##### 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
|                            |  | Number         
|December 31, 2003           |  | 1-13640        

SOUTHFIRST BANCSHARES, INC.




(Exact name of registrant as specified in its charter)


|                                                                 |  |                    
|---------------------------------------------------------------- |  | -------------------
|Delaware                                                         |  | 63-1121255         
|                                                                 |  |                    
|(State or other jurisdiction of                                  |  | (I.R.S. Employer   
|incorporation or organization)                                   |  | Identification No.)
|                                                                 |  |                    
|126 North Norton Avenue, Sylacauga, Alabama                      |  | 35150              
|                                                                 |  |                    
|(Address of principal executive offices)                         |  | (Zip Code)         
|                                                                 |  |                    
|Registrants telephone number, including area code:
256-245-4365
|                                                                 |  |                    
|Not applicable                                                   |  |                    
|                                                                 |  |                    

(Former name, former address and former fiscal year, if changed since last
report)


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.

|        |  |        
|------- |  | -------
|[X] Yes |  | [  ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Exchange Act).

|         |  |       
|-------- |  | ------
|[  ] Yes |  | [X] 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 |  | 709,083 shares                 
|                                       |  | Outstanding at February 2, 2003
|Class                                  |  |                                

Transitional Small Business Disclosure
Format [  ] Yes [X] No





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TABLE OF CONTENTS



|                                               |                                                                                               |                                                            |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION                 
|                                               | Item 1: Financial Statements                                                                 
|                                               |                                                                                               | Consolidated Statements of Financial Condition            
|                                               |                                                                                               | Consolidated Statements of Operations                     
|                                               |                                                                                               | Consolidated Statements of Changes in Stockholders Equity
|                                               |                                                                                               | Consolidated Statements of Cash Flows                     
|                                               |                                                                                               | Notes to Consolidated Financial Statements                
|                                               | Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                               | Item 3: Controls and Procedures                                                              
|PART II. OTHER INFORMATION                    
|                                               | Item 1: Legal Proceedings                                                                    
|                                               | Item 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                    
|Exhibit Index                                 
|EX-31.1 SECTION 302 CERTIFICATION OF CEO      
|EX-31.2 SECTION 302 CERTIFICATION OF CFO      
|EX-32.1 SECTION 906 CERTIFICATION OF CEO & CFO



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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.

TABLE OF CONTENTS

|                                                                                              |                                                                                                                     |  |       |     | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- |  | ----- | --- | 
|PART I - FINANCIAL INFORMATION                                                                |                                                                                                                     |  |       |    
|Item 1: Financial Statements (Unaudited)                                                      |                                                                                                                     |  | 1     |    
|                                                                                              | Consolidated Statements of Financial Condition at December 31, 2003 (Unaudited)
and September 30, 2002              |  |       | 1   | 
|                                                                                              | Consolidated Statements of Operations (Unaudited) for the Three Months
Ended December 31, 2003 and 2002             |  |       | 2   | 
|                                                                                              | Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the
Three Months Ended December 31, 2003 |  |       | 3   | 
|                                                                                              | Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended
December 31, 2003 and 2002             |  |       | 4-5 | 
|                                                                                              | Notes to Consolidated Financial Statements (Unaudited) - December 31, 2003                                          |  |       | 6-8 | 
|Item 2: Managements Discussion and Analysis of Financial Condition and Results
of Operations |                                                                                                                     |  | 9-13  |    
|Item 3: Controls and Procedures                                                               |                                                                                                                     |  | 13    |    
|PART II - OTHER INFORMATION                                                                   |                                                                                                                     |  | 14    |    
|Item 1: Legal Proceedings                                                                     |                                                                                                                     |  | 14    |    
|Item 6: Exhibits and Reports on Form 8-K                                                      |                                                                                                                     |  | 14    |    
|SIGNATURES                                                                                    |                                                                                                                     |  | 15    |    
|CERTIFICATIONS                                                                                |                                                                                                                     |  | 16-19 |    





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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




PART I: FINANCIAL INFORMATION




Item 1: Financial Statements




Consolidated Statements of Financial Condition
December 31, 2003 (Unaudited) and September 30, 2003

|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |               |            |             |             | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------ | ------------------------------------ | ---------- | ------------ | ----------- | ------------- | ---------- | ----------- | ----------- | 
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            | December 30, |             | September 30,
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            | 2003         |             | 2003         
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            | (Unaudited)  |             |               |            |            
|                                                            |                                                                                                                                                                                                                  |                      |                                            | Assets                               |            |              |             |               |            |             |             | 
|Cash and cash equivalents                                   |                                                                                                                                                                                                                  | $                    | 3,794,964                                  |                                      |            | $            | 6,049,325   |              
|Interest-bearing deposits in other financial institutions   |                                                                                                                                                                                                                  |                      | 546,519                                    |                                      |            |              | 533,003     |              
|Investment securities available-for-sale, at fair value     |                                                                                                                                                                                                                  |                      | 31,525,658                                 |                                      |            |              | 32,599,988  |              
|Loans receivable                                            |                                                                                                                                                                                                                  |                      | 88,813,323                                 |                                      |            |              | 85,573,736  |              
|Less allowance for loan losses                              |                                                                                                                                                                                                                  |                      | (1,194,196                                 | )                                    |            |              | (1,191,033  | )            
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Net loans                                                                                                                                                                                                        |                      |                                            | 87,619,127                           |            |              |             | 84,382,703    |           
|Loans held for sale at cost (which approximates fair value) |                                                                                                                                                                                                                  |                      | 749,240                                    |                                      |            |              | 1,107,805   |              
|Foreclosed assets, net                                      |                                                                                                                                                                                                                  |                      | 50,156                                     |                                      |            |              | 77,680      |              
|Premises and equipment, net                                 |                                                                                                                                                                                                                  |                      | 4,445,138                                  |                                      |            |              | 4,298,889   |              
|Federal Home Loan Bank stock, at cost                       |                                                                                                                                                                                                                  |                      | 1,117,000                                  |                                      |            |              | 1,117,000   |              
|Goodwill                                                    |                                                                                                                                                                                                                  |                      | 543,706                                    |                                      |            |              | 543,706     |              
|Accrued interest receivable                                 |                                                                                                                                                                                                                  |                      | 771,827                                    |                                      |            |              | 679,402     |              
|Other assets                                                |                                                                                                                                                                                                                  |                      | 2,014,449                                  |                                      |            |              | 2,264,952   |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Total Assets                                                                                                                                                                                                     |                      | $                                          | 133,177,784                          |            |              | $           | 133,654,453   |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            | Liabilities And Stockholders Equity |            |              |             |               |            |             |             | 
|Liabilities:                                                |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Deposits:                                                                                                                                                                                                        |                      |                                            |                                      |            |              |             |               |           
|                                                            |                                                                                                                                                                                                                  | Non-interest bearing |                                            | $                                    | 3,195,937  |              |             | $             | 3,657,079  |            
|                                                            |                                                                                                                                                                                                                  | Interest bearing     |                                            |                                      | 87,413,800 |              |             |               | 89,900,902 |            
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            | Total deposits                       |            |              | 90,609,737  |               |            |             | 93,557,981  | 
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Advances by borrowers for property taxes and insurance                                                                                                                                                           |                      |                                            | 119,730                              |            |              |             | 213,042       |           
|                                                            | Accrued interest payable                                                                                                                                                                                         |                      |                                            | 542,305                              |            |              |             | 576,676       |           
|                                                            | Borrowed funds                                                                                                                                                                                                   |                      |                                            | 29,708,261                           |            |              |             | 27,000,861    |           
|                                                            | Accrued expenses and other liabilities                                                                                                                                                                           |                      |                                            | 534,235                              |            |              |             | 628,522       |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            | Total liabilities                    |            |              | 121,514,268 |               |            |             | 121,977,082 | 
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|Stockholders Equity:                                       |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Common stock, $.01 par value, 2,000,000 shares authorized,
990,284 shares issued and 709,122 shares outstanding at December 31, 2003;
989,868 shares issued and 713,944 shares outstanding at September 30, 2003 |                      |                                            | 10,000                               |            |              |             | 9,996         |           
|                                                            | Additional paid-in capital                                                                                                                                                                                       |                      |                                            | 9,843,959                            |            |              |             | 9,837,058     |           
|                                                            | Treasury stock, at cost (281,162 shares at December 31, 2003;
275,924 shares at September 30, 2003)                                                                                                              |                      |                                            | (3,892,879                           | )          |              |             | (3,809,839    | )         
|                                                            | Deferred compensation on common stock employee benefit plans                                                                                                                                                     |                      |                                            | (177,241                             | )          |              |             | (183,179      | )         
|                                                            | Shares held in trust at cost (9,775 shares at December 31, 2003
and September 30, 2003)                                                                                                                          |                      |                                            | (107,161                             | )          |              |             | (107,161      | )         
|                                                            | Retained earnings                                                                                                                                                                                                |                      |                                            | 6,145,582                            |            |              |             | 6,148,255     |           
|                                                            | Accumulated comprehensive other income (loss)                                                                                                                                                                    |                      |                                            | (158,744                             | )          |              |             | (217,759      | )         
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      | Total stockholders equity                 |                                      |            | 11,663,516   |             |               |            | 11,677,371  |            
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      | Total Liabilities and Stockholders Equity |                                      | $          | 133,177,784  |             |               | $          | 133,654,453 |            
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              

See accompanying notes to consolidated financial statements.

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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Operations (Unaudited)
for the Three Months Ended December 31, 2003 and 2002

|                                     |                                                                 |                                                     |        |           |           |      |        |           |           | 
|------------------------------------ | --------------------------------------------------------------- | --------------------------------------------------- | ------ | --------- | --------- | ---- | ------ | --------- | --------- | 
|                                     |                                                                 |                                                     |        | 2003      |           | 2002
|                                     |                                                                 |                                                     |        |           |           |     
|Interest and dividend income:        |                                                                 |                                                     |        |           |           |      |        |          
|                                     | Interest and fees on loans                                      |                                                     | $      | 1,339,578 |           |      | $      | 1,554,040 |          
|                                     | Interest income on deposits in other financial institutions     |                                                     |        | 7,455     |           |      |        | 30,128    |          
|                                     | Interest and dividend income on investment securities           |                                                     |        | 439,030   |           |      |        | 337,649   |          
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|                                     |                                                                 | Total interest and dividend income                  |        |           | 1,786,063 |      |        |           | 1,921,817 | 
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|Interest expense:                    |                                                                 |                                                     |        |           |           |      |        |          
|                                     | Interest on deposits                                            |                                                     |        | 430,658   |           |      |        | 744,685   |          
|                                     | Interest on borrowed funds                                      |                                                     |        | 268,993   |           |      |        | 256,625   |          
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|                                     |                                                                 | Total interest expense                              |        |           | 699,651   |      |        |           | 1,001,310 | 
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|                                     |                                                                 | Net interest income                                 |        |           | 1,086,412 |      |        |           | 920,507   | 
|Provision for loan losses            |                                                                 |                                                     |       |           |           |      | 75,000 |          
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|                                     |                                                                 | Net interest income after provision for loan losses |        |           | 1,086,412 |      |        |           | 845,507   | 
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|Other income:                        |                                                                 |                                                     |        |           |           |      |        |          
|                                     | Service charges and other fees                                  |                                                     |        | 130,584   |           |      |        | 134,440   |          
|                                     | Employee benefit trust and consulting fees                      |                                                     |        | 329,013   |           |      |        | 285,591   |          
|                                     | Gain on sale of loans                                           |                                                     |        | 136,869   |           |      |        | 295,536   |          
|                                     | Gain (loss) on sale of foreclosed assets                        |                                                     |        | (1,535    | )         |      |        | (1,895    | )        
|                                     | Gain (loss) on sale of equipment                                |                                                     |        | 927       |           |      |        | 11,165    |          
|                                     | Gain (loss) on sale of investment securities available-for-sale |                                                     |        |          |           |      |        | 131,644   |          
|                                     | Other                                                           |                                                     |        | 91,706    |           |      |        | 56,214    |          
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|                                     |                                                                 | Total other income                                  |        |           | 687,564   |      |        |           | 912,695   | 
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|Other expenses:                      |                                                                 |                                                     |        |           |           |      |        |          
|                                     | Compensation and benefits                                       |                                                     |        | 1,015,464 |           |      |        | 1,032,977 |          
|                                     | Net occupancy expense                                           |                                                     |        | 89,794    |           |      |        | 92,236    |          
|                                     | Furniture and fixtures                                          |                                                     |        | 111,294   |           |      |        | 119,232   |          
|                                     | Data processing                                                 |                                                     |        | 57,376    |           |      |        | 75,846    |          
|                                     | Office supplies and expense                                     |                                                     |        | 101,746   |           |      |        | 104,033   |          
|                                     | Deposit insurance premiums                                      |                                                     |        | 24,394    |           |      |        | 27,555    |          
|                                     | Legal                                                           |                                                     |        | 33,750    |           |      |        | 30,000    |          
|                                     | Other                                                           |                                                     |        | 173,011   |           |      |        | 134,422   |          
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|                                     |                                                                 | Total other expenses                                |        |           | 1,606,829 |      |        |           | 1,616,301 | 
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|                                     |                                                                 | Income before income taxes                          |        |           | 167,147   |      |        |           | 141,901   | 
|Income tax expense                   |                                                                 |                                                     | 63,578 |           |           |      | 54,407 |          
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|                                     |                                                                 | Net income                                          |        | $         | 103,569   |      |        | $         | 87,494    | 
|                                     |                                                                 |                                                     |        |           |           |      |        |          
|Earnings per share:                  |                                                                 |                                                     |        |           |           |      |        |          
|                                     | Basic                                                           |                                                     |        | 0.15      |           |      |        | 0.11      |          
|                                     | Diluted                                                         |                                                     |        | 0.14      |           |      |        | 0.11      |          
|Cash dividends declared              |                                                                 |                                                     | 0.15   |           |           |      | 0.15   |          
|Weighted average shares outstanding: |                                                                 |                                                     |        |           |           |      |        |          
|                                     | Basic                                                           |                                                     |        | 709,234   |           |      |        | 799,533   |          
|                                     | Diluted                                                         |                                                     |        | 739,521   |           |      |        | 807,215   |          

See accompanying notes to consolidated financial statements.

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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Changes in Stockholders Equity (Unaudited)
for the Three Months Ended December 31, 2003

|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |            |         | 
|------------------------------------------------------------------------------------------------------------------------------- | ---------- | - | ------ |  | ------- | - | ---------- |  | ------------- | - | ---------- | - | -------- | - | ------------- | - | ------------- | - | -------- | - | ----- | - | --------- | ------- | ----------- | - | -------- | - |  | - | ---------- | ------- | 
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   | Deferred      |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |           
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   | Compensation  |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |           
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   | on Common     |   |               |   |          |   |       |   |           |         | Accumulated |   |          |   | 
|                                                                                                                                |            |   |        |  |         |   | Additional |  |               |   |            |   | Stock    |   | Shares        |   |               |   |          |   | Other |   | Total    
|                                                                                                                                |            |   | Common |  | Paid-in |   | Treasury   |  | Employee      |   | Held in    |   | Retained |   | Comprehensive |   | Stockholders
|                                                                                                                                |            |   | Stock  |  | Capital |   | Stock      |  | Benefit Plans |   | Trust      |   | Earnings |   | Income (Loss) |   | Equity       
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |              
|Balance at September 30,
2003                                                                                                   |            | $ | 9,996  |  |         | $ | 9,837,058  |  |               | $ | (3,809,839 | ) |          | $ | (183,179      | ) |               | $ | (107,161 | ) |       | $ | 6,148,255 |         |             | $ | (217,759 | ) |  | $ | 11,677,371 |        
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |            |        
|Comprehensive income:                                                                                                           |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |            |        
|                                                                                                                                | Net income |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           | 103,569 |             |   |          |   |  |   |            | 103,569 | 
|Change in net unrealized
gain on available-for-sale
securities, net of reclassification adjustments and
income taxes of $36,173 |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   | 59,015   |   |  |   | 59,015     |        
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |            |        
|Total comprehensive income                                                                                                      |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   | 162,584    |        
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |            |        
|Vesting of deferred
compensation shares                                                                                         |            |   |        |  |         |   |            |  |               |   |            |   |          |   | 5,938         |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   | 5,938      |        
|Acquisition of treasury
stock                                                                                                   |            |   |        |  |         |   |            |  |               |   | (83,040    | ) |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   | (83,040    | )      
|Stock options exercised                                                                                                         |            |   | 4      |  |         |   | 6,901      |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   | 6,905      |        
|Cash dividends declared                                                                                                         |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   | (106,242  | )       |             |   |          |   |  |   | (106,242   | )      
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |            |        
|Balance at December 31,
2003                                                                                                    |            | $ | 10,000 |  |         | $ | 9,843,959  |  |               | $ | (3,892,879 | ) |          | $ | (177,241      | ) |               | $ | (107,161 | ) |       | $ | 6,145,582 |         |             | $ | (158,744 | ) |  | $ | 11,663,516 |        
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |       |   |           |         |             |   |          |   |  |   |            |        

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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended December 31, 2003 and 2002

|                      |                                                                                          |                                                                                  |                                                  |            |            |            |      |            |             |           |  
|--------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------ | ---------- | ---------- | ---------- | ---- | ---------- | ----------- | --------- | -
|                      |                                                                                          |                                                                                  |                                                  |            | 2003       |            | 2002
|                      |                                                                                          |                                                                                  |                                                  |            |            |            |     
|Operating activities: |                                                                                          |                                                                                  |                                                  |            |            |            |      |           
|                      | Net income                                                                               |                                                                                  | $                                                | 103,569    |            |            | $    | 87,494     |            
|                      | Adjustments to reconcile net income to net cash provided (used) by operating activities: |                                                                                  |                                                  |            |            |            |      |            |            
|                      |                                                                                          | Provision for loan losses                                                        |                                                  |            |           |            |      |            | 75,000      |          
|                      |                                                                                          | Depreciation and amortization                                                    |                                                  |            | 75,589     |            |      |            | 91,138      |          
|                      |                                                                                          | Gain on sale of securities                                                       |                                                  |            |           |            |      |            | (131,644    | )        
|                      |                                                                                          | Gain on sale of loans                                                            |                                                  |            | (136,869   | )          |      |            | (295,536    | )        
|                      |                                                                                          | Increase (decrease) in deferred loan origination fees                            |                                                  |            | 7,372      |            |      |            | (42,604     | )        
|                      |                                                                                          | Net amortization of premium/discount on investment
securities available-for-sale |                                                  |            | 2,684      |            |      |            | (9,125      | )        
|                      |                                                                                          | Loss on sale of foreclosed assets                                                |                                                  |            | 1,535      |            |      |            | 1,895       |          
|                      |                                                                                          | Gain on sale of premises and equipment                                           |                                                  |            | (927       | )          |      |            | (11,165     | )        
|                      |                                                                                          | Loans originated for sale                                                        |                                                  |            | (6,153,127 | )          |      |            | (14,047,780 | )        
|                      |                                                                                          | Proceeds from sale of loans                                                      |                                                  |            | 6,648,561  |            |      |            | 13,563,544  |          
|                      |                                                                                          | (Increase) decrease in accrued interest receivable                               |                                                  |            | (92,425    | )          |      |            | 126,298     |          
|                      |                                                                                          | (Increase) decrease in other assets                                              |                                                  |            | 250,503    |            |      |            | 263,146     |          
|                      |                                                                                          | Deferred compensation expense                                                    |                                                  |            | 5,938      |            |      |            | 23,939      |          
|                      |                                                                                          | Increase (decrease) in accrued interest payable                                  |                                                  |            | (34,371    | )          |      |            | (4,546      | )        
|                      |                                                                                          | Increase (decrease) in accrued expenses and other liabilities                    |                                                  |            | (130,466   | )          |      |            | (100,044    | )        
|                      |                                                                                          |                                                                                  |                                                  |            |            |            |      |           
|                      |                                                                                          |                                                                                  | Net cash provided (used) by operating activities |            |            | 547,566    |      |            |             | (409,990  | )
|                      |                                                                                          |                                                                                  |                                                  |            |            |            |      |           
|Investing activities: |                                                                                          |                                                                                  |                                                  |            |            |            |      |           
|                      | Net change in interest-bearing deposits in other financial institutions                  |                                                                                  |                                                  | (13,516    | )          |            |      | 8,179      |            
|                      | Proceeds from calls and maturities of investment securities available-for-sale           |                                                                                  |                                                  | 1,266,840  |            |            |      | 2,629,011  |            
|                      | Purchase of investment securities available-for-sale                                     |                                                                                  |                                                  | (100,000   | )          |            |      | (5,544,884 | )          
|                      | Proceeds from sale of investments available-for-sale                                     |                                                                                  |                                                  |           |            |            |      | 3,438,105  |            
|                      | Proceeds from sale of Federal Home Loan Bank stock                                       |                                                                                  |                                                  |           |            |            |      | 862,800    |            
|                      | Net (increase) decrease in loans                                                         |                                                                                  |                                                  | (3,243,796 | )          |            |      | 1,671,453  |            
|                      | Purchase of premises and equipment                                                       |                                                                                  |                                                  | (231,287   | )          |            |      | (20,522    | )          
|                      | Proceeds from sale of foreclosed assets                                                  |                                                                                  |                                                  | 37,282     |            |            |      | 2,249      |            
|                      | Proceeds from sale of other assets                                                       |                                                                                  |                                                  | 10,376     |            |            |      | 193,118    |            
|                      | Transfer from loans of repossessed assets                                                |                                                                                  |                                                  | (11,293    | )          |            |      | (437,791   | )          
|                      |                                                                                          |                                                                                  |                                                  |            |            |            |      |           
|                      |                                                                                          |                                                                                  | Net cash provided (used) by investing activities |            |            | (2,285,394 | )    |            |             | 2,801,718 |  
|                      |                                                                                          |                                                                                  |                                                  |            |            |            |      |           

(Continued)
See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended December 31, 2003 and 2002

|                                                   |                                                                    |   |                                       |             |      |          |            |            |   |            |  
|-------------------------------------------------- | ------------------------------------------------------------------ | - | ------------------------------------- | ----------- | ---- | -------- | ---------- | ---------- | - | ---------- | -
|                                                   |                                                                    |   |                                       |             | 2003 |          | 2002      
|                                                   |                                                                    |   |                                       |             |      |          |           
|Financing activities:                              |                                                                    |   |                                       |             |      |          |            |           
|                                                   | Increase (decrease) in deposits                                    |   | $                                     | (2,948,244  | )    |          | $          | 1,607,497  |  
|                                                   | Decrease in advances by borrowers for property taxes and insurance |   |                                       | (93,312     | )    |          |            | (105,915   | )
|                                                   | Proceeds from borrowed funds                                       |   |                                       | 18,416,689  |      |          |            | 125,000    |  
|                                                   | Repayment of borrowed funds                                        |   |                                       | (15,709,289 | )    |          |            | (6,018,750 | )
|                                                   | Cash dividends paid                                                |   |                                       | (106,242    | )    |          |            | (121,075   | )
|                                                   | Proceeds from exercise of stock options                            |   |                                       | 6,905       |      |          |            |           |  
|                                                   | Acquisition of Treasury shares                                     |   |                                       | (83,040     | )    |          |            | (37,560    | )
|                                                   |                                                                    |   |                                       |             |      |          |            |           
|                                                   |                                                                    |   | Net cash used in financing activities |             |      | (516,533 | )          |            |   | (4,550,803 | )
|                                                   |                                                                    |   |                                       |             |      |          |            |           
|Increase (decrease) in cash and cash equivalents   |                                                                    |   | (2,254,361                            | )           |      |          | (2,159,075 | )         
|Cash and cash equivalents at beginning of period   |                                                                    |   | 6,049,325                             |             |      |          | 8,122,898  |           
|                                                   |                                                                    |   |                                       |             |      |          |            |           
|Cash and cash equivalents at end of period         |                                                                    | $ | 3,794,964                             |             |      | $        | 5,963,823  |           
|                                                   |                                                                    |   |                                       |             |      |          |            |           
|Supplemental information on cash payments:         |                                                                    |   |                                       |             |      |          |            |           
|                                                   | Interest paid                                                      |   | $                                     | 734,022     |      |          | $          | 1,005,856  |  
|                                                   |                                                                    |   |                                       |             |      |          |            |           
|                                                   | Income taxes paid                                                  |   | $                                     | 37,600      |      |          | $          | 18,500     |  
|                                                   |                                                                    |   |                                       |             |      |          |            |           
|Supplemental information on non-cash transactions: |                                                                    |   |                                       |             |      |          |            |           
|                                                   | Real estate obtained through foreclosure                           |   | $                                     |            |      |          | $          | 432,834    |  
|                                                   |                                                                    |   |                                       |             |      |          |            |           

See accompanying notes to consolidated financial statements.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Notes to Consolidated Financial Statements (Unaudited)
December 31, 2003 and 2002



|(1) |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The accounting and reporting policies of SouthFirst Bancshares, Inc. 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, 2003, was derived from the financial records of SouthFirst
Bancshares, Inc. (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., 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-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 had been granted. The
term of the options range from seven to ten years and they vest equally over
periods from three to five years.                                                                                                                                                                                                                
|   
|    |  | Following is a summary of the status of the 1995 and 1998 plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                  |  |           |        |           |  |           |       |          |  |  |        |          |  |   |       | 
|--------------------------------- |  | --------- | ------ | --------- |  | --------- | ----- | -------- |  |  | ------ | -------- |  | - | ----- | 
|                                  |  | 1995 Plan |        | 1998 Plan
|                                  |  |           |        |          
|                                  |  |           |        |           |  | Weighted  |       |          |  |  |        | Weighted
|                                  |  |           |        |           |  | Average   |       |          |  |  |        | Average 
|                                  |  | Number    |        | Exercise  |  | Number    |       | Exercise
|                                  |  | of Shares |        | Price     |  | of Shares |       | Price   
|                                  |  |           |        |           |  |           |       |         
|Outstanding at September 30, 2003 |  |           | 73,700 |           |  | $         | 12.40 |          |  |  | 61,971 |          |  | $ | 13.36 | 
|Exercised                         |  |           |       |           |  |           |      |          |  |  | (416   | )        |  |   | 10.22 | 
|Forfeited                         |  |           |       |           |  |           |      |          |  |  | (1,256 | )        |  |   | 13.55 | 
|                                  |  |           |        |           |  |           |       |          |  |  |        |          |  |   |       | 
|Outstanding at December 31, 2003  |  |           | 73,700 |           |  | $         | 12.40 |          |  |  | 60,299 |          |  | $ | 13.38 | 
|                                  |  |           |        |           |  |           |       |          |  |  |        |          |  |   |       | 

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##### Table of Contents





| |  | Information pertaining to options outstanding at December 31, 2003 is as
follows:
| |  | ---------------------------------------------------------------------------------

|                                 |  |             |         |      |             |            |                     |             |                     |       |          |  |        |  |          |   |       |  |  |  | 
|-------------------------------- |  | ----------- | ------- | ---- | ----------- | ---------- | ------------------- | ----------- | ------------------- | ----- | -------- |  | ------ |  | -------- | - | ----- |  |  |  | 
|                                 |  |             |         |      |             |            | Options Outstanding |             | Options Exercisable
|                                 |  |             |         |      |             |            |                     |             |                    
|                                 |  |             |         |      |             |            | Weighted            |             |                     |       |          |  |        |  |          |   |       |  | 
|                                 |  |             |         |      |             |            | Average             |             | Weighted            |       |          |  |        |  | Weighted
|                                 |  |             |         |      |             |            | Remaining           |             | Average             |       |          |  |        |  | Average 
|                                 |  |             | Number  |      | Contractual |            | Exercise            |             | Number              |       | Exercise
|Exercise Price                   |  | Outstanding |         | Life |             | Price      |                     | Exercisable |                     | Price
|                                 |  |             |         |      |             |            |                     |             |                     |      
|$ 9.75                           |  |             | 20,905  |      |             | 3.84 years |                     |             |                     |       |          |  | 20,905 |  |          |   |       | 
|$ 9.92                           |  |             | 9,000   |      |             | 7.92 years |                     |             |                     |       |          |  | 3,600  |  |          |   |       | 
|$12.10                           |  |             | 43,760  |      |             | 8.79 years |                     |             |                     |       |          |  | 8,752  |  |          |   |       | 
|$14.00                           |  |             | 29,880  |      |             | 1.68 years |                     |             |                     |       |          |  | 29,880 |  |          |   |       | 
|$15.75                           |  |             | 30,454  |      |             | 4.07 years |                     |             |                     |       |          |  | 30,454 |  |          |   |       | 
|                                 |  |             |         |      |             |            |                     |             |                     |       |          |  |        |  |          |   |       |  |  | 
|Outstanding at
December 31, 2003 |  |             | 133,999 |      |             | 5.30 years |                     | $           | 12.84               |       |          |  | 93,591 |  |          | $ | 13.29 | 
|                                 |  |             |         |      |             |            |                     |             |                     |       |          |  |        |  |          |   |       |  |  | 



| |  | 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 Ended
|                                                                                                                                            |                       |   | December 31,      
|                                                                                                                                            |                       |   |                   
|                                                                                                                                            |                       |   | 2003               |     | 2002
|                                                                                                                                            |                       |   |                    |     |     
|Net income, as reported                                                                                                                     |                       | $ | 103,569            |     |      | $ | 87,494 |    
|Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects |                       |   | (801               | )   |      |   | (1,770 | )  
|                                                                                                                                            |                       |   |                    |     |      |   |        |    
|Pro forma net income                                                                                                                        |                       | $ | 102,768            |     |      | $ | 85,724 |    
|                                                                                                                                            |                       |   |                    |     |      |   |        |    
|Earnings per share:                                                                                                                         |                       |   |                    |     |      |   |        |    
|                                                                                                                                            | Basic - as reported   |   |                    | .15 |      |   |        | .11 | 
|                                                                                                                                            | Basic - pro forma     |   |                    | .14 |      |   |        | .11 | 
|                                                                                                                                            | Diluted - as reported |   |                    | .14 |      |   |        | .11 | 
|                                                                                                                                            | Diluted - pro forma   |   |                    | .14 |      |   |        | .11 | 



| |  | 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.                                                                                                                                                                                                                             
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The weighted average fair value of options granted during the three months
ended December 31, 2003 and 2002 was $0 and $12.10, respectively. The fair
value of each grant is estimated on the date of grant using the Black-Sholes
option pricing model with the following assumptions used for grants in 2002:
expected dividend yield of 4.96%; expected option life of 10 years;
expected volatility of 7.21%; and a risk-free interest rate of 4.03%.

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|(3) |  | Business Segment Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company organizes its business units into two reportable segments:
traditional banking activities and employee benefits consulting and trust
activities. The banking segment provides a full range of banking services
within its primary market areas of central Alabama. The employee benefits
trust company operates primarily in the state of Alabama. The Companys
reportable business segments are strategic business units that offer
different products and services. Each segment is managed separately,
because each unit is subject to different marketing and regulatory
environments.
|   
|    |  | The accounting policies used by each reportable segment are the same as
those discussed in Note 1 to the Consolidated Financial Statements included
under Item 13 of the Annual Report on Form 10-KSB. The following table
presents financial information for each reportable segment:                                                                                                                                                                                                                                                                                                                 

|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|--------------------------------------------------- |  | ------------------------------------ | --------- | ------------------------------------ |  | -------- | ------- | ---------- |  | ---------- | --------- | -------- |  | - | --------- | -------- |  | - | ------- |  |  | - | --------- | 
|                                                    |  | Three Months Ended December 31, 2003 |           | Three Months Ended December 31, 2002
|                                                    |  |                                      |           |                                      |  | Employee |         |            |  |            |           |          |  |   |           | Employee |  |   |         | 
|                                                    |  | Banking                              |           | Benefits                             |  |          |         |            |  | Banking    |           | Benefits |  |   |           |         
|                                                    |  | Activities                           |           | Activities                           |  | Total    |         | Activities |  | Activities |           | Total   
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |         
|Interest and dividend
income                        |  | $                                    | 1,780,963 |                                      |  | $        | 5,100   |            |  | $          | 1,786,063 |          |  | $ | 1,916,119 |          |  | $ | 5,698   |  |  | $ | 1,921,817 | 
|Interest expenses                                   |  |                                      | 699,651   |                                      |  |          |        |            |  |            | 699,651   |          |  |   | 1,001,310 |          |  |   |        |  |  |   | 1,001,310 | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net interest income                                 |  |                                      | 1,081,312 |                                      |  |          | 5,100   |            |  |            | 1,086,412 |          |  |   | 914,809   |          |  |   | 5,698   |  |  |   | 920,507   | 
|Provision for loan losses                           |  |                                      |          |                                      |  |          |        |            |  |            |          |          |  |   | 75,000    |          |  |   |        |  |  |   | 75,000    | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net interest income after
provision for loan losses |  |                                      | 1,081,312 |                                      |  |          | 5,100   |            |  |            | 1,086,412 |          |  |   | 839,809   |          |  |   | 5,698   |  |  |   | 845,507   | 
|Other income                                        |  |                                      | 355,551   |                                      |  |          | 332,013 |            |  |            | 687,564   |          |  |   | 624,104   |          |  |   | 288,591 |  |  |   | 912,695   | 
|Other expenses                                      |  |                                      | 1,287,695 |                                      |  |          | 319,134 |            |  |            | 1,606,829 |          |  |   | 1,341,078 |          |  |   | 275,223 |  |  |   | 1,616,301 | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Income before income taxes                          |  |                                      | 149,168   |                                      |  |          | 17,979  |            |  |            | 167,147   |          |  |   | 122,835   |          |  |   | 19,066  |  |  |   | 141,901   | 
|Income taxes                                        |  |                                      | 56,686    |                                      |  |          | 6,892   |            |  |            | 63,578    |          |  |   | 47,038    |          |  |   | 7,369   |  |  |   | 54,407    | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net income                                          |  | $                                    | 92,482    |                                      |  | $        | 11,087  |            |  | $          | 103,569   |          |  | $ | 75,797    |          |  | $ | 11,697  |  |  | $ | 87,494    | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 



|    |  | 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | Subsequent Event                                                                                                                                                                                                                
|   
|    |  | On January 28, 2004, the Company declared a regular $0.15 per share cash
dividend on the Companys outstanding stock, payable on February 17, 2004,
to stockholders of record as of February 10, 2004.                          

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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 2004, which ended December 31, 2003,
increased $16,075, or 18.4%, to $103,569, when compared to the same period in
fiscal 2003. Net interest income increased $165,905, or 18.0%, for the
three-month period ended December 31, 2003, compared to the same period in
fiscal 2003. Non-interest income decreased $225,131, or 24.7%, for the
three-month period ended December 31, 2003 compared to the same period in
fiscal 2003, while non-interest expense decreased $9,472, or .06%.

Primary earnings per common share, based on weighted average shares outstanding
was $.15 and $.11 for the three months ended December 31, 2003 and December 31,
2002, respectively.

Those items significantly affecting net earnings are discussed in detail below.

Net Interest Income

Net interest income is the difference between the interest and fees earned on
loans, securities, and other interest-bearing assets (interest income) and the
interest paid on deposits and borrowed funds (interest expense). Net interest
income is directly related to the interest rate spread, which is the difference
between the interest rates on interest-earning assets and interest-bearing
liabilities.

As of December 31, 2003, the interest rate spread increased 50 basis points as
rates earned on interest-earning assets decreased 43 basis points to 5.91%
while the cost of funds decreased 94 basis points to 2.39% compared to the same
three-month period ending December 31, 2002. The decrease in rates paid and
the decrease in rates received during this three-month interval reflects the
downward trend in the repricing of higher yielding certificates of deposit, as
well as a downward trend of the overall interest rate environment. While the
cost of funds has been steadily decreasing over the past several months,
interest rates on consumer loans, construction loans and mortgages have also
decreased. The average balance of interest-earning assets decreased $.3
million, or .25%, from $121.3 million to $121.0 million while the average
balance of interest-bearing liabilities decreased $3.4 million, or 2.8%, from
$120.3 million to $116.9 million. The combined effect of the decreases in
average balances and the changes in rates discussed above resulted in an
increase in net interest income of approximately $166,000, or 18.0%, and an
increase in the interest rate spread from 3.01% to 3.51% for the three months
ended December 31, 2003, respectively, compared to the same period in 2002.

Provision for Loan Losses

Provision for Loan Losses reflects a decrease in the amount of $75,000 for the
three- month period ending December 31, 2003, when compared to the same period
in fiscal 2003.

Other Income

For the three-month period ended December 31, 2003, total non-interest income
decreased by approximately $225,000 to $688,000, compared to the same period in
fiscal 2003. This decrease was primarily the result of a decrease of
approximately $159,000 in gains on sales of loans, and a decrease of
approximately $132,000 in gains on sale of investment securities available for
sale. The decreases in non-

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interest income are partially offset by an increase
in employee benefit consulting fees and an increase in other income of
approximately $43,000 and $35,000, respectively, when compared to the same
period in fiscal 2003.

Other Expense

For the three-month period ended December 31, 2003, total non-interest expense
decreased approximately $9,000 to $1,607,000 from $1,616,000 for the
three-month period ended December 31, 2003. This decrease resulted primarily
from a decrease in compensation and benefits of approximately $17,000, a
decrease in occupancy and depreciation expense of approximately $10,000 and a
decrease in data processing fees of approximately $18,000. These decreases in
expenses are partially offset by an increase in other expenses of approximately
$38,000.

Income Taxes

The Companys effective tax rate for the three-month periods ended December 31,
2003 and 2002 was 38.0% and 38.0%, respectively, compared to the federal
statutory rate of 34.0%. SouthFirsts effective tax rate was higher then the
statutory rate due primarily to state income taxes. Income tax expense
increased approximately $9,000 or 16.9% to $63,000 for the three months ended
December 31 2003, as compared to $54,000 for the three months ended December
31, 2002, 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      
|                                                          |  | months ended December 31,
|                                                          |  |                          
|                                                          |  | 2003                      |       | 2002
|                                                          |  |                           |       |     
|Return on assets                                          |  |                           | 0.31  | %    |  |   | 0.25   | %
|Return on equity                                          |  |                           | 3.58  | %    |  |   | 2.54   | %
|Equity to asset ratio                                     |  |                           | 8.66  | %    |  |   | 9.99   | %
|Interest rate spread                                      |  |                           | 3.51  | %    |  |   | 3.01   | %
|Net interest margin                                       |  |                           | 3.59  | %    |  |   | 3.04   | %
|Total risk-based capital                                  |  |                           | 16.15 | %    |  |   | 16.44  | %
|Non-performing loans to loans                             |  |                           | 2.94  | %    |  |   | 0.75   | %
|Allowance for loan losses to loans                        |  |                           | 1.34  | %    |  |   | 0.98   | %
|Allowance for loan losses to average non-performing loans |  |                           | 45.71 | %    |  |   | 130.42 | %
|Ratio of net charge-offs to average loans outstanding     |  |                           | 0.00  | %    |  |   | 0.01   | %
|Book value per common share outstanding                   |  | $                         | 16.45 |      |  | $ | 17.23  |  

Significant factors affecting the SouthFirsts financial condition during the
three months ended December 31, 2003 are detailed below:

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Assets

Total assets decreased approximately $476,000, or .4%, from $133,654,000 at
September 30, 2003 to $133,178,000 at December 31, 2003. Cash and amounts due
from banks decreased approximately $2,254,000, or 37.3%, which was used
primarily for the purpose of funding new loans during the first quarter of
fiscal 2004. Net loans increased approximately $3,236,000, or 3.8%. These
increase occurred primarily in business and residential construction loans.
Other significant changes in assets occurring during the period was decreases
in investment securities available for sale, loans held for sale and other
assets for approximately $1,074,000, $359,000 and $251,000, respectively.

Liabilities

Total liabilities decreased approximately $463,000, or .4%, from $121,977,000
at September 30, 2003 to $121,514,000 at December 31, 2003. Deposits decreased
approximately $2,948,000, or 3.2%, during the period, which represents a
decrease in certificates of deposit of approximately $2,700,000 and a decrease
in checking and other savings accounts of approximately $250,000. Borrowed
funds increased approximately $2,708,000, which represents an increase of
approximately $2,473,000 in short-term reverse repurchase agreements with
Morgan Keegan and an increase in the balance of an existing line of credit with
First Commercial Bank of $235,000. The increase in borrowed funds was used
primarily for the purpose of meeting deposit demand.

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, 2003, the allowance for loan losses was $1,194,196, compared to
$1,191,033 at September 30, 2003, which represents an increase of approximately
$3,000. Non-performing loans at December 31, 2003 were approximately
$2,612,000 as compared to approximately $2,299,000 at September 30, 2003. At
December 31, 2003 and September 30, 2003, the allowance for loan losses
represented 1.34% and 1.39% 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,

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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, 2003, First Federals average daily balance of liquid assets
was approximately 37% of its September 30, 2003 liquidity base, far exceeding
the 4% requirement set by the previous regulation. These liquid assets
included approximately $6,324,000 in cash and cash equivalents, and
approximately $28,166,000 in other qualifying assets. In addition, as of
December 31, 2003, the fair market value of the companys investment securities
portfolio, which is held for sale, was $31,525,000. 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, 2003, the amount of deposits was
$90,610,000, which represents a decrease of 2,948,000 from the amount of
deposits at September 30, 2003.

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, 2003, 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 on June 1, 2004, and of which there is an outstanding balance at
December 31, 2003 for approximately $2,153,000. At December 31, 2003, the
Company had outstanding balances with the FHLBA of $22,340,000.

First Federal also has short-term borrowings through reverse repurchase
agreements with Morgan Keegan & Co. As of December 31, 2003, the balance
outstanding on these was approximately $5,215,000.

Management believes that the Companys significant liquidity and existing
funding sources are more than adequate to ensure sufficient cash flow to
satisfy demand for credit and any deposit withdrawals, to fund operations, and,
otherwise, to meet other Company obligations and commitments on a timely and
cost-effective basis.

Capital Adequacy and Resources

Management is committed to maintaining 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, 2003, First Federal has satisfied all regulatory capital
requirements. First Federals compliance with the current standards is as
follows:

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|                   |  |        |            |               |  |         |       |  
|------------------ |  | ------ | ---------- | ------------- |  | ------- | ----- | -
|                   |  |        |            |               |  | Percent
|                   |  | Amount |            | of Asset Base
|                   |  |        |            |              
|Tangible capital   |  | $      | 13,450,000 |               |  |         | 10.13 | %
|Core capital       |  |        | 13,450,000 |               |  |         | 10.13 | %
|Tier-based capital |  |        | 13,748,000 |               |  |         | 16.15 | %

Cautionary Statement Concerning Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-QSB contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements generally can be identified by
the use of forward-looking terminology, such as may, will, expect,
estimate, anticipate,
believe, target, plan, project, or continue or the negatives thereof
or other variations thereon or similar terminology, and are made on the basis
of managements plans and current analyses of the Company, its business and the
industry as a whole. These forward-looking statements are subject to risks and
uncertainties, including, but not limited to, economic conditions, competition,
interest rate sensitivity and exposure to regulatory and legislative changes.
The above factors, in some cases, have affected, and in the future could
affect, the Companys financial performance and could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements. The Company does not undertake to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.




Item 3: Controls and Procedures

The Companys management, with the participation of the Companys Chief
Executive Officer and Controller (principal financial officer) evaluated the
effectiveness of the design and operation of the Companys disclosure controls
and procedures (as such term is defined in Rule 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end
of the period covered by this report). Based on such evaluation, the Companys
Chief Executive Officer and Controller have concluded that, as of the end of
such period, the Companys disclosure controls and procedures are effective.

There have not been any significant changes in the Companys internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




PART II. OTHER INFORMATION




Item 1: Legal Proceedings

In the normal course of business, SouthFirst and 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 |  | Description                                                                                                                                                                                                  
|               |  |                                                                                                                                                                                                              
|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 February 13, 2004.                      
|               |  |                                                                                                                                                                                                              
|31.2           |  | Certificate 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 13, 2004.                      
|               |  |                                                                                                                                                                                                              
|32.1           |  | Certificate of the Chief Executive Officer and 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 13, 2004.



| |  | The certificate listed as Exhibit 32.1 is being furnished pursuant to interim
guidance issued by the Securities and Exchange Commission in Release No.
33-8212 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, nor shall such certificates be
deemed incorporated by reference in any filing under the Securities Act of
1933 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 9, 2004, SouthFirst filed Form 8-K announcing the acquisition of
the assets of Walton Mortgage pursuant to an asset purchase agreement.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------

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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 13, 2004 |  | By:                         |  | /s/ Joe K. McArthur           
|                        |  |                             |  |                               
|                        |  |                             |  | Joe K. McArthur               
|                        |  |                             |  | Chief Executive Officer       
|                        |  |                             |  | (principal executive officer) 
|                        |  |                             |  |                               
|Date: February 13, 2004 |  | By:                         |  | /s/ Janice Browning           
|                        |  |                             |  |                               
|                        |  |                             |  | Janice Browning               
|                        |  |                             |  | Controller, Treasurer         
|                        |  |                             |  | (principal accounting officer)

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Exhibit Index

|            |  |                                                                                                                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                              
|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 February 13, 2004.                      
|            |  |                                                                                                                                                                                                              
|31.2        |  | Certificate 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 13, 2004.                      
|            |  |                                                                                                                                                                                                              
|32.1        |  | Certificate of the Chief Executive Officer and 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 13, 2004.

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