##### 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 NumberDecember 31, 2005
    
    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:  
    
    
    
    256-245-4365Not applicable(Former name, former address and former fiscal year, if changed since last report)
  þ Yes o No
  o Yes þ No
  Common Stock, par value $.01 per share
    
    708,871 sharesClass
    
    Outstanding at January 31, 2006
 o þ




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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1: Financial Statements (Unaudited)
    
    
    1Consolidated Statements of Financial Condition at December 31, 2005 (Unaudited)
and September 30, 2005
    
    
    1Consolidated Statements of Operations (Unaudited) for the Three Months
Ended December 31, 2005 and 2004
    
    
    2Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the
Three Months Ended December 31, 2005
    
    
    3Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended
December 31, 2005 and 2004
    
    
    4-5Notes to Consolidated Financial Statements (Unaudited)  December 31, 2005 and 2004
    
    
    6-10Item 2: Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    11-15Item 3: Controls and Procedures
    
    
    15PART II  OTHER INFORMATION
    
    
    16Item 1: Legal Proceedings
    
    
    16Item 6: Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    17EXHIBIT INDEX
    
    
    18CERTIFICATIONS
    
    
    19-21EX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO




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##### Table of Contents



Item 1: Financial Statements
 
   December 30,
    
    
    September 30,2005
    
    
    2005(Unaudited)AssetsCash and cash equivalents
    
    $
    4,589,587
    
    
    $
    5,042,170Interest-bearing deposits in other financial institutions
    
    
    857,967
    
    
    
    871,801Securities available-for-sale, at fair value
    
    
    25,413,874
    
    
    
    26,482,705Loans receivable
    
    
    95,640,826
    
    
    
    95,907,301Less allowance for loan losses
    
    
    (532,964
    )
    
    
    (518,572
    )Net loans
    
    
    95,107,862
    
    
    
    95,388,729Loans held for sale at cost (which approximates fair value)
    
    
    
    
    
    
    948,250Foreclosed assets, net
    
    
    374,063
    
    
    
    255,470Premises and equipment, net
    
    
    4,620,173
    
    
    
    4,645,624Federal Home Loan Bank stock, at cost
    
    
    1,479,200
    
    
    
    1,218,200Goodwill
    
    
    543,706
    
    
    
    543,706Accrued interest receivable
    
    
    548,579
    
    
    
    656,455Other assets
    
    
    2,582,844
    
    
    
    3,084,414Total Assets
    
    $
    136,117,855
    
    
    $
    139,137,524Liabilities And Stockholders EquityLiabilities:Deposits:Non-interest bearing
    
    $
    5,338,184
    
    
    $
    4,232,573Interest bearing
    
    
    91,267,403
    
    
    
    96,892,239Total deposits
    
    
    96,605,587
    
    
    
    101,124,812Advances by borrowers for property taxes and insurance
    
    
    196,702
    
    
    
    237,052Accrued interest payable
    
    
    717,369
    
    
    
    641,075Borrowed funds
    
    
    27,872,861
    
    
    
    26,015,861Accrued expenses and other liabilities
    
    
    523,318
    
    
    
    694,781Total liabilities
    
    
    125,915,837
    
    
    
    128,713,581Stockholders Equity:Common stock, $.01 par value, 2,000,000 shares authorized;
990,241 shares issued and 708,871 shares outstanding at
December 31, 2005;
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 (281,370 shares at December 31, 2005
and 281,270 at September 30, 2005)
    
    
    (3,893,823
    )
    
    
    (3,892,598
    )Deferred compensation on common stock employee benefit plans
    
    
    (129,737
    )
    
    
    (135,675
    )Shares held in trust at cost (9,402 shares at December 31, 2005
and September 30, 2005)
    
    
    (103,483
    )
    
    
    (103,483
    )Retained earnings
    
    
    4,828,007
    
    
    
    4,874,445Accumulated comprehensive other income (loss)
    
    
    (348,793
    )
    
    
    (168,593
    )Total stockholders equity
    
    
    10,202,018
    
    
    
    10,423,943Total Liabilities and Stockholders Equity
    
    $
    136,117,855
    
    
    $
    139,137,524
  -1-




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##### Table of Contents



2005
    
    
    2004Interest and dividend income:Interest and fees on loans
    
    $
    1,630,788
    
    
    $
    1,493,102Interest income on deposits in other financial institutions
    
    
    24,624
    
    
    
    16,750Interest and dividend income on securities available-for-sale
    
    
    319,869
    
    
    
    165,338Interest income on securities held-to-maturity
    
    
    
    
    
    
    211,648Total interest and dividend income
    
    
    1,975,281
    
    
    
    1,886,838Interest expense:Interest on deposits
    
    
    635,063
    
    
    
    476,497Interest on borrowed funds
    
    
    343,464
    
    
    
    293,216Total interest expense
    
    
    978,527
    
    
    
    769,713Net interest income
    
    
    996,754
    
    
    
    1,117,125Provision for loan losses
    
    
    53,237
    
    
    
    25,000Net interest income after provision for loan losses
    
    
    943,517
    
    
    
    1,092,125Other income:Service charges and other fees
    
    
    141,278
    
    
    
    126,928Employee benefit trust and consulting fees
    
    
    375,322
    
    
    
    365,049Gain on sale of loans
    
    
    133,950
    
    
    
    186,690Gain (loss) on sale of foreclosed assets
    
    
    (862
    )
    
    
    (2,102
    )Gain (loss) on sale of equipment
    
    
    
    
    
    
    3,500Other
    
    
    100,354
    
    
    
    92,806Total other income
    
    
    750,042
    
    
    
    772,871Other expenses:Compensation and benefits
    
    
    949,666
    
    
    
    985,861Net occupancy expense
    
    
    109,624
    
    
    
    109,120Furniture and fixtures
    
    
    133,199
    
    
    
    123,030Data processing
    
    
    68,706
    
    
    
    85,381Office supplies and expense
    
    
    116,846
    
    
    
    96,320Deposit insurance premiums
    
    
    27,502
    
    
    
    26,795Legal
    
    
    24,996
    
    
    
    52,800Other professional services
    
    
    61,173
    
    
    
    67,815Other
    
    
    161,987
    
    
    
    120,817Total other expenses
    
    
    1,653,699
    
    
    
    1,667,939Income before income taxes
    
    
    39,860
    
    
    
    197,057Income tax expense
    
    
    15,411
    
    
    
    74,882Net income
    
    $
    24,449
    
    
    $
    122,175Earnings per share:Basic
    
    
    0.03
    
    
    
    0.17Diluted
    
    
    0.03
    
    
    
    0.17Cash dividends declared
    
    
    0.10
    
    
    
    0.15Weighted average shares outstanding:Basic
    
    
    708,885
    
    
    
    709,406Diluted
    
    
    713,003
    
    
    
    732,548
  -2-




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##### Table of Contents



DeferredCompensationon Common
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Stock
    
    
    Shares
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-in
    
    
    Treasury
    
    
    Employee
    
    
    Held in
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Stock
    
    
    Benefit Plans
    
    
    Trust
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at September 30,
2005
    
    $
    9,996
    
    
    $
    9,839,851
    
    
    $
    (3,892,598
    )
    
    $
    (135,675
    )
    
    $
    (103,483
    )
    
    $
    4,874,445
    
    
    $
    (168,593
    )
    
    $
    10,423,943Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,449
    
    
    
    
    
    
    
    24,449Change in net unrealized
gain on
available-for-sale
securities, net of
reclassification adjustments
and
income taxes of $110,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180,200
    )
    
    
    (180,200
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (155,751
    )Vesting of deferred
compensation shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,938
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,938Acquisition of treasury
stock
    
    
    
    
    
    
    
    
    
    
    (1,225
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,225
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,887
    )
    
    
    
    
    
    
    (70,887
    )Balance at December 31,
2005
    
    $
    9,996
    
    
    $
    9,839,851
    
    
    $
    (3,893,823
    )
    
    $
    (129,737
    )
    
    $
    (103,483
    )
    
    $
    4,828,007
    
    
    $
    (348,793
    )
    
    $
    10,202,018
  -3-




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##### Table of Contents



2005
    
    
    2004Operating activities:Net income
    
    $
    24,449
    
    
    $
    122,175Adjustments
to reconcile net income to net cash provided (used) by operating activities:Provision for loan losses
    
    
    53,237
    
    
    
    25,000Depreciation and amortization
    
    
    95,794
    
    
    
    99,232Gain on sale of loans
    
    
    (133,950
    )
    
    
    (186,690
    )Increase (decrease) in deferred loan origination fees
    
    
    (11,470
    )
    
    
    34,806Net amortization of premium/discount on investment securities
    
    
    8,479
    
    
    
    (343
    )Loss on sale of foreclosed assets
    
    
    862
    
    
    
    2,102Gain on sale of premises and equipment
    
    
    
    
    
    
    (3,500
    )Loans originated for sale
    
    
    (4,846,691
    )
    
    
    (7,997,975
    )Proceeds from sale of loans
    
    
    5,928,891
    
    
    
    7,821,272(Increase) decrease in accrued interest receivable
    
    
    107,876
    
    
    
    (89,367
    )(Increase) decrease in other assets
    
    
    501,570
    
    
    
    391,343Deferred compensation expense
    
    
    5,938
    
    
    
    5,938Increase (decrease) in accrued interest payable
    
    
    76,294
    
    
    
    50,308Increase (decrease) in accrued expenses and other liabilities
    
    
    (61,018
    )
    
    
    (430,697
    )Net cash provided (used) by operating activities
    
    
    1,750,261
    
    
    
    (156,396
    )Investing activities:Net change in interest-bearing deposits in other financial institutions
    
    
    13,834
    
    
    
    (6,678
    )Proceeds from calls and maturities of securities available-for-sale
    
    
    769,707
    
    
    
    439,587Purchase of Federal Home Loan Bank stock
    
    
    (261,000
    )
    
    
    (79,500
    )Net (increase) decrease in loans
    
    
    239,100
    
    
    
    (2,176,267
    )Purchase of premises and equipment
    
    
    (70,343
    )
    
    
    (50,427
    )Proceeds from sale of foreclosed assets
    
    
    8,613
    
    
    
    3,800Proceeds from sale of other assets
    
    
    
    
    
    
    3,500Transfer from loans of repossessed assets
    
    
    (128,068
    )
    
    
    (73,922
    )Net cash provided (used) by investing activities
    
    
    571,843
    
    
    
    (1,939,907
    )
   -4-




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##### Table of Contents



2005
    
    
    2004Financing activities:Increase (decrease) in deposits
    
    $
    (4,519,225
    )
    
    $
    6,254,014Decrease in advances by borrowers for property taxes and insurance
    
    
    (40,350
    )
    
    
    (113,573
    )Proceeds from borrowed funds
    
    
    16,479,000
    
    
    
    20,747,448Repayment of borrowed funds
    
    
    (14,622,000
    )
    
    
    (24,199,580
    )Cash dividends paid
    
    
    (70,887
    )
    
    
    (106,485
    )Acquisition of Treasury shares
    
    
    (1,225
    )
    
    
    Net cash provided (used) by financing activities
    
    
    (2,774,687
    )
    
    
    2,581,824Increase (decrease) in cash and cash equivalents
    
    
    (452,583
    )
    
    
    485,521Cash and cash equivalents at beginning of period
    
    
    5,042,170
    
    
    
    5,015,108Cash and cash equivalents at end of period
    
    $
    4,589,587
    
    
    $
    5,500,629Supplemental information on cash payments:Interest paid
    
    $
    902,233
    
    
    $
    719,405Income taxes paid
    
    $
    3,600
    
    
    $
    36,000Supplemental information on non-cash transactions:Real estate obtained through foreclosure
    
    $
    98,513
    
    
    $
    66,284
  -5-




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##### Table of Contents



(1) Basis of Presentation
     (2) New Accounting Pronouncements
 Share-Based Payment Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees
 -6-




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##### Table of Contents



(3) Stock-Based Compensation Plans
   1995 Plan
    
    
 
    
    
    
    1998 PlanWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    AverageNumber
    
    
    Exercise
    
    
    
    
    
    Number
    
    
    
    Exerciseof Shares
    
    
    Price
    
    


    
    
    of Shares
    
    
    
    PriceOutstanding at September 30, 2005
    
    
    38,796
    
    
    $
    11.51
    
    
    
    
    
    
    
    46,477
    
    
    $
    13.15Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2005
    
    
    38,796
    
    
    $
    11.51
    
    
    
    
    
    
    
    46,477
    
    
    $
    13.15
  Options OutstandingWeighted
    
    
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Price
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$9.75
    
    
    15,547
    
    
    1.84 years
    
    
    
    
    
    
    15,547$9.92
    
    
    9,000
    
    
    5.92 years
    
    
    
    
    
    
    7,200$12.10
    
    
    38,200
    
    
    6.79 years
    
    
    
    
    
    
    22,920$15.75
    
    
    22,526
    
    
    2.07 years
    
    
    
    
    
    
    22,526Outstanding at
December 31, 2005
    
    
    85,273
    
    
    4.55 years
    
    $
    12.41
    
    
    
    68,193
    
    
    $
    12.54
 -7-




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##### Table of Contents



Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 Three Months EndedDecember 31,2005
    
    
    2004Net income, as reported
    
    $
    24,449
    
    
    $
    122,175Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (580
    )
    
    
    (643
    )Pro forma net income
    
    $
    23,869
    
    
    $
    121,532Earnings per share:Basic 
   as reported
    
    
    .03
    
    
    
    .17Basic
    pro forma
    
    
    .03
    
    
    
    .17Diluted  as reported
    
    
    .03
    
    
    
    .17Diluted  pro forma
    
    
    .03
    
    
    
    .17
   (4) Earnings Per Share
   -8-




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##### Table of Contents



EarningsIncome
    
    
    Shares
    
    
    Per ShareFor the Three Months Ended December 31, 2005:Basic earnings
    
    $
    24,449
    
    
    
    708,885
    
    
    $
    0.03Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    4,118Dilutive earnings
    
    $
    24,449
    
    
    
    713,003
    
    
    $
    0.03For the Three Months Ended December 31, 2004:Basic earnings
    
    $
    122,175
    
    
    
    709,406
    
    
    $
    0.17Dilutive Securities:Stock Option Plan shares
    
    
    
    
    
    
    23,142Dilutive earnings
    
    $
    122,175
    
    
    
    732,548
    
    
    $
    0.17
 (5) Business Segment Information
   Three Months Ended December 31, 2005
    
    
    Three Months Ended December 31, 2004Employee
    
    
    
    
    
    
    
    
    
    
    EmployeeBanking
    
    
    Benefits
    
    
    
    
    
    
    Banking
    
    
    BenefitsActivities
    
    
    Activities
    
    
    Total
    
    
    Activities
    
    
    Activities
    
    
    TotalInterest and dividend
income
    
    $
    1,965,292
    
    
    $
    9,989
    
    
    $
    1,975,281
    
    
    $
    1,879,496
    
    
    $
    7,342
    
    
    $
    1,886,838Interest expenses
    
    
    978,527
    
    
    
    
    
    
    
    978,527
    
    
    
    769,713
    
    
    
    
    
    
    
    769,713Net interest income
    
    
    986,765
    
    
    
    9,989
    
    
    
    996,754
    
    
    
    1,109,783
    
    
    
    7,342
    
    
    
    1,117,125Provision for loan losses
    
    
    53,237
    
    
    
    
    
    
    
    53,237
    
    
    
    25,000
    
    
    
    
    
    
    
    25,000Net interest income after
provision for loan losses
    
    
    933,528
    
    
    
    9,989
    
    
    
    943,517
    
    
    
    1,084,783
    
    
    
    7,342
    
    
    
    1,092,125Other income
    
    
    371,720
    
    
    
    378,322
    
    
    
    750,042
    
    
    
    404,760
    
    
    
    368,111
    
    
    
    772,871Other expenses
    
    
    1,242,217
    
    
    
    411,482
    
    
    
    1,653,699
    
    
    
    1,298,876
    
    
    
    369,063
    
    
    
    1,667,939Income (loss) before
income taxes
    
    
    63,031
    
    
    
    (23,171
    )
    
    
    39,860
    
    
    
    190,667
    
    
    
    6,390
    
    
    
    197,057Income taxes
    
    
    24,215
    
    
    
    (8,804
    )
    
    
    15,411
    
    
    
    72,453
    
    
    
    2,429
    
    
    
    74,882Net income (loss)
    
    $
    38,816
    
    
    $
    (14,367
    )
    
    $
    24,449
    
    
    $
    118,214
    
    
    $
    3,961
    
    
    $
    122,175
 -9-




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##### Table of Contents



(6) Subsequent Event
  -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
  Other Income
  Other Expenses
  -11-




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##### Table of Contents



Income Taxes
  REVIEW OF FINANCIAL CONDITION
 Overview
   At or for the three monthsended December 31,2005
    
    2004Return on assets
    
    
    0.07
    %
    
    
    0.34
    %Return on equity
    
    
    0.96
    %
    
    
    4.72
    %Equity to asset ratio
    
    
    7.46
    %
    
    
    7.20
    %Interest rate spread
    
    
    3.18
    %
    
    
    3.46
    %Net interest margin
    
    
    3.24
    %
    
    
    3.49
    %Total risk-based capital
    
    
    13.22
    %
    
    
    13.19
    %Non-performing loans to loans
    
    
    1.56
    %
    
    
    1.19
    %Allowance for loan losses to loans
    
    
    0.55
    %
    
    
    0.95
    %Allowance for loan losses to average non-performing loans
    
    
    35.47
    %
    
    
    80.29
    %Ratio of net charge-offs to average loans outstanding
    
    
    0.04
    %
    
    
    0.00
    %Book value per common share outstanding
    
    $
    14.39
    
    
    $
    14.60
  Assets
  -12-




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##### Table of Contents



Liabilities
  Loan Quality
   Liquidity and Funding Sources
   -13-




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##### Table of Contents



Capital Adequacy and Resources
    -14-




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##### Table of Contents



Percent ofAmount
    
    Asset BaseTangible capital
    
    $
    11,635,000
    
    
    
    8.55
    %Core capital
    
    
    11,635,000
    
    
    
    8.55
    %Tier-based capital
    
    
    12,134,000
    
    
    
    13.22
    %
 Cautionary Statement Concerning Forward-Looking Statements
  
 Item 3: Controls and Procedures
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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 February 14, 2006.31.2
    
    Certificate of the equivalent of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2006.32
    
    Certificate of the Chief Executive Officer and the equivalent of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, dated February 14, 2006.
  (b)
    
    Reports on Form 8-K.
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##### Table of Contents



SIGNATURES
  SOUTHFIRST BANCSHARES, INC.Date: February 14, 2006
    By:
    /s/ Sandra H. StephensSandra H. StephensChief Executive Officer
(principal executive officer)Date: February 14, 2006
    By:
    /s/ Janice BrowningJanice BrowningController, Treasurer
(principal accounting officer) -17-




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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 February 14, 2006.31.2
    
    Certificate of the equivalent of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2006.32
    
    Certificate of the Chief Executive Officer and the equivalent of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, dated February 14, 2006.
 -18-