##### 



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 NumberDecember 31, 2004
    
    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:
    
    256-245-4365
 Not applicable(Former name, former address and former fiscal year, if changed since last report)
 Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes            þ
    

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
    

No              þ
 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
    
    709,406
sharesClass
    
    Outstanding at February 1, 2005
 Transitional Small Business
Disclosure Format o Yes
   þ No




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##### 



SOUTHFIRST BANCSHARES, INC. TABLEOFCONTENTS PART I  FINANCIAL INFORMATIONItem 1: Financial Statements (Unaudited)
    
    
    1Consolidated Statements of Financial Condition at December 31, 2004 (Unaudited)
and September 30, 2004
    
    
    1Consolidated Statements of Operations (Unaudited) for the Three Months
Ended December 31, 2004 and 2003
    
    
    2Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the
Three Months Ended December 31, 2004
    
    
    3Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended
December 31, 2004 and 2003
    
    
    4-5Notes to Consolidated Financial Statements (Unaudited)  December 31, 2004 and 2003
    
    
    6-10Item 2: Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    11-15Item 3: Controls and Procedures
    
    
    15PART II  OTHER INFORMATION
    
    
    16Item 1: Legal Proceedings
    
    
    16Item 6: Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    17EXHIBIT INDEX
    
    
    18CERTIFICATIONS
    
    
    Exhibits




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##### 



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES PART 1: FINANCIAL INFORMATION Item 1: Financial Statements Consolidated Statements of Financial Condition
December 31, 2004 (Unaudited) and September 30, 2004 December 30,
    
    
    September 30,2004
    
    
    2004(Unaudited)AssetsCash and cash equivalents
    
    $
    5,500,629
    
    
    $
    5,015,108Interest-bearing deposits in other financial institutions
    
    
    720,485
    
    
    
    713,807Securities available-for-sale, at fair value
    
    
    13,699,072
    
    
    
    14,180,243Securities held-to-maturity at amortized cost (fair value of $15,600,853
at December 31, 2004 and $15,674,973 at September 30, 2004)
    
    
    15,097,160
    
    
    
    15,081,723Loans receivable
    
    
    97,630,333
    
    
    
    95,486,200Less allowance for loan losses
    
    
    (939,636
    )
    
    
    (911,964
    )Net loans
    
    
    96,690,697
    
    
    
    94,574,236Loans held for sale at cost (which approximates fair value)
    
    
    1,456,012
    
    
    
    1,092,619Foreclosed assets, net
    
    
    582,527
    
    
    
    514,507Premises and equipment, net
    
    
    4,747,585
    
    
    
    4,796,390Federal Home Loan Bank stock, at cost
    
    
    1,196,500
    
    
    
    1,117,000Goodwill
    
    
    543,706
    
    
    
    543,706Accrued interest receivable
    
    
    715,006
    
    
    
    625,639Other assets
    
    
    2,886,836
    
    
    
    3,278,179Total Assets
    
    $
    143,836,215
    
    
    $
    141,533,157Liabilities And Stockholders EquityLiabilities:Deposits:Non-interest bearing
    
    $
    4,770,925
    
    
    $
    4,003,251Interest bearing
    
    
    99,275,915
    
    
    
    93,789,575Total deposits
    
    
    104,046,840
    
    
    
    97,792,826Advances by borrowers for property taxes and insurance
    
    
    145,854
    
    
    
    259,427Accrued interest payable
    
    
    508,325
    
    
    
    458,017Borrowed funds
    
    
    28,136,641
    
    
    
    31,588,773Accrued expenses and other liabilities
    
    
    637,748
    
    
    
    1,078,510Total liabilities
    
    
    133,475,408
    
    
    
    131,177,553Stockholders Equity:Common stock, $.01 par value, 2,000,000 shares authorized,
990,241 shares issued and 709,406 shares outstanding at
December 31, 2004 and September 30, 2004
    
    
    9,996
    
    
    
    9,996Additional paid-in capital
    
    
    9,838,965
    
    
    
    9,838,965Treasury stock, at cost (280,835 shares at December 31, 2004
and September 30, 2004)
    
    
    (3,891,155
    )
    
    
    (3,891,155
    )Deferred compensation on common stock employee benefit plans
    
    
    (153,489
    )
    
    
    (159,427
    )Shares held in trust at cost (9,402 shares at December 31, 2004
and September 30, 2004)
    
    
    (103,483
    )
    
    
    (103,483
    )Retained earnings
    
    
    5,210,851
    
    
    
    5,195,161Accumulated comprehensive other income (loss)
    
    
    (550,878
    )
    
    
    (534,453
    )Total stockholders equity
    
    
    10,360,807
    
    
    
    10,355,604Total Liabilities and Stockholders Equity
    
    $
    143,836,215
    
    
    $
    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 Months Ended December 31, 2004 and 2003 2004
    
    
    2003Interest and dividend income:Interest and fees on loans
    
    $
    1,493,102
    
    
    $
    1,339,578Interest income on deposits in other financial institutions
    
    
    16,750
    
    
    
    7,455Interest and dividend income on securities available-for-sale
    
    
    165,338
    
    
    
    439,030Interest income on securities held-to-maturity
    
    
    211,648
    
    
    
    Total interest and dividend income
    
    
    1,886,838
    
    
    
    1,786,063Interest expense:Interest on deposits
    
    
    476,497
    
    
    
    430,658Interest on borrowed funds
    
    
    293,216
    
    
    
    268,993Total interest expense
    
    
    769,713
    
    
    
    699,651Net interest income
    
    
    1,117,125
    
    
    
    1,086,412Provision for loan losses
    
    
    25,000
    
    
    
    Net interest income after provision for loan losses
    
    
    1,092,125
    
    
    
    1,086,412Other income:Service charges and other fees
    
    
    126,928
    
    
    
    130,584Employee benefit trust and consulting fees
    
    
    365,049
    
    
    
    329,013Gain on sale of loans
    
    
    186,690
    
    
    
    136,869Gain (loss) on sale of foreclosed assets
    
    
    (2,102
    )
    
    
    (1,535
    )Gain (loss) on sale of equipment
    
    
    3,500
    
    
    
    927Other
    
    
    92,806
    
    
    
    91,706Total other income
    
    
    772,871
    
    
    
    687,564Other expenses:Compensation and benefits
    
    
    985,861
    
    
    
    1,015,464Net occupancy expense
    
    
    109,120
    
    
    
    89,794Furniture and fixtures
    
    
    123,030
    
    
    
    111,294Data processing
    
    
    85,381
    
    
    
    57,376Office supplies and expense
    
    
    96,320
    
    
    
    101,746Deposit insurance premiums
    
    
    26,795
    
    
    
    24,394Legal
    
    
    52,800
    
    
    
    33,750Other
    
    
    188,632
    
    
    
    173,011Total other expenses
    
    
    1,667,939
    
    
    
    1,606,829Income before income taxes
    
    
    197,057
    
    
    
    167,147Income tax expense
    
    
    74,882
    
    
    
    63,578Net income
    
    $
    122,175
    
    
    $
    103,569Earnings per share:Basic
    
    
    0.17
    
    
    
    0.15Diluted
    
    
    0.17
    
    
    
    0.14Cash dividends declared
    
    
    0.15
    
    
    
    0.15Weighted average shares outstanding:Basic
    
    
    709,406
    
    
    
    709,234Diluted
    
    
    732,548
    
    
    
    739,521
 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 Three Months Ended December 31, 2004 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,175
    
    
    
    
    
    
    
    122,175Change in net unrealized
gain on available-for-sale
securities, net of reclassification adjustments and
income taxes of $10,065
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,425
    )
    
    
    (16,425
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,750Vesting of deferred
compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,938
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,938Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106,485
    )
    
    
    
    
    
    
    (106,485
    )Balance at December 31,
2004
    
    $
    9,996
    
    
    $
    9,838,965
    
    
    $
    (3,891,155
    )
    
    $
    (153,489
    )
    
    $
    (103,483
    )
    
    $
    5,210,851
    
    
    $
    (550,878
    )
    
    $
    10,360,807
 -3-




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##### 



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended December 31, 2004 and 2003 2004
    
    
    2003Operating activities:Net income
    
    $
    122,175
    
    
    $
    103,569Adjustments to reconcile net income to net cash provided (used) by
operating activities:Provision for loan losses
    
    
    25,000
    
    
    
    Depreciation and amortization
    
    
    99,232
    
    
    
    75,589Gain on sale of loans
    
    
    (186,690
    )
    
    
    (136,869
    )Increase (decrease) in deferred loan origination fees
    
    
    34,806
    
    
    
    7,372Net amortization of premium/discount on investment securities
    
    
    (343
    )
    
    
    2,684Loss on sale of foreclosed assets
    
    
    2,102
    
    
    
    1,535Gain on sale of premises and equipment
    
    
    (3,500
    )
    
    
    (927
    )Loans originated for sale
    
    
    (7,997,975
    )
    
    
    (6,153,127
    )Proceeds from sale of loans
    
    
    7,821,272
    
    
    
    6,648,561(Increase) decrease in accrued interest receivable
    
    
    (89,367
    )
    
    
    (92,425
    )(Increase) decrease in other assets
    
    
    391,343
    
    
    
    250,503Deferred compensation expense
    
    
    5,938
    
    
    
    5,938Increase (decrease) in accrued interest payable
    
    
    50,308
    
    
    
    (34,371
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    (430,697
    )
    
    
    (130,466
    )Net cash provided (used) by operating activities
    
    
    (156,396
    )
    
    
    547,566Investing activities:Net change in interest-bearing deposits in other financial institutions
    
    
    (6,678
    )
    
    
    (13,516
    )Proceeds from calls and maturities of securities available-for-sale
    
    
    439,587
    
    
    
    1,266,840Purchase of securities available-for-sale
    
    
    
    
    
    
    (100,000
    )Purchase of Federal Home Loan Bank stock
    
    
    (79,500
    )
    
    
    Net (increase) decrease in loans
    
    
    (2,176,267
    )
    
    
    (3,243,796
    )Purchase of premises and equipment
    
    
    (50,427
    )
    
    
    (231,287
    )Proceeds from sale of foreclosed assets
    
    
    3,800
    
    
    
    37,282Proceeds from sale of other assets
    
    
    3,500
    
    
    
    10,376Transfer from loans of repossessed assets
    
    
    (73,922
    )
    
    
    (11,293
    )Net cash
used in investing activities
    
    
    (1,939,907
    )
    
    
    (2,285,394
    )
 (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 Three Months Ended December 31, 2004 and 2003 2004
    
    
    2003Financing activities:Increase (decrease) in deposits
    
    $
    6,254,014
    
    
    $
    (2,948,244
    )Decrease in advances by borrowers for property taxes and insurance
    
    
    (113,573
    )
    
    
    (93,312
    )Proceeds from borrowed funds
    
    
    20,747,448
    
    
    
    18,416,689Repayment of borrowed funds
    
    
    (24,199,580
    )
    
    
    (15,709,289
    )Cash dividends paid
    
    
    (106,485
    )
    
    
    (106,242
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    6,905Acquisition of Treasury shares
    
    
    
    
    
    
    (83,040
    )Net cash
used in financing activities
    
    
    2,581,824
    
    
    
    (516,533
    )Increase (decrease) in cash and cash equivalents
    
    
    485,521
    
    
    
    (2,254,361
    )Cash and cash equivalents at beginning of period
    
    
    5,015,108
    
    
    
    6,049,325Cash and cash equivalents at end of period
    
    $
    5,500,629
    
    
    $
    3,794,964Supplemental information on cash payments:Interest paid
    
    $
    719,405
    
    
    $
    734,022Income taxes paid
    
    $
    36,000
    
    
    $
    37,600Supplemental information on non-cash transactions:Real estate obtained through foreclosure
    
    $
    66,284
    
    
    $
    
 See accompanying notes to consolidated financial statements. -5-




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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited)
December 31, 2004 and 2003  (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 December 31, 2004, 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). SFAS No. 123
is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.SFAS No. 123
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123 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 focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions.
SFAS No. 123 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 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 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 is effective for public
entities that do not file as small business issuers as of the beginning of the first interim or
annual reporting -6-




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##### 



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 the adoption of SFAS No. 123
will have on its statement of condition and results of operations.  (3)
    Stock-Based Compensation Plans  During 1995, the Company adopted a Stock Option and Incentive Plan for directors and key
employees of the Company. The exercise price cannot be less than the market price on the grant
date and 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
    
    
    $
    13.38Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    (1,254
    )
    
    $
    12.93Outstanding at December 31, 2004
    
    
    73,700
    
    
    $
    12.40
    
    
    
    59,045
    
    
    $
    13.39
  Information pertaining to options outstanding at December 31, 2004 is as follows: Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Price
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$  9.75
    
    
    20,571
    
    
    3.09 years
    
    
    
    
    
    
    20,571$  9.92
    
    
    9,000
    
    
    7.17 years
    
    
    
    
    
    
    5,400$12.10
    
    
    43,340
    
    
    8.04 years
    
    
    
    
    
    
    17,336$14.00
    
    
    29,880
    
    
    .68 years
    
    
    
    
    
    
    29,880$15.75
    
    
    29,954
    
    
    3.32 years
    
    
    
    
    
    
    29,954Outstanding atDecember 31, 2004
    
    
    132,745
    
    
    4.49 years
    
    $
    12.84
    
    
    
    103,141
    
    
    $
    13.13
 -7-




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##### 



The Company accounts for these plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all options granted under
these plans had an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123,Accounting for Stock-Based
Compensation, to
stock-based employee compensation. Three Months EndedDecember 31,2004
    
    
    2003Net income, as reported
    
    $
    122,175
    
    
    $
    103,569Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (643
    )
    
    
    (801
    )Pro forma net income
    
    $
    121,532
    
    
    $
    102,768Earnings per share:Basic  as reported
    
    
    .17
    
    
    
    .15Basic  pro forma
    
    
    .17
    
    
    
    .14Diluted  as reported
    
    
    .17
    
    
    
    .14Diluted  pro forma
    
    
    .17
    
    
    
    .14
  Because the SFAS No. 123 method of accounting 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 three months ended December 31, 2004 or 2003.(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 three month periods ended December 31, 2004 and
2003. 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 three month periods ended December 31, 2004 and 2003 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
December 31, 2004 and 2003: -8-




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##### 



EarningsIncome
    
    
    Shares
    
    
    Per ShareFor the Three Months Ended December 31, 2004:Basic earnings
    
    $
    122,175
    
    
    
    709,406
    
    
    $
    0.17Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    23,142Dilutive earnings
    
    $
    122,175
    
    
    
    732,548
    
    
    $
    0.17For the Three Months Ended December 31, 2003:Basic earnings
    
    $
    103,569
    
    
    
    709,234
    
    
    $
    0.15Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    30,287Dilutive earnings
    
    $
    103,569
    
    
    
    739,521
    
    
    $
    0.14
  (5)
    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: Three Months Ended December 31, 2004
    
    
    Three Months Ended December 31, 2003Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalInterest and dividend
income
    
    $
    1,879,496
    
    
    $
    7,342
    
    
    $
    1,886,838
    
    
    $
    1,780,963
    
    
    $
    5,100
    
    
    $
    1,786,063Interest expenses
    
    
    769,713
    
    
    
    
    
    
    
    769,713
    
    
    
    699,651
    
    
    
    
    
    
    
    699,651Net interest income
    
    
    1,109,783
    
    
    
    7,342
    
    
    
    1,117,125
    
    
    
    1,081,312
    
    
    
    5,100
    
    
    
    1,086,412Provision for loan losses
    
    
    25,000
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    Net interest income after
provision for loan losses
    
    
    1,084,783
    
    
    
    7,342
    
    
    
    1,092,125
    
    
    
    1,081,312
    
    
    
    5,100
    
    
    
    1,086,412Other income
    
    
    404,760
    
    
    
    368,111
    
    
    
    772,871
    
    
    
    355,551
    
    
    
    332,013
    
    
    
    687,564Other expenses
    
    
    1,298,876
    
    
    
    369,063
    
    
    
    1,667,939
    
    
    
    1,287,695
    
    
    
    319,134
    
    
    
    1,606,829Income before income taxes
    
    
    190,667
    
    
    
    6,390
    
    
    
    197,057
    
    
    
    149,168
    
    
    
    17,979
    
    
    
    167,147Income taxes
    
    
    72,453
    
    
    
    2,429
    
    
    
    74,882
    
    
    
    56,686
    
    
    
    6,892
    
    
    
    63,578Net income
    
    $
    118,214
    
    
    $
    3,961
    
    
    $
    122,175
    
    
    $
    92,482
    
    
    $
    11,087
    
    
    $
    103,569
 -9-




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##### 



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.(6)
    Subsequent EventOn January 26, 2005, the Company declared a regular $0.15 per share cash dividend on the
Companys outstanding stock, payable on February 21, 2005, to stockholders of record as of
February 6, 2005. -10-




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##### 



Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations REVIEW OF RESULTS OF OPERATIONS Overview Net income for the first quarter of fiscal year 2005, which ended December 31, 2004, increased
$18,606, or 17.9%, to $122,175 when compared to the same period in fiscal year 2004. Net interest
income increased $30,713, or 2.8%, for the first quarter of fiscal year 2005, compared to the same
period in fiscal year 2004. Non-interest income increased $85,307, or 12.4%, for the first quarter
of fiscal year 2005 compared to the same period in fiscal year 2004, while non-interest expense
increased $61,110, or 3.8%. Primary earnings per common share, based on weighted average shares outstanding was $.17 and $.15
for the three months ended December 31, 2004 and 2003, respectively. Those items significantly affecting earnings are discussed in detail below. Net Interest Income Net interest income is the difference between the interest and fees earned on loans, securities and
other interest-bearing assets (interest income) and the interest paid on deposits and borrowed
funds (interest expense). Net interest income is directly related to the interest rate spread,
which is the difference between the interest rates on interest-earning assets and interest-bearing
liabilities. As of December 31, 2004, the interest rate spread decreased 6 basis points as rates earned on
interest-earning assets decreased 2 basis points to 5.89%, while the cost of funds increased 4
basis points to 2.43% compared to the same three-month period ending December 31, 2003. The change
in the interest rate spread occurring during the three-month interval is a result of increases in
interest rates. The average balance of interest-earning assets increased approximately $7.2
million, or 5.9%, from approximately $121.0 million to approximately $128.1 million while the
average balance of interest-bearing liabilities increased approximately $9.8 million, or 8.4%, from
approximately $116.9 million to approximately $126.7 million. The combined effect of the increases
in average balances and the changes in rates discussed above resulted in an increase in net
interest income of approximately $31,000, or 2.8%, for the three months ended December 31, 2004. Provision for Loan Losses Provision for loan losses reflects an increase in the amount of $25,000 for the three-month period
ending December 31, 2004, when compared to the same period in fiscal year 2004. Other Income For the three-month period ended December 31, 2004, total non-interest income increased by
approximately $85,000 to $772,871, compared to the same period in fiscal year 2004. This increase
was primarily the result of an increase of approximately $50,000 in gains on sales of loans and an
increase in employee benefit consulting fees of approximately $36,000. Service charges and other
fees, gain (loss) from the sale of assets and other income remained constant between the two
periods at approximately $127,000, $1,000 and $93,000, respectively. Other Expenses For the three month period ended December 31, 2004, total non-interest expense increased
approximately $61,000 to $1,667,939 from $1,606,829 for the three-month period ended December 31,
2003. This -11-




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##### 



increase resulted primarily from an increase in net occupancy, furniture and fixtures, data
processing, legal and other expenses of approximately $19,000, $12,000, $28,000, $19,000 and
$16,000, respectively. These increases in expenses were partially offset by decreases in expenses
for compensation and benefits and office supplies of approximately $30,000 and $5,000,
respectively. Income Taxes The Companys effective tax rate for the three-month periods ended December 31, 2004 and 2003 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 increased approximately $11,000, or 17.8%, to $74,882 for the three months ended
December 31, 2004, as compared to $63,578 for the three months ended December 31, 2003, 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 periods indicated. At or for the three monthsended December 31,2004
    
    
    2003Return on assets
    
    
    0.34
    %
    
    
    0.31
    %Return on equity
    
    
    4.72
    %
    
    
    3.58
    %Equity to asset ratio
    
    
    7.20
    %
    
    
    8.66
    %Interest rate spread
    
    
    3.46
    %
    
    
    3.52
    %Net interest margin
    
    
    3.49
    %
    
    
    3.59
    %Total risk-based capital
    
    
    13.19
    %
    
    
    16.15
    %Non-performing loans to loans
    
    
    1.19
    %
    
    
    2.94
    %Allowance for loan losses to loans
    
    
    0.95
    %
    
    
    1.34
    %Allowance for loan losses to average non-performing loans
    
    
    80.29
    %
    
    
    45.71
    %Ratio of net charge-offs to average loans outstanding
    
    
    0.00
    %
    
    
    0.00
    %Book value per common share outstanding
    
    $
    14.60
    
    
    $
    16.45
 Significant factors affecting SouthFirsts financial condition during the three months ended
December 31, 2004 are detailed below: Assets Total assets increased approximately $2,303,000, or 1.6%, from $141,533,157 at September 30, 2004
to $143,836,215 at December 31, 2004. Cash and amounts due from banks increased approximately
$486,000, or 9.7%, as a result of new deposit growth during the period. Net loans increased
approximately $2,116,000, or 2.2%. These increases occurred primarily in business and various
types of residential mortgage loans. Other increases in assets occurring during the period were
increases in loans held for sale, Federal Home Loan Bank stock and repossessed assets of
approximately $363,000, or -12-




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##### 



33.3%, $80,000, or 7.1%, and $68,000, or 13.2%, respectively. Decreases in assets consisted
primarily in investment securities available-for-sale and other assets of approximately $481,000,
or 3.4%, and $391,000, or 11.9%, respectively. Liabilities Total liabilities increased approximately $2,298,000, or 1.8%, from $131,177,533 at September 30,
2004 to $133,475,408 at December 31, 2004. Deposits increased approximately $6,254,000, or 6.4%,
during the period, which represents an increase in certificates of deposit of approximately
$5,900,000 and an increase in checking and other savings accounts of approximately $354,000. The
additional funds from deposit growth was used primarily to repay borrowed funds and to meet loan
demand. Borrowed funds decreased approximately $3,452,000, or 10.9%, which represents a decrease
of approximately $3,552,000 in short-term reverse repurchase agreements with Morgan Keegan &
Company. There was an increase in the balance of an existing line of credit with First Commercial
Bank of $100,000 which occurred during the period. 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 December 31, 2004, the allowance for loan losses was $939,636, compared to $911,964 at September
30, 2004, which represents an increase of approximately $28,000. Non-performing loans at December
31, 2004 were approximately $1,170,000, as compared to approximately $1,194,000 at September 30,
2004. At December 31, 2004 and September 30, 2004, the allowance for loan losses represented 0.95%
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 liquidity to assure its safe and sound operation. The requirement
to maintain a specific minimum amount of liquid assets, established by previous regulation, has
been eliminated. Presently, there is no specific standard or guideline regarding the application
of the current regulatory requirement. Under the previous regulation, First Federal was required to maintain an average daily balance of
liquid assets, in each calendar quarter, of not less than 4% of (i) the amount of its liquidity
base at the end of the preceding calendar quarter, or (ii) the average daily balance of its
liquidity base during the preceding quarter. For purposes of this computation, liquid assets
included specified short-term assets (e.g., cash, certain time deposits, certain bankers
acceptances and short-term U. S. Government, state or federal agency obligations) and long-term
assets (e.g., U.S. Government obligations of more than one and less than five years and state
agency obligations maturing in two years or less). As of December 31, 2004, First Federals average daily balance of liquid assets was approximately
14.4% -13-




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##### 



of its September 30, 2004 liquidity base, exceeding the 4% requirement set by the previous
regulation. These liquid assets included approximately $5,326,000 in cash and cash equivalents and
approximately $9,726,000 in other qualifying assets. In addition, as of December 31, 2004, the
fair market value of the companys investment securities portfolio available-for-sale was
approximately $13,699,000. 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
December 31, 2004, the amount of deposits was $104,046,840, which represents an increase of
approximately $6,254,000 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 December 31, 2004, 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
December 31, 2004 for approximately $1,003,000. At December 31, 2004, the Company had outstanding
balances with the FHLBA of approximately $20,670,000. First Federal also has short-term borrowings through reverse repurchase agreements with Morgan
Keegan & Company. As of December 31, 2004, the balance outstanding on these was approximately
$6,464,000. Management believes that the Companys liquidity and existing funding sources are adequate to
ensure sufficient cash flow to satisfy demand for credit and any deposit withdrawals, to fund
operations and, otherwise, to meet other Company obligations and commitments on a timely and
cost-effective basis. Capital Adequacy and Resources Management is committed to maintaining First Federals capital at a level that would be sufficient
to protect depositors, provide for reasonable growth, and comply fully with all regulatory
requirements. Managements strategy to meet this commitment is to retain sufficient earnings while
providing a reasonable return on equity. The Office of Thrift Supervision has issued guidelines identifying minimum regulatory tangible
capital equal to 1.50% 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. As of December 31, 2004, First Federal has satisfied all regulatory capital requirements. First
Federals compliance with the current standards is as follows: Percent ofAmount
    
    
    Asset BaseTangible capital
    
    $
    11,571,000
    
    
    
    8.04
    %Core capital
    
    
    11,571,000
    
    
    
    8.04
    %Tier-based capital
    
    
    12,139,000
    
    
    
    13.19
    %
 -14-




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##### 



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




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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
    
    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 February 14, 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 February 14, 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 February 14, 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. -16-




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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: February 14, 2005
    
    By:
    
    /s/ Joe K. McArthurJoe K. McArthurChief Executive Officer(principal executive officer)Date: February 14, 2005
    
    By:
    
    /s/ Janice BrowningJanice BrowningController, Treasurer(principal accounting officer)
 -17-




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##### 



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 February 14, 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 February 14, 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 February 14, 2005.
 -18-