##### 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: March 31, 2006
 Commission File Number 1-13640
 SOUTHFIRST BANCSHARES, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    63-1121255(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)126 North Norton Avenue, Sylacauga, Alabama
    
    35150(Address of principal executive offices)
    
    (Zip Code)
 Registrants
telephone number, including area code: 256-245-4365
  (Former
name, former address and former fiscal year, if changed since last
report)
  þ o
  o þ
 o þ
  Common Stock, par value $.01 per share
    
    708,671 sharesClass
    
    Outstanding at May 3, 2006
 o þ




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##### 



SOUTHFIRST BANCSHARES, INC.
 TABLE  OF  CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1: Financial Statements (Unaudited)
    
    
    1Consolidated Statements of Financial Condition at March 31, 2006 (Unaudited) and September 30, 2005
    
    
    1Consolidated Statements of Operations (Unaudited) for the Six and Three Months Ended March 31, 2006 and 2005
    
    
    2Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the Six Months Ended March 31, 2006
    
    
    3Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2006 and 2005
    
    
    4-5Notes to Consolidated Financial Statements (Unaudited)  March 31, 2006 and 2005
    
    
    6-11Item 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-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



Item 1: Financial Statements
 
   March 31,
    
    
    September 30,2006
    
    
    2005(Unaudited)AssetsCash and cash equivalents
    
    $
    4,924,275
    
    
    $
    5,042,170Interest-bearing deposits in other financial institutions
    
    
    870,158
    
    
    
    871,801Securities available-for-sale, at fair value
    
    
    25,070,581
    
    
    
    26,482,705Loans receivable
    
    
    99,720,497
    
    
    
    95,907,301Less allowance for loan losses
    
    
    (492,367
    )
    
    
    (518,572
    )Net loans
    
    
    99,228,130
    
    
    
    95,388,729Loans held for sale at cost (which approximates fair value)
    
    
    831,990
    
    
    
    948,250Foreclosed assets, net
    
    
    843,348
    
    
    
    255,470Premises and equipment, net
    
    
    3,105,672
    
    
    
    4,645,624Federal Home Loan Bank stock, at cost
    
    
    1,463,900
    
    
    
    1,218,200Goodwill
    
    
    543,706
    
    
    
    543,706Accrued interest receivable
    
    
    718,407
    
    
    
    656,455Other assets
    
    
    2,566,751
    
    
    
    3,084,414Total Assets
    
    $
    140,166,918
    
    
    $
    139,137,524Liabilities And Stockholders EquityLiabilities:Deposits:Non-interest bearing
    
    $
    4,727,593
    
    
    $
    4,232,573Interest bearing
    
    
    95,703,592
    
    
    
    96,892,239Total deposits
    
    
    100,431,185
    
    
    
    101,124,812Advances by borrowers for property taxes and insurance
    
    
    137,533
    
    
    
    237,052Accrued interest payable
    
    
    730,820
    
    
    
    641,075Borrowed funds
    
    
    28,004,828
    
    
    
    26,015,861Accrued expenses and other liabilities
    
    
    545,748
    
    
    
    694,781Total liabilities
    
    
    129,850,114
    
    
    
    128,713,581Stockholders Equity:Common stock, $.01 par value, 2,000,000 shares authorized,
990,241 shares issued and 708,671 shares outstanding at March 31, 2006
990,241 shares issued and 708,971 shares outstanding at September 30, 2005
    
    
    9,996
    
    
    
    9,996Additional paid-in capital
    
    
    9,839,851
    
    
    
    9,839,851Treasury stock, at cost (281,570 shares at March 31, 2006
and 281,270 shares at September 30, 2005)
    
    
    (3,896,213
    )
    
    
    (3,892,598
    )Deferred compensation on common stock employee benefit plans
    
    
    (123,798
    )
    
    
    (135,675
    )Shares held in trust at cost (9,402 shares at March 31, 2006
and September 30, 2005)
    
    
    (103,483
    )
    
    
    (103,483
    )Retained earnings
    
    
    4,986,734
    
    
    
    4,874,445Accumulated comprehensive other income (loss)
    
    
    (396,283
    )
    
    
    (168,593
    )Total stockholders equity
    
    
    10,316,804
    
    
    
    10,423,943Total Liabilities and Stockholders Equity
    
    $
    140,166,918
    
    
    $
    139,137,524
  -1-




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##### Table of Contents



Six Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest and dividend income:Interest and fees on loans
    
    $
    3,313,118
    
    
    $
    3,019,752
    
    
    $
    1,682,330
    
    
    $
    1,526,651Interest income on deposits in other financial institutions
    
    
    52,722
    
    
    
    33,684
    
    
    
    28,098
    
    
    
    16,935Interest and dividend income on securities available-for-sale
    
    
    637,274
    
    
    
    326,007
    
    
    
    317,405
    
    
    
    160,668Interest and dividend income on securities held-to-maturity
    
    
    
    
    
    
    431,513
    
    
    
    
    
    
    
    219,865Total interest and dividend income
    
    
    4,003,114
    
    
    
    3,810,956
    
    
    
    2,027,833
    
    
    
    1,924,119Interest expense:Interest on deposits
    
    
    1,300,040
    
    
    
    1,002,818
    
    
    
    664,977
    
    
    
    526,321Interest on borrowed funds
    
    
    721,693
    
    
    
    583,611
    
    
    
    378,229
    
    
    
    290,395Total interest expense
    
    
    2,021,733
    
    
    
    1,586,429
    
    
    
    1,043,206
    
    
    
    816,716Net interest income
    
    
    1,981,381
    
    
    
    2,224,527
    
    
    
    984,627
    
    
    
    1,107,403Provision for loan losses (benefit)
    
    
    11,239
    
    
    
    104,846
    
    
    
    (41,998
    )
    
    
    79,846Net interest income after provision for loan losses
    
    
    1,970,142
    
    
    
    2,119,681
    
    
    
    1,026,625
    
    
    
    1,027,557Other income:Service charges and other fees
    
    
    274,108
    
    
    
    228,794
    
    
    
    132,830
    
    
    
    101,866Employee benefit trust and consulting fees
    
    
    847,967
    
    
    
    761,009
    
    
    
    472,645
    
    
    
    395,961Gain on sale of loans
    
    
    263,021
    
    
    
    322,355
    
    
    
    129,071
    
    
    
    135,665Gain (loss) on sale of foreclosed assets
    
    
    (13,816
    )
    
    
    (11,216
    )
    
    
    (12,954
    )
    
    
    (9,115
    )Gain (loss) on sale of premises and equipment
    
    
    182,579
    
    
    
    5,827
    
    
    
    182,579
    
    
    
    2,327Gain (loss) on sale of securities held-to-maturity
    
    
    
    
    
    
    (701,099
    )
    
    
    
    
    
    
    (701,099
    )Other
    
    
    222,943
    
    
    
    185,968
    
    
    
    122,589
    
    
    
    93,161Total other income
    
    
    1,776,802
    
    
    
    791,638
    
    
    
    1,026,760
    
    
    
    18,766Other expenses:Compensation and benefits
    
    
    1,900,588
    
    
    
    1,962,603
    
    
    
    950,922
    
    
    
    976,742Net occupancy expense
    
    
    215,850
    
    
    
    216,505
    
    
    
    106,226
    
    
    
    107,385Furniture and fixtures
    
    
    266,861
    
    
    
    251,972
    
    
    
    133,662
    
    
    
    128,942Data processing
    
    
    143,295
    
    
    
    168,456
    
    
    
    74,589
    
    
    
    83,076Office supplies and expense
    
    
    224,578
    
    
    
    211,530
    
    
    
    107,732
    
    
    
    115,211Deposit insurance premiums
    
    
    43,801
    
    
    
    53,921
    
    
    
    16,299
    
    
    
    27,126Legal
    
    
    49,992
    
    
    
    105,600
    
    
    
    24,996
    
    
    
    52,800Other professional services
    
    
    116,637
    
    
    
    136,302
    
    
    
    55,464
    
    
    
    68,487Termination expense
    
    
    
    
    
    
    140,941
    
    
    
    
    
    
    
    140,941Other
    
    
    375,891
    
    
    
    288,728
    
    
    
    213,903
    
    
    
    167,911Total other expenses
    
    
    3,337,493
    
    
    
    3,536,558
    
    
    
    1,683,793
    
    
    
    1,868,621Income (loss) before income taxes
    
    
    409,451
    
    
    
    (625,239
    )
    
    
    369,592
    
    
    
    (822,298
    )Income tax expense (benefit)
    
    
    155,388
    
    
    
    (237,589
    )
    
    
    139,977
    
    
    
    (312,471
    )Net income (loss)
    
    $
    254,063
    
    
    $
    (387,650
    )
    
    $
    229,615
    
    
    $
    (509,827
    )Earnings (loss) per share:Basic
    
    
    0.36
    
    
    
    (0.55
    )
    
    
    0.32
    
    
    
    (0.72
    )Diluted
    
    
    0.36
    
    
    
    (0.55
    )
    
    
    0.32
    
    
    
    (0.72
    )Cash dividends declared
    
    
    0.20
    
    
    
    0.30
    
    
    
    0
    
    
    
    0.15Weighted average shares outstanding:Basic
    
    
    708,865
    
    
    
    709,406
    
    
    
    708,844
    
    
    
    709,406Diluted
    
    
    713,340
    
    
    
    709,406
    
    
    
    713,386
    
    
    
    709,406See accompanying notes to consolidated financial statements.
 -2-




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##### Table of Contents



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,
2005
    
    $
    9,996
    
    
    $
    9,839,851
    
    
    $
    (3,892,598
    )
    
    $
    (135,675
    )
    
    $
    (103,483
    )
    
    $
    4,874,445
    
    
    $
    (168,593
    )
    
    $
    10,423,943Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254,063
    
    
    
    
    
    
    
    254,063Change in net unrealized
loss on available-for-sale
securities, net of reclassification adjustments and
income taxes of $139,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227,690
    )
    
    
    (227,690
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,373Vesting of deferred
compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,877
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,877Acquisition of treasury stock
    
    
    
    
    
    
    
    
    
    
    (3,615
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,615
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141,774
    )
    
    
    
    
    
    
    (141,774
    )Balance at March 31,
2006
    
    $
    9,996
    
    
    $
    9,839,851
    
    
    $
    (3,896,213
    )
    
    $
    (123,798
    )
    
    $
    (103,483
    )
    
    $
    4,986,734
    
    
    $
    (396,283
    )
    
    $
    10,316,804
 -3-




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##### Table of Contents



2006
    
    
    2005Operating activities:Net income (loss)
    
    $
    254,063
    
    
    $
    (387,650
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Provision for loan losses
    
    
    11,239
    
    
    
    104,846Depreciation and amortization
    
    
    190,509
    
    
    
    197,259Loss on sale of securities held-to-maturity
    
    
    
    
    
    
    701,099Gain on sale of loans
    
    
    (263,021
    )
    
    
    (322,355
    )Increase (decrease) in deferred loan origination fees
    
    
    (7,427
    )
    
    
    30,457Net amortization of premium/discount on securities available-for-sale
    
    
    14,561
    
    
    
    (629
    )(Gain) loss on sale of other property owned
    
    
    (182,579
    )
    
    
    (5,827
    )(Gain) loss on sale of foreclosed assets
    
    
    13,816
    
    
    
    11,216Loans originated for sale
    
    
    (11,478,924
    )
    
    
    (12,370,645
    )Proceeds from sale of loans
    
    
    11,858,205
    
    
    
    13,400,714(Increase) decrease in accrued interest receivable
    
    
    (61,952
    )
    
    
    74,924(Increase) decrease in other assets
    
    
    517,663
    
    
    
    (242,716
    )Deferred compensation expense
    
    
    11,877
    
    
    
    11,877Increase (decrease) in accrued interest payable
    
    
    89,745
    
    
    
    97,473Increase (decrease) in accrued expenses and other liabilities
    
    
    (9,481
    )
    
    
    (376,378
    )Net cash provided by operating activities
    
    
    958,294
    
    
    
    923,665Investing activities:Net change in interest-bearing deposits in other financial institutions
    
    
    1,643
    
    
    
    (14,244
    )Proceeds from calls and maturities of securities available-for-sale
    
    
    1,380,321
    
    
    
    865,504Purchase of securities available-for-sale
    
    
    (350,000
    )
    
    
    (14,992,500
    )Proceeds from sale of securities held-to-maturity
    
    
    
    
    
    
    15,297,145Purchase of Federal Home Loan Bank stock
    
    
    (245,700
    )
    
    
    (101,200
    )Net (increase) decrease in loans
    
    
    (3,843,213
    )
    
    
    (1,552,875
    )Purchase of premises and equipment
    
    
    (102,021
    )
    
    
    (137,994
    )Proceeds from sale of foreclosed assets
    
    
    21,848
    
    
    
    10,800Proceeds from sale of other assets
    
    
    1,634,043
    
    
    
    8,500Transfer from loans of repossessed assets
    
    
    (623,542
    )
    
    
    (1,124,870
    )Net cash used in investing activities
    
    
    (2,126,621
    )
    
    
    (1,741,734
    )
   -4-




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##### Table of Contents



2006
    
    
    2005Financing activities:Increase (decrease) in deposits
    
    $
    (693,627
    )
    
    $
    6,096,806Proceeds from borrowed funds
    
    
    26,138,828
    
    
    
    35,028,468Repayment of borrowed funds
    
    
    (24,149,861
    )
    
    
    (40,759,880
    )Cash dividends paid
    
    
    (141,774
    )
    
    
    (212,993
    )Acquisition of treasury stock
    
    
    (3,615
    )
    
    
    Decrease in advances by borrowers for property taxes and insurance
    
    
    (99,519
    )
    
    
    (80,660
    )Net cash provided by financing activities
    
    
    1,050,432
    
    
    
    71,741Increase (decrease) in cash and cash equivalents
    
    
    (117,895
    )
    
    
    (746,328
    )Cash and cash equivalents at beginning of period
    
    
    5,042,170
    
    
    
    5,015,108Cash and cash equivalents at end of period
    
    $
    4,924,275
    
    
    $
    4,268,780Supplemental information on cash payments:Interest paid
    
    $
    1,931,988
    
    
    $
    1,488,956Income taxes paid
    
    $
    18,600
    
    
    $
    36,000Supplemental information on non-cash transactions:Real estate obtained through foreclosure
    
    $
    661,227
    
    
    $
    1,082,756
  -5-




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##### Table of Contents



(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, 2006, was
derived from the financial records of SouthFirst and its wholly-owned subsidiaries, SouthFirst
Bank (SouthFirst Bank) and SouthFirst Financial Services, Inc. (SouthFirst Financial) and
SouthFirst Banks wholly-owned subsidiaries, Pension & Benefit Trust Company (Pension &
Benefit), a Montgomery, Alabama-based employee benefits consulting firm, and SouthFirst
Mortgage, Inc. (SouthFirst Mortgage), a Birmingham, Alabama based residential construction
loan and mortgage loan origination office. Collectively, SouthFirst Bancshares, Inc. and its
subsidiaries are referred to herein as the Company and as SouthFirst.The accompanying unaudited consolidated financial statements have been prepared in accordance
with the instructions for Form 10-QSB and, therefore, do not include all information and
footnotes necessary for a complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the United States.
For a summary of significant accounting policies that have been consistently followed, see Note
1 to the consolidated financial statements included under Item 7 on Form 10-KSB. It is
managements opinion that all adjustments, consisting of only normal and recurring items
necessary for a fair presentation, have been included. The results contained in these
statements are not necessarily indicative of the results which may be expected for the entire
year.(2)
    
    Stock ListingOn February 21, 2006, the Company filed an application with the Securities & Exchange Commission
to withdraw its common stock from listing and registration on the American Stock Exchange. The
request was made due to the limited number of stockholders, the limited volume of trading, and
the cost associated with maintaining status as a listed company. The application was approved
effective March 28, 2006. The Company has made arrangements with Howe Barnes Investments, Inc.,
an Illinois corporation, for it to act as a market maker for the Companys common stock on the
Over the Counter Bulletin Board (OTCBB).(3)
    
    New Accounting 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
 -6-




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##### Table of Contents



(4)
    
    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, 2005
    
    
    38,796
    
    
    $
    11.51
    
    
    
    46,477
    
    
    $
    13.15Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    38,796
    
    
    $
    11.51
    
    
    
    46,477
    
    
    $
    13.15
 Information pertaining to options outstanding at March 31, 2006 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
    
    
    
    1.59
    
    
    
    
    
    
    
    15,547$9.92
    
    
    9,000
    
    
    
    5.67
    
    
    
    
    
    
    
    7,200$12.10
    
    
    38,200
    
    
    
    6.54
    
    
    
    
    
    
    
    22,920
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##### Table of Contents



Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Price
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$15.75
    
    
    22,526
    
    
    
    1.82
    
    
    
    
    
    
    
    22,526Outstanding at
March 31, 2006
    
    
    85,273
    
    
    
    4.30
    
    
    $
    12.41
    
    
    
    68,193
    
    
    $
    12.54
 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 312006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss), as reported
    
    $
    254,063
    
    
    $
    (387,650
    )
    
    $
    229,615
    
    
    $
    (509,827
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (1,159
    )
    
    
    (1,180
    )
    
    
    (579
    )
    
    
    (537
    )Pro forma net income (loss)
    
    $
    252,904
    
    
    $
    (388,830
    )
    
    $
    229,036
    
    
    $
    (510,364
    )Earnings (loss) per share:Basic  as reported
    
    $
    .36
    
    
    $
    (.55
    )
    
    $
    .32
    
    
    $
    (.72
    )Basic  pro forma
    
    
    .36
    
    
    
    (.55
    )
    
    
    .32
    
    
    
    (.72
    )Diluted  as reported
    
    
    .36
    
    
    
    (.55
    )
    
    
    .32
    
    
    
    (.72
    )Diluted  pro forma
    
    
    .35
    
    
    
    (.55
    )
    
    
    .32
    
    
    
    (.72
    )
 The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will
have on its statement of condition and results of operations once such standards become
effective with respect to the Company. Because the SFAS No. 123 method of accounting (and
related disclosures) has not been applied to options granted prior to October 1, 1995, the
resulting pro forma compensation costs may not be representative of that to be expected in
future years.There were no options granted during the six months ended March 31, 2006 or 2005.(5)
    
    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, 2006
and 2005. Common stock outstanding consists of issued shares less treasury stock and shares
owned by the Management Recognition Plan and Stock Option plan trusts. Diluted earnings per share for the six and three month periods ended March 31, 2006 and 2005, were computed by
dividing net income by the weighted average number of shares of common stock and the dilutive
effects of the shares awarded under the Stock Option plan, based on the treasury stock method
using an average fair market value of the stock during the respective periods.
 -8-




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##### Table of Contents



The following table represents the earnings per share calculations for the three months ended
March 31, 2006 and 2005:
 EarningsIncome
    
    
    Shares
    
    
    Per ShareFor the Three Months Ended March 31, 2006:Basic earnings
    
    $
    229,615
    
    
    
    708,844
    
    
    $
    .32Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    4,542Dilutive earnings
    
    $
    229,615
    
    
    
    713,386
    
    
    $
    .32For the Three Months Ended March 31, 2005:Basic earnings (loss)
    
    $
    (509,827
    )
    
    
    709,406
    
    
    $
    (.72
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    Dilutive earnings (loss)
    
    $
    (509,827
    )
    
    
    709,406
    
    
    $
    (.72
    )For the Six Months Ended March 31, 2006:Basic earnings
    
    $
    254,063
    
    
    
    708,865
    
    
    $
    .36Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    4,475Dilutive earnings
    
    $
    254,063
    
    
    
    713,340
    
    
    $
    .36For the Six Months Ended March 31, 2005:Basic earnings (loss)
    
    $
    (387,650
    )
    
    
    709,406
    
    
    $
    (.55
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    Dilutive earnings (loss)
    
    $
    (387,650
    )
    
    
    709,406
    
    
    $
    (.55
    )
 Options on 60,726 and 22,526 shares of common stock in 2006 and 2005 were not included in
computing diluted earnings per share because their effects were anti-dilutive.(6)
    
    Investment 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.
 -9-




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##### Table of Contents



(7)
    
    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.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, 2006
    
    
    Six Months Ended March 31, 2005Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalInterest and dividend
income
    
    $
    3,983,191
    
    
    $
    19,923
    
    
    $
    4,003,114
    
    
    $
    3,795,933
    
    
    $
    15,023
    
    
    $
    3,810,956Interest expenses
    
    
    2,021,733
    
    
    
    
    
    
    
    2,021,733
    
    
    
    1,586,429
    
    
    
    
    
    
    
    1,586,429Net interest income
    
    
    1,961,458
    
    
    
    19,923
    
    
    
    1,981,381
    
    
    
    2,209,504
    
    
    
    15,023
    
    
    
    2,224,527Provision for loan losses
    
    
    11,239
    
    
    
    
    
    
    
    11,239
    
    
    
    104,846
    
    
    
    
    
    
    
    104,846Net interest income after
provision for loan losses
    
    
    1,950,219
    
    
    
    19,923
    
    
    
    1,970,142
    
    
    
    2,104,658
    
    
    
    15,023
    
    
    
    2,119,681Other income
    
    
    916,714
    
    
    
    860,088
    
    
    
    1,776,802
    
    
    
    22,240
    
    
    
    769,398
    
    
    
    791,638Other expenses
    
    
    2,503,468
    
    
    
    834,025
    
    
    
    3,337,493
    
    
    
    2,791,876
    
    
    
    744,682
    
    
    
    3,536,558Income (loss) before
income taxes
    
    
    363,465
    
    
    
    45,986
    
    
    
    409,451
    
    
    
    (664,978
    )
    
    
    39,739
    
    
    
    (625,239
    )Income taxes
    
    
    137,913
    
    
    
    17,475
    
    
    
    155,388
    
    
    
    (252,689
    )
    
    
    15,100
    
    
    
    (237,589
    )Net income (loss)
    
    $
    225,552
    
    
    $
    28,511
    
    
    $
    254,063
    
    
    $
    (412,289
    )
    
    $
    24,639
    
    
    $
    (387,650
    )
 Three Months Ended March 31, 2006
    
    
    Three Months Ended March 31, 2005Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalInterest and dividend
income
    
    $
    2,017,899
    
    
    $
    9,934
    
    
    $
    2,027,833
    
    
    $
    1,916,437
    
    
    $
    7,682
    
    
    $
    1,924,119Interest expenses
    
    
    1,043,206
    
    
    
    
    
    
    
    1,043,206
    
    
    
    816,716
    
    
    
    
    
    
    
    816,716Net interest income
    
    
    974,693
    
    
    
    9,934
    
    
    
    984,627
    
    
    
    1,099,721
    
    
    
    7,682
    
    
    
    1,107,403Provision for loan losses
    
    
    (41,998
    )
    
    
    
    
    
    
    (41,998
    )
    
    
    79,846
    
    
    
    
    
    
    
    79,846Net interest income after
provision for loan losses
    
    
    1,016,691
    
    
    
    9,934
    
    
    
    1,026,625
    
    
    
    1,019,875
    
    
    
    7,682
    
    
    
    1,027,557Other income
    
    
    544,994
    
    
    
    481,766
    
    
    
    1,026,760
    
    
    
    (382,522
    )
    
    
    401,288
    
    
    
    18,766Other expenses
    
    
    1,261,250
    
    
    
    422,543
    
    
    
    1,683,793
    
    
    
    1,493,001
    
    
    
    375,620
    
    
    
    1,868,621
 -10-




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##### Table of Contents



Three Months Ended March 31, 2006
    
    
    Three Months Ended March 31, 2005Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalIncome (loss) before
income taxes
    
    
    300,435
    
    
    
    69,157
    
    
    
    369,592
    
    
    
    (855,648
    )
    
    
    33,350
    
    
    
    (822,298
    )Income taxes
    
    
    113,698
    
    
    
    26,279
    
    
    
    139,977
    
    
    
    (325,143
    )
    
    
    12,672
    
    
    
    (312,471
    )Net income (loss)
    
    $
    186,737
    
    
    $
    42,878
    
    
    $
    229,615
    
    
    $
    (530,505
    )
    
    $
    20,678
    
    
    $
    (509,827
    )
 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.(8)
    
    Subsequent EventOn April 19, 2006, the Company declared a regular $0.10 per share cash dividend on the Companys
outstanding stock, payable on May 15, 2006, to stockholders of record as of April 29, 2006.
 
 Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
 REVIEW OF RESULTS OF OPERATIONS
 Overview
   Net Interest Income
   -11-




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Provision for Loan Losses
    Other Income
   Other Expenses
  -12-




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##### Table of Contents



Income Taxes
  REVIEW OF FINANCIAL CONDITION
 Overview
   At or for the threemonths ended March 31,2006
    
    2005Return on assets
    
    
    0.66
    %
    
    
    (1.43
    )%Return on equity
    
    
    8.92
    %
    
    
    (19.88
    )%Equity to asset ratio
    
    
    7.42
    %
    
    
    7.21
    %Interest rate spread
    
    
    3.08
    %
    
    
    3.46
    %Net interest margin
    
    
    3.15
    %
    
    
    3.48
    %Total risk-based capital
    
    
    12.88
    %
    
    
    12.55
    %Non-performing loans to loans
    
    
    0.65
    %
    
    
    0.86
    %Allowance for loan losses to loans
    
    
    0.50
    %
    
    
    1.01
    %Allowance for loan losses to average non-performing loans
    
    
    76.74
    %
    
    
    118.14
    %Ratio of net charge-offs to average loans outstanding
    
    
    0.00
    %
    
    
    0.03
    %Book value per common share outstanding
    
    $
    14.56
    
    
    $
    14.32
 -13-




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##### Table of Contents



Assets
  Liabilities
  Loan Quality
   -14-




---



##### Table of Contents



Liquidity and Funding Sources
       Capital Adequacy and Resources
  -15-




---



##### Table of Contents



Percent ofAmount
    
    Asset BaseTangible capital
    
    $
    11,903,000
    
    
    
    8.49
    %Core capital
    
    
    11,903,000
    
    
    
    8.49
    %Tier-based capital
    
    
    12,364,000
    
    
    
    12.88
    %
 Cautionary Statement Concerning Forward-Looking Statements
  
 Item 3: Controls and Procedures
   -16-




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##### Table of Contents



Item 1: Legal Proceedings
  
 Item 6: Exhibits and Reports on Form 8-K
  Exhibit Number
    
    Description31.1
    
    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 15, 2006.31.2
    
    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 15, 2006.32
    
    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 15, 2006.
 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)
    
    Report on Form 8-K.On February 17, 2006, the Company filed an application with the Division of Market Regulation,
Securities and Exchange Commission, for voluntary removal by the Registrant of the listing of
the Registrants Common Stock on the American Stock Exchange (AMEX) pursuant to Section 12(d)
of the Securities and Exchange Act of 1934 and Rule 12d2-2 promulgated thereunder.
 -17-




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##### Table of Contents



SIGNATURES
  SOUTHFIRST BANCSHARES, INC.Date:  May 15, 2006
    By:
    /s/ Sandra H. StephensSandra H. StephensChief Executive Officer
(principal executive officer) Date: May 15, 2006
    By:
    /s/ Janice BrowningJanice BrowningController, Treasurer
(principal accounting officer) -18-




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description of Exhibit31.1
    
    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 15, 2006.31.2
    
    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 15, 2006.32
    
    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 15, 2006.
 -19-