##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 For Quarterly Period Ended:
    
    Commission File NumberMarch 31, 2005
    
    1-13640
 SOUTHFIRST BANCSHARES, INC. 
 ( Exact name of registrant as specified in its charter)
 Delaware
    
    
    
    63-1121255(State or other jurisdiction of
    
    
    
    (I.R.S. Employerincorporation or organization)
    
    
    Identification No.)126 North Norton Avenue, Sylacauga, Alabama
    
    
    
    35150(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code:
    
    
    
    256-245-4365Not applicable(Former name, former address and former fiscal year, if changed since last report)
 Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes                                o No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12(b)-2 of the Exchange Act). o Yes                                þ No Indicate the number of shares outstanding of each of the registrants classes of common
stock, as of the latest practicable date: Common Stock, par value $.01 per share
    
    709,328 sharesClass
    
    Outstanding at May 3, 2005
 Transitional Small Business Disclosure Format o Yes þ No




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##### Table of Contents



SOUTHFIRST BANCSHARES, INC. TABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1: Financial Statements (Unaudited)
    
    
    1Consolidated Statements of Financial Condition at March 31, 2005 (Unaudited) and September 30, 2004
    
    
    1Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended March 31, 2005 and 2004
    
    
    2Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the Six Months Ended March 31, 2005
    
    
    3Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2005 and 2004
    
    
    4-5Notes to Consolidated Financial Statements (Unaudited)  March 31, 2005 and 2004
    
    
    6-10Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11-16Item 3: Controls and Procedures
    
    
    16PART II  OTHER INFORMATION
    
    
    17Item 1: Legal Proceedings
    
    
    17Item 6: Exhibits and Reports on Form 8-K
    
    
    17SIGNATURES
    
    
    18EXHIBIT INDEX
    
    
    19CERTIFICATIONS
    
    
    20-22EX-10.1 RESIGNATION, SEVERANCE AND GENERAL RELEASE AGREEMENTEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32 SECTION 906, CERTIFICATION OF THE CEO AND CFO




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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES 
 PART 1: FINANCIAL INFORMATION 
 Item 1: Financial Statements
 
   March 31,
    
    
    September 30,2005
    
    
    2004(Unaudited)AssetsCash and cash equivalents
    
    $
    4,268,780
    
    
    $
    5,015,108Interest-bearing deposits in other financial institutions
    
    
    728,051
    
    
    
    713,807Securities available-for-sale, at fair value
    
    
    28,028,181
    
    
    
    14,180,243Securities held-to-maturity at amortized cost
(fair value of $15,674,973 at September 30, 2004)
    
    
    
    
    
    
    15,081,723Loans receivable
    
    
    96,984,948
    
    
    
    95,486,200Less allowance for loan losses
    
    
    (993,140
    )
    
    
    (911,964
    )Net loans
    
    
    95,991,808
    
    
    
    94,574,236Loans held for sale at cost (which approximates fair value)
    
    
    384,905
    
    
    
    1,092,619Foreclosed assets, net
    
    
    1,617,361
    
    
    
    514,507Premises and equipment, net
    
    
    4,734,452
    
    
    
    4,796,390Federal Home Loan Bank stock, at cost
    
    
    1,218,200
    
    
    
    1,117,000Goodwill
    
    
    543,706
    
    
    
    543,706Accrued interest receivable
    
    
    550,715
    
    
    
    625,639Other assets
    
    
    3,520,895
    
    
    
    3,278,179Total Assets
    
    $
    141,587,054
    
    
    $
    141,533,157Liabilities And Stockholders EquityLiabilities:Deposits:Non-interest bearing
    
    $
    4,093,565
    
    
    $
    4,003,251Interest bearing
    
    
    99,796,067
    
    
    
    93,789,575Total deposits
    
    
    103,889,632
    
    
    
    97,792,826Advances by borrowers for property taxes and insurance
    
    
    178,767
    
    
    
    259,427Accrued interest payable
    
    
    555,490
    
    
    
    458,017Borrowed funds
    
    
    25,857,361
    
    
    
    31,588,773Accrued expenses and other liabilities
    
    
    944,131
    
    
    
    1,078,510Total liabilities
    
    
    131,425,381
    
    
    
    131,177,553Stockholders Equity:Common stock, $.01 par value, 2,000,000 shares authorized,
990,241 shares issued and 709,406 shares outstanding at
March 31, 2005 and September 30, 2004
    
    
    9,996
    
    
    
    9,996Additional paid-in capital
    
    
    9,838,965
    
    
    
    9,838,965Treasury stock, at cost (280,835 shares at March 31, 2005
and September 30, 2004)
    
    
    (3,891,155
    )
    
    
    (3,891,155
    )Deferred compensation on common stock employee benefit plans
    
    
    (147,550
    )
    
    
    (159,427
    )Shares held in trust at cost (9,402 shares at March 31, 2005
and September 30, 2004)
    
    
    (103,483
    )
    
    
    (103,483
    )Retained earnings
    
    
    4,594,518
    
    
    
    5,195,161Accumulated comprehensive other income (loss)
    
    
    (139,618
    )
    
    
    (534,453
    )Total stockholders equity
    
    
    10,161,673
    
    
    
    10,355,604Total Liabilities and Stockholders Equity
    
    $
    141,587,054
    
    
    $
    141,533,157
 See accompanying notes to consolidated financial statements. -1-




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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES 
 Consolidated Statements of Operations (Unaudited)
for the Three and Six Months Ended March 31, 2005 and 2004 Six Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest and dividend income:Interest and fees on loans
    
    $
    3,019,752
    
    
    $
    2,689,637
    
    
    $
    1,526,651
    
    
    $
    1,350,059Interest income on deposits in other
financial institutions
    
    
    33,684
    
    
    
    19,011
    
    
    
    16,935
    
    
    
    11,556Interest and dividend income on
securities available-for-sale
    
    
    326,007
    
    
    
    864,024
    
    
    
    160,668
    
    
    
    424,994Interest and dividend income on
securities held-to-maturity
    
    
    431,513
    
    
    
    
    
    
    
    219,865
    
    
    
    Total interest and dividend income
    
    
    3,810,956
    
    
    
    3,572,672
    
    
    
    1,924,119
    
    
    
    1,786,609Interest expense:Interest on deposits
    
    
    1,002,818
    
    
    
    872,194
    
    
    
    526,321
    
    
    
    441,536Interest on borrowed funds
    
    
    583,611
    
    
    
    535,932
    
    
    
    290,395
    
    
    
    266,938Total interest expense
    
    
    1,586,429
    
    
    
    1,408,126
    
    
    
    816,716
    
    
    
    708,474Net interest income
    
    
    2,224,527
    
    
    
    2,164,546
    
    
    
    1,107,403
    
    
    
    1,078,135Provision for loan losses
    
    
    104,846
    
    
    
    1,235,690
    
    
    
    79,846
    
    
    
    1,235,690Net interest income (loss) after
provision for loan losses
    
    
    2,119,681
    
    
    
    928,856
    
    
    
    1,027,557
    
    
    
    (157,555
    )Other income:Service charges and other fees
    
    
    228,794
    
    
    
    264,175
    
    
    
    101,866
    
    
    
    133,591Employee benefit trust and consulting
fees
    
    
    761,009
    
    
    
    709,662
    
    
    
    395,961
    
    
    
    380,649Gain on sale of loans
    
    
    322,355
    
    
    
    293,605
    
    
    
    135,665
    
    
    
    156,736Gain (loss) on sale of foreclosed assets
    
    
    (11,216
    )
    
    
    (1,535
    )
    
    
    (9,115
    )
    
    
    Gain (loss) on sale of equipment
    
    
    5,827
    
    
    
    927
    
    
    
    2,327
    
    
    
    Gain (loss) on sale of securities
available-for-sale
    
    
    
    
    
    
    157,931
    
    
    
    
    
    
    
    157,931Gain (loss) on sale of securities
held-to-maturity
    
    
    (701,099
    )
    
    
    
    
    
    
    (701,099
    )Other
    
    
    185,968
    
    
    
    171,909
    
    
    
    93,161
    
    
    
    80,203Total other income
    
    
    791,638
    
    
    
    1,596,674
    
    
    
    18,766
    
    
    
    909,110Other expenses:Compensation and benefits
    
    
    1,962,603
    
    
    
    2,127,464
    
    
    
    976,742
    
    
    
    1,112,000Net occupancy expense
    
    
    216,505
    
    
    
    192,525
    
    
    
    107,385
    
    
    
    102,732Furniture and fixtures
    
    
    251,972
    
    
    
    226,733
    
    
    
    128,942
    
    
    
    115,437Data processing
    
    
    168,456
    
    
    
    170,287
    
    
    
    83,076
    
    
    
    112,911Office supplies and expense
    
    
    211,530
    
    
    
    213,174
    
    
    
    115,211
    
    
    
    111,427Deposit insurance premiums
    
    
    53,921
    
    
    
    49,693
    
    
    
    27,126
    
    
    
    25,299Legal
    
    
    105,600
    
    
    
    77,500
    
    
    
    52,800
    
    
    
    43,750Termination expense
    
    
    140,941
    
    
    
    
    
    
    
    140,941
    
    
    
    Other
    
    
    425,030
    
    
    
    357,085
    
    
    
    236,398
    
    
    
    184,078Total other expenses
    
    
    3,536,558
    
    
    
    3,414,461
    
    
    
    1,868,621
    
    
    
    1,807,634Income (loss) before income taxes
    
    
    (625,239
    )
    
    
    (888,931
    )
    
    
    (822,298
    )
    
    
    (1,056,079
    )Income tax expense (benefit)
    
    
    (237,589
    )
    
    
    (337,685
    )
    
    
    (312,471
    )
    
    
    (401,262
    )Net income (loss)
    
    $
    (387,650
    )
    
    $
    (551,246
    )
    
    $
    (509,827
    )
    
    $
    (654,817
    )Earnings (loss) per share:Basic
    
    
    (0.55
    )
    
    
    (0.78
    )
    
    
    (0.72
    )
    
    
    (0.92
    )Diluted
    
    
    (0.53
    )
    
    
    (0.75
    )
    
    
    (0.70
    )
    
    
    (0.88
    )Cash dividends declared
    
    
    0.30
    
    
    
    0.30
    
    
    
    0.15
    
    
    
    0.15Weighted average shares outstanding:Basic
    
    
    709,406
    
    
    
    709,161
    
    
    
    709,406
    
    
    
    709,088Diluted
    
    
    727,867
    
    
    
    739,823
    
    
    
    727,826
    
    
    
    740,059
 See accompanying notes to consolidated financial statements. -2-




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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES 
 Consolidated Statements of Changes in Stockholders Equity (Unaudited)
for the Six Months Ended March 31, 2005 DeferredCompensationon Common
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Stock
    
    
    Shares
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-in
    
    
    Treasury
    
    
    Employee
    
    
    Held in
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Stock
    
    
    Benefit Plans
    
    
    Trust
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at September 30,
2004
    
    $
    9,996
    
    
    $
    9,838,965
    
    
    $
    (3,891,155
    )
    
    $
    (159,427
    )

    
    $
    (103,483
    )
    
    $
    5,195,161
    
    
    $
    (534,453
    )
    
    $
    10,355,604Comprehensive income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (387,650
    )
    
    
    
    
    
    
    (387,650
    )Change in net unrealized
loss on available-for-sale
securities, net of reclassification adjustments and
income taxes of $241,996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    394,835
    
    
    
    394,835Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,185Vesting of deferred
compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,877
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,877Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (212,993
    )
    
    
    
    
    
    
    (212,993
    )Balance at March 31,
2005
    
    $
    9,996
    
    
    $
    9,838,965
    
    
    $
    (3,891,155
    )
    
    $
    (147,550
    )
    
    $
    (103,483
    )
    
    $
    4,594,518
    
    
    $
    (139,618
    )
    
    $
    10,161,673
 -3-




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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended March 31, 2005 and 2004 2005
    
    
    2004Operating activities:Net income (loss)
    
    $
    (387,650
    )
    
    $
    (551,246
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Provision for loan losses
    
    
    104,846
    
    
    
    1,235,690Depreciation and amortization
    
    
    197,259
    
    
    
    157,986Gain on sale of securities available-for-sale
    
    
    
    
    
    
    (157,931
    )Loss on sale of securities held-to-maturity
    
    
    701,099
    
    
    
    Gain on sale of loans
    
    
    (322,355
    )
    
    
    (293,605
    )Increase (decrease) in deferred loan origination fees
    
    
    30,457
    
    
    
    6,661Net amortization of premium/discount on securities available-for-sale
    
    
    (629
    )
    
    
    4,415(Gain) loss on sale of other property owned
    
    
    (5,827
    )
    
    
    (927
    )(Gain) loss on sale of foreclosed assets
    
    
    11,216
    
    
    
    1,535Loans originated for sale
    
    
    (12,370,645
    )
    
    
    (12,862,387
    )Proceeds from sale of loans
    
    
    13,400,714
    
    
    
    12,500,146(Increase) decrease in accrued interest receivable
    
    
    74,924
    
    
    
    34,490(Increase) decrease in other assets
    
    
    (242,716
    )
    
    
    (1,349,059
    )Deferred compensation expense
    
    
    11,877
    
    
    
    11,877Increase (decrease) in accrued interest payable
    
    
    97,473
    
    
    
    (73,298
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    (376,378
    )

    
    
    (346,729
    )Net cash provided (used) by operating activities
    
    
    923,665
    
    
    
    (1,682,382
    )Investing activities:Net change in interest-bearing deposits in other financial institutions
    
    
    (14,244
    )
    
    
    (48,905
    )Proceeds from calls and maturities of securities available-for-sale
    
    
    865,504
    
    
    
    1,997,450Purchase of securities available-for-sale
    
    
    (14,992,500
    )
    
    
    (3,600,000
    )Proceeds from sale of securities available-for-sale
    
    
    
    
    
    
    3,547,919Proceeds from sale of securities held-to-maturity
    
    
    15,297,145
    
    
    
    Purchase of Federal Home Loan Bank stock
    
    
    (101,200
    )
    
    
    Net (increase) decrease in loans
    
    
    (1,552,875
    )
    
    
    (4,675,423
    )Purchase of premises and equipment
    
    
    (137,994
    )
    
    
    (405,903
    )Proceeds from sale of foreclosed assets
    
    
    10,800
    
    
    
    37,282Proceeds from sale of other assets
    
    
    8,500
    
    
    
    10,376Transfer from loans of repossessed assets
    
    
    (1,124,870
    )
    
    
    (536,318
    )Net cash used in investing activities
    
    
    (1,741,734
    )
    
    
    (3,673,522
    )
 (Continued) See accompanying notes to consolidated financial statements. -4-




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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended March 31, 2005 and 2004 2005
    
    
    2004Financing activities:Increase (decrease) in deposits
    
    $
    6,096,806
    
    
    $
    4,900,618Proceeds from borrowed funds
    
    
    35,028,468
    
    
    
    33,101,389Repayment of borrowed funds
    
    
    (40,759,880
    )
    
    
    (34,036,689
    )Cash dividends paid
    
    
    (212,993
    )
    
    
    (212,745
    )Acquisition of treasury stock
    
    
    
    
    
    
    (83,723
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    6,905Decrease in advances by borrowers for property taxes and insurance
    
    
    (80,660
    )
    
    
    (47,833
    )Net cash provided by financing activities
    
    
    71,741
    
    
    
    3,627,922Increase (decrease) in cash and cash equivalents
    
    
    (746,328
    )
    
    
    (1,727,982
    )Cash and cash equivalents at beginning of period
    
    
    5,015,108
    
    
    
    6,049,325Cash and cash equivalents at end of period
    
    $
    4,268,780
    
    
    $
    4,321,343Supplemental information on cash payments:Interest paid
    
    $
    1,488,956
    
    
    $
    1,334,828Income taxes paid
    
    $
    36,000
    
    
    $
    50,191Supplemental information on non-cash transactions:Real estate obtained through foreclosure
    
    $
    1,082,756
    
    
    $
    500,000
 See accompanying notes to consolidated financial statements. -5-




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SOUTHFIRST BANCSHARES, INC.  
 Notes to Consolidated Financial Statements (Unaudited)
March 31, 2005 and 2004  (1)
    Basis of PresentationThe accounting and reporting policies of SouthFirst Bancshares, Inc. (SouthFirst) conform with
accounting principles generally accepted in the United States and with general financial
services industry practices.Information filed on this Form 10-QSB as of and for the quarter ended March 31, 2005, was
derived from the financial records of SouthFirst and its wholly-owned subsidiaries, First
Federal of the South (First Federal) and SouthFirst Financial Services, Inc. (SouthFirst
Financial) and First Federals wholly-owned subsidiaries, Pension & Benefit Trust Company
(Pension & Benefit), a Montgomery, Alabama-based employee benefits consulting firm, and
SouthFirst Mortgage, Inc. (SouthFirst Mortgage), a Birmingham, Alabama based residential
construction loan and mortgage loan origination office. Collectively, SouthFirst Bancshares,
Inc. and its subsidiaries are referred to herein as the Company and as SouthFirst.The accompanying unaudited consolidated financial statements have been prepared in accordance
with the instructions for Form 10-QSB and, therefore, do not include all information and
footnotes necessary for a complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the United States.
For a summary of significant accounting policies that have been consistently followed, see Note
1 to the consolidated financial statements included under Item 7 on Form 10-KSB. It is
managements opinion that all adjustments, consisting of only normal and recurring items
necessary for a fair presentation, have been included. The results contained in these
statements are not necessarily indicative of the results which may be expected for the entire
year.(2)
    New Accounting PronouncementsIn 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 -6-




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##### Table of Contents



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 3, and is currently evaluating the
impact that the adoption of SFAS No. 123(R) will have on its statement of condition and results
of operations.(3)
    Stock-Based Compensation PlansDuring 1995, the Company adopted a Stock Option and Incentive Plan for directors and key
employees of the Company. The exercise price cannot be less than the market price on the grant
date and the number of shares available for options cannot exceed 83,000. Stock appreciation
rights may also be granted under the plan. During 1998, the Company adopted the 1998 Stock
Option & Incentive Plan for directors and key employees of the Company. Under the 1998 plan,
options to acquire 63,361 shares have been granted. The term of the options range from seven to
ten years, and the options vest equally over periods ranging in length from three to five years.Following is a summary of the status of the 1995 and 1998 plans: 1995 Plan
    
    
    1998 PlanWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNumber
    
    
    Exercise
    
    
    Number
    
    
    Exerciseof Shares
    
    
    Price
    
    
    of Shares
    
    
    PriceOutstanding at September 30, 2004
    
    
    73,700
    
    
    $
    12.40
    
    
    
    60,299
    
    
    $
    13.38ExercisedForfeited
    
    
    (18,304
    )
    
    $
    12.83
    
    
    
    (12,982
    )
    
    $
    14.27Outstanding at March 31, 2005
    
    
    55,396
    
    
    $
    12.26
    
    
    
    47,317
    
    
    $
    13.14
 Information pertaining to options outstanding at March 31, 2005 is as follows: Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Price
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$9.75
    
    
    15,547
    
    
    2.59 years
    
    
    
    
    
    
    15,547$9.92
    
    
    9,000
    
    
    6.67 years
    
    
    
    
    
    
    5,400$12.10
    
    
    39,040
    
    
    7.54 years
    
    
    
    
    
    
    15,616$14.00
    
    
    16,600
    
    
    .43 years
    
    
    
    
    
    
    16,600$15.75
    
    
    22,526
    
    
    2.82 years
    
    
    
    
    
    
    22,526Outstanding at
March 31, 2005
    
    
    102,713
    
    
    4.53 years
    
    $
    12.96
    
    
    
    75,689
    
    
    $
    12.66
 -7-




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##### Table of Contents



The Company accounts for these plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all options granted under
these plans had an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Six Months Ended
    
    
    Three Months EndedMarch 31
    
    
    March 312005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    (387,650
    )
    
    $
    (551,246
    )
    
    $
    (509,827
    )
    
    $
    (654,817
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (1,180
    )
    
    
    (1,445
    )
    
    
    (537
    )
    
    
    (644
    )Pro forma net income (loss)
    
    $
    (388,830
    )
    
    $
    (552,691
    )
    
    $
    (510,364
    )
    
    $
    (655,461
    )Earnings (loss) per share:Basic  as reported
    
    $
    (.55
    )
    
    $
    (.78
    )
    
    $
    (.72
    )
    
    $
    (.92
    )Basic  pro forma
    
    
    (.55
    )
    
    
    (.78
    )
    
    
    (.72
    )
    
    
    (.92
    )Diluted  as reported
    
    
    (.53
    )
    
    
    (.75
    )
    
    
    (.70
    )
    
    
    (.88
    )Diluted  pro forma
    
    
    (.53
    )
    
    
    (.75
    )
    
    
    (.70
    )
    
    
    (.89
    )
  The Company is currently evaluating the impact that the adoption of SFAS No. 123® will
have on its statement of condition and results of operations once such standards become
effective with respect to the Company. Because the SFAS No. 123
method of accounting (and related disclosures) has not been applied
to options granted prior to October 1, 1995, the resulting pro forma
compensation costs may not be representative of that to be expected
in future years.There were no options granted during the six months ended March 31, 2005 or 2004.(4)
    Earnings Per ShareBasic earnings per share were computed by dividing net income by the weighted average number of
shares of common stock outstanding during the six and three month periods ended March 31, 2005
and 2004. Common stock outstanding consists of issued shares less treasury stock and shares
owned by the Management Recognition Plan and Stock Option plan trusts. Diluted earnings per
share for the six and three month periods ended March 31, 2005 and 2004 were computed by
dividing net income by the weighted average number of shares of common stock and the dilutive
effects of the shares awarded under the Stock Option plan, based on the treasury stock method
using an average fair market value of the stock during the respective periods.The following table represents the earnings per share calculations for the three months ended
March 31, 2005 and 2004: -8-




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##### Table of Contents



EarningsIncome
    
    
    Shares
    
    
    Per ShareFor the Three Months Ended March 31, 2005:Basic earnings (loss)
    
    $
    (509,827
    )
    
    
    709,406
    
    
    $
    (.72
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    18,420Dilutive earnings (loss)
    
    $
    (509,827
    )
    
    
    727,826
    
    
    $
    (.72
    )For the Three Months Ended March 31, 2004:Basic earnings (loss)
    
    $
    (654,817

    )
    
    
    709,088
    
    
    $
    (.92
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    30,971Dilutive earnings (loss)
    
    $
    (654,817
    )
    
    
    749,059
    
    
    $
    (.88
    )For the Six Months Ended March 31, 2005:Basic earnings (loss)
    
    $
    (387,650
    )
    
    
    709,406
    
    
    $
    (.55
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    18,461Dilutive earnings (loss)
    
    $
    (387,650
    )
    
    
    727,867
    
    
    $
    (.53
    )For the Six Months Ended March 31, 2004:Basic earnings (loss)
    
    $
    (551,246
    )
    
    
    709,161
    
    
    $
    (.78
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    30,662Dilutive earnings (loss)
    
    $
    (551,246
    )
    
    
    739,823
    
    
    $
    (.75
    )
  (5)
    Investment SecuritiesDuring 2005, the Company transferred all of its securities in the held-to-maturity category to
the available-for-sale category and immediately sold those securities. The amortized cost of
the sold securities was $15,998,287, resulting in a realized loss of $701,099. The decision to
transfer the securities was based on a change in investment strategy and to improve overall
liquidity and interest rate risk.(6)
    Business Segment InformationThe Company organizes its business units into two reportable segments: traditional banking
activities and employee benefits consulting and trust activities. The banking segment provides
a full range of banking services within its primary market areas of central Alabama. The
employee benefits trust company operates primarily in the state of Alabama. The Companys
reportable business segments are strategic business units that offer different products and
services. Each segment is managed separately, because each unit is subject to different
marketing and regulatory environments. -9-




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##### Table of Contents



The accounting policies used by each reportable segment are the same as those discussed in Note
1 to the Consolidated Financial Statements included under Item 7 on Form 10-KSB. The following
table presents financial information for each reportable segment: Six Months Ended March 31, 2005
    
    
    Six Months Ended March 31, 2004Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalInterest and dividend
income
    
    $
    3,795,933
    
    
    $
    15,023
    
    
    $
    3,810,956
    
    
    $
    3,561,361
    
    
    $
    11,311
    
    
    $
    3,572,672Interest expenses
    
    
    1,586,429
    
    
    
    
    
    
    
    1,586,429
    
    
    
    1,408,126
    
    
    
    
    
    
    
    1,408,126Net interest income
    
    
    2,209,504
    
    
    
    15,023
    
    
    
    2,224,527
    
    
    
    2,153,235
    
    
    
    11,311
    
    
    
    2,164,546Provision for loan losses
    
    
    104,846
    
    
    
    
    
    
    
    104,846
    
    
    
    1,235,690
    
    
    
    
    
    
    
    1,235,690Net interest income after
provision for loan losses
    
    
    2,104,658
    
    
    
    15,023
    
    
    
    2,119,681
    
    
    
    917,545
    
    
    
    11,311
    
    
    
    928,856Other income
    
    
    22,240
    
    
    
    769,398
    
    
    
    791,638
    
    
    
    877,386
    
    
    
    719,288
    
    
    
    1,596,674Other expenses
    
    
    2,791,876
    
    
    
    744,682
    
    
    
    3,536,558
    
    
    
    2,777,174
    
    
    
    637,287
    
    
    
    3,414,461Income (loss) before
income taxes
    
    
    (664,978
    )
    
    
    39,739
    
    
    
    (625,239
    )
    
    
    (982,243
    )
    
    
    93,312
    
    
    
    (888,931
    )Income taxes
    
    
    (252,689
    )
    
    
    15,100
    
    
    
    (237,589
    )
    
    
    (373,226
    )
    
    
    35,541
    
    
    
    (337,685
    )Net income (loss)
    
    $
    (412,289
    )
    
    $
    24,639
    
    
    $
    (387,650
    )
    
    $
    (609,017
    )
    
    $
    57,771
    
    
    $
    (551,246
    )
 Three Months Ended March 31, 2005
    
    
    Three Months Ended March 31, 2004Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalInterest and dividend
income
    
    $
    1,916,437
    
    
    $
    7,682
    
    
    $
    1,924,119
    
    
    $
    1,780,398
    
    
    $
    6,211
    
    
    $
    1,786,609Interest expenses
    
    
    816,716
    
    
    
    
    
    
    
    816,716
    
    
    
    708,474
    
    
    
    
    
    
    
    708,474Net interest income
    
    
    1,099,721
    
    
    
    7,682
    
    
    
    1,107,403
    
    
    
    1,071,924
    
    
    
    6,211
    
    
    
    1,078,135Provision for loan losses
    
    
    79,846
    
    
    
    
    
    
    
    79,846
    
    
    
    1,235,690
    
    
    
    
    
    
    
    1,235,690Net interest income after
provision for loan losses
    
    
    1,019,875
    
    
    
    7,682
    
    
    
    1,027,557
    
    
    
    (163,766
    )
    
    
    6,211
    

    
    
    (157,555
    )Other income
    
    
    (382,522
    )
    
    
    401,288
    
    
    
    18,766
    
    
    
    521,835
    
    
    
    387,275
    
    
    
    909,110Other expenses
    
    
    1,493,001
    
    
    
    375,620
    
    
    
    1,868,621
    
    
    
    1,489,482
    
    
    
    318,152
    
    
    
    1,807,634Income (loss) before
income taxes
    
    
    (855,648
    )
    
    
    33,350
    
    
    
    (822,298
    )
    
    
    (1,131,413
    )
    
    
    75,334
    
    
    
    (1,056,079
    )Income taxes
    
    
    (325,143
    )
    
    
    12,672
    
    
    
    (312,471
    )
    
    
    (429,911
    )
    
    
    28,649
    
    
    
    (401,262
    )Net income (loss)
    
    $
    (530,505
    )
    
    $
    20,678
    
    
    $
    (509,827
    )
    
    $
    (701,502
    )
    
    $
    46,685
    
    
    $
    (654,817
    )
  There have been no differences from the last annual report in the basis of measuring segment
profit or loss. There have been no material changes in the amount of assets for any operating
segment since the last annual report. -10-




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##### Table of Contents



(7)
    Subsequent EventOn April 26, 2005, the Company declared a regular $0.10 per share cash dividend on the Companys
outstanding stock, payable on May 20, 2005, to stockholders of record as of May 6, 2005. 
 Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations REVIEW OF RESULTS OF OPERATIONS Overview Net income for the three month and six month periods ended March 31, 2005 increased $144,990 and
$163,596, respectively, compared to the same periods in fiscal 2004. Net interest income, after
the provision for loan losses, increased $1,185,112 for the three months ended March 31, 2005 and
increased $1,190,825 for the six month period ended March 31, 2005, compared to the same periods in
fiscal 2004. These increases are primarily attributable to a reduction in the provision for loan
losses of $1,155,844 and $1,130,844 for the three and six month periods ended March 31, 2005,
respectively. An analysis of the allowance for loan losses are discussed below under the heading
Provision for Loan Losses. Non-interest income decreased $890,344, or 97.9%, for the three month
period ended March 31, 2005 and decreased $805,036, or 50.4%, for the six month period ended March
31, 2005, when compared to the same periods in fiscal 2004. Non-interest expense increased
$60,987, or 3.4%, for the three month period ended March 31, 2005 and increased $122,097, or 3.8%,
for the six month period ended March 31, 2005, compared to the same periods in fiscal 2004. Primary earnings (loss) per common share, based on weighted-average shares outstanding was $(.72)
and $(.92) for the three months ended March 31, 2005 and 2004, respectively, and $(.55) and $(.78)
for the six months ended March 31, 2005 and 2004, respectively. Net Interest Income Net interest income is the difference between the interest and fees earned on loans, securities,
and other interest-bearing assets (interest income) and the interest paid on deposits and borrowed
funds (interest expense). Net interest income is directly related to the interest rate spread,
which is the difference between the interest rates on interest-earning assets and interest-bearing
liabilities. As of March 31, 2005, the interest rate spread decreased 5 basis points as rates earned on
interest-earning assets increased 20 basis points to 6.05%, while the cost of funds increased 25
basis points to 2.59% compared to the same three-month period ending March 31, 2004. The change in
the interest rate spread is a result of the increase in interest rates. The average balance of
interest-earning assets increased approximately $5.1 million, or 4.2%, from $122.1 million to
$127.2 million, while the average balance of interest-bearing liabilities increased approximately
$5.1 million, or 4.2%, from $121.1 million to $126.2 million. The combined effect of the increases
in average balances and the changes in rates discussed above resulted in a decrease in the interest
rate spread from 3.51% to 3.46%, and an increase in net interest income of approximately $29,000,
or 2.7%, and $60,000, or 2.8%, for the three and six months ended March 31, 2005, respectively,
compared to the same periods in fiscal 2004. Provision for Loan Losses Provision for loan losses reflects a decrease in the amount of $1,130,844, or 91.5%, for the six
month period ended March 31, 2005, when compared to the same period in fiscal 2004. The current year to date provision of $104,846 includes approximately $93,000 to cover reserve
requirements associated with construction lending located in Birmingham. These loans represent
five -11-




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##### Table of Contents



construction loans, for a contract amount of $554,829 and a disbursed amount of $525,132. In
addition, there are three lot loans with a contract amount of $275,000 and a disbursed amount of
$69,260. These loans were foreclosed on in March 2005. No significant losses are anticipated on
any of these foreclosed properties. At March 31, 2005, the allowance for loan losses to total average loans outstanding was 1.01%,
compared to 0.93% for the same period ended March 31, 2004. For the same period in fiscal 2004, the provision for loan losses of $1,235,600 represented
approximately $1,035,000 for the write-down of an acquisition and development loan, which was
foreclosed on in January 2004. At the date of foreclosure, this loan had a disbursed balance of
approximately $1,948,000, with previously recognized allowances of approximately $525,000. At the
time of foreclosure, the fair value of the property was estimated to be $500,000. The provision
also included $200,000 additional general loan loss to increase the balance in the allowance for
loan losses to an appropriate level. Other Income Total other income for the six months ended March 31, 2005 decreased approximately $805,000 to
$792,000, compared to $1,597,000 for the six months ended March 31, 2004. A significant portion of
the decrease in total non-interest income was attributable to a loss on the sale of investment
securities held-to-maturity of approximately $701,000. Management made a decision to sell the
entire portfolio of held-to-maturity investments of $16,000,000 after the reclassification from
available-for-sale to held-to-maturity during the June quarter of fiscal 2004. Other reductions in
other income included a reduction from the gain of investment securities available for sale,
service charges and other fees, and gain from the sale of equipment of approximately $158,000,
$35,000 and $5,000, respectively. These reductions in other income are partially offset by
increases in employee benefit consulting fees, gain on sale of loans and other income of
approximately $51,000, $28,000 and $14,000, respectively. For the three months ended March 31, 2005, total non-interest income decreased approximately
$890,000 to $19,000, compared to $909,000 for the same period in fiscal 2004. This decrease is
attributable to a loss of approximately $701,000 on the sale of investment securities that were
previously categorized as held-to-maturity, as discussed in the preceding paragraph. Other
reductions in other income included a reduction from the gain of investment securities available
for sale, service charges and other fees, gain on sale of loans and loss from the sale of
foreclosed assets of approximately $158,000, $32,000, $21,000 and $9,000, respectively. These
reductions in other non interest income are partially offset by increases in employee benefit
consulting fees and other income of $15,000 and $13,000, respectively. Other Expenses Total other expense for the six months ended March 31, 2005, increased by approximately $122,000 to
$3,537,000, compared to $3,414,000 for the six months ended March 31, 2004. The changes in other
non-interest expense is largely attributable to an increase in termination expenses relative to the
resignation, severance and general release agreement between Joe K. McArthur and First Federal of
the South and SouthFirst Bancshares, Inc., which was effective March 31, 2005. Mr. McArthur was
paid a severance benefit in one lump sum of $228,361, as provided under his employment contract
dated January 1, 2005. In addition to the severance benefits described above, SouthFirst
Bancshares also paid to Mr. McArthur $10,000 for the surrender of all stock options that Mr.
McArthur possessed at the time of his resignation. This expense was offset by the reduction of
certain deferred compensation benefits payable to Mr. McArthur which were adjusted due to his
termination prior to normal retirement age. Other increases in expenses occurred in net occupancy
of approximately $24,000, furniture and fixtures expense of approximately $25,000, legal expense of
approximately $28,000, and other expenses of approximately $68,000. Offsetting these increases in
expenses were decreases in compensation and benefits of approximately $165,000. Expenses relative
to data processing, office supplies and deposit -12-




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##### Table of Contents



insurance premiums remained constant for the six months ended March 31, 2005 at approximately
$168,000, $212,000 and $54,000, respectively. For the three months ended March 31, 2005, total non-interest expense increased approximately
$61,000 to $1,869,000, compared to $1,808,000 for the three months ended March 31, 2004. The
changes in other non-interest expense is largely attributable to an increase in termination
expenses, as discussed in the preceding paragraph. Other increases in expenses occurred in net
occupancy, furniture and fixtures, legal expenses and other of approximately $5,000, $14,000,
$9,000 and $52,000, respectively. Offsetting these increases in expenses are decreases in
compensation and benefits and data processing of approximately $135,000 and $30,000, respectively.
Expenses relative to office supplies and deposit insurance premiums remained constant for the three
months ended March 31, 2005, at approximately $115,000 and $27,000, respectively. Income Taxes The Companys effective tax rate for the three month periods ended March 31, 2005 and 2004 was
38.0% and 38.0%, respectively, compared to the federal statutory rate of 34.0%. SouthFirsts
effective tax rate was higher than the statutory rate due primarily to state income taxes. Income
tax expense (benefit) increased approximately $100,000 to ($237,589) for the six months ended March
31, 2005, as compared to ($337,685) for the six months ended March 31, 2004, due to the increase in
pre-tax earnings. REVIEW OF FINANCIAL CONDITION Overview Management continuously monitors the financial condition of SouthFirst in order to protect
depositors, increase retained earnings, and protect current and future earnings. Return on average stockholders equity is one way of assessing the return SouthFirst has generated
for its stockholders. The table below sets forth the return on average stockholders equity and
other performance ratios of SouthFirst for the periods indicated. At or for the three monthsended March 31,2005
    
    
    2004Return on assets
    
    
    (1.43
    )%
    
    
    (1.90
    )%Return on equity
    
    
    (19.88
    )%
    
    
    (22.79
    )%Equity to asset ratio
    
    
    7.21
    %
    
    
    8.35
    %Interest rate spread
    
    
    3.46
    %
    
    
    3.51
    %Net interest margin
    
    
    3.48
    %
    
    
    3.53
    %Total risk-based capital
    
    
    12.55
    %
    
    
    15.16
    %Non-performing loans to loans
    
    
    0.86
    %
    
    
    0.53
    %Allowance for loan losses to loans
    
    
    1.01
    %
    
    
    0.93
    %Allowance for loan losses to average non-performing loans
    
    
    118.14
    %
    
    
    175.02
    %Ratio of net charge-offs to average loans outstanding
    
    
    0.03
    %
    
    
    1.76
    %Book value per common share outstanding
    
    $
    14.32
    
    
    $
    15.65
 Significant factors affecting SouthFirsts financial condition during the six months ended March
31, 2005 are detailed below. -13-




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##### Table of Contents



Assets Total assets remained approximately the same at $141,500,000 at September 30, 2004 and March 31,
2005. Net loans increased approximately $1,418,000, or 1.5%, which occurred primarily in business
and various other types of residential mortgages. Cash and amounts due from banks decreased
approximately $746,000, or 14.9%, which was used primarily for the funding of new loans.
Investment securities available-for-sale increased approximately $13,850,000, net of principal
reduction, as a result of the purchase of $15,000,000 in mortgage-backed securities. This purchase
was the result of the transfer and sale of investment securities held-to-maturity in the amount of
$16,000,000. Management made the decision to transfer and sell the entire portfolio of
held-to-maturity investments due to a change in investment strategy and to improve overall
liquidity and interest rate risk. The sale resulted in an overall increase in equity of
approximately $113,000 and an increase in eligible liquidity of approximately $15,000,000. Other
significant changes in assets were increases in Federal Home Loan Bank stock, foreclosed and other
repossessed assets and other assets of approximately $101,000, $1,103,000, and $243,000,
respectively, while decreases occurred in loans held for sale, premises and fixed assets and
accrued interest receivable of approximately $708,000, $62,000, and $75,000, respectively. Liabilities Total liabilities increased approximately $247,000, or 0.2%, from $131,178,000 at September 30,
2004 to $131,425,000 at March 31, 2005. Deposits increased approximately $6,100,000, or 6.2%,
during the same period, which represents an increase in certificates of deposit of approximately
$6,400,000 and a decrease in checking and other savings accounts of approximately $300,000. This
increase in deposits was used primarily to repay borrowed funds, which decreased approximately
$5,700,000 from $31,589,000 at September 30, 2004 to $25,857,000 at March 31, 2005. Borrowed funds
at March 31, 2005, consisted of $20,670,000 Federal Home Loan Bank advances, $3,934,500 in
short-term reverse repurchase agreements with Morgan Keegan and $1,252,861 in an existing line of
credit with First Commercial Bank. Loan Quality Key to long-term earnings growth is maintenance of a high-quality loan portfolio. SouthFirsts
directive in this regard is carried out through its policies and procedures for review of loans.
The goal and result of these policies and procedures is to provide a sound basis for new credit
extensions and an early recognition of problem assets to allow the greatest flexibility in their
timely disposition. At March 31, 2005, the allowance for loan losses was $993,140, compared to $911,964 at September
30, 2004, which represents an increase of approximately $81,000. Non-performing loans at March 31,
2005 were approximately $841,000, as compared to approximately $1,194,000 at September 30, 2004.
At March 31, 2005 and September 30, 2004, the allowance for loan losses represented 1.01% and 0.96%
of average loan balances, respectively. The allowance for loan losses is based upon managements
continuing evaluation of the collectibility of the loan portfolio under current economic conditions
and includes analysis of underlying collateral value and other factors, which could affect
collectibility. Management considers the allowance for loan losses to be adequate based upon the
evaluations of the averages of specific loans, internal loan rating systems, and guidelines
provided by the banking regulatory authorities governing First Federal. Liquidity and Funding Sources The Asset and Liability Committee of First Federals board of directors monitors and manages the
liquidity needs of the Company to ensure that there is sufficient cash flow to satisfy demand for
credit and deposit withdrawals, to fund operations and to meet other Company obligations and
commitments on a timely and cost effective basis. Under current regulations, First Federal is
required to maintain sufficient -14-




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liquidity to assure its safe and sound operation. The requirement to maintain a specific minimum
amount of liquid assets, established by previous regulation, has been eliminated. Presently, there
is no specific standard or guideline regarding the application of the current regulatory
requirement. Under the previous regulation, First Federal was required to maintain an average daily balance of
liquid assets, in each calendar quarter, of not less than 4% of (i) the amount of its liquidity
base at the end of the preceding calendar quarter, or (ii) the average daily balance of its
liquidity base during the preceding quarter. For purposes of this computation, liquid assets
included specified short-term assets (e.g., cash, certain time deposits, certain bankers
acceptances and short-term U. S. Government, state or federal agency obligations) and long-term
assets (e.g., U. S. Government obligations of more than one and less than five years and state
agency obligations maturing in two years or less). At March 31, 2005, First Federals average daily balance of liquid assets was approximately 14.0%
of its December 31, 2004 liquidity base, exceeding the 4% requirement set by the previous
regulation. These liquid assets included approximately $5,453,000 in cash and cash equivalents and
approximately $10,434,000 in other qualifying assets. In addition, as of March 31, 2005, the fair
market value of the Companys investment securities portfolio available-for-sale was approximately
$28,000,000. The Company uses its investment securities portfolio to manage liquidity and interest
rate risk, whereby liquidity is available through those securities that are not pledged. Further,
cash flows from operations, resulting primarily from net income adjusted for certain items such as
interest expense and provision for loan loss, are an additional source of liquidity for the
Company. With respect to current funding sources, deposits provide a significant portion of the Companys
cash flow needs and continue to provide a relatively stable, low cost source of funds. As of March
31, 2005, the amount of deposits was $103,889,632, which represents an increase of approximately
$6,100,000 from the amount of deposits at September 30, 2004. Other sources of funding used by the Company include commercial lines of credit and advances from
the Federal Home Loan Bank of Atlanta (the FHLBA). As of March 31, 2005, the Company had a line
of credit, based on prime, with First Commercial Bank in the amount of $2,500,000, which presently
is scheduled to mature in June 2005, and of which there is an outstanding balance at March 31,
2005, of approximately $1,252,861. At March 31, 2005, the Company had outstanding balances with
the Federal Home Loan Bank of approximately $20,670,000. First Federal also has short-term borrowing through reverse repurchase agreements with Morgan
Keegan & Company. As of March 31, 2005, the balance outstanding on these was approximately
$3,934,500. Management believes that the Companys liquidity and existing funding sources are adequate to
ensure sufficient cash flow to satisfy demand and credit and any deposit withdrawals, to fund
operations and, otherwise, to meet other Company obligations and commitments on a timely and
cost-effective basis. Capital Adequacy and Resources Management is committed to maintaining First Federals capital at a level that would be sufficient
to protect deposits, provide for reasonable growth, and comply fully with all regulatory
requirements. Managements strategy to meet this commitment is to retain sufficient earnings while
providing a reasonable return on equity. The Office of Thrift Supervision has issued guidelines identifying minimum regulatory tangible
capital equal to 1.50% of adjusted total assets, a minimum of 4.0% core capital ratio, and a
minimum risk-based capital of 8.0% of risk-weighted assets. First Federal has satisfied its
capital requirements primarily through the retention of earnings. -15-




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As of March 31, 2005, First Federal has satisfied all regulatory capital requirements. First
Federals compliance with the current standards is as follows: Percent ofAmount
    
    
    Asset BaseTangible capital
    
    $
    11,097,000
    
    
    
    7.85
    %Core capital
    
    
    11,097,000
    
    
    
    7.85
    %Tier-based capital
    
    
    11,658,000
    
    
    
    12.55
    %
 Cautionary Statement Concerning Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-QSB contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, which statements
generally can be identified by the use of forward-looking terminology, such as may, will,
expect, estimate, anticipate, believe, target, plan, project, or continue or the
negatives thereof or other variations thereon or similar terminology, and are made on the basis of
managements plans and current analyses of the Company, its business and the industry as a whole.
These forward-looking statements are subject to risks and uncertainties, including, but not limited
to, economic conditions, competition, interest rate sensitivity and exposure to regulatory and
legislative changes. The above factors, in some cases, have affected, and in the future could
affect, the Companys financial performance and could cause actual results to differ materially
from those expressed or implied in such forward-looking statements. The Company does not undertake
to publicly update or revise its forward-looking statements even if experience or future changes
make it clear that any projected results expressed or implied therein will not be realized. 
 Item 3: Controls and Procedures The Companys management, with the participation of the Companys Interim Chief Executive Officer
and Controller (principal financial officer) evaluated the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as such term is defined in Rule
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as
of the end of the period covered by this report. Based on such evaluation, the Companys Interim
Chief Executive Officer and Controller have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective. There have not been any significant changes in the Companys internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting. -16-




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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES 
 PART II. OTHER INFORMATION 
 Item 1: Legal Proceedings In the normal course of business, SouthFirst and First Federal from time to time are involved in
legal proceedings. Management believes that there are no pending or threatened legal proceedings
which, upon resolution, are expected to have a material effect upon SouthFirsts or First Federals
financial condition. 
 Item 6: Exhibits and Reports on Form 8-K (a) Exhibits. The Following Exhibits are filed with this report. Exhibit Number
    
    Description10.1
    
    Resignation, Severance and General Release Agreement by and between Joe
K. McArthur and First Federal of the South and SouthFirst Bancshares, Inc., dated
effective as of March 31, 2005.31.1
    
    Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated May 16, 2005.31.2
    
    Certificate of the equivalent of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated May 16, 2005.32
    
    Certificate of the Chief Executive Officer and the equivalent of the
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated May 16, 2005.
  The certificate listed as Exhibit 32 is being furnished pursuant to the final rule issued
by the Securities and Exchange Commission in Release No. 33-8238 to accompany this quarterly
report and shall not be deemed filed for the purposes of Section 18 of the Securities and
Exchange Act of 1934 (the Exchange Act), or otherwise subject to the liability of such
section or Section 11 of the Securities Act of 1933 (the Securities Act), nor shall such
certificates be deemed incorporated by reference in any filing under the Securities Act or the
Exchange Act, regardless of the general incorporation language of such filings, except as shall
be expressly set forth by specific reference in such filing.  (b)
    Reports on Form 8-K.On January 6, 2005, SouthFirst filed Form 8-K announcing the amendments and restatements of
existing employment agreements with certain of its executive officers.On March 18, 2005, SouthFirst filed Form 8-K announcing the resignation of Joe K. McArthur as
Chief Executive Officer of SouthFirst Bancshares, Inc. and as a member of SouthFirsts Board of
Directors by mutual agreement with the Board. -17-




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHFIRST BANCSHARES, INC.Date: May 16, 2005
    
    By:
    
    /s/ Sandra H. StephensSandra H. StephensInterim Chief Executive Officer(principal executive officer)Date: May 16, 2005
    
    By:
    
    /s/ Janice BrowningJanice BrowningController, Treasurer(principal accounting officer)
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EXHIBIT INDEX Exhibit No.
    
    Description of Exhibit10.1
    
    Resignation, Severance and General Release Agreement by and between Joe K.
McArthur and First Federal of the South and SouthFirst Bancshares, Inc., dated
effective as of March 31, 2005.31.1
    
    Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated May 16, 2005.31.2
    
    Certificate of the equivalent of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated May 16, 2005.32
    
    Certificate of the Chief Executive Officer and the equivalent of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, dated May 16, 2005.
 -19-