




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Federal Home Loan Bank System
 General
  Federal Home Loan Bank Advances
    18




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Federal Reserve System
   
 ITEM 2. PROPERTIES.
   Net Book Value
    
    
    DepositsLeased
    
    
    
    
    
    
    as of
    
    
    as ofLocation
    
    or Owned
    
    
    Date Opened
    
    
    Sept. 30, 2005
    
    
    Sept. 30, 2005(In thousands)SouthFirst and SouthFirst BankMain Office126 North Norton AvenueSylacauga, Alabama 35150
    
    Owned
    
    April 1966
    
    $
    692
    
    
    $
    54,756Office/Storage BuildingNorth Norton AvenueSylacauga, Alabama 35150
    
    Owned
    
    November 1995
    
    
    196
    
    
    
    N/ASouthFirst Bank Branch Offices301 West North StreetTalladega, Alabama 35160
    
    Owned
    
    April 1961
    
    
    222
    
    
    
    13,757102 Fifth Street NorthClanton, Alabama 35045
    
    Owned
    
    November 1997
    
    
    1,049
    
    
    
    32,612SouthFirst MortgageLoan Production Offices2159 Rocky Ridge RoadBirmingham, Alabama 35216
    
    Leased
    
    March 1994
    
    
    1,445
    
    
    
    N/A70 Chelsea CornersChelsea, AL 35043
    
    Leased
    
    January 2004
    
    
    
    
    
    
    N/A
 19




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Net Book Value
    
    
    DepositsLeased
    
    
    
    
    
    
    as of
    
    
    as ofLocation
    
    or Owned
    
    
    Date Opened
    
    
    Sept. 30, 2005
    
    
    Sept. 30, 2005(In thousands)Pension & Benefit260 Commerce Street, Third FloorMontgomery, Alabama 36101
    
    Owned
    
    April 1997
    
    
    251
    
    
    
    N/ATotal
    
    
    
    
    
    
    
    
    
    $
    3,855
    
    
    $
    101,125
 
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  CashDividendsHigh Sale
    
    Low Sale
    

Declared
(1)Fiscal Year Ended September 30, 2005First Quarter ended December 31, 2004
    
    
    15 5/6
    
    
    
    14 6/7
    
    
    $
    106,487Second Quarter ended March 31, 2005
    
    
    16
    
    
    
    14 5/6
    
    
    
    106,505Third Quarter ended June 30, 2005
    
    
    15 2/9
    
    
    
    12
    
    
    
    70,904Fourth Quarter ended September 30, 2005
    
    
    12 3/4
    
    
    
    11 3/5
    
    
    
    70,900Fiscal Year Ended September 30, 2004First Quarter ended December 31, 2003
    
    
    17 1/3
    
    
    
    15 1/2
    
    
    $
    106,500Second Quarter ended March 31, 2004
    
    
    17 4/5
    
    
    
    16
    
    
    
    106,501Third Quarter ended June 30, 2004
    
    
    18 3/4
    
    
    
    15 5/9
    
    
    
    106,495Fourth Quarter ended September 30, 2004
    
    
    16 3/4
    
    
    
    15 1/7
    
    
    
    106,487
 
 (1)
    
    Certain cash dividends associated with SouthFirsts Management Recognition Plans and Employee
Stock Option Plan shares are reflected as compensation expense in the consolidated financial
statements. See Item 10. EXECUTIVE COMPENSATION  Management Recognition Plans and 
Employee Stock Ownership Plan. 20




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21




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS
   Forward Looking Statements
 As stated in the opening paragraph to this Annual Report on Form 10-KSB , entitled Safe Harbor
Statement Under the Private Securities Litigation Reform Act of 1995, this Annual Report on Form
10-KSB contains certain forward-looking statements, including managements discussion and analysis
of financial condition and results of operation under this Item 6. While SouthFirst believes that
the statements contained in this Item 6, and throughout this Annual Report on Form 10-KSB , are
accurate, SouthFirsts business is dependent upon general economic conditions and various
conditions specific to its industry. Future trends and conditions could cause actual results to
differ materially from the forward-looking statements made herein.
 Results of Operations
 Net Income
    Net Interest Income
  22




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Rate/Volume Variance Analysis
  Year Ended September 30,2005 vs. 2004
    
    
    2004 vs. 2003
    
    
    2003 vs. 2002Increase (Decrease)
    
    
    Increase (Decrease)
    
    
    Increase (Decrease)Due to
    
    
    Due to
    
    
    Due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Dollar amounts in thousands)Interest income:Securities
    
    $
    (102
    )
    
    $
    (84
    )
    
    $
    (186
    )
    
    $
    167
    
    
    $
    (30
    )
    
    $
    197
    
    
    $
    (215
    )
    
    $
    4
    
    
    $
    (211
    )Loans receivable
    
    
    383
    
    
    
    335
    
    
    
    718
    
    
    
    (152
    )
    
    
    (301
    )
    
    
    (513
    )
    
    
    (154
    )
    
    
    (726
    )
    
    
    (880
    )Total interest income
    
    
    281
    
    
    
    251
    
    
    
    532
    
    
    
    15
    
    
    
    (331
    )
    
    
    (316
    )
    
    
    (369
    )
    
    
    (722
    )
    
    
    (1,091
    )Interest expense:NOW accounts
    
    
    1
    
    
    
    8
    
    
    
    9
    
    
    
    (1
    )
    
    
    (43
    )
    
    
    (44
    )
    
    
    1
    
    
    
    (81
    )
    
    
    (80
    )Money market demand
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Passbook savings
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (47
    )
    
    
    (48
    )
    
    
    1
    
    
    
    (106
    )
    
    
    (105
    )CDs other than Jumbos
    
    
    193
    
    
    
    271
    
    
    
    464
    
    
    
    25
    
    
    
    (567
    )
    
    
    (542
    )
    
    
    (57
    )
    
    
    (749
    )
    
    
    (806
    )Jumbos
    
    
    (49
    )
    
    
    (11
    )
    
    
    (60
    )
    
    
    (139
    )
    
    
    (13
    )
    
    
    (152
    )
    
    
    68
    
    
    
    (46
    )
    
    
    22Borrowed funds
    
    
    (44
    )
    
    
    205
    
    
    
    161
    
    
    
    148
    
    
    
    (94
    )
    
    
    54
    
    
    
    (194
    )
    
    
    (22
    )
    
    
    (216
    )Total interest expense
    
    
    100
    
    
    
    473
    
    
    
    573
    
    
    
    32
    
    
    
    (764
    )
    
    
    (732
    )
    
    
    (181
    )
    
    
    (1,005
    )
    
    
    (1,186
    )Change in net interest income
    
    $
    181
    
    
    $
    (222
    )
    
    $
    (41
    )
    
    $
    (17
    )
    
    $
    433
    
    
    $
    416
    
    
    $
    (188
    )
    
    $
    283
    
    
    $
    95
 Interest Income
  23




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Interest Expense
    24




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Provision for Loan Losses
       25




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Other Income
      Other Expense
   26




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Income Tax Expense
  Supervisory Agreement
  New Accounting Pronouncements
 The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
 Share-Based Payment Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees
 27




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Interest Rate Sensitivity
   28




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29




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Interest Rate Sensitivity Gap
 At September 30, 2005
    
    
    At September 30, 2004One year
    
    
    One to
    
    
    Three to
    
    
    Over
    
    
    
    
    
    
    One year
    
    
    One to
    
    
    Three to
    
    
    Overor less
    
    
    three years
    
    
    five years
    
    
    five years
    
    
    Total
    
    
    Or less
    
    
    three years
    
    
    five years
    
    
    five years
    
    
    Total(Dollar Amounts in Thousands)Interest-earning assets:Mortgage loans
    
    $
    46,634
    
    
    $
    20,024
    
    
    $
    10,786
    
    
    $
    7,703
    
    
    $
    85,147
    
    
    $
    46,699
    
    
    $
    19,994
    
    
    $
    12,337
    
    
    $
    6,766
    
    
    $
    85,796All other loans
    
    
    4,842
    
    
    
    4,050
    
    
    
    1,489
    
    
    
    555
    
    
    
    10,936
    
    
    
    3,340
    
    
    
    3,087
    
    
    
    1,726
    
    
    
    1,938
    
    
    
    10,091Collateralized mortgage
obligations
    
    
    521
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    521
    
    
    
    875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    875Mortgage-backed
securities
    
    
    2,508
    
    
    
    4,409
    
    
    
    3,034
    
    
    
    4,285
    
    
    
    14,236
    
    
    
    1,431
    
    
    
    2,233
    
    
    
    1,585
    
    
    
    3,004
    
    
    
    8,253Other Investments (1)
    
    
    3,912
    
    
    
    6,052
    
    
    
    1,000
    
    
    
    5,522
    
    
    
    16,486
    
    
    
    25,235
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    25,335Total interest- earning assets
    
    $
    58,417
    
    
    $
    34,535
    
    
    $
    16,309
    
    
    $
    18,065
    
    
    $
    127,326
    
    
    $
    77,580
    
    
    $
    25,414
    
    
    $
    15,648
    
    
    $
    11,708
    
    
    $
    130,350Interest-bearing liabilities:Deposits
    
    $
    57,259
    
    
    $
    17,413
    
    
    $
    11,692
    
    
    $
    10,575
    
    
    $
    96,939
    
    
    $
    58,621
    
    
    $
    24,634
    
    
    $
    10,123
    
    
    $
    4,477
    
    
    $
    97,855Borrowed funds
    
    
    9,613
    
    
    
    
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    24,613
    
    
    
    28,186
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    30,686Total interest-bearing liabilities
    
    $
    66,872
    
    
    $
    17,413
    
    
    $
    16,692
    
    
    $
    20,575
    
    
    $
    121,552
    
    
    $
    86,807
    
    
    $
    27,134
    
    
    $
    10,123
    
    
    $
    4,477
    
    
    $
    128,541Interest sensitivity gap
    
    $
    (8,455
    )
    
    $
    17,122
    
    
    $
    (383
    )
    
    $
    (2,510
    )
    
    $
    5,774
    
    
    $
    (9,227
    )
    
    $
    (1,720
    )
    
    $
    5,525
    
    
    $
    7,231
    
    
    $
    1,809Cumulative interest sensitivity gap
    
    $
    (8,455
    )
    
    $
    8,667
    
    
    $
    8,284
    
    
    $
    5,774
    
    
    $
    
    
    
    $
    (9,227
    )
    
    $
    (10,947
    )
    
    $
    (5,422
    )
    
    $
    1,809
    
    
    $
    Ratio of cumulative interest sensitivity
gap to total interest earning assets
    
    
    (6.64
    )%
    
    
    6.81
    %
    
    
    6.51
    %
    
    
    4.53
    %
    
    
    
    
    
    
    (7.08
    )%
    
    
    (8.40
    )%
    
    
    (4.16
    )%
    
    
    1.39
    %
    
    
    Ratio of cumulative interest sensitivity
gap to total assets of $138,739
    
    
    (6.09
    )%
    
    
    6.25
    %
    
    
    5.97
    %
    
    
    4.16
    %
    
    
    
    
    
    
    (6.57
    )%
    
    
    (7.79
    )%
    
    
    (3.86
    )%
    
    
    1.29
    %
    
    
    
 
 (1)
    
    Includes investments in overnight deposits. 30




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Gap Sensitivity
  Interest Rate Risk Strategy
  Effects of Inflation and Changing Prices
  31




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Average Balance, Interest, Yields and Rates
   32




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Consolidated Average Balances, Interest Income/Expense and Yields/Rates
 Year Ended September 30,2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest Earning Assets:Interest earnings deposited
in other financial institutions
    
    $
    742,972
    
    
    $
    86,108
    
    
    
    11.59
    %
    
    $
    602,805
    
    
    $
    37,776
    
    
    
    6.27
    %
    
    $
    761,750
    
    
    $
    91,223
    
    
    
    11.98
    %Total securities
    
    
    28,362,205
    
    
    
    1,413,520
    
    
    
    4.98
    %
    
    
    30,476,375
    
    
    
    1,647,473
    
    
    
    5.41
    %
    
    
    27,237,544
    
    
    
    1,397,105
    
    
    
    5.13
    %Loans receivable
    
    
    97,694,359
    
    
    
    6,153,817
    
    
    
    6.30
    %
    
    
    91,610,652
    
    
    
    5,435,692
    
    
    
    5.93
    %
    
    
    94,166,707
    
    
    
    5,948,317
    
    
    
    6.32
    %Total interest earning assets
    
    
    126,799,536
    
    
    
    7,653,445
    
    
    
    6.04
    %
    
    
    122,689,832
    
    
    
    7,120,941
    
    
    
    5.80
    %
    
    
    122,166,001
    
    
    
    7,436,645
    
    
    
    6.09
    %Allowance for loan losses
    
    
    (754,566
    )
    
    
    
    
    
    
    
    
    
    
    (980,380
    )
    
    
    
    
    
    
    
    
    
    
    (927,683
    )Cash and amounts due from
depository institutions
    
    
    5,251,660
    
    
    
    
    
    
    
    
    
    
    
    5,592,476
    
    
    
    
    
    
    
    
    
    
    
    8,364,641Premises and equipment
    
    
    4,710,512
    
    
    
    
    
    
    
    
    
    
    
    4,568,474
    
    
    
    
    
    
    
    
    
    
    
    4,507,558FHLB stock, at cost
    
    
    1,195,908
    
    
    
    
    
    
    
    
    
    
    
    1,117,000
    
    
    
    
    
    
    
    
    
    
    
    1,262,833Foreclosed real estate
    
    
    689,336
    
    
    
    
    
    
    
    
    
    
    
    495,330
    
    
    
    
    
    
    
    
    
    
    
    420,213Real estate held for investment
    
    
    166,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accrued interest receivable
    
    
    619,999
    
    
    
    
    
    
    
    
    
    
    
    665,166
    
    
    
    
    
    
    
    
    
    
    
    605,552Other assets
    
    
    3,562,871
    
    
    
    
    
    
    
    
    
    
    
    3,299,720
    
    
    
    
    
    
    
    
    
    
    
    2,650,805Total Assets
    
    $
    142,241,923
    
    
    
    
    
    
    
    
    
    
    $
    137,447,618
    
    
    
    
    
    
    
    
    
    
    $
    139,049,920Interest Bearing Liabilities:Deposits:NOW accounts
    
    $
    10,846,062
    
    
    $
    28,279
    
    
    
    
    
    
    $
    10,612,198
    
    
    $
    19,403
    
    
    
    .18
    %
    
    $
    11,208,905
    
    
    $
    63,071
    
    
    
    .56
    %Money market demand
    
    
    70,044
    
    
    
    67
    
    
    
    
    
    
    
    54,929
    
    
    
    54
    
    
    
    .10
    %
    
    
    46,293
    
    
    
    161
    
    
    
    .35
    %Statement savings
    
    
    11,030,037
    
    
    
    25,231
    
    
    
    
    
    
    
    11,494,036
    
    
    
    25,921
    
    
    
    .23
    %
    
    
    12,142,016
    
    
    
    74,506
    
    
    
    .61
    %CDs, other than Jumbos
    
    
    71,360,202
    
    
    
    1,946,425
    
    
    
    
    
    
    
    64,272,679
    
    
    
    1,482,260
    
    
    
    2.31
    %
    
    
    63,192,912
    
    
    
    2,024,399
    
    
    
    3.20
    %Jumbo certificates
    
    
    4,104,920
    
    
    
    147,094
    
    
    
    
    
    
    
    5,466,536
    
    
    
    207,212
    
    
    
    3.79
    %
    
    
    9,116,476
    
    
    
    358,691
    
    
    
    3.93
    %Total interest-bearing deposits
    
    
    97,411,265
    
    
    
    2,147,096
    
    
    
    2.20
    %
    
    
    91,900,378
    
    
    
    1,734,850
    
    
    
    1.89
    %
    
    
    95,706,602
    
    
    
    2,520,828
    
    
    
    2.63
    %Borrowed funds
    
    
    28,236,468
    
    
    
    1,238,754
    
    
    
    4.39
    %
    
    
    29,241,967
    
    
    
    1,077,477
    
    
    
    3.68
    %
    
    
    25,217,611
    
    
    
    1,023,365
    
    
    
    4.06
    %Total interest-bearing liabilities
    
    
    125,647,733
    
    
    
    3,385,850
    
    
    
    2.69
    %
    
    
    121,142,345
    
    
    
    2,812,327
    
    
    
    2.32
    %
    
    
    120,924,213
    
    
    
    3,544,193
    
    
    
    2.93
    %Non-interest bearing demand accounts
    
    
    4,753,022
    
    
    
    
    
    
    
    
    
    
    
    4,077,675
    
    
    
    
    
    
    
    
    
    
    
    3,585,780Advances by borrowers for property taxes
    
    
    194,826
    
    
    
    
    
    
    
    
    
    
    
    179,793
    
    
    
    
    
    
    
    
    
    
    
    208,122Accrued interest payable
    
    
    544,791
    
    
    
    
    
    
    
    
    
    
    
    490,022
    
    
    
    
    
    
    
    
    
    
    
    726,747Income taxes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (396,075
    )
    
    
    
    
    
    
    
    
    
    
    447,058Accrued expenses and other liabilities
    
    
    758,599
    
    
    
    
    
    
    
    
    
    
    
    1,002,548
    
    
    
    
    
    
    
    
    
    
    
    431,172Total liabilities
    
    
    131,898,971
    
    
    
    
    
    
    
    
    
    
    
    126,496,308
    
    
    
    
    
    
    
    
    
    
    
    126,323,092Stockholders equity
    
    
    10,342,952
    
    
    
    
    
    
    
    
    
    
    
    10,951,309
    
    
    
    
    
    
    
    
    
    
    
    12,726,828Total liabilities & stockholders equity
equity
    
    $
    142,241,923
    
    
    
    
    
    
    
    
    
    
    $
    137,447,617
    
    
    
    
    
    
    
    
    
    
    $
    139,049,920Net interest income
    
    
    
    
    
    $
    4,267,595
    
    
    
    
    
    
    
    
    
    
    $
    4,308,614
    
    
    
    
    
    
    
    
    
    
    $
    3,892,452Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.34
    %
    
    
    
    
    
    
    
    
    
    
    3.48
    %
    
    
    
    
    
    
    
    
    
    
    3.16
    %Net yield on total interest earning assets
    
    
    
    
    
    
    
    
    
    
    3.37
    %
    
    
    
    
    
    
    
    
    
    
    3.51
    %
    
    
    
    
    
    
    
    
    
    
    3.19
    %Average interest-earning assets to average
total interest-bearing liabilities ratio
    
    
    
    
    
    
    
    
    
    
    100.92
    %
    
    
    
    
    
    
    
    
    
    
    101.28
    %
    
    
    
    
    
    
    
    
    
    
    101.03
    %
 33




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Financial Condition
 Investment Securities
      34




---



##### Table of Contents



Total Fair Value2005
    
    
    2004
    
    
    2003(in thousands)Available-for-Sale Securities :U.S. Government agencies
    
    $
    11,455
    
    
    $
    4,533
    
    
    $
    22,608Corporate obligations
    
    
    389
    
    
    
    403
    
    
    
    355Mortgage-backed securities
    
    
    14,110
    
    
    
    8,350
    
    
    
    8,175Collateralized mortgage obligations
    
    
    519
    
    
    
    882
    
    
    
    1,456Other investments
    
    
    9
    
    
    
    12
    
    
    
    6Total Available-for-Sale Securities
    
    $
    26,482
    
    
    $
    14,180
    
    
    $
    32,600Held-to-Maturity Securities :U.S. Government agencies
    
    $
    
    
    
    $
    15,675
    
    
    $
    
    Maturities of SecuritiesAfter one
    
    
    After fiveWithin
    
    
    through
    
    
    through
    
    
    Afterone year
    
    
    five years
    
    
    ten years
    
    
    ten years(in thousands)Available-for-Sale Securities:U.S. Government agencies, excluding
mortgage-backed securities
    
    $
    
    
    
    $
    334
    
    
    $
    6,633
    
    
    $
    4,488Mortgage-backed securities
    
    
    
    
    
    
    115
    
    
    
    3,915
    
    
    
    10,080Collateralized mortgage obligations
    
    
    
    
    
    
    519
    
    
    
    
    
    
    
    Corporate obligations
    
    
    98
    
    
    
    149
    
    
    
    142
    
    
    
    Total Available-for-Sale Securities
    
    $
    98
    
    
    $
    1,117
    
    
    $
    10,690
    
    
    $
    14,568
 35




---



##### Table of Contents



Weighted Average Yields(Taxable-equivalent basis) (1)After one
    
    After fiveWithin
    
    through
    
    through
    
    Afterone year
    
    five years
    
    ten years
    
    Ten yearsAvailable-for-Sale Securities:U.S. Government agencies, excluding
mortgage-backed securities
    
    
    
    
    
    
    5.050
    %
    
    
    4.970
    %
    
    
    5.390
    %Mortgage-backed securities
    
    
    
    
    
    
    8.850
    %
    
    
    4.400
    %
    
    
    4.830
    %Collateralized mortgage obligations
    
    
    
    
    
    
    3.640
    %
    
    
    
    
    
    
    Corporate obligations
    
    
    3.850
    %
    
    
    5.260
    %
    
    
    6.540
    %
    
    
    Total Weighted Average Yield
    
    
    3.850
    %
    
    
    4.824
    %
    
    
    4.782
    %
    
    
    5.001
    %
 
 (1)
    
    None of SouthFirst Banks investment securities are tax exempt.  Principal Payments Expected During the Year Ended September 30,
 WeightedAmortized
    
    Fair
    
    Average2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter
    
    Cost
    
    Value
    
    YieldCollateralized mortgage
Obligations
    
    $
    239
    
    
    $
    175
    
    
    $
    107
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    521
    
    
    $
    519
    
    
    
    3.64
    %Mortgage-backed securities
    
    
    2,164
    
    
    
    1,907
    
    
    
    1,674
    
    
    
    1,475
    
    
    
    1,296
    
    
    
    5,588
    
    
    
    14,104
    
    
    
    14,110
    
    
    
    4.74
    %Agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    765
    
    
    
    10,830
    
    
    
    11,595
    
    
    
    11,455
    
    
    
    5.14
    %Corporate obligations
    
    
    100
    
    
    
    100
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    400
    
    
    
    389
    
    
    
    5.33
    %
 Loans
   36




---



##### Table of Contents



37




---



##### Table of Contents



Loan Portfolio CompositionAt September 30,(Dollars in thousands)2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total
    
    
    Amount
    
    
    of Total
    
    
    Amount
    
    
    of Total
    
    
    Amount
    
    
    of TotalReal estate mortgage loans:One-to-four family
    
    $
    41,839
    
    
    
    43.86
    %
    
    $
    44,904
    
    
    
    47.48
    %
    
    $
    39,839
    
    
    
    47.21
    %
    
    $
    44,347
    
    
    
    47.69
    %
    
    $
    51,083
    
    
    
    50.51
    %Multi-family and commercial
    
    
    17,564
    
    
    
    18.41
    %
    
    
    14,003
    
    
    
    14.81
    %
    
    
    11,407
    
    
    
    13.52
    %
    
    
    13,490
    
    
    
    14.51
    %
    
    
    14,205
    
    
    
    14.05
    %Construction loans
    
    
    12,831
    
    
    
    13.45
    %
    
    
    12,836
    
    
    
    13.57
    %
    
    
    12,629
    
    
    
    14.97
    %
    
    
    16,621
    
    
    
    17.87
    %
    
    
    25,378
    
    
    
    25.09
    %Land
    
    
    2,214
    
    
    
    2.32
    %
    
    
    3,271
    
    
    
    3.46
    %
    
    
    3,635
    
    
    
    4.31
    %
    
    
    5,077
    
    
    
    5.46
    %
    
    
    
    
    
    
    Savings account loans
    
    
    824
    
    
    
    0.86
    %
    
    
    768
    
    
    
    0.81
    %
    
    
    881
    
    
    
    1.04
    %
    
    
    1,190
    
    
    
    1.28
    %
    
    
    1,144
    
    
    
    1.13
    %Installment loans
    
    
    3,664
    
    
    
    3.84
    %
    
    
    3,192
    
    
    
    3.38
    %
    
    
    3,921
    
    
    
    4.65
    %
    
    
    3,599
    
    
    
    3.87
    %
    
    
    3,507
    
    
    
    3.47
    %Second mortgage loans
    
    
    17,128
    
    
    
    17.96
    %
    
    
    16,670
    
    
    
    17.63
    %
    
    
    13,404
    
    
    
    15.88
    %
    
    
    9,665
    
    
    
    10.39
    %
    
    
    7,593
    
    
    
    7.51
    %Total loans
    
    
    96,064
    
    
    
    
    
    
    
    95,644
    
    
    
    
    
    
    
    85,716
    
    
    
    
    
    
    
    93,989
    
    
    
    
    
    
    
    102,910Less:Loans in process
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (0.01
    )%Discounts and other, net
    
    
    (156
    )
    
    
    (0.16
    )%
    
    
    (158
    )
    
    
    ( 0.17
    )%
    
    
    (142
    )
    
    
    (0.17
    )%
    
    
    (149
    )
    
    
    (0.16
    )%
    
    
    (189
    )
    
    
    (0.19
    )%Allowance for loan losses
    
    
    (519
    )
    
    
    (0.54
    )%
    
    
    (912
    )
    
    
    ( 0.96
    )%
    
    
    (1,191
    )
    
    
    (1,41
    )%
    
    
    (855
    )
    
    
    (0.92
    )%
    
    
    (1,578
    )
    
    
    (1.56
    )%Total loans, net
    
    $
    95,389
    
    
    
    100.00
    %
    
    $
    94,574
    
    
    
    100.00
    %
    
    $
    84,383
    
    
    
    100.00
    %
    
    $
    92,985
    
    
    
    100.00
    %
    
    $
    101,135
    
    
    
    100.00
    %
 38




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##### Table of Contents



Loan MaturitiesDue during theyear ending Sept 30,Due after
    
    
    Due after
    
    
    Due After
    
    
    Due After2006
    
    
    2007
    
    
    2008
    
    
    3-5 years
    
    
    5-10 years
    
    
    10-15 years
    
    
    15 years
    
    
    Total(Dollars in thousands)Residential loans
    
    $
    1,344
    
    
    $
    1,408
    
    
    $
    2,913
    
    
    $
    6,728
    
    
    $
    4,353
    
    
    $
    12,011
    
    
    $
    23,857
    
    
    $
    52,614Commercial loans
    
    
    1,739
    
    
    
    982
    
    
    
    540
    
    
    
    1,903
    
    
    
    1,919
    
    
    
    5,121
    
    
    
    5,192
    
    
    
    17,396Construction loans
    
    
    15,018
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,044Consumer loans
    
    
    1,590
    
    
    
    504
    
    
    
    666
    
    
    
    1,771
    
    
    
    2,488
    
    
    
    2,103
    
    
    
    1,888
    
    
    
    11,010Total
    
    $
    19,691
    
    
    $
    2,920
    
    
    $
    4,119
    
    
    $
    10,402
    
    
    $
    8,760
    
    
    $
    19,235
    
    
    $
    30,937
    
    
    $
    96,064
 
 (1)
    
    The maturity period for construction loans is typically one year. If the home is not sold
at the maturity date, however, the loan may be extended for an
additional six months, provided that the builder restructures the loan to provide for principal
reduction or arranges for permanent financing that will pay off the construction loan.  September 30, 2005Floating orFixed
    
    
    AdjustableRates
    
    
    Rate
    
    
    Total(Dollars in thousands)Residential loans
    
    $
    19,915
    
    
    $
    32,699
    
    
    $
    52,614Commercial loans
    
    
    6,349
    
    
    
    11,047
    
    
    
    17,396Construction loans
    
    
    15,044
    
    
    
    
    
    
    
    15,044Consumer loans
    
    
    9,245
    
    
    
    1,765
    
    
    
    11,010Total
    
    $
    50,553
    
    
    $
    45,511
    
    
    $
    96,064
 September 30, 2004Floating orFixed
    
    
    AdjustableRates
    
    
    Rate
    
    
    Total(Dollars in thousands)Residential loans
    
    $
    26,037
    
    
    $
    29,347
    
    
    $
    55,384Commercial loans
    
    
    5,466
    
    
    
    8,370
    
    
    
    13,836Construction loans
    
    
    16,105
    
    
    
    
    
    
    
    16,105Consumer loans
    
    
    10,319
    
    
    
    
    
    
    
    10,319Total
    
    $
    57,927
    
    
    $
    37,717
    
    
    $
    95,644
 39




---



##### Table of Contents



Year ended September 30,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Loan Originations:Real estate mortgage loans
    
    $
    60,339
    
    
    $
    86,214
    
    
    $
    101,134All other loans
    
    
    4,888
    
    
    
    4,026
    
    
    
    4,407Total
    
    $
    65,227
    
    
    $
    90,240
    
    
    
    105,541Portfolio Loan Purchases:Real estate mortgage loans
    
    $
    
    
    
    $
    
    
    
    $
    Portfolio Loan Sales Proceeds:Real estate mortgage loans
    
    $
    28,566
    
    
    $
    31,097
    
    
    $
    55,222Principal Repayments:Real estate mortgage loans
    
    $
    33,924
    
    
    $
    24,835
    
    
    $
    53,222All other loans
    
    
    4,360
    
    
    
    4,889
    
    
    
    4,394Total
    
    $
    38,284
    
    
    $
    29,724
    
    
    $
    57,616
 Allowance for Loan Losses and Risk Elements
     40




---



##### Table of Contents



41




---



##### Table of Contents



Year Ended September 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Balance at beginning of period
    
    $
    912
    
    
    $
    1,191
    
    
    $
    854
    
    
    $
    1,578
    
    
    $
    701Charge-offs:Real estate
    
    
    55
    
    
    
    1,561
    
    
    
    219
    
    
    
    
    
    
    
    Installment
    
    
    482
    
    
    
    103
    
    
    
    22
    
    
    
    79
    
    
    
    49Total charge-offs
    
    
    537
    
    
    
    1,664
    
    
    
    241
    
    
    
    79
    
    
    
    49Recoveries:Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Installment
    
    
    37
    
    
    
    28
    
    
    
    27
    
    
    
    23
    
    
    
    68Total recoveries
    
    
    37
    
    
    
    28
    
    
    
    28
    
    
    
    23
    
    
    
    68Net loans (recovered) charged off
    
    
    500
    
    
    
    1,636
    
    
    
    213
    
    
    
    56
    
    
    
    (19
    )Provisions for loan losses (benefit)
    
    
    107
    
    
    
    1,357
    
    
    
    550
    
    
    
    (668
    )
    
    
    858Balance at end of period
    
    $
    519
    
    
    $
    912
    
    
    $
    1,191
    
    
    $
    854
    
    
    $
    1,578Ratio of net charge-offs to total loans
outstanding, net of unearned income
    
    
    0.52
    %
    
    
    1.73
    %
    
    
    0.25
    %
    
    
    0.06
    %
    
    
    (0.02
    )%Ratio of allowance for loan losses
to loans outstanding, net of
unearned income
    
    
    0.54
    %
    
    
    0.96
    %
    
    
    1.41
    %
    
    
    0.92
    %
    
    
    1.56Total Loans Outstanding  Net
    
    $
    95,389
    
    
    $
    94,574
    
    
    $
    84,383
    
    
    $
    92,985
    
    
    $
    101,135
  42




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##### Table of Contents



At September 30,2005
    
    
    2004
    
    
    2003Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofloans in each
    
    
    
    
    
    
    loans in each
    
    
    
    
    
    
    loans in eachcategory
    
    
    
    
    
    
    category
    
    
    
    
    
    
    categoryAmount
    
    
    to total loans
    
    
    Amount
    
    
    to total loans
    
    
    Amount
    
    
    to total loans(Dollars in thousands)Real estate mortgage loans
    
    $
    278
    
    
    
    53.56
    %
    
    $
    335
    
    
    
    36.73
    %
    
    $
    738
    
    
    
    61.96
    %All other loans
    
    
    241
    
    
    
    46.44
    %
    
    
    577
    
    
    
    63.27
    %
    
    
    453
    
    
    
    38.04
    %Total allowance for
loan losses
    
    $
    519
    
    
    
    100.00
    %
    
    $
    912
    
    
    
    100.00
    %
    
    $
    1,191
    
    
    
    100.00
    %
  Non-Performing Assets
    43




---



##### Table of Contents



At September 30,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Loans accounted for on a non-accrual basis:Real estate mortgage loans
    
    $
    307
    
    
    $
    891
    
    
    $
    2,077All other loans
    
    
    485
    
    
    
    303
    
    
    
    72Total
    
    
    792
    
    
    
    1,194
    
    
    
    2,149Accruing loans which are past due 90 days or more:Real estate mortgage loans
    
    
    83
    
    
    
    
    
    
    
    All other loans
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    83
    
    
    
    
    
    
    
    Total of non-accrual and 90 days past due loans
    
    
    875
    
    
    
    1,194
    
    
    
    2,149Foreclosed real estate (net of related loss provisions)
    
    
    251
    
    
    
    509
    
    
    
    68Total non-performing assets
    
    $
    1,126
    
    
    $
    1,703
    
    
    $
    2,217Non-accrual and 90 days past due loans as a
percent of total loans
    
    
    0.92
    %
    
    
    1.26
    %
    
    
    2.55
    %Non-performing assets as a percent of total loans
    
    
    1.18
    %
    
    
    1.80
    %
    
    
    2.63
    %Total loans outstanding
    
    $
    95,389
    
    
    $
    94,574
    
    
    $
    84,383
  Deposits
    44




---



##### Table of Contents



September 30,2005
    
    
    2004
    
    
    2003Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentchange
    
    
    
    
    
    
    change
    
    
    
    
    
    
    changefrom prior
    
    
    
    
    
    
    from prior
    
    
    
    
    
    
    from priorAmount
    
    
    year-end
    
    
    Amount
    
    
    year-end
    
    
    Amount
    
    
    year-end(Dollars in thousands)Non-interest bearing
demand deposits
    
    $
    4,233
    
    
    
    5.75
    %
    
    $
    4,003
    
    
    
    9.46
    %
    
    $
    3,657
    
    
    
    28.32
    %Interest bearing deposits:NOW accounts
    
    
    11,032
    
    
    
    3.47
    %
    
    
    10,662
    
    
    
    5.94
    %
    
    
    10,064
    
    
    
    (2.24
    )%Money market demand
    
    
    142
    
    
    
    (38.26
    )%
    
    
    230
    
    
    
    48.39
    %
    
    
    155
    
    
    
    (66.88
    )%Passbook savings
    
    
    10,359
    
    
    
    (10.96
    )%
    
    
    11,634
    
    
    
    1.19
    %
    
    
    11,497
    
    
    
    (5.37
    )%CDs other than Jumbos
    
    
    72,144
    
    
    
    9.65
    %
    
    
    65,796
    
    
    
    8.72
    %
    
    
    60,518
    
    
    
    (4.46
    )%Jumbos
    
    
    3,215
    
    
    
    (41.20
    )%
    
    
    5,468
    
    
    
    (28.68
    )%
    
    
    7,667
    
    
    
    3.97
    %Total interest bearing deposits
    
    
    96,892
    
    
    
    3.31
    %
    
    
    93,790
    
    
    
    4.33
    %
    
    
    89,901
    
    
    
    (3.98
    )%Total deposits
    
    $
    101,125
    
    
    
    3.41
    %
    
    $
    97,793
    
    
    
    4.53
    %
    
    $
    93,558
    
    
    
    (3.03
    )%
  At September 30, 2005PercentageInterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    of TotalRate
    
    Term
    
    Category
    
    Minimum
    
    
    Balance
    
    
    Balances(Dollars in thousands, except minimum balance)0.00%
    
    None
    
    Non-interest bearing demand
    
    $
    50
    
    
    $
    4,233
    
    
    
    4.19
    %0.10%
    
    None
    
    NOW accounts
    
    
    250
    
    
    
    10,726
    
    
    
    10.61
    %0.10%
    
    None
    
    Non-profit
    
    
    100
    
    
    
    306
    
    
    
    0.30
    %0.10%
    
    None
    
    Money market checking
    
    
    50
    
    
    
    142
    
    
    
    0.14
    %0.15%
    
    None
    
    Statement savings
    
    
    100
    
    
    
    10,359
    
    
    
    10.24
    %2.30%
    
    3 months
    
    Fixed-term fixed rate certificate
    
    
    2,500
    
    
    
    87
    
    
    
    0.09
    %3.75%
    
    5 months
    
    Fixed-term fixed rate certificate
    
    
    2.500
    
    
    
    4,502
    
    
    
    4.45
    %2.40%
    
    6 months
    
    Fixed-term fixed rate certificate
    
    
    2,500
    
    
    
    4,927
    
    
    
    4.87
    %2.80%
    
    12 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    7,046
    
    
    
    6.97
    %3.70%
    
    14 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    11,550
    
    
    
    11.42
    %3.00%
    
    18 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    1,611
    
    
    
    1.59
    %2.80%
    
    12 mth IRA
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    156
    
    
    
    0.15
    %3.00%
    
    18 mth Roth IRA
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    77
    
    
    
    0.08
    %3.00%
    
    18 mth IRA
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    7,024
    
    
    
    6.95
    %3.25%
    
    24 mth IRA
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    205
    
    
    
    0.20
    %4.30%
    
    60 mth IRA
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    2,604
    
    
    
    2.58
    %3.25%
    
    24 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    581
    
    
    
    0.57
    %3.30%
    
    30 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    4,642
    
    
    
    4.59
    %4.00%
    
    4 year
    
    Fixed-term fixed rate certificate
    
    
    1,500
    
    
    
    499
    
    
    
    0.49
    %4.30%
    
    5  year
    
    Fixed-term fixed rate certificate
    
    
    1,500
    
    
    
    7,213
    
    
    
    7.13
    %3.41%
    
    Jumbo
    
    Fixed-term fixed rate certificate
    
    
    100,000
    
    
    
    3,215
    
    
    
    3.18
    %3.55%
    
    6 months
    
    6 month brokered TD
    
    
    
    
    
    
    2,784
    
    
    
    2.75
    %
 45




---



##### Table of Contents



At September 30, 2005PercentageInterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    of TotalRate
    
    Term
    
    Category
    
    Minimum
    
    
    Balance
    
    
    Balances(Dollars in thousands, except minimum balance)3.04%
    
    12  months
    
    12 month brokered TD
    
    
    
    
    
    
    8,431
    
    
    
    8.34
    %3.20%
    
    24 months
    
    24 month brokered TD
    
    
    
    
    
    
    3,355
    
    
    
    3.32
    %2.60%
    
    30 months
    
    30 month brokered TD
    
    
    
    
    
    
    1,058
    
    
    
    1.05
    %2.75%
    
    33 months
    
    33 month brokered TD
    
    
    
    
    
    
    1,065
    
    
    
    1.05
    %2.98%
    
    18 months
    
    18 month brokered TD
    
    
    
    
    
    
    2,727
    
    
    
    2.70
    %$
    101,125
    
    
    
    100.00
    %
 At September 30, 2004PercentageInterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    of TotalRate
    
    Term
    
    Category
    
    Minimum
    
    
    Balance
    
    
    Balances(Dollars in thousands, except minimum balance)0.00%
    
    None
    
    Non-interest bearing demand
    
    $
    50
    
    
    $
    4,003
    
    
    
    4.09
    %0.10%
    
    None
    
    NOW accounts
    
    
    250
    
    
    
    10,507
    
    
    
    10.74
    %0.10%
    
    None
    
    Non-profit
    
    
    100
    
    
    
    155
    
    
    
    0.16
    %0.10%
    
    None
    
    Money market checking
    
    
    50
    
    
    
    230
    
    
    
    0.24
    %0.15%
    
    None
    
    Statement savings
    
    
    100
    
    
    
    11,634
    
    
    
    11.90
    %1.50%
    
    3 months
    
    Fixed-term fixed rate certificate
    
    
    2,500
    
    
    
    696
    
    
    
    0.71
    %1.60%
    
    6 months
    
    Fixed-term fixed rate certificate
    
    
    2,500
    
    
    
    8,248
    
    
    
    8.43
    %2.30%
    
    12 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    12,754
    
    
    
    13.04
    %2.50%
    
    14 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    360
    
    
    
    0.37
    %2.25%
    
    18 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    2,957
    
    
    
    3.02
    %2.25%
    
    18 mth Roth IRA
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    88
    
    
    
    0.09
    %2.25%
    
    18 mth IRA
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    8,202
    
    
    
    8.39
    %3.75%
    
    60 mth IRA
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    2,194
    
    
    
    2.24
    %2.75%
    
    24 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    14
    
    
    
    0.01
    %2.80%
    
    30 months
    
    Fixed-term fixed rate certificate
    
    
    500
    
    
    
    6,262
    
    
    
    6.40
    %3.70%
    
    4 year
    
    Fixed-term fixed rate certificate
    
    
    1,500
    
    
    
    332
    
    
    
    0.34
    %3.75%
    
    5  year
    
    Fixed-term fixed rate certificate
    
    
    1,500
    
    
    
    5,410
    
    
    
    5.53
    %5.08%
    
    Jumbo
    
    Fixed-term fixed rate certificate
    
    
    100,000
    
    
    
    5,468
    
    
    
    5.59
    %1.46%
    
    6 months
    
    6 month brokered TD
    
    
    
    
    
    
    2,463
    
    
    
    2.52
    %1.78%
    
    9 months
    
    9 month brokered TD
    
    
    
    
    
    
    3,926
    
    
    
    4.01
    %1.88%
    
    12  months
    
    12 month brokered TD
    
    
    
    
    
    
    2,871
    
    
    
    2.94
    %1.75%
    
    13 months
    
    13 month brokered TD
    
    
    
    
    
    
    2,244
    
    
    
    2.29
    %1.77%
    
    14 months
    
    14 month brokered TD
    
    
    
    
    
    
    3,099
    
    
    
    3.17
    %2.25%
    
    24 months
    
    24 month brokered TD
    
    
    
    
    
    
    1,559
    
    
    
    1.59
    %2.60%
    
    30 months
    
    30 month brokered TD
    
    
    
    
    
    
    1,055
    
    
    
    1.08
    %2.75%
    
    33 months
    
    33 month brokered TD
    
    
    
    
    
    
    1,062
    
    
    
    1.09
    %$
    97,793
    
    
    
    100.00
    %
  Year ended September 30,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Interest bearing
    
    
    Time
    
    
    Interest bearing
    
    
    Time
    
    
    Interest bearing
    
    
    Timedemand deposits
    
    
    Deposits
    
    
    demand deposits
    
    
    deposits
    
    
    demand deposits
    
    
    depositsAverage balance
    
    $
    21,946
    
    
    $
    75,465
    
    
    $
    22,161
    
    
    $
    69,739
    
    
    $
    23,397
    
    
    $
    72,309Average rate
    
    
    .024
    %
    
    
    2.77
    %
    
    
    0.20
    %
    
    
    2.42
    %
    
    
    .059
    %
    
    
    3.29
    %
 46




---



##### Table of Contents



Year ended September 30,Interest Rate
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)0.00 - 1.99%
    
    $
    3,472
    
    
    $
    36,801
    
    
    $
    24,5542.00 - 2.99%
    
    
    29,907
    
    
    
    22,498
    
    
    
    21,9373.00 - 3.99%
    
    
    30,679
    
    
    
    3,781
    
    
    
    11,5704.00 - 4.99%
    
    
    7,757
    
    
    
    1,946
    
    
    
    3,5205.00 - 5.99%
    
    
    2,924
    
    
    
    2,179
    
    
    
    2,4116.00 - 6.99%
    
    
    252
    
    
    
    529
    
    
    
    6267.00 - 7.99%
    
    
    368
    
    
    
    3,530
    
    
    
    3,567Total
    
    $
    75,359
    
    
    $
    71,264
    
    
    $
    68,185
  Amount dueLess than
    
    
    One to
    
    
    Two to
    
    
    Three to
    
    
    Four toone year
    
    
    two years
    
    
    three years
    
    
    Four years
    
    
    five years
    
    
    Thereafter
    
    
    Total(Dollars in thousands)Interest Rate0.00 - 1.99%
    
    $
    3,472
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,4722.00 - 2.99%
    
    
    27,040
    
    
    
    2,623
    
    
    
    29
    
    
    
    215
    
    
    
    
    
    
    
    
    
    
    
    29,9073.00 - 3.99%
    
    
    19,852
    
    
    
    5,535
    
    
    
    1,730
    
    
    
    1,093
    
    
    
    2,469
    
    
    
    
    
    
    
    30,6794.00 - 4.99%
    
    
    1,529
    
    
    
    2,617
    
    
    
    548
    
    
    
    167
    
    
    
    2,896
    
    
    
    
    
    
    
    7,7575.00 - 5.99%
    
    
    319
    
    
    
    1,778
    
    
    
    127
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    2,9246.00 - 6.99%
    
    
    252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2527.00 - 7.99%
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    368Total
    
    $
    52,832
    
    
    $
    12,553
    
    
    $
    2,434
    
    
    $
    1,475
    
    
    $
    6,065
    
    
    $
    
    
    
    $
    75,359
  AmountMaturity Period
    
    (In Thousands)Three months or less
    
    $
    8,727After three within six months
    
    
    11,595After six within twelve months
    
    
    6,285Over twelve months
    
    
    10,146$
    36,753
 47




---



##### Table of Contents



Maturities of Time DepositsSeptember 30,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Three months or less
    
    $
    17,471
    
    
    $
    17,577
    
    
    $
    13,566After three within six months
    
    
    19,837
    
    
    
    15,543
    
    
    
    12,736After six within twelve months
    
    
    15,523
    
    
    
    16,775
    
    
    
    19,421One year to two years
    
    
    12,553
    
    
    
    11,077
    
    
    
    12,750Two years to three years
    
    
    2,434
    
    
    
    4,680
    
    
    
    2,830Three years to four years
    
    
    1,476
    
    
    
    1,805
    
    
    
    2,617Four years to five years
    
    
    6,065
    
    
    
    1,377
    
    
    
    1,833Over five years
    
    
    
    
    
    
    2,430
    
    
    
    2,432Total
    
    $
    75,359
    
    
    $
    71,264
    
    
    $
    68,185Weighted average rate on all certificates of
deposit at period-end
    
    
    2.78
    %
    
    
    2.03
    %
    
    
    2.64
    %
 Short-Term Borrowings
     At or for the Year EndedSeptember 30,2005
    
    
    2004(Dollars in Thousands)Amounts outstanding at end of period:Line of credit
    
    $
    1,403
    
    
    $
    903FHLB advances
    
    
    20,670
    
    
    
    20,670Reverse repurchase agreements
    
    
    3,943
    
    
    
    10,016Weighted average rate paid at period-end:Line of credit
    
    
    7.00
    %
    
    
    5.00
    %FHLB advances
    
    
    5.08
    %
    
    
    4.46
    %Reverse repurchase agreements
    
    
    3.94
    %
    
    
    1.85
    %Maximum amount of borrowings outstanding at any month-end:Line of credit
    
    
    1,403
    
    
    
    2,353FHLB advances
    
    
    20,670
    
    
    
    22,340Reverse repurchase agreements
    
    
    10,649
    
    
    
    10,016Approximate average amount outstanding for period:Line of credit
    
    
    1,165
    
    
    
    2,081FHLB advances
    
    
    20,670
    
    
    
    22,124
 48




---



##### Table of Contents



At or for the Year EndedSeptember 30,2005
    
    
    2004(Dollars in Thousands)Reverse repurchase agreements
    
    
    6,095
    
    
    
    4,901Approximate weighted average rate paid during period (1):Line of credit
    
    
    6.08
    %
    
    
    4.36
    %FHLB advances
    
    
    4.81
    %
    
    
    4.17
    %Reverse repurchase agreements
    
    
    2.84
    %
    
    
    1.32
    %
 
 (1)
    
    The approximate weighted average rate paid during the period was
computed by dividing the average amounts outstanding into the related
interest expense for the period. Capital Resources
 Stockholders Equity
    Equity and Asset RatiosSeptember 30,2005
    
    
    2004
    
    
    2003Return on average assets
    
    
    0.02
    %
    
    
    (0.38
    )%
    
    
    0.08
    %Return on average stockholders equity
    
    
    0.33
    %
    
    
    (4.82
    )%
    
    
    0.91
    %Common dividend payout ratio
    
    
    1,049.48
    %
    
    
    N/A
    
    
    
    391.45
    %Average stockholders equity to average assets ratio
    
    
    7.27
    %
    
    
    7.97
    %
    
    
    9.15
    %Net Income (Loss)
    
    $
    33,778
    
    
    $
    (527,935
    )
    
    $
    115,864Average Assets
    
    
    142,241,923
    
    
    
    137,447,618
    
    
    
    138,049,920Average Equity
    
    
    10,342,952
    
    
    
    10,951,309
    
    
    
    12,726,828Cash Dividends Paid
    
    
    354,494
    
    
    
    425,159
    
    
    
    425,052
 Capital
  49




---



##### Table of Contents



At September 30, 2005
    
    
    At September 30, 2004Tangible
    
    
    Core
    
    
    Risk-based
    
    
    Tangible
    
    
    Core
    
    
    Risk-basedCapital
    
    
    Capital
    
    
    Capital
    
    
    Capital
    
    
    Capital
    
    
    CapitalCapital
    
    $
    11,955,000
    
    
    $
    11,955,000
    
    
    $
    11,955,000
    
    
    $
    11,432,000
    
    
    $
    11,432,000
    
    
    $
    11,432,000Adjustments:General valuation
allowance
    
    
    
    
    
    
    
    
    
    
    432,000
    
    
    
    
    
    
    
    
    
    
    
    516,000Goodwill
    
    
    (544,000
    )
    
    
    (544,000
    )
    
    
    (544,000
    )
    
    
    (544,000
    )
    
    
    (544,000
    )
    
    
    (544,000
    )Unrealized gains
    
    
    169,000
    
    
    
    169,000
    
    
    
    169,000
    
    
    
    536,000
    
    
    
    536,000
    
    
    
    536,000Regulatory capital
    
    $
    11,580,000
    
    
    $
    11,580,000
    
    
    $
    12,012,,000
    
    
    $
    11,424,000
    
    
    $
    11,424,000
    
    
    $
    11,940,000Regulatory asset base
    
    $
    138,909,000
    
    
    $
    138,909,000
    
    
    $
    92,023,000
    
    
    $
    141,469,000
    
    
    $
    141,469,000
    
    
    $
    90,574,000Capital ratio
    
    
    8.34
    %
    
    
    8.34
    %
    
    
    13.05
    %
    
    
    8.08
    %
    
    
    8.08
    %
    
    
    13.18
    %Minimum required ratio
    
    
    1.50
    %
    
    
    4.00
    %
    
    
    8.00
    %
    
    
    1.50
    %
    
    
    4.00
    %
    
    
    8.00
    %Capital ratio required for
well-capitalized
designation
    
    
    
    
    
    
    5.00
    %
    
    
    10.00
    %
    
    
    
    
    
    
    5.00
    %
    
    
    10.00
    %
 Liquidity
 SouthFirst Bank
     50




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##### Table of Contents



SouthFirst
   
 ITEM 7. FINANCIAL STATEMENTS
  
 
 ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 8A. CONTROLS AND PROCEDURES
  51




---



##### Table of Contents



PART III
 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE REGISTRANT
 Management of SouthFirst
    52




---



##### Table of Contents



Year FirstElected as a
    
    YearDirector of
    
    TermName
    
    Age(1)
    
    Position Held
    
    SouthFirst
    
    ExpiresJ. Malcomb Massey
    
    56
    
    Former President of
    
    1997
    
    2006SouthFirst; Director ofSouthFirst and FirstFederal; President andChief Executive Officer ofPension & BenefitAllen Gray McMillan, III
    
    48
    
    Chairman of SouthFirst and
    
    1994
    
    2008SouthFirst Bank; Director ofSouthFirst and SouthFirst BankH. David Foote, Jr.
    
    56
    
    Director of SouthFirst and
    
    1994
    
    2007SouthFirst BankKenneth E. Easterling
    
    62
    
    Director of SouthFirst and
    
    2001
    
    2007SouthFirst BankL. Neal Bice
    
    65
    
    Director of SouthFirst and
    
    2001
    
    2007SouthFirst BankDonald R. Hardy
    
    55
    
    Director of SouthFirst and
    
    2001
    
    2008SouthFirst BankSandra H. Stephens
    
    46
    
    Chief Executive Officer of
    
    2002
    
    2006SouthFirst and SouthFirst Bank;Director of SouthFirst andSouthFirst BankRuth M. Roper
    
    55
    
    Executive Vice President ofPension & Benefit
 
 (1)
    
    At September 30, 2005  J. Malcomb Massey
 53




---



##### Table of Contents



Allen Gray McMillan, III
 H. David Foote, Jr.
 Kenneth E. Easterling
 L. Neal Bice
 Donald R. Hardy
 Sandra H. Stephens
 54




---



##### Table of Contents



Ruth M. Roper
 Audit Committee Financial Expert
  Compliance With Section 16(a) of the Securities Exchange Act of 1934
   Code of Ethics for Senior Financial Officers
   
 ITEM 10. EXECUTIVE COMPENSATION
  55




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##### Table of Contents



Summary Compensation Table
 Long TermCompensationAnnual Compensation (1)
    
    SecuritiesName and
    
    Fiscal
    
    
    
    
    
    
    
    
    
    Other Annual
    
    Underlying
    
    All OtherPrincipal Position
    
    Year
    
    Salary
    
    Bonus
    
    Compensation (2)
    
    Options (No.)
    
    CompensationJoe K. McArthur (3)
    
    
    2005
    
    
    $
    75,000
    
    
    $
    4,505
    (4)
    
    $
    8,400
    
    
    
    0
    
    
    $
    239,586
    (5)Former Chief
    
    
    2004
    
    
    
    150,000
    
    
    
    23,788
    (6)
    
    
    21,000
    
    
    
    0
    
    
    
    2,451
    (7)Executive Officer of
    
    
    2003
    
    
    
    150,000
    
    
    
    26,669
    (8)
    
    
    24,000
    
    
    
    4,300
    (9)
    
    
    2,451
    (10)SouthFirst and
SouthFirst Bank, and
President of
SouthFirst BankJ. Malcomb Massey (1)
    
    
    2005
    
    
    $
    150,000
    
    
    $
    19,611
    (11)
    
    $
    16,800
    
    
    
    0
    
    
    $
    2,488
    (12)Former President
    
    
    2004
    
    
    
    150,000
    
    
    
    15,551
    (13)
    
    
    21,000
    
    
    
    0
    
    
    
    2,488
    (14)of SouthFirst, and
    
    
    2003
    
    
    
    150,000
    
    
    
    5,850
    (15)
    
    
    24,000
    
    
    
    4,300
    (16)
    
    
    2,488
    (17)current President and
Chief Executive
Officer of
Pension & BenefitSandra H. Stephens (18)
    
    
    2005
    
    
    $
    125,000
    
    
    $
    11,770
    (19)
    
    $
    16,800
    
    
    
    0
    
    
    $
    1,747
    (20)Chief Executive
    
    
    2004
    
    
    
    125,000
    
    
    
    11,887
    (21)
    
    
    21,000
    
    
    
    0
    
    
    
    1,747
    (22)Officer of SouthFirst
    
    
    2003
    
    
    
    125,000
    
    
    
    14,290
    (23)
    
    
    22,500
    
    
    
    4,300
    (24)
    
    
    1,537
    (25)and SouthFirst BankRuth M. Roper
    
    
    2005
    
    
    $
    100,000
    
    
    $
    18,885
    (26)
    
    $
    2,400
    
    
    
    0
    
    
    $
    2,744
    (27)Executive Vice
    
    
    2004
    
    
    
    100,000
    
    
    
    12,649
    (28)
    
    
    2,850
    
    
    
    0
    
    
    
    2,744
    (29)President of Pension
    
    
    2003
    
    
    
    100,000
    
    
    
    5,598
    (30)
    
    
    3,000
    
    
    
    1,950
    (31)
    
    
    2,744
    (32)& Benefit
 
 (1)
    
    All compensation received by the Named Executive Officers was paid by SouthFirst Bank
and Pension & Benefit, except for an annual salary, in the amount of $20,000, paid by
SouthFirst to its President, J. Malcomb Massey. Mr. Massey resigned his position as President
of SouthFirst, effective September 29, 2005.(2)
    
    Fees received as a member of the Board of Directors of SouthFirst, SouthFirst Bank, Pension &
Benefit and/or SouthFirst Mortgage.(3)
    
    Mr. McArthur resigned all positions from the Company and subsidiaries effective March 31,
2005.(4)
    
    Consists of $4,505 of compensation resulting from receipt of dividends paid under
SouthFirsts Dividend Incentive Plan on unexercised stock options. (See   Compensation of
Directors below.)(5)
    
    Consists of severance benefits of $228,361 as provided under Mr. McArthurs employment
contract dated January 1, 2005, $10,000 for the surrender of all stock options possessed at
the time of his resignation, $742 automobile allowance and $483 recognized on employer
provided group term life insurance in excess of $50,000.(6)
    
    Consists of a regular bonus of $5,769 as well as $18,019 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. (See
 Compensation of Directors below.)(7)
    
    Represents a $1,485 automobile allowance and income of $966 recognized on employer provided
group term life insurance in excess of $50,000.(8)
    
    Consists of a regular bonus of $8,650 as well as $18,019 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. (See
 Compensation of Directors below.) 56




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##### Table of Contents



(9)
    
    On October 16, 2002, SouthFirst issued 4,300 options under the 1998 plan to Mr. McArthur at
an exercise price of $12.10 per share. These options vested in equal increments commencing
October 16, 2002, through October 16, 2007, which options were surrendered at termination (See
Note (3) above).(10)
    
    Represents a $1,485 automobile allowance and income of $966 recognized on employer provided
group term life insurance in excess of $50,000.(11)
    
    Consists of a regular bonus of $18,148 as well as $1,463 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. ( See
  Compensation of Directors below.)(12)
    
    Represents a $1,522 automobile allowance and income of $966 recognized on employer provided
group term life insurance in excess of $50,000.(13)
    
    Consists of a regular bonus of $9,701 as well as $5,850 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. (See
  Compensation of Directors below.)(14)
    
    Represents a $1,522 automobile allowance and income of $966 recognized on employer provided
group term life insurance in excess of $50,000.(15)
    
    Consists of dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock
options. (See   Compensation of Directors below.)(16)
    
    On October 16, 2002, SouthFirst issued 4,300 options under the 1998 plan to Mr. Massey at an
exercise price of $12.10 per share. These options vest in equal increments commending October
16, 2002 through October 16, 2007.(17)
    
    Represents a $1,522 automobile allowance and income of $966 recognized on employer provided
group term life insurance in excess of $50,000.(18)
    
    Ms. Stephens was appointed Chief Executive Officer of SouthFirst and SouthFirst Bank
effective July 1, 2005. Prior to this time, Ms. Stephens served as interim Chief Executive
Officer and Executive Vice-President and Chief Operations Officer of SouthFirst and SouthFirst
Bank.(19)
    
    Consists of a regular bonus of $ 10,000 as well as $1,770 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. ( See
  Compensation of Directors below.)(20)
    
    Represents a $1,117 automobile allowance and income of $630 recognized on employer provided
group term life insurance in excess of $50,000.(21)
    
    Consists of a regular bonus of $4,807 as well as $7,080 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. (See
  Compensation of Directors below.)(22)
    
    Represents a $1,117 automobile allowance and income of $630 recognized on employer provided
group term life insurance in excess of $50,000.(23)
    
    Consists of a regular bonus of $7,210 as well as $7,080 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. (See
  Compensation of Directors below.)(24)
    
    On October 16, 2002, SouthFirst issued 2,589 options under the 1995 plan and 1,711 options
under the 1998 plan to Ms. Stephens at an exercise price of $12.10 per share. These options
vest in equal annual increments commencing October 16, 2002 through October 16, 2007.(25)
    
    Represents a $1,117 automobile allowance and income of $420 recognized on employer provided
group term life insurance in excess of $50,000.(26)
    
    Consists of a regular bonus of $18,148 as well as $737 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. (See
  Compensation of Directors below.)(27)
    
    Represents a $1,778 automobile allowance and income of $966 recognized on employer provided
group term life insurance in excess of $50,000.(28)
    
    Consists of a regular bonus of $9,701 as well as $2,948 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. ( See
  Compensation of Directors below.)(29)
    
    Represents a $1,778 automobile allowance and income of $966 recognized on employer provided
group term life insurance in excess of $50,000. 57




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##### Table of Contents



(30)
    
    Consists of a regular bonus of $2,650 as well as $2,948 of compensation resulting from
dividends paid under SouthFirsts Dividend Incentive Plan on unexercised stock options. (See
  Compensation of Directors below.)(31)
    
    On October 16, 2002, SouthFirst issued 1,950 options under the 1998 plan to Ms. Roper at an
exercise price of $12.10 per share. These options vest in equal increments commending October
16, 2002 through October 16, 2007.(32)
    
    Represents a $1,778 automobile allowance and income of $966 recognized on employer provided
group term life insurance in excess of $50,000. Employment Agreements
  Sandra H. Stephens
      58




---



##### Table of Contents



J. Malcomb Massey
       59




---



##### Table of Contents



Ruth M. Roper
       60




---



##### Table of Contents



Deferred Compensation Agreement
   Management Recognition Plans
     61




---



##### Table of Contents



Stock Option Plans
       62




---



##### Table of Contents



Repricing of Stock Options under the Stock Option Plans
  Ten-Year Option/SAR Repricings
 Number ofSecurities
    
    
    
    
    
    
    
    
    
    Length of OriginalUnderlying
    
    
    
    
    
    
    
    
    
    Option TermOptions
    
    Original Exercise
    
    New Exercise
    
    Remaining at DateName
    
    Date
    
    Repriced(1)
    
    Price ($)
    
    Price ($)
    
    of RepricingJ. Malcomb Massey
(1998 Plan)
    
    November 4, 1998
    
    
    3,726
    
    
    
    21.25
    
    
    
    15.75
    
    
    9.2 years
 
 (1)
    
    The 1998 Plan authorizes the grant of up to 63,361 shares of Common Stock to select
officers and employees in the form of (i) Options or (ii) SARs, all of which shares were
granted under the 1998 Plan. Subsequently, options to purchase 52,272 shares expired prior to
being exercised, which shares then became available for re-issuance under the 1998 Plan, and
additional options to purchase 35,388 shares were issued. Thus, at September 30, 2005, 16,884
shares were available for issuance under the 1998 Plan. 63




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##### Table of Contents



Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
 Number of Securities
    
    
    Value ofUnderlying
    
    
    UnexercisedUnexercised Options
    
    
    In-the-Moneyat
    
    
    Options at FiscalShares
    
    
    
    
    
    
    Fiscal Year End
    
    
    Year EndAcquired
    
    
    Value
    
    
    Exercisable/
    
    
    Exercisable/Name
    
    on Exercise
    
    
    Realized
    
    
    Unexercisable
    
    
    Unexercisable(1)J. Malcomb Massey
    
    
    0
    
    
    $
    0
    
    
    
    7,170 / 2,580
    
    
    $
    4,086 / $26Sandra H. Stephens
    
    
    0
    
    
    $
    0
    
    
    
    6,220 / 5,580
    
    
    $
    9,872 / $6,596Ruth M. Roper
    
    
    0
    
    
    $
    0
    
    
    
    3,744 / 1,170
    
    
    $
    2,283 / $12
 
 (1)
    
    Represents the value of unexercised, in-the-money stock options on September 30, 2005,
using the $12.11 closing price of SouthFirst Common Stock on that date. Employee Retirement Savings Plan
  Employee Stock Ownership Plan
   64




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##### Table of Contents



Dividend Incentive Plan
  Compensation of Directors
 Director Fees and Dividends
   65




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##### Table of Contents



Director Retirement Benefits
   Compensation Committee Interlocks and Insider Participation
  
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  66




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##### Table of Contents



Shares ofCommon Stock
    
    Percent ofBeneficially
    
    OutstandingBeneficial Owner
    
    Owned(1)
    
    Shares(2)H. David Foote, Jr.(4)
    
    
    12,823
    
    
    
    1.79
    %2517 Overhill Rd.
Sylacauga, AL 35150J. Malcomb Massey(5)
    
    
    31,972
    
    
    
    4.5
    %8318 Longneedle, Dr.
Montgomery, AL 36117Allen Gray McMillan, III(6)
    
    
    18,323
    
    
    
    2.6
    %One Gunston Ave.
Talladega, AL 35160Kenneth E. Easterling(7)
    
    
    28,763
    
    
    
    4.0
    %4141 Co. Road 85
Clanton, AL 35045L. Neal Bice(8)
    
    
    34,344
    
    
    
    4.8
    %304 Eastwood Dr.
Clanton, AL 35045Donald R. Hardy(9)
    
    
    4,163
    
    
    
    0.6
    %130 Stone Ridge Dr.
Sylacauga, AL 35150Jeffrey L. Gendell, et. al.(10)
    
    
    62,800
    
    
    
    8.9
    %55 Railroad Ave., 3rd Floor
Greenwich, CT 06830Robert J. Salmon and Mary Anne J. Salmon(11)
    
    
    47,600
    
    
    
    6.7
    %3623 Raymond St.
Chevy Chase, MD 20815Sandra H. Stephens(12)
    
    
    10,614
    
    
    
    1.5
    %4004 Charring Cross Lane
Hoover, AL 35226Ruth M. Roper(13)
    
    
    12,976
    
    
    
    1.8
    %1111 Buck Ridge Rd
Wetumpka, AL 36093Pension & Benefit Financial Services, Inc.(14)
    
    
    29,466
    
    
    
    4.2
    %260 Commerce St., 3rd Floor
Montgomery, AL 36101All directors and executive officers as a group (8 persons)
    
    
    153,978
    (15)
    
    
    20.3
    %
 67




---



##### Table of Contents



(1)
    
    Beneficial Ownership includes shares for which an individual, directly or
indirectly, has or shares voting or investment power or both and also includes options which
are exercisable within sixty days of the date hereof. Beneficial ownership as reported in the
above table has been determined in accordance with Rule 13d-3 of the Exchange Act.(2)
    
    The percentages are based upon 708,871 shares outstanding, except for certain
parties who hold presently exercisable options to purchase shares. The percentages for those
parties holding presently exercisable options are based upon the sum of 708,871 shares plus
the number of shares subject to presently exercisable options held by them, as indicated in
the following notes.(4)
    
    Of the amount shown, 3,000 shares are owned jointly by Mr. Foote and his wife,
1,500 shares are held by Mr. Foote as custodian for each of his two minor children, 6,663
shares are subject to presently exercisable options and 1,660 shares represent restricted
stock granted under SouthFirsts Management Recognition Plan A, all of which are fully
vested.(5)
    
    Of the amount shown, 15,521 shares are restricted stock acquired pursuant to
that certain employment agreement between Mr. Massey and Pension & Benefit, vesting in equal
increments over a period of 15 years beginning on April 11, 1997, 3,782 shares are held in his
account under SouthFirsts 401(k) plan, 2,642 shares are held in an Individual Retirement
Account, 1,997 shares are held in his account under SouthFirst Banks ESOP, and 8,030 shares
are subject to exercisable options.(6)
    
    Of the amount shown, 10,000 shares are held jointly by Mr. McMillan and his wife,
6,663 shares are subject to presently exercisable options and 1,660 shares represent
restricted stock granted under SouthFirsts Management Recognition Plan A, all of which are
fully vested.(7)
    
    Of the amount shown, 21,099 shares are held jointly by Mr. Easterling and his
wife, 1,001 shares are held individually by Mr. Easterling and 6,663 shares are subject to
exercisable options.(8)
    
    Of the amount shown, 27,681 are held individually by Mr. Bice and 6,663 shares
are subject to exercisable options.(9)
    
    Of the amount shown, 200 shares are held jointly by Mr. Hardy and his wife and
3,963 shares are subject to exercisable options.(10)
    
    Of the amount shown, Jeffrey L. Gendell has shared voting power with respect to
62,800 shares, Tontine Management, L.L.C. (TM) has shared voting power with respect to
62,800 shares, and Tontine Financial Partners, L.P. (TFP) has shared voting power with
respect to 62,800 shares. TM, the general partner of TFP, has the power to direct the affairs
of TFP. Mr. Gendell is the Managing Member of Tontine Management, L.L.C. and, in that
capacity, directs its operations. The business address of Mr. Gendell and TFP is 237 Park
Avenue, 9th Floor, New York, New York 10017. The foregoing information is based on
a Schedule 13F, dated September 30, 2005 filed by Mr. Gendell, TM, and TFP. SouthFirst makes
no representation as to the accuracy or completeness of the information reported.(11)
    
    Robert J. Salmon and Mary Anne J. Salmon beneficially own and have shared voting
and dispositive power with respect to 47,600 shares. The foregoing information is based on a
Schedule 13G, dated October 8, 1998, received by SouthFirst from Mr. and Mrs. Salmon.
SouthFirst makes no representation as to the accuracy or completeness of the information
reported therein.(12)
    
    Of the amount shown, 8,580 shares are subject to presently exercisable options, 284
shares are held in her account under SouthFirst Banks ESOP, and 1,750 shares represent
restricted stock granted under SouthFirsts Management Recognition Plan(s), of which 1,050
shares are fully vested.(13)
    
    Of the amount shown, 1,914 shares are owned jointly by Ms. Roper and her husband,
5,623 shares are restricted stock acquired pursuant to that certain employment agreement
between Ms. Roper and Pension & Benefit, vesting in equal increments over a period of 15 years
beginning on April 11, 1997, 1,305 shares are held in her account in SouthFirst Banks ESOP,
and 4,134 shares are subject to presently exercisable options.(14)
    
    These shares are held in trust by Pension & Benefit as trustee of SouthFirst Banks
ESOP. See Item 10. EXECUTIVE COMPENSATION  Employee Stock Ownership Plan.(15)
    
    Of the amount shown, 51,359 shares are subject to exercisable options. 68




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##### Table of Contents



Equity Compensation Plan Information
 Number of securities
    
    
    Weighted-average
    
    
    Number of securitiesto be issued upon exercise
    
    
    exercise price of
    
    
    remaining available forof outstanding options,
    
    
    outstanding options,
    
    
    future issuance underwarrants and rights
    
    
    warrants and rights
    
    
    equity compensation plans(excluding securitiesreflected in column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by security holders
(2)
    
    
    85,273
    
    
    $
    12.41
    
    
    
    4,062Equity compensation plans not approved by security
holders
    
    
    0
    
    
    $
    0
    
    
    
    0
 
 (1)
    
    The term equity compensation plan, as used in this table, refers to compensation
plans and individual compensation arrangements for employees and directors of the Company and
its affiliates, which authorize the issuance of equity securities of the Company, excluding
all compensation plans and arrangements which meet the qualification requirements under
Section 401(a) of the Code.(2)
    
    Includes the SouthFirst Bancshares, Inc. Stock Option and Incentive Plan, the 1998
Stock Option and Incentive Plan, the SouthFirst Bancshares, Inc. Management Recognition Plan
A and the SouthFirst Bancshares, Inc. Management Recognition Plan B. See also, Item 10.
EXECUTIVE COMPENSATION  Management Recognition Plans, and  Stock Option Plans. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  69




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##### Table of Contents



ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
 (a)
    
    The following documents are filed as part of this report:
 (1)
    
    Financial Statements
  Report of Independent Registered Public Accounting Firm of Jones & Kirkpatrick, P.C.Consolidated Statements of Financial Condition as of
September 30, 2005 and 2004Consolidated Statements of Operations for the years ended
September 30, 2005, 2004 and 2003Consolidated Statements of Stockholders Equity for the years ended
September 30, 2005, 2004 and 2003Consolidated Statements of Cash Flows for the years ended
September 30, 2005, 2004 and 2003Notes to Consolidated Financial Statements(2)
    
    Exhibits
  Exhibit No.
    
    Description of Exhibit3.1*
    
    Amended and Restated Certificate of Incorporation (1994 S-1).3.2*
    
    Bylaws (1994 S-1, Exhibit 3.2).3.3*
    
    Amendment to Article III, Section 2 of the Bylaws (2002 Form 10-KSB).4*
    
    Form of Common Stock Certificate (1994 S-1).10.1*
    
    Form of Employment Agreement between SouthFirst Bancshares, Inc. and Joe
K. McArthur (March 31, 2005 Form 10-QSB).
 70




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##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.2*
    
    Form of Amended and Restated Employment Agreement effective as of January
1, 2005 between SouthFirst Bank and J. Malcomb Massey (January 7, 2005 Form 8-K).10.3*
    
    Form of Amended and Restated Employment Agreement effective as of October
1, 2003 between Pension and Benefit Financial Services, Inc. and J. Malcomb Massey
(January 7, 2005 Form 8-K).10.4*
    
    Form of Guaranty of Employment Agreement among SouthFirst Bancshares,
Inc., SouthFirst Bank, Pension & Benefit Financial Services, Inc. and J. Malcomb
Massey (2001 Form 10-KSB, Exhibit 10.4.2).10.5*
    
    Form of Amended and Restated Employment Agreement effective as of January
1, 2005 between Pension & Benefit Financial Services, Inc. and Ruth M. Roper (January
7, 2005 Form 8-K).10.6*
    
    Form of Guaranty of Employment Agreement among SouthFirst Bancshares,
Inc., SouthFirst Bank, Pension & Benefit Financial Services, Inc. and Ruth M. Roper
(2001 Form 10-KSB, Exhibit 10.5.2).10.7*
    
    Form of Management Recognition Plan A (1994 S-1, Exhibit 10.5).10.8 *
    
    Form of Management Recognition Plan A, as amended (1995 Form 10-K,
Exhibit 10.8.2).10.9*
    
    Management Recognition Plan A Restated and Continued (Plan A S-8, Exhibit 4.1).10.10*
    
    Form of Management Recognition Plan B (1994 S-1, Exhibit 10.6).10.11*
    
    Form of Management Recognition Plan B, as amended (1995 Form 10-K, Exhibit 10.9.2).10.12*
    
    Management Recognition Plan B, Restated and Continued (Plan B S-8, Exhibit 4.1).10.13*
    
    Form of Stock Option and Incentive Plan (1994 S-1, Exhibit 10.7) (1995 Form 10-K,
Exhibit 10.10.1).10.14*
    
    Form of Stock Option and Incentive Plan, as amended (1995 Form 10-K, Exhibit
10.10.2).10.15*
    
    From of Stock Option and Incentive Plan, Restated and Continued (Option
Plan S-8, Exhibit 4.1).10.16*
    
    Form of Stock Option and Incentive Plan, as Amended (Amended Option Plan S-8,
Exhibit 10.10.4).10.17*
    
    Form of Incentive Stock Option Agreement (Option Plan S-8, Exhibit 4.2).10.18*
    
    Form of Incentive Stock Option Agreement, as Amended (Amended Option Plan S-8,
Exhibit 10.10.6)10.19 *
    
    Form of SouthFirst Bancshares, Inc. Employee Stock Ownership Plan (1994
S-1, Exhibit 10.8).
 71




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##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.20*
    
    Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership Plan
executed as of September 29, 2001 (2001 Form 10-KSB, Exhibit 10.11.2).10.21*
    
    Deferred Compensation Agreement between Pension & Benefit and Ruth M. Roper (2001
Form 10-KSB, Exhibit 10.14).10.22*
    
    Stock Option Agreement between SouthFirst Bancshares, Inc. and Sandra H. Stephens
(December 31, 2001 10-QSB, Exhibit 10.16).10.23*
    
    Supervisory Agreement dated March 22, 2002, by and between SouthFirst Bank and the
Office of Thrift Supervision (March 29, 2002 Form 8-K, Exhibit 99.1).10.24*
    
    Form of Settlement Agreement dated June 28, 2002, by and between SouthFirst Bank
and Charles R. Vawter, Jr., Charles R. Vawter, Sr., Vawter Properties & Resources,
LP, Angela H. Vawter and Automatic Gas & Appliance Co., Inc. (July 2, 2002 Form 8-K,
Exhibit 99.1).10.25*
    
    Letter from the Office of Thrift Supervision dated December 14, 2004, rescinding
Supervisory Agreement dated March 22, 2002, by and between SouthFirst Bank and the
Office of Thrift Supervision as of December 14, 2004 (December 9, 2004 Form 8-K,
Exhibit 99.1).11
    
    Statement Regarding Computation of Per Share Earnings.14*
    
    Code of Ethics for Principal Executive Officers and Senior Financial
Officers (2003 Form 10-KSB)21
    
    Subsidiaries of Registrant.23.1
    
    Consent of Jones & Kirkpatrick, P.C.31.1
    
    Rule 13a  14a Certification of the Chief Executive Officer31.2
    
    Rule 13a  14a Certification of the Controller (Chief Financial Officer)32.1
    
    Written Statement of the Chief Executive Officer, Pursuant to 18
U.S.C. Section 135032.2
    
    Written Statement of the Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350
 (b)
    
    Reports on Form 8-K during the fourth quarter
  72




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Audit
    
    
    Audit-Related
    
    
    Tax
    
    
    Other
    
    
    TotalFees
    
    
    Fees (1)
    
    
    Fees (2)
    
    
    Fees (3)
    
    
    FeesFiscal Year 2005
    
    $
    120,250
    
    
    $31,600

    
    
    $
    13,650
    
    
    $

    
    
    $
    165,500Fiscal Year 2004
    
    $
    109,685
    
    
    $29,550

    
    
    $
    10,100
    
    
    $

    
    
    $
    149,335
 
 (1)
    
    Audit related fees are for SEC compliance reviews of Form 10-QSB.(2)
    
    Tax fees are for preparation of federal and state income tax returns.(3)
    
    No financial information systems implementation or design services were rendered by Jones
& Kirkpatrick, P.C. during fiscal year 2005 or 2004.  Audit
    
    
    Tax
    
    
    
    TotalFees
    
    
    Fees
    
    
    
    FeesFiscal Year 2005
    
    $
    9,500
    
    
    
    $200
    
    
    
    $9,700Fiscal Year 2004
    
    $
    9,000
    
    
    
    $185
    
    
    
    $9,185
  
    
    approved by our audit committee; or
    
    entered into pursuant to pre-approval policies and procedures established by the
audit committee, provided the policies and procedures are detailed as to the particular
service, the audit committee is informed of each service, and such policies and
procedures do not include delegation of the audit committees responsibilities to
management.
   73




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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.By:
    /s/ Sandra H. StephensSandra H. StephensChief Executive Officer  Signature
    
    Title
    
    Date/s/ Sandra H. Stephens
    
    Chief Executive Officer &
Director
    
    December 29, 2005Sandra H. Stephens
    
    (Principal Executive Officer)/s/ Janice Browning
    
    Controller, TreasurerJanice Browning
    
    (Principal Accounting
Officer)
    
    December 29, 2005/s/ Allen Gray McMillan, III
    
    Chairman and Director
    
    December 29, 2005Allen Gray McMillan, III/s/ J. Malcomb Massey
    
    Director
    
    December 29, 2005J. Malcomb Massey/s/ Kenneth E. Easterling
    
    Director
    
    December 29, 2005Kenneth E. Easterling/s/ H. David Foote, Jr.
    
    Director
    
    December 29, 2005H. David Foote, Jr./s/ L. Neal Bice
    
    Director
    
    December 29, 2005L. Neal Bice/s/ Donald R. Hardy
    
    Director
    
    December 29, 2005Donald R. Hardy
 74




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##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Description of Exhibit11
    
    Statement Regarding Computation of Per Share Earnings.21
    
    Subsidiaries of Registrant.23.1
    
    Consent of Jones & Kirkpatrick, P.C.31.1
    
    Rule 13a  14a Certification of the Chief Executive Officer31.2
    
    Rule 13a  14a Certification of the Controller (Chief Financial Officer)32.1
    
    Written Statement of the Chief Executive Officer, Pursuant to 18
U.S.C. Section 135032.2
    
    Written Statement of the Chief Financial Officer, Pursuant to 18
U.S.C. Section 13
 75




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM




---



##### Table of Contents



2 
 
 2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    5,042,170
    
    
    $
    5,015,108Interest-bearing deposits in other financial institutions
    
    
    871,801
    
    
    
    713,807Securities available-for-sale, at fair value
    
    
    26,482,705
    
    
    
    14,180,243Securities held-to-maturity (fair value of $15,674,973)
    
    
    
    
    
    
    15,081,723Loans
receivable, net of allowance for loan losses of $518,572 in 2005 and $911,964 in 2004
    
    
    95,388,729
    
    
    
    94,574,236Loans held for sale at cost (which approximates fair value)
    
    
    948,250
    
    
    
    1,092,619Foreclosed assets, net
    
    
    255,470
    
    
    
    514,507Premises and equipment, net
    
    
    4,645,624
    
    
    
    4,796,390Federal Home Loan Bank stock, at cost
    
    
    1,218,200
    
    
    
    1,117,000Goodwill
    
    
    543,706
    
    
    
    543,706Accrued interest receivable
    
    
    656,455
    
    
    
    625,639Other assets
    
    
    3,084,414
    
    
    
    3,278,179Total Assets
    
    $
    139,137,524
    
    
    $
    141,533,157LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits:Non-interest bearing
    
    $
    4,232,573
    
    
    $
    4,003,251Interest bearing
    
    
    96,892,239
    
    
    
    93,789,575Total deposits
    
    
    101,124,812
    
    
    
    97,792,826Advances by borrowers for property taxes and insurance
    
    
    237,052
    
    
    
    259,427Accrued interest payable
    
    
    641,075
    
    
    
    458,017Borrowed funds
    
    
    26,015,861
    
    
    
    31,588,773Accrued expenses and other liabilities
    
    
    694,781
    
    
    
    1,078,510Total liabilities
    
    
    128,713,581
    
    
    
    131,177,553Stockholders Equity:Common stock, $.01 par value, 2,000,000 shares authorized;
990,241 shares issued and 708,971 shares outstanding in 2005;
990,241 shares issued and 709,406 shares outstanding in 2004
    
    
    9,996
    
    
    
    9,996Additional paid-in capital
    
    
    9,839,851
    
    
    
    9,838,965Treasury stock, at cost ( 281,270 shares in 2005; 280,835 shares in 2004)
    
    
    (3,892,598
    )
    
    
    (3,891,155
    )Deferred compensation on common stock employee benefit plans
    
    
    (135,675
    )
    
    
    (159,427
    )Shares held in trust, at cost ( 9,402 shares in 2005 and 2004)
    
    
    (103,483
    )
    
    
    (103,483
    )Retained earnings
    
    
    4,874,445
    
    
    
    5,195,161Accumulated other comprehensive income (loss)
    
    
    (168,593
    )
    
    
    (534,453
    )Total stockholders equity
    
    
    10,423,943
    
    
    
    10,355,604Total Liabilities and Stockholders Equity
    
    $
    139,137,524
    
    
    $
    141,533,157




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##### Table of Contents



3 
 
 2005
    
    
    2004
    
    
    2003Interest and dividend income:Interest and fees on loans
    
    $
    6,153,817
    
    
    $
    5,435,692
    
    
    $
    5,948,317Interest and dividend income on securities
available-for-sale
    
    
    985,156
    
    
    
    1,302,001
    
    
    
    1,397,105Interest and dividend income on securities
held-to-maturity
    
    
    428,364
    
    
    
    345,472
    
    
    
    Other interest income
    
    
    86,108
    
    
    
    37,776
    
    
    
    91,223Total interest and dividend income
    
    
    7,653,445
    
    
    
    7,120,941
    
    
    
    7,436,645Interest expense:Interest on deposits
    
    
    2,147,096
    
    
    
    1,734,850
    
    
    
    2,520,828Interest on borrowed funds
    
    
    1,238,754
    
    
    
    1,077,477
    
    
    
    1,023,365Total interest expense
    
    
    3,385,850
    
    
    
    2,812,327
    
    
    
    3,544,193Net interest income
    
    
    4,267,595
    
    
    
    4,308,614
    
    
    
    3,892,452Provision for loan losses
    
    
    107,235
    
    
    
    1,356,937
    
    
    
    549,603Net interest income after provision for loan losses
    
    
    4,160,360
    
    
    
    2,951,677
    
    
    
    3,342,849Other income:Service charges and other fees
    
    
    496,267
    
    
    
    546,035
    
    
    
    568,701Employee benefit trust and consulting fees
    
    
    1,716,071
    
    
    
    1,582,057
    
    
    
    1,231,622Gain on sale of loans
    
    
    685,526
    
    
    
    719,389
    
    
    
    1,170,453Gain on sales and calls of securities
available-for-sale
    
    
    47,407
    
    
    
    83,614
    
    
    
    238,291Gain (loss) on sales of securities
held-to-maturity
    
    
    (701,099
    )
    
    
    
    
    
    
    Gain on sale of premises and equipment
    
    
    7,776
    
    
    
    927
    
    
    
    7,759Net premium on transfer of deposits
    
    
    
    
    
    
    
    
    
    
    249,769Other
    
    
    401,053
    
    
    
    307,491
    
    
    
    275,149Total other income
    
    
    2,653,001
    
    
    
    3,239,513
    
    
    
    3,741,744




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##### Table of Contents



4 
 
 2005
    
    
    2004
    
    
    2003Other expenses:Compensation and benefits
    
    $
    3,747,431
    
    
    $
    4,331,282
    
    
    $
    4,279,501Net occupancy expense
    
    
    428,841
    
    
    
    419,776
    
    
    
    392,354Furniture and fixtures
    
    
    511,162
    
    
    
    505,295
    
    
    
    451,577Data processing
    
    
    321,860
    
    
    
    382,885
    
    
    
    259,685Office supplies and expenses
    
    
    435,438
    
    
    
    442,189
    
    
    
    436,677Deposit insurance premiums
    
    
    111,644
    
    
    
    102,938
    
    
    
    107,706Legal expenses
    
    
    151,648
    
    
    
    156,519
    
    
    
    214,261Other professional services
    
    
    286,645
    
    
    
    225,212
    
    
    
    259,913Termination expense
    
    
    140,941
    
    
    
    
    
    
    
    Other
    
    
    623,269
    
    
    
    476,220
    
    
    
    495,737Total other expenses
    
    
    6,758,879
    
    
    
    7,042,316
    
    
    
    6,897,411Income (loss) before income taxes
    
    
    54,482
    
    
    
    (851,126
    )
    
    
    187,182Income tax expense (benefit)
    
    
    20,704
    
    
    
    (323,191
    )
    
    
    71,318Net income (loss)
    
    $
    33,778
    
    
    $
    (527,935
    )
    
    $
    115,864Earnings (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.74
    )
    
    $
    0.16Diluted
    
    $
    0.05
    
    
    $
    (0.74
    )
    
    $
    0.15Weighted average shares outstanding:Basic
    
    
    709,200
    
    
    
    709,106
    
    
    
    744,641Diluted
    
    
    719,982
    
    
    
    709,106
    
    
    
    759,550




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##### Table of Contents



5 
 
 DeferredCompensation
    
    
    
    
    
    
    
    
    
    
    Accumulatedon Common
    
    
    
    
    
    
    
    
    
    
    OtherAdditional
    
    
    
    
    
    
    Stock
    
    
    
    
    
    
    
    
    
    
    ComprehensiveCommon
    
    
    Paid-in
    
    
    Retained
    
    
    Employee
    
    
    Shares Held
    
    
    Treasury
    
    
    IncomeStock
    
    
    Capital
    
    
    Earnings
    
    
    Benefit Plans
    
    
    in Trust
    
    
    Stock
    
    
    (Loss)
    
    
    TotalBalance  September 30, 2002
    
    $
    9,996
    
    
    $
    9,819,676
    
    
    $
    6,457,443
    
    
    $
    (324,060
    )
    
    $
    (107,161
    )
    
    $
    (2,407,231
    )
    
    $
    429,720
    
    
    $
    13,878,383Comprehensive Income (Loss):Net income
    
    
    
    
    
    
    
    
    
    
    115,864
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,864Change in net unrealized gain (loss) on
available-for-sale securities, net of
reclassification adjustments and tax
effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (647,479
    )
    
    
    (647,479
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (531,615
    )Release of unallocated ESOP shares
    
    
    
    
    
    
    16,349
    
    
    
    
    
    
    
    58,730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,079Acquisition of ESOP shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,399
    
    
    
    
    
    
    
    (58,363
    )
    
    
    
    
    
    
    36Vesting of shares on Management
Recognition Plans
    
    
    
    
    
    
    1,033
    
    
    
    
    
    
    
    3,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,883Vesting of deferred compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,902
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,902Acquisition of Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,344,245
    )
    
    
    
    
    
    
    (1,344,245
    )Cash dividends declared ($ .60/share)
    
    
    
    
    
    
    
    
    
    
    (425,052
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (425,052
    )Balance  September 30, 2003
    
    
    9,996
    
    
    
    9,837,058
    
    
    
    6,148,255
    
    
    
    (183,179
    )
    
    
    (107,161
    )
    
    
    (3,809,839
    )
    
    
    (217,759
    )
    
    
    11,677,371Comprehensive Income (Loss):Net income (loss)
    
    
    
    
    
    
    
    
    
    
    (527,935
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (527,935
    )Change in net unrealized gain (loss) on
available-for-sale securities, net of
reclassification adjustments and tax
effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (316,694
    )
    
    
    (316,694
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (844,629
    )Cancellation of shares held in trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,678
    
    
    
    
    
    
    
    
    
    
    
    3,678Vesting of shares on Management
Recognition Plans
    
    
    
    
    
    
    1,907
    
    
    
    
    
    
    
    3,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,757Vesting of deferred compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,902
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,902Acquisition of Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81,316
    )
    
    
    
    
    
    
    (81,316
    )Cash dividends declared ($ .60/share)
    
    
    
    
    
    
    
    
    
    
    (425,159
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (425,159
    )Balance  September 30, 2004
    
    
    9,996
    
    
    
    9,838,965
    
    
    
    5,195,161
    
    
    
    (159,427
    )
    
    
    (103,483
    )
    
    
    (3,891,155
    )
    
    
    (534,453
    )
    
    
    10,355,604




---



##### Table of Contents



6 
 
 DeferredCompensation
    
    
    
    
    
    
    
    
    
    
    Accumulatedon Common
    
    
    
    
    
    
    
    
    
    
    OtherAdditional
    
    
    
    
    
    
    Stock
    
    
    
    
    
    
    
    
    
    
    ComprehensiveCommon
    
    
    Paid-in
    
    
    Retained
    
    
    Employee
    
    
    Shares Held
    
    
    Treasury
    
    
    IncomeStock
    
    
    Capital
    
    
    Earnings
    
    
    Benefit Plans
    
    
    in Trust
    
    
    Stock
    
    
    (Loss)
    
    
    TotalBalance  September 30, 2004
    
    $
    9,996
    
    
    $
    9,838,965
    
    
    $
    5,195,161
    
    
    $
    (159,427
    )
    
    $
    (103,483
    )
    
    $
    (3,891,155
    )
    
    $
    (534,453
    )
    
    $
    10,355,604Comprehensive Income :Net income
    
    
    
    
    
    
    
    
    
    
    33,778
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,778Change in net unrealized gain (loss) on
available-for-sale securities, net of
reclassification adjustments and tax
effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365,860
    
    
    
    365,860Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    399,638Vesting of shares on Management
Recognition Plans
    
    
    
    
    
    
    886
    
    
    
    
    
    
    
    3,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,736Vesting of deferred compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,902
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,902Acquisition of Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,443
    )
    
    
    
    
    
    
    (1,443
    )Cash dividends declared ($ .50/share)
    
    
    
    
    
    
    
    
    
    
    (354,494
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (354,494
    )Balance  September 30, 2005
    
    $
    9,996
    
    
    $
    9,839,851
    
    
    $
    4,874,445
    
    
    $
    (135,675
    )
    
    $
    (103,483
    )
    
    $
    (3,892,598
    )
    
    $
    (168,593
    )
    
    $
    10,423,943




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##### Table of Contents



7 
 
 2005
    
    
    2004
    
    
    2003OPERATING ACTIVITIESNet income (loss)
    
    $
    33,778
    
    
    $
    (527,935
    )
    
    $
    115,864Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Provision for loan losses (benefit)
    
    
    107,235
    
    
    
    1,356,937
    
    
    
    549,603Depreciation and amortization
    
    
    388,664
    
    
    
    377,681
    
    
    
    331,198Proceeds from sales of loans
    
    
    26,287,005
    
    
    
    31,096,549
    
    
    
    55,989,812Loans originated for sale
    
    
    (25,457,110
    )
    
    
    (30,361,974
    )
    
    
    (53,634,764
    )Gain on sale of loans
    
    
    (685,526
    )
    
    
    (719,389
    )
    
    
    (1,170,453
    )Gain on sale of premises and equipment
    
    
    (7,776
    )
    
    
    (927
    )
    
    
    (7,759
    )Gain on sale of affiliate
    
    
    
    
    
    
    (25,000
    )
    
    
    (Gain) loss on sale of foreclosed assets
    
    
    (32,981
    )
    
    
    6,770
    
    
    
    69,885Compensation expense on ESOP and MRPs
    
    
    24,638
    
    
    
    25,659
    
    
    
    99,864Gain on sale of securities available-for-sale
    
    
    (47,407
    )
    
    
    (83,614
    )
    
    
    (238,291
    )Loss on sale of securities held-to-maturity
    
    
    701,099
    
    
    
    
    
    
    
    Net amortization of premium on securities
    
    
    79,870
    
    
    
    7,906
    
    
    
    46,663(Increase) decrease in accrued interest receivable
    
    
    (30,816
    )
    
    
    53,763
    
    
    
    54,766(Increase) decrease in other assets
    
    
    (30,471
    )
    
    
    (1,013,227
    )
    
    
    (156,421
    )Increase (decrease) in accrued interest payable
    
    
    183,058
    
    
    
    (118,659
    )
    
    
    (249,174
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    (383,729
    )
    
    
    644,087
    
    
    
    (67,463
    )Net cash provided by operating activities
    
    
    1,129,531
    
    
    
    718,627
    
    
    
    1,733,330INVESTING ACTIVITIESNet change in interest-bearing deposits in other financial institutions
    
    
    (157,994
    )
    
    
    (180,804
    )
    
    
    350,259Proceeds from calls and maturities of securities available-for-sale
    
    
    2,524,868
    
    
    
    2,931,352
    
    
    
    15,438,689Proceeds from sales of securities available-for-sale
    
    
    19,128,997
    
    
    
    11,541,353
    
    
    
    16,589,714Proceeds from sales of securities held-to-maturity
    
    
    15,297,187
    
    
    
    
    
    
    
    Proceeds from redemption of Federal Home Loan Bank stock
    
    
    
    
    
    
    
    
    
    
    1,112,800Purchase of Federal Home Loan Bank stock
    
    
    (101,200
    )
    
    
    
    
    
    
    Purchase of securities available-for-sale
    
    
    (34,315,257
    )
    
    
    (11,569,768
    )
    
    
    (38,713,047
    )Net (increase) decrease in loans
    
    
    (2,035,563
    )
    
    
    (12,088,252
    )
    
    
    7,443,226Proceeds from sale of premises and equipment
    
    
    12,354
    
    
    
    10,377
    
    
    
    452,058Purchase of premises and equipment
    
    
    (242,476
    )
    
    
    (884,632
    )
    
    
    (207,151
    )Proceeds from sale of foreclosed assets
    
    
    1,405,853
    
    
    
    96,185
    
    
    
    541,708Proceeds from sale of affiliate
    
    
    
    
    
    
    25,000
    
    
    
    Net cash provided (used) by investing activities
    
    
    1,516,769
    
    
    
    (10,119,189
    )
    
    
    3,008,256




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##### Table of Contents



8 
 
 2005
    
    
    2004
    
    
    2003FINANCING ACTIVITIESNet increase (decrease) in demand accounts and savings accounts
    
    $
    (762,972
    )
    
    $
    1,156,098
    
    
    $
    (390,261
    )Net increase (decrease) in certificates of deposit
    
    
    4,094,958
    
    
    
    3,078,747
    
    
    
    (2,535,020
    )Proceeds from borrowed funds
    
    
    112,185,006
    
    
    
    70,534,271
    
    
    
    18,588,000Repayment of borrowed funds
    
    
    (117,757,918
    )
    
    
    (65,946,359
    )
    
    
    (20,644,750
    )Cash dividends paid
    
    
    (354,494
    )
    
    
    (425,159
    )
    
    
    (425,052
    )Acquisition of ESOP and MRP shares
    
    
    
    
    
    
    3,678
    
    
    
    36Acquisition of treasury stock
    
    
    (1,443
    )
    
    
    (81,316
    )
    
    
    (1,344,245
    )(Increase) decrease in advances by borrowers
for property taxes and insurance
    
    
    (22,375
    )
    
    
    46,385
    
    
    
    (63,867
    )Net cash provided (used) by financing activities
    
    
    (2,619,238
    )
    
    
    8,366,345
    
    
    
    (6,815,159
    )Increase (decrease) in cash and cash equivalents
    
    
    27,062
    
    
    
    (1,034,217
    )
    
    
    (2,073,573
    )Cash and cash equivalents  beginning of year
    
    
    5,015,108
    
    
    
    6,049,325
    
    
    
    8,122,898Cash and cash equivalents  end of year
    
    $
    5,042,170
    
    
    $
    5,015,108
    
    
    $
    6,049,325Supplemental information on cash payments:Interest paid
    
    $
    3,202,792
    
    
    $
    2,930,986
    
    
    $
    3,793,367Income taxes paid
    
    $
    63,860
    
    
    $
    148,326
    
    
    $
    210,320Supplemental information on non-cash transactions:Real estate owned, obtained through foreclosure
    
    $
    1,121,856
    
    
    $
    539,782
    
    
    $
    609,290




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##### Table of Contents



1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThis summary of significant accounting policies of SouthFirst Bancshares, Inc. (the Company)
is presented to assist in understanding the Companys financial statements. The financial
statements and notes are representations of the Companys management who is responsible for the
integrity and objectivity of the financial statements. These accounting policies conform to
accounting principles generally accepted in the United States of America and have been
consistently applied in the preparation of the financial statements.Basis of Presentation  The accompanying consolidated financial statements include the
accounts of SouthFirst Bancshares, Inc. (the Corporation) and its wholly-owned subsidiaries,
First Federal of the South (the Bank) (a wholly-owned subsidiary of SouthFirst Bancshares, Inc.)
(the Bank changed its name to SouthFirst Bank on September 1, 2005, with an operational
effective date of October 1, 2005), Pension & Benefit Trust Company (a wholly-owned subsidiary
of First Federal of the South, which is an employee benefits consulting company), SouthFirst Mortgage, Inc. (a
wholly-owned subsidiary of First Federal of the South) and SouthFirst Financial Services, Inc. (a wholly-owned
subsidiary of SouthFirst Bancshares, Inc.), collectively as the Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.Business  The Company provides a full range of banking services to individual and
corporate customers in its primary market area of the cities of Sylacauga, Clanton and Talladega
in the state of Alabama, and provides lending services in Birmingham, Alabama. The Company is
subject to competition from other financial institutions. The Company is subject to the
regulations of certain federal agencies and undergoes periodic examinations by those regulatory
authorities.Use of Estimates  The accounting principles and reporting policies of the Company, and
the methods of applying these principles, conform with generally accepted accounting principles
and with general practice within the savings and loan industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statement of financial condition and
revenues and expenses for the period. Actual results could differ significantly from those
estimates.Material estimates that are particularly susceptible to significant change in the near-term
relate to the determination of the allowance for loan losses. In connection with the
determination of the allowance for loan losses, management obtains independent appraisals for
properties collateralizing significant troubled loans.




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##### Table of Contents



10 
  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Significant Group Concentrations of Credit Risk  A substantial portion of the Companys
loans are secured by real estate in the Companys primary market area. Note 3 discusses the
types of lending that the Company engages in. The Company does not have any significant
concentration to any one industry or customer.Cash and Cash Equivalents  For purposes of presentation in the consolidated statements
of cash flows, cash and cash equivalents include cash and balances due from other depository
institutions.Interest-bearing Deposits in Other Financial Institutions  Interest-bearing deposits in
other financial institutions mature within one year and are carried at cost.Securities  The Company classifies its securities in one of the following three
categories: (i) held-to-maturity securities, (ii) securities available-for-sale, and (iii)
trading account securities. Securities held-to-maturity represent securities which management
has both the positive intent and ability to hold to maturity. These securities are reported at
cost adjusted for amortization of premiums and accretion of discounts using the interest method.
Securities available-for-sale represent securities which management may decide to sell prior to
maturity for liquidity, tax planning or other valid business purposes. Available-for-sale
securities are reported at fair value with any unrealized gains or losses excluded from earnings
and reflected as a net amount in a separate component of stockholders equity until realized.
Trading account securities represent securities which management has purchased and is holding
principally for the purpose of selling in the near term. Trading account securities are reported
at fair value with any unrealized gains or losses included in earnings.Declines in fair value of securities (available-for-sale or held-to-maturity) that are
considered other than temporary are charged to securities losses, reducing the carrying value of
such securities. Gains or losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method and are shown separately in non-interest
income in the consolidated statements of operations. No securities were classified as trading
account securities as of September 30, 2005 or 2004.The stock of the Federal Home Loan Bank has no quoted fair value and no ready market exists. The
investment in the stock is required of insured institutions that utilize the services of the
Federal Home Loan Bank. The Federal home Loan Bank periodically reviews the required investment
and will redeem any excess stock at cost. The Federal Home Loan Bank will also purchase the
stock at its cost basis from the Company in the event the Company ceases to utilize the services
of the Federal Home Loan Bank.




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##### Table of Contents



11 
  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Loans  The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans throughout the
Companys primary market area. The ability of the Companys debtors to honor their contracts is
dependent upon the real estate and general economic conditions in this area.Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off generally are reported at their outstanding unpaid principal balances
adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on
originated loans. Interest income is accrued on the unpaid principal balance.The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is
90 days delinquent unless the credit is well-secured and in process of collection. Credit card
loans and other personal loans are typically charged-off no later than 180 days past due. In
all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection
of principal or interest is considered doubtful.All interest accrued but not collected for loans that are placed on nonaccrual or
charged-off is reversed against interest income. The interest on these loans is accounted for
on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.Allowance for Loan Losses  The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.The allowance for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect the
borrowers ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the
Companys allowances for loan losses and foreclosed real estate. Such agencies may require the
Company to recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.




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##### Table of Contents



12 
  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)A loan is considered impaired when, based on current information and events, it is probable that
the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loans effective interest
rate, the loans obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.Loan Origination Fees, Premiums and Discounts on Loans, Mortgage-Backed Securities and
Collateralized Mortgage Obligations  Loan origination fees and certain direct loan
origination costs are deferred and recognized over the lives of the related loans as an
adjustment of the loan yields using the interest method. Premiums or discounts on loans,
mortgage-backed securities, and collateralized mortgage obligations are amortized over the
estimated lives of the related mortgage loans, adjusted for prepayments, using a method
approximating the interest method. Premiums and discounts on loans, mortgage-backed securities,
and collateralized mortgage obligations were insignificant at September 30, 2005.Loans Held for Sale  Loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by charges to income.
Gains or losses on loan sales are recognized at the time of sale and are determined by the
difference between net sales proceeds and the carrying value of the loans sold.The Company enters into interest rate locks, where customers have locked into mortgages at a set
interest rate, and forward sales commitments, which are sales of mortgage loans to third parties
at a specified price. These interest rate locks and forward sales commitments qualify as
derivatives; however, the change in fair value of these derivatives during the year did not have
a material impact on the Companys financial position or results of operations.




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##### Table of Contents



13 
  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Goodwill  In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, which changed the accounting for goodwill from an amortization method to an impairment
only approach. Upon adoption of SFAS No. 142 on October 1, 2002, the Company ceased amortizing
goodwill. Based upon the initial goodwill impairment test completed October 1, 2002, as
required by SFAS No. 142, no goodwill impairment was indicated. In addition, the goodwill
impairment testing completed at September 30, 2005 and 2004, indicated there was no goodwill
impairment. Therefore, the Company had no changes in the carrying amount of goodwill from
September 30, 2004, to September 30, 2005.Foreclosed Assets  Assets acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount or fair value less cost
to sell. Cost related to the development and improvement of property are capitalized, where as
costs relating to the holding of the property are expensed.Long-Lived Assets  Land is carried at cost. Premises and equipment are stated at cost
less accumulated depreciation computed on a straight-line basis over the estimated service lives
of the related assets (30 to 50 years for buildings and 3 to 10 years for equipment).
Expenditures for maintenance and repairs are charged to operations as incurred; expenditures for
renewals and improvements are capitalized and written off through depreciation and amortization
charges. Equipment retired or sold is removed from the asset and related accumulated
depreciation amounts and any gain or loss resulting therefrom is reflected in the accompanying
consolidated statements of operations.The Company continually evaluates whether events and circumstances have occurred that indicate
such long-lived assets have been impaired. Measurement of any impairment of such long-lived
assets is based on those assets fair values and is recognized through a valuation allowance
with the resulting charge reflected in the accompanying consolidated statements of operations.
There were no impairment losses recorded during any period reported herein.




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##### Table of Contents



14 
  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Stock-Based Compensation  The Company applies Accounting Principles Bulletin (APB)
Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting
for employee stock compensation plans and, accordingly, does not recognize compensation cost for
stock options granted when the option price is greater than or equal to the underlying stock
price. This accounting method is referred to as the intrinsic value method. The Company
follows the pro-forma disclosures of Statement of Financial Accounting Standards (SFAS) No. 123,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure,
using the fair value method of accounting for stock-based compensation.Income Taxes  The Company provides for income taxes based upon pretax income,
adjusted for permanent differences between reported and taxable earnings. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment date.Advertising  Advertising costs are charged to operations when incurred. Advertising
expense was $96,520, $90,625 and $84,259 for the years ended September 30, 2005, 2004 and 2003,
respectively.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 year. 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 year 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 years ended
September 30, 2005:




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##### Table of Contents



15 
  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 EarningsIncome
    
    
    
    
    
    
    (Loss)(Loss)
    
    
    Shares
    
    
    Per ShareFor the Year Ended September 30, 2005:Basic earnings
    
    $
    33,778
    
    
    
    709,200
    
    
    $
    .05Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    10,782Dilutive earnings
    
    $
    33,778
    
    
    
    719,982
    
    
    $
    .05For the Year Ended September 30, 2004:Basic earnings (loss)
    
    $
    (527,935
    )
    
    
    709,106
    
    
    $
    (.74
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    Dilutive earnings (loss)
    
    $
    (527,935
    )
    
    
    709,106
    
    
    $
    (.74
    )For the Year Ended September 30, 2003:Basic earnings
    
    $
    115,864
    
    
    
    744,641
    
    
    $
    .16Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    14,909Dilutive earnings
    
    $
    115,864
    
    
    
    759,550
    
    
    $
    .15
 Options on 22,526, 133,999 and 60,834 shares of common stock in 2005, 2004 and 2003,
respectively, were not included in computing diluted earnings per share because their effects
were antidilutive.Comprehensive Income  Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on available-for-sale securities,
are reported as a separate component of the equity section of the statement of financial
condition, such items, along with net income, are components of comprehensive income.The components of other comprehensive income and related tax effects are as follows:




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##### Table of Contents



16 
  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 2005
    
    
    2004
    
    
    2003Unrealized holding gains (losses) on available-for-sale securities arising during the period
    
    $
    (279,013
    )
    
    $
    (453,227
    )
    
    $
    (806,032
    )Amortization of discount of securities
transferred to held-to-maturity
    
    
    30,829
    
    
    
    26,048
    
    
    
    Unamortized holding loss on held-to-maturity
securities previously transferred from
available-for-sale
    
    
    885,689
    
    
    
    
    
    
    
    Reclassification adjustment for losses (gains)
realized in income
    
    
    (47,407
    )
    
    
    (83,614
    )
    
    
    (238,291
    )Net unrealized gains (losses)
    
    
    590,098
    
    
    
    (510,793
    )
    
    
    (1,044,323
    )Tax effect
    
    
    (224,238
    )
    
    
    194,099
    
    
    
    396,844Net-of-tax amount
    
    $
    365,860
    
    
    $
    (316,694
    )
    
    $
    (647,479
    )
 Recent Accounting Pronouncements  In November 2005, the Financial Accounting Standards
Board (FASB) approved the issuance of FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The
FSP addresses the determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss. The FSP also
includes accounting considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The FSP is effective for reporting periods
beginning after December 15, 2005. The Company has adopted the disclosure requirements of the
FSP and is currently evaluating the impact of the adoption of the accounting guidance in the
FSP.




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##### Table of Contents



17 
  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)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 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 11, 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.




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##### Table of Contents



18 
  2.
    
    SECURITIESDebt and equity securities have been classified in the consolidated statements of financial
condition according to managements intent. The carrying amount of securities and their
approximate fair value at September 30, 2005 and 2004 were as follows:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-Sale SecuritiesSeptember 30, 2005:U.S. Government agency
    
    $
    11,590,913
    
    
    $
    
    
    
    $
    (135,925
    )
    
    $
    11,454,988Collateralized mortgage
obligations
(CMOs)
    
    
    520,509
    
    
    
    
    
    
    
    (1,100
    )
    
    
    519,409Mortgage-backed securities
    
    
    14,234,215
    
    
    
    19,812
    
    
    
    (143,618
    )
    
    
    14,110,409Corporate obligations
    
    
    400,000
    
    
    
    
    
    
    
    (11,101
    )
    
    
    388,899Other common stock
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    9,000$
    26,754,637
    
    
    $
    19,812
    
    
    $
    (291,744
    )
    
    $
    26,482,705September 30, 2004:U.S. Government agency
    
    $
    4,588,937
    
    
    $
    444
    
    
    $
    (56,476
    )
    
    $
    4,532,905Collateralized mortgage
obligations
(CMOs)
    
    
    875,317
    
    
    
    6,320
    
    
    
    
    
    
    
    881,637Mortgage-backed securities
    
    
    8,252,500
    
    
    
    97,855
    
    
    
    
    
    
    
    8,350,355Corporate obligations
    
    
    400,000
    
    
    
    4,381
    
    
    
    (1,035
    )
    
    
    403,346Other common stock
    
    
    9,000
    
    
    
    3,000
    
    
    
    
    
    
    
    12,000$
    14,125,754
    
    
    $
    112,000
    
    
    $
    (57,511
    )
    
    $
    14,180,243Held-to-Maturity SecuritiesSeptember 30, 2004:U.S. Government agency
    
    $
    15,081,723
    
    
    $
    593,250
    
    
    $
    
    
    
    $
    15,674,973
 The Company sold securities available-for-sale for total proceeds of $19,128,997,
$11,541,353 and $16,589,714, resulting in gross realized gains of $47,407, $83,614 and $238,291
in 2005, 2004 and 2003, respectively.




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19 
  2.
    
    SECURITIES (Continued)The scheduled maturities at September 30, 2005, of securities (other than equity securities) by
contractual maturity are shown below. Expected maturities will differ from contractual
maturities because the borrower may have the right to call or prepay obligations with or without
call or prepayment penalties.
 Available-for-SaleAmortizedCost
    
    
    Fair ValueDue in one year or less
    
    $
    100,000
    
    
    $
    98,347Due from one to five years
    
    
    1,113,108
    
    
    
    1,117,631Due from five to ten years
    
    
    10,771,384
    
    
    
    10,689,264Due after ten years
    
    
    14,761,145
    
    
    
    14,568,463$
    26,745,637
    
    
    $
    26,473,705
 Securities available-for-sale with a carrying amount of approximately $2,790,000 and $3,714,000
at September 30, 2005 and 2004, respectively, were pledged to secure public deposits as required
by law and for other purposes required or permitted by law.In May 2004, the Company transferred certain securities from the available-for-sale to
held-to-maturity category. The securities were transferred at fair value on the date of
transfer. The unrealized loss at the date of transfer was $942,565 and continued to be reported
in accumulated other comprehensive income (loss) in stockholders equity. That amount was being
amortized over the remaining lives of the securities as an adjustment of yield. The
amortization of the unrealized loss offset the effect of the amortization of the discount for
those held-to-maturity securities. The amount of such amortization was $30,829 and $26,048 for
the years ended September 30, 2005 and 2004, respectively, and the unamortized balance of the
unrealized losses, net of applicable income taxes which was included in stockholders equity was
$568,241 at September 30, 2004.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 $15,998,286, 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.




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##### Table of Contents



20 
  2.
    
    SECURITIES (Continued)The following table shows the Companys combined investments gross unrealized losses and fair
values, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position, at September 30, 2005 and 2004:
 Less Than 12 Months
    
    
    More Than 12 Months
    
    

TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesSeptember 30, 2005:U.S. Government
Agency
    
    $
    7,017,519
    
    
    $
    34,126
    
    
    $
    4,539,270
    
    
    $
    101,799
    
    
    $
    11,556,789
    
    
    $
    135,925Collateralized
mortgage
obligations
    
    
    520,509
    
    
    
    1,100
    
    
    
    
    
    
    
    
    
    
    
    520,509
    
    
    
    1,100Mortgage-backed
securities
    
    
    13,767,549
    
    
    
    143,618
    
    
    
    
    
    
    
    
    
    
    
    13,767,549
    
    
    
    143,618Corporate obligations
    
    
    241,194
    
    
    
    8,806
    
    
    
    147,705
    
    
    
    2,295
    
    
    
    388,899
    
    
    
    11,101September 30, 2004:U.S. Government
Agency
    
    $
    6,907,740
    
    
    $
    67,260
    
    
    $
    13,249,694
    
    
    $
    312,483
    
    
    $
    20,157,434
    
    
    $
    379,743Corporate obligations
    
    
    148,965
    
    
    
    1,035
    
    
    
    
    
    
    
    
    
    
    
    148,965
    
    
    
    1,035
 At September 30, 2005, the Company had twenty-three individual securities that were in an
unrealized loss position. Of those, five had been in an unrealized loss position for longer
than 12 months. The unrealized losses on the Companys investments in U.S. Government agency,
collateralized mortgage obligations and mortgage-backed securities were caused by interest rate
increases. The contractual term of these investments do not permit the issuer to settle the
securities at a price less than the par value of the investments (which approximate the original
purchase price). Because the Company has the ability and intent to hold their investments until
a recovery of fair value, which may be maturity, the Company does not consider these investments
to be other than temporarily impaired at September 30, 2005. The unrealized losses in the
Companys investment in corporate obligations are deemed not to be other than temporary
impairment and are primarily due to the fact that these securities have experienced volatility
in their market prices as a result of current market conditions, with no credit concerns related
to the entities that issued the securities. The Company does not expect any permanent
impairment to develop related to these securities.




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21 
 
  3.
    
    LOANSLoans consisted of the following at September 30, 2005 and 2004:
 2005
    
    
    2004Real estate mortgage loans:First mortgage loans:Single family residential
    
    $
    41,839,029
    
    
    $
    44,904,742Multi-family and commercial real estate
    
    
    17,563,932
    
    
    
    14,002,478Second mortgage loans
    
    
    17,128,456
    
    
    
    16,670,2041-4 family construction loans
    
    
    15,044,389
    
    
    
    16,106,277Savings account loans
    
    
    824,064
    
    
    
    768,088Installment loans
    
    
    3,663,580
    
    
    
    3,192,16996,063,450
    
    
    
    95,643,958Deduct:Deferred loan fees
    
    
    156,149
    
    
    
    157,758Allowance for loan losses
    
    
    518,572
    
    
    
    911,964674,721
    
    
    
    1,069,722Total loans receivable  net
    
    $
    95,388,729
    
    
    $
    94,574,236
 Activity in the allowance for loan losses was as follows for the years ended September 30, 2005,
2004 and 2003:
 2005
    
    
    2004
    
    
    2003Beginning balance
    
    $
    911,964
    
    
    $
    1,191,033
    
    
    $
    854,013Provision charged to income
    
    
    107,235
    
    
    
    1,356,937
    
    
    
    549,603Recovery of amounts charged off
in prior years
    
    
    37,099
    
    
    
    28,432
    
    
    
    27,930Loans charged off
    
    
    (537,726
    )
    
    
    (1,664,438
    )
    
    
    (240,513
    )Ending balance
    
    $
    518,572
    
    
    $
    911,964
    
    
    $
    1,191,033




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22 
  3.
    
    LOANS (Continued)The following is a summary of information pertaining to impaired loans:
 September 30,2005
    
    
    2004Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    106,965
    
    
    
    618,035Total impaired loans
    
    $
    106,965
    
    
    $
    618,035Valuation allowance related to impaired loans
    
    $
    106,965
    
    
    $
    393,203
 Years Ended September 30,2005
    
    
    2004
    
    
    2003Average investment in impaired loans
    
    $
    74,428
    
    
    $
    821,854
    
    
    $
    413,387Interest income recognized on impaired loans
    
    
    5,450
    
    
    
    25,294
    
    
    
    23,068Interest income recognized on a cash basis
on impaired loans
    
    
    5,450
    
    
    
    25,294
    
    
    
    23,068
 Interest on impaired loans is generally recorded on a cash basis and is included in
earnings only when actually received in cash.At September 30, 2005 and 2004, the total recorded investment in loans on non-accrual amounted
to approximately $875,239 and $1,194,034, respectively, and the total recorded investment in
loans past due ninety days or more and still accruing interest was $0 for each year.In January 2004, the Company agreed to modify the terms of several loans to one customer. The
modified terms included a reduction in interest rates from an original range of prime plus .50%
to 15% to a restructured range of 7% to 10%. Additional funds of approximately $55,000 were
advanced on the restructuring and additional collateral was received for those advances. The
recorded investment in the loans was approximately $210,000 at September 30, 2004. Interest
income of approximately $13,000 has been recorded in 2004 on the restructured note. Had the
terms of the note not been modified, interest income of approximately $14,000 would have been
recorded.In 2005, the Company agreed to extend the terms of two loans totaling approximately $191,000.
No additional funds were advanced on the restructuring and no additional collateral was
received.The Company sells loans to third party investors with limited recourse, primarily related to
prepayment. The total amount of recourse liability at September 30, 2005, was approximately
$83,000. Because historical losses related to these guarantees have been insignificant, no
liability has been recorded for these at September 30, 2005 or 2004.




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23 
  4.
    
    PREMISES AND EQUIPMENTPremises and equipment are summarized as follows at September 30, 2005 and 2004:
 2005
    
    
    2004Land
    
    $
    1,798,595
    
    
    $
    1,798,595Buildings and improvements
    
    
    3,240,070
    
    
    
    3,162,549Furniture, fixtures and equipment
    
    
    1,297,363
    
    
    
    1,363,035Automobiles
    
    
    143,698
    
    
    
    191,9406,479,726
    
    
    
    6,516,119Less: Accumulated depreciation
    
    
    1,834,102
    
    
    
    1,719,729Premises and equipment, net
    
    $
    4,645,624
    
    
    $
    4,796,390
 Depreciation expense charged to operations was $388,664, $377,681 and $331,198 in 2005, 2004 and
2003, respectively.
 5.
    
    ACCRUED INTEREST RECEIVABLEAccrued interest receivable consists of the following at September 30, 2005 and 2004:
 2005
    
    
    2004Loans
    
    $
    396,902
    
    
    $
    339,002Investment securities
    
    
    259,553
    
    
    
    286,637Total accrued interest receivable
    
    $
    656,455
    
    
    $
    625,639
 6.
    
    INVESTMENTS IN AFFILIATEIn March 1995, the Company obtained a 50% ownership interest in Magnolia Title Services, Inc.
(Magnolia) for an investment of $100,000. Magnolia provides title insurance and related
services to various borrowers and lenders in the state of Alabama. The Company accounted for
this investment under the equity method. As of September 30, 2003, the Company had written down
its investment to $0. In November 2003, the Company sold its investment for $25,000, thereby
realizing a gain of $25,000, which is included in other income.




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24 
 
  7.
    
    LEASESThe Company leases certain real estate and office equipment under operating leases expiring in
various years through 2008. Minimum future rental payments under non-cancellable operating
leases having original or remaining terms in excess of one year as of September 30, 2005, are as
follows:
 Year EndingSeptember 30,
    
    Amount2006
    
    $
    113,3492007
    
    
    80,3072008
    
    
    3,489Total
    
    $
    197,145
 Lease expense charged to operations was $158,550, $140,637 and $127,930 for the years ended
September 30, 2005, 2004 and 2003, respectively.The Company is also the lessor of a portion of its office space under a lease expiring in 2007.Minimum future rentals to be received on non-cancelable leases as of September 30, 2005, for
each of the next five years and in the aggregate are as follows:
 Year EndingSeptember 30,
    
    Amount2006
    
    $
    12,0002007
    
    
    12,0002008
    
    
    3,000Total minimum
future rentals
    
    $
    27,000




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##### Table of Contents



25 
  8.
    
    DEPOSITSAn analysis of deposit accounts at the end of the period is as follows at September 30, 2005 and
2004:
 2005
    
    
    2004Demand accounts:Non interest-bearing checking accounts
    
    $
    4,232,573
    
    
    $
    4,003,251Interest-bearing:NOW accounts
    
    
    8,721,860
    
    
    
    10,661,374Money market demand
    
    
    2,452,428
    
    
    
    230,010Total demand accounts
    
    
    15,406,861
    
    
    
    14,894,635Statement savings accounts
    
    
    10,358,774
    
    
    
    11,633,972Certificate accounts
    
    
    75,359,177
    
    
    
    71,264,219Total
    
    $
    101,124,812
    
    
    $
    97,792,826
 Certificate accounts greater than or equal to $100,000 were $36,798,410 and $34,345,365
at September 30, 2005 and 2004, respectively. Overdrafts of demand deposits in the amounts of
$15,763 and $43,356 have been reclassified as loan balances at September 30, 2005 and 2004,
respectively.Scheduled maturities of certificate accounts were as follows at September 30, 2005:
 Year
    
    Amount2006
    
    $
    52,831,2672007
    
    
    12,553,1232008
    
    
    2,433,7372009
    
    
    1,475,8512010
    
    
    6,065,199Total
    
    $
    75,359,177




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##### Table of Contents



26 
  8.
    
    DEPOSITS (Continued)Interest expense on deposits for the years ended September 30, 2005, 2004 and 2003, was as
follows:
 2005
    
    
    2004
    
    
    2003Demand accounts
    
    $
    28,346
    
    
    $
    19,457
    
    
    $
    63,232Statement savings accounts
    
    
    25,231
    
    
    
    25,921
    
    
    
    74,506Certificate accounts
    
    
    2,093,519
    
    
    
    1,689,472
    
    
    
    2,383,090Total
    
    $
    2,147,096
    
    
    $
    1,734,850
    
    
    $
    2,520,828
 9.
    
    BORROWED FUNDSFederal Home Loan Bank AdvancesThe Company was liable to the Federal Home Loan Bank of Atlanta on the following advances at
September 30, 2005 and 2004:
 Maturity Date
    
    Callable Date
    
    
    Type
    
    
    Rate at 9/30
    
    
    2005
    
    
    2004April 2005
    
    
    
    
    
    Adjustable
    
    
    1.80
    %
    
    
    
    
    
    $
    4,000,000May 2005
    
    
    
    
    
    Adjustable
    
    
    2.11
    %
    
    
    
    
    
    
    1,670,000April 2006
    
    
    
    
    
    Adjustable
    
    
    4.16
    %
    
    $
    4,000,000
    
    
    
    April 2006
    
    
    
    
    
    Adjustable
    
    
    4.16
    %
    
    
    1,670,000
    
    
    
    March 2010
    
    December 2005
    
    Fixed Rate
    
    
    5.88
    %
    
    
    5,000,000
    
    
    
    5,000,000November 2010
    
    November 2005
    
    Fixed Rate
    
    
    5.43
    %
    
    
    5,000,000
    
    
    
    5,000,000January 2011
    
    October 2005
    
    Fixed Rate
    
    
    4.65
    %
    
    
    2,500,000
    
    
    
    2,500,000January 2011
    
    January 2006
    
    Fixed Rate
    
    
    5.30
    %
    
    
    2,500,000
    
    
    
    2,500,000$
    20,670,000
    
    
    $
    20,670,000Weighted average rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.08
    %
    
    
    4.46
    %




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##### Table of Contents



27 
  9.
    
    BORROWED FUNDS (Continued)At September 30, 2005 and 2004, the advances were collateralized by first-mortgage residential
loans with carrying values of approximately $41,278,000 and $42,907,000, respectivelyOn April 15, 2002, the Bank was notified that the amount available under its credit line with
the Federal Home Loan Bank of Atlanta had been changed from a variable amount, equal to 30% of
total assets to a fixed amount of $22,000,000. This amount was subsequently changed to an
amount equal to 10% of its total assets. The Federal Home Loan Bank of Atlanta had notified the
Bank that it would not require the Banks existing borrowings to be reduced to the new amount
prior to the existing advance maturities, but that it will require that any additional borrowing
by the Bank be approved through application by the Bank to the Federal Home Loan Bank of
Atlantas Credit Committee. In November 2005, the Federal Home Loan Bank approved a credit line
increase up to 25% of the Banks assets.Line of CreditThe Corporation also has a line of credit with a commercial bank. A summary of this line of
credit at September 30, 2005 and 2004, is as follows:
 Outstanding Balanceat September 30,2005
    
    
    2004$2,500,000 line of credit, due June 1,
2006, interest at prime plus .25% (7.00% at
September 30, 2005), secured by the
Companys stock in its subsidiary, First Federal of the South
    
    $
    1,402,861
    
    
    $
    902,861
 Securities Sold Under Agreements to Repurchase
 Securities sold under agreements to repurchase, which are classified as secured borrowings and
are reflected at the amount of cash received in connection with the transaction. The Company
may be required to provide additional collateral based on the fair value of the underlying
securities. A summary of such agreements is as follows:




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##### Table of Contents



9.
    
    BORROWED FUNDS (Continued)
 2005
    
    
    2004Agreement to repurchase on October
14, 2005, plus interest at 3.95%
    
    $
    949,000
    
    
    $
    Agreement to repurchase on October
14, 2005, plus interest at 3.95%
    
    
    1,979,000
    
    
    
    Agreement to repurchase on October
14, 2005, plus interest at 3.89%
    
    
    1,015,000
    
    
    
    Agreement to repurchase on October
12, 2004, plus interest at 1.76%
    
    
    
    
    
    
    1,002,375Agreement to repurchase on October
15, 2004, plus interest at 1.81%
    
    
    
    
    
    
    1,476,425Agreement to repurchase on October
20, 2004, plus interest at 1.88%
    
    
    
    
    
    
    976,400Agreement to repurchase on October
20, 2004, plus interest at 1.88%
    
    
    
    
    
    
    993,037Agreement to repurchase on October
20, 2004, plus interest at 1.88%
    
    
    
    
    
    
    983,580Agreement to repurchase on October
22, 2004, plus interest at 1.90%
    
    
    
    
    
    
    1,000,000Agreement to repurchase on October
25, 2004, plus interest at 1.85%
    
    
    
    
    
    
    1,480,470Agreement to repurchase on November
1, 2004, plus interest at 1.87%
    
    
    
    
    
    
    1,103,625Agreement to repurchase on November
1, 2004, plus interest at 1.87%
    
    
    
    
    
    
    1,000,000$
    3,943,000
    
    
    $
    10,015,912
   Year EndingSeptember 30,
    
    Amount2006
    
    $
    26,015,861




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##### Table of Contents



29 
  9.
    
    BORROWED FUNDS (Continued)
 September 30,2005
    
    2004Maximum amounts outstanding at any month-end:Line of credit
    
    $
    1,402,861
    
    
    $
    2,352,861Federal Home Loan Bank advances
    
    
    20,670,000
    
    
    
    22,340,000Reverse repurchase agreements
    
    
    10,648,938
    
    
    
    10,015,912Average amount outstanding:Line of credit
    
    
    1,165,327
    
    
    
    2,080,964Federal Home Loan Bank advances
    
    
    20,670,000
    
    
    
    22,124,426Reverse repurchase agreements
    
    
    6,094,621
    
    
    
    4,901,304Weighted average interest rate at year-end:Line of credit
    
    
    7.00
    %
    
    
    5.00
    %Federal Home Loan Bank advances
    
    
    5.08
    %
    
    
    4.46
    %Reverse repurchase agreements
    
    
    3.94
    %
    
    
    1.85
    %Weighted average interest rate on amounts outstanding
during the year:Line of credit
    
    
    6.08
    %
    
    
    4.36
    %Federal Home Loan Bank advances
    
    
    4.81
    %
    
    
    4.17
    %Reverse repurchase agreements
    
    
    2.84
    %
    
    
    1.32
    %




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##### Table of Contents



30 
  INCOME TAX EXPENSE
  2005
    
    
    2004
    
    
    2003Federal:Current
    
    $
    (214,522
    )
    
    $
    (513,893
    )
    
    $
    272,976Deferred
    
    
    212,624
    
    
    
    248,685
    
    
    
    (237,810
    )(1,898
    )
    
    
    (265,208
    )
    
    
    35,166State:Current
    
    
    6,968
    
    
    
    (76,269
    )
    
    
    53,638Deferred
    
    
    15,634
    
    
    
    18,286
    
    
    
    (17,486
    )22,602
    
    
    
    (57,983
    )
    
    
    36,152Total
    
    $
    20,704
    
    
    $
    (323,191
    )
    
    $
    71,318
   2005
    
    
    2004
    
    
    2003Computed expected income tax expense
    
    $
    18,524
    
    
    $
    (289,383
    )
    
    $
    63,642Increase (reduction) in income tax resulting
from:Compensation expense for ESOP
    
    
    
    
    
    
    
    
    
    
    (8,260
    )Management Recognition Plan
    
    
    102
    
    
    
    193
    
    
    
    265State tax, net of federal income tax benefit
    
    
    16,436
    
    
    
    (44,540
    )
    
    
    12,527Other  net
    
    
    (14,358
    )
    
    
    10,539
    
    
    
    3,144Total
    
    $
    20,704
    
    
    $
    (323,191
    )
    
    $
    71,318Effective tax rate
    
    
    38
    %
    
    
    38
    %
    
    
    38
    %




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31 
  INCOME TAX EXPENSE
  2005
    
    
    2004Deferred taxes:Foreclosed real estate gain
    
    $
    55,869
    
    
    $
    55,869Bad debts
    
    
    80,218
    
    
    
    223,806Accrued salaries
    
    
    47,909
    
    
    
    33,305Deferred compensation
    
    
    135,159
    
    
    
    163,556Unrealized loss on securities available-for-sale
    
    
    103,342
    
    
    
    328,718Other
    
    
    28,692
    
    
    
    28,692Total deferred tax assets
    
    
    451,189
    
    
    
    833,946Deferred tax liabilities:Management Recognition Plan
    
    
    (385
    )
    
    
    1,344FHLB stock
    
    
    237,138
    
    
    
    237,138Depreciation
    
    
    270,299
    
    
    
    220,208Prepaid expenses
    
    
    56,038
    
    
    
    59,423Federal/state tax deduction on a cash basis
    
    
    34,872
    
    
    
    25,422Goodwill
    
    
    89,294
    
    
    
    72,845Total deferred tax liabilities
    
    
    687,256
    
    
    
    616,380Net deferred tax asset
    
    $
    (236,067
    )
    
    $
    217,566




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##### Table of Contents



32 
  11.
    
    EMPLOYEE BENEFIT PLANS
 Employee Stock Ownership Plan
   Stock-based Compensation Plan




---



##### Table of Contents



33 
  11.
    
    EMPLOYEE BENEFIT PLANS (Continued)
  1995 Plan
    
    1998 PlanNumber of Shares
    
    Weighted Average
    
    Number of Shares
    
    Weighted AverageUnder Option
    
    Exercise Price
    
    Under Option
    
    Exercise PriceOutstanding at September 30, 2002
    
    
    45,311
    
    
    
    12.59
    
    
    
    47,088
    
    
    
    13.69Granted
    
    
    28,389
    
    
    
    12.10
    
    
    
    16,211
    
    
    
    12.10Forfeited
    
    
    
    
    
    
    
    
    
    
    (1,328
    )
    
    
    9.75Outstanding at September 30, 2003
    
    
    73,700
    
    
    
    12.40
    
    
    
    61,971
    
    
    
    13.36Granted
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    (1,256
    )
    
    
    13.55Exercised/sold
    
    
    
    
    
    
    
    
    
    
    (416
    )
    
    
    10.22Outstanding at September 30, 2004
    
    
    73,700
    
    
    
    12.40
    
    
    
    60,299
    
    
    
    13.38Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (18,304
    )
    
    
    12.83
    
    
    
    (13,822
    )
    
    
    14.14Expired
    
    
    (16,600
    )
    
    
    14.00
    
    
    
    
    
    
    
    Outstanding at September 30, 2005
    
    
    38,796
    
    
    
    11.51
    
    
    
    46,477
    
    
    
    13.15
  Options Outstanding
    
    
    Options ExercisableWeighted AverageRemaining
    
    Weighted Average
    
    
    
    
    
    
    Weighted AverageExercise Price
    
    Number Outstanding
    
    
    Contractual Life
    
    Exercise Price
    
    
    Number Exercisable
    
    
    Exercise Price9.75
    
    
    15,547
    
    
    2.09 years
    
    
    
    
    
    
    15,5479.92
    
    
    9,000
    
    
    6.17 years
    
    
    
    
    
    
    5,40012.10
    
    
    38,200
    
    
    7.04 years
    
    
    
    
    
    
    15,28015.75
    
    
    22,526
    
    
    2.32 years
    
    
    
    
    
    
    22,526Outstanding at end
of year
    
    
    85,273
    
    
    4.80 years
    
    $
    12.41
    
    
    
    58,753
    
    
    $
    12.68




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##### Table of Contents



34 
  11.
    
    EMPLOYEE BENEFIT PLANS (Continued)
  2005
    
    
    2004
    
    
    2003Net income (loss):As reported
    
    $
    33,778
    
    
    $
    (527,935
    )
    
    $
    115,864Less: Stock-based compensation expense
based on fair-value method for all
awards, net of related tax effects
    
    
    (2,319
    )
    
    
    (2,743
    )
    
    
    (7,079
    )Pro forma
    
    $
    31,459
    
    
    $
    (530,678
    )
    
    $
    108,785Basic earnings (loss) per share:As reported
    
    
    .05
    
    
    
    (.74
    )
    
    
    .16Pro forma
    
    
    .04
    
    
    
    (.75
    )
    
    
    .15Fully diluted earnings (loss) per share:As reported
    
    
    .05
    
    
    
    (.74
    )
    
    
    .15Pro forma
    
    
    .04
    
    
    
    (.75
    )
    
    
    .14
 Share-Based Payment
  2003Dividend yield
    
    
    5.38
    %Expected life
    
    9 yearsExpected volatility
    
    
    8.10
    %Risk-free interest rate
    
    
    4.73
    %




---



##### Table of Contents



35 
  11.
    
    EMPLOYEE BENEFIT PLANS (Continued)
 Management Recognition Plan
  401 (k) Plan
 Deferred Compensation Agreements




---



##### Table of Contents



36 
  11.
    
    EMPLOYEE BENEFIT PLANS (Continued)
   Directors Retirement Agreements
 Bank Owned Life Insurance
 12.
    
    RELATED PARTY TRANSACTIONS




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##### Table of Contents



37 
  13.
    
    COMMITMENTS AND CONTINGENCIES
 Off Balance Sheet Items
   Litigation
 Employment Agreements




---



##### Table of Contents



38 
  13.
    
    COMMITMENTS AND CONTINGENCIES (Continued)
  Significant Group Concentrations of Credit Risk
 Supervisory Agreement
 14.
    
    RETAINED EARNINGS AND REGULATORY CAPITAL




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##### Table of Contents



39 
  14.
    
    RETAINED EARNINGS AND REGULATORY CAPITAL (Continued)
  For CapitalActual
    
    Adequacy Purposes
    
    Well CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of September 30, 2005:Total risk-based capital
(to risk weighted assets)
    
    $
    12,012,000
    
    
    
    13.08
    %
    
    
    3$7,362,000
    
    
    
    38.00
    %
    
    
    3$9,202,000
    
    
    
    310.00
    %Tier I capital
(to risk weighted assets)
    
    
    11,580,000
    
    
    
    8.34
    %
    
    
    3   3,681,000
    
    
    
    34.00
    %
    
    
    3   5,521,000
    
    
    
    3  6.00
    %Tier I capital (to adjusted
total assets)
    
    
    11,580,000
    
    
    
    8.34
    %
    
    
    3   5,556,000
    
    
    
    34.00
    %
    
    
    3   6,945,,000
    
    
    
    3  5.00
    %Tangible equity (to
adjusted total assets)
    
    
    11,580,000
    
    
    
    8.34
    %
    
    
    3   2,778,000
    
    
    
    32.00
    %Tangible capital (to
adjusted total assets)
    
    
    11,580,000
    
    
    
    8.34
    %
    
    
    3   2,084,000
    
    
    
    31.50
    %As of September 30, 2004:Total risk-based capital
(to risk weighted assets)
    
    $
    11,940,000
    
    
    
    13.18
    %
    
    
    3$7,246,000
    
    
    
    38.00
    %
    
    
    3$9,057,000
    
    
    
    310.00
    %Tier I capital
(to risk weighted assets)
    
    
    11,424,000
    
    
    
    12.61
    %
    
    
    3   3,623,000
    
    
    
    34.00
    %
    
    
    3   5,434,000
    
    
    
    3  6.00
    %Tier I capital (to adjusted
total assets)
    
    
    11,424,000
    
    
    
    8.08
    %
    
    
    3   5,659,000
    
    
    
    34.00
    %
    
    
    3   7,073,000
    
    
    
    3  5.00
    %Tangible equity (to
adjusted total assets)
    
    
    11,424,000
    
    
    
    8.08
    %
    
    
    3   2,829,000
    
    
    
    32.00
    %Tangible capital (to
adjusted total assets)
    
    
    11,424,000
    
    
    
    8.08
    %
    
    
    3   2,122,000
    
    
    
    31.50
    %




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##### Table of Contents



40 
  14.
    
    RETAINED EARNINGS AND REGULATORY CAPITAL (Continued)
   15.
    
    SHAREHOLDERS RIGHTS PLAN
  16.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS




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##### Table of Contents



41 
  16.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
  Cash and Cash Equivalents 
 Interest-bearing Deposits in Other Financial Institutions
 Securities and Accrued Interest Receivable 
 Loans Receivable 
 Deposits
 Borrowed Funds




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##### Table of Contents



42 
  16.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 2005
    
    2004Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    5,042,170
    
    
    $
    5,042,170
    
    
    $
    5,015,108
    
    
    $
    5,015,108Interest-bearing deposits
    
    
    871,801
    
    
    
    871,801
    
    
    
    713,807
    
    
    
    713,807Securities
    
    
    26,482,705
    
    
    
    26,482,705
    
    
    
    29,261,966
    
    
    
    29,855,216Loans receivable  net
    
    
    95,388,729
    
    
    
    96,235,820
    
    
    
    94,574,236
    
    
    
    93,186,318Accrued interest receivable
    
    
    656,455
    
    
    
    656,455
    
    
    
    625,639
    
    
    
    625,639Financial liabilities:Deposits
    
    
    101,124,812
    
    
    
    101,237,869
    
    
    
    97,792,826
    
    
    
    97,319,502Borrowed funds
    
    
    26,015,861
    
    
    
    26,441,624
    
    
    
    31,588,773
    
    
    
    32,699,122Accrued interest payable
    
    
    641,075
    
    
    
    641,075
    
    
    
    458,017
    
    
    
    458,017




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##### Table of Contents



17.
    
    PARENT COMPANY
 The condensed financial information for SouthFirst Bancshares, Inc. (Parent Company) is presented
below:
 September 30, 2005 and 2004
 2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    21,304
    
    
    $
    49,303Securities available for sale
    
    
    9,000
    
    
    
    12,000Investment in financial institution subsidiary
    
    
    10,736,969
    
    
    
    10,388,146Investment in other subsidiaries
    
    
    1,217,911
    
    
    
    1,044,303Other assets
    
    
    37,319
    
    
    
    24,044Total Assets
    
    $
    12,022,503
    
    
    $
    11,517,796LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Borrowed funds
    
    $
    1,402,861
    
    
    $
    902,861Other liabilities
    
    
    195,699
    
    
    
    259,331Total liabilities
    
    
    1,598,560
    
    
    
    1,162,192Stockholders equity:Common stock, $ .01 par value, 2,000,000 shares authorized;
990,241 shares issued and 708,971 shares outstanding in 2005;
990,241 shares issued and 709,406 shares outstanding in 2004
    
    
    9,996
    
    
    
    9,996Additional paid-in capital
    
    
    9,839,851
    
    
    
    9,838,965Treasury stock
    
    
    (3,892,598
    )
    
    
    (3,891,155
    )Deferred compensation on common stock employee benefit plans
    
    
    (135,675
    )
    
    
    (159,427
    )Shares held in trust
    
    
    (103,483
    )
    
    
    (103,483
    )Retained earnings
    
    
    4,874,445
    
    
    
    5,195,161Accumulated other comprehensive income (loss)
    
    
    (168,593
    )
    
    
    (534,453
    )Total stockholders equity
    
    
    10,423,943
    
    
    
    10,355,604Total Liabilities and Stockholders Equity
    
    $
    12,022,503
    
    
    $
    11,517,796




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##### Table of Contents



44 
  17.
    
    PARENT COMPANY(Continued)
 
 Years Ended September 30, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Cash dividends from financial institution subsidiary
    
    $
    
    
    
    $
    1,500,000
    
    
    $
    500,000Interest and dividend income
    
    
    228
    
    
    
    
    
    
    
    10,986Gain (loss) on sale of securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    (78,610
    )Gain on sale of affiliate
    
    
    
    
    
    
    25,000
    
    
    
    Commission income
    
    
    
    
    
    
    739
    
    
    
    95,015Total income
    
    
    228
    
    
    
    1,525,739
    
    
    
    527,391Expenses:Interest on borrowed funds
    
    
    70,955
    
    
    
    90,774
    
    
    
    67,914Compensation and benefits
    
    
    21,750
    
    
    
    44,000
    
    
    
    62,000Management fee
    
    
    30,000
    
    
    
    30,000
    
    
    
    30,000Other
    
    
    72,573
    
    
    
    67,470
    
    
    
    70,029195,278
    
    
    
    232,244
    
    
    
    229,943Income (loss) before income taxes
    
    
    (195,050
    )
    
    
    1,293,495
    
    
    
    297,448Income tax benefit
    
    
    74,119
    
    
    
    78,472
    
    
    
    76,971Income (loss) before equity in undistributed
earnings of subsidiaries
    
    
    (120,931
    )
    
    
    1,371,967
    
    
    
    374,419Equity in undistributed earnings of subsidiaries
(dividends in excess of earnings):Financial institution
    
    
    (26,287
    )
    
    
    (2,085,177
    )
    
    
    (335,185
    )Other
    
    
    180,996
    
    
    
    185,275
    
    
    
    76,630154,709
    
    
    
    (1,899,902
    )
    
    
    (258,555
    )Net income (loss)
    
    $
    33,778
    
    
    $
    (527,935
    )
    
    $
    115,864




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##### Table of Contents



45 
  17.
    
    PARENT COMPANY (Continued)
 Years Ended September 30, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Operating Activities:Net income (loss)
    
    $
    33,778
    
    
    $
    (527,935
    )
    
    $
    115,864Adjustments to reconcile net income (loss) to
cash from operating activities:Equity in undistributed earnings of subsidiaries
    
    
    (154,709
    )
    
    
    1,899,902
    
    
    
    258,555Compensation expense on ESOP and MRP
    
    
    24,638
    
    
    
    25,659
    
    
    
    99,864(Gain) loss on sale of securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    78,610Gain on sale of affiliate
    
    
    
    
    
    
    (25,000
    )
    
    
    (Increase) decrease in other assets
    
    
    (13,275
    )
    
    
    54,761
    
    
    
    20,098Increase (decrease) in other liabilities
    
    
    (63,632
    )
    
    
    81,872
    
    
    
    (47,591
    )Net cash provided (used) by operating activities
    
    
    (173,200
    )
    
    
    1,509,259
    
    
    
    525,400Investing Activities:Investment in subsidiaries, net of dividends received
    
    
    1,138
    
    
    
    (2,510
    )
    
    
    (28,730
    )Proceeds from sale of affiliate
    
    
    
    
    
    
    25,000
    
    
    
    Net cash provided (used) by investing activities
    
    
    1,138
    
    
    
    22,490
    
    
    
    (28,730
    )Financing Activities:Acquisition of ESOP and MRP shares
    
    
    
    
    
    
    3,678
    
    
    
    36Proceeds from borrowed funds
    
    
    500,000
    
    
    
    435,000
    
    
    
    1,519,000Repayment on borrowed funds
    
    
    
    
    
    
    (1,450,000
    )
    
    
    (300,000
    )Cash dividends paid
    
    
    (354,494
    )
    
    
    (425,159
    )
    
    
    (425,052
    )Acquisition of treasury stock
    
    
    (1,443
    )
    
    
    (81,316
    )
    
    
    (1,344,245
    )Net cash provided (used) by financing activities
    
    
    144,063
    
    
    
    (1,517,797
    )
    
    
    (550,261
    )Net increase (decrease) in cash and cash equivalents
    
    
    (27,999
    )
    
    
    13,952
    
    
    
    (53,591
    )Cash and cash equivalents  beginning of year
    
    
    49,303
    
    
    
    35,351
    
    
    
    88,942Cash and cash equivalents  end of year
    
    $
    21,304
    
    
    $
    49,303
    
    
    $
    35,351




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##### Table of Contents



46 
  18.
    
    SELECTED QUARTERLY INFORMATION (UNAUDITED)
 Year Ended September 30, 2005Three Months EndedSeptember 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,Interest and dividend income
    
    $
    1,936,314
    
    
    $
    1,906,174
    
    
    $
    1,924,119
    
    
    $
    1,886,838Interest expense
    
    
    936,869
    
    
    
    862,552
    
    
    
    816,716
    
    
    
    769,713Net interest income
    
    
    999,445
    
    
    
    1,043,622
    
    
    
    1,107,403
    
    
    
    1,117,125Provision for loan losses (benefit)
    
    
    30,659
    
    
    
    (28,270
    )
    
    
    79,846
    
    
    
    25,000Net interest income after provision for
loan losses
    
    
    968,786
    
    
    
    1,071,892
    
    
    
    1,027,557
    
    
    
    1,092,125Non-interest income
    
    
    986,953
    
    
    
    874,411
    
    
    
    18,766
    
    
    
    772,871Non-interest expenses
    
    
    1,690,598
    
    
    
    1,531,721
    
    
    
    1,868,621
    
    
    
    1,667,939Income (loss) before taxes
    
    
    265,141
    
    
    
    414,582
    
    
    
    (822,298
    )
    
    
    197,057Provision for income taxes (benefit)
    
    
    100,773
    
    
    
    157,520
    
    
    
    (312,471
    )
    
    
    74,882Net income (loss)
    
    $
    164,368
    
    
    $
    257,062
    
    
    $
    (509,827
    )
    
    $
    122,175Earnings (loss) per share:Basic
    
    $
    0.23
    
    
    $
    0.36
    
    
    $
    (0.72
    )
    
    $
    0.17Diluted
    
    $
    0.23
    
    
    $
    0.36
    
    
    $
    (0.72
    )
    
    $
    0.17Dividends per share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.15
    
    
    $
    0.15
 Year Ended September 30, 2004Three Months EndedSeptember 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,Interest and dividend income
    
    $
    1,791,905
    
    
    $
    1,756,364
    
    
    $
    1,786,609
    
    
    $
    1,786,063Interest expense
    
    
    716,855
    
    
    
    687,347
    
    
    
    708,474
    
    
    
    699,651Net interest income
    
    
    1,075,050
    
    
    
    1,069,017
    
    
    
    1,078,135
    
    
    
    1,086,412Provision for loan losses
    
    
    111,979
    
    
    
    9,268
    
    
    
    1,235,690
    
    
    
    Net interest income after provision for
loan losses
    
    
    963,071
    
    
    
    1,059,749
    
    
    
    (157,555
    )
    
    
    1,086,412Non-interest income
    
    
    789,051
    
    
    
    853,788
    
    
    
    909,110
    
    
    
    687,564Non-interest expenses
    
    
    1,699,529
    
    
    
    1,928,324
    
    
    
    1,807,634
    
    
    
    1,606,829Income (loss) before taxes
    
    
    52,593
    
    
    
    (14,787
    )
    
    
    (1,056,079
    )
    
    
    167,147Provision for income taxes (benefit)
    
    
    18,838
    
    
    
    (4,345
    )
    
    
    (401,262
    )
    
    
    63,578Net income (loss)
    
    $
    33,755
    
    
    $
    (10,442
    )
    
    $
    (654,817
    )
    
    $
    103,569Earnings (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.01
    )
    
    $
    (0.92
    )
    
    $
    0.15Diluted
    
    $
    0.05
    
    
    $
    (0.01
    )
    
    $
    (0.92
    )
    
    $
    0.14Dividends per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.15




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##### Table of Contents



47 
  19.
    
    BUSINESS SEGMENT INFORMATIONThe Company organizes its business units into two reportable segments: traditional banking
activities and employee benefits consulting. The banking segment provides a full range of
banking services within its primary market areas of central Alabama. The employee benefits
consuting firm operates primarily in the Montgomery, Alabama area.The segments accounting policies are the same as those described in the summary of significant
accounting policies. 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 following table presents financial information for each reportable segment:
 September 30, 2005Employee BenefitsBanking Activities
    
    
    Consulting
    
    
    TotalInterest and dividend income
    
    $
    7,620,978
    
    
    $
    32,467
    
    
    $
    7,653,445Interest expenses
    
    
    3,385,850
    
    
    
    
    
    
    
    3,385,850Net interest income
    
    
    4,235,128
    
    
    
    32,467
    
    
    
    4,267,595Provision for loan losses
    
    
    107,235
    
    
    
    
    
    
    
    107,235Net interest income after provision for loan losses
    
    
    4,127,893
    
    
    
    32,467
    
    
    
    4,160,360Non-interest income
    
    
    922,541
    
    
    
    1,730,460
    
    
    
    2,653,001Non-interest expenses
    
    
    5,287,879
    
    
    
    1,471,000
    
    
    
    6,758,879Income (loss) before income taxes
    
    
    (237,445
    )
    
    
    291,927
    
    
    
    54,482Provision for income taxes (benefit)
    
    
    (90,227
    )
    
    
    110,931
    
    
    
    20,704Net income (loss)
    
    $
    (147,218
    )
    
    $
    180,996
    
    
    $
    33,778Depreciation and amortization included in other expenses
    
    $
    317,811
    
    
    $
    70,853
    
    
    $
    388,664Total assets at year-end
    
    $
    137,689,356
    
    
    $
    1,772,084
    
    
    $
    139,461,440




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48 
  19.
    
    BUSINESS SEGMENT INFORMATION (Continued)
 September 30, 2004Employee BenefitsBanking Activities
    
    
    Consulting
    
    
    TotalInterest and dividend income
    
    $
    7,096,079
    
    
    $
    24,862
    
    
    $
    7,120,941Interest expenses
    
    
    2,812,327
    
    
    
    
    
    
    
    2,812,327Net interest income
    
    
    4,283,752
    
    
    
    24,862
    
    
    
    4,308,614Provision for loan losses
    
    
    1,356,937
    
    
    
    
    
    
    
    1,356,937Net interest income after provision for loan losses
    
    
    2,926,815
    
    
    
    24,862
    
    
    
    2,951,677Non-interest income
    
    
    1,641,830
    
    
    
    1,597,683
    
    
    
    3,239,513Non-interest expenses
    
    
    5,718,985
    
    
    
    1,323,331
    
    
    
    7,042,316Income (loss) before income taxes
    
    
    (1,150,340
    )
    
    
    299,214
    
    
    
    (851,126
    )Provision for income taxes (benefit)
    
    
    (437,130
    )
    
    
    113,939
    
    
    
    (323,191
    )Net income (loss)
    
    $
    (713,210
    )
    
    $
    185,275
    
    
    $
    (527,935
    )Depreciation and amortization included in other expenses
    
    $
    310,154
    
    
    $
    67,527
    
    
    $
    377,681Total assets at year-end
    
    $
    140,508,524
    
    
    $
    1,743,131
    
    
    $
    142,251,655




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49 
  19.
    
    BUSINESS SEGMENT INFORMATION (Continued)
 September 30, 2003Employee BenefitsBanking Activities
    
    
    Consulting
    
    
    TotalInterest and dividend income
    
    $
    7,416,268
    
    
    $
    20,377
    
    
    $
    7,436,645Interest expenses
    
    
    3,544,193
    
    
    
    
    
    
    
    3,544,193Net interest income
    
    
    3,872,075
    
    
    
    20,377
    
    
    
    3,892,452Provision for loan losses
    
    
    549,603
    
    
    
    
    
    
    
    549,603Net interest income after provision for loan losses
    
    
    3,322,472
    
    
    
    20,377
    
    
    
    3,342,849Non-interest income
    
    
    2,498,122
    
    
    
    1,243,622
    
    
    
    3,741,744Non-interest expenses
    
    
    5,757,392
    
    
    
    1,140,019
    
    
    
    6,897,411Income before income taxes
    
    
    63,202
    
    
    
    123,980
    
    
    
    187,182Provision for income taxes
    
    
    23,968
    
    
    
    47,350
    
    
    
    71,318Net income
    
    $
    39,234
    
    
    $
    76,630
    
    
    $
    115,864Depreciation and amortization included in other expenses
    
    $
    269,584
    
    
    $
    61,614
    
    
    $
    331,198Total assets at year-end
    
    $
    132,459,815
    
    
    $
    1,512,626
    
    
    $
    133,972,441




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50 
  19.
    
    BUSINESS SEGMENT INFORMATION (Continued)Following are reconciliations (where applicable) to corresponding totals in the accompanying
consolidated financial statements.
 2005
    
    
    2004ASSETSTotal assets for reportable segments
    
    $
    139,461,440
    
    
    $
    142,251,655Elimination of intercompany receivables
    
    
    (323,916
    )
    
    
    (718,498
    )Consolidated assets
    
    $
    139,137,524
    
    
    $
    141,533,157