##### 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: June 30, 2006
 Commission File Number: 1-13640
 SOUTHFIRST BANCSHARES, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    63-1121255(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)126 North Norton Avenue, Sylacauga, Alabama
    
    35150(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code: 256-245-4365
  
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o þ
  Common Stock, par value $0.01 per share
    
    708,671 sharesClass
    
    Outstanding at July 28, 2006
 o þ




---



##### 



SOUTHFIRST BANCSHARES, INC.
 TABLE  OF  CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1: Financial Statements (Unaudited)
    
    
    1Consolidated Statements of Financial Condition at June 30, 2006 (Unaudited)
and September 30, 2005
    
    
    1Consolidated Statements of Operations (Unaudited) for the Nine and Three Months
Ended June 30, 2006 and 2005
    
    
    2Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the
Nine Months Ended June 30, 2006
    
    
    3Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended
June 30, 2006 and 2005
    
    
    4-5Notes to Consolidated Financial Statements (Unaudited)  June 30, 2006 and 2005
    
    
    6-10Item 2: Managements Discussion and Analysis or Plan of Operations
    
    
    11-16Item 3: Controls and Procedures
    
    
    16PART II  OTHER INFORMATION
    
    
    17Item 1: Legal Proceedings
    
    
    17Item 6: Exhibits
    
    
    17-18SIGNATURES
    
    
    19EXHIBIT INDEX
    
    
    20-21EX-10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT - SANDRA H. STEPHENSEX-10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT - J. MALCOMB MASSEYEX-10.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT - RUTH M. ROPEREX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32 SECTION 906, CERTIFICATION OF THE CEO AND CFO




---



##### Table of Contents



June 30,
    
    
    September 30,2006
    
    
    2005(Unaudited)AssetsCash and cash equivalents
    
    $
    4,310,231
    
    
    $
    5,042,170Interest-bearing deposits in other financial institutions
    
    
    1,180,852
    
    
    
    871,801Securities available-for-sale, at fair value
    
    
    25,647,674
    
    
    
    26,482,705Loans receivable
    
    
    101,914,736
    
    
    
    95,907,301Less allowance for loan losses
    
    
    (621,941
    )
    
    
    (518,572
    )Net loans
    
    
    101,292,795
    
    
    
    95,388,729Loans held for sale at cost (which approximates fair value)
    
    
    604,400
    
    
    
    948,250Foreclosed assets, net
    
    
    890,209
    
    
    
    255,470Premises and equipment, net
    
    
    3,018,718
    
    
    
    4,645,624Federal Home Loan Bank stock, at cost
    
    
    1,373,900
    
    
    
    1,218,200Goodwill
    
    
    543,706
    
    
    
    543,706Accrued interest receivable
    
    
    655,939
    
    
    
    656,455Other assets
    
    
    2,651,450
    
    
    
    3,084,414Total Assets
    
    $
    142,169,874
    
    
    $
    139,137,524Liabilities And Stockholders EquityLiabilities:Deposits:Non-interest bearing
    
    $
    3,974,792
    
    
    $
    4,232,573Interest bearing
    
    
    100,766,167
    
    
    
    96,892,239Total deposits
    
    
    104,740,959
    
    
    
    101,124,812Advances by borrowers for property taxes and insurance
    
    
    162,978
    
    
    
    237,052Accrued interest payable
    
    
    848,656
    
    
    
    641,075Borrowed funds
    
    
    25,914,828
    
    
    
    26,015,861Accrued expenses and other liabilities
    
    
    473,666
    
    
    
    694,781Total liabilities
    
    
    132,141,087
    
    
    
    128,713,581Stockholders Equity:Common stock, $.01 par value, 2,000,000 shares authorized,
990,241 shares issued and 708,671 shares outstanding at June 30, 2006;
990,241 shares issued and 708,971 shares outstanding at September 30, 2005;
    
    
    9,996
    
    
    
    9,996Additional paid-in capital
    
    
    9,839,851
    
    
    
    9,839,851Treasury stock, at cost ( 281,570 shares at June 30, 2006;
281,270 shares at September 30, 2005)
    
    
    (3,896,213
    )
    
    
    (3,892,598
    )Deferred compensation on common stock employee benefit plans
    
    
    (117,860
    )
    
    
    (135,675
    )Shares held in trust at cost (9,402 shares at June 30, 2006
and September 30, 2005)
    
    
    (103,483
    )
    
    
    (103,483
    )Retained earnings
    
    
    5,029,057
    
    
    
    4,874,445Accumulated comprehensive other income (loss)
    
    
    (732,561
    )
    
    
    (168,593
    )Total stockholders equity
    
    
    10,028,787
    
    
    
    10,423,943Total Liabilities and Stockholders Equity
    
    $
    142,169,874
    
    
    $
    139,137,524
  1




---



##### Table of Contents



Nine Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest and dividend income:Interest and fees on loans
    
    $
    5,062,705
    
    
    $
    4,574,516
    
    
    $
    1,749,587
    
    
    $
    1,554,764Interest income on deposits in other financial institutions
    
    
    83,894
    
    
    
    59,876
    
    
    
    31,172
    
    
    
    26,192Interest and dividend income on securities available for sale
    
    
    960,767
    
    
    
    654,375
    
    
    
    323,493
    
    
    
    325,218Interest income on securities held to maturity
    
    
    
    
    
    
    428,364
    
    
    
    
    
    
    
    Total interest and dividend income
    
    
    6,107,366
    
    
    
    5,717,131
    
    
    
    2,104,252
    
    
    
    1,906,174Interest expense:Interest on deposits
    
    
    2,118,218
    
    
    
    1,549,609
    
    
    
    818,178
    
    
    
    546,791Interest on borrowed funds
    
    
    1,075,723
    
    
    
    899,371
    
    
    
    354,030
    
    
    
    315,761Total interest expense
    
    
    3,193,941
    
    
    
    2,448,980
    
    
    
    1,172,208
    
    
    
    862,552Net interest income before provision for loan losses
    
    
    2,913,425
    
    
    
    3,268,151
    
    
    
    932,044
    
    
    
    1,043,622Provision (benefit) for loan losses
    
    
    142,386
    
    
    
    76,576
    
    
    
    131,147
    
    
    
    (28,270
    )Net interest income after provision for loan losses
    
    
    2,771,039
    
    
    
    3,191,575
    
    
    
    800,897
    
    
    
    1,071,892Other income:Service charges and other fees
    
    
    419,490
    
    
    
    348,216
    
    
    
    145,382
    
    
    
    119,421Employee benefit trust and consulting fees
    
    
    1,407,680
    
    
    
    1,208,803
    
    
    
    559,713
    
    
    
    447,793Gain on sale of loans
    
    
    353,368
    
    
    
    475,504
    
    
    
    90,347
    
    
    
    153,149Gain (loss) on sale of foreclosed assets
    
    
    (11,076
    )
    
    
    12,953
    
    
    
    2,740
    
    
    
    24,170Gain (loss) on sale of premises and equipment
    
    
    177,253
    
    
    
    7,776
    
    
    
    (5,326
    )
    
    
    1,949Gain (loss) on sale of securities available-for-sale
    
    
    
    
    
    
    47,407
    
    
    
    
    
    
    
    47,407Gain (loss) on sale of securities held-to-maturity
    
    
    
    
    
    
    (701,099
    )
    
    
    
    
    
    
    Other
    
    
    323,501
    
    
    
    266,487
    
    
    
    100,558
    
    
    
    80,522Total other income
    
    
    2,670,216
    
    
    
    1,666,047
    
    
    
    893,414
    
    
    
    874,411Other expenses:Compensation and benefits
    
    
    2,728,091
    
    
    
    2,804,824
    
    
    
    827,503
    
    
    
    842,221Net occupancy expense
    
    
    311,628
    
    
    
    316,570
    
    
    
    95,778
    
    
    
    100,065Furniture and fixtures
    
    
    407,504
    
    
    
    376,050
    
    
    
    140,643
    
    
    
    124,078Data processing
    
    
    214,746
    
    
    
    249,962
    
    
    
    71,451
    
    
    
    81,506Office supplies and expense
    
    
    335,169
    
    
    
    321,707
    
    
    
    110,591
    
    
    
    110,177Deposit insurance premiums
    
    
    58,064
    
    
    
    81,881
    
    
    
    14,263
    
    
    
    27,960Legal
    
    
    81,730
    
    
    
    142,560
    
    
    
    31,738
    
    
    
    36,960Other professional services
    
    
    177,520
    
    
    
    186,416
    
    
    
    60,883
    
    
    
    50,114Termination expense
    
    
    
    
    
    
    140,941
    
    
    
    
    
    
    
    Other
    
    
    536,684
    
    
    
    447,368
    
    
    
    160,793
    
    
    
    158,640Total other expenses
    
    
    4,851,136
    
    
    
    5,068,279
    
    
    
    1,513,643
    
    
    
    1,531,721Income (loss) before income taxes
    
    
    590,119
    
    
    
    (210,657
    )
    
    
    180,668
    
    
    
    414,582Income tax expense (benefit)
    
    
    222,866
    
    
    
    (80,069
    )
    
    
    67,478
    
    
    
    157,520Net income (loss)
    
    $
    367,253
    
    
    $
    (130,588
    )
    
    $
    113,190
    
    
    $
    257,062Earnings (loss) per share:Basic
    
    
    0.52
    
    
    
    (0.18
    )
    
    
    0.16
    
    
    
    0.36Diluted
    
    
    0.51
    
    
    
    (0.18
    )
    
    
    0.16
    
    
    
    0.36Cash dividends declared
    
    
    0.30
    
    
    
    0.40
    
    
    
    0.10
    
    
    
    0.10Weighted average shares outstanding:Basic
    
    
    708,800
    
    
    
    709,273
    
    
    
    708,671
    
    
    
    709,006Diluted
    
    
    715,774
    
    
    
    725,539
    
    
    
    717,306
    
    
    
    721,281
  2




---



##### 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,
2005
    
    $
    9,996
    
    
    $
    9,839,851
    
    
    $
    (3,892,598
    )
    
    $
    (135,675
    )
    
    $
    (103,483
    )
    
    $
    4,874,445
    
    
    $
    (168,593
    )
    
    $
    10,423,943Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    367,253
    
    
    
    
    
    
    
    367,253Change in net unrealized
loss on available-for-sale
securities, net of reclassification adjustments and
income taxes of $345,658
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (563,968
    )
    
    
    (563,968
    )Total comprehensive
income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (196,715
    )Vesting of deferred
compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,815
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,815Acquisition of Treasury
stock
    
    
    
    
    
    
    
    
    
    
    (3,615
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,615
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (212,641
    )
    
    
    
    
    
    
    (212,641
    )Balance at June 30, 2006
    
    $
    9,996
    
    
    $
    9,839,851
    
    
    $
    (3,896,213
    )
    
    $
    (117,860
    )
    
    $
    (103,483
    )
    
    $
    5,029,057
    
    
    $
    (732,561
    )
    
    $
    10,028,787
  3




---



##### Table of Contents



2006
    
    
    2005Operating activities:Net income (loss)
    
    $
    367,253
    
    
    $
    (130,588
    )Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    142,386
    
    
    
    76,576Depreciation and amortization
    
    
    283,459
    
    
    
    291,884Gain on sale of securities available-for-sale
    
    
    
    
    
    
    (47,407
    )Loss on sale of securities held-to-maturity
    
    
    
    
    
    
    701,099Gain on sale of loans
    
    
    (353,368
    )
    
    
    (475,504
    )Increase (decrease) in deferred loan origination fees
    
    
    (9,559
    )
    
    
    2,545Net amortization of premium/discount on investment securities
    
    
    19,005
    
    
    
    69,093(Gain) loss on sale of other property owned
    
    
    (177,253
    )
    
    
    (7,776
    )(Gain) loss on sale of foreclosed assets
    
    
    11,076
    
    
    
    (12,953
    )Loans originated for sale
    
    
    (16,119,343
    )
    
    
    (16,766,771
    )Proceeds from sale of loans
    
    
    16,816,561
    
    
    
    18,017,644(Increase) decrease in accrued interest receivable
    
    
    516
    
    
    
    84,380(Increase) decrease in other assets
    
    
    432,964
    
    
    
    365,300Deferred compensation expense
    
    
    17,815
    
    
    
    17,815Increase (decrease) in accrued interest payable
    
    
    207,581
    
    
    
    124,310Increase (decrease) in accrued expenses and other liabilities
    
    
    124,543
    
    
    
    (772,539
    )Net cash provided by operating activities
    
    
    1,763,636
    
    
    
    1,537,108Investing activities:Net change in interest-bearing deposits in other financial institutions
    
    
    (309,051
    )
    
    
    75,994Proceeds from calls and maturities of securities available-for-sale
    
    
    2,081,850
    
    
    
    1,564,978Purchase of securities available-for-sale
    
    
    (2,175,450
    )
    
    
    (34,365,257
    )Proceeds from sale of securities available-for-sale
    
    
    
    
    
    
    19,092,405Proceeds from sale of securities held-to-maturity
    
    
    
    
    
    
    15,297,145Purchase of Federal Home Loan Bank stock
    
    
    (155,700
    )
    
    
    (101,200
    )Net increase in loans
    
    
    (6,036,893
    )
    
    
    (490,384
    )Purchase of premises and equipment
    
    
    (113,343
    )
    
    
    (165,802
    )Proceeds from sale of foreclosed assets
    
    
    60,088
    
    
    
    571,273Proceeds from sale of other assets
    
    
    1,634,043
    
    
    
    12,354Transfer from loans of real estate owned property
    
    
    (635,987
    )
    
    
    (1,014,227
    )Transfer from loans of other repossessed assets
    
    
    (69,916
    )
    
    
    (63,058
    )Net cash provided (used) by investing activities
    
    
    (5,720,359
    )
    
    
    414,221
   4




---



##### Table of Contents



2006
    
    
    2005Financing activities:Increase in deposits
    
    $
    3,616,147
    
    
    $
    2,782,301Proceeds from borrowed funds
    
    
    53,208,828
    
    
    
    70,673,955Repayment of borrowed funds
    
    
    (53,309,861
    )
    
    
    (74,154,405
    )Cash dividends paid
    
    
    (212,641
    )
    
    
    (283,897
    )Acquisition of treasury stock
    
    
    (3,615
    )
    
    
    (1,141
    )Decrease in advances by borrowers for property taxes and insurance
    
    
    (74,074
    )
    
    
    (50,371
    )Net cash provided (used) by financing activities
    
    
    3,224,784
    
    
    
    (1,033,558
    )Increase (decrease) in cash and cash equivalents
    
    
    (731,939
    )
    
    
    917,771Cash and cash equivalents at beginning of period
    
    
    5,042,170
    
    
    
    5,015,108Cash and cash equivalents at end of period
    
    $
    4,310,231
    
    
    $
    5,932,879Supplemental information on cash payments:Interest paid
    
    $
    2,986,360
    
    
    $
    2,324,670Income taxes paid
    
    $
    29,289
    
    
    $
    36,000Supplemental information on non-cash transactions:Change in net unrealized gain on investment securities available-for-sale
    
    $
    (563,968
    )
    
    $
    568,241Real estate obtained through foreclosure
    
    $
    707,760
    
    
    $
    1,158,305
  5




---



##### 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, 2006, was derived
from the financial records of SouthFirst and its wholly-owned subsidiaries, SouthFirst Bank
(SouthFirst Bank) and SouthFirst Financial Services, Inc. (SouthFirst Financial) and
SouthFirst Banks wholly-owned subsidiaries, Pension & Benefit Trust Company (Pension &
Benefit), a Montgomery, Alabama-based employee benefits consulting firm, and SouthFirst
Mortgage, Inc. (SouthFirst Mortgage), a Birmingham, Alabama-based residential construction
loan and mortgage loan origination office. Collectively, SouthFirst Bancshares, Inc. and its
subsidiaries are referred to herein as the Company and as SouthFirst.The accompanying unaudited consolidated financial statements have been prepared in accordance
with the instructions for Form 10-QSB and, therefore, do not include all information and
footnotes necessary for a complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the United States.
For a summary of significant accounting policies that have been consistently followed, see Note
1 to the consolidated financial statements included under Item 7 on Form 10-KSB. It is
managements opinion that all adjustments, consisting of only normal and recurring items
necessary for a fair presentation, have been included. The results contained in these
statements are not necessarily indicative of the results that may be expected for the entire
year.(2)
    
    Stock ListingOn February 21, 2006, the Company filed an application with the Securities & Exchange Commission
to withdraw its common stock from listing and registration on the American Stock Exchange. The
request was made primarily due to the limited number of stockholders, the limited volume of
trading, and the cost associated with maintaining status as a listed company. The application
was approved effective March 28, 2006. The Company has made arrangements with Howe Barnes
Investments, Inc., an Illinois corporation, for it to act as a market maker for the Companys
common stock on the Over the Counter Bulletin Board (OTCBB).(3)
    
    New Accounting PronouncementsIn December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123 (revised 2004) Share-Based Payment(SFAS No. 123(R)). SFAS No.
123(R) is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.SFAS
No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for goods or services
that are based on the fair value of the entitys equity instruments or that may be settled by
the issuance of those equity instruments. SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires a public entity to measure the cost of employee services received in
exchange for an award of 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
 -6-




---



##### Table of Contents



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 use of 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) became effective for public entities that did not file as
small business issuers as of the beginning of the first interim or annual reporting period that
began after June 15, 2005, and for public entities that file as small business issuers as of the
beginning of the first interim or annual reporting period of the registrants first fiscal year
that begins after December 15, 2005. Accordingly, the Company will be required to account for
its transactions involving the exchange of its equity instruments for goods and services
beginning with the first interim report filed by the Company following September 30, 2006. The
Company currently accounts for its stock options under APB No. 25, as further explained in Note
4, 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.(4)
    
    Stock-Based Compensation PlansDuring 1995, the Company adopted a Stock Option and Incentive Plan for directors and key
employees of the Company. The exercise price cannot be less than the market price on the grant
date and the number of shares available for options cannot exceed 83,000. Stock appreciation
rights may also be granted under the plan. During 1998, the Company adopted the 1998 Stock
Option & Incentive Plan for directors and key employees of the Company. Under the 1998 plan,
options to acquire 63,361 shares have been granted. The term of the options range from seven to
ten years, and the options vest equally over periods ranging in length from three to five years.Following is a summary of the status of the 1995 and 1998 plans:
 1995 Plan
    
    
    1998 PlanWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNumber
    
    
    Exercise
    
    
    Number
    
    
    Exerciseof Shares
    
    
    Price
    
    
    of Shares
    
    
    PriceOutstanding at September 30, 2005
    
    
    38,796
    
    
    $
    11.51
    
    
    
    46,477
    
    
    $
    13.15Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    920Outstanding at June 30, 2006
    
    
    38,796
    
    
    $
    11.51
    
    
    
    45,557
    
    
    $
    13.14
  Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Price
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$  9.75
    
    
    15,547
    
    
    
    1.35
    
    
    
    
    
    
    
    15,547$  9.92
    
    
    9,000
    
    
    
    5.47
    
    
    
    
    
    
    
    7,200$12.10
    
    
    37,780
    
    
    
    6.29
    
    
    
    
    
    
    
    22,668$15.75
    
    
    22,026
    
    
    
    1.58
    
    
    
    
    
    
    
    22,026Outstanding at
June 30, 2006
    
    
    84,353
    
    
    
    4.06
    
    
    $
    12.39
    
    
    
    67,441
    
    
    $
    12.52
 -7-




---



##### Table of Contents



Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 Nine Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss), as reported
    
    $
    367,253
    
    
    $
    (130,588
    )
    
    $
    113,190
    
    
    $
    257,062Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (1,723
    )
    
    
    (1,739
    )
    
    
    (564
    )
    
    
    (559
    )Pro forma net income (loss)
    
    $
    365,530
    
    
    $
    (132,327
    )
    
    $
    112,626
    
    
    $
    256,503Earnings (loss) per share:Basic  as reported
    
    $
    .52
    
    
    $
    (.18
    )
    
    $
    .16
    
    
    $
    .36Basic  pro forma
    
    
    .52
    
    
    
    (.18
    )
    
    
    .16
    
    
    
    .36Diluted  as reported
    
    
    .51
    
    
    
    (.18
    )
    
    
    .16
    
    
    
    .36Diluted  pro forma
    
    
    .51
    
    
    
    (.18
    )
    
    
    .16
    
    
    
    .36
 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, 2006 or 2005.(5)
    
    Earnings Per ShareBasic earnings per share were computed by dividing net income by the weighted average number of
shares of common stock outstanding during the nine and three month periods ended June 30, 2006
and 2005. Common stock outstanding consists of issued shares less treasury stock and shares
owned by the Management Recognition Plan and Stock Option plan trusts. Diluted earnings per
share for the nine and three month periods ended June 30, 2006 and 2005, were computed by
dividing net income by the weighted average number of shares of common stock and the dilutive
effects of the shares awarded under the Stock Option plan, based on the treasury stock method
using an average fair market value of the stock during the respective periods.The following table represents the earnings per share calculations for the three and nine months
ended June 30, 2006 and 2005:
 -8-




---



##### Table of Contents



EarningsIncome
    
    
    Shares
    
    
    Per ShareFor the Three Months Ended June 30, 2006:Basic earnings
    
    $
    113,190
    
    
    
    708,671
    
    
    $
    .16Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    8,635Dilutive earnings
    
    $
    113,190
    
    
    
    717,306
    
    
    $
    .16For the Three Months Ended June 30, 2005:Basic earnings
    
    $
    257,062
    
    
    
    709,006
    
    
    $
    .36Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    2,275Dilutive earnings (loss)
    
    $
    257,062
    
    
    
    721,281
    
    
    $
    .36For the Nine Months Ended June 30, 2006:Basic earnings
    
    $
    367,253
    
    
    
    708,800
    
    
    $
    .52Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    6,974Dilutive earnings
    
    $
    367,253
    
    
    
    715,774
    
    
    $
    .51For 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
    )
 Options on 22,026 and 39,126 shares of common stock in 2006 and 2005 were not included in
computing diluted earnings per share because their effects were anti-dilutive.(6)
    
    Investment SecuritiesDuring 2005, the Company transferred all of its securities in the held-to-maturity category to
the available-for-sale category and immediately sold those securities. The amortized cost of
the sold securities was $15,998,287, resulting in a realized loss of $701,099. The decision to
transfer the securities was based on a change in investment strategy and to improve overall
liquidity and interest rate risk.(7)
    
    Business Segment InformationThe Company organizes its business units into two reportable segments: traditional banking
activities and employee benefits consulting and trust activities. The banking segment provides
a full range of banking services within its primary market areas of central Alabama. The
employee benefits trust company operates primarily in the state of Alabama. The Companys
reportable business segments are strategic business units that offer different products and
services. Each segment is managed separately, because each unit is subject to different
marketing and regulatory environments.The accounting policies used by each reportable segment are the same as those discussed in Note
1 to the Consolidated Financial Statements included under Item 13 of the Annual Report on Form
10-KSB. The following table presents financial information for each reportable segment:
 -9-




---



##### Table of Contents



Nine Months Ended June 30, 2006
    
    
    Nine Months Ended June 30, 2005Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalInterest and dividend
income
    
    $
    6,077,099
    
    
    $
    30,267
    
    
    $
    6,107,366
    
    
    $
    5,693,816
    
    
    $
    23,315
    
    
    $
    5,717,131Interest expenses
    
    
    3,193,941
    
    
    
    
    
    
    
    3,193,941
    
    
    
    2,448,980
    
    
    
    
    
    
    
    2,448,980Net interest income
    
    
    2,883,158
    
    
    
    30,267
    
    
    
    2,913,425
    
    
    
    3,244,836
    
    
    
    23,315
    
    
    
    3,268,151Provision for loan losses
    
    
    142,386
    
    
    
    
    
    
    
    142,386
    
    
    
    76,576
    
    
    
    
    
    
    
    76,576Net interest income after
provision for loan losses
    
    
    2,740,772
    
    
    
    30,267
    
    
    
    2,771,039
    
    
    
    3,168,260
    
    
    
    23,315
    
    
    
    3,191,575Other income
    
    
    1,247,415
    
    
    
    1,422,801
    
    
    
    2,670,216
    
    
    
    445,855
    
    
    
    1,220,192
    
    
    
    1,666,047Other expenses
    
    
    3,593,074
    
    
    
    1,258,062
    
    
    
    4,851,136
    
    
    
    3,958,197
    
    
    
    1,110,082
    
    
    
    5,068,279Income (loss) before
income taxes
    
    
    395,113
    
    
    
    195,006
    
    
    
    590,119
    
    
    
    (344,082
    )
    
    
    133,425
    
    
    
    (210,657
    )Income taxes
    
    
    148,764
    
    
    
    74,102
    
    
    
    222,866
    
    
    
    (130,770
    )
    
    
    50,701
    
    
    
    (80,069
    )Net income (loss)
    
    $
    246,349
    
    
    $
    120,904
    
    
    $
    367,253
    
    
    $
    (213,312
    )
    
    $
    82,724
    
    
    $
    (130,588
    )
 Three Months Ended June 30, 2006
    
    
    Three Months Ended June 30, 2005Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalInterest and dividend
income
    
    $
    2,093,908
    
    
    $
    10,344
    
    
    $
    2,104,252
    
    
    $
    1,897,883
    
    
    $
    8,291
    
    
    $
    1,906,174Interest expenses
    
    
    1,172,208
    
    
    
    
    
    
    
    1,172,208
    
    
    
    862,552
    
    
    
    
    
    
    
    862,552Net interest income
    
    
    921,700
    
    
    
    10,344
    
    
    
    932,044
    
    
    
    1,035,331
    
    
    
    8,291
    
    
    
    1,043,622Provision for loan losses
    
    
    131,147
    
    
    
    
    
    
    
    131,147
    
    
    
    (28,270
    )
    
    
    
    
    
    
    (28,270
    )Net interest income after
provision for loan losses
    
    
    790,553
    
    
    
    10,344
    
    
    
    800,897
    
    
    
    1,063,601
    
    
    
    8,291
    
    
    
    1,071,892Other income
    
    
    330,701
    
    
    
    562,713
    
    
    
    893,414
    
    
    
    423,618
    
    
    
    450,793
    
    
    
    874,411Other expenses
    
    
    1,089,606
    
    
    
    424,037
    
    
    
    1,513,643
    
    
    
    1,166,322
    
    
    
    365,399
    
    
    
    1,531,721Income before income taxes
    
    
    31,648
    
    
    
    149,020
    
    
    
    180,668
    
    
    
    320,897
    
    
    
    93,685
    
    
    
    414,582Income taxes
    
    
    10,851
    
    
    
    56,627
    
    
    
    67,478
    
    
    
    121,919
    
    
    
    35,601
    
    
    
    157,520Net income
    
    $
    20,797
    
    
    $
    92,393
    
    
    $
    113,190
    
    
    $
    198,978
    
    
    $
    58,084
    
    
    $
    257,062
 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 24, 2006, the Company declared a regular $0.10 per share cash dividend on the Companys
outstanding stock, payable on August 18, 2006, to stockholders of record as of August 3, 2006.
 -10-




---



##### Table of Contents



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




---



##### Table of Contents



Other Income
   Other Expenses
  -12-




---



##### Table of Contents



Income Taxes
  REVIEW OF FINANCIAL CONDITION
 Overview
   At or for the three monthsended June 30,2006
    
    2005Return on assets
    
    
    0.32
    %
    
    
    0.72
    %Return on equity
    
    
    4.48
    %
    
    
    9.95
    %Equity to asset ratio
    
    
    7.14
    %
    
    
    7.24
    %Interest rate spread
    
    
    2.85
    %
    
    
    3.30
    %Net interest margin
    
    
    2.92
    %
    
    
    3.31
    %Total risk-based capital
    
    
    12.52
    %
    
    
    12.29
    %Non-performing loans to loans
    
    
    1.49
    %
    
    
    0.53
    %Allowance for loan losses to loans
    
    
    0.61
    %
    
    
    0.51
    %Allowance for loan losses to average non-performing loans
    
    
    41.00
    %
    
    
    96.05
    %Ratio of net charge-offs to average loans outstanding
    
    
    0.00
    %
    
    
    0.49
    %Book value per common share outstanding
    
    $
    14.15
    
    
    $
    14.77
  Assets
  -13-




---



##### Table of Contents



Liabilities
  Loan Quality
   Liquidity and Funding Sources
  -14-




---



##### Table of Contents



Capital Adequacy and Resources
    -15-




---



##### Table of Contents



Percent ofAmount
    
    Asset BaseTangible capital
    
    $
    11,803,000
    
    
    
    8.28
    %Core capital
    
    
    11,803,000
    
    
    
    8.28
    %Tier-based capital
    
    
    12,402,000
    
    
    
    12.52
    %
 Cautionary Statement Concerning Forward-Looking Statements
  
 Item 3: Controls and Procedures
   -16-




---



##### Table of Contents



Item 1: Legal Proceedings
  
 Item 6: Exhibits
 Exhibit No.
    
    Description of Exhibit3.1
    
    
    Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 to the
Companys Registration Statement on Form S-1 under
the Securities Act, Reg. No. 33-80730).3.2
    
    
    Bylaws (Incorporated by reference to Exhibit 3.2 to
the Companys Registration Statement on Form S-1
under the Securities Act, Reg. No. 33-80730).3.3
    
    
    Amendment to Article III, Section 2 of the Bylaws
(Incorporated by reference to Exhibit 3.3 to the
Companys Annual Report on Form 10-KSB for the year
ended September 30, 2002).4
    
    
    Form of Common Stock Certificate (Incorporated by
reference to Exhibit 4 to the Companys
Registration Statement on Form S-1 under the
Securities Act, Reg. No. 33-80730).10.1
    
    
    Form of Amended and Restated Employment Agreement
effective as of January 1, 2006, between SouthFirst
Bank and Sandra H. Stephens (Filed herewith).10.2
    
    
    Form of Amended and Restated Employment Agreement
effective as of January 1, 2006, between Pension
and Benefit Financial Services, Inc. and J. Malcomb
Massey (Filed herewith).10.3
    
    
    Form of Guaranty of Employment Agreement among
SouthFirst Bancshares, Inc., SouthFirst Bank,
Pension & Benefit Financial Services, Inc. and J.
Malcomb Massey (Incorporated by reference to
Exhibit 10.4.2 to the Companys Annual Report on
Form 10-KSB for the year ended September 30, 2001).10.4
    
    
    Form of Amended and Restated Employment Agreement
effective as of January 1, 2006, between Pension &
Benefit Financial Services, Inc. and Ruth M. Roper
(Filed herewith).10.5
    
    
    Form of Guaranty of Employment Agreement among
SouthFirst Bancshares, Inc., SouthFirst Bank,
Pension & Benefit Financial Services, Inc. and Ruth
M. Roper (Incorporated by reference to Exhibit
10.5.2 to the Companys Annual Report on Form
10-KSB for the year ended September 30, 2001).10.6
    
    
    Form of Management Recognition Plan A (Incorporated
by reference to Exhibit 10.5 to the Companys
Registration Statement on Form S-1 under the
Securities Act, Reg. No. 33-80730).10.7
    
    
    Form of Management Recognition Plan A, as amended
(Incorporated by reference to Exhibit 10.8.2 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 1995).10.8
    
    
    Management Recognition Plan A Restated and
Continued (Incorporated by reference to Exhibit 4.1
to the Companys Registration Statement on Form S-8
under the Securities Act, Reg. No. 333-4534).10.9
    
    
    Form of Management Recognition Plan B (Incorporated
by reference to Exhibit 10.6 to the Companys
Registration Statement on Form S-1 under the
Securities Act, Reg. No. 33-80730 filed 1994).
 -17-




---



##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.10
    
    
    Form of Management Recognition Plan B, as amended
(Incorporated by reference to Exhibit 10.9.2 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 1995).10.11
    
    
    Management Recognition Plan B, Restated and
Continued (Incorporated by reference to Exhibit 4.1
to the Companys Registration Statement on From S-8
under the Securities Act, Reg. No. 333-4536).10.12
    
    
    Form of Stock Option and Incentive Plan
(Incorporated by reference to Exhibit 10.10.1 to
the Companys Annual Report on Form 10-K for the
year ended September 30, 1995).10.13
    
    
    Form of Stock Option and Incentive Plan, as amended
(Incorporated by reference to Exhibit 10.10.2 to
the Companys Annual Report on Form 10-K for the
year ended September 30, 1995).10.14
    
    
    From of Stock Option and Incentive Plan, Restated
and Continued (Incorporated by reference to Exhibit
4.1 to the Companys Registration Statement on Form
S-8, Reg. No. 333-4538).10.15
    
    
    Form of Stock Option and Incentive Plan, as Amended
(Incorporated by reference to Exhibit 10.10.4 to
the Companys Registration Statement on Form S-8,
Reg. No. 333-85705).10.16
    
    
    Form of Incentive Stock Option Agreement
(Incorporated by reference to Exhibit 4.2 to the
Companys Registration Statement on Form S-8, Reg.
No. 333-4538).10.17
    
    
    Form of Incentive Stock Option Agreement, as
Amended (Incorporated by reference to Exhibit
10.10.6 to the Companys Registration Statement on
Form S-8, Reg. No. 333-85705).10.18
    
    
    Form of SouthFirst Bancshares, Inc. Employee Stock
Ownership Plan (Incorporated by reference to
Exhibit 10.8 to the Companys Incorporated by
reference to Exhibit 10.8 to the Companys
Registration Statement on Form S-1 under the
Securities Act, Reg. No. 33-80730).10.19
    
    
    Third Amendment to the SouthFirst Bancshares, Inc.
Employee Stock Ownership Plan executed as of
September 29, 2001 (Incorporated by reference to
Exhibit 10.11.2 to the Companys Annual Report on
Form 10-KSB for the year ended September 30, 2001).10.20
    
    
    Deferred Compensation Agreement between Pension &
Benefit and Ruth M. Roper (Incorporated by
reference to Exhibit 10.14 to the Companys Annual
Report on Form 10-KSB for the year ended September
30, 2001).10.21
    
    
    Stock Option Agreement between SouthFirst
Bancshares, Inc. and Sandra H. Stephens
(Incorporated by reference to Exhibit 10.16 to the
Companys Quarterly Report on Form 10-QSB for the
period ended December 31, 2001).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 August 14, 2006 (Filed herewith).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 14,
2006 (Filed herewith).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 14, 2006 (Furnished herewith).
  -18-




---



##### Table of Contents



SIGNATURES
  SOUTHFIRST BANCSHARES, INC.Date: August 14, 2006
    By:
    /s/ Sandra H. StephensSandra H. StephensChief Executive Officer
(principal executive officer)Date: August 14, 2006
    By:
    /s/ Janice BrowningJanice BrowningController, Treasurer
(principal accounting officer) -19-




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description of Exhibit3.1
    
    
    Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 to the
Companys Registration Statement on Form S-1 under
the Securities Act, Reg. No. 33-80730).3.2
    
    
    Bylaws (Incorporated by reference to Exhibit 3.2 to
the Companys Registration Statement on Form S-1
under the Securities Act, Reg. No. 33-80730).3.3
    
    
    Amendment to Article III, Section 2 of the Bylaws
(Incorporated by reference to Exhibit 3.3 to the
Companys Annual Report on Form 10-KSB for the year
ended September 30, 2002).4
    
    
    Form of Common Stock Certificate (Incorporated by
reference to Exhibit 4 to the Companys
Registration Statement on Form S-1 under the
Securities Act, Reg. No. 33-80730).10.1
    
    
    Form of Amended and Restated Employment Agreement
effective as of January 1, 2006, between SouthFirst
Bank and Sandra H. Stephens (Filed herewith).10.2
    
    
    Form of Amended and Restated Employment Agreement
effective as of January 1, 2006, between Pension
and Benefit Financial Services, Inc. and J. Malcomb
Massey (Filed herewith).10.3
    
    
    Form of Guaranty of Employment Agreement among
SouthFirst Bancshares, Inc., SouthFirst Bank,
Pension & Benefit Financial Services, Inc. and J.
Malcomb Massey (Incorporated by reference to
Exhibit 10.4.2 to the Companys Annual Report on
Form 10-KSB for the year ended September 30, 2001).10.4
    
    
    Form of Amended and Restated Employment Agreement
effective as of January 1, 2006, between Pension &
Benefit Financial Services, Inc. and Ruth M. Roper
(Filed herewith).10.5
    
    
    Form of Guaranty of Employment Agreement among
SouthFirst Bancshares, Inc., SouthFirst Bank,
Pension & Benefit Financial Services, Inc. and Ruth
M. Roper (Incorporated by reference to Exhibit
10.5.2 to the Companys Annual Report on Form
10-KSB for the year ended September 30, 2001).10.6
    
    
    Form of Management Recognition Plan A (Incorporated
by reference to Exhibit 10.5 to the Companys
Registration Statement on Form S-1 under the
Securities Act, Reg. No. 33-80730).10.7
    
    
    Form of Management Recognition Plan A, as amended
(Incorporated by reference to Exhibit 10.8.2 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 1995).10.8
    
    
    Management Recognition Plan A Restated and
Continued (Incorporated by reference to Exhibit 4.1
to the Companys Registration Statement on Form S-8
under the Securities Act, Reg. No. 333-4534).10.9
    
    
    Form of Management Recognition Plan B (Incorporated
by reference to Exhibit 10.6 to the Companys
Registration Statement on Form S-1 under the
Securities Act, Reg. No. 33-80730 filed 1994).10.10
    
    
    Form of Management Recognition Plan B, as amended
(Incorporated by reference to Exhibit 10.9.2 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 1995).10.11
    
    
    Management Recognition Plan B, Restated and
Continued (Incorporated by reference to Exhibit 4.1
to the Companys Registration Statement on From S-8
under the Securities Act, Reg. No. 333-4536).10.12
    
    
    Form of Stock Option and Incentive Plan
(Incorporated by reference to Exhibit 10.10.1 to
the Companys Annual Report on Form 10-K for the
year ended September 30, 1995).10.13
    
    
    Form of Stock Option and Incentive Plan, as amended
(Incorporated by reference to Exhibit 10.10.2 to
the Companys Annual Report on Form 10-K for the
year ended September 30, 1995).
 -20-




---



##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.14
    
    
    From of Stock Option and Incentive Plan, Restated
and Continued (Incorporated by reference to Exhibit
4.1 to the Companys Registration Statement on Form
S-8, Reg. No. 333-4538).10.15
    
    
    Form of Stock Option and Incentive Plan, as Amended
(Incorporated by reference to Exhibit 10.10.4 to
the Companys Registration Statement on Form S-8,
Reg. No. 333-85705).10.16
    
    
    Form of Incentive Stock Option Agreement
(Incorporated by reference to Exhibit 4.2 to the
Companys Registration Statement on Form S-8, Reg.
No. 333-4538).10.17
    
    
    Form of Incentive Stock Option Agreement, as
Amended (Incorporated by reference to Exhibit
10.10.6 to the Companys Registration Statement on
Form S-8, Reg. No. 333-85705).10.18
    
    
    Form of SouthFirst Bancshares, Inc. Employee Stock
Ownership Plan (Incorporated by reference to
Exhibit 10.8 to the Companys Incorporated by
reference to Exhibit 10.8 to the Companys
Registration Statement on Form S-1 under the
Securities Act, Reg. No. 33-80730).10.19
    
    
    Third Amendment to the SouthFirst Bancshares, Inc.
Employee Stock Ownership Plan executed as of
September 29, 2001 (Incorporated by reference to
Exhibit 10.11.2 to the Companys Annual Report on
Form 10-KSB for the year ended September 30, 2001).10.20
    
    
    Deferred Compensation Agreement between Pension &
Benefit and Ruth M. Roper (Incorporated by
reference to Exhibit 10.14 to the Companys Annual
Report on Form 10-KSB for the year ended September
30, 2001).10.21
    
    
    Stock Option Agreement between SouthFirst
Bancshares, Inc. and Sandra H. Stephens
(Incorporated by reference to Exhibit 10.16 to the
Companys Quarterly Report on Form 10-QSB for the
period ended December 31, 2001).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 August 14, 2006 (Filed herewith).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 14,
2006 (Filed herewith).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 14, 2006 (Furnished herewith).
 -21-