##### 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 NumberJune 30, 2005
    
    1-13640
 SOUTHFIRST BANCSHARES, INC.
 ( Exact name of registrant as specified in its charter)
 Delaware
    
    
    63-1121255(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)126 North Norton Avenue, Sylacauga, Alabama
    
    
    35150(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code:
    
    
    256-245-4365Not applicable(Former name, former address and former fiscal year, if changed since last report)
  þ o
  o þ
  Common Stock, par value $.01 per share
    
    708,996 sharesClass
    
    Outstanding at July 29, 2005
 o þ




---



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




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##### Table of Contents



June 30,
    
    September 30,2005
    
    2004(Unaudited)AssetsCash and cash equivalents
    
    $
    5,932,879
    
    
    $
    5,015,108Interest-bearing deposits in other financial institutions
    
    
    637,813
    
    
    
    713,807Securities available-for-sale, at fair value
    
    
    27,775,952
    
    
    
    14,180,243Securities held-to-maturity at amortized cost, fair value of $15,674,973
    
    
    
    
    
    
    15,081,723Loans receivable
    
    
    95,476,398
    
    
    
    95,486,200Less allowance for loan losses
    
    
    (490,899
    )
    
    
    (911,964
    )Net loans
    
    
    94,985,499
    
    
    
    94,574,236Loans held for sale at cost (which approximates fair value)
    
    
    317,250
    
    
    
    1,092,619Foreclosed assets, net
    
    
    533,472
    
    
    
    514,507Premises and equipment, net
    
    
    4,665,730
    
    
    
    4,796,390Real estate held for investment
    
    
    500,000
    
    
    
    Federal Home Loan Bank stock, at cost
    
    
    1,218,200
    
    
    
    1,117,000Goodwill
    
    
    543,706
    
    
    
    543,706Accrued interest receivable
    
    
    541,259
    
    
    
    625,639Other assets
    
    
    2,912,879
    
    
    
    3,278,179Total Assets
    
    $
    140,564,639
    
    
    $
    141,533,157Liabilities And Stockholders EquityLiabilities:Deposits:Non-interest bearing
    
    $
    4,643,278
    
    
    $
    4,003,251Interest bearing
    
    
    95,931,849
    
    
    
    93,789,575Total deposits
    
    
    100,575,127
    
    
    
    97,792,826Advances by borrowers for property taxes and insurance
    
    
    209,056
    
    
    
    259,427Accrued interest payable
    
    
    582,327
    
    
    
    458,017Borrowed funds
    
    
    28,108,323
    
    
    
    31,588,773Accrued expenses and other liabilities
    
    
    619,867
    
    
    
    1,078,510Total liabilities
    
    
    130,094,700
    
    
    
    131,177,553Stockholders Equity:Common stock, $.01 par value, 2,000,000 shares authorized,
990,241 shares issued and 708,996 shares outstanding at June 30, 2005;
990,241 shares issued and 709,406 shares outstanding at September 30, 2004;
    
    
    9,996
    
    
    
    9,996Additional paid-in capital
    
    
    9,838,965
    
    
    
    9,838,965Treasury stock, at cost ( 281,245 shares at June 30, 2005;
280,835 shares at September 30, 2004)
    
    
    (3,892,296
    )
    
    
    (3,891,155
    )Deferred compensation on common stock employee benefit plans
    
    
    (141,612
    )
    
    
    (159,427

    )Shares held in trust at cost (9,402 shares at June 30, 2005
and September 30, 2004)
    
    
    (103,483
    )
    
    
    (103,483
    )Retained earnings
    
    
    4,780,676
    
    
    
    5,195,161Accumulated comprehensive other income (loss)
    
    
    (22,307
    )
    
    
    (534,453
    )Total stockholders equity
    
    
    10,469,939
    
    
    
    10,355,604Total Liabilities and Stockholders Equity
    
    $
    140,564,639
    
    
    $
    141,533,157
  1




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##### Table of Contents



Nine Months Ended
    
    Three Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Interest and dividend income:Interest and fees on loans
    
    $
    4,574,516
    
    
    $
    4,040,405
    
    
    $
    1,554,764
    
    
    $
    1,350,769Interest income on deposits in other
financial institutions
    
    
    59,876
    
    
    
    27,184
    
    
    
    26,192
    
    
    
    8,172Interest and dividend income on
securities available for sale
    
    
    654,375
    
    
    
    1,129,723
    
    
    
    325,218
    
    
    
    265,699Interest income on securities held to
maturity
    
    
    428,364
    
    
    
    131,724
    
    
    
    
    
    
    
    131,724Total interest and dividend income
    
    
    5,717,131
    
    
    
    5,329,036
    
    
    
    1,906,174
    
    
    
    1,756,364Interest expense:Interest on deposits
    
    
    1,549,609
    
    
    
    1,294,193
    
    
    
    546,791
    
    
    
    422,000Interest on borrowed funds
    
    
    899,371
    
    
    
    801,279
    
    
    
    315,761
    
    
    
    265,347Total interest expense
    
    
    2,448,980
    
    
    
    2,095,472
    
    
    
    862,552
    
    
    
    687,347Net interest income before provision
for loan losses
    
    
    3,268,151
    
    
    
    3,233,564
    
    
    
    1,043,622
    
    
    
    1,069,017Provision (benefit) for loan losses
    
    
    76,576
    
    
    
    1,244,958
    
    
    
    (28,270
    )
    
    
    9,268Net interest income after provision
for loan losses
    
    
    3,191,575
    
    
    
    1,988,606
    
    
    
    1,071,892
    
    
    
    1,059,749Other income:Service charges and other fees
    
    
    348,216
    
    
    
    412,140
    
    
    
    119,421
    
    
    
    147,965Employee benefit trust and consulting fees
    
    
    1,208,803
    
    
    
    1,152,793
    
    
    
    447,793
    
    
    
    443,132Gain on sale of loans
    
    
    475,504
    
    
    
    560,333
    
    
    
    153,149
    
    
    
    266,729Gain (loss) on sale of foreclosed assets
    
    
    12,953
    
    
    
    1,868
    
    
    
    24,170
    
    
    
    3,404Gain (loss) on sale of equipment
    
    
    7,776
    
    
    
    927
    
    
    
    1,949
    
    
    
    Gain (loss) on sale of securities
available-for-sale
    
    
    47,407
    
    
    
    79,024
    
    
    
    47,407
    
    
    
    (78,906
    )Gain (loss) on sale of securities
held-to-maturity
    
    
    (701,099
    )
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    266,487
    
    
    
    243,375
    
    
    
    80,522
    
    
    
    71,464Total other income
    
    
    1,666,047
    
    
    
    2,450,460
    
    
    
    874,411
    
    
    
    853,788Other expenses:Compensation and benefits
    
    
    2,804,824
    
    
    
    3,355,748
    
    
    
    842,221
    
    
    
    1,228,274Net occupancy expense
    
    
    316,570
    
    
    
    297,077
    
    
    
    100,065
    
    
    
    104,552Furniture and fixtures
    
    
    376,050
    
    
    
    356,319
    
    
    
    124,078
    
    
    
    129,587Data processing
    
    
    249,962
    
    
    
    288,048
    
    
    
    81,506
    
    
    
    117,761Office supplies and expense
    
    
    321,707
    
    
    
    327,857
    
    
    
    110,177
    
    
    
    114,683Deposit insurance premiums
    
    
    81,881
    
    
    
    76,233
    
    
    
    27,960
    
    
    
    26,539Legal
    
    
    142,560
    
    
    
    126,250
    
    
    
    36,960
    
    
    
    48,750Termination expense
    
    
    140,941
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    633,784
    
    
    
    515,252
    
    
    
    208,754
    
    
    
    158,178Total other expenses
    
    
    5,068,279
    
    
    
    5,342,784
    
    
    
    1,531,721
    
    
    
    1,928,324Income (loss) before income taxes
    
    
    (210,657
    )
    
    
    (903,718
    )
    
    
    414,582
    
    
    
    (14,787
    )Income tax expense (benefit)
    
    
    (80,069
    )
    
    
    (342,029
    )
    
    
    157,520
    
    
    
    (4,345
    )Net income (loss)
    
    $
    (130,588
    )
    
    $
    (561,689
    )
    
    $
    257,062
    
    
    $
    (10,442
    )Earnings (loss) per share:Basic
    
    
    (0.18
    )
    
    
    (0.79
    )
    
    
    0.36
    
    
    
    (0.01
    )Diluted
    
    
    (0.18
    )
    
    
    (0.76
    )
    
    
    0.36
    
    
    
    (0.01
    )Cash dividends declared
    
    
    0.40
    
    
    
    0.45
    
    
    
    0.10
    
    
    
    0.15Weighted average shares outstanding:Basic
    
    
    709,273
    
    
    
    709,131
    
    
    
    709,006
    
    
    
    709,070Diluted
    
    
    725,539
    
    
    
    739,481
    
    
    
    721,281
    
    
    
    739,107
  2




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##### Table of Contents



DeferredCompensationon Common
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    Stock
    
    Shares
    
    
    
    
    
    Comprehensive
    
    TotalCommon
    
    Paid-in
    
    Treasury
    
    Employee
    
    Held in
    
    Retained
    
    Other Income
    
    StockholdersStock
    
    Capital
    
    Stock
    
    Benefit Plans
    
    Trust
    
    Earnings
    
    (Loss)
    
    EquityBalance at September 30,
2004
    
    $
    9,996
    
    
    $
    9,838,965
    
    
    $
    (3,891,155
    )
    
    $
    (159,427
    )
    
    $
    (103,483
    )
    
    $
    5,195,161
    
    
    $
    (534,453
    )
    
    $
    10,355,604Comprehensive income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (130,588
    )
    
    
    
    
    
    
    (130,588
    )Change in net unrealized
gain on available-for-sale
securities, net of reclassi-fication adjustments and
income taxes of $313,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    512,146
    
    
    
    512,146Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    381,558Vesting of deferred
compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,815
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,815Acquisition of Treasury
stock
    
    
    
    
    
    
    
    
    
    
    (1,141
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,141
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (283,897
    )
    
    
    
    
    
    
    (283,897
    )Balance at June 30, 2005
    
    $
    9,996
    
    
    $
    9,838,965
    
    
    $
    (3,892,296
    )
    
    $
    (141,612
    )
    
    $
    (103,483
    )
    
    $
    4,780,676
    
    
    $
    (22,307
    )
    
    $
    10,469,939
  3




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##### Table of Contents



2005
    
    2004Operating activities:Net income (loss)
    
    $
    (130,588
    )
    
    $
    (561,689
    )Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    76,576
    
    
    
    1,244,958Depreciation and amortization
    
    
    291,884
    
    
    
    265,891Gain on sale of securities available-for-sale
    
    
    (47,407
    )
    
    
    (79,024
    )Loss on sale of securities held-to-maturity
    
    
    701,099Gain on sale of loans
    
    
    (475,504
    )
    
    
    (560,333
    )Increase (decrease) in deferred loan origination fees
    
    
    2,545
    
    
    
    (5,032
    )Net amortization of premium/discount on investment securities
    
    
    69,093
    
    
    
    (537
    )(Gain) loss on sale of other property owned
    
    
    (7,776
    )
    
    
    (927
    )(Gain) loss on sale of foreclosed assets
    
    
    (12,953
    )
    
    
    (1,868
    )Loans originated for sale
    
    
    (16,766,771
    )
    
    
    (24,122,621
    )Proceeds from sale of loans
    
    
    18,017,644
    
    
    
    24,987,039(Increase) decrease in accrued interest receivable
    
    
    84,380
    
    
    
    (54,717
    )(Increase) decrease in other assets
    
    
    365,300
    
    
    
    (1,028,336
    )Deferred compensation expense
    
    
    17,815
    
    
    
    17,815Increase (decrease) in accrued interest payable
    
    
    124,310
    
    
    
    (83,034
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    (772,539
    )
    
    
    542,623Net cash provided by operating activities
    
    
    1,537,108
    
    
    
    560,208Investing activities:Net change in interest-bearing deposits in other financial institutions
    
    
    75,994
    
    
    
    (104,239
    )Proceeds from calls and maturities of securities available-for-sale
    
    
    1,564,978
    
    
    
    2,468,580Purchase of securities available-for-sale
    
    
    (34,365,257
    )
    
    
    (8,503,846
    )Proceeds from sale of securities available-for-sale
    
    
    19,092,405
    
    
    
    8,538,610Proceeds from sale of securities held-to-maturity
    
    
    15,297,145
    
    
    
    Purchase of Federal Home Loan Bank stock
    
    
    (101,200
    )
    
    
    Net (increase) decrease in loans
    
    
    (490,384
    )
    
    
    (6,108,153
    )Purchase of premises and equipment
    
    
    (165,802
    )
    
    
    (635,056
    )Proceeds from sale of foreclosed assets
    
    
    571,273
    
    
    
    81,185Proceeds from sale of other assets
    
    
    12,354
    
    
    
    10,376Transfer from loans of real estate owned property
    
    
    (1,014,227
    )
    
    
    (508,605
    )Transfer from loans of other repossessed assets
    
    
    (63,058
    )
    
    
    (54,456
    )Net cash provided (used) by investing activities
    
    
    414,221
    
    
    
    (4,815,604
    )
   4




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##### Table of Contents



2005
    
    2004Financing activities:Increase (decrease) in deposits
    
    $
    2,782,301
    
    
    $
    4,492,161Proceeds from borrowed funds
    
    
    70,673,955
    
    
    
    49,168,299Repayment of borrowed funds
    
    
    (74,154,405
    )
    
    
    (47,148,149
    )Cash dividends paid
    
    
    (283,897
    )
    
    
    (319,243
    )Acquisition of treasury stock
    
    
    (1,141
    )
    
    
    (84,543
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    6,905Decrease in advances by borrowers for property taxes and insurance
    
    
    (50,371
    )
    
    
    (8,260
    )Net cash provided (used) by financing activities
    
    
    (1,033,558
    )
    
    
    6,107,170Increase (decrease) in cash and cash equivalents
    
    
    917,771
    
    
    
    1,851,774Cash and cash equivalents at beginning of period
    
    
    5,015,108
    
    
    
    6,049,325Cash and cash equivalents at end of period
    
    $
    5,932,879
    
    
    $
    7,901,099Supplemental information on cash payments:Interest paid
    
    $
    2,324,670
    
    
    $
    2,178,506Income taxes paid
    
    $
    36,000
    
    
    $
    124,917Supplemental information on non-cash transactions:Change in net unrealized gain on investment securities available-for-sale
    
    $
    568,241
    
    
    $
    33,178Real estate obtained through foreclosure
    
    $
    1,158,305
    
    
    $
    508,605
  -5-




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##### Table of Contents



(1)
    
    Basis of PresentationThe accounting and reporting policies of SouthFirst Bancshares, Inc. (SouthFirst) conform with
accounting principles generally accepted in the United States and with general financial
services industry practices.Information filed on this Form 10-QSB as of and for the quarter ended June 30, 2005, was derived
from the financial records of SouthFirst and its wholly-owned subsidiaries, First Federal of the
South (First Federal) and SouthFirst Financial Services, Inc. (SouthFirst Financial) and
First Federals wholly-owned subsidiaries, Pension & Benefit Trust Company (Pension &
Benefit), a Montgomery, Alabama-based employee benefits consulting firm, and SouthFirst
Mortgage, Inc. (SouthFirst Mortgage), a Birmingham, Alabama based residential construction
loan and mortgage loan origination office. Collectively, SouthFirst Bancshares, Inc. and its
subsidiaries are referred to herein as the Company and as SouthFirst.The accompanying unaudited consolidated financial statements have been prepared in accordance
with the instructions for Form 10-QSB and, therefore, do not include all information and
footnotes necessary for a complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the United States.
For a summary of significant accounting policies that have been consistently followed, see Note
1 to the consolidated financial statements included under Item 7 on Form 10-KSB. It is
managements opinion that all adjustments, consisting of only normal and recurring items
necessary for a fair presentation, have been included. The results contained in these
statements are not necessarily indicative of the results which may be expected for the entire
year.(2)
    
    New Accounting PronouncementsIn December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123 (revised 2004) Share-Based Payment(SFAS No. 123(R)). SFAS No.
123(R) is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.SFAS
No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for goods or services
that are based on the fair value of the entitys equity instruments or that may be settled by
the issuance of those equity instruments. SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award  the requisite service period
(usually the vesting period). No compensation cost is recognized for equity instruments for
which employees do not render the requisite service. SFAS No. 123(R) eliminates the alternative
to use APB Opinion 25s intrinsic value method of accounting that was provided in Statement 123
as originally issued. Under Opinion 25, issuing stock options to employees generally resulted
in recognition of no compensation cost. SFAS No. 123(R) requires entities to recognize the cost
of employee services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards (with limited exceptions). SFAS No. 123(R) is effective
for public entities that do not file as small business issuers as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005, and for public entities that
file as small business issuers as of the beginning of
 -6-




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##### Table of Contents



the first interim or annual reporting
period that
begins after December 15, 2005. The Company currently accounts for its stock options under APB
No. 25, as further explained in Note 3, and is currently evaluating the impact that the adoption
of SFAS No. 123(R) will have on its statement of condition and results of operations.(3)
    
    Stock-Based Compensation PlansDuring 1995, the Company adopted a Stock Option and Incentive Plan for directors and key
employees of the Company. The exercise price cannot be less than the market price on the grant
date and the number of shares available for options cannot exceed 83,000. Stock appreciation
rights may also be granted under the plan. During 1998, the Company adopted the 1998 Stock
Option & Incentive Plan for directors and key employees of the Company. Under the 1998 plan,
options to acquire 63,361 shares have been granted. The term of the options range from seven to
ten years, and the options vest equally over periods ranging in length from three to five years.Following is a summary of the status of the 1995 and 1998 plans:
 1995 Plan
    
    1998 PlanWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageNumber
    
    Exercise
    
    Number
    
    Exerciseof Shares
    
    Price
    
    of Shares
    
    PriceOutstanding at September 30, 2004
    
    
    73,700
    
    
    $
    12.40
    
    
    
    60,299
    
    
    $
    13.38Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (18,304
    )
    
    $
    12.83
    
    
    
    (13,822
    )
    
    $
    14.14Outstanding at June 30, 2005
    
    
    55,396
    
    
    $
    12.26
    
    
    
    46,477
    
    
    $
    13.15
 Information pertaining to options outstanding at June 30, 2005 is as follows:
 Options Outstanding
    
    Options ExercisableWeightedAverage
    
    
    
    
    
    
    
    
    
    WeightedRemaining
    
    Weighted Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Price
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$  9.75
    
    
    15,547
    
    
    2.35 years
    
    
    
    
    
    
    15,547$  9.92
    
    
    9,000
    
    
    6.42 years
    
    
    
    
    
    
    5,400$12.10
    
    
    38,200
    
    
    7.29 years
    
    
    
    
    
    
    15,280$14.00
    
    
    16,600
    
    
    .18 years
    
    
    
    
    
    
    16,600$15.75
    
    
    22,526
    
    
    2.58 years
    
    
    
    
    
    
    22,526Outstanding at
June 30, 2005
    
    
    101,873
    
    
    4.26 years
    
    $
    12.67
    
    
    
    75,353
    
    
    $
    12.97
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##### Table of Contents



The Company accounts for these plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all options granted under
these plans had an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
 Nine Months Ended
    
    Three Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss), as reported
    
    $
    (130,588
    )
    
    $
    (561,689
    )
    
    $
    257,062
    
    
    $
    (10,442
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (1,739
    )
    
    
    (2,094
    )
    
    
    (559
    )
    
    
    (649
    )Pro forma net income (loss)
    
    $
    (132,327
    )
    
    $
    (563,783
    )
    
    $
    256,503
    
    
    $
    (11,091
    )Earnings (loss) per share:Basic  as reported
    
    $
    (.18
    )
    
    $
    (.79
    )
    
    $
    .36
    
    
    $
    (.01
    )Basic  pro forma
    
    
    (.19
    )
    
    
    (.80
    )
    
    
    .36
    
    
    
    (.02
    )Diluted  as reported
    
    
    (.18
    )
    
    
    (.76
    )
    
    
    .36
    
    
    
    (.01
    )Diluted  pro forma
    
    
    (.18
    )
    
    
    (.76
    )
    
    
    .36
    
    
    
    (.02
    )
 The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will
have on its statement of condition and results of operations once such standards become
effective with respect to the Company. Because the SFAS No. 123 method of accounting (and
related disclosures) has not been applied to options granted prior to October 1, 1995, the
resulting pro forma compensation costs may not be representative of that to be expected in
future years.There were no options granted during the nine months ended June 30, 2005 or 2004.(4)
    
    Earnings Per ShareBasic earnings per share were computed by dividing net income by the weighted average number of
            shares of common stock outstanding during the nine and three month periods ended June 30, 2005
and 2004. Common stock outstanding consists of issued shares less treasury stock and shares
owned by the Management Recognition Plan and Stock Option plan trusts. Diluted earnings per
share for the nine and three month periods ended June 30, 2005 and 2004, were computed by
dividing net income by the weighted average number of shares of common stock and the dilutive
effects of the shares awarded under the Stock Option plan, based on the treasury stock method
using an average fair market value of the stock during the respective periods.The following table represents the earnings per share calculations for the three and nine months
ended June 30, 2005 and 2004:
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##### Table of Contents



EarningsIncome
    
    Shares
    
    Per ShareFor the Three Months Ended June 30, 2005:Basic earnings
    
    $
    257,062
    
    
    
    709,006
    
    
    $
    .36Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    12,275Dilutive earnings
    
    $
    257,062
    
    
    
    721,281
    
    
    $
    .36For the Three Months Ended June 30, 2004:Basic earnings (loss)
    
    $
    (10,442
    )
    
    
    709,070
    
    
    $
    (.01
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    30,037Dilutive earnings (loss)
    
    $
    (10,442
    )
    
    
    739,107
    
    
    $
    (.01
    )For the Nine Months Ended June 30, 2005:Basic earnings (loss)
    
    $
    (130,588
    )
    
    
    709,273
    
    
    $
    (.18
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    16,266Dilutive earnings (loss)
    
    $
    (130,588
    )
    
    
    725,539
    
    
    $
    (.18
    )For the Nine Months Ended June 30, 2004:Basic earnings (loss)
    
    $
    (561,689
    )
    
    
    709,131
    
    
    $
    (.79
    )Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    30,350Dilutive earnings (loss)
    
    $
    (561,689
    )
    
    
    739,481
    
    
    $
    (.76
    )
 (5)
    
    Investment SecuritiesDuring 2005, the Company transferred all of its securities in the held-to-maturity category to
the available-for-sale category and immediately sold those securities. The amortized cost of
the sold securities was $15,998,287, resulting in a realized loss of $701,099. The decision to
transfer the securities was based on a change in investment strategy and to improve overall
liquidity and interest rate risk.(6)
    
    Business Segment InformationThe Company organizes its business units into two reportable segments: traditional banking
activities and employee benefits consulting and trust activities. The banking segment provides
a full range of banking services within its primary market areas of central Alabama. The
employee benefits trust company operates primarily in the state of Alabama. The Companys
reportable business segments are strategic business units that offer different products and
services. Each segment is managed separately, because each unit is subject to different
marketing and regulatory environments.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:
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##### Table of Contents



Nine Months Ended June 30, 2005
    
    Nine Months Ended June 30, 2004Employee
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    Benefits
    
    
    
    
    
    Banking
    
    BenefitsActivities
    
    Activities
    
    Total
    
    Activities
    
    Activities
    
    TotalInterest and dividend
income
    
    $
    5,693,816
    
    
    $
    23,315
    
    
    $
    5,717,131
    
    
    $
    5,311,161
    
    
    $
    17,875
    
    
    $
    5,329,036Interest expenses
    
    
    2,448,980
    
    
    
    
    
    
    
    2,448,980
    
    
    
    2,095,472
    
    
    
    
    
    
    
    2,095,472Net interest income
    
    
    3,244,836
    
    
    
    23,315
    
    
    
    3,268,151
    
    
    
    3,215,689
    
    
    
    17,875
    
    
    
    3,233,564Provision for loan losses
    
    
    76,576
    
    
    
    
    
    
    
    76,576
    
    
    
    1,244,958
    
    
    
    
    
    
    
    1,244,958Net interest income after
provision for loan losses
    
    
    3,168,260
    
    
    
    23,315
    
    
    
    3,191,575
    
    
    
    1,970,731
    
    
    
    17,875
    
    
    
    1,988,606Other income
    
    
    445,855
    
    
    
    1,220,192
    
    
    
    1,666,047
    
    
    
    1,285,041
    
    
    
    1,165,419
    
    
    
    2,450,460Other expenses
    
    
    3,958,197
    
    
    
    1,110,082
    
    
    
    5,068,279
    
    
    
    4,366,321
    
    
    
    976,463
    
    
    
    5,342,784Income (loss) before
income taxes
    
    
    (344,082
    )
    
    
    133,425
    
    
    
    (210,657
    )
    
    
    (1,110,549
    )
    
    
    206,831
    
    
    
    (903,718
    )Income taxes
    
    
    (130,770
    )
    
    
    50,701
    
    
    
    (80,069
    )
    
    
    (420,789
    )
    
    
    78,760
    
    
    
    (342,029
    )Net income (loss)
    
    $
    (213,312
    )
    
    $
    82,724
    
    
    $
    (130,588
    )
    
    $
    (689,760
    )
    
    $
    128,071
    
    
    $
    (561,689
    )
 Three Months Ended June 30, 2005
    
    Three Months Ended June 30, 2004Employee
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    Benefits
    
    
    
    
    
    Banking
    
    BenefitsActivities
    
    Activities
    
    Total
    
    Activities
    
    Activities
    
    TotalInterest and dividend
income
    
    $
    1,897,883
    
    
    $
    8,291
    
    
    $
    1,906,174
    
    
    $
    1,749,801
    
    
    $
    6,563
    
    
    $
    1,756,364Interest expenses
    
    
    862,552
    
    
    
    
    
    
    
    862,552
    
    
    
    687,347
    
    
    
    
    
    
    
    687,347Net interest income
    
    
    1,035,331
    
    
    
    8,291
    
    
    
    1,043,622
    
    
    
    1,062,454
    
    
    
    6,563
    
    
    
    1,069,017Provision for loan losses
    
    
    (28,270
    )
    
    
    
    
    
    
    (28,270
    )
    
    
    9,268
    
    
    
    
    
    
    
    9,268Net interest income after
provision for loan losses
    
    
    1,063,601
    
    
    
    8,291
    
    
    
    1,071,892
    
    
    
    1,053,186
    
    
    
    6,563
    
    
    
    1,059,749Other income
    
    
    423,618
    
    
    
    450,793
    
    
    
    874,411
    
    
    
    407,656
    
    
    
    446,132
    
    
    
    853,788Other expenses
    
    
    1,166,322
    
    
    
    365,399
    
    
    
    1,531,721
    
    
    
    1,589,148
    
    
    
    339,176
    
    
    
    1,928,324Income (loss) before
income taxes
    
    
    320,897
    
    
    
    93,685
    
    
    
    414,582
    
    
    
    (128,306
    )
    
    
    113,519
    
    
    
    (14,787
    )Income taxes
    
    
    (121,919
    )
    
    
    35,601
    
    
    
    157,520
    
    
    
    (47,565
    )
    
    
    43,220
    
    
    
    (4,345
    )Net income (loss)
    
    $
    198,978
    
    
    $
    58,084
    
    
    $
    257,062
    
    
    $
    (80,741
    )
    
    $
    70,299
    
    
    $
    (10,442
    )
 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.(7)
    
    Subsequent EventOn July 27, 2005, the Company declared a regular $0.10 per share cash dividend on the Companys
outstanding stock, payable on August 22, 2005, to stockholders of record as of August 7, 2005.
 -10-




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##### Table of Contents



Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
 REVIEW OF RESULTS OF OPERATIONS
 Overview
    Net Interest Income
   Provision for Loan Losses
   -11-




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##### Table of Contents



Other Income
   Other Expenses
  -12-




---



##### Table of Contents



Income Taxes
  REVIEW OF FINANCIAL CONDITION
 Overview
   At or for the threemonths ended June 30,2005
    
    2004Return on assets
    
    
    0.72
    %
    
    
    (0.03
    %)Return on equity
    
    
    9.95
    %
    
    
    (0.40
    %)Equity to asset ratio
    
    
    7.24
    %
    
    
    7.47
    %Interest rate spread
    
    
    3.30
    %
    
    
    3.48
    %Net interest margin
    
    
    3.31
    %
    
    
    3.48
    %Total risk-based capital
    
    
    12.29
    %
    
    
    15.32
    %Non-performing loans to loans
    
    
    0.53
    %
    
    
    0.88
    %Allowance for loan losses to loans
    
    
    0.51
    %
    
    
    0.90
    %
 -13-




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##### Table of Contents



At or for the threemonths ended June 30,2005
    
    2004Allowance for loan losses to average non-performing loans
    
    
    96.05
    %
    
    
    101.43
    %Ratio of net charge-offs to average loans outstanding
    
    
    0.49
    %
    
    
    0.02
    %Book value per common share outstanding
    
    $
    14.77
    
    
    $
    14.36
  Assets
  Liabilities
  Loan Quality
   -14-




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##### Table of Contents



Liquidity and Funding Sources
        Capital Adequacy and Resources
  -15-




---



##### Table of Contents



Percent ofAmount
    
    Asset BaseTangible capital
    
    $
    10,884,000
    
    
    
    7.80
    %Core capital
    
    
    10,884,000
    
    
    
    7.80
    %Tier-based capital
    
    
    11,292,000
    
    
    
    12.29
    %
 Cautionary Statement Concerning Forward-Looking Statements
  
 Item 3: Controls and Procedures
   -16-




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##### Table of Contents



Item 1: Legal Proceedings
  
 Item 6: Exhibits and Reports on Form 8-K
 (a)
    
    Exhibits. The Following Exhibits are filed with this report.
 Exhibit Number
    
    Description31.1
    
    
    Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated August 15, 2005.31.2
    
    
    Certificate of the equivalent of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated August 15, 2005.32
    
    
    Certificate of the Chief Executive Officer and the equivalent of the
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August 15, 2005.
 The certificate listed as Exhibit 32 is being furnished pursuant to the final rule issued by
the Securities and Exchange Commission in Release No. 33-8238 to accompany this quarterly
report and shall not be deemed filed for the purposes of Section 18 of the Exchange Act, or
otherwise subject to the liability of such section or Section 11 of the Securities Act of 1933
(the Securities Act), nor shall such certificates be deemed incorporated by reference in any
filing under the Securities Act or the Exchange Act, regardless of the general incorporation
language of such filings, except as shall be expressly set forth by specific reference in such
filing.(b)
    
    Reports on Form 8-K.On July 7, 2005, SouthFirst filed Form 8-K announcing the appointment of Sandra H. Stephens as
Chief Executive Officer of SouthFirst Bancshares, Inc., effective July 1, 2005.
 -17-




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##### Table of Contents



SIGNATURES
  SOUTHFIRST BANCSHARES, INC.Date: August 15, 2005
    
    By:
    
    /s/ Sandra H. StephensSandra H. StephensChief Executive Officer(principal executive officer)Date: August 15, 2005
    
    By:
    
    /s/ Janice BrowningJanice BrowningController, Treasurer(principal accounting officer)
 -18-




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description of Exhibit31.1
    
    Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated August 15, 2005.31.2
    
    Certificate of the equivalent of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated August 15, 2005.32
    
    Certificate of the Chief Executive Officer and the equivalent of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, dated August 15, 2005.
 -19-