10KSB

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                             -----------------------

                                   FORM 10-KSB
(Mark One)
(X)             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended September 30, 2001

( )             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                                     OF THE
                         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from               to
                                       --------------    -----------------
                         Commission File Number: 1-13640

                           SOUTHFIRST BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

                             A Delaware Corporation
                  I.R.S. Employer Identification No. 63-1121255
                              126 North Norton Ave.
                            Sylacauga, Alabama 35150
                                 (256) 245-4365

                 Securities Registered Pursuant to Section 12(b)
                              of the Exchange Act:

                                                     Name of Each Exchange
     Title of Each Class                              on Which Registered
- -----------------------------                     -----------------------------
Common Stock, $ .01 par value                     American Stock Exchange, Inc.

                 Securities Registered Pursuant to Section 12(g)
                            of the Exchange Act: None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB, or any
amendment to this Form 10-KSB. [ ]

         Issuer's Revenues for the fiscal year ended September 30, 2001:
$13,202,922

         The aggregate market value of the common equity held by non-affiliates
of the Registrant (751,402 shares), computed using the closing price as reported
on the American Stock Exchange for the Registrant's Common Stock on December 27,
2001 was $7,251,029. For the purposes of this response, officers, directors and
holders of 5% or more of the Registrant's Common Stock are considered the
affiliates of the Registrant.

         The number of shares outstanding of the Registrant's Common Stock as of
December 15, 2001: 858,244 shares of $.01 par value Common Stock.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

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






SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         Management has endeavored in its communications, in its Annual Report,
and in this Form 10-KSB to highlight the trends and factors that might have an
impact on SouthFirst Bancshares, Inc. ("SouthFirst") and the industry in which
SouthFirst competes. Any "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which statements generally can
be identified by the use of forward-looking terminology, such as "may," "will,"
"expect," "estimate," "anticipate," "believe," "target," "plan," "project," or
"continue" or the negatives thereof or other variations thereon or similar
terminology, are made on the basis of management's plans and current analyses of
SouthFirst, its business and the industry as a whole. These forward-looking
statements are subject to risks and uncertainties, including, but not limited
to, economic conditions, competition, interest rate sensitivity and exposure to
regulatory and legislative changes. The above factors, in some cases, have
affected, and in the future could affect, SouthFirst's financial performance and
could cause actual results for fiscal year 2002 and beyond to differ materially
from those expressed or implied in such forward-looking statements. SouthFirst
does not undertake to publicly update or revise its forward-looking statements
even if experience or future changes make it clear that any projected results
expressed or implied therein will not be realized.

                                     PART I

ITEM 1. BUSINESS

BUSINESS OF SOUTHFIRST

         SouthFirst Bancshares, Inc. ("SouthFirst") was formed in April of 1994,
at the direction of the Board of Directors of First Federal of the South ("First
Federal"), a federally chartered savings association subject to the regulatory
oversight of the Office of Thrift Supervision ("OTS") for the purpose of
becoming a holding company to own all of the outstanding Common Stock of First
Federal. On February 13, 1995, First Federal was converted from a mutual to a
stock form of ownership (the "Conversion"), whereupon SouthFirst, approved by
the OTS as a thrift holding company, acquired all of the issued and outstanding
shares of First Federal. SouthFirst's business primarily involves directing,
planning and coordinating the business activities of its wholly owned
subsidiary, First Federal, along with First Federal's two wholly owned operating
subsidiaries, (i) Pension & Benefit Financial Services, Inc., d/b/a Pension &
Benefit Trust Company ("Pension & Benefit"), an employee benefit plan consulting
firm and trust company, located in Montgomery, Alabama, and (ii) SouthFirst
Mortgage, Inc. ("SouthFirst Mortgage"), a subsidiary, through which First
Federal conducts a residential mortgage and construction lending operation.
Further, SouthFirst organized, as a wholly owned subsidiary, SouthFirst
Financial Services, Inc. ("SouthFirst Financial"), located in Montgomery and
Sylacauga, Alabama, through which SouthFirst provides insurance products and
other financial services to the customers of First Federal. In the future,
SouthFirst may acquire or organize other operating affiliates or subsidiaries,
including other financial institutions.

         To date, SouthFirst has neither owned nor leased any property, but has
instead used the premises, equipment and furniture of First Federal. At the
present time, because SouthFirst does not intend to employ any persons other
than officers, it will continue utilizing the support staff of First Federal
from time to time. Additional employees may be hired as appropriate to the
extent SouthFirst expands in the future.


                                       1






BUSINESS OF FIRST FEDERAL

         GENERAL

         First Federal was organized in 1949 as a federally chartered mutual
savings and loan association under the name Sylacauga Federal Savings and Loan
Association. In 1959, First Federal changed its name to First Federal Savings
and Loan Association of Sylacauga. In the Conversion, First Federal changed its
name to First Federal of the South. First Federal is a member of the Federal
Home Loan Bank (the "FHLB") System and its deposit accounts are insured up to
the maximum amount allowable by the FDIC.

         At September 30, 2001, First Federal conducted business from four (4)
full-service locations in Alabama. These locations included its main office in
Sylacauga and branches in Talladega, Clanton, and Centreville. In addition,
SouthFirst Mortgage, the wholly owned subsidiary of First Federal, operates a
loan production office in the Alabama city of Hoover (a suburb of metropolitan
Birmingham), primarily to enhance First Federal's construction lending
activities in the growing residential markets of metropolitan Birmingham.
Further, First Federal operates a loan production office in Dothan, Alabama, to
enhance residential mortgage and construction lending in the fast growing "wire
grass" region of southern Alabama and northwest Florida. First Federal also
pursues other types of loans such as consumer and commercial loans in the
Birmingham and Dothan market areas, as demands dictate.

         First Federal's principal business has been, and continues to be,
attracting retail deposits from the general public and investing those deposits,
together with funds generated from operations, primarily in one-to-four family
mortgage loans, residential constructions loans, mortgage-backed securities,
collateralized mortgage obligations ("CMOs") and investment securities.

         First Federal's revenues are derived principally from interest and fees
on loans in its portfolio and from mortgage-backed securities, CMOs, investment
securities portfolios and customer service fees. First Federal's primary sources
of funds are deposits and proceeds from principal and interest payments on
loans, mortgage-backed securities, CMOs, FHLB advances and other investment
securities. First Federal's primary expense is interest paid on deposits.

         First Federal markets its one-to-four family residential loans and
deposit accounts primarily to persons in Talladega, Chilton, and Bibb Counties
in Alabama. Mortgage loans are generated from depositors, walk-in customers,
referrals from local real estate brokers and developers and, to a limited
extent, local radio and newspaper advertising. Construction loan originations
are attributable largely to First Federal's lending officers' reputations and
their long-standing relationships with builders and developers in the market
areas they serve. See "-- Construction Lending."

         First Federal offers its customers fixed-rate and adjustable-rate
residential mortgage loans, residential construction loans, as well as other
consumer loans, including savings account loans. Fixed-rate mortgage loans are
generally sold upon origination to the secondary market. One-year adjustable
rate loans with 30-year maturities are generally originated for retention in
First Federal's loan portfolio. All consumer loans are retained in First
Federal's portfolio.

         To attract deposits, First Federal offers a selection of deposit
accounts including NOW, money market, passbook savings and certificates of
deposit. First Federal offers competitive rates and relies substantially on
customer service, advertising and long-standing relationships with customers to
attract and retain deposits.


                                       2





         MARKET AREA

         First Federal's primary deposit gathering and lending area covers
Talladega, Chilton and Bibb Counties in central Alabama. To a lesser extent,
First Federal's deposit gathering and lending area covers the adjoining Alabama
counties of Coosa, Shelby, Clay, Cleburne, Calhoun, St. Clair and Jefferson.
Talladega County has a population of approximately 80,000 and Chilton County and
Bibb County had populations of approximately 40,000 and 21,000, respectively,
based on 2000 census data as published by the U.S. Bureau of Vital Statistics.
First Federal's main office in Sylacauga is situated approximately 38 miles
southeast of Birmingham, the largest city in Alabama. First Federal's branch
office in Talladega is situated approximately 55 miles east of Birmingham. First
Federal's Clanton office is located approximately 55 miles north of Montgomery.
First Federal's Centreville office is located approximately 25 miles south of
Tuscaloosa. The loan production office of SouthFirst Mortgage in Hoover is
situated within the Birmingham metropolitan area. The Dothan loan production
office is located approximately 191 miles southeast of Birmingham.

         First Federal is the largest financial institution headquartered in
Sylacauga and is the second largest in Talladega County. Talladega County has a
diversified economy based primarily on textile and other manufacturing,
wholesale, retail, mining, service, government, agriculture and tourism.
Manufacturing accounts for approximately one-third of total employment in
Talladega County. The economy is generally stable and there has been no
substantial increase or decrease in the population in the last five years.

         Sylacauga's economy is based primarily on major industrial employers
such as ECC International, Inc., American Color Graphics, Inc., Avondale Mills,
Blue Bell Ice Cream, Pursell Industries and Georgia Marble. U.S. Alliance
Corporation, a paper manufacturer, is a major employer in Childersburg,
Alabama, located 10 miles from Sylacauga in Talladega County. On November 1,
1999, Teksid, Inc. announced plans to build a new aluminum casting
manufacturing facility. The new plant, to be operated by Teksid Automotive
Components, Inc., will be located in Sylacauga, and will employ, upon
completion in calendar year 2002, approximately 400 skilled workers.

         Talladega's economy is based largely on major textile manufacturing
employers such as Brecon Knitting Mills, Wehadkee Yarn Mills, and Image
Industries, Inc. Georgia-Pacific Corporation also employs a number of persons in
Talladega. On May 6, 1999, American Honda Motor Co., Inc. ("Honda") announced
plans to construct a comprehensive automobile manufacturing facility near the
town of Lincoln, Talladega County, Alabama. The plant has been built on a
1,350-acre tract forty miles east of Birmingham and will employ approximately
1,500 associates when it reaches its twin annual capacities of 120,000 vehicles,
and 120,000 engines. Production began in the last quarter of 2001. In addition,
Talladega is the home of the Talladega Superspeedway which hosts the Winston 500
and other NASCAR events and attracts individuals to Talladega County primarily
from the southeast region of the United States.

         First Federal's Clanton office, in Chilton County, and Centreville
office, in Bibb County, were each acquired by First Federal on October 31, 1997.
Although Chilton and Bibb Counties are generally rural areas in which the
economy is largely based on the growth and harvesting of peaches, each of these
counties has been experiencing relatively higher growth rates than Talladega
County in terms of population and households. Chilton County's employers include
GulfStates Paper Corp., International Paper Corp. and Union Camp Corp. Both
counties are in close proximity to the Birmingham metropolitan area. Bibb County
is located near Tuscaloosa and the fast-growing town of Vance, the location of
the Mercedes-Benz manufacturing plant.


                                       3





         RESIDENTIAL LENDING

         First Federal's primary lending activity consists of the origination of
one-to-four family, owner-occupied, residential mortgage loans secured by
property located in First Federal's market area. Originations for such loans are
generally obtained from existing or past customers, realtors, referrals,
walk-ins, and, to a lesser extent, local newspaper and radio advertising. Loans
are originated by First Federal personnel. No loan brokers or commissioned loan
officers are used. Conventional residential loans are priced based on rates
offered by the local competition and the secondary market. At September 30,
2001, First Federal had $51.1 million, or 51% of its loan portfolio, invested in
one-to-four family residential mortgage loans. Management believes that this
policy of focusing on one-to-four family lending has been effective in
contributing to net interest income while reducing credit risk by keeping loan
delinquencies and losses to a minimum.

         First Federal offers conventional fixed rate one-to-four family
mortgage loans with terms of 15 and 30 years. Fixed rate loans are generally
underwritten either according to Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA") guidelines,
utilizing their approved documents so that the loans qualify for sale in the
secondary mortgage market. Generally, First Federal holds a portion of its fixed
rate mortgage loans with maturities not exceeding 15 years in its portfolio as
long-term investments.

         Adjustable rate mortgage ("ARM") loans originated by First Federal
consist of one, three, five, and seven-year ARMs that are indexed to the
comparable maturity Treasury index or various cost of funds indexes. At
September 30, 2001, First Federal held approximately $35.6 million ARMs, which
represented approximately 35.2% of First Federal's total loan portfolio. First
Federal's ARM loans are subject to a limitation of 2.0% per adjustment for
interest rate increases and decreases. In addition, ARM loans currently
originated by First Federal typically have a lifetime cap of 6.0% on increases
in the interest rate. These limits, based on the initial rate, may reduce the
interest rate sensitivity of such loans during periods of changing interest
rates. The repayment terms of ARM loans may increase the likelihood of
delinquencies during periods of rising interest rates. First Federal offers
teaser rates on ARM loans to remain competitive. Adjustable-rate loans which
provide for teaser rates may be subject to increased risk of delinquency or
default as the higher, fully indexed rate of interest subsequently replaces the
lower, initial rate.

         Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. First Federal's lending policies, however,
generally limit the maximum loan-to-value ratio to 95% of the appraised value of
the property, based on an independent appraisal. For Federal Housing
Administration ("FHA"), Veterans' Administration ("VA") and Farmers' Home Loans,
First Federal generally limits the maximum loan-to-value ratio to 100% of the
appraised value of the property. When First Federal makes a loan in excess of
80% of the appraised value or purchase price, private mortgage insurance is
required.

         The loan-to-value ratio, maturity and other provisions of the
residential real estate loans made by First Federal reflect the policy of making
loans generally below the maximum limits permitted under applicable regulations.
For all residential mortgage loans originated by First Federal, upon receipt of
a completed loan application from a prospective borrower, a credit report is
ordered, income, employment and certain other information are verified, and, if
necessary, additional financial information is requested. First Federal requires
an independent appraisal, title insurance (or an attorney's opinion), flood
hazard insurance (if applicable), and fire and casualty insurance on all
properties securing real estate loans made by First Federal. First Federal
reserves the right to approve the selection of which title insurance companies'
policies are acceptable to insure the real estate in the loan transactions.


                                       4





         Members of the First Federal Board of Directors receive a monthly
summary of all loans which are closed. Construction loans in excess of $350,000
require authorizations by the Loan Committee of the First Federal Board prior to
closing. First Federal issues written, formal commitments as to interest rates
to prospective borrowers upon request on real estate loans at the date of
application. The interest rate commitment remains valid for 30 to 60 days (the
"lock-in period") from the date of the application. Upon receipt of loan
approval, the borrower has the balance of the lock-in period to close the loan
at the interest rate committed.

         Originated mortgage loans held in First Federal's portfolio generally
include due-on-sale clauses which provide First Federal with the contractual
right to deem the loan immediately due and payable in the event that the
borrower transfers ownership of the property without First Federal's consent. It
is First Federal's policy to enforce due-on-sale provisions or to require that
the interest rate be adjusted to the current market rate when ownership is
transferred.

         First Federal also offers loans secured by second mortgages on real
estate, such as home improvement and home equity loans. On September 30, 2001,
such loans amounted to $7.6 million. Second mortgage loans are extended for up
to 80% of the appraised value of the property, less existing liens, at an
adjustable or fixed interest rate. Home equity loans are extended in amounts up
to 90% of the appraised value of the property. First Federal generally holds the
first mortgage loans on the properties securing the second mortgages.

         CONSTRUCTION LENDING - SOUTHFIRST MORTGAGE, INC.

         Although First Federal does make certain residential construction loans
through its loan production office in Dothan, Alabama, the majority of the
residential construction lending of First Federal is conducted by its wholly
owned subsidiary, SouthFirst Mortgage, located in Hoover, Alabama, a suburb of
Birmingham. At September 30, 2001, committed construction loans secured by
single-family residential property totaled $37.0 million; of this amount,
approximately $11.6 million was not disbursed. SouthFirst Mortgage makes
construction loans primarily to builders for the construction of single-family
residences, on both a pre-sold and speculative basis. SouthFirst Mortgage also
makes construction loans on single-family residences to individuals who will
ultimately be the owner-occupant of the house.

         Construction loan proceeds are disbursed in increments as construction
progresses. Disbursements are scheduled by contract, with SouthFirst Mortgage
reviewing the progress of the underlying construction project prior to each
disbursement. The construction loan agreements of SouthFirst Mortgage with
builders generally provide that principal repayments are required as individual
units are sold to third parties.

         Construction loans are principally made to builders who have an
established credit history with SouthFirst Mortgage and First Federal, as well
as to builders who are referred by such borrowers. New builders must be approved
by First Federal's Loan Committee and, further, must display the same levels of
knowledge and financial strength similar to that of existing builders. The
application process includes a submission to SouthFirst Mortgage of plans,
specifications and costs of the project to be constructed or developed.
SouthFirst Mortgage and the Loan Committee of First Federal also review the
borrower's existing financial condition and total debt outstanding. All borrower
relationships are reviewed annually by the SouthFirst Mortgage and the Loan
Committee. The residential construction loans are originated with adjustable or
fixed rates of interest that are negotiated with the builders, but typically
will be tied to the prime rate plus a spread and have terms of 12 months or
less. Construction loans generally have a maximum loan-to-value ratio of 80% on
an "as completed" basis. SouthFirst Mortgage generally obtains personal
guarantees for all of its construction loans and converts many of its
construction loans to permanent loans upon completion of the construction phase.



                                       5





         Construction loans generally involve a higher level of credit risk than
permanent single-family residential lending, due to the concentration of
principal in a limited number of borrowers and the effects of changing economic,
governmental and weather conditions. The nature of these loans is such that they
require a sophisticated knowledge of building standards, material costs, union
rules, real estate values and housing demand, and, thus, are more difficult to
evaluate and monitor. The risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. If the estimate of construction cost proves to be inaccurate,
SouthFirst Mortgage may be required to advance funds beyond the amount
originally committed in order to permit completion of the project and will be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.

         Margie R. Bryant, President and CEO of SouthFirst Mortgage Construction
Lending Division, manages the Hoover loan production office. Her primary
responsibility is to manage the construction lending portfolio of SouthFirst
Mortgage. Ms. Bryant performs all underwriting of the construction loans and has
the authority to originate construction loans up to $350,000. No other loan
officer of First Federal or its affiliates has this amount of lending authority.
Loans in excess of $350,000 must be approved by the Board of Directors of
SouthFirst Mortgage and the Loan Committee of the First Federal Board of
Directors. Funds are disbursed based upon percentage of completion as verified
by on-site inspections performed by Ms. Bryant and other qualified employees of
SouthFirst Mortgage.

         Ms. Bryant is responsible for soliciting business, performing
credit-risk assessments and annual credit reviews, preparing loan origination
documents, maintaining loan files, performing site inspections and disbursing
loan proceeds. SouthFirst Mortgage is heavily dependent on Ms. Bryant for
determining the quality of the construction loan portfolio and the accuracy of
the recorded balances. Ms. Bryant reports loan information to the SouthFirst
Mortgage Board and the First Federal Board on a monthly basis. In addition,
First Federal has instituted a system of internal procedures to help ensure that
construction loan interest, construction loan balances and other related
construction loan accounts of SouthFirst Mortgage are fairly stated. Over time,
these procedures have been developed and closely coordinated with First
Federal's independent auditors and First Federal's Internal Control Review
Committee, which reports to the First Federal Board of Directors on a quarterly
basis.

         At September 30, 2001, 25 borrowers had construction loan commitments
from SouthFirst Mortgage in excess of $500,000 with the largest commitment being
$2,913,600. The majority of loans in the construction loan portfolio were made
on a speculative basis. As previously discussed, construction loans are
typically outstanding for a period of 12 months or less. If the loan is not paid
within the original 12 month period, it is renewed for a six month period. All
renewals are approved by SouthFirst Mortgage and First Federal's Loan Committee.
At September 30, 2001, there were 21 such renewal loans totaling $2,651,140.

         Under federal law, the aggregate amount of loans that SouthFirst
Mortgage and First Federal are permitted to make to any one borrower is
generally limited to the greater of 15% (25% if the security has a readily
ascertainable value) of unimpaired capital and surplus of First Federal, or
$500,000. First Federal and SouthFirst Mortgage have received permission from
the OTS to increase the applicable loan-to-one-borrower limits for single-family
residential builders, as permitted under applicable federal law and regulations.
The increased limit for these borrowers is 30% of unimpaired capital and surplus
of First Federal, with an aggregate limit to all such borrowers equal to 150% of
First Federal's unimpaired capital and surplus.


                                       6





         COMMERCIAL LENDING

         At September 30, 2001, commercial lending totaled $14.2 million, or
14.1%, of First Federal's total loan portfolio. First Federal's commercial loans
are secured by real estate or other acceptable collateral. In addition,
borrowers generally must personally guarantee loans secured by commercial real
estate. Commercial loans are mostly made at adjustable rates.

         Commercial loans generally involve a greater degree of risk than
residential mortgage loans. Because payments on loans are often dependent on
successful operation or management of business, repayment of such loans may be
subject to a greater extent to adverse economic conditions. First Federal seeks
to minimize these risks by lending to established customers and generally
restricting such loans to its primary market area. Due to the growth in
commercial lending in recent years, First Federal has increased its commercial
loan portfolio.

         CONSUMER LENDING AND OTHER LENDING

         As a community-oriented financial institution, First Federal offers
certain consumer loans, including both unsecured loans and loans secured by
assets such as deposits, vehicles, and heavy equipment. At September 30, 2001,
consumer loans totaled $4.7 million, or 4.6% of First Federal's total loan
portfolio. This amount includes $1.1 million in loans secured by savings
accounts, $2.3 million in loans secured by vehicles, and $1.3 million in other
secured loans.

         The underwriting standards employed by First Federal for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the underwriting process. Creditworthiness of
the applicant is of primary consideration; however, the underwriting process
also includes a comparison of the value of the security, if any, in relation to
the proposed loan amount.

         LOAN APPROVAL

         All first-mortgage loans, other than construction loans less than
$350,000, are underwritten and approved by the Loan Committee of the First
Federal Board of Directors. Ms. Bryant has underwriting and loan approval
authority for any construction loan up to $350,000. See "-- Construction Lending
- - SouthFirst Mortgage, Inc." First Federal has implemented a second loan review
policy applicable to all loans that are brought before the Loan Committee that
the Loan Committee has not yet approved or denied. The second loan review for
loans that have not yet been approved or denied is performed by designated
members of First Federal's Internal Control Review Committee on a timely basis
following the initial meeting of the Loan Committee. After the second loan
review, the Loan Committee makes a final determination as to whether the loan
application will be denied or approved.

         LOAN ORIGINATION, COMMITMENT AND OTHER FEES AND COMMISSIONS

         In addition to interest earned on loans, First Federal charges fees for
originating and making loan commitments, prepayments of non-residential loans,
late payments, changes in property ownership and other miscellaneous services.
The income realized from such fees varies with the volume of loans made or
repaid, and the fees vary from time to time depending upon the supply of funds
and other competitive conditions in the mortgage markets. Loan demand and the
availability of money also affect these conditions. Fees, net of related
origination costs, are deferred as an adjustment to yield. First Federal also
charges commissions on the sale of credit life insurance and fees in connection
with retail banking activities which are reflected in First Federal's
non-interest operations income.


                                       7





         COMPETITION

         First Federal has significant competition for its residential real
estate mortgage loans, construction loans and other loans and deposits in
Talladega, Jefferson, Chilton and Bibb Counties. The cities of Sylacauga,
Talladega and Clanton have a high density of financial institutions, some of
which are larger, have a state-wide or regional presence and have greater
financial resources than First Federal. First Federal faces significant
competition both in originating mortgage loans and other loans and in attracting
deposits. First Federal's competition for loans comes principally from savings
and loan associations and commercial banks. In addition, there are a number of
mortgage bankers, mortgage brokers, finance companies and insurance companies
that compete with First Federal for loan customers. Credit unions, securities
firms and mutual funds compete with First Federal in raising deposits. Many of
these institutions also seek to provide the same community-oriented services as
First Federal. First Federal competes for deposit accounts by offering
depositors competitive interest rates and a high level of personal service.
First Federal competes for loans primarily through the interest rates and loan
fees it charges and the efficiency and quality of service it provides borrowers
and contractors. Competition in the financial services industry has increased
significantly within the past several years as a result of federal and state
legislation which has, in several respects, deregulated financial institutions.
The full impact of this legislation and subsequent laws cannot be fully assessed
or predicted.

         First Federal also faces significant competition for originations of
residential construction loans. First Federal's competition for these loans
comes principally from larger savings associations and commercial banks who have
greater financial resources than First Federal. First Federal competes for
residential construction loans primarily through the quality of service it
provides borrowers and the long-standing business relationships that First
Federal has with builders and developers in the area.

         First Federal is a community and retail-oriented financial institution
serving its market area with deposit services, residential and commercial real
estate loans and consumer loans. Management considers First Federal's reputation
for financial strength and quality customer service to be its major competitive
advantage in attracting and retaining customers in its market area. While First
Federal is subject to competition from other financial institutions which may
have greater financial and marketing resources, management believes First
Federal benefits from its community orientation and its long-standing
relationship with many of its customers.

         DATA PROCESSING

         First Federal has entered into a data processing servicing agreement
with Kirchman Corp. This servicing agreement provides for First Federal to
receive a full range of data processing services, including an automated general
ledger, deposit accounting, commercial, real estate and installment lending data
processing, central information file and ATM processing and investment portfolio
accounting.

         EMPLOYEES

         First Federal presently employs 62 individuals on a full-time basis,
including 14 officers, and 4 individuals on a part-time basis. First Federal
will hire additional persons as needed, including additional tellers and
financial service representatives.




                                      8



BUSINESS OF SUBSIDIARIES

         SOUTHFIRST MORTGAGE, INC.

         SouthFirst Mortgage was incorporated on July 23, 1999, as a wholly
owned operating subsidiary of First Federal. Through SouthFirst Mortgage, First
Federal is conducting residential mortgage and construction lending activities
in Birmingham, Alabama, and intends to pursue such activities in other markets
(See "Business of First Federal - Construction Lending - SouthFirst Mortgage,
Inc." above).

         PENSION & BENEFIT TRUST COMPANY

         Pension & Benefit was acquired by SouthFirst in April of 1997, and was,
initially, the wholly owned subsidiary thereof. On April 27, 1998, SouthFirst
and First Federal submitted an application to the OTS, seeking approval to
exercise limited trust powers through Pension & Benefit and to establish Pension
& Benefit as an operating subsidiary. Upon being granted limited trust powers
from the OTS, SouthFirst transferred the ownership of Pension & Benefit to First
Federal. Upon the transfer, Pension & Benefit became the wholly owned subsidiary
of First Federal.

         The primary business of Pension & Benefit is rendering actuarial and
administrative services to employee benefit plans of corporate employers,
including their plan administrators and plan trustees, and, under appropriate
circumstances, serving as an employee benefit plan trustee. These actuarial,
administrative and trust services are rendered to approximately 200 retirement
plans, and, generally, are, as follows:

                  ACTUARIAL SERVICES

         The actuarial services include: the computation of retirement benefits,
the determination of plan costs, the projection of benefit payments,
contributions, and non-income, and the analysis of turnover rates and other
contingencies for specific groups of plan participants.

                  ADMINISTRATIVE SERVICES

         The administrative services include: the preparation of the annual
returns and reports for retirement plans (including Form 5500, or 5500-C/R, and
related schedules and attachments), the preparation of summary plan
descriptions, summary annual reports, statements of accrued benefits and various
other notices and reports required under ERISA, and the preparation of
accounting records for plan trustees, including the preparation and maintenance
of participants' accounts.

                     TRUST SERVICES

         The trust services rendered by Pension & Benefit are limited to those
trust services required by self-directed profit sharing plans, 401(k) plans and
Employee Stock Ownership Plans.

         MAGNOLIA TITLE SERVICE, INC.

         At September 30, 2001, SouthFirst owned a 50% interest in Magnolia
Title Services, Inc. ("Magnolia"), a company which provides title insurance and
related services to borrowers and lenders. Start-up losses at Magnolia have
resulted in a write-off of SouthFirst's investment, in the amount of $245,000.
As a consequence, SouthFirst has undertaken programs to re-evaluate its
ownership interest in Magnolia.


                                       9





         SOUTHFIRST FINANCIAL SERVICES, INC.

         SouthFirst Financial was incorporated on June 16, 2000, as the wholly
owned subsidiary of SouthFirst. Through SouthFirst Financial, SouthFirst
provides insurance products and other financial services to the customers of
First Federal and to others.

SUPERVISION AND REGULATION

GENERAL

         First Federal derives its lending and investing powers, as a federal
savings association, from the Home Owners' Loan Act, as amended ("HOLA"), which
is implemented by regulations adopted and administered by the OTS. As a federal
savings association, First Federal is subject to regulation, supervision and
regular examination by the OTS. Federal banking laws and regulations control,
among other things, First Federal's required reserves, investments, loans,
mergers and consolidations, payment of dividends and other aspects of First
Federal's operations. First Federal's deposits are insured by the Savings
Association Insurance Fund (the "SAIF"), which is administered by the FDIC, to
the maximum extent provided by law ($100,000 for each depositor). In addition,
the FDIC has certain regulatory and examination authority over OTS-regulated
savings associations and may recommend enforcement actions against savings
associations to the OTS.

         SouthFirst, as a savings and loan holding company (a "thrift holding
company"), is also required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS and of the Securities and Exchange
Commission (the "Commission"), under the federal securities laws. Certain of the
regulatory requirements applicable to First Federal and to SouthFirst are
referred to below or elsewhere herein.

         As a federally insured depository institution, First Federal is subject
to various regulations promulgated by the Federal Reserve Board, including
Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements),
Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending),
Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD
(Truth in Savings).

         The OTS and the FDIC, along with other state and federal regulators,
have significant discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. The system of regulation and supervision applicable to
First Federal and SouthFirst establishes a comprehensive framework for the
operations of First Federal and SouthFirst, and is intended primarily for the
protection of the FDIC and the depositors of First Federal. Changes in the
regulatory framework could have a material adverse effect on First Federal and
its operations that, in turn, could have a material adverse effect on
SouthFirst. To the extent that the following information describes certain
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of SouthFirst.

RECENTLY ENACTED LEGISLATION

         On November 12, 1999, the Gramm-Leach-Bliley Act, previously known as
the Financial Services Modernization Act of 1999 ("Act"), was signed into law by
President Clinton. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also permits bank holding companies to engage in a
statutorily-provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are related and incidental to these financial activities.

         The Act contains a number of provisions specifically applicable to
savings associations, such as First Federal. For example, the Act repeals the
Savings Association Insurance Fund special reserve, modernizes the Federal Home
Loan Bank System, provides regulatory relief for community banks with
satisfactory or


                                       10




outstanding Community Reinvestment Act ratings, in the form of less frequent
compliance examinations, and creates privacy provisions that address consumer
needs without disrupting necessary information sharing between community banks
and their financial services partners.

         Further, the Act prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or affiliating with nonfinancial entities.
The prohibition applies to a company that becomes a unitary thrift holding
company pursuant to an application filed with the OTS after May 4, 1999. A
"grandfathered" unitary thrift holding company, such as SouthFirst, retains its
authority to engage in nonfinancial activities, but does not retain its ability
to be acquired by a nonfinancial company. See "Regulation of SouthFirst -
Restrictions on Acquisitions."

         The Act is intended to grant to community banks certain powers, as a
matter of right, that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that SouthFirst faces from larger institutions and other types of
companies. In fact, it is not possible to predict the full effect that the Act
will have on SouthFirst.

REGULATION OF SOUTHFIRST

         GENERAL

         As the owner of all of the stock of only one federal savings
association, First Federal, SouthFirst is a "unitary" thrift holding company
subject to regulatory oversight by the OTS and the Commission. As such,
SouthFirst is required to register and file reports with the OTS and the
Commission and is subject to regulation and examination by the OTS. In addition,
the OTS' enforcement authority over SouthFirst and its non-savings association
subsidiaries permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of First Federal rather than for the benefit of stockholders of
SouthFirst.

         QUALIFIED THRIFT LENDER TEST

         As a unitary thrift holding company, SouthFirst generally is allowed to
engage and invest in a broad range of business activities not permitted to
commercial bank holding companies (see "Supervision and Regulation - Recently
Enacted Legislation") or multiple savings and loans holding companies, provided
that First Federal continues to qualify as a "qualified thrift lender." See
"Regulation of First Federal -- Qualified Thrift Lender Test." In the event
SouthFirst acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of SouthFirst and any of its subsidiaries (other than First Federal
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a Qualified Thrift Lender and were acquired in a
supervisory acquisition.

         RESTRICTIONS ON ACQUISITIONS

         SouthFirst must obtain approval from the OTS before acquiring control
of any other SAIF-insured association or savings and loan holding company.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally insured savings
association without giving at least 60 days' written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. Such
acquisition of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings association or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Control of a savings association or a savings and loan
holding company is conclusively presumed to exist if, among other things, a
person or group of persons acting in concert, directly or indirectly, acquires
more than 25.0% of any class of voting stock of the


                                       11



institution or holding company or controls in any manner the election of a
majority of the directors of the insured institution or the holding company.
Control is rebuttably presumed to exist if, among other things, a person
acquires 10.0% or more of any class of voting stock (or 25.0% of any class of
stock) and is subject to any of certain specified "control factors."

         The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") amended provisions of the Bank Holding Company Act of 1956 (the
"BHCA") to specifically authorize the Federal Reserve Board to approve an
application by a bank holding company to acquire control of a savings
association. FIRREA also authorized a bank holding company that controls a
savings association to merge or consolidate the assets and liabilities of the
savings association with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the Bank Insurance Fund ("BIF") with the approval of
the appropriate federal banking agency and the Federal Reserve Board. The
Federal Deposit Insurance Corporation Improvement Act ("FDICIA") further amended
the BHCA to permit federal savings associations to acquire or be acquired by any
insured depository institution. As a result of these provisions, there have been
a number of acquisitions of savings associations by bank holding companies and
other financial institutions in recent years.

         The Gramm-Leach-Bliley Act has further restricted the acquisitions of
nonfinancial companies by unitary thrift holding companies formed after May 4,
1999, and has eliminated the acquisition of "grandfathered" unitary thrift
holding companies, such as SouthFirst, as well as the "new" unitary thrift
holding companies (formed after May 4, 1999) by nonfinancial companies. See
"Supervision and Regulation - Recently Enacted Legislation."

         FEDERAL SECURITIES LAWS

         Common Stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of SouthFirst may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
SouthFirst meets specified current public information requirements, however,
each affiliate of SouthFirst is able to sell in the public market, without
registration, a limited number of shares in any three-month period.

REGULATION OF FIRST FEDERAL

         INSURANCE OF DEPOSIT ACCOUNTS

         First Federal's deposit accounts are insured by the SAIF to a maximum
of $100,000 for each insured member (as defined by law and regulation). Insured
institutions are members of either the SAIF or the BIF. Pursuant to FIRREA, an
insured institution may not convert from one insurance fund to the other without
the advance approval of the FDIC.

         Under FIRREA, the FDIC is given the authority, should it initiate
proceedings to terminate an institution's deposit insurance, to suspend the
insurance of any such institution without tangible capital. However, if a
savings association has positive capital when it includes qualifying intangible
assets, the FDIC cannot suspend deposit insurance unless capital declines
materially or the institution fails to enter into and remain in compliance with
an approved capital plan.

         Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of First Federal is unaware of any practice, condition or violation
that might lead to termination of its deposit insurance.

         As an insurer, the FDIC issues regulations, conducts examinations and
generally supervises the operations of its insured members. FDICIA directed the
FDIC to establish a risk-based premium system under which the FDIC is directed
to charge an annual assessment for the insurance of deposits based on the risk a
particular institution poses to its deposit insurance fund. Under the FDIC's
risk-related insurance regulations, an institution


                                       12



is classified according to capital and supervisory factors. Institutions are
assigned to one of three capital groups: "well capitalized," "adequately
capitalized" or "undercapitalized." Within each capital group, institutions are
assigned to one of three supervisory subgroups. There are nine combinations of
groups and subgroups (or assessment risk classifications) to which varying
assessment rates are applicable.

         As a result of the recapitalization of the SAIF implemented by the
Economic Growth and Regulatory Paperwork Reduction Act (the "Economic Growth
Act") (see " -- Special FDIC Assessment"), the FDIC reduced the insurance
assessment rate for SAIF-assessable deposits for periods beginning on October 1,
1996. For the first half of 1997, the FDIC set the effective insurance
assessment rates for SAIF-insured institutions, such as First Federal, at zero
to 27 basis points. In addition, SAIF-insured institutions were required, until
December 31, 1999, to pay assessments to the FDIC at an annual rate of between
6.0 and 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO"), an agency of the federal government
established to recapitalize the predecessor to the SAIF. During this period, BIF
member banks were assessed for payment of the FICO obligations at one-fifth the
annual rate applicable to SAIF member institutions. After December 31, 1999, BIF
and SAIF members have been assessed at the same rate for FICO obligations.

         The Economic Growth Act also provides that the FDIC may not assess
regular insurance assessments for the SAIF unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except for such assessments on
those institutions that are not classified as "well-capitalized" or that have
been found to have "moderately severe" or "unsatisfactory" financial,
operational or compliance weaknesses. First Federal is classified as
"well-capitalized" and has not been found by the OTS to have such supervisory
weaknesses.

         OTS SUPERVISORY ASSESSMENTS

         In addition to federal deposit insurance premiums, savings associations
like First Federal are required by OTS regulations to pay assessments to the OTS
to fund the operations of the OTS. The general assessment is paid on either a
semi-annual or quarterly basis, as determined by the OTS on an annual basis, and
is computed based on total assets of the institution, including consolidated
subsidiaries, as reported in the association's latest quarterly Thrift Financial
Report. The OTS has adopted amendments to its regulations, effective January 1,
1999, that are intended to assess savings associations on a more equitable
basis. The regulations base the assessment for an individual savings association
on three components: the size of the association, on which the basic assessment
is based; the association's supervisory condition, which results in percentage
increases for any savings association with a composite rating of 3, 4, or 5 in
its most recent safety and soundness examination; and the complexity of the
savings association's operations, which results in a percentage increase for a
savings association that manages over $1 billion in trust assets, provides
services for other loans aggregating more than $1 billion, or has certain
off-balance sheet assets aggregating more than $1 billion. In order to avoid a
disproportionate impact upon the smaller savings institutions, which are those
whose total assets never exceeded $100 million, the new regulations provide that
the portion of the assessment based on asset size will be the lesser of the
assessment under the amended regulations or the regulations before the
amendment.

         REGULATORY CAPITAL REQUIREMENTS

         General. The OTS has adopted capital regulations which establish
capital standards applicable to all savings associations. To meet its regulatory
capital requirements, a savings association must satisfy each of the following
capital requirements: (i) a risk-based capital requirement, where a savings
association's minimum risk-based capital requirement shall be an amount equal to
8% of its risk-weighted assets; (ii) a leverage ratio requirement, where a
savings association's minimum leverage ratio requirement shall be: (a) for a
savings association assigned a composite rating of 1 on the CAMELS financial
institutions rating system, equal to a ratio of core capital to adjusted total
assets of 3%; (b) for all other savings associations which are assigned a value
lower than 1 on the CAMELS financial institutions rating system, equal to a
ratio of core capital to adjusted total assets of 4%; and (iii) a tangible
capital requirement, where the savings association's minimum tangible capital
requirement shall be an amount equal to at least 1.5% of adjusted total assets.


                                       13




         The OTS, also, has established, pursuant to FDICIA, five
classifications for institutions based upon the capital requirements: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. At September 30, 2001, First
Federal was "well capitalized." Failure to maintain that status could result in
greater regulatory oversight or restrictions on First Federal's activities.

         Core Capital and Tangible Capital. The OTS requires savings
associations receiving a composite examination rating of "1," the best possible
rating under the CAMELS examination rating system, to maintain a ratio of core
capital to adjusted total assets of 3.0%. All other savings associations are
required to maintain minimum core capital of at least 4.0% of total adjusted
assets. "Core capital" includes, generally, (i) common stockholders' equity
(including retained earnings), (ii) non-cumulative perpetual preferred stock and
related surplus, (iii) non-withdrawable accounts and certain pledged deposits of
mutual savings associations, (iv) minority interests in fully-consolidated
subsidiaries, and (v) the remaining goodwill resulting from certain prior
regulatory accounting practices, less a savings association's (A) investments in
certain "non-includable" subsidiaries (as determined by regulation) and (B)
intangible assets (with limited exceptions for purchased mortgage servicing
rights, purchased credit card relationships and certain intangible assets
arising from prior regulatory accounting practices). At September 30, 2001,
First Federal's ratio of tangible and core capital to total adjusted assets was
9.28%.

         The "tangible capital" requirement requires a savings association to
maintain tangible capital in an amount not less than 1.5% of its adjusted total
assets. "Tangible capital" means (i) common stockholders' equity (including
retained earnings), (ii) non-cumulative perpetual preferred stock and related
earnings, (iii) non-withdrawable accounts and pledged deposits that qualify as
core capital and (iv) minority interests in equity accounts of
fully-consolidated subsidiaries, less (A) any intangible assets (except for
purchased mortgage servicing rights and purchased credit card relationships
included in core capital), and (B) investments, both equity and debt, in certain
subsidiaries that are not "includable subsidiaries."

         Risk-Based Capital. The risk-based capital standard for savings
associations requires the maintenance of total regulatory capital (which is
defined as core capital plus supplementary capital) of 8.0% of risk-weighted
assets. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock and the general
allowance for credit losses. The portion of the allowance for credit losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, supplementary capital is limited to 100.0% of
core capital. Risk-weighted assets equal assets plus consolidated off-balance
sheet items where each asset or item is multiplied by the appropriate risk
weight. The risk weight assigned to a particular asset or on-balance sheet
credit equivalent amount determines the percentage of that asset/credit
equivalent amount that is included in the calculation of risk-weighted assets.
Thus, to determine the ratio of total capital to total risk-weighted asset: (i)
each off-balance sheet item must be converted to an on-balance sheet credit
equivalent amount by multiplying the face amount of such item by a credit
conversion factor ranging from 0.0% to 100.0% (depending upon the nature of the
item); (ii) the credit equivalent amount of each off-balance sheet item and each
on-balance sheet asset must be multiplied by a risk factor ranging from 0% to
100.0% (again depending on the nature of the item); and (iii) the resulting
amounts are added together and constitute total risk-weighted assets. At
September 30, 2001, First Federal's ratio of total capital to total
risk-weighted assets was 16.01%.

         The OTS and other federal banking regulators adopted, effective October
1, 1998, an amendment to their risk-based capital guidelines that permits
insured depository institutions to include in supplementary capital up to 45% of
the pretax net unrealized holding gains on certain available-for-sale equity
securities, as such gains are computed under the guidelines.

         The OTS regulations require a savings association with "above normal"
interest rate risk to deduct a portion of such capital from its total capital to
account for the "above normal" interest rate risk. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e. the difference between incoming and outgoing discounted cash flows
from assets, liabilities, and off-balance sheet contracts) that would result
from a hypothetical 200 basis point increase or decrease in market rates of
interest (whichever


                                       14




results in a lower net portfolio value), divided by the estimated economic value
of the savings association's assets, as calculated in accordance with guidelines
set forth by the OTS. A savings association's interest rate risk exposure is
measured by the decline in the net portfolio value that would result from a 200
basis point increase or decrease in market interest rates, except when the
3-month Treasury bond equivalent yield falls below 400 basis points. In that
case, the decrease would be equal to one-half of that Treasury rate.

         A savings association whose measured interest rate risk exposure
exceeds 0.02 (2%) must deduct an interest rate risk component in calculating its
total capital for purposes of determining whether it meets its risk-based
capital requirement. The interest rate risk component is an amount equal to
one-half of the difference between its measured interest rate risk and 0.02,
multiplied by the estimated economic value of its total assets. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the association's financial data on
which the interest rate risk was computed.

         The OTS has indefinitely deferred the implementation of the interest
rate risk component in the computation of an institution's risk-based capital
requirements. The OTS continues to monitor the interest rate risk of individual
institutions and retains the right to impose additional capital requirements on
individual institutions.

         See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --
Capital Resources" for tables setting forth First Federal's compliance with its
regulatory capital requirements as of September 30, 2001.

         PROMPT CORRECTIVE ACTION

         Under the OTS final rule implementing the prompt corrective action
provisions of FDICIA, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or greater, has
a Tier 1 risk-based capital ratio (ratio of Tier 1 capital (core capital) to
risk-weighted assets) of 6.0% or greater, has a leverage capital ratio of 5.0%
or greater and is not subject to any order, capital directive or prompt
correction action directive to meet and maintain a specific capital level for
any capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or
greater and has either a leverage ratio of 4.0% or greater or has a leverage
ratio that is 3.0% or greater, if the savings association receives a composite
rating of 1 on the CAMEL financial institutions rating system, and does not meet
the definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, or has a Tier 1 risk-based
capital ratio that is less than 4.0% or has either a leverage ratio that is less
than 4.0% or has a leverage ratio that is less than 3.0% if the savings
association receives a composite rating of 1 on the CAMEL financial institutions
rating system; (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, or a Tier 1 risk-based capital
ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v)
"critically undercapitalized" if the financial association has a ratio of
tangible equity to total assets that is less than 2.0%. Under certain
circumstances, however, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At September 30, 2001, First Federal was
classified as a "well capitalized" institution.

         The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person, if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of


                                       15



compensation during the 12 months preceding the month when the association
became undercapitalized. A significantly undercapitalized association may also
be subject, among other things, to forced changes in the composition of its
board of directors or senior management, additional restrictions on transactions
with affiliates, restrictions on acceptance of deposits from correspondent
associations, further restrictions on asset growth, restrictions on rates paid
on deposits, forced termination or reduction of activities deemed risky, and any
further operational restrictions deemed necessary by the OTS.

         When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.

         STANDARDS FOR SAFETY AND SOUNDNESS

         Under FDICIA, as amended by the Riegle Community Development and
Regulatory Improvements Act of 1994, the federal banking agencies were required
to establish safety and soundness standards for institutions under its
authority. The federal banking agencies, including the OTS, have adopted
interagency guidelines establishing standards for safety and soundness and final
rules establishing deadlines for submission and review of safety and soundness
compliance plans. The guidelines require savings associations to maintain
internal controls and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's business. The
guidelines also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings associations should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
compensation practices at comparable institutions. Additionally, the OTS
guidelines require savings associations to maintain internal controls over their
asset quality and earnings. Under the guidelines, a savings association should
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. If the OTS determines that
a savings association is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A savings association must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
institution to regulatory sanctions.

         DIVIDENDS AND OTHER CAPITAL DISTRIBUTION LIMITATIONS

         OTS regulations currently impose limitations upon savings associations'
capital distributions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. Effective
April 1, 1999, the OTS amended its capital distribution regulations to reduce
regulatory burdens on savings associations. Under the amended OTS regulations
governing capital distributions, certain savings associations are permitted to
pay capital distributions during a calendar year that do not exceed the
association's net income for the year plus its retained net income for the prior
two years, without notice to, or the approval of, the OTS. However, a savings
association subsidiary of a savings and loan holding company, such as
SouthFirst, will continue to have to file an application to receive the approval
of the OTS. These new regulations are more restrictive to SouthFirst than
regulations being replaced based upon SouthFirst's historical dividend
declaration activities.

         OTS regulations impose limitations upon all capital distributions by
savings associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger and other distributions charged against capital. The
regulations establish three tiers of institutions, based primarily on an
institution's capital level. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution (Tier 1
institution) and has not been advised by the OTS that it is in need of more than
normal supervision can, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (i)
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the percentage by which an
association's capital-to-assets ratio exceeds the ratio of its fully phased-in
capital requirement to its


                                       16




assets) at the beginning of the calendar year, or (ii) 75% of its net income
over the most recent four quarter period. Any additional capital distributions
require prior regulatory approval. A Tier 2 association is an association that
has capital equal to or in excess of its minimum capital requirements but does
not meet the fully phased-in capital requirement both before and after the
proposed distribution. A Tier 3 association is defined as an association that
has capital less than its minimum capital requirement before or after the
proposed distribution. At September 30, 2001, First Federal was rated a Tier 1
institution. In the event First Federal's capital falls below its fully
phased-in requirement or the OTS notifies it that it is in need of more than
normal supervision, First Federal's ability to make capital distributions could
be restricted. In addition, the OTS could prohibit a proposed capital
distribution, otherwise permissible under the regulations, if the OTS determines
that the proposed distribution by a savings association would constitute an
unsafe or unsound practice. Finally, under FDICIA, a savings association is
prohibited from making a capital distribution if, after making the distribution,
the savings association would be "undercapitalized" (i.e., not meet any one of
its minimum regulatory capital requirements).

         QUALIFIED THRIFT LENDER TEST

         HOLA requires savings associations to meet the Qualified Thrift Lender
("QTL") test, or suffer a number of regulatory sanctions, including restrictions
on business activities and on FHLB advances. To qualify as a QTL, a savings
association must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code (the "Code") by maintaining at least 60% of its
total assets in specified types of assets, including cash, certain government
securities, loans secured by and other assets related to residential real
property, educational loans, and investments in premises of the institution or
(ii) maintain at least 65% of its "portfolio assets" in certain "qualified
thrift investments" in at least nine months of the most recent twelve-month
period. "Portfolio assets" means, in general, a saving's association's total
assets less the sum of (a) certain intangible assets, including goodwill and
credit card and purchased mortgage servicing rights, (b) the value of property
used by a savings association in its business, and (c) specified liquid assets
up to 20% of total assets. "Qualified thrift investments" includes (i) various
types of loans made to finance, construct, improve or repair domestic
residential or manufactured housing, (ii) home equity loans, (iii) securities
backed by or representing interest in mortgages or domestic residential or
manufactured housing, (iv) obligations issued by the federal deposit insurance
agencies, (v) small business loans, (vi) credit card loans, (vii) education
loans and (viii) shares in the FNMA, FHLMC and FHLB owned by the savings
association. In addition, subject to a 20% of portfolio assets limit, savings
associations are able to treat as Qualified Thrift Investments 200% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small business in "credit needy" areas. At September 30, 2001, First
Federal was a Qualified Thrift Lender.

         A savings association that does not maintain its status as a QTL in at
least nine out of every 12 months must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the savings
association may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank and for a savings association; (ii) the branching powers of the
savings association are restricted to those of a national bank in the savings
association's home state; (iii) the savings association is not eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the savings
association are subject to the rules regarding payment of dividends by a
national bank. In addition, within one year of the date a savings association
ceases to meet the QTL test, any company controlling the association would have
to register under, and become subject to, the requirements of the Bank Holding
Company Act of 1956, as amended. If the savings association does not requalify
as a QTL within the three year period after it failed the QTL test, it would be
required to cease any activity and not retain any investment not permissible for
a national bank and immediately repay any outstanding FHLB advances as promptly
as can be prudently done consistent with the safe and sound operation of the
savings association. A savings association that has failed the QTL test may
requalify as a QTL and be free of such limitations, but it may do so only once.

         LOANS TO ONE BORROWER

         Under HOLA, savings associations are subject to the national bank
limits on loans to one borrower. Generally, a savings association may not make a
loan or extend credit to a single or related group of borrowers in


                                       17




excess of 15.0% of unimpaired capital and surplus. An additional amount, not in
excess of 10.0% of unimpaired capital and surplus, may be loaned, if such loan
is secured by readily-marketable collateral, which is defined to include certain
debt and equity securities and bullion, but generally does not include real
estate. First Federal currently has permission from the OTS to increase its loan
to one borrower limits for single-family residential builders, as permitted
under applicable federal law and regulations. The increased limit for these
borrowers is 30.0% of unimpaired capital and surplus of First Federal, with an
aggregate limit to all such borrowers equal to 150.0% of First Federal's
unimpaired capital and surplus.

         LENDING GUIDELINES

         All financial institutions must adopt and maintain comprehensive
written real estate lending policies that are consistent with safe and sound
banking practices. These lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies adopted by the federal
banking agencies (the "Guidelines"). The Guidelines set forth, pursuant to the
mandates of FDICIA, uniform regulations prescribing standards for real estate
lending. Real estate lending is defined as the extension of credit secured by
liens on interests in real estate or made for the purpose of financing the
construction of a building or other improvements to real estate, regardless of
whether a lien has been taken on the property.

         The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being the
total amount of credit to be extended divided by the appraised value of the
property securing or being improved by the extension of credit plus the amount
of readily-marketable collateral or other acceptable collateral, must be
established for each category of real estate loans. If not a first lien, the
lender must combine all senior liens when calculating this ratio. The
Guidelines, among other things, establish the following supervisory LTV limits:
raw land (65.0%); land development (75.0%); construction (commercial,
multifamily and nonresidential) (80.0%); and improved property (85.0%).
One-to-four family residential (owner occupied) requires no maximum ratio,
however, any LTV ratio in excess of 90.0% should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.

         Certain institutions can make real estate loans that do not conform
with the established LTV ratio limits up to 100.0% of the institutions total
capital. Within this aggregate limit, total loans for all commercial,
agricultural, multi-family and other non-one-to-four family residential
properties should not exceed 30.0% of total capital. An institution will come
under increased supervisory scrutiny as the total of such loans approaches these
levels. Certain loans are also exempt from the LTV ratios, such as loans
guaranteed by a government agency, loans to facilitate the sale of real estate
owned, and loans renewed, refinanced or restructured by the original lender(s)
to the same borrower(s) where there is no advancement of new funds.

         COMMUNITY REINVESTMENT

         Under the Community Reinvestment Act of 1977 ("CRA"), as implemented by
OTS regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings association, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. FIRREA amended the CRA to require public disclosure of an
institution's CRA rating and require the OTS to provide a written evaluation of
an institution's CRA performance utilizing a four-tiered descriptive rating
system in lieu of the existing five-tiered numerical rating system. First
Federal received a satisfactory rating as a result of its latest evaluation on
June 30, 1998.


                                       18




         CONSUMER CREDIT REGULATION

         First Federal's mortgage lending activities are subject to the
provisions of various federal and state statutes, including, among others, the
Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate
Settlement Procedures Act, the Fair Housing Act, and the regulations promulgated
thereunder. These statutes and regulations, among other provisions, prohibit
discrimination, prohibit unfair and deceptive trade practices, require the
disclosure of certain basic information to mortgage borrowers concerning credit
terms and settlement costs, and otherwise regulate terms and conditions of
credit and the procedures by which credit is offered and administered. Many of
the above regulatory requirements are designed to protect the interests of
consumers, while others protect the owners or insurers of mortgage loans.
Failure to comply with these requirements can lead to administrative enforcement
actions, class action lawsuits and demands for restitution or loan rescission.

         TRANSACTIONS WITH AFFILIATES

         Generally, statutory restrictions, promulgated by OTS regulations and
by Section 23A and 23B of the Federal Reserve Act, limit the authority of First
Federal to engage in transactions with affiliates. These restrictions require
that transactions between a savings association or its subsidiaries and its
affiliates be on terms as favorable to the institution as comparable
transactions with non-affiliates. In addition, extensions of credit and certain
other transactions with affiliates are restricted to an aggregate percentage of
a savings association's capital, and collateral in specified amounts must
usually be provided by affiliates to receive loans from the institution.
Affiliates of First Federal include, among others, SouthFirst and any company
which would be under common control with First Federal. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of any affiliate which is
not a subsidiary. Currently, a subsidiary of a savings association that is not
also a depository institution is not treated as an affiliate of the savings
association for purposes of Section 23A and 23B.

         A savings association's authority to extend credit to its officers,
directors and 10% stockholders, as well as to entities that such persons
control, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O promulgated by the Federal Reserve Board. Among other things, these
laws and regulations require such loans to be made on terms substantially
similar to those offered to unaffiliated individuals, place limits on the amount
of loans a savings association may make to such persons based, in part, on the
institution's capital position, and require certain approval procedures to be
followed. OTS regulations, with minor variations, apply Regulation O to savings
associations.

         BRANCHING BY FEDERAL ASSOCIATIONS

         Subject to certain limitations, HOLA and the OTS regulations permit
federally chartered savings associations to establish branches in any state of
the United States. The authority to establish such a branch is available (a) in
states that expressly authorize branches of savings associations located in
another state and (b) to an association that either satisfies the QTL test or
qualifies as a "domestic building and loan association" under the Internal
Revenue Code, which imposes qualification requirements similar to those for a
"qualified thrift lender" under HOLA. The authority for a federal savings
association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities. This authority under
HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.

         LIQUIDITY REQUIREMENTS

           All savings associations are required to maintain an average daily
balance of liquid assets in each calendar quarter of not less than 4% of:(i) the
amount of its liquidity base at the end of the preceding calendar quarter; or
(ii) the average daily balance of its liquidity base during the preceding
quarter. The average daily balance of either liquid assets or liquidity base in
a quarter is calculated by adding the respective balance as of the close of each
business day in a quarter, and for any non-business day, as of the close of the
nearest preceding business day, and dividing the total by the number of days in
the quarter.


                                       19




           Liquid assets for purposes of this computation include specified
short-term assets (e.g., cash, certain time deposits, certain banker's
acceptances and short-term U.S. Government, state, or federal agency
obligations), and long-term assets (e.g., U. S. Government obligations of more
than one and less than five years and state agency obligations maturing in two
years or less). The regulations governing liquidity requirements include, within
the definition of liquid assets, debt securities hedged with forward commitments
to purchase the obligation obtained from (including a commitment represented by
a repurchase agreement) members of Bank of Primary Dealers in United States
Government Securities or banks whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial future position, debt
securities with a long put option and debt securities that provide the holder
with a right to redeem the security at the stated or par value, regardless of
the stated maturities of the securities. FIRREA also authorized the OTS to
designate as liquid assets certain mortgage-related securities with less than
one year to maturity. Monetary penalties may be imposed upon associations for
violations of liquidity requirements.

           The OTS has recently revised its liquidity regulations to decrease
the burden of compliance with such rules. Specifically, the OTS has (1) reduced
the liquidity base by excluding withdrawable accounts payable in more than one
year from the definition of "net withdrawable accounts," (2) reduced the
liquidity requirement from 5% of net withdrawable accounts and short-term
borrowings to 4%, (3) removed a requirement that short-term liquid assets
constitute at least 1% of an association's average daily balance of net
withdrawable deposit accounts and current borrowings, and (4) expanded the
categories of liquid assets that may count toward satisfaction of the liquidity
requirements.

           The OTS may, in certain circumstances, permit a savings association
to reduce its liquid assets below the minimum amount required above, in order to
meet withdrawals or pay obligations.

         FEDERAL HOME LOAN BANK SYSTEM

         General. First Federal is a member of the FHLB System, which consists
of twelve regional FHLBs subject to supervision and regulation by the Federal
Housing Finance Board (the "FHFB"). The FHLBs maintain central credit facilities
primarily for member institutions.

         First Federal, as a member of the FHLB of Atlanta, is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of: (i) one percent of the aggregate outstanding
principal amount of its unpaid home mortgage loans, home purchase contracts and
similar obligations as of the beginning of each year or (ii) $500. First Federal
is in compliance with this requirement with an investment in stock of the FHLB
of Atlanta at September 30, 2001 of $2,229,800.

         Advances from Federal Home Loan Bank. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances (i.e., loans) to members in accordance with policies and
procedures established by the Board of Directors of the FHLB. Long term advances
may only be made for the purpose of providing funds for residential housing. At
September 30, 2001, First Federal had $32.25 million of advances outstanding
from the FHLB.

         As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low and moderate income housing projects. These
contributions have adversely affected the level of dividends paid on FHLB stock
and could continue to do so in the future. For the years ended September 30,
2001 and September 30, 2000, dividends were paid by the FHLB to First Federal in
the amount of $158,762 and $150,603, respectively. If the dividends were
reduced, or interest subsidies on future FHLB advances were to increase, First
Federal's net interest income would likely be reduced.


                                       20




         FEDERAL RESERVE SYSTEM

         The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their deposit
transaction accounts (e.g., primarily checking, NOW and Super NOW checking
accounts) and non-personal time deposits. Under current Federal Reserve Board
regulations, no reserves are required to be maintained on the first $4.4 million
of transaction accounts, while reserves equal to 3% must be maintained on the
next $49.3 million of transaction accounts, plus reserves equal to 10% of the
remainder. Because required reserves must be maintained in the form of vault
cash or in a non-interest bearing account at a Federal Reserve Bank, the reserve
requirement has the effect of reducing the amount of the institution's
interest-earning assets. At September 30, 2001, First Federal was in compliance
with the reserve requirements of the Federal Reserve Board.

         Savings associations have authority to borrow from the Federal Reserve
Bank's "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. First Federal did not have any such borrowings at September 30,
2001.

ITEM 2.  PROPERTIES

         First Federal conducts its business through its main office located in
Sylacauga, Alabama, branch offices located in Talladega, Clanton and
Centreville, Alabama, and loan production offices in Hoover, and Dothan,
Alabama. In addition, on November 24, 1998, First Federal purchased a parcel of
land in Birmingham, Alabama at a price of $1,250,000, and on January 20, 1999,
First Federal purchased a parcel of land in Dothan, Alabama at a price of
$180,000.

         The following table sets forth information relating to the offices of
SouthFirst, First Federal and Pension & Benefit at September 30, 2001. The total
net book value of these properties at September 30, 2001 was approximately
$4,266,000.

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                                       21






                                                                                    NET BOOK VALUE              DEPOSITS
                                                   LEASED                               AS OF                     AS OF
                      LOCATION                    OR OWNED      DATE OPENED         SEPT. 30, 2001           SEPT. 30, 2001
                      --------                    --------      -----------         --------------           --------------
                                                                                                 (In thousands)
                                                                                                 
SOUTHFIRST AND FIRST FEDERAL
  MAIN OFFICE
         126 North Norton Avenue
         Sylacauga, Alabama  35150                 Owned        April 1966             $     705                  $ 40,530
  OFFICE/STORAGE BUILDING
         North Norton Avenue
         Sylacauga, Alabama  35150                 Owned        November 1995                228                       N/A
  FIRST FEDERAL BRANCH OFFICES
         301 West North Street
         Talladega, Alabama  35160                 Owned        April 1961                   186                    14,155

         102 Fifth Street North
         Clanton, Alabama 35045                    Owned        November 1997              1,407                    36,383

         125 Olan Heights Shopping Center
         Centreville, Alabama 35042                Leased       November 1997                N/A                     7,974

SOUTHFIRST MORTGAGE
      LOAN PRODUCTION OFFICES
         3055 Lorna Road
         Birmingham, Alabama 35216                 Leased       March 1994                 1,257                       N/A

         BrightLeaf Court
         25 Honeysuckle Rd., Suite 20
         Dothan, Alabama 36305                     Leased       April 1998                   180                        13

PENSION & BENEFIT
         260 Commerce Street
         Third Floor
         Montgomery, Alabama 36101                 Owned        April 1997                   303                       N/A
                                                                                       ---------                  --------

TOTAL                                                                                  $   4,266                  $ 99,055
                                                                                       =========                  ========



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                                       22





ITEM 3.  LEGAL PROCEEDINGS

         In the normal course of business, SouthFirst and First Federal from
time to time are involved in legal proceedings. SouthFirst and First Federal
management believe there are no pending or threatened legal proceedings which,
upon resolution, are expected to have a material adverse effect upon
SouthFirst's or First Federal's financial condition. Nonetheless, descriptions
of certain, previously disclosed legal proceedings follow:

         Settlement of Legal Proceeding

         Bobby R. Cook, President of the Western Division of First Federal and
member of the Board of Directors of SouthFirst and First Federal, filed a
lawsuit in Chilton County, Alabama, on January 19, 2000, against First Federal,
SouthFirst and Donald C. Stroup (President, Chief Executive Officer, and
Chairman of SouthFirst and First Federal at that time), alleging wrongful
termination of his employment as President of the Western Division and other
claims. Mr. Cook was terminated for cause by the Board of Directors of First
Federal, pursuant to the provisions of Mr. Cook's employment agreement with
First Federal. Further, Mr. Cook, on January 25, 2000, was removed for cause as
a member of the Board of Directors of First Federal, upon the unanimous written
consent of SouthFirst, the sole shareholder of First Federal. Mr. Cook continued
to serve as a member of the Board of Directors of SouthFirst until April, 2001.

         SouthFirst, on August 20, 2001, agreed to settle these claims with Mr.
Cook. The proposed terms of the settlement agreement provide for a payment of
$570,000 to Mr. Cook. In exchange for the payment, SouthFirst will receive
13,856 shares of its common stock, which Mr. Cook owns and which had a market
value of approximately $160,000 at the time of the settlement agreement. Based
on this settlement agreement, SouthFirst accrued the excess of the proposed
payment ($410,000) and included this excess in the statement of operations under
"other expenses," as part of the "termination agreements" item, therein. The
settlement agreement was reduced to writing and executed by the parties as of
December 11, 2001. When received, management anticipates treating the common
stock as treasury stock.

         Litigation Against Former Director

         SouthFirst, in its earnings release on December 4, 2001, announced that
First Federal had filed a complaint to recover the total amount of loss on a
loan made to Vawter Properties and Resources, LP ("Vawter Properties"), an
Alabama limited partnership whose general partner is Charles R. Vawter, Jr., a
former director of SouthFirst and First Federal, and personal guarantor of the
loan. SouthFirst previously disclosed the allegations contained in the complaint
in its current report on Form 8-K as filed with the Securities and Exchange
Commission on December 14, 2001. Mr. Vawter resigned his positions as director
of both SouthFirst and First Federal, vice-chairman of the Board of First
Federal and member of First Federal's loan committee, on August 13, 2001.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was submitted during the fourth quarter ended September 30,
2001 to a vote of security holders of SouthFirst.


                                       23





                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

         As of December 15, 2001, SouthFirst's Common Stock was held by
approximately 349 persons. SouthFirst's Common Stock trades on the American
Stock Exchange, under the symbol "SZB." The following data reflects, by fiscal
quarter, the high and low sales price as well as cash dividends declared for
each quarter from October 1, 1999 through September 30, 2001:



                                                                                                       Cash
                                                                                                     Dividends
                                                                       High Sale      Low Sale       Declared(1)
                                                                       ---------      --------       ----------
                                                                                            
         FISCAL YEAR ENDED SEPTEMBER 30, 2001
         First Quarter ended December 31, 2000                           10 1/8         8 4/9        $ 139,362
         Second Quarter ended March 31, 2001                                 11         9 2/3          139,312
         Third Quarter ended June 30, 2001                               11 4/5        10 1/2          137,689
         Fourth Quarter ended September 30, 2001                         11 3/4        10 5/7          137,689

         FISCAL YEAR ENDED SEPTEMBER 30, 2000
         First Quarter ended December 31, 1999                           11 1/8         9 3/8          139,362
         Second Quarter ended March 31, 2000                             11 3/8        10 5/8          139,362
         Third Quarter ended June 30, 2000                                9 3/4         9 1/4          139,362
         Fourth Quarter ended September 30, 2000                         10             9 3/4          139,362




(1)      Certain cash dividends associated with SouthFirst's Management
         Recognition Plans and Employee Stock Option Plan shares are reflected
         as compensation expense in the consolidated financial statements. See
         "EXECUTIVE COMPENSATION -- Management Recognition Plans" and "--
         Employee Stock Ownership Plan."


                                       24





         Holders of SouthFirst Common Stock are entitled to receive such
dividends as may be declared by SouthFirst's Board of Directors. The amount and
frequency of cash dividends will be determined in the judgment of SouthFirst's
Board of Directors based upon a number of factors, including the company's
earnings, financial condition, capital requirements, and other relevant factors.
SouthFirst management presently intends to continue its present dividend
policies. See "BUSINESS -- Supervision and Regulation -- Regulation of First
Federal -- Dividends and Other Capital Distribution Limitations."

           The amount of dividends payable by First Federal is limited by law
and regulation. The need for First Federal to maintain adequate capital also
limits dividends that may be paid to SouthFirst. Although Federal Reserve policy
could restrict future dividends on SouthFirst Common Stock, such policy places
no current restrictions on such dividends. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Capital Resources"
and "BUSINESS -- Supervision and Regulation -- Regulation of First Federal --
Dividends and Other Capital Distribution Limitations."

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following discussion and analysis is designed to provide a better
understanding of the major factors which affected SouthFirst's results of
operations and financial condition for the referenced periods.

         The purpose of this discussion is to focus on significant changes in
the financial condition and results of SouthFirst during the two year period
ended September 30, 2001. This discussion and analysis is intended to supplement
and highlight information contained in the accompanying consolidated financial
statements and the selected financial data presented elsewhere herein.

RESULTS OF OPERATIONS

         NET INCOME

         For the fiscal year ended September 30, 2001, net income decreased
$1,383,585 from $961,492 to a loss of $422,093. Earnings/(loss) per common share
was ($ .47) and $1.06 for the fiscal years ended September 30, 2001 and 2000,
respectively. The decrease in net income for fiscal 2001 was due primarily to an
increase in loan loss reserves, the settlement and termination of certain
employment contracts and the decrease in interest rates. First Federal's net
interest income after provision for loan losses decreased $1,720,767 (36.1%)
during fiscal 2001, from $4,770,744 to $3,049,977. This decrease was
attributable to a decrease of $1,023,314 in interest income, resulting primarily
from a decrease in interest rates on loans and investments, a decrease in the
loan portfolio and an increase in the provision for loan losses of $852,116,
from $5,572 to $857,688, the reasons for which are discussed below under the
heading "Provision for Loan Losses." Fee income received by Pension and Benefit
increased $41,112 (3.8%) during fiscal 2001, from $1,087,884 to $1,128,996.
Other expenses increased $726,000 (13.7%) from $5,299,379 to $6,025,379 during
fiscal 2001.

         For the fiscal year ended September 30, 2000, net income decreased
$338,507, or 26%, to $961,492. Earnings per common share were $1.06 for the
fiscal year ended September 30, 2000. The decrease in net income in fiscal 2000
was due primarily to a one-time gain of approximately $2,265,000 realized on the
sale by First Federal of FHLMC stock and an increase in the provision for loan
losses of $543,000 in 1999.

         The components of net income discussed in the preceding paragraphs are
discussed more fully below.


                                       25





         NET INTEREST INCOME

         Net interest income was $3,908,000 for the twelve months ended
September 30, 2001, which represents a decrease of $868,651 (18.18%) from fiscal
2000. Net interest income is the difference between the interest earned on
loans, investment securities and other earning assets and the interest cost
associated with deposits and borrowed funds. The decrease in 2001 is primarily
due to a decrease in the net interest rate spread. The net interest rate spread
decreased as rates on interest-earning assets decreased twenty-one basis points
to 7.69% and the cost of funds also increased sixteen basis points to 5.14%. The
combined effect of the changes in average balances and the changes in rates
above resulted in a decrease in net interest income.

         Net interest income was $4,776,000 for the twelve months ended
September 30, 2000. This increase of $659,000, or 16%, over the comparable
twelve months of 1999 was primarily the result of the increase in the average
balance of interest-earning assets from $142.2 million to $150.9 million, where
the average balance of interest-bearing liabilities increased from $134.2
million to $143.2 million. The combined effect of the changes in average balance
and the increase in the net interest rate spread resulted in the $659,000
increase in net interest income for fiscal 2000.

         First Federal's Asset/Liability Committee ("ALCO") conducts a gap
analysis in order to assist in analyzing the yields on earning assets and the
rates paid on interest-bearing liabilities. There can be no assurance, however,
that such analysis will positively affect earnings.

         RATE/VOLUME VARIANCE ANALYSIS

         The following table sets forth information regarding the extent to
which changes in interest rates, changes in volume of interest assets, and
changes in volume of interest related assets and liabilities have affected First
Federal's interest income and expense during the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided for changes attributable to (i) changes in volume (change in volume
multiplied by old rate), (ii) changes in rates (change in rate multiplied by old
volume) and (iii) changes in rate/volume (change in rate multiplied by change in
volume). Changes in rate/volume have been allocated proportionately between
changes in volume and changes in rates.




                                                                      Year Ended September 30,
                                    ----------------------------------------------------------------------------------------------
                                              2001 vs. 2000               2000 vs. 1999                    1999 vs. 1998
                                           Increase (Decrease)          Increase (Decrease)              Increase (Decrease)
                                                 Due to                        Due to                          Due to
                                    ------------------------------  ------------------------------  ------------------------------
                                     Volume      Rate      Total     Volume      Rate      Total     Volume     Rate       Total
                                    --------   --------   --------  --------   --------   --------  --------   --------   --------
                                                                    (Dollar amounts in thousands)
                                                                                               
Interest income:
     Investment securities          $   (167)  $    (20)  $   (187) $    346   $    204   $    550  $   (113)  $   (689)  $   (802)
     Loans receivable                   (542)      (294)      (836)      278        603        881       531       (343)       188
                                    --------   --------   --------  --------   --------   --------  --------   --------   --------
Total interest income                   (709)      (314)    (1,023)      624        807      1,431       418     (1,032)      (614)
                                    --------   --------   --------  ========   ========   ========  ========   ========   ========

Interest expense:
     NOW accounts                        (10)        (5)       (15)      (21)       (27)       (48)       23        (80)       (57)
     Money market demand                  (1)        --         (1)       (1)        (1)        (2)       (1)        (1)        (2)
     Passbook savings                    (15)        (8)       (23)      (33)       (20)       (53)       --        (35)       (35)
     CDs other than Jumbos              (158)       151         (7)     (555)       (52)      (607)     (222)       139        (83)
     Jumbos                               59        107        166       167         12        179        92         58        150
     Borrowed funds                     (213)       (61)      (274)    1,165        138      1,303        44       (215)      (171)
                                    --------   --------   --------  --------   --------   --------  --------   --------   --------
Total interest expense                  (338)       184       (154)     (722)        50        772       (64)      (134)      (198)
                                    --------   --------   --------  --------   --------   --------  --------   --------   --------
     Change in net interest income  $   (371)  $   (498)  $   (869) $    (98)  $    757   $    659  $    482   $   (898)  $   (416)
                                    ========   ========   ========  ========   ========   ========  ========   ========   ========



                                       26


         INTEREST INCOME

         Interest income is a function of both the volume of interest earning
assets and their related yields. Interest income was $10,892,000, $11,915,000
and $10,484,000 for the twelve months ended September 30, 2001, September 30,
2000 and September 30, 1999, respectively. Average interest earning assets
decreased $9,269,000 (6.14%) during 2001, increased $8,682,000 (6.1%) during
2000 and increased $4,821,000 (3.5%) during 1999. The 2001 yield decreased
primarily due to rates on mortgage loans and residential construction loans
decreasing during the year, while the 2000 yield increased, primarily due to
rates on residential construction loans increasing during the year, while the
1999 yield decreased due to a declining interest rate environment during that
period. Interest and fees on loans were $8,506,000, $9,342,000 and $8,461,000
for the twelve months ended September 30, 2001, September 30, 2000, and
September 30, 1999, respectively. The decrease in loans receivable in 2001 was
due to a decreasing rate environment with customers refinancing higher rate
mortgages. The increase in average loans receivable in 2000 and 1999 was largely
due to increases in residential construction loans, home equity loans, as well
as residential mortgage loans.

         Interest income on total investment securities, including those held to
maturity and those available for sale, decreased $188,000 (7.3%) to $2,385,000
in 2001. The average balance outstanding of investment securities, including
those held to maturity and those available for sale, decreased $2,373,000 (6.1%)
to $36,519,000 in 2001, increased $4,212,000 (12.2%) to $38,891,000 in 2000, and
decreased $1,930,000 (5.3%) to $34,679,000 in 1999. The yields on investment
securities were 5.78% in 2001 and 6.26% in 2000. Interest income on total
investment securities, including those held to maturity and those available for
sale, increased $550,000 (27.2%) in 2000.

         INTEREST EXPENSE

         Total average interest-bearing liabilities were $136,000,000,
$143,213,000 and $134,177,000 for fiscal years 2001, 2000 and 1999,
respectively. Interest bearing liabilities decreased by $9,592,000 (6.6%) in
2001, increased by $9,036,000 (6.7%) in 2000, and decreased by $326,000 (0.24%)
in 1999. The rates paid on these liabilities increased by 16 basis points to
5.14% in 2001, increased 23 basis points to 4.98% in 2000, and decreased 13
basis points to 4.75% in 1999. Total interest expense was $6,984,000 for 2001,
$7,139,000 for 2000, and $6,367,000 for 1999, which represent a decrease of
$155,000 (2.2%), an increase of $772,000 (12.1%) and a decrease of $198,000
(3.02%) during 2001, 2000 and 1999, respectively. The decrease in 2001 was
primarily the result of a decrease in interest-bearing liabilities, which was
partially offset by an increase in interest rates. The increase in 2000 was
primarily the result of an increase in interest-bearing liabilities. The
decrease in 1999 resulted from a decrease in the cost of funds.

         Interest on deposits, the primary component of total interest expense,
increased to $4,977,000 in 2001, while interest on deposits decreased to
$4,858,000 in 2000 and decreased to $5,399,000 in 1999. The average balance of
interest-bearing deposits decreased to $101,528,000 in 2001 from $105,088,000 in
2000 and from $115,533,000 in 1999.

         Interest expense on borrowed funds, including both short-term and other
borrowed funds, was $2,007,000, $2,281,000 and $977,000 for fiscal 2001, 2000
and 1999, respectively. The decrease in 2001 was due to the repayment of FHLB
advances with funds received from investments maturing and principal repayment
of mortgage loans. The increase in 2000 was due to the replacement of
certificates of deposit with FHLB Advances, as well as for the funding of
additional investments. The decrease in 1999 was due to lower FHLB advance
rates. The average balance of FHLB advances outstanding was $31,717,000 for
2001, $34,861,000 for 2000, and $17,596,000 for 1999. The average balance of
borrowed funds outstanding was $34,471,000 for 2001, $38,125,000 for 2000, and
$18,644,000 for 1999.


                                       27


         PROVISION FOR LOAN LOSSES

         The provision for loan losses is based on management's current
assessment of the risk in the loan portfolio and is influenced primarily by the
amount of recent loan losses. The provision for loan losses was $857,688,
$5,572, and $587,690 for fiscal 2001, 2000 and 1999, respectively. The amount of
the provision for loan losses for fiscal 2001 is primarily the result of an
additional provision for a loan, which defaulted in the fourth quarter. The
loan, in the principal amount of $657,000, was made to Vawter Properties and
Resources, LP, an Alabama limited partnership whose general partner is Charles
R. Vawter, Jr., a former director of the Company and the Bank, and who also
personally guaranteed the loan. Mr. Vawter resigned his position as director,
vice-chairman of the Board and member of the Bank's loan committee on August 13,
2001. The total of the loan loss and the fourth-quarter expenses associated with
this loan is $713,000, including the loss of principal and unpaid interest, as
well as related legal and accounting expenses. The Bank has brought suit against
Mr. Vawter, Vawter Properties and Resources, LP, and other related parties to
recover the total amount of the loan loss and related expenses. See "Item 3 -
Legal Proceedings."

         The amount of the provision for loan losses for fiscal 1999 was
primarily the result of additional provisions for loan losses in the amount of
$451,593. This provision for loan losses was attributable in significant part
($346,507) to certain loan quality problems observed in internal audits, and in
other reviews by management, of the loan assets for First Federal's Western
Division.

         First Federal's provision for loan losses also reflects management's
current assessment of economic and other factors which management deems relevant
to its risk analysis, including loan concentrations in particular markets,
economic activity in particular markets, certain regulatory requirements
regarding loan loss reserves and related safety and soundness issues, as well as
management's view of the general economic outlook.

         As previously discussed, the loan portfolio is comprised primarily of
one-to-four family residential mortgage loans and residential construction
loans. The one-to-four family residential mortgage loans are originated in First
Federal's primary market area of Talladega and Chilton County, Alabama.
Management believes that the credit risks associated with this type of loan are
significantly lower than other loan types.

         Although residential construction loans have characteristics of
relatively higher credit risks, such as concentrations of amounts due from a
smaller number of borrowers and dependence on the expertise of the builder,
management believes that its residential construction lending policies and
procedures reduce the credit risks associated with this type of loan, and that
its current provisions for loan losses in the construction loan portfolio (1%)
is adequate in light of these policies and procedures. First Federal entered the
residential construction lending area in 1994 by purchasing the portfolio of
another Alabama thrift. A significant portion of First Federal's residential
construction loans were originated in Hoover, Alabama, a suburb of Birmingham
and one of the most affluent areas of the state. Since acquiring the portfolio,
First Federal has not suffered a significant loss on a residential construction
loan.

         Charge-offs in the total loan portfolio, net of recoveries, averaged
approximately, $6,000 from 1994 through 1997. In 1999, net charge-offs increased
from approximately $85,000 to approximately $468,000, due in significant part,
to the previously mentioned loan quality problems occurring in the Western
Division of First Federal. There were no significant charge-offs in 2000. In
2001, a provision was made in the amount of $654,746, for the previously
mentioned Vawter loan. Management also reserved approximately $200,000 on a
commercial loan to a used automobile dealership. The loan to the dealership was
originated in 1998 and the bank has classified the loan as doubtful. Management
believes the allowances for loan losses at September 30, 2001 ($1,577,952) to be
at an adequate level relative to the total loan portfolio and to non-performing
loans, and in light of the other factors, which are relevant to the assessment
of risks in the loan portfolio.


                                       28


         Future additions to the allowance may be necessary based on changes in
economic conditions and other factors. In addition, various regulatory agencies
periodically review First Federal's allowance for loan losses and may require
First Federal to recognize additions to the allowance based upon and analysis of
information available at the time of their review.

         OTHER INCOME

         Other income increased $212,000 (10.1%) in 2001, from $2,100,000 in
2000. Other income decreased $2,318,000 (52.5%) in 2000 from $4,418,000 in 1999.
The increase in 2001 was due to an increase in fee income from Pension and
Benefit from $1,087,000 to $1,129,000 as well as an increase in the gain on the
sale of mortgage loans and other income from $592,000 to $748,000. The decrease
in 2000 was largely due to an increase of $2,279,000 in gain on sale of
investment securities available for sale, which was primarily the result of
selling FHLMC stock at a gain of approximately $2,265,000 in 1999.

         Service charges and other fees were $443,000, $440,000, and $502,000 in
fiscal 2001, 2000, and 1999, respectively. The fluctuations are primarily due to
changes in overdraft fees and NSF charges.

         Gain on sale of loans increased $82,000 (26.2%) in 2001, decreased
$130,000 (29.5%) in 2000, and increased $203,000 (85.1%) in 1999. The increase
in 2001 was primarily due to a decrease in mortgage loan rates, which resulted
in more originations and sales of mortgage loans. The decrease in 2000 was
primarily due to a decreased mortgage loan demand as a result of higher interest
rates from the prior years of 1999 and 1998.

         OTHER EXPENSE

         Total other expense increased to $6,025,000 in 2001 from $5,299,000 in
2000. Other expense had increased in 1999 to $5,831,000. This represented an
increase of $726,000 (13.7%) in 2001, a decrease of $532,000 (9.1%) in 2000 and
an increase of $621,000 (11.9%) in 1999.

         Compensation and benefits totaled $3,118,000, $2,901,000, and
$3,268,000 for 2001, 2000, and 1999, respectively. These levels reflect an
increase of $217,000 (7.5%) in 2001, a decrease of $367,000 (11.2%) in 2000, and
an increase of $140,000 (4%) in 1999. The increase in 2001 was primarily
attributable to merit and cost of living raises and the cost of benefits
associated with such increases. The decrease in 2000 is the result of
streamlining operations and the reduction of employees through attrition. The
increase in 1999 was also associated with merit and cost-of-living increases.

         Termination agreements expense was $560,000 in 2001 and zero in both
2000 and 1999, respectively. This expense is related to the settlement of
certain legal actions with a former director and officer as well as other
expense under the employment contract of the Company's President and Chairman of
the Board of Directors who resigned. See "ITEM 3. LEGAL PROCEEDINGS" and "ITEM
10. EXECUTIVE COMPENSATION."

         INCOME TAX EXPENSE

         Income tax benefit for 2001 was $242,000 while income tax expense was
$609,000 and $816,000 for fiscal years 2000 and 1999, respectively. These levels
represent an effective tax rate on pre-tax earnings (losses) of 36% for the
fiscal year ended September 30, 2001 and 38% for each of the fiscal years ended
September 30, 2000 and September 30, 1999. For 2001, 2000, and 1999, First
Federal's effective tax rate was slightly higher than the statutory rate due to
state income taxes and differences between taxable income for financial
reporting and income tax purposes.

         NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement establishes
accounting and reporting standards for derivative instruments


                                       29


embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. Under certain conditions, a derivative may be
specifically designated as a hedge.

         On October 1, 2000, the Company adopted SFAS No. 133 as amended.
Management assessed the impact of this Statement on the Company's consolidated
financial position and results of operations; the impact was immaterial.

         In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, a
replacement of FASB Statement No. 125. This Statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral, and requires certain disclosures. The Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company adopted SFAS No. 140 on April 1,
2001. Accordingly, disclosures pertaining to collateral have been properly
included in the consolidated financial statements. Transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001, have not been material.

         In June 2001, the FASB issued SFAS No. 141, Business Combinations, SFAS
No. 142, Goodwill and Other Intangible Assets, and SFAS No. 143, Accounting for
Asset Retirement Obligations. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead an entity must perform an
assessment of whether goodwill is impaired as of the date of adoption and test
for impairment at least annually in accordance with the provisions of the
Statement. The new standard will also require that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment. SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development,
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees.

         In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.

         The Company is required to adopt the provisions of SFAS No. 141
immediately. SFAS Nos. 142, 143 and 144 are required to be adopted October 1,
2002, with earlier application permitted. The impact of adopting these standards
on the financial condition of the Company has not been determined at this time.


                                       30


ASSET/LIABILITY MANAGEMENT

         INTEREST RATE SENSITIVITY

         An integral aspect of the funds management of First Federal is the
maintenance of a reasonably balanced position between interest rate sensitive
assets and liabilities. ALCO is charged with the responsibility of managing, to
the degree prudently possible, the bank's exposure to "interest rate risk,"
while attempting to provide a stable and steadily increasing flow of depositors
and borrowers and to seek earnings enhancement opportunities. An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. First Federal measures its interest
rate risk as the ratio of cumulative interest sensitivity gap to total interest
earning assets ("ratio"). The ratio is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that same time period, divided by the total interest earning assets. The
ratio is positive when the amount of interest rate sensitive assets exceeds the
amount of interest sensitive liabilities, and is negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative ratio would adversely affect net interest income, while a positive
ratio would result in an increase in net interest income. Conversely, during a
period of falling interest rates, a negative ratio would result in an increase
in net interest income and a positive ratio would adversely affect net interest
income. Due to the nature of First Federal's balance sheet structure and its use
of the market approach to pricing liabilities, First Federal's management and
the First Federal Board of Directors recognize that achieving a perfectly
matched gap position in any given time frame would be extremely rare. At
September 30, 2001, First Federal had a negative one-year cumulative ratio of
(12.68%) and a five-year cumulative ratio of 6.89%, as a result of which its net
interest income could be negatively affected by rising interest rates and
positively affected by falling interest rates. At September 30, 2000, First
Federal had a negative one-year cumulative ratio of (16.46%) and a positive
five-year cumulative ratio of 6.16%. During the declining interest environment
of 2001, First Federal's interest rate spread decreased while during the rising
interest rate environment of 2000 and 1999, First Federal's interest rate spread
remained fairly constant. Consistent with a positive ratio during the increasing
interest rate environment experienced in late 1994 and 1995, when interest rates
increased further and more rapidly on interest-bearing liabilities than on
interest-earning assets, First Federal experienced a decrease in its interest
rate spread. Conversely, consistent with a negative ratio, during the declining
interest rate environment experienced from 1991 through late 1994, when interest
rates declined further and more rapidly on interest-bearing liabilities than on
interest-earning assets, First Federal experienced an increase in its interest
rate spread.

         There are other factors that may affect the interest rate sensitivity
of First Federal's assets and liabilities. These factors generally are difficult
to quantify but can have a significant impact on First Federal when interest
rates change. Such factors include features in adjustable rate loans that limit
the changes in interest rates on a short-term basis and over the life of the
loan. First Federal's portfolio of one-to-four family residential mortgage loans
included $30.0 million and $32.7 million (29.7% and 30.1% of First Federal's
total loan portfolio) of adjustable rate loans at September 30, 2001 and
September 30, 2000, respectively. These loans have restrictions limiting
interest rate changes to 1.0% or 2.0% per year and 6.0% over the life of the
loan. In a rapidly declining or rising interest rate environment, these
restrictions could have a material effect on interest income by slowing the
overall response of the portfolio to market movements. ALCO utilizes the "Asset
and Liability Management Report" prepared by Farin & Associates (the Strategic
Asset Liability Management) in order to assist First Federal in determining
First Federal's gap and interest rate position. (In prior years ALCO utilized a
similar report prepared by Morgan Keegan & Company, Inc.) Through use of the
Farin & Associates analysis, ALCO analyzed the effect of an increase or decrease
of up to 300 basis points on the market value of First Federal's portfolio
equity ("MVPE") at September 30, 2001 and September 30, 2000. At a 300 basis
point increase, First Federal's MVPE decreased approximately $5,628,000 and
decreased $4,383,000 at September 30, 2001 and September 30, 2000, respectively,
and, at a 300 basis point decrease, First Federal's MVPE increased approximately
$7,290,000 and increased $5,772,000 at September 30, 2001 and September 30,
2000, respectively. Management determined that these changes in MVPE were
acceptable.


                                       31


         The following table sets forth information regarding the projected
maturities and repricing of the major asset and liability categories of First
Federal as of September 30, 2001 and September 30, 2000. Maturity and repricing
dates have been projected by applying the assumptions set forth below as to
contractual maturity and repricing dates. Classifications of items in the table
are different from those presented in other tables and the financial statements
and accompanying notes included therein.

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                                       32


                          INTEREST RATE SENSITIVITY GAP



                                                                                At September 30, 2001
                                                     ------------------------------------------------------------------------------
                                                     One year           One to           Three to           Over
                                                      or less         three years       five years       five years          Total
                                                     --------         -----------       ----------       ----------        --------
                                                                                 (Dollars in thousands)
                                                                                                            
INTEREST-EARNING ASSETS:
  Mortgage loans                                     $ 50,888          $ 17,074          $ 10,341          $17,103         $ 95,406
  All other loans                                       4,103             2,012               565              206            6,886
  Collateralized mortgage
    obligations                                         2,075             1,932             1,727            7,752           13,486
  Mortgage-backed
    securities                                          2,337             2,359             1,564            2,518            8,778
  Other Investments(1)                                 13,742                --                --            2,574           16,316
                                                     --------          --------          --------          -------         --------

 Total interest-earning assets                       $ 73,145          $ 23,377          $ 14,197          $30,153         $140,872
                                                     ========          ========          ========          =======         ========

INTEREST-BEARING LIABILITIES:
    Deposits                                         $ 55,397          $ 25,618          $ 10,905          $ 3,645         $ 95,565
    Borrowed funds                                     35,605                --                --               --           35,605
                                                     --------          --------          --------          -------         --------

Total interest-bearing liabilities                   $ 91,002          $ 25,618          $ 10,905          $ 3,645         $131,170
                                                     ========          ========          ========          =======         ========

Interest sensitivity gap                             $(17,857)         $ (2,241)         $  3,292          $26,508         $  9,702

Cumulative interest sensitivity gap                  $(17,857)         $(20,098)         $(16,806)         $ 9,702

Ratio of cumulative interest sensitivity
gap to total interest earning assets                   (12.68)%          (14.27)%          (11.93)%           6.89%

Ratio of cumulative interest sensitivity
gap to total assets of $151,194                        (11.81)%          (13.29)%          (11.12)%           6.42%



                                                                                At September 30, 2000
                                                     ------------------------------------------------------------------------------
                                                     One year           One to           Three to           Over
                                                      or less         three years       five years       five years          Total
                                                     --------         -----------       ----------       ----------        --------
                                                                                 (Dollars in thousands)
                                                                                                            

INTEREST-EARNING ASSETS:
  Mortgage loans                                     $  59,551          $ 14,988         $11,204           $ 9,165         $ 94,908
  All other loans                                        2,488             4,807           4,617                --           11,912
  Collateralized mortgage
    obligations                                         13,602                --              --                --           13,602
  Mortgage-backed
    securities                                           1,823             1,973           1,752             4,548           10,096
   Other Investments(2)                                  4,138             3,000           6,148             6,732           20,018
                                                     ---------          --------         -------           -------         --------

 Total interest- earning assets                      $  81,602          $ 24,768         $23,721           $20,445         $150,536
                                                     =========          ========         =======           =======         ========

INTEREST-BEARING LIABILITIES:
    Deposits                                         $  67,486          $ 15,336         $ 3,320           $16,230         $102,372
    Borrowed funds                                      38,889                --              --                --           38,889
                                                     ---------          --------         -------           -------         --------

  Total interest-bearing liabilities                 $ 106,375          $ 15,336         $ 3,320           $16,230         $141,261
                                                     =========          ========         =======           =======         ========

Interest sensitivity gap                             $ (24,773)         $  9,432         $20,401           $ 4,215         $  9,275

Cumulative interest sensitivity gap                  $ (24,773)         $(15,341)        $ 5,060           $ 9,275

Ratio of cumulative interest sensitivity
gap to total interest earning assets                    (16.46)%          (10.19)%          3.36%             6.16%

Ratio of cumulative interest sensitivity
 gap  to total assets of $151,194                       (15.43)%           (9.56)%          3.15%             5.78%


- ---------------------
(1)      Includes investments in overnight deposits.
(2)      Includes investments in overnight deposits.

                                       33


         The Farin & Associates analysis for 2001 and the preceding table were
prepared based upon the contractual terms of the asset or liability and with the
following assumptions regarding prepayment of loans, collateralized mortgage
obligations ("CMOs") and mortgage-backed securities, and decay rates of
deposits. These prepayment and decay rate assumptions are management's estimates
based on expectations of future interest rates. Fixed rate mortgage loans are
assumed to prepay at approximately 8%. Adjustable rate loans, CMOs and
mortgage-backed securities are presented in the period in which they next
reprice. All other loans (principally consumer installment loans) are presented
at their contractual maturities. Fixed rate CMOs are assumed to prepay at rates
ranging from 15% to 20%. The decay rates for money market demand accounts are
assumed to be 47% for the first year and 40% for the second year. The decay
rates for passbook accounts are assumed to be 22% for the first year and 22%
thereafter and the decay rates for NOW accounts are assumed to be 23% for the
first year and approximately 22% thereafter. Certificate accounts and borrowed
funds are presented at their contractual maturities. Certain shortcomings are
inherent in the method of analysis presented in the table above. Although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in the market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets and liabilities may lag behind changes in market interest rates.
Certain assets, such as ARMs, generally have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayments and early withdrawal levels
would cause significant deviations in the table. Additionally, an increased
credit risk may result if the ability of many borrowers to service their debt
decreases in the event of an interest rate increase. A majority of the
adjustable rate loans in First Federal's portfolio contain conditions which
restrict the periodic change in interest rates.

         INTEREST RATE RISK STRATEGY

         First Federal has employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations by providing a better
match between the interest rate sensitivity of its assets and liabilities. First
Federal's strategies are intended to stabilize long term net interest income by
protecting its interest rate spread against decreases and increases in interest
rates. To offset the interest rate risk associated with holding a substantial
amount of fixed rate loans and having a predominantly short-term certificate of
deposit base, First Federal maintains a portfolio of residential adjustable-rate
mortgage loans that reprice in less than one year. The amount of loans in this
portfolio was equal to $32,652,000 at September 30, 2001 and $28,989,000 at
September 30, 2000. First Federal also sells a significant portion of its fixed
rate loan originations in the secondary markets, and directs excess cash flow
into short-term and adjustable rate investment securities. Diversification into
more interest-sensitive mortgage loans and construction loans in the Birmingham
area has also served to reduce First Federal's interest rate risk exposure.

         EFFECTS OF INFLATION AND CHANGING PRICES

         Inflation generally increases the costs of funds and operating
overhead, and, to the extent loans and other assets bear variable rates, the
yields on such assets. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on the
performance of a financial institution than the effects of general levels of
inflation. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. In addition,
inflation affects a financial institution's cost of goods and services
purchased, the cost of salaries and benefits, occupancy expense, and similar
items. Inflation and related increases in interest rates generally decrease the
market value of investments and loans held and may adversely affect liquidity,
earnings, and stockholders' equity. Mortgage originations and refinancings tend
to slow as interest rates increase and would likely reduce First Federal's
earnings from such activities. Further, First Federal's income from the sale of
residential mortgage loans in the secondary market would also likely decrease if
interest rates increased.


                                       34


AVERAGE BALANCE, INTEREST, YIELDS AND RATES

         The following table sets forth certain information relating to First
Federal's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. Average balances are derived from month-end-balances.
Management does not believe that the use of month-end balances instead of daily
balances has caused any material difference in the information presented.

         The table also presents information for the periods indicated with
respect to the difference between the average yield earned on interest-earning
assets and average rate paid on interest-bearing liabilities, or "interest rate
spread," which savings associations have traditionally used as an indicator of
profitability. Another indicator of an institution's net interest income is its
"net yield on total interest-earning assets," which is its net interest income
divided by the average balance of interest-earning assets. Net interest income
is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.

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                                       35


                   AVERAGE BALANCE, INTEREST, YIELDS AND RATES



                                                                               Year Ended September 30,
                                                 ---------------------------------------------------------------------------------
                                                                  2001                                       2000
                                                 --------------------------------------     --------------------------------------
                                                    Average                      Yield/        Average                      Yield/
                                                    Balance        Interest       Cost         Balance        Interest       Cost
                                                 ------------     -----------    ------     ------------     -----------    ------
                                                                                                          
INTEREST EARNING ASSETS:
     Interest earnings deposited
        in other financial institutions          $    916,802     $   276,257     30.13%    $  1,171,156     $   138,758
     Total investment securities                   36,518,896       2,109,156      5.78%      38,891,644       2,433,984      6.26%
     Loans receivable                             104,148,074       8,506,455      8.17%     110,789,666       9,342,440      8.43%
                                                 ------------     -----------    ------     ------------     -----------    ------
TOTAL INTEREST EARNING ASSETS                     141,583,772      10,891,868      7.69%     150,852,466      11,915,182      7.90%

   Allowance for loan losses                         (770,245)                                  (736,726)
   Cash and amounts due from
       depository institutions                      7,237,695                                  4,404,043
   Premises and equipment                           4,938,849                                  5,054,685
   Foreclosed real estate                             535,006                                    383,862
   Accrued interest receivable                        965,109                                  1,055,087
   Other assets                                     1,504,934                                  1,714,340
   Investments in Affiliates                            4,116                                     14,006
                                                 ------------                               ------------
 TOTAL ASSETS                                    $155,999,236                               $162,741,763
                                                 ============                               ============

INTEREST BEARING LIABILITIES:
   Deposits:
      NOW accounts                                  9,929,758         159,740      1.61%    $ 10,581,025     $   175,539      1.66%
      Money market demand                             144,497           1,992      1.38%         219,418           3,371      1.54%
      Statement savings                            11,650,760         216,553      1.86%      12,476,710         240,270      1.93%
      CDs, other than Jumbos                       72,197,589       4,044,144      5.60%      75,020,005       4,050,687      5.40%
      Jumbo certificates                            7,605,523         554,878      7.30%       6,790,810         388,441      5.72%
                                                 ------------     -----------    ------     ------------     -----------    ------
TOTAL INTEREST-BEARING DEPOSITS                   101,528,127       4,977,307      4.90%     105,087,968       4,858,308      4.62%
    Borrowed funds                                 34,471,370       2,006,896      5.82%      38,124,848       2,280,558      5.98%
                                                 ------------     -----------    ------     ------------     -----------    ------
TOTAL INTEREST-BEARING LIABILITIES                135,999,497       6,984,203      5.14%     143,212,816       7,138,866      4.98%
Non-interest bearing demand accounts                2,836,095                                  3,128,850
Advances by borrowers for property taxes              310,794                                    323,424
Accrued interest payable                            1,342,510                                  1,113,935
Income taxes payable                                  231,595                                    111,491
Accrued expenses and other liabilities                286,462                                    495,292
                                                 ------------                               ------------
   TOTAL LIABILITIES                              141,006,953                                148,385,808
Stockholders' equity                               14,992,283                                 14,355,955
                                                 ------------                               ------------
   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY      $155,999,236                               $162,741,763
                                                 ============                               ============

Net interest income                                               $ 3,907,665                                $ 4,776,316
                                                                  ===========                                ===========
Interest rate spread                                                               2.56%                                      2.91%
Net yield on total interest earning assets                                         2.76%                                      3.17%
Average interest-earning assets to
   average total interest-bearing
   liabilities ratio                                                             104.11%                                    105.33%
                                                                                 ======                                     ======



                                                         Year Ended September 30,
                                                 --------------------------------------
                                                                  1999
                                                 --------------------------------------
                                                   Average                       Yield/
                                                   Balance         Interest       Cost
                                                 ------------     -----------    ------
                                                                        
INTEREST EARNING ASSETS:
     Interest earnings deposited
        in other financial institutions
     Total investment securities                 $ 34,679,305     $ 2,023,243      5.83%
     Loans receivable                             107,491,039       8,460,854      7.87%
                                                 ------------     -----------    ------
TOTAL INTEREST EARNING ASSETS                     142,170,344      10,484,097      7.37%

   Allowance for loan losses                         (648,011)
   Cash and amounts due from
       depository institutions                      5,831,483
   Premises and equipment                           5,091,035
   Foreclosed real estate                             497,565
   Accrued interest receivable                        957,191
   Other assets                                     1,781,940
      Investments in Affiliates                       138,089
                                                 ------------
 TOTAL ASSETS                                    $155,819,636
                                                 ============

INTEREST BEARING LIABILITIES:
   Deposits:
      NOW accounts                               $ 11,879,338     $   224,338      1.89%
          Money market demand                         297,113           5,471      1.84%
          Statement savings                        14,185,017         292,846      2.06%
          CDs, other than Jumbos                   85,308,830       4,657,951      5.46%
         Jumbo certificates                         3,862,585         208,938      5.41%
                                                 ------------     -----------    ------
TOTAL INTEREST-BEARING DEPOSITS                   115,532,883       5,389,544      4.66%
    Borrowed funds                                 18,644,068         977,279      5.24%
                                                 ------------     -----------    ------
TOTAL INTEREST-BEARING LIABILITIES                134,176,951       6,366,823      4.75%
Non-interest bearing demand accounts                3,266,569
Advances by borrowers for property taxes              322,996
Accrued interest payable                            1,042,165
Income taxes payable                                1,274,069
Accrued expenses and other liabilities                404,940
                                                 ------------
   TOTAL LIABILITIES                              140,487,690
Stockholders' equity                               15,331,946
                                                 ------------
   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY      $155,819,636
                                                 ============

Net interest income                                               $ 4,117,275
                                                                  ===========
Interest rate spread                                                               2.63%
Net yield on total interest earning assets                                         2.90%
Average interest-earning assets to
   average total interest-bearing
   liabilities ratio                                                             105.96%
                                                                                 ======



                                       36


FINANCIAL CONDITION

         INVESTMENT SECURITIES

         Investment securities held to maturity were $0, $0 and $29,000 at
September 30, 2001, September 30, 2000 and September 30, 1999, respectively. The
decrease of $29,000 in 2000 was the result of principal repayments and scheduled
maturities. First Federal's portfolio of investment securities available for
sale totaled $33,053,000 and $36,097,000 at September 30, 2001 and September 30,
2000, respectively.

         The composition of First Federal's total investment securities
portfolio partly reflects First Federal's former investment strategy of
providing acceptable levels of interest income from portfolio yields while
maintaining a level of liquidity allowing First Federal a degree of control over
its interest rate position. In previous years, First Federal invested primarily
in investment grade CMOs and mortgage-backed securities because of their
liquidity, credit quality and yield characteristics. The yields, values and
duration of such securities generally vary with interest rates, prepayment
levels, and general economic conditions and, as a result, the values of such
instruments may be more volatile than other instruments with similar maturities.
Such securities also may have longer stated maturities than other securities,
which may result in further price volatility.

         With First Federal's purchase of the construction loan portfolio of
another Alabama thrift institution in April of 1994, First Federal revised its
investment strategy, curtailing its purchases of CMOs and mortgage-backed
securities and utilizing principal repayments on these securities to fund
construction loans. Accordingly, First Federal did not purchase any CMOs or
mortgage-backed securities from 1994 through 1997. However, as a result of First
Federal's acquisition of Chilton County in October 1998, First Federal acquired
approximately $466,000 in CMOs and $16,101,000 in mortgage-backed securities. In
addition, as a result of the excess cash on hand from the Chilton County
acquisition, First Federal purchased approximately $18,670,000 in
mortgage-backed securities in 1998. During 1999, First Federal purchased
approximately $10,500,000 of FNMA and FHLMC adjustable rate CMO's that reprice
to LIBOR on a monthly basis. These CMO's were funded by FHLB advances that also
reprice each month to LIBOR. This investment arbitrage is projected to produce a
positive interest rate spread of approximately 1%.

         Principal repayments on both CMOs and mortgage-backed securities for
the years ended September 30, 2001, 2000 and 1999 were $1,774,867, $1,938,438
and $17,884,113, respectively. As of September 30, 2001, First Federal had an
investment in U.S. Government agencies of $9,590,000 compared to $8,901,000 as
of September 30, 2000. At September 30, 2001, First Federal had investments of
approximately $3,071,000 in equity securities such as FHLB stock, other Common
Stock and mutual funds. FHLMC stock was sold in the last quarter of 1999 at a
pre-tax gain of approximately $2,265,000. The proceeds were reinvested in U.S.
Government agencies which resulted in higher investment yields.

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                                       37


         The following table indicates the amortized cost of the portfolio of
investment securities held to maturity at September 30, 2001, September 30, 2000
and September 30, 1999:



                                                                                Amortized Cost
                                                                    -------------------------------------
                                                                      2001           2000           1999
                                                                    -------        -------        -------
                                                                               (in thousands)
                                                                                         
Investments Securities HTM:
   U.S. Government Agency                                           $    --        $    --        $    --
   Mortgage-backed securities                                            --             --             29
   Collateralized mortgage obligations                                   --             --             --
   Other investments                                                     --             --             --
                                                                    -------        -------        -------

          Total Investment Securities Held to Maturity              $    --        $    --        $    29
                                                                    =======        =======        =======


         The following table indicates the fair value of the portfolio of
investment securities available for sale at September 30, 2001, 2000 and 1999:



                                                                              Total Fair Value
                                                                    -------------------------------------
                                                                      2001           2000           1999
                                                                    -------        -------        -------
                                                                               (in thousands)
                                                                                         
Investment Securities AFS:
   U.S. Government Agency                                           $ 9,590        $ 8,901        $ 8,915
   Mortgage-backed securities                                         9,127         10,096         11,979
   Collateralized mortgage obligations                               13,495         13,602         13,232
   Other investments                                                    841          3,498          3,790
                                                                    -------        -------        -------

          Total Investment Securities Available for Sale            $33,053        $36,097        $37,916
                                                                    =======        =======        =======


         At September 30, 2001, First Federal owned CMOs totaling $13,495,000.
These securities were all backed by federal agency guaranteed mortgages except
for two issues, in the aggregate amount of $27,000, which are privately issued
mortgage pass-through certificates. All CMO's presently owned are variable rate
instruments.

         The mortgage-backed securities portfolio, totaling $9,127,000 at
September 30, 2001, consists of fixed rate mortgages in the amount of $8,376,000
and ARMs in the amount of $751,000. At the time of purchase, First Federal looks
at various prepayment speeds and makes the purchase based on the ability to
accept the yield and average life based on both increasing and decreasing
prepayment speeds.

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                                       38


         The following tables present the contractual maturities and weighted
average yields of investment securities, other than equity securities, available
for sale at September 30, 2001:



                                                                           Maturities of
                                                                       Investment Securities
                                                        ---------------------------------------------------
                                                                    After one     After five
                                                         Within      through        through         After
                                                        one year    five years     ten years      ten years
                                                        --------    ----------    ----------      ---------
                                                                            (In thousands)
                                                                                      
U.S. Government agencies, excluding
    mortgage-backed securities                            $514        $2,381        $ 3,363        $    --
U.S. Government agencies - Callable bonds                   --           214          3,118             --
Mortgage-backed securities                                  --           869          5,527          2,732
Collateralized mortgage obligations                         --            --          2,295         11,199
                                                          ----        ------        -------        -------

      Total Investment Securities
           Available for Sale                             $514        $3,464        $14,303        $13,931
                                                          ====        ======        =======        =======



                                                                      Weighted Average Yields
                                                                   (Taxable-equivalent basis)(1)
                                                        ---------------------------------------------------
                                                                    After one     After five
                                                         Within      through        through         After
                                                        one year    five years     ten years      ten years
                                                        --------    ----------    ----------      ---------
                                                                            (In thousands)
                                                                                      
U.S. Government agencies, excluding
   mortgage-backed securities                             5.687%       6.038%         6.729%            --
U.S. Government agencies - Callable bonds                   --         6.800%         5.765%            --
Mortgage-backed securities                                  --         6.496%         6.069%         7.227%
Collateralized mortgage obligations                         --            --          5.283%         4.432%

      Total Weighted Average Yield                        5.687%       6.200%         6.032%         4.980%


- -------------------
(1)      None of First Federal's investment securities are tax exempt.

              [The remainder of this page intentionally left blank]


                                       39


         The maturities for the CMOs and mortgage-backed securities presented
above represent contractual maturities of such securities. Due to the nature of
these securities, the timing and the amount of principal repayments is generally
unpredictable. However, assuming current prepayment rates and normal, required
principal repayments, the following table sets forth certain information
regarding the expected principal payments, carrying values, fair values, and
weighted average yields of First Federal's CMOs and mortgage-backed securities
at September 30, 2001.

         PRINCIPAL PAYMENTS EXPECTED DURING THE YEAR ENDED SEPTEMBER 30,
                             (Dollars in thousands)



- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Weighted
                                                                                                   Amortized      Fair     Average
                                 2002        2003        2004       2005      2006    Thereafter     Cost         Value     Yield
                                ------      ------      ------      ----      ----    ----------   ---------    --------  --------
                                                                                               
Collateralized mortgage
   obligations                  $5,751      $2,498      $1,238      $629      $448      $3,131      $13,485      $13,494      4.57%

Mortgage-backed securities       1,898       1,202         958       495       381       4,097        8,776        9,128      6.70%

Agencies                         3,960         194       2,000        --        --          --        6,065        6,258      5.97%

Agencies - Callable bonds           --       3,332          --        --        --          --        3,194        3,332      5.83%


LOANS

         Total loans of $101,135,000 at September 30, 2001 reflected a decrease
of $7,219,000 (6.7%) compared to September 30, 2000. Total loans of $108,354,000
at September 30, 2000 reflected an increase of 1.9% from total loans of
$106,312,000 at September 30, 1999. The increase from fiscal 1999 to fiscal 2000
was due to the loans generated in the normal course of business. First Federal
has experienced strong loan demand in its one-to-four family construction loan
portfolio since First Federal's purchase of the construction loan portfolio of
Chilton County, and the opening of a loan production office in 1994.

         One-to-four family real estate mortgage loans decreased $7,042,000
(10.7%) from September 30, 1999 to September 30, 2000, and decreased $7,512,000
(12.8%) from September 30, 2000 to September 30, 2001. First Federal
aggressively pursues real estate mortgage loans within its own market area. In
addition to originating mortgage loans for its own portfolio, First Federal also
actively originates residential mortgage loans which are sold in the secondary
market, with servicing released. First Federal sells a significant portion of
all fixed rate residential mortgage loans. For the most part, such sales are
composed of residential mortgage loans with terms of 30 years. Proceeds from
loan sales were $19,731,000, $15,092,000 and $23,424,000 for the years ended
September 30, 2001, 2000 and 1999, respectively. Had First Federal not sold
residential mortgage loans over the past several years, the one-to-four family
real estate mortgage loan portfolio would have increased by a larger margin (or
decreased by a lesser margin) than the percentage indicated above. The declining
interest rate market for much of 2001 resulted in an increase in volume of loans
sold during the period over fiscal year 2000 during a rising interest rate
environment. The following table presents the composition of the loan portfolio
for each of the past five years:


                                       40




                                                                       Loan Portfolio Composition
                                                                            At September 30,
                                          -------------------------------------------------------------------------------------
                                                                         (Dollars in thousands)
                                                   2001                           2000                           1999
                                          -----------------------        -----------------------        -----------------------
                                                         Percent                        Percent                        Percent
                                           Amount        of Total         Amount        of Total         Amount        of Total
                                          --------       --------        --------       --------        --------       --------
                                                                                                     
Real estate mortgage loans:
    One-to four family                    $ 51,083         50.51%        $ 58,595         54.08%        $ 65,637         61.74%
    Multi-family and
       commercial                           14,205         14.05%          13,790         12.73%           8,330          7.84%
   Construction loans                       25,378         25.09%          24,381         22.50%          17,510         16.47%
Savings account loans                        1,144          1.13%           1,097          1.01%           1,267          1.19%
Installment loans                            3,507          3.47%           4,089          3.77%           5,616          5.28%
Second mortgage loans                        7,593          7.51%           7,334          6.77%           9,046          8.51%
                                          --------                       --------                       --------

        Total loans                        102,910                        109,286                        107,406

Less:
    Loans in process                            (8)         (.01)%            (39)         (.03)%             --           .00%
    Discounts and other, net                  (189)         (.19)%           (192)         (.18)%           (242)         (.23)%
    Allowance for loan losses               (1,578)        (1.56)%           (701)         (.65)%           (852)         (.80)%
                                          --------        ------         --------        ------         --------        ------

        Total loans, net                  $101,135        100.00%        $108,354        100.00%        $106,312        100.00%
                                          ========        ======         ========        ======         ========        ======



                                                        Loan Portfolio Composition
                                                             At September 30,
                                          ------------------------------------------------------
                                                          (Dollars in thousands)
                                                   1998                           1997
                                          -----------------------        -----------------------
                                                         Percent                        Percent
                                           Amount        of Total         Amount        of Total
                                          --------       --------        --------       --------
                                                                            
Real estate mortgage loans:
    One-to four family                    $ 73,239         70.02%        $ 52,855         73.74%
    Multi-family and
       commercial                            1,837          1.76%             390           .54%
   Construction loans                       14,731         14.09%          16,102         22.46%
Savings account loans                        1,988          1.90%             826          1.15%
Installment loans                            7,593          7.26%           2,044          2.85%
Second mortgage loans                        6,216          5.94%              --            --
                                          --------                       --------

        Total loans                        105,604                         72,217

Less:
    Loans in process                            --           .00%              --           .00)%
    Discounts and other, net                  (282)         (.27)%           (251)         (.35)%
    Allowance for loan losses                 (732)         (.70)%           (284)         (.40)%
                                          --------        ------         --------        ------

        Total loans, net                  $104,590        100.00%        $ 71,682        100.00%
                                          ========        ======         ========        ======



                                       41


         The following table shows the maturity of First Federal's loan
portfolio at September 30, 2001, based upon contractual maturity dates. Demand
loans, loans having no schedule of repayment and no stated maturity and
overdrafts are reflected as due during the twelve months ended September 30,
2001. The table below does not include an estimate of prepayments, the
occurrence of which would significantly shorten the average life of all mortgage
loans and cause First Federal's actual repayment to differ from that shown
below.



                                                                          Loan Maturities
                                    ------------------------------------------------------------------------------------------------
                                          Due during the year
                                             ending Sept 30,
                                    -------------------------------
                                                                       Due after   Due after     Due After    Due After
                                      2002        2003        2004     3-5 years   5-10 years   10-15 years   15 years       Total
                                    -------      ------      ------    --------    ---------    -----------   ---------     --------
                                                                        (Dollars in thousands)
                                                                                                    
Real estate mortgage loans          $   481      $  526      $  871      $1,808      $11,299      $16,564      $18,694      $ 50,243
Construction loans(1)                24,563         306         290          --           --           --          219        25,378
Business loans                          979         855         550         657        2,304        2,378        2,855        10,578
All other loans                       6,102       2,042       1,568       2,558        2,157          509       14,936
                                    -------      ------      ------      ------      -------      -------      -------      --------
     Total                          $32,125      $3,729      $3,279      $5,023      $15,760      $19,451      $21,768      $101,135
                                    =======      ======      ======      ======      =======      =======      =======      ========


- --------------------
(1)      The maturity period for construction loans is typically one year. If
the home is not sold at the maturity date, however, the loan may be extended for
an additional six months provided that the builder restructures the loan to
provide for principal reduction or arranges for permanent financing which will
pay off the construction loan.

         The following tables set forth, at September 30, 2001 and September 30,
2000, the dollar amount of loans due after September 30, 2001 and September 30,
2000, respectively, based upon whether such loans have fixed interest rates or
adjustable interest rates:



                                                              September 30, 2001
                                                  --------------------------------------------
                                                   Fixed         Floating or
                                                   Rates       Adjustable Rate        Total
                                                  -------      ---------------     -----------
                                                                          
Real estate mortgage loans                        $28,266          $29,987          $ 58,253
Commercial loans                                    4,916            5,654            10,570
Construction loans                                 25,378                0            25,378
Savings and installments loans                      6,935                0             6,935
                                                  -------          -------          --------

   Total                                          $65,495          $35,641          $101,136
                                                  =======          =======          ========



                                                              September 30, 2000
                                                  --------------------------------------------
                                                   Fixed         Floating or
                                                   Rates       Adjustable Rate        Total
                                                  -------      ---------------     -----------
                                                                          
Real estate mortgage loans                        $33,913          $32,667          $ 66,580
Commercial loans                                    4,694            5,208             9,902
Construction loans                                 24,381                0            24,381
Savings and installments loans                      7,491                0             7,491
                                                  -------          -------          --------

   Total                                          $70,479          $37,875          $108,354
                                                  =======          =======          ========



                                       42


         The following table sets forth First Federal's loan originations, sales
and principal repayments for the periods indicated.



                                                            Year ended September 30,
                                                  ------------------------------------------
                                                    2001             2000             1999
                                                  -------          -------          --------
                                                                (In thousands)
                                                                           
Loan Originations:
    Real estate mortgage loans                    $67,995          $68,671          $ 76,383
    All other loans                                 4,407            5,457             7,012
                                                  -------          -------          --------
        Total                                     $72,402          $74,128          $ 83,395
                                                  =======          =======          ========
Portfolio Loan Purchases:
    Real estate mortgage loans                    $     0          $     0          $      0
                                                  =======          =======          ========
Portfolio Loan Sales Proceeds:
    Real estate mortgage loans                    $19,731          $15,092          $ 23,424
                                                  =======          =======          ========
Principal Repayments:
    Real estate mortgage loans                    $54,071           51,636            49,190
     All other loans                                4,964            6,821            10,429
                                                  -------          -------          --------
     Total                                        $59,035          $58,457          $ 59,619
                                                  =======          =======          ========


         ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS

         The performance of loans is evaluated primarily on the basis of a
review of each customer relationship over a period of time and the judgment of
lending officers as to the ability of borrowers to meet the repayment terms of
loans. If there is reasonable doubt as to the repayment of a loan in accordance
with the agreed terms, the loan may be placed on a non-accrual basis pending the
sale of any collateral or a determination as to whether sources of repayment
exist. Generally, delinquency of 90 days or more creates reasonable doubt as to
repayment. This action may be taken even though the financial condition of the
borrower or the collateral may be sufficient to ultimately reduce or satisfy the
obligation. Generally, when a loan is placed on a non-accrual basis, all
payments are applied to reduce principal to the extent necessary to eliminate
doubt as to the repayment of the loan. Interest income on a non-accrual loan is
recognized only on a cash basis. See "--Non-performing Assets."

         Lending officers are responsible for the ongoing review and
administration of each particular loan. As such, they make the initial
identification of loans which present some difficulty in collection or where
circumstances indicate that the probability of loss exists. The responsibilities
of the lending officers include the collection effort on a delinquent loan.
Senior management and the First Federal Board are informed of the status of
delinquent loans on a monthly basis. Senior management reviews the allowance for
loan losses and makes recommendations to the First Federal Board as to loan
charge-offs on a monthly basis.

         At September 30, 2001, September 30, 2000 and September 30, 1999, loans
accounted for on a non-accrual basis were approximately $742,000, $1,064,000 and
$1,214,000, respectively, or 0.7%, 0.9% and 1.1% of the total loans outstanding,
net of unearned income. The balances of accruing loans past due 90 days or more
as to principal and interest payments were $0 at September 30, 2001, September
30, 2000 and September 30, 1999.

         The allowance for loan losses represents management's assessment of the
risk associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for loan losses and the appropriate provision required to
maintain a level considered adequate to absorb anticipated loan losses. In
assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans in the portfolio. Management also considers such factors as
First Federal's historical loan loss experience, the level, severity, and trend
of criticized assets, the distribution of loans by risk class, and various
qualitative factors such as current and anticipated economic conditions.


                                       43


         First Federal began construction lending activities in March of 1994.
As of September 30, 2001, First Federal has not experienced any significant
losses on the construction loan portfolio. Due to the concentration of these
loans, a default by certain construction loan borrowers, or other financial
difficulty, could result in a significant addition to the allowance for loan
losses.

         While it is First Federal's policy to charge off loans in the period in
which a loss is considered probable, there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.

         In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged off
and to assess the risk characteristics of the portfolio in the aggregate. This
review takes into consideration the judgments of the responsible lending
officers, senior management and those of bank regulatory agencies that review
the loan portfolio as part of First Federal's examination process. Specific
percentages are allocated to each loan type. Management recognizes that there is
more risk traditionally associated with commercial and consumer lending as
compared to real estate mortgage lending; correspondingly, a greater allocation
is made for commercial and consumer loans than real estate mortgage loans. While
all information available is used by management to recognize losses in the loan
portfolio, there can be no assurances that future additions to the allowance
will not be necessary. First Federal's Board of Directors reviews the
assessments of management in determining the adequacy of the allowance for loan
losses. Generally, the only loans, including construction loans, which are
classified are loans which are greater than 90 days delinquent. However, the
Board of Directors may also classify loans less than 90 days delinquent should
such classification be considered necessary.

         First Federal's allowance for loan losses is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the allowance for loan loss
reserves and the size of the loan loss reserve in comparison to a group of peer
banks identified by the regulators. During its routine examinations of banks,
the OTS has, from time to time, required additions to banks' provisions for loan
losses and allowances for loan losses as the regulators' credit evaluations and
allowance for loan loss methodology have differed from those of the management
of such banks. Such regulatory examinations have focused on loan quality,
particularly that of real estate loans. First Federal attempts to reduce the
risks of real estate lending through maximum loan-to-value requirements as well
as systematic cash flow and initial customer credit history analyses.

         Management believes that the $1,578,000 allowance for loan losses, at
September 30, 2001, is adequate to absorb known risks in the portfolio. No
assurance can be given, however, that adverse economic circumstances will not
result in increased losses in First Federal's loan portfolio. At September 30,
2001, $250,000 of the allowance for loan losses was reserved for possible losses
on construction real estate loans, $380,000 was reserved for possible losses on
other real estate mortgage loans, $655,000 was reserved for a loan made to
Vawter Properties & Resources, LLP (see additional discussion of this in "ITEM
3. LEGAL PROCEEDINGS" and in "Results of Operations - Provision for Loan
Losses"), and the remaining $293,000 was reserved for all other loan
classifications.


                                       44


         The following table summarizes the levels of the allowance for loan
losses at the end of the last five years:



                                                                            Year Ended September 30,
                                                     ----------------------------------------------------------------------------
                                                       2001              2000             1999             1998             1997
                                                     --------          --------         --------         --------         -------
                                                                         (Dollar amounts in thousands)
                                                                                                           
Balance at beginning of period                       $    701          $    852         $    732         $    284         $   251
                                                     --------          --------         --------         --------         -------

Clanton balance at acquisition                              0                 0                0              488               0
Charge-offs:
   Real estate                                             --                54              216               16              --
   Installment                                             49               138              290               82               4
                                                     --------          --------         --------         --------         -------
      Total charge-offs                                    49               192              506               98               4
                                                     --------          --------         --------         --------         -------

Recoveries:
   Real estate mortgage                                    --                --               --                4              --
   Installment                                             68                35               38               39               1
                                                     --------          --------         --------         --------         -------
      Total recoveries                                     68                35               38               13               1
                                                     --------          --------         --------         --------         -------

Net loans (recovered) charged off                         (19)              157              468               85               3
Provisions for loan losses                                858                 6              588               45              36
                                                     --------          --------         --------         --------         -------

Balance at end of period                             $  1,578          $    701         $    852         $    732         $   284
                                                     ========          ========         ========         ========         =======

Ratio of net charge-offs to total loans
   outstanding, net of unearned income                   (.02)%            0.14%            0.44%            0.08%           0.00%
                                                     ========          ========         ========         ========         =======

Ratio of allowance for loan losses
   to loans outstanding, net of
   unearned income                                       1.56              0.65%            0.80%            0.70%           0.39%
                                                     ========          ========         ========         ========         =======

Total Loans Outstanding                              $101,135          $108,354         $106,312         $104,590         $71,967


         As indicated in the above table, First Federal substantially increased
its loan loss allowance in fiscal 2001 and 1998 from the levels of the preceding
years. The increase in 1998 was primarily due to the acquisition of Chilton
County, and the increase in 2001 was due primarily to the Vawter Properties &
Resources, LLP loan as discussed above.

              [The remainder of this page intentionally left blank]


                                       45


         The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily an indication of
future losses and does not restrict the use of the allowance to absorb losses in
any category.



                                                                               At September 30,
                                                ------------------------------------------------------------------------------
                                                          2001                       2000                       1999
                                                ------------------------    -----------------------    -----------------------
                                                           Percent of                 Percent of                 Percent of
                                                          loans in each              loans in each              loans in each
                                                            category                   category                   category
                                                Amount    to total loans    Amount   to total loans    Amount   to total loans
                                                ------    --------------    ------   --------------    ------   --------------
                                                               (Dollar amounts in thousands)
                                                                                              
Real estate mortgage loans                      $  630         39.92%        $584         83.31%        $513         60.21%

All other loans                                    948         60.08%         117         16.69%         339         39.79%
                                                ------        ------         ----        ------         ----        ------

Total allowance for loan losses                 $1,578        100.00%        $701        100.00%        $852        100.00%
                                                ======        ======         ====        ======         ====        ======


         At September 30, 2001 and 2000, the total recorded investment in
impaired loans was approximately $648,000 and $4,000, respectively. The average
recorded investment in impaired loans amounted to approximately $54,000 and
$5,000 for the years ended September 30, 2001 and 2000, respectively. The
allowance for loan losses related to impaired loans was approximately $648,000
and $4,000 for fiscal years 2001 and 2000, respectively. Interest income on
impaired loans of approximately $0 and $400 was booked in 2001 and 2000,
respectively. Loans impaired at September 30, 1999 were $75,000.

         NON-PERFORMING ASSETS

         First Federal has policies, procedures and underwriting guidelines
intended to assist in maintaining the overall quality of its loan portfolio.
First Federal monitors its delinquency levels for any adverse trends.
Non-performing assets consist of loans on non-accrual status, accruing loans
which are past due 90 days or more, and foreclosed real estate.

         First Federal's policy generally is to place a loan on non-accrual
status when there is reasonable doubt as to the repayment of the loan in
accordance with the agreed terms. Generally, delinquency of 90 days or more
creates reasonable doubt as to repayment. At the time a loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current earnings. Income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower is able to make periodic interest and principal payments and the loan
is no longer delinquent and is returned to accrual status.

         Non-performing assets were $1,000,000, $1,240,000 and $1,782,000, at
September 30, 2001, September 30, 2000 and September 30, 1999, respectively. As
a percentage of total loans, non-performing assets continue to be at levels
which management considers to be acceptable and commensurate with First
Federal's conservative lending policies.


                                       46


         An analysis of the components of non-performing assets at September 30,
2001, September 30, 2000 and September 30, 1999 is presented in the following
table:



                                                                                     At September 30,
                                                                      ----------------------------------------------
                                                                        2001               2000               1999
                                                                      --------           --------           --------
                                                                                   (Dollar amounts in thousands)
                                                                                                   
Loans accounted for on a non-accrual basis:
   Real estate mortgage loans                                         $    735           $  1,039           $  1,089
   All other loans                                                           7                 25                125
                                                                      --------           --------           --------
      Total                                                                742              1,064              1,214
                                                                      --------           --------           --------

Accruing loans which are past due 90 days or more:
   Real estate mortgage loans                                               --                 --                 --
   All other loans                                                          --                 --                 --
                                                                      --------           --------           --------
      Total                                                                 --                 --                 --
                                                                      --------           --------           --------

Total of non-accrual and 90 days past due loans                            742              1,064              1,214

Foreclosed real estate (net of related loss provisions)                    258                176                568
                                                                      --------           --------           --------

   Total non-performing assets                                        $  1,000           $  1,240           $  1,782
                                                                      ========           ========           ========

Non-accrual and 90 days past due loans as a
   percent of total loans                                                  .73%               .98%              1.14%
                                                                      ========           ========           ========

Non-performing assets as a percent of total loans                          .99%              1.14%              1.68%
                                                                      ========           ========           ========

   Total loans outstanding                                            $101,135           $108,354           $106,312
                                                                      ========           ========           ========


         Management regularly reviews and monitors the loan portfolio in an
effort to identify borrowers experiencing financial difficulties, but such
measures are subject to uncertainties that cannot be predicted.

         DEPOSITS

         Total deposits decreased in fiscal 2001 by $6,307,000 (6.0%) to
$99,056,000 and decreased in fiscal 2000 by $9,359,000 (8.1%) to $105,363,000.
In fiscal 1999, total deposits decreased 7.4% from $123,883,000 to $114,722,000.
Non-interest-bearing demand deposits were $3,349,000, $2,991,000 and $3,838,000,
while total interest-bearing deposits were $95,706,000, $102,371,000 and
$110,883,000, at September 30, 2001, September 30, 2000, and September 30, 1999,
respectively.

         First Federal's deposit mix at September 30, 2001 changed compared to
September 30, 2000. NOW accounts decreased $239,000 (2.5%), while money market
demand accounts decreased $225,000 (35.6%). Certificates of deposit other than
jumbo certificates of deposit, which are certificates of deposit greater than or
equal to $100,000 with specially negotiated rates ("Jumbos"), decreased
$4,327,000 (6.0%). Non-interest-bearing demand deposits increased $358,000
(12.0%). During 2001, certificates of deposit, excluding Jumbos, comprised
approximately 67.9% of total deposits while low cost funds, including NOW
accounts, money market demand accounts, and passbook savings accounts, made up
24.6% of First Federal's total deposits. Jumbos comprised 7.4% of total deposits
at September 30, 2001.


                                       47


         The composition of total deposits for the last three fiscal years is
presented in the following table:



                                                                         September 30,
                                         -----------------------------------------------------------------------------
                                                 2001                       2000                       1999
                                         ----------------------    ------------------------    -----------------------
                                                       Percent                     Percent                    Percent
                                                       change                      change                     change
                                                     from prior                  from prior                 from prior
                                          Amount      year-end      Amount        year-end      Amount       year-end
                                         --------    ----------    --------      ----------    ---------    ----------
                                                                                          
Non-interest bearing
    demand deposits                      $  3,349       11.97%     $  2,991      (22.07)%      $   3,838      11.70%
Interest bearing deposits:
   NOW accounts                             9,490       (2.46)%       9,729      (19.79)%         12,129       6.83%
   Money market demand                        407      (35.60)%         632        9.53%             577      78.09%
   Passbook savings                        11,158       (5.39)%      11,794      (12.12)%         13,420      (9.13)%
   CDs other than Jumbos                   67,265       (6.05)%      71,592      (11.01)%         80,448     (11.30)%
   Jumbos                                   7,387      (14.34)%       8,624      100.14%           4,309      30.50%
                                         --------                  --------                    ---------
      Total interest bearing deposits      95,707       (6.51)%     102,371       (7.68)%        110,883      (7.94)%
                                         --------                  --------                    ---------
Total deposits                           $ 99,056       (5.99)%    $105,363       (8.16)%      $ 114,722      (7.39)%
                                         ========                  ========                    =========




              [The remainder of this page intentionally left blank]


                                       48





         The following tables set forth the distribution of First Federal's
deposit accounts at the dates indicated and the nominal interest rates offered
on each category of deposits at September 30, 2001 and September 30, 2000,
based on actual balances:




                                                                  At September 30, 2001
                            -----------------------------------------------------------------------------------------------
                                                                                                                 Percentage
 Interest                                                                                                         of Total
   Rate         Term                    Category                               Minimum           Balance          Balances
 --------       ----                    --------                              ---------          --------        ----------
                                        (In thousands except minimum balance)
                                                                                                  
   0.00%        None        Non-interest bearing demand                       $      50          $  3,349            3.38%
   1.50%        None        NOW accounts                                            250             9,385            9.48%
   1.50%        None        Non-profit                                              100               105             .11%
   1.50%        None        Money market checking                                    50               407             .41%
   1.80%        None        Statement savings                                        50            11,158           11.26%
   3.00%      3 months      Fixed-term fixed rate certificate                       250               377             .38%
   3.50%      6 months      Fixed-term fixed rate certificate                       250            10,966           11.07%
   3.75%      12 months     Fixed-term fixed rate certificate                       250            17,227           17.39%
   4.00%      18 months     Fixed-term fixed rate certificate                       250             5,650            5.70%
   4.00%         IRA        Fixed-term fixed rate certificate                       250            14,777           14.92%
   4.25%      30 months     Fixed-term fixed rate certificate                       250            14,702           14.84%
   4.50%       4 year       Fixed-term fixed rate certificate                     1,500               731             .74%
   4.75%       5 year       Fixed-term fixed rate certificate                     1,500             2,835            2.86%
   7.00%        Jumbo       Fixed-term fixed rate certificate                   100,000             7,387            7.46%
                                                                                                 --------          ------
                                                                                                 $ 99,056          100.00%
                                                                                                 ========          ======





                                                               At September 30, 2000
                            -----------------------------------------------------------------------------------------------
                                                                                                                 Percentage
 Interest                                                                                                         of Total
   Rate         Term                    Category                              Minimum            Balance          Balances
 --------       ----                    --------                             -- -------         ---------        ---------
                                        (In thousands except minimum balance)
                                                                                                  
   0.00%        None        Non-interest bearing demand                      $       50         $   2,991            2.84%
   1.50%        None        NOW accounts                                            250             9,528            9.04%
   1.50%        None        Non-profit                                              100               201            0.19%
   2.53%        None        Money market checking                                    50               632            0.60%
   1.93%        None        Statement savings                                        50            11,794           11.19%
   4.50%      3 months      Fixed-term fixed rate certificate                       250               400            0.38%
   5.50%      6 months      Fixed-term fixed rate certificate                       250            11,422           10.84%
   6.00%      12 months     Fixed-term fixed rate certificate                       250            19,433           18.44%
   6.25%      18 months     Fixed-term fixed rate certificate                       250             6,172            5.86%
   6.50%         IRA        Fixed-term fixed rate certificate                       250            15,685           14.89%
   6.25%      30 months     Fixed-term fixed rate certificate                       250            15,277           14.50%
   5.00%       1 month      Fixed-term fixed rate certificate                     1,000                26            0.02%
   6.50%       4 year       Fixed-term fixed rate certificate                     1,500               918            0.87%
   6.75%       5 year       Fixed-term fixed rate certificate                     1,500             2,260            2.14%
   7.00%        Jumbo       Fixed-term fixed rate certificate                   100,000             8,624            8.19%
                                                                                                ---------          ------
                                                                                                $ 105,363          100.00%
                                                                                                =========          ======



                                       49






         Information about the average balances of interest-bearing demand
deposits and time deposits for the periods indicated based upon average balances
is provided below:




                                                              Year ended September 30,
                             ----------------------------------------------------------------------------------------------
                                        2001                             2000                             1999
                             ----------------------------    ----------------------------     -----------------------------
                                                            (Dollar amounts in thousands)

                             Interest bearing      Time      Interest bearing      Time       Interest bearing       Time
                              demand deposits    deposits     demand deposits    deposits      demand deposits     deposits
                             ----------------    --------    ----------------    --------     ----------------     ---------
                                                                                                 
         Average balance          $ 21,725       $ 79,803       $ 23,277         $ 81,811         $ 26,361         $ 89,172

         Average rate                 1.83%          5.34%          1.80%            5.76%            1.81%           5.23%



         The following table presents changes in deposits for the periods
indicated:



                                                                           Year ended September 30,
                                                            ------------------------------------------------------
                                                               2001          2000           1999           1998
                                                            ---------      ---------      ---------      ---------
                                                                            (Dollars in thousands)
                                                                                             
         Opening balance                                    $ 105,363      $ 114,722      $ 123,884      $  60,552
         Deposits acquired in Chilton County Acquisition           --             --             --         64,608
         Net deposits (withdrawals)                            (9,864)       (12,623)       (13,168)        (4,331)
         Interest credited on deposits                          3,557          3,264          4,006          3,055
                                                            ---------      ---------      ---------      ---------
         Ending balance                                     $  99,056      $ 105,363      $ 114,722      $ 123,884
                                                            =========      =========      =========      =========

         Total decrease (increase) in deposits              $  (6,307)     $  (9,359)     $  (9,162)     $  63,332
                                                            =========      =========      =========      =========

         Percentage decrease (increase)                         (5.99)%        (8.16)%        (7.40)%       104.59%
                                                            =========      =========      =========      =========



         The following table presents, by various interest rate categories, the
amount of certificate accounts outstanding at the end of the last three fiscal
years:



                                         Year ended September 30,
                                  --------------------------------------
         Interest Rate              2001           2000           1999
         -------------            --------       --------      ---------
                                         (Dollars in thousands)
                                                      
         3.00.-3.99%              $  7,077       $    373      $     399
         4.00-4.99%                 25,368          9,489         35,608
         5.00.-5.99%                 9,623         34,239         33,660
         6.00-6.99%                 22,998         24,581         13,964
         7.00.-7.99%                 9,585         11,535          1,126
                                  --------       --------      ---------

               Total              $ 74,651       $ 80,217      $  84,757
                                  ========       ========      =========



                                       50




         There were no certificates of deposit bearing an interest rate less
than 3% at September 30, 2001. At September 30, 2001, First Federal had
outstanding approximately $74.7 million in certificate accounts that mature as
follows:



                                                                         Amount due
                           ----------------------------------------------------------------------------------------------------
                                                           Two to
                            Less than      One to          three         Three to       Four to
                            one year      two years        years        four years     five years     Thereafter       Total
                           ----------     ----------     ----------     ----------     ----------     ----------     ----------
                                                                     (In thousands)
                                                                                                
         Interest Rate
         3.00-3.99%        $    7,077     $       --     $       --     $       --     $       --     $       --     $    7,077
         4.00-4.99%            15,297          8,175          1,865             25              5             --         25,367
         5.00.-5.99%            7,566          1,343            236             12            467             --          9,624
         6.00-6.99%            15,113          4,845             80          2,698            262             --         22,998
         7.00.-7.99%            3,977          1,775             38          3,325            470             --          9,585
                           ----------     ----------     ----------     ----------     ----------     ----------     ----------
              Total        $   49,030     $   16,138     $    2,219     $    6,060     $    1,204     $       --     $   74,651
                           ==========     ==========     ==========     ==========     ==========     ==========     ==========



         Certificates of deposit, other than Jumbos, mature as follows as of
September 30, 2001:



                                                                Amount due
                           -------------------------------------------------------------------------------------
                                                          Two to
                            Less than       One to         three         Three to       Four to
                            one year      two years        years        four years     five years       Total
                           ----------     ----------     ----------     ----------     ----------     ----------
                                                                                    
         Interest Rate                                   (Dollars in thousands)
         3.00-3.99%        $    6,969     $       --     $       --     $       --     $       --     $    6,969
         4.00-4.99%            14,697          8,175          1,865             25              5         24,767
         5.00.-5.99%            7,359          1,343            236             12            467          9,417
         6.00-6.99%            14,913          4,845             80            256            262         20,356
         7.00.-7.99%            2,846          1,542             39          1,112            216          5,755
                           ----------     ----------     ----------     ----------     ----------     ----------
              Total        $   46,784     $   15,905     $    2,220     $    1,405     $      950     $   67,264
                           ==========     ==========     ==========     ==========     ==========     ==========



         Jumbos mature as follows as of September 30, 2001:



                                                                Amount due
                           -------------------------------------------------------------------------------------
                                                           Two to
                            Less than      One to          three         Three to       Four to
                            one year      two years        years        four years     five years       Total
                           ----------     ----------     ----------     ----------     ----------     ----------
         Interest Rate                                    (Dollars in thousands)
                                                                                    
         3.00-3.99%        $      108     $       --     $       --     $       --     $       --     $      108
         4.00-4.99%               600             --             --             --             --            600
         5.00.-5.99%              207             --             --             --             --            207
         6.00-6.99%               200             --             --          2,442             --          2,642
         7.00.-7.99%            1,131            233             --          2,213            253          3,830
                           ----------     ----------     ----------     ----------     ----------     ----------

              Total        $    2,246     $      233     $       --     $    4,655     $      253     $    7,387
                           ==========     ==========     ==========     ==========     ==========     ==========



                                       51





         The following table presents the maturities of certificates of deposit
as of September 30, 2001, September 30, 2000 and September 30, 1999:



                                                              Maturities of Time Deposits
                                                                     September 30,
                                                          ------------------------------------
                                                            2001          2000          1999
                                                          --------      --------      --------
                                                                      (In thousands)
                                                                             
         Three months or less                             $ 12,281      $ 15,541      $ 17,476
         After three within six months                      15,765        18,979        23,768
         After six within twelve months                     20,984        27,015        24,517
         One year to two years                              16,138        11,418        15,262
         Two years to three years                            2,219         3,943         2,875
         Three years to four years                           6,060           389           594
          Four years to five years                           1,204         2,932           265
                                                          --------      --------      --------
             Total                                        $ 74,651      $ 80,217      $ 84,757
                                                          ========      ========      ========

         Weighted average rate on all certificates of
             deposit at period-end                            5.34%         5.76%         5.23%
                                                          ========      ========      ========



SHORT-TERM BORROWINGS

         First Federal has a line of credit of up to $4,000,000 which bears
interest at the prime lending rate. The line of credit requires monthly interest
payments and a payment of the outstanding balance on an annual basis, in March
of each year. However, the line of credit can be automatically-renewed for an
additional one year period. The prime lending rate was 6.0% at September 30,
2001, and the outstanding balance on the line of credit was $3,355,000.

         Borrowings also include borrowings from the FHLB of Atlanta (See "--
Liquidity"). The balances outstanding at September 30, 2001, and September 30,
2000 were $32,250,000 and $35,844,000, respectively. These balances included
advances with both fixed and variable interest rates, which averaged 4.43% and
6.34% at September 30, 2001 and September 30, 2000, respectively.

CAPITAL RESOURCES

         STOCKHOLDERS' EQUITY

         SouthFirst's consolidated stockholders' equity was $14,282,000 and
$14,925,000 at September 30, 2001 and September 30, 2000, respectively. The 2001
decrease was primarily due to net loss from operations in the amount of $422,000
and the purchase of treasury stock in the amount of $508,000, which were
partially offset by the change in accumulated other comprehensive income of
$850,000 resulting from the increase in unrealized holding gains on available,
for-sale securities.

         During 2001, cash dividends of $554,051, or $0.60 per share, were
declared on SouthFirst Common Stock. During 2000, cash dividends of $557,446, or
$0.60 per share, were declared. During 1999, cash dividends of $571,846, or
$0.60 per share, were declared. Management believes that a strong capital
position is vital to the continued profitability of First Federal and provides a
foundation for future growth as well as promoting depositor and investor
confidence in the institution.



                                       52





         Certain financial ratios for SouthFirst as of the end of the most
recent three fiscal years are presented in the following table:



                                                                                  Equity and Asset Ratios
                                                                     ---------------------------------------------------
                                                                                         September 30,
                                                                                         -------------
                                                                        2001                 2000                1999
                                                                     -----------          -----------         ----------
                                                                                                     
         Return on average assets                                          (0.27)%               0.59%               0.83%
         Return on average stockholder's equity                            (2.82)%               6.70%               8.48%
         Common dividend payout ratio                                        N/A                57.98%              43.99%
         Average stockholders' equity to average assets ratio               9.61%                8.82%               9.84%

         Net Income (Loss)                                              (422,093)             961,492           1,299,999
         Average Assets                                              155,999,236          162,741,763         155,819,636
         Average Equity                                               14,992,282           14,355,955          15,331,948
         Cash Dividends Paid                                             554,051              557,446             571,846



         FIRREA and the implementing regulations of the OTS, which became
effective on December 7, 1989, changed the capital requirements applicable to
thrifts, including First Federal, and the consequences for failing to comply
with such standards. The capital standards include (i) a core capital
requirement, (ii) a tangible capital requirement, and (iii) a risk-based capital
requirement. FIRREA specifies such capital requirements and states that such
standards shall be no less stringent than the capital standards applicable to
national banks. The OTS has issued guidelines identifying minimum regulatory
tangible capital equal to 1.50% of adjusted total assets, a minimum 3.0% core
capital ratio, and a minimum risk-based capital of 8.0% of risk-weighted assets.
As shown in the table below, First Federal was in compliance with these
regulatory capital requirements at September 30, 2001 and September 30, 2000.



                                            At September 30, 2001                              At September 30, 2000
                             ------------------------------------------------     -------------------------------------------------
                                Tangible            Core         Risk-based         Tangible           Core            Risk-based
                                Capital           Capital          Capital          Capital           Capital            Capital
                             -------------     -------------     ------------     -------------     -------------     -------------
                                                                                                    
Capital                      $  14,883,000     $  14,883,000     $ 14,883,000     $  14,889,000     $  14,889,000     $  14,889,000
Adjustments
   General valuation
       allowance                        --                --          852,000                --                --           625,000
   Goodwill                       (562,000)         (562,000)        (562,000)         (613,000)         (613,000)         (613,000)
   Unrealized Gains               (418,000)         (418,000)        (418,000)          450,000           450,000           450,000

Regulatory capital              13,903,000        13,903,000       14,755,000        14,726,000        14,726,000        15,351,000

Regulatory asset base          150,798,000       150,798,000       92,155,000       161,319,000       161,319,000        95,827,000
Capital ratio                         9.28%             9.28%           16.01%             9.14%             9.14%            16.02%
Minimum required ratio                1.50%             4.00%            8.00%             1.50%             4.00%             8.00%
Capital ratio required for
   "well-capitalized"
   designation                          --              5.00%           10.00%               --              5.00%            10.00%



                                       53





LIQUIDITY

         Liquidity is a bank's ability to convert assets into cash equivalents
in order to meet daily cash flow requirements, primarily for deposit
withdrawals, loan demand, and maturing liabilities. Without proper management,
First Federal could experience higher costs of obtaining funds due to
insufficient liquidity. On the other hand, excessive liquidity could lead to a
decline in earnings due to the cost of foregoing alternative higher-yielding
investment opportunities.

         Asset liquidity is provided primarily through the repayment and
maturity of investment securities, and the sale and repayment of loans.

         Sources of liability liquidity include customer deposits and
participation in the FHLB advance program. Although deposit growth historically
has been a primary source of liquidity, such balances may be influenced by
changes in the banking industry, interest rates available on other investments,
general economic conditions, competition and other factors. FHLB advances
include both fixed and variable terms and are taken out with varying maturities.
First Federal can borrow an amount equal to 75% of its mortgage loans which are
backed by one-to-four family residential properties. At September 30, 2001,
First Federal had credit available, net of advances drawn down, of approximately
$6 million. First Federal has drawn down such advances in order to fund dividend
payments to stockholders and to pay various holding company expenses.

         On a consolidated basis, net cash provided by operating activities in
fiscal 2001 was $634,000, a $551,000 decrease from 2000. The $11,356,000 in net
cash provided by investing activities during 2001 consisted primarily of a
$5,684,000 decrease in loan funding activities. Net cash decreased for the
purchase of investment securities available for sale to $7,054,000 from
$1,568,000 in 2000. Cash provided by calls and maturities of investment
securities available for sale and held to maturity increased to $1,755,000 from
$1,550,000, while cash provided from the sale of investment securities available
for sale increased to $9,696,000 from $1,008,000 in 2000. The $10,637,000 in net
cash used by financing activities resulted from a decrease of $5,536,000 in
certificates of deposits, and a decrease of $772,000 in demand accounts, coupled
with a net decrease of $3,284,000 in borrowed funds, payment of $514,000 in
common stock dividends and the acquisition of treasury stock of $508,000.

         First Federal's liquidity ratio at September 30, 2001 was 25.29% and at
September 30, 2000 was 25.17%. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, management's expectations
to the level of yield that will be available in the future, and management's
projections as to the short-term demand for funds to be used in loan
origination. First Federal is subject to certain regulatory limitations with
respect to the payment of dividends to SouthFirst. First Federal paid $771,900
to SouthFirst during 2001 and none during 2000.

         SouthFirst also requires cash for various purposes including servicing
debt, paying dividends to stockholders and paying general corporate expenses.
The primary source of funds for SouthFirst is dividends from First Federal.
First Federal's capital levels meet the requirements for a "well capitalized"
institution and enable First Federal to pay dividends to SouthFirst. In addition
to dividends, SouthFirst has access to various capital markets and other sources
of borrowings.

         SouthFirst retained $3,624,000 of the net proceeds from the initial
public offering of Common Stock in 1994. Substantially all of those funds have
been used to pay dividends, (including a special $2.00 per share dividend in
1996), acquire treasury stock, invest in affiliates and pay general corporate
expenses. Accordingly, SouthFirst will likely rely on dividends from First
Federal to repay borrowings under its line of credit, which has been used, in
part, to pay dividends to Stockholders.


                                       54





ITEM 7.  FINANCIAL STATEMENTS

         The following financial statements are filed with this report as
Exhibit 99.1:

          Independent Auditors' Report
               1.        Jones & Kirkpatrick, P.C.

          Consolidated Statements of Financial Condition as of
               September 30, 2001 and 2000
          Consolidated Statements of Operations for the years ended
               September 30, 2001, 2000 and 1999
          Consolidated Statements of Stockholders' Equity for the years ended
               September 30, 2001, 2000 and 1999
          Consolidated Statements of Cash Flows for the years ended
               September 30, 2001, 2000 and 1999
          Notes to Consolidated Financial Statements


ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

         There have been no changes in, or disagreements with, the Company's
accountants on accounting and financial disclosure in the preceding two fiscal
years.

                                    PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         MANAGEMENT OF SOUTHFIRST

         The SouthFirst Board of Directors currently consists of seven persons
and is divided into three classes, each of which contains approximately
one-third of the SouthFirst Board of Directors. The directors of SouthFirst are
elected by the stockholders of SouthFirst for staggered, three-year terms, so
that approximately one-third of the directors will be elected at each annual
meeting of stockholders to hold office until their successors are elected and
qualified. The executive officers of SouthFirst are elected annually by the
Board of Directors of SouthFirst and hold office until their successors are
elected and qualified.

         The direction and control of First Federal is vested in the First
Federal Board of Directors, which currently consists of seven members and is
divided into three classes, each of which contains approximately one-third of
the members. The directors of First Federal serve three-year terms. The terms of
the directors of First Federal are staggered (as in the case of SouthFirst), so
that approximately one-third of the directors will be elected at each annual
meeting of stockholders. Since SouthFirst owns all of the issued and outstanding
shares of Common Stock of First Federal, SouthFirst will elect the directors of
First Federal, in accordance with applicable law.

         There are no arrangements or understandings pursuant to which the
directors or executive officers of SouthFirst or First Federal were elected and
there are no family relationships between any of such persons.

         The following table sets forth certain information regarding the
executive officers and directors of SouthFirst and First Federal.


                                       55







                                                                                             YEAR FIRST
                                                                                             ELECTED AS A           YEAR
                                                                                             DIRECTOR OF            TERM
               NAME                    AGE(1)                 POSITION HELD                   SOUTHFIRST           EXPIRES
               ----                    ------                 -------------                  -------------         -------
                                                                                                       
      Joe K. McArthur                    50           Chief Executive Officer of                  1995              2002
                                                      SouthFirst and First Federal,
                                                      President of First Federal

      J. Malcomb Massey(2)               52           President of SouthFirst,                    1997              2003
                                                      Director of SouthFirst and
                                                      First Federal

      Allen Gray McMillan, III           44           Chairman of SouthFirst and                  1995              2002
                                                      First Federal, Director of
                                                      SouthFirst and First Federal

      H. David Foote, Jr.                52           Director of SouthFirst and                  1994              2004
                                                      First Federal

      Kenneth E. Easterling              58           Director of SouthFirst and                  2001              2004
                                                      First Federal

      L. Neal Bice                       61           Director of SouthFirst and                  2001              2004
                                                      First Federal

      Donald R. Hardy                    51           Director of SouthFirst and                  2001              2002
                                                      First Federal

      Sandra H. Stephens                 42           Executive Vice President and
                                                      Chief Operating Officer of
                                                      SouthFirst and First Federal

      Ruth M. Roper                      51           Executive Vice President of
                                                      Pension & Benefit


- ---------------

         (1)      At September 30, 2001

         (2)      Mr. Massey is also Chief Executive Officer and President of
                  Pension and Benefit Trust Company.

         Set forth below is certain information with respect to the directors
and executive officers of SouthFirst and First Federal. Unless otherwise
indicated, the principal occupation listed for each person below has been his or
her principal occupation for the past five years.

         JOE K. MCARTHUR has served as a director of First Federal and
SouthFirst since February 1996. Effective September 1, 2001, Mr. McArthur was
elected President and Chief Executive Officer of SouthFirst and First Federal.
Thereafter, as part of the Company's restructuring efforts, Mr. McArthur
resigned as President of SouthFirst to allow J. Malcomb Massey to assume that
office, as of October 1, 2001. Prior to assuming his current positions, Mr.
McArthur served as the Executive Vice President, Chief Financial Officer and
Secretary of First Federal and SouthFirst since 1992 and 1994, respectively. Mr.
McArthur has over 25 years of experience in the banking industry and received a
B.S. in Accounting from the University of Alabama-Birmingham and a Masters of
Business Administration equivalent from the National School of Finance and
Management. He has also completed all courses with the Institute of Financial
Education. Prior to joining First Federal, Mr. McArthur was Assistant Executive
Director of Finance of Humana, a hospital, from 1990 to 1992, and Senior Vice
president



                                       56




of First Federal of Alabama from 1983 to 1990. He has also served as a manager
of various Little League and Babe Ruth Baseball teams, as well as Boys' Club
basketball teams. Mr. McArthur is a member of the First United Methodist Church
of Sylacauga.

         J. MALCOMB MASSEY has served as a director of First Federal and
SouthFirst since May, 1997. On September 26, 2001, Mr. Massey was elected
President of SouthFirst to be effective October 1, 2001. In addition, Mr. Massey
is President and Chief Executive Officer of Pension & Benefit, First Federal's
wholly owned, operating subsidiary. This is a position he has held since he
joined Pension & Benefit in 1997, after it acquired substantially all of the
assets of Lambert, Massey, Roper & Taylor, Inc., an employee benefits consulting
firm, based in Montgomery, for which Mr. Massey had served as President since
1980. Mr. Massey is a member of the American Society of Pension Actuaries, the
South Central Alabama Association of Insurance and Financial Advisors, Life and
Qualifying Member of Million Dollar Roundtable, Top of the Table, Montgomery
Lions Club and Young Meadows Presbyterian Church.

         ALLEN GRAY MCMILLAN, III has served as a director of First Federal
since 1993 and of SouthFirst since 1994. On August 15, 2001, Mr. McMillan was
elected Chairman of SouthFirst and First Federal. Mr. McMillan is also President
of Brecon Knitting Mill, where he has been employed since 1979. Mr. McMillan has
been active in the Kiwanis Club, United Way, and Boy Scouts of America. He is a
member of the First United Methodist Church.

         H. DAVID FOOTE, JR. has served as a director of First Federal since
1988 and of SouthFirst since 1994. Mr. Foote has been President and owner of
Foote Bros. Furniture since 1973. Mr. Foote has been a director of the Sylacauga
Chamber of Commerce, the Coosa Valley Country Club and Talladega County E-911.
He has served as President of Wesley Chapel Methodist Men's Club and head of the
Wesley Chapel Methodist Administrative Board.

         KENNETH E. EASTERLING has served as a director of First Federal since
1997 and of SouthFirst since 2001. Mr. Easterling previously served as a member
of the Board of Directors of First Federal Savings and Loan of Chilton County
from 1992 to 1997. Mr. Easterling is the owner of Home Printing Company, located
in Clanton, Alabama, which was established in 1969. Mr. Easterling served in the
Army National Guard from 1963 to 1969, is a Charter member of the Exchange Club
of Chilton County, is a member of the Board of Directors of Chilton County
Cattlemen's Association, is a member of the Board of Directors of Alfa, and has
served as a Deacon of the West End Baptist Church from 1969 to the present.

         L. NEAL BICE has served as a director of First Federal since 1997 and
of SouthFirst since 2001. Mr. Bice previously served as a director of First
Federal Savings and Loan of Chilton County, from 1989 to 1997. Mr. Bice is an
owner and a director of Chilton County Feed and Seed Company, located in
Clanton, Alabama. Mr. Bice presently is a professor of economics and business at
the Clanton extension of the George C. Wallace State Community College. Mr. Bice
is a past professor of finance at Auburn University, a past professor of
economics, finance and banking at the University of Southwestern Louisiana, and
a past professor of finance at the University of Alabama. Mr. Bice is a member
of the Chilton County Board of Education, the Alabama Education Association, the
Southern School Board Association, Omicron Delta Epsilon Society in Economics,
the Chilton County High School Athletic Association, and the Chilton County
Cattlemen's Association. He is a past President of the Chilton County Board of
Education, and serves as director of the Chilton County Chamber of Commerce, the
President of the Chilton County University of Alabama Alumni Association, the
Zone Chairman of the Clanton Lion's Club, and the President of the War Eagle
Lion's Club, Auburn, Alabama. Mr. Bice is a member of the Concord Baptist
Church.

         DONALD R. HARDY has served as a director of First Federal and
SouthFirst since January, 2001. Mr. Hardy is the owner, President and CEO of H &
B Builders, Inc., located in Sylacauga, Alabama. He is a member of the Business
Council of Alabama, Sylacauga Chamber of Commerce and has served on the
Sylacauga Planning Commission since 1992. Mr. Hardy is an active member of the
First Baptist Church of Sylacauga.


                                       57




         SANDRA H. STEPHENS was elected Executive Vice President and Chief
Operating Officer of SouthFirst and First Federal, effective November 1, 2001.
Ms. Stephens previously served as the Chief Operating Officer (1997-2001) and
Chief Financial Officer (1992-1997) of First Federal Bank, in Tuscaloosa,
Alabama. Prior to her employment with First Federal Bank, Ms. Stephens held
various executive positions with Federal Home Loan Mortgage Corporation in
Atlanta, Georgia, from 1990 until 1992, and with Pinnacle Bank in Jasper,
Alabama from 1981 until 1990. Ms. Stephens is a member of the American Society
of Women Accountants, and she is a member of the First United Methodist Church
in Tuscaloosa, Alabama.

         RUTH M. ROPER is Executive Vice President of Pension & Benefit, First
Federal's wholly owned, operating subsidiary. This is a position Ms. Roper has
held since she joined Pension & Benefit in 1997, after it acquired substantially
all of the assets of Lambert, Massey, Roper & Taylor, Inc., a Montgomery based
employee benefits consulting firm of which Ms. Roper was a named shareholder.
Since 1983, when Ms. Roper first joined Lambert, Massey & Associates, Inc., she
has served in various capacities related to qualified plan and employee benefit
consulting, including qualified plan administration activities and the provision
of employee benefit consulting services. Ms. Roper is a member of the American
Society of Pension Actuaries and the Montgomery Association of Life
Underwriters.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Exchange Act requires SouthFirst's directors and
certain of SouthFirst's officers and persons who own more than 10% of the
outstanding Common Stock of SouthFirst to file with the Securities and Exchange
Commission reports of changes in ownership of the Common Stock of SouthFirst
held by such persons. Officers, directors and greater than 10% stockholders are
also required to furnish SouthFirst with copies of all forms they file under
this regulation. SouthFirst has been subject to this regulation since February
13, 1995. With the exceptions of two late filings, those being the Initial
Statement of Beneficial Ownership of Securities (Form 3) for both Donald R.
Hardy and Sandra H. Stephens, to SouthFirst's knowledge, based solely on a
review of copies of such reports furnished to SouthFirst and representations
that no other reports were required, all Section 16(a) filing requirements
applicable to its officers, directors and 10% holders were complied with during
fiscal 2001.

         Although SouthFirst has no obligation to make filings pursuant to
Section 16 of the Exchange Act, SouthFirst has adopted a policy requiring all
Section 16 reporting persons to report monthly to a designated employee of
SouthFirst as to whether any transactions in SouthFirst's Common Stock occurred
during the previous month.

ITEM 10. EXECUTIVE COMPENSATION

         The following table provides certain summary information for fiscal
2001, 2000, and 1999 concerning compensation paid or accrued by SouthFirst and
First Federal to or on behalf of SouthFirst's Chief Executive Officer and the
other executive officers of SouthFirst whose total annual salary and bonus
exceeded $100,000 during fiscal 2001 (the "Named Executive Officers"):


                                       58






                           SUMMARY COMPENSATION TABLE





                                                                   Annual                           Long Term Compensation
                                                             Compensation(1)

                                                                                                  Securities
   Name and Principal              Fiscal                                       Other Annual      Underlying        All Other
       Position(2)                  Year          Salary        Bonus          Compensation(3)    Options (#)     Compensation
                                                                                                
Joe K. McArthur                     2001        $ 107,916     $ 22,314(5)         $ 19,725         5,024(6)         $ 1,414(7)
      Chief Executive Officer       2000          105,000       29,490(8)           13,155             0              1,624(9)
      of SouthFirst and First       1999          105,000       24,104(10)          12,250         7,428(11)          1,624(12)
      Federal, President of
      First Federal

J. Malcomb Massey                   2001        $ 130,000     $  9,270(13)        $ 16,725         3,131(14)        $ 1,819(15)
      President of                  2000          130,000       17,069(16)          13,155             0              1,873(17)
      SouthFirst, Director          1999          130,000        2,236              13,250         3,726(18)          1,873(19)
      and
      President of
      Pension & Benefit

Donald C. Stroup(4)                 2001        $ 128,333     $ 25,565(20)        $ 16,980         7,679(21)        $ 2,526(22)
      President,                    2000          140,000       43,605(23)          13,155             0              2,901(24)
      Chief                         1999          140,000       35,812(25)          12,250        14,180(26)          2,901(27)
      Executive Officer
      and Chairman


- -----------------

(1)      All compensation received by the Named Executive Officers was paid by
         First Federal and Pension & Benefit.

(2)      On August 31, 2001, Donald C. Stroup, the former Chairman, President
         and Chief Executive Officer of SouthFirst and First Federal, resigned
         from all positions that he previously held as an officer and director
         of SouthFirst, First Federal, and their respective affiliates.
         Following the resignation of Mr. Stroup, effective September 1, 2001,
         Joe K. McArthur was elected President of First Federal and Chief
         Executive Officer of both SouthFirst and First Federal. Prior to this,
         Mr. McArthur served as the Executive Vice-President, and Chief
         Financial Officer of both entities. Thereafter, effective October 1,
         2001, J. Malcomb Massey, Chief Executive Officer and President of
         Pension and Benefit Trust Company, a subsidiary of First Federal, was
         elected as President of SouthFirst. Finally, effective November 1,
         2001, Sandra H. Stephens, who had previously served as the Chief
         Operating Officer and Chief Financial Officer of First Federal Bank,
         Tuscaloosa, Alabama was elected as Executive Vice President and Chief
         Operating Officer of SouthFirst and First Federal.

(3)      Fees received as member of the Board of Directors of SouthFirst, First
         Federal and/or Pension & Benefit.

(4)      On August 31, 2001, Donald C. Stroup, SouthFirst and First Federal
         entered into a Severance, Release and Stock Redemption Agreement (the
         "severance agreement") by which Mr. Stroup resigned all positions he
         held as an employee and director of SouthFirst and First Federal. Mr.
         Stroup's employment agreements with SouthFirst and First Federal, both
         dated October 1, 2000, consequently were terminated; however, the
         Deferred Compensation Agreement entered into by and between Mr. Stroup
         and First Federal, dated November 16, 1994, remains in effect.

         Under the terms of the severance agreement, SouthFirst agreed to
         purchase from Mr. Stroup, and Mr. Stroup agreed to sell, assign,
         transfer and deliver to SouthFirst 44,942 shares of common stock of
         SouthFirst owned


                                       59




         by Mr. Stroup for an aggregate cash purchase price of $668,700.
         SouthFirst also agreed to pay to Mr. Stroup's counsel $10,000 for legal
         fees and expenses incurred by Mr. Stroup during the period from July
         15, 2001 through August 31, 2001 in connection with his employment with
         SouthFirst and First Federal. In addition, SouthFirst agreed to waive
         any right to reimbursement from Mr. Stroup of any amounts paid to Mr.
         Stroup pursuant to SouthFirst's Dividend Incentive Plan; provided,
         however, that the maximum amount waived by SouthFirst would be $22,500.
         Finally, SouthFirst transferred title to the automobile then provided
         by SouthFirst for Mr. Stroup's use. These payments by SouthFirst to Mr.
         Stroup were exclusive and in lieu of any other compensation, benefits,
         severance pay or other remuneration or claims arising in connection
         with Mr. Stroup's employment relationship with SouthFirst or First
         Federal or the termination of either such relationship.

(5)      Consists of a regular bonus of $6,875 as well as $15,439 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options. See "-- Compensation of
         Directors."

(6)      On February 17, 2001, SouthFirst issued 5,024 options under the 1995
         plan to Mr. McArthur at an exercise price of $9.75 per share. These
         option's vest in equal annual increments commencing on November 4, 2001
         through November 4, 2003.

(7)      Represents a $964 automobile allowance and income of $450 recognized on
         employer provided group term life insurance in excess of $50,000.

(8)      Consists of a regular bonus of $17,065 as well as $12,425 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options. See "-- Compensation of
         Directors."

(9)      Represents a $964 automobile allowance and income of $660 recognized on
         employer provided group term life insurance in excess of $50,000.

(10)     Consisted of a regular bonus of $13,125 as well as $10,979 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options and a bonus paid to assist
         in the payment of applicable federal taxes due in connection with such
         dividend payments. See "-- Compensation of Directors."

(11)     On November 4, 1998, SouthFirst canceled all options granted to Mr.
         McArthur in 1998, and issued these options to purchase the same number
         of shares at a lower exercise price. These options vest in equal annual
         increments commencing on 11/4/99. See "-- Repricing of Stock Options
         under the Stock Option Plans."

(12)     Represents a $964 automobile allowance and income of $660 recognized on
         employer provided group term life insurance in excess of $50,000.

(13)     Consists of a regular bonus of $6,000 as well as $3,270 of compensation
         consisting of dividends paid under SouthFirst's Dividend Investment
         Plan on unexercised stock options. See "-- Compensation of Directors."

(14)     On February 17,2001, SouthFirst issued 1,407 options under the 1995
         plan and 317 options under the 1998 plan to Mr. Massey at an exercise
         price of $9.75 per share. These options vest in equal annual increments
         commencing on November 4, 2001 through November 4, 2003.

(15)     Represents a $1,405 automobile allowance and income of $414 recognized
         on employer provided group term life insurance in excess of $50,000.

(16)     Consists of a regular bonus of $14,833 as well as $2,236 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options. See "-- Compensation of
         Directors."

(17)     Represents a $1,405 automobile allowance and income of $468 recognized
         on employer provided group term life insurance in excess of $50,000.


                                       60



(18)     On November 4, 1998, SouthFirst canceled all options granted to Mr.
         Massey in 1998, and issued options to purchase the same number of
         shares at a lower exercise price. These options vest in equal annual
         increments commencing on 11/4/99. See "---Repricing of Stock Options
         under the Stock Option Plans."

(19)     Represents a $1,405 automobile allowance and income of $468 recognized
         on employer provided group term life insurance in excess of $50,000.

(20)     Consists of dividends paid under SouthFirst's Dividend Investment Plan
         on unexercised stock options. See "--Compensation of Directors."

(21)     On February 17, 2001, SouthFirst issued 7,679 options under the 1995
         plan to Mr. Stroup at an exercise price of $9.75 per share. Due to Mr.
         Stroup's resignation on August 31, 2001, these options expired on
         November 29, 2001.

(22)     Represents a $1,836 automobile allowance and income of $690 recognized
         on employer provided group term life insurance in excess of $50,000.

(23)     Consists of a regular bonus of $22,647 as well as $20,958 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options. See "-- Compensation of
         Directors."

(24)     Represents a $1,836 automobile allowance and income of $1,065
         recognized on employer provided group term life insurance in excess of
         $50,000.

(25)     Consists of a regular bonus of $17,500 as well as $18,312 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options and a bonus paid to assist
         in the payment of applicable federal taxes due in connection with such
         dividend payments. See "-- Compensation of Directors."

(26)     On November 4, 1998, SouthFirst canceled all options granted to Mr.
         Stroup in 1998, and issued these options to purchase the same number of
         shares at a lower exercise price. These options vest in equal annual
         increments commencing on 11/4/99. See "---Repricing of Stock Options
         under the Stock Option Plans."

(27)     Represents a $1,836 automobile allowance and income of $1,065
         recognized on employer provided group term life insurance in excess of
         $50,000.

EMPLOYMENT AGREEMENTS

         SouthFirst and First Federal have entered into employment agreements
with each of the following executive officers (including each of the Named
Executive Officers). The terms and conditions of these employment contracts are
described below.

Joe K. McArthur, Chief Executive Officer of SouthFirst and First Federal,
President of First Federal.

         The employment agreement with Mr. McArthur was effective as of
September 1, 2001 and is for a term of two years. On each anniversary of the
effective date, Mr. McArthur's term of employment shall be extended for an
additional one-year period beyond the then effective expiration date, provided
the Board determines, in a duly adopted resolution, that the performance of Mr.
McArthur has met the Board's requirements and standards, and that such
employment agreement shall be extended.

         Pursuant to Mr. McArthur's employment agreement, SouthFirst shall be
jointly and severally liable for the payment of all amounts due under a separate
employment agreement with First Federal, which is of even date with the
employment agreement with SouthFirst. Under the terms of the employment
agreement with First Federal, SouthFirst and First Federal agree to pay Mr.
McArthur a salary at the rate of $140,000 per annum,


                                       61




payable in cash not less frequently than monthly. Beginning on the Effective
Date, Mr. McArthur shall be eligible to receive such performance bonuses as may
be determined in the sole discretion of the Board. In addition, Mr. McArthur
shall participate in standard retirement and medical plans, and is entitled to
customary fringe benefits, vacation and sick leave.

         Mr. McArthur's employment agreement terminates upon his death or
disability, and is terminable for "cause" as defined in the employment
agreement. In the event of termination for cause, no severance benefits are
payable to Mr. McArthur. If SouthFirst or First Federal terminates Mr. McArthur
without cause, he will be entitled to a continuation of his salary from the date
of termination through the remaining term of the employment agreements plus an
additional twelve-month period, and he will be entitled to the cost of obtaining
benefits in which Mr. McArthur would have been eligible to participate through
the termination date. Mr. McArthur may voluntarily terminate his employment
agreement by providing sixty days written notice to the Boards of Directors of
SouthFirst and First Federal, in which case he is entitled to receive only his
compensation, vested rights and benefits up to the date of termination.

         Mr. McArthur's employment agreement further provides that, in the event
of Mr. McArthur's involuntary termination in connection with, or within two
years after any change in control of First Federal or SouthFirst, other than for
"cause," or death or disability, Mr. McArthur will be paid, within 10 days of
such termination, an amount equal to the difference between (i) 2.99 times his
"base amount," as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code"), and (ii) the sum of any other
"parachute payments," as defined under Section 280G(b)(2) of the Internal
Revenue Code, that Mr. McArthur receives on account of the change in control.
Under Mr. McArthur's employment agreement, a "change in control" generally
refers to a change in ownership, holding or power to vote more than 25% of
SouthFirst's or First Federal's voting stock, a change in the ownership or
possession of the ability to control the election of a majority of First
Federal's or SouthFirst's directors or the exercise of a controlling influence
over the management or policies of SouthFirst or First Federal. In addition,
under Mr. McArthur's employment agreement, a change in control occurs when,
during any consecutive two-year period, the directors of SouthFirst or First
Federal, at the beginning of such period, cease to constitute two-thirds of the
Boards of Directors of SouthFirst or First Federal, unless the election of
replacement directors was approved by a two-thirds (66 2/3%) vote of the initial
directors then in office. Mr. McArthur's employment agreement also provides for
a similar lump sum payment to be made in the event of his voluntary termination
of employment within one year following a change in control of First Federal or
SouthFirst.

Sandra H. Stephens, Executive Vice President and Chief Operating Officer.

         The employment agreement with Ms. Stephens was effective as of November
1, 2001 and is for a term of two years. On each annual anniversary date from the
effective date, Ms. Stephens' term of employment shall be extended for an
additional one-year period beyond the then effective expiration date, provided
the Board determines in a duly adopted resolution that the performance of Ms.
Stephens has met the Board's requirements and standards, and that such
employment agreement should be extended.

         Pursuant to Ms. Stephens' employment agreement, First Federal pays Ms.
Stephens an annual base salary of $115,000, payable in cash not less frequently
than monthly. Beginning on the Effective Date, Ms. Stephens shall be eligible to
receive such performance bonuses as may be determined in the sole discretion of
the Board. In addition, Ms. Stephens shall participate in standard retirement
and medical plans, and is entitled to customary fringe benefits, vacation and
sick leave.

         Ms. Stephens' employment agreement terminates upon her death or
disability, and is terminable for "cause" as defined in the employment
agreement. In the event of termination for cause, no severance benefits are
payable to Ms. Stephens. If First Federal terminates Ms. Stephens without cause,
she will be entitled to a continuation of her salary from the date of
termination through the remaining term of the employment agreement plus an
additional twelve-month period, and she will be entitled to the cost of
obtaining benefits in which Ms. Stephens would have been eligible to participate
through the termination date. Ms. Stephens may voluntarily terminate her
employment agreement by providing sixty days written notice to the Board of
Directors of First


                                       62




Federal, in which case she is entitled to receive only her compensation, vested
rights and benefits up to the date of termination.

         Ms. Stephens' employment agreement further provides that, in the event
of her involuntary termination in connection with, or within two years after any
change in control of First Federal or SouthFirst, other than for "cause," or
death or disability, Ms. Stephens will be paid, within 10 days of such
termination, an amount equal to the difference between (i) 2.99 times her "base
amount," as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"), and (ii) the sum of any other
"parachute payments," as defined under Section 280G(b)(2) of the Internal
Revenue Code, that Ms. Stephens receives on account of the change in control.
Under Ms. Stephens' employment agreement, a "change in control" generally refers
to a change in ownership, holding or power to vote more than 25% of First
Federal's or SouthFirst's voting stock, a change in the ownership or possession
of the ability to control the election of a majority of First Federal's or
SouthFirst's directors, or the exercise of a controlling influence over the
management or policies of First Federal or SouthFirst. In addition, under Ms.
Stephens' employment agreement, a change in control occurs when, during any
consecutive two-year period, the directors of First Federal or SouthFirst, at
the beginning of such period, cease to constitute two-thirds of the Board of
Directors of First Federal or SouthFirst, unless the election of replacement
directors was approved by a two-thirds (66 2/3%) vote of the initial directors
then in office. Ms. Stephens' employment agreement also provides for a similar
lump sum payment to be made in the event of her voluntary termination of
employment within one year following a change in control of First Federal or
SouthFirst.

J. Malcomb Massey, President and Chief Executive Officer of Pension & Benefit.

         The employment agreement by and between Pension & Benefit and Mr.
Massey was effective as of October 1, 2001 and provides for a term of two years.
On each annual anniversary date from the effective date, Mr. Massey's term of
employment shall be extended for an additional one-year period beyond the then
effective expiration date, provided the Board determines in a duly adopted
resolution that the performance of Mr. Massey has met the Board's requirements
and standards, and that such employment agreement should be extended.

         The employment agreement with Mr. Massey provides for an annual base
salary of $150,000, payable in cash not less frequently than monthly. In
addition, as a provision of a prior employment agreement, Mr. Massey received
15,512 shares of restricted SouthFirst Common Stock, one-fifteenth of which vest
on each of the first fifteen anniversaries of April 11, 1997. Should Mr.
Massey's employment be terminated due to death, disability or the termination of
his employment "without cause," as defined in the employment agreement, all
unvested shares shall be deemed earned and fully vested as of such date and
shall be distributed as soon as practicable thereafter. All unvested shares will
also vest upon a "change in control" of Pension & Benefit, First Federal or
SouthFirst. Under Mr. Massey's employment agreement, "change in control"
generally refers to a change in ownership, holding or power to vote more than
25% of Pension & Benefit's, First Federal's or SouthFirst's voting stock, a
change in the ownership or possession of the ability to control the election of
a majority of Pension & Benefit's, First Federal's or SouthFirst's directors, or
the exercise of a controlling influence over the management or policies of
Pension & Benefit, First Federal or SouthFirst. In addition, under Mr. Massey's
employment agreement, a change in control occurs when, during any consecutive
two-year period, directors of Pension & Benefit, First Federal or SouthFirst, at
the beginning of such period, cease to constitute two-thirds of the Boards of
Directors of Pension & Benefit, First Federal or SouthFirst, unless the election
of replacement directors was approved by a two-thirds (66 2/3%) vote of the
initial directors then in office.

         Mr. Massey's employment agreement entitles him to participate in an
equitable manner with all other senior management employees of Pension & Benefit
in discretionary bonuses that the Board may award from time to time to senior
management employees. Mr. Massey may also participate in standard retirement and
medical plans, and is entitled to customary fringe benefits, vacation and sick
leave.

         Mr. Massey's employment agreement terminates upon his death or
disability, and is terminable for "cause," as defined in the employment
agreement. In the event of termination for cause, no severance benefits are
payable to Mr. Massey. If Mr. Massey is terminated without cause, he will be
entitled to severance pay equal to the amount of his salary and benefits from
the date of termination through the remaining term of the employment


                                       63




agreement plus an additional twelve-month period. Mr. Massey has the option to
receive this payment either (i) in periodic payments, as if the termination had
not occurred, or (ii) in one lump sum payment within ten days of the termination
of his employment. In either case, however, the severance pay shall not exceed
two (2) times Mr. Massey's "average annual compensation," which is the average
total annual compensation received by Mr. Massey under the employment agreement
over the five full fiscal years preceding the termination, or, if Mr. Massey has
been employed less than five full fiscal years, over each full fiscal year
preceding the termination. Mr. Massey may terminate voluntarily his employment
agreement by providing sixty days written notice to the Board, in which case he
is entitled to receive only his compensation, vested rights and benefits up to
the date of termination.

         In addition to Mr. Massey's employment agreement, SouthFirst, First
Federal, Pension & Benefit and Mr. Massey have entered into a guaranty of
employment agreement pursuant to which SouthFirst and First Federal have
guaranteed the performance of Pension & Benefit under the terms of the
employment agreement by and between Pension & Benefit and Mr. Massey.

Ruth M. Roper, Executive Vice President of Pension & Benefit.

         The employment agreement with Ms. Roper was effective as of October 1,
2001 and provides for a term of two years. On each annual anniversary date from
the effective date, Ms. Roper's term of employment shall be extended for an
additional one-year period beyond the then effective expiration date, provided
the Board determines in a duly adopted resolution that the performance of Ms.
Roper has met the Board's requirements and standards, and that such employment
agreement should be extended.

         The employment agreement with Ms. Roper provides for an annual base
salary of $98,000, payable in cash not less frequently than monthly. In
addition, as a provision of a prior employment agreement, Ms. Roper received
5,623 shares of restricted SouthFirst Common Stock, one-fifteenth of which vest
on each of the first fifteen anniversaries of April 11, 1997. Should Ms. Roper's
employment be terminated due to death, disability or the termination of her
employment "without cause," as defined in the employment agreement, all unvested
shares shall be deemed earned and fully vested as of such date and shall be
distributed as soon as practicable thereafter. All unvested shares will also
vest upon a "change in control" of Pension & Benefit, First Federal or
SouthFirst. Under Ms. Roper's employment agreement, "change in control"
generally refers to a change in ownership, holding or power to vote more than
25% of Pension & Benefit's, First Federal's or SouthFirst's voting stock, a
change in the ownership or possession of the ability to control the election of
a majority of Pension & Benefit's, First Federal's or SouthFirst's directors, or
the exercise of a controlling influence over the management or policies of
Pension & Benefit, First Federal or SouthFirst. In addition, under Ms. Roper's
employment agreement, a change in control occurs when, during any consecutive
two-year period, directors of Pension & Benefit, First Federal or SouthFirst, at
the beginning of such period, cease to constitute two-thirds of the Boards of
Directors of Pension & Benefit, First Federal or SouthFirst, unless the election
of replacement directors was approved by a two-thirds (66 2/3%) vote of the
initial directors then in office.

         Ms. Roper's employment agreement entitles her to participate in an
equitable manner with all other senior management employees of Pension & Benefit
in discretionary bonuses that the Board may award from time to time to senior
management employees. Ms. Roper may also participate in standard retirement and
medical plans, and is entitled to customary fringe benefits, vacation and sick
leave.

         Ms. Roper's employment agreement terminates upon her death or
disability, and is terminable for "cause," as defined in the employment
agreement. In the event of termination for cause, no severance benefits are
payable to Ms. Roper. If Ms. Roper is terminated without cause, she will be
entitled to severance pay equal to the amount of her salary and benefits from
the date of termination through the remaining term of the employment agreement
plus an additional twelve-month period. Ms. Roper has the option to receive this
payment either (i) in periodic payments, as if the termination had not occurred,
or (ii) in one lump sum payment within ten days of the termination of her
employment. In either case, however, the severance pay shall not exceed two (2)
times Ms. Roper's "average annual compensation," which is the average total
annual compensation received by Ms. Roper under the employment agreement over
the five full fiscal years preceding the termination, or if Ms. Roper has been
employed less than five full fiscal years, over each full fiscal year preceding
the termination. Ms. Roper may voluntarily terminate her employment agreement by
providing sixty days written notice to the Board, in which case she is entitled
to receive only her compensation, vested rights and benefits up to the date of
termination.

         In addition to Ms. Roper's employment agreement, SouthFirst, First
Federal, Pension & Benefit and Ms. Roper have entered into a guaranty of
employment agreement pursuant to which SouthFirst and First Federal have
guaranteed the performance of Pension & Benefit under the terms of the
employment agreement by and between Pension & Benefit and Ms. Roper.


                                       64



Donald C. Stroup - Severance Agreement

         On August 31, 2001, Donald C. Stroup, SouthFirst and First Federal
entered into a Severance, Release and Stock Redemption Agreement (the "Severance
Agreement") by which Mr. Stroup resigned all positions he held as an employee
and director of SouthFirst and First Federal. Mr. Stroup's employment agreements
with SouthFirst and First Federal, both dated October 1, 2000, consequently were
terminated; however, the Deferred Compensation Agreement entered into by and
between Mr. Stroup and First Federal, dated November 16, 1994, remains in
effect.

         Under the terms of the Severance Agreement, SouthFirst agreed to
purchase from Mr. Stroup, and Mr. Stroup agreed to sell, assign, transfer and
deliver to SouthFirst 44,942 shares of common stock of SouthFirst owned by Mr.
Stroup for an aggregate cash purchase price of $668,700. SouthFirst also agreed
to pay to Mr. Stroup's counsel $10,000 for legal fees and expenses incurred by
Mr. Stroup during the period from July 15, 2001 through August 31, 2001 in
connection with his employment with SouthFirst and First Federal. In addition,
SouthFirst agreed to waive any right to reimbursement from Mr. Stroup of any
amounts paid to Mr. Stroup pursuant to SouthFirst's Dividend Incentive Plan;
provided, however, that the maximum amount waived by SouthFirst would be
$22,500. Finally, SouthFirst transferred title to the automobile then provided
by SouthFirst for Mr. Stroup's use. These payments by SouthFirst to Mr. Stroup
were exclusive and in lieu of any other compensation, benefits, severance pay or
other remuneration or claims arising in connection with Mr. Stroup's employment
relationship with SouthFirst or First Federal or the termination of either such
relationship.

DEFERRED COMPENSATION AGREEMENTS

         First Federal has previously entered into deferred compensation
agreements (collectively, the "Deferred Compensation Agreements") with Mr.
Stroup, Mr. McArthur, and Ms. Roper, pursuant to which each would receive
certain retirement benefits at age 65. Under the Deferred Compensation
Agreements, benefits would be payable for 15 years. A portion of the retirement
benefits would accrue each year until age 65 or, if sooner, until termination of
employment. Had Mr. Stroup remained in the employment of First Federal until age
65, his annual benefit would have been $65,000. Mr. Stroup, however, resigned on
August 31, 2001, and, pursuant to such resignation, his accrual of annual
benefits has ceased. Mr. Stroup's current annual benefit, to be received at age
65, now is fixed at approximately $25,000.

         If Mr. McArthur remains in the employment of First Federal until age
65, his annual benefit will be $45,000. If Mr. McArthur dies prior to age 65,
while in the employment of First Federal, the full retirement benefits available
under the deferred compensation agreement will accrue and will, thereupon, be
payable to his beneficiaries. Similarly, if Ms. Roper remains in the employment
of First Federal until age 65, her annual benefit will be $30,000. If Ms. Roper
dies prior to age 65, while in the employment of First Federal, the full
retirement benefits available under the deferred compensation agreement will
accrue and will, thereupon, be payable to her beneficiaries.

         The retirement benefits available under the Deferred Compensation
Agreements are unfunded. However, First Federal has purchased life insurance
policies on the lives of these officers that will be available to SouthFirst and
First Federal to provide for both retirement benefits and key man insurance. The
costs of these arrangements was $57,075 for each of 2001, 2000, and 1999.

MANAGEMENT RECOGNITION PLANS

         The SouthFirst Board of Directors has adopted two management
recognition plans ("MRPs"), denominated SouthFirst Bancshares, Inc. Management
Recognition Plan "A" ("Plan A") and SouthFirst Bancshares, Inc. Management
Recognition Plan "B" ("Plan B") (collectively, the "Plans"). The objective of
the Plans is to enable SouthFirst and First Federal to reward and retain
personnel of experience and ability in key positions of responsibility by
providing such personnel with a proprietary interest in SouthFirst and by
recognizing their past contributions to SouthFirst and First Federal, and to act
as an incentive to make such contributions in the future.


                                       65




         Plan A and Plan B are identical except that while Plan B provides for
awards only to employees of SouthFirst and First Federal, Plan A provides for
awards to employees, as well as to non-employee directors. The Plans are
administered by a committee (the "Committee") of the SouthFirst Board of
Directors. Awards under the Plans are in the form of restricted stock grants
("MRP grants"). Each Plan has reserved a total of 16,600 shares of SouthFirst
Common Stock for issuance pursuant to awards made by the Committee. Such shares,
with respect to each Plan, are held in trust until awards are made by the
Committee, at which time the shares are distributed from the trust to the award
recipient. Such shares will bear restrictive legends until vested, as described
below. The Committee may make awards to eligible participants under the Plans in
its discretion, from time to time. Under Plan A, on November 15, 1995, each
non-employee director serving in such capacity on February 13, 1995 (the
effective date of the conversion of SouthFirst from a mutual to a stock form of
ownership) automatically received an award of 1,660 shares. In selecting the
employees to whom awards are granted under the Plans, the Committee considers
the position, duties and responsibilities of the employees, the value of their
services to SouthFirst and First Federal and any other factors the Committee may
deem relevant.

         Awards under the Plans vest at the rate of 20% per year, commencing on
the first anniversary of the date of the award. The Committee may, however, from
time to time and in its sole discretion, accelerate the vesting with respect to
any participant, if the Committee determines that such acceleration is in the
best interest of SouthFirst. If a participant terminates employment for reasons
other than death or disability, the participant forfeits all rights to any
shares which have not vested, including the dividends received with respect to
such non-vested shares. If the participant's termination is caused by death or
disability, all shares become vested. Participants will recognize compensation
income on the date their interests vest, or at such earlier date pursuant to a
participant's election to accelerate recognition pursuant to Section 83(b) of
the Internal Revenue Code.

         As of September 30, 1996, a total of 33,200 shares had been awarded
under the Plans. During the year-ended September 30, 2001, SouthFirst
re-purchased 11,525 shares of its common stock which shares subsequently were
designated MRP shares and are currently held in trust. As of September 30, 2001,
a total of 33,200 shares have been awarded under the Plans.

         STOCK OPTION PLANS

         The SouthFirst Board of Directors has adopted two Stock Option Plans.
The first was adopted November 15, 1995 and is denominated the SouthFirst
Bancshares, Inc. Stock Option and Incentive Plan (the "1995 Stock Option Plan"),
and the second was adopted on January 28, 1998 and is denominated the 1998 Stock
Option and Incentive Plan ("the 1998 Stock Option Plan"). The objective of each
of the Stock Option Plans is to attract, retain, and motivate the best possible
personnel for positions of substantial responsibility with SouthFirst and First
Federal. In order to attract and retain members of the Board of Directors of
SouthFirst who contribute to SouthFirst's success, each of the Stock Option
Plans also provides for the award of non-qualified stock options to non-employee
directors of SouthFirst.

         The 1995 Stock Option Plan authorizes the grant of up to 83,000 shares
of Common Stock to select officers and employees in the form of (i) incentive
and non-qualified stock options ("Options") or (ii) Stock Appreciation Rights
("SARs") (Options and SARs are referred to herein collectively as "Awards"), as
determined by the committee administering the 1995 Stock Option Plan. As of
September 30, 1996, options to purchase a total of 83,000 shares had been issued
under the 1995 Stock Option Plan, and, as of that date, no other shares were
available for future issuance. After September 30, 1996, grants to purchase
4,150 shares of Common Stock expired prior to being exercised, and,
consequently, the 4,150 shares reserved to be issued pursuant to such expired
options became available for re-issuance under the 1995 Stock Option Plan. In
1998, the Board of Directors of First Federal granted options to purchase these
4,150 shares available under the 1995 Stock Option Plan but they again expired
prior to being exercised.

         The 1998 Stock Option Plan authorizes the grant of up to 63,361 shares
of Common Stock to select officers and employees in the form of (i) incentive
and non-qualified stock options ("Options") or (ii) Stock


                                       66




Appreciation Rights ("SARs"). As of September 30, 2001, options to purchase a
total of 63,361 shares had been issued under the 1998 Stock Option Plan.

         The terms and conditions of the two Stock Option Plans are
substantially the same. The exercise price for Options and SARs granted under
the Stock Option Plans may not be less than the fair market value of the shares
on the day of the grant, and no Awards shall be exercisable after the expiration
of ten years from the date of this grant. Each Stock Option Plan has a term of
10 years unless earlier terminated by the SouthFirst Board of Directors. The
Stock Option Plans are administered by a committee of the directors of
SouthFirst (the "Option Plan Committee"). Except as discussed below with respect
to non-employee directors, the Option Plan Committee has complete discretion to
make Awards to persons eligible to participate in the Stock Option Plans, and
determines the number of shares to be subject to such Awards, and the terms and
conditions of such Awards. In selecting the persons to whom Awards are granted
under the Stock Option Plan, the Option Plan Committee considers the position,
duties, and responsibilities of the employees, the value of their services to
SouthFirst and First Federal, and any other factor the Option Plan Committee may
deem relevant to achieving the stated purpose of the Stock Option Plan.

         Options granted under the Stock Option Plans become exercisable at
rates ranging from 20% to 33% per year commencing one year from the date of
grant, with the exception that all options will become immediately exercisable
in the event the optionee's employment is terminated due to the optionee's
death, disability or retirement, or in the event of a change in control of First
Federal or SouthFirst.

          Under the 1995 Stock Option Plan, all directors who were not employees
of SouthFirst as of November 15, 1995 (the date of the approval of the Stock
Option Plan by the stockholders of SouthFirst and the OTS), received
non-qualified stock options for the purchase of 4,150 shares with an exercise
price equal to $14.00 per share, the fair market value of SouthFirst Common
Stock on the date of grant. Likewise, under the 1998 Stock Option Plan, all
directors who were not employees of SouthFirst as of January 28, 1998 (the date
of the approval of the Stock Option Plan by the Board of Directors of
SouthFirst) received non-qualified stock options for the purchase of 2,700
shares with an exercise price equal to $21.25 per share, the fair market value
of SouthFirst Common Stock on the date of grant.

REPRICING OF STOCK OPTIONS UNDER THE STOCK OPTION PLANS

         On January 28, 1998, the Wage and Compensation Committee, acting on the
approval of the Board of Directors, granted incentive stock options to purchase
14,180; 7,428; and 3,726 options to Donald C. Stroup, Joe K. McArthur and J.
Malcomb Massey, respectively (i.e., the Named Executive Officers at that time).
Options to purchase an aggregate of 36,777 shares were concurrently granted to
approximately 19 non-executive employees of SouthFirst and/or First Federal and
two former executive officers. Such options were granted at an exercise price of
$21.25 per share, which was equal to the fair market value of SouthFirst's
Common Stock on the date of grant. During the ensuing nine and one half months,
the market price of SouthFirst's Common Stock declined significantly to a point
below which such options no longer served the intended purpose for which they
were issued. In order to protect the intended value of the January 28 options,
the Board of Directors elected to reprice all of such options by the
cancellation of such options and the regrant of an equal number of new options
at the then current lower market price. Such replacement options were granted on
November 4, 1998 at an exercise price of $15.75 a share, which was equal to the
fair market value of SouthFirst's Common Stock on the date of grant. The
following table provides, with respect to the Named Executive Officers, the name
of grantee, number of securities underlying the options repriced, the original
exercise price, the new exercise price, and the length of original option term
remaining after the repricing, as of September 30, 2001:


                                       67



                         TEN-YEAR OPTION/SAR REPRICINGS



Name                       Date           Number of             Original         New Exercise           Length of
                                          Securities         Exercise Price         Price ($)        Original Option
                                          Underlying               ($)                              Term Remaining at
                                            Options                                                 Date of Repricing
                                          Repriced(1)
                                                                                     
Donald Stroup(2)      November 4, 1998         4150               21.25              15.75              9.2  years
(1995 Plan)

Donald Stroup(2)      November 4, 1998        10030               21.25              15.75              9.2 years
(1998 Plan)

Joe McArthur          November 4, 1998         7428               21.25              15.75              9.2 years
(1998 Plan)

Malcomb Massey        November 4, 1998         3726               21.25              15.75              9.2 years
(1998 Plan)



         (1) As of September 30, 1996, options to purchase a total of 83,000
shares had been issued under the 1995 Stock Option Plan, and, as of that date,
no other shares were available for future issuance. Since September 30, 1996,
grants to purchase 4,150 shares of Common Stock expired prior to being exercised
and, consequently, the 4,150 shares reserved to be issued pursuant to such
expired options became available for re-issuance under the 1995 Stock Option
Plan. On January 28, 1998, the Board of Directors of First Federal granted to
Donald C. Stroup options to purchase 4,150 shares available under the 1995 Stock
Option Plan in conjunction with certain additional stock option grants made
pursuant to the 1998 Stock Option Plan. These options were issued pursuant to
the vesting schedule utilized for the 1998 Stock Option Plan. Subsequently, as
of September 30, 2001, 12,450 options have expired and remain unissued under the
1995 Stock Option Plan and 0 options have expired and remain unissued under the
1998 Stock Option Plan.

         (2) Effective August 31, 2001, Donald C. Stroup resigned from all
positions previously held by him as an officer and director of SouthFirst and
its affiliates, including First Federal. Mr. Stroup's options expired on
November 29, 2001 after his resignation on August 31, 2001.

         The following table provides certain information concerning the
exercise of stock options under SouthFirst's Stock Option Plans during the
fiscal year ended September 30, 2001, by the Named Executive Officers and the
fiscal-year-end value of unexercised options held by those individuals:


                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR END OPTION VALUES



                                                          Number of Securities           Value of
                                                               Underlying               Unexercised
                                                           Unexercised Options         In-the-Money
                                                                  at                 Options at Fiscal
                            Shares                          Fiscal Year End              Year End
                           Acquired          Value            Exercisable/              Exercisable/
        Name              on Exercise       Realized          Unexercisable           Unexercisable(1)
                                                                         
Donald C. Stroup(2)            0               $0            26,422 / 16,187            $0 / $11,902

Joe K. McArthur                0               $0            16,251 /  9,481            $0 / $ 7,787

J. Malcomb Massey              0               $0             1,490 /  3,960            $0 / $ 2,672


- --------------

         (1) Represents the value of unexercised, in-the-money stock options on
September 30, 2001, using the $11.30 closing price of SouthFirst Common Stock on
that date.

         (2) Effective August 31, 2001, Donald C. Stroup resigned from all
positions previously held by him as an officer and director of SouthFirst and
its affiliates, including First Federal. Mr. Stroup's options expired 90 days
after his resignation, on November 29, 2001.



                                       68


EMPLOYEE RETIREMENT SAVINGS PLAN

         First Federal has established a savings and profit-sharing Plan that
qualifies as a tax-deferred savings Plan under Section 401(k) of the Internal
Revenue Code (the "401(k) Plan") for its salaried employees who are at least 21
years old and who have completed one year of service with First Federal. Under
the 401(k) Plan, eligible employees may contribute up to 14% of their gross
salary to the 401(k) Plan or $10,500, whichever is less. Currently, all
contributions are fully vested under the 401(k) Plan at the time of the
contribution. Prior to First Federal's adoption of an Employee Stock Ownership
Plan (see "--Employee Stock Ownership Plan"), the first 1% to 3% of employee
compensation was matched by a First Federal contribution of $0.50 for each $1.00
of employee contribution and contributions from 4% to 6% were 100% matched.
Effective October 1, 2000, the first 1% to 3% of employee compensation was
matched by a First Federal contribution of $0.25 for each $1.00 of employee
contribution and contributions from 4% to 6% were matched by a contribution of
$0.50 for each $1.00 of employee contribution. During these periods,
contributions were 100% vested following the completion of five years of service
and were invested in one or more investment accounts administered by the Plan
administrator.

EMPLOYEE STOCK OWNERSHIP PLAN

         First Federal has adopted an Employee Stock Ownership Plan (the "ESOP")
for the exclusive benefit of participating employees. All employees of First
Federal who are at least 21 years old and who have completed a year of service
with First Federal are eligible to participate in the ESOP. SouthFirst has
loaned the ESOP $664,000, which the ESOP used to purchase 66,400 shares of
SouthFirst Common Stock. This loan is secured by the shares purchased with the
proceeds of the loan. Shares purchased with the loan proceeds are held in a
suspense account for allocation among participants as the loan is repaid.

         Contributions to the ESOP are expected to be used to repay the ESOP
loan. Shares released from the suspense account as the ESOP loan is repaid, any
contributions to the ESOP that are not used to repay the ESOP loan, and
forfeitures will be allocated among participants on the basis of their relative
compensation. With the exception of terminations due to death, disability or
retirement, a participant must be employed by First Federal on the last day of
the Plan year and have completed 1,000 hours of service during the Plan year in
order to share in the allocation for the Plan year. Any dividends paid on
unallocated shares of SouthFirst Common Stock are to be used to repay the ESOP
loan; any dividends paid on shares of SouthFirst Common Stock allocated to
participant accounts will be credited to said accounts.

         Benefits under the ESOP vest at a rate of 20% per year of service, with
the first 20% vesting after the Participant has served for two years.
Participant's benefits also become fully vested upon the Participant's death,
disability, attainment of normal retirement age, or the termination of the ESOP.
For vesting purposes, a year of service means any Plan year in which an employee
completes at least 1,000 hours of service with First Federal. An employee's
years of service prior to the ESOP's effective date will be considered for
purposes of determining vesting under the ESOP.

         A participant who separates from service because of death, disability
or retirement will be entitled to receive an immediate distribution of his or
her benefits. A participant who separates from service for any other reason and
who is not re-employed by an employer will receive a lump sum distribution of
the vested portion of his account as soon as administratively feasible after his
date of termination, unless the participant elects a later distribution.
Distributions generally will be made in whole shares of SouthFirst Common Stock,
with the value of fractional shares being paid in cash. Although accounts
generally will be distributed in a lump sum, if the fair market value of a
participant's account is in excess of $500,000 as of the date distribution is
required to begin, distributions will be made in substantially equal annual
payments over a period not longer than five (5) years plus an additional one (1)
year (up to an additional five (5) years) for each $100,000 increment, or
fraction of such increment, by which the value of the participant's Account
exceeds $500,000.

         Pension & Benefit serves as the plan administrator and trustee of the
ESOP (the "ESOP Trustee"). Participants may vote the shares of SouthFirst Common
Stock that are allocated to their account. Any unallocated


                                       69


shares of SouthFirst Common Stock and allocated shares of SouthFirst Common
Stock for which no timely direction is received are voted by the ESOP Trustee in
accordance with its fiduciary obligations.

DIVIDEND INCENTIVE PLAN

         SouthFirst, in November, 1995, adopted, by resolution of the Board of
Directors of SouthFirst, a dividend incentive plan (the "Dividend Incentive
Plan"), pursuant to which each director and/or employee in the SouthFirst
family, who holds options to purchase SouthFirst Common Stock under the Stock
Option Plans is paid an amount equal to the number of shares underlying the
stock options held by him or her, multiplied by the amount of dividends
SouthFirst pays to the holders of its Common Stock. If the service of an
employee or director is terminated prior to the full vesting of his or her stock
options, then the employee or director immediately forfeits, and must repay to
SouthFirst, all amounts received under the Dividend Incentive Plan with respect
to the non-vested options.

COMPENSATION OF DIRECTORS

         Each member of the First Federal Board of Directors receives a fee of
$915 for each board meeting attended (with one excused absence), and each
non-employee director of First Federal, if a member of a committee, receives
$500 for each committee meeting attended. The members of the SouthFirst Board of
Directors do not receive a fee for board meeting attendance.

         During fiscal 2001, each non-employee director was paid from $830 to
$4,940 under the Dividend Incentive Plan with respect to the shares of Common
Stock underlying the stock options held by him. Further, certain SouthFirst
directors, during fiscal 2001, received a cash dividend in the amount of $996
with respect to the restricted shares held by him, as granted under Management
Recognition Plans "A" and "B."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         SouthFirst presently does not have a compensation committee because no
officers of SouthFirst receive any compensation for services to SouthFirst. All
officers of SouthFirst are compensated by First Federal solely for their
services to First Federal. In addition, directors are paid for attendance at
First Federal committee meetings, but employee members of committees are not
paid. Joe K. McArthur, Chief Executive Officer of First Federal and SouthFirst,
and President of First Federal and J. Malcomb Massey, President of SouthFirst
and Pension & Benefit serve as members of the Wage and Compensation Committee of
First Federal. First Federal's Wage and Compensation Committee is responsible
for reviewing salaries and benefits of directors, officers, and employees of
First Federal. SouthFirst had no "interlocking" relationships existing at or
before the year ended September 30, 2001 in which (i) any executive officer is a
member of the board of directors/trustees of another entity, one of whose
executive officers is a member of the First Federal Board of Directors, or where
(ii) any executive officer is a member of the compensation committee of another
entity, one of whose executive officers is a member of the First Federal Board
of Directors.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information as of December 26,
2001 with respect to the beneficial ownership of SouthFirst's Common Stock by
(i) each person known by SouthFirst to own beneficially more than five percent
(5%) of SouthFirst Common Stock, (ii) each director of SouthFirst, (iii) each of
the Named Executive Officers (as defined at herein) and (iv) all directors and
executive officers of SouthFirst as a group. Unless otherwise indicated, each of
the stockholders has sole voting and investment power with respect to the shares
beneficially owned.



                                       70




                                                         Shares of
                                                        Common Stock                        Percent of
         Beneficial Owner                           Beneficially Owned(1)              Outstanding Shares(2)
         ----------------                           ---------------------              ---------------------
                                                                                 
         Joe K. McArthur(3)                               36,734                               4.2%
         H. David Foote, Jr.(4)                           12,386                               1.4%
         J. Malcomb Massey(5)                             26,107                               3.0%
         Allen Gray McMillan, III(6)                      17,886                               2.1%
         Kenneth E. Easterling(7)                         22,576                               2.6%
         L. Neal Bice(8)                                  29,757                               3.5%
         Donald R. Hardy(9)                                  656                               0.1%
         Jeffrey L. Gendell, et. al.(10)                  87,700                              10.2%
         Robert J. Salmon and
            Mary Anne J. Salmon(11)                       47,600                               5.6%
         Pension & Benefit Financial
            Services, Inc.(12)                            66,400                               7.7%
         All directors and
            executive officers
            as a group (9 persons)                       153,243(13)                            17%


- -------------------

(1)      "Beneficial Ownership" includes shares for which an individual,
         directly or indirectly, has or shares voting or investment power or
         both and also includes options which are exercisable within sixty days
         of the date hereof. Beneficial ownership as reported in the above table
         has been determined in accordance with Rule 13d-3 of the Exchange Act.

(2)      The percentages are based upon 858,244 shares outstanding, except for
         certain parties who hold presently exercisable options to purchase
         shares. The percentages for those parties holding presently exercisable
         options are based upon the sum of 858,244 shares plus the number of
         shares subject to presently exercisable options held by them, as
         indicated in the following notes.

(3)      Of the amount shown, 1,500 shares are owned jointly by Mr. McArthur and
         his wife, 5,373 shares are held in his account under SouthFirst's
         401(k) Plan, 5,154 shares are held in his account under First Federal's
         ESOP, 19,395 shares are subject to presently exercisable options and
         5,312 shares represent restricted stock granted under SouthFirst's
         Management Recognition Plans "A" and "B," all of which are fully
         vested.

(4)      Of the amount shown, 3,000 shares are owned jointly by Mr. Foote and
         his wife, 1,500 shares are held by Mr. Foote as custodian for each of
         his two minor children, 6,226 shares are subject to presently
         exercisable options and 1,660 shares represent restricted stock granted
         under SouthFirst's Management Recognition Plan "A," all of which are
         fully vested.

 (5)     Of the amount shown, 15,521 shares are restricted stock acquired
         pursuant to that certain employment agreement between Mr. Massey and
         Benefit Financial, vesting in equal increments over a period of 15
         years beginning on April 11, 1997, 3,399 shares are held in a profit
         sharing account, and 2,234 shares are held in an Individual Retirement
         Account, and 1,058 shares are held in his account under First Federal's
         ESOP, 2,805 shares are subject to exercisable options, and 1,090 shares
         are owned jointly by Mr. Massey and his wife.

(6)      Of the amount shown, 10,000 shares are held jointly by Mr. McMillan and
         his wife, 6,226 shares are subject to presently exercisable options and
         1,660 shares represent restricted stock granted under SouthFirst's
         Management Recognition Plan "A," all of which are fully vested.

(7)      Of the amount shown, 19,499 shares are held jointly by Mr. Easterling
         and his wife, 1,001 shares are held individually by Mr. Easterling and
         2,076 shares are subject to exercisable options.

(8)      Of the amount shown, 13,332 shares are held by Mr. Bice, as the
         Executor of the Estate of H. D. Bice, his father, 14,349 are held
         individually by Mr. Bice and 2,076 shares are subject to exercisable
         options.



                                       71


(9)      Of the amount shown, 200 shares are held jointly by Mr. Hardy and his
         wife and 456 shares are subject to exercisable options.

(10)     Of the amount shown, Jeffrey L. Gendell has shared voting power with
         respect to 87,700 shares, Tontine Management, L.L.C. ("TM") has shared
         voting power with respect to 87,700 shares, and Tontine Financial
         Partners, L.P. ("TFP") has shared voting power with respect to 87,700
         shares. TM, the general partner of TFP, has the power to direct the
         affairs of TFP. Mr. Gendell is the Managing Member of Tontine
         Management, L.L.C. and, in that capacity, directs its operations. The
         business address of Mr. Gendell and TFP is 200 Park Avenue, Suite 3900,
         New York, New York 10166. The foregoing information is based on a
         Schedule 13G, dated May 10, 2000 filed by Mr. Gendell, TM, and TFP.
         SouthFirst makes no representation as to the accuracy or completeness
         of the information reported.

(11)     Robert J. Salmon and Mary Anne J. Salmon beneficially own and have
         shared voting and dispositive power with respect to 47,600 shares. The
         foregoing information is based on a Schedule 13G, dated October 8, 1998
         received by SouthFirst from Mr. and Mrs. Salmon. Mr. and Mrs. Salmon's
         address is 3623 Raymond Street, Chevy Chase, Maryland, 20815.
         SouthFirst makes no representation as to the accuracy or completeness
         of the information reported therein.

(12)     These shares are held in trust by Pension & Benefit Financial Services,
         Inc as trustee of First Federal's ESOP. See "Employee Stock Ownership
         Plan."

(13)     Of the amount shown, 40,778 shares are subject to exercisable options.

         There are no arrangements known to SouthFirst pursuant to which a
change in control of SouthFirst would result.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         First Federal, like many financial institutions, has followed a policy
of granting various types of loans to officers, directors and employees. The
loans have been made in the ordinary course of business and on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with First Federal's other customers, and do
not involve more than the normal risk of collectibility, nor present other
unfavorable features. All loans by First Federal to its officers and executive
officers are subject to OTS regulations restricting loans and other transactions
with affiliated persons of First Federal. In addition, all future credit
transactions with such directors, officers and related interests of SouthFirst
and First Federal will be on substantially the same terms as, and following
credit underwriting procedures that are not less stringent than, those
prevailing at the time for comparable transactions with unaffiliated persons and
must be approved by a majority of the directors of SouthFirst, including a
majority of the disinterested directors. At September 30, 2001, the aggregate of
all loans by First Federal to its officers, directors, and related interests was
$1,026,000.



                                       72



ITEM 13.   EXHIBITS

         The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference, from
SouthFirst's: Registration Statement on Form S-1 under the Securities Act of
1933 Registration No. 33-80730 ("1994 S-1"); Registration Statement on Form S-8
under the Securities Act of 1933, Registration No. 333-4534 ("Plan `A' S-8");
Registration Statement on From S-8 under the Securities Act of 1933,
Registration No. 333-4536 ("Plan `B' S-8"); Registration Statement on Form S-8,
Registration No. 333-4538 ("Option Plan S-8"); Registration Statement on Form
S-8, Registration No. 333-85705 ("Amended Option Plan S-8"); Annual Report on
Form 10-K for the year ended September 30, 1995 ("1995 10-K"); Annual Report on
Form 10-K for the year ended September 30, 1998 (1998 Form 10-K). Unless
otherwise indicated, the exhibit number corresponds to the exhibit number in the
referenced document.



         Exhibit No.       Description of Exhibit

                        
             3.1*          Amended and Restated Certificate of Incorporation (1994 S-1).

             3.2*          Bylaws (1994 S-1, Exhibit 3.2).

             4*            Form of Common Stock Certificate (1994 S-1).

             10.1          Form of Employment Agreement between SouthFirst Bancshares, Inc.
                           and Joe K. McArthur.

             10.2          Form of Employment Agreement between First Federal of the South
                           and Joe K. McArthur.

             10.3          Form of Employment Agreement between First Federal of the South
                           and Sandra H. Stephens.

             10.4.1        Form of Employment Agreement between Pension & Benefit Financial Services, Inc.
                           and J. Malcomb Massey.

             10.4.2        Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc.,
                           First Federal of the South, Pension & Benefit Financial Services, Inc., and J. Malcomb Massey.

             10.5.1        Form of Employment Agreement between Pension & Benefit Financial Services, Inc.
                           and Ruth M. Roper.

             10.5.2        Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc.,
                           First Federal of the South, Pension & Benefit Financial Services, Inc., and Ruth M. Roper.

             10.6          Severance Agreement dated as of August 31, 2001 by and among SouthFirst Bancshares, Inc., First
                           Federal of the South and Donald C. Stroup.

             10.7*         Employment Agreement dated as of October 31, 1997 between First Federal of the South
                           and Bobby R. Cook (1997 Form 10-K).

             10.8.1 *      Form of Management Recognition Plan A (1994 S-1, Exhibit 10.5).

             10.8.2 *      Form of Management Recognition Plan A, as amended (1995 Form 10-K).

             10.8.3 *      Management Recognition Plan A Restated and Continued (Plan "A" S-8, Exhibit 4.1).

             10.9.1 *      Form of Management Recognition Plan B (1994 S-1, Exhibit 10.6).

             10.9.2 *      Form of Management Recognition Plan B, as amended (1995 Form 10-K).

             10.9.3 *      Management Recognition Plan B, Restated and Continued (Plan "B" S-8, Exhibit 4.1).

             10.10.1 *     Form of Stock Option and Incentive Plan (1994 S-1, Exhibit 10.7)  (1995 Form 10-K).




                                       73



           
             10.10.2 *     Form of Stock Option and Incentive Plan, as amended (1995 Form 10-K).

             10.10.3 *     From of Stock Option and Incentive Plan, Restated and Continued (Option Plan S-8, Exhibit 4.1).

             10.10.4 *     Form of Stock Option and Incentive Plan, as Amended (Amended Option Plan S-8)

             10.10.5*      Form of Incentive Stock Option Agreement (Option Plan S-8, Exhibit 4.2).

             10.10.6*      Form of Incentive Stock Option Agreement, as Amended (Amended Option Plan S-8)

             10.11.1*      Form of SouthFirst Bancshares, Inc. Employee Stock Ownership Plan (1994 S-1, Exhibit 10.8).

             10.11.2       Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership Plan executed
                           as of September 29, 2001.

             10.12 *       Deferred Compensation Agreement between First Federal of the South and Joe K. McArthur
                           (1995 Form 10-K).

             10.13 *       Deferred Compensation Agreement between First Federal of the South and Donald C. Stroup
                           (1995 Form 10-K).

             10.14         Deferred Compensation Agreement between Benefit Financial Services, Inc. and Ruth M. Roper.

             10.12*        Employment Agreement dated as of January 1, 1998 between First Federal of the South
                           and Jimmy C. Maples (1998 Form 10-K).

             11            Statement Regarding Computation of Per Share Earnings.

             21            Subsidiaries of Registrant.

             23.1          Consent of Jones and Kirkpatrick, P.C.

             99.1          Financial Statements of SouthFirst Bancshares, Inc. and subsidiaries.

             


                                       74



                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Sylacauga, State of Alabama, on the
31st day of December, 2001.

                                            SOUTHFIRST BANCSHARES, INC.


                                            By: /s/ Joe K. McArthur
                                                -------------------------------
                                                Joe K. McArthur
                                                Chief Executive Officer


         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.




                       Signature                     Title                            Date
                       ---------                     -----                            ----
                                                                               
       /s/ Joe K. McArthur                        Chief Executive Officer
       ---------------------------------------    (principal executive officer)      December 31, 2001
       Joe K. McArthur

       /s/ Sandra H. Stephens                     Executive Vice President,
       ---------------------------------------    Chief Operating Officer,
       Sandra H. Stephens                         Secretary                          December 31, 2001

       /s/ Janice Browning                        Controller, Treasurer
       ---------------------------------------    (Principal Accounting
       Janice Browning                            Officer)                           December 31, 2001

       /s/ Allen Gray McMillan, III               Chairman and Director              December 31, 2001
       ---------------------------------------
       Allen Gray McMillan, III

       /s/ J. Malcomb Massey                      President and Director             December 31, 2001
       ---------------------------------------
       J. Malcomb Massey

       /s/ Kenneth E. Easterling                  Director                           December 31, 2001
       ---------------------------------------
       Kenneth E. Easterling

       /s/ H. David Foote, Jr.                    Director                           December 31, 2001
       ---------------------------------------
       H. David Foote, Jr.

       /s/ L. Neal Bice                           Director                           December 31, 2001
       ---------------------------------------
       L. Neal Bice

       /s/ Donald R. Hardy                        Director                           December 31, 2001
       ---------------------------------------
       Donald R. Hardy




                                       75


                           SOUTHFIRST BANCSHARES, INC.

EXHIBIT INDEX




EXHIBIT NO.       DESCRIPTION OF EXHIBIT
               
10.1              Form of Employment Agreement between SouthFirst Bancshares, Inc. and Joe K. McArthur.

10.2              Form of Employment Agreement between First Federal of the South and Joe K. McArthur.

10.3              Form of Employment Agreement between First Federal of the South and Sandra H. Stephens.

10.4.1            Form of Employment Agreement between Pension & Benefit Financial Services, Inc. and
                  J. Malcomb Massey.

10.4.2            Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., First Federal of
                  the South, Pension & Benefit Financial Services, Inc., and J. Malcomb Massey.

10.5.1            Form of Employment Agreement between Pension & Benefit Financial Services, Inc. and
                  Ruth M. Roper.

10.5.2            Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., First Federal
                  of the South, Pension & Benefit Financial Services, Inc., and Ruth M. Roper.

10.6              Severance Agreement dated as of August 31, 2001 by and among SouthFirst Bancshares, Inc.,
                  First Federal of the South and Donald C. Stroup.

10.11.2           Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership Plan executed
                  as of September 29, 2001.

10.14             Deferred Compensation Agreement between Benefit Financial Services, Inc. and Ruth M. Roper.

11                Statement Regarding Computation of Per Share Earnings.

21                Subsidiaries of Registrant.

23.1              Consent of Jones and Kirkpatrick, P.C.

99.1              Financial Statements of SouthFirst Bancshares, Inc. and subsidiaries.





                                       76

EX-10.1

                                                                    EXHIBIT 10.1



                                [EXECUTION COPY]


                           SOUTHFIRST BANCSHARES, INC.

                              EMPLOYMENT AGREEMENT

                       (Effective as of September 1, 2001)

                                (JOE K. MCARTHUR)


         THIS AGREEMENT is entered into as of the 1st day of September, 2001
(the "Effective Date"), by and between SouthFirst Bancshares, Inc. , the parent
and holding company (the "Holding Company") of First Federal of the South (the
"Association") and Joe K. McArthur (the "Employee").

         WHEREAS, the Employee has heretofore been employed by the Holding
Company as Executive Vice-President, Chief Operating Officer and Chief Financial
Officer and is experienced in all phases of the business of the Holding Company;
and

         WHEREAS, the parties desire by this writing to establish and to set
forth the new employment relationship between the Holding Company and the
Employee.

         NOW, THEREFORE, it is AGREED as follows:

         1.       Employment. The Employee is hereby employed as the Chief
Executive Officer of the Holding Company. The Employee shall render such
administrative and management services for the Holding Company as are currently
rendered and as are customarily performed by persons situated in a similar
executive capacity. The Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of the Holding
Company. The Employee's other duties shall be such as the Board of Directors of
the Holding Company ("Board") may from time to time reasonably direct, including
normal duties as an officer of the Holding Company.

         2.       Consideration from Holding Company: Joint and Several
Liability. The Holding Company, in lieu of paying the Employee a base salary
during the term of this Agreement, hereby agrees that, to the extent permitted
by law, it shall be jointly and severally liable with the Association for the
payment of all amounts due under the employment agreement of even date herewith
between the Association and the Employee (the "Association Contract").
Nevertheless, the Board may in its discretion, at any time during the term of
this Agreement, determine and agree to pay the Employee a base salary for the
remaining term of this Agreement; provided that, prior to such determination by
the Board, the term "base salary" as used herein shall refer to the base salary
paid to Employee by the Association under the Association Contract. If the Board
agrees to pay such salary, the Board shall thereafter review, not less often





than annually, the rate of the Employee's salary, and in its sole discretion may
decide to increase his salary.

         3.       Performance Bonus. Beginning on the Effective Date, and in
addition to Employee's base salary, Employee shall be eligible to receive such
performance bonuses as may be determined in the sole discretion of the Board.

         4.       Additional Compensation.

                  (a)      Participation in Retirement, Medical and Other Plans.
The Employee shall participate in any plan that the Holding Company maintains
for the benefit of its employees if the plan relates to (i) pension,
profit-sharing, or other retirement benefits, (ii) medical insurance or the
reimbursement of medical or dependent care expenses, or (iii) other group
benefits, including disability and life insurance plans.

                  (b)      Employee Benefits; Expenses. The Employee shall
participate in any fringe benefits which are, or may become, available to the
Holding Company's senior management employees, including for example: any stock
option or incentive compensation plans, club memberships, provision of company
owned or leased automobile, and any other benefits which are commensurate with
the responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Holding Company, including country club initiation fees and
dues, which further the interests of the Holding Company and Association.

                  (c)      Stock Options. Beginning on the Effective Date, and
in addition to other compensation provided to the Employee pursuant to this
Agreement, and in addition to the Employee's participation in any incentive
stock option plan adopted by the Holding Company, Employee shall be eligible to
receive a grant of such stock options, pursuant to such provisions therein
regarding amount, exercise price, vesting, expiration and other relevant option
terms, all as may be determined in the sole discretion of the Board.

         5.       Term. The Holding Company hereby employs the Employee, and the
Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective Date and ending 24 months thereafter (or such
earlier date as is determined in accordance with Section 9). Additionally, on
each anniversary of the Effective Date, this Agreement and the Employee's term
of employment shall be extended for an additional one-year period beyond the
then effective expiration date, provided the Board determines, in a duly adopted
resolution, that the performance of the Employee has met the Board's
requirements and standards, and that this Agreement shall be extended.

         6.       Loyalty; Full Time and Attention.

                  (a)      During the period of his employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall


                                      -2-


devote all his full business time, attention, skill, and efforts to the faithful
performance of his duties hereunder; provided, however, that, from time to time,
Employee may serve on the boards of directors of, and hold any other offices or
positions in, companies or organizations, which will not present any conflict of
interest with the Holding Company or any of its subsidiaries or affiliates, or
unfavorably affect the performance of Employee's duties pursuant to this
Agreement, or will not violate any applicable statute or regulation. "Full
business time" is hereby defined as that amount of time usually devoted to like
companies by similarly situated executive officers. During the term of his
employment under this Agreement, the Employee shall not engage in any business
or activity contrary to the business affairs or interests of the Holding
Company, or be gainfully employed in any other position or job other than as
provided above.

                  (b)      Nothing contained in this Paragraph 6 shall be
deemed to prevent or limit the Employee's right to invest in the capital stock
or other securities of any business dissimilar from that of the Holding Company,
or, solely as a passive or minority investor, in any business.

         7.       Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Holding Company will provide Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.

         8.       Vacation, Sick Leave and Annual Physical Examination.

                  (a)      The Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his duties under this
Agreement in accordance with the terms set forth below, all such voluntary
absences to count as vacation time; provided that:

                           (i)      The Employee shall be entitled to an annual
vacation in accordance with the policies that the Board periodically establishes
for senior management employees of the Holding Company.

                           (ii)     The Employee shall not receive any
additional compensation from the Holding Company on account of his failure to
take a vacation, and the Employee shall not accumulate unused vacation from one
fiscal year to the next, except, in either case, to the extent authorized by the
Board.

                           (iii)    In addition to the aforesaid paid vacations,
the Employee shall be entitled, without loss of pay, to absent himself
voluntarily from the performance of his employment obligations with the Holding
Company for such additional periods of time and for such valid and legitimate
reasons as the Board may in its discretion approve. Further, the Board may grant
to the Employee a leave or leaves of absence, with or without pay, at such time
or times and upon such terms and conditions as the Board in its discretion may
determine.

                           (iv)     In addition, the Employee shall be entitled
to an annual sick leave benefit, as established by the Board.



                                      -3-


                  (b)      The Employee, at least once during each 12-month
period, beginning on the Effective Date and each anniversary thereof, shall
schedule and submit to a full physical examination by a licensed medical
physician and, if requested, shall submit the findings of such examination to
the Board of Directors.

         9.       Termination and Termination Pay. Subject to the provisions of
Section 11 hereof, the Employee's employment hereunder may be terminated under
the following circumstances:

                  (a)      Death. The Employee's employment under this Agreement
shall terminate upon the event of his death during the term of this Agreement,
in which event the Employee's estate shall be entitled to receive the
compensation due the Employee through the last day of the calendar month in
which his death occurred.

                  (b)      Disability. The Holding Company may terminate the
Employee's employment after having established, through a determination by the
Board, the Employee's Disability. For purposes of this Agreement, "Disability"
means a physical or mental infirmity which impairs the Employee's ability to
substantially perform his duties under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits under the Holding
Company's long-term disability plan or under any disability insurance otherwise
provided to Employee (or, if the Holding Company has no such plan in effect,
which impairs the Employee's ability to substantially perform his duties under
this Agreement for a period of one hundred eighty (180) consecutive days). The
Employee shall be entitled to the compensation and benefits provided for under
this Agreement for (i) any period during the term of this Agreement, and prior
to the establishment of the Employee's Disability, during which the Employee is
unable to work due to the physical or mental infirmity, or (ii) any period of
Disability which is prior to the Executive's termination of employment pursuant
to this Section 9(b).

                  (c)      For Cause. The Board may, by written notice to the
Employee, immediately terminate his employment at any time, for Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Cause. Termination for "Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Cause unless there
shall have been delivered to the Employee a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board (excluding the Employee, if a member of the Board) at a meeting of the
Board called and held for the purpose (after reasonable notice to the Employee
and an opportunity for the Employee to be heard before the Board), finding that,
in the good faith opinion of the Board, the Employee was guilty of conduct set
forth above in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.


                                      -4-


                  (d)      Without Cause. Subject to the provisions of Section
11 hereof, the Board may, by written notice to the Employee, immediately
terminate his employment at any time for any reason; provided that if such
termination is for any reason other than pursuant to Sections 9 (a), (b) or (c)
above, the Employee shall be entitled to receive the following compensation and
benefits: (i) the base salary provided pursuant to Section 2 hereof, up to the
date of expiration of the term (including any renewal term then in effect) of
this Agreement (the "Termination Date"), plus said salary for an additional
12-month period, and (ii) the cost to the Employee of obtaining all health, life
and disability benefits which the Employee would have been eligible to
participate in through the Termination Date, based upon the benefit levels
substantially equal to those that the Holding Company provided for the Employee
at the date of termination of employment. Said sum shall be paid, at the option
of the Employee, either (I) in periodic payments over the remaining term of this
Agreement, as if the Employee's employment had not been terminated, or (II) in
one lump sum within ten (10) days of such termination; provided however, that
the amount to be paid by the Holding Company to the Employee hereunder shall not
exceed two (2) times the Employee's "average annual compensation". The
Employee's "average annual compensation" shall be the average of the total
annual "compensation" acquired by the Employee during each of the five (5)
fiscal years (or the number of full fiscal years of employment, if the
Employee's employment is less than five (5) years at the termination thereof)
immediately preceding the date of termination. The term "compensation" shall
mean any money or provision of any other thing of value in consideration of
employment, paid or guaranteed hereunder this Agreement, including, without
limitation, base salary, bonuses, pensions and profit sharing plans, directors
fees or committee fees, fringe benefits and deferred compensation accruals.

                  (e)      Voluntary Termination by Employee. Subject to the
provisions of Section 11 hereof, the Employee may voluntarily terminate
employment with the Holding Company during the term of this Agreement, upon at
least 60 days' prior written notice to the Board of Directors, in which case the
Employee shall receive only his compensation, vested rights and employee
benefits accrued up to the date of his termination.

         10.      No Mitigation. The Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Employee in any
subsequent employment.

         11.      Change in Control.

                  (a)      Notwithstanding any provision herein to the contrary,
if the Employee's employment under this Agreement is terminated by the Holding
Company, without the Employee's prior written consent and for a reason other
than for Cause, death or disability, in connection with, or within twenty-four
(24) months after, any change in control of the Holding Company or the
Association, the Employee shall be paid an amount equal to the difference
between (i) the product of 2.99 times his "base amount," as paid or guaranteed
under this Agreement, and as defined in Section 28OG(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder, and (ii) the sum of any other


                                      -5-


parachute payments (as defined under Section 28OG(b)(2) of the Code) that the
Employee receives on account of the change in control. Said sum shall be paid in
one lump sum within ten (10) days of such termination. The term "change in
control" shall mean (1) an increase in the ownership of, or the holding of, or
the power to vote, by any person, or by any persons acting as a "group" (within
the meaning of Section 13(d) of the Securities Exchange Act of 1934), the
Holding Company's or Association's voting stock, to an amount which is more than
25% of the issued and outstanding shares thereof, (2) a change in the ownership
of, or possession of, the ability to control the election of a majority of the
Holding Company's or Association's directors, (3) a change in the ownership of,
or possession of, the ability to exercise a controlling influence over the
management or policies of the Holding Company or the Association, by any person,
or by persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934) (except in the case of (1), (2) and (3) hereof,
ownership or control of the Association, or its board of directors, by the
Holding Company itself shall not constitute a "change in control"), or (4)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Association or the Holding
Company (the "Company Board") (the "Continuing Directors") cease for any reason
to constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Company Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. The term "person" means an
individual (other than the Employee), individuals acting in concert or as a
"group", a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other form of
entity not specifically listed herein.

                  (b)      Notwithstanding any other provision of this Agreement
to the contrary, the Employee may voluntarily terminate his employment under
this Agreement within twelve (12) months following a change in control of the
Association or the Holding Company, and the Employee shall thereupon be entitled
to receive the payment described in Section 11(a) of this Agreement, upon the
occurrence of any of the following events, or within ninety (90) days
thereafter, which have not been consented to in advance by the Employee in
writing: (i) the requirement that the Employee move his personal residence, or
perform his principal executive functions, more than thirty-five (35) miles from
his primary office as of the date of the change in control; (ii) a material
reduction in the Employee's base compensation as in effect on the date of the
change in control, as the same may be increased from time to time; (iii) the
failure by the Holding Company to continue to provide the Employee with
compensation and benefits provided for under this Agreement, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the
Holding Company which would directly or indirectly reduce any of such benefits
or deprive the Employee of any material fringe benefit enjoyed by him at the
time of the change in control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position as referenced at Section 1; (v) a failure to elect or reelect the
Employee to the Board of Directors of the Holding Company if the Employee is
serving on such Board on the date of the change in control; or (vi) a material
diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with his employment with
the Holding Company.



                                      -6-


                  (c)      Notwithstanding any other provision of this Agreement
or the Association Contract to the contrary, the Employee may voluntarily
terminate his employment under this Agreement within twelve (12) months
following a change in control of the Holding Company or the Association, and the
Employee shall thereupon be entitled to receive the payment described in Section
11(a) of this Agreement.

                  (d)      Any and all amounts paid to Employee under Section 9
and/or Section 11 of the Association Contract shall be deemed to be paid in
satisfaction of, and shall therefore offset, any amounts to be paid to Employee
pursuant to Section 9 hereof or pursuant to this Section 11, to the extent that
any amounts to be paid under Section 9 hereof or under this Section 11 are
attributable to, or related to, the base salary, or other compensation and
amounts, paid to Employee by the Association under the Association Contract.

                  (e)      Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

                  (f)      In the event that any dispute arises between the
Employee and the Holding Company as to the terms or interpretation of this
Agreement, including this Section 11, whether instituted by formal legal
proceedings or otherwise, including any, action that the Employee takes to
enforce the terms of this Section 11 or to defend against any action taken by
the Holding Company, the Employee shall be reimbursed for all costs and
expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, provided that the Employee shall have obtained a final
judgement by a court of competent jurisdiction in favor of the Employee. Such
reimbursement shall be paid within ten (10) days of Employee's furnishing to the
Holding Company written evidence, which may be in the form, among other things,
of a canceled check or receipt, of any costs or expenses incurred by the
Employee.

         12.      Successors and Assigns.

                  (a)      This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Holding Company which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Holding
Company.

                  (b)      The Holding Company and Employee agree that the
Holding Company is contracting for the unique and personal skills of the
Employee. The Employee, therefore, shall be precluded from assigning or
delegating his rights or duties hereunder, without first obtaining the written
consent of the Holding Company.

         13.      Amendments. No amendments or additions to this Agreement shall
be binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.



                                      -7-


         14.      Applicable Law. Except to the extent preempted by Federal law,
the laws of the State of Delaware shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.

         15.      Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

         16.      Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto. Further,
should any provision of this Agreement give rise to a discrepancy or conflict
with respect to any applicable law or regulation, then the applicable law or
regulation shall control the relevant construction and operation of this
Agreement.

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first hereinabove written.


ATTEST:                             SOUTHFIRST BANCSHARES, INC.


                                    BY:
- ---------------------------            ----------------------------------------
Secretary                              Allen G. McMillan, III
                                       Chairman of the Board of Directors

WITNESS:

- -------------------------              ----------------------------------------
                                       Joe K. McArthur ("Employee")



                                      -8-

EX-10.2

                                                                    EXHIBIT 10.2

                                                                  EXECUTION COPY



                           FIRST FEDERAL OF THE SOUTH

                              EMPLOYMENT AGREEMENT

                       (Effective as of September 1, 2001)

                                (JOE K. MCARTHUR)


         THIS AGREEMENT is entered into as of the 1st day of September, 2001
(the "Effective Date"), by and between First Federal of the South (the
"Association") and Joe K. McArthur (the "Employee").

         WHEREAS, the Employee has heretofore been employed by the Association
as Executive Vice-President, Chief Operating Officer and Chief Financial Officer
and is experienced in all phases of the business of the Association; and

         WHEREAS, the parties desire by this writing to establish and to set
forth the new employment relationship between the Association and the Employee.

         NOW, THEREFORE, it is AGREED as follows:

         1.       Employment. The Employee is hereby employed as the Chief
Executive Officer and President of the Association. The Employee shall render
such administrative and management services for the Association as are currently
rendered and as are customarily performed by persons situated in a similar
executive capacity. The Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of the
Association. The Employee's other duties shall be such as the Board of Directors
of the Association ("Board") may from time to time reasonably direct, including
normal duties as an officer of the Association.

         2.       Base Compensation. The Association agrees to pay the Employee
during the term of this Agreement a salary at the rate of $140,000 per annum,
payable in cash not less frequently than monthly. The Board shall review, not
less often than annually, the rate of the Employee's salary, and in its sole
discretion may decide to increase his salary.

         3.       Performance Bonus. Beginning on the Effective Date, and in
addition to Employee's base salary, Employee shall be eligible to receive such
performance bonuses as may be determined in the sole discretion of the Board.

         4.       (a)      Participation in Retirement, Medical and Other Plans.
The Employee shall participate in any plan that the Association maintains for
the benefit of its employees if the plan relates to (i) pension, profit-sharing,
or other retirement benefits, (ii)


                                      -1-


medical insurance or the reimbursement of medical or dependent care expenses, or
(iii) other group benefits, including disability and life insurance plans.

                  (b)      Employee Benefits; Expenses. The Employee shall
participate in any fringe benefits which are or may become available to the
Association's senior management employees, including for example: any stock
option or incentive compensation plans, club memberships, and any other benefits
which are commensurate with the responsibilities and functions to be performed
by the Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-pocket business expenses which he shall incur in connection
with his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Association.

         5.       Term. The Association hereby employs the Employee, and the
Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective Date and ending 24 months thereafter (or such
earlier date as is determined in accordance with Section 9). Additionally, on
each annual anniversary date from the Effective Date, this Agreement and the
Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date, provided the Board determines
in a duly adopted resolution that the performance of the Employee has met the
Board's requirements and standards, and that this Agreement shall be extended.

         6.       Loyalty; Full Time and Attention.

                  (a)      During the period of his employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall devote all his full business time, attention, skill,
and efforts to the faithful performance of his duties hereunder; provided,
however, from time to time, Employee may serve on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which
will not present any conflict of interest with the Association or any of its
subsidiaries or affiliates, or unfavorably affect the performance of Employee's
duties pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his employment under this Agreement, the Employee shall not
engage in any business or activity contrary to the business affairs or interests
of the Association, or be gainfully employed in any other position or job other
than as provided above.

                  (b)      Nothing contained in this Paragraph 6 shall be
deemed to prevent or limit the Employee's right to invest in the capital stock
or other securities of any business dissimilar from that of the Association, or,
solely as a passive or minority investor, in any business.

         7.       Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Association will provide Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.



                                      -2-


         8.       Vacation and Sick Leave. The Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
duties under this Agreement in accordance with the terms set forth below, all
such voluntary absences to count as vacation time; provided that:

                  (a)      The Employee shall be entitled to an annual vacation
in accordance with the policies that the Board periodically establishes for
senior management employees of the Association.

                  (b)      The Employee shall not receive any additional
compensation from the Association on account of his failure to take a vacation,
and the Employee shall not accumulate unused vacation from one fiscal year to
the next, except in either case to the extent authorized by the Board.

                  (c)      In addition to the aforesaid paid vacations, the
Employee shall be entitled without loss of pay, to absent himself voluntarily
from the performance of his employment obligations with the Association for such
additional periods of time and for such valid and legitimate reasons as the
Board may in its discretion approve. Further, the Board may grant to the
Employee a leave or leaves of absence, with or without pay, at such time or
times and upon such terms and conditions as the Board in its discretion may
determine.

                  (d)      In addition, the Employee shall be entitled to an
annual sick leave benefit as established by the Board.

         9.       Termination and Termination Pay. Subject to the provisions of
Section 11 hereof, the Employee's employment hereunder may be terminated under
the following circumstances:

                  (a)      Death. The Employee's employment under this Agreement
shall terminate upon his death during the term of this Agreement, in which event
the Employee's estate shall be entitled to receive the compensation due the
Employee through the last day of the calendar month in which his death occurred.

                  (b)      Disability. The Association may terminate the
Employee's employment after having established, through a determination by the
Board, the Employee's Disability. For purposes of this Agreement, "Disability"
means a physical or mental infirmity which impairs the Employee's ability to
substantially perform his duties under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits under the
Association's long-term disability plan (or, if the Association has no such plan
in effect, which impairs the Employee's ability to substantially perform his
duties under this Agreement for a period of one hundred eighty (180) consecutive
days). The Employee shall be entitled to the compensation and benefits provided
for under this Agreement for (i) any period during the term of this Agreement
and prior to the establishment of the Employee's Disability during which the
Employee is unable to work due to the physical or mental infirmity, or (ii) any
period of Disability which is prior to the Executive's termination of employment
pursuant to this Section 9(b).



                                      -3-


                  (c)      For Cause. The Board may, by written notice to the
Employee, immediately terminate his employment at any time, for Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Cause. Termination for "Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Cause unless there
shall have been delivered to the Employee a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board (excluding the Employee if a member of the Board) at a meeting of the
Board called and held for the purpose (after reasonable notice to the Employee
and an opportunity for the Employee to be heard before the Board), finding that
in the good faith opinion of the Board the Employee was guilty of conduct set
forth above in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.

                  (d)      Without Cause. Subject to the provisions of Section
11 hereof, the Board may, by written notice to the Employee, immediately
terminate his employment at any time for any reason; provided that if such
termination is for any reason other than pursuant to Sections 9 (a) (b) or (c)
above, the Employee shall be entitled to receive the following compensation and
benefits: (i) the salary provided pursuant to Section 2 hereof, up to the date
of expiration of the term (including any renewal term then in effect) of this
Agreement (the "Termination Date"), plus said salary for an additional 12-month
period, and (ii) the cost to the Employee of obtaining all health, life and
disability benefits which the Employee would have been eligible to participate
in through the Termination Date, based upon the benefit levels substantially
equal to those that the Association provided for the Employee at the date of
termination of employment. Said sum shall be paid, at the option of the
Employee, either (I) in periodic payments over the remaining term of this
Agreement, as if the Employee's employment had not been terminated, or (II) in
one lump sum within ten (10) days of such termination; provided however, that
the amount to be paid by the Association to the Employee hereunder shall not
exceed two (2) times the Employee's "average annual compensation". The
Employee's "average annual compensation" shall be the average of the total
annual "compensation" acquired by the Employee during each of the five (5)
fiscal years (or the number of full fiscal years of employment, if the
Employee's employment is less than five (5) years at the termination thereof)
immediately preceding the date of termination. The term "compensation" shall
mean any payment of money or provision of any other thing of value in
consideration of employment, including, without limitation, base compensation,
bonuses, pension and profit sharing plan, director fees or committee fees,
fringe benefits and deferred compensation accruals.

                  (e)      Voluntary Termination by Employee. Subject to the
provisions of Section 11 hereof, the Employee may voluntarily terminate
employment with the Association during the term of this Agreement, upon at least
60 days' prior written notice to the Board of Directors, in which case the
Employee shall receive only his compensation, vested rights and employee
benefits accrued up to the date of his termination.



                                      -4-


         10.      No Mitigation. The Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Employee in any
subsequent employment.

         11.      Change in Control.

                  (a)      Notwithstanding any provision herein to the contrary,
if the Employee's employment under this Agreement is terminated by the
Association, without the Employee's prior written consent and for a reason other
than for Cause, death or disability in connection with or within twenty-four
(24) months after any change in control of the Association or SouthFirst
Bancshares, Inc. (the "Corporation"), the Employee shall be paid an amount equal
to the difference between (i) the product of 2.99 times his "base amount" as
defined in Section 28OG(b)(3) of the Internal Revenue Code of 1986, as amended
(the "Code") and regulations promulgated thereunder, and (ii) the sum of any
other "parachute payments" (as defined under Section 28OG(b)(2) of the Code)
that the Employee receives on account of the change in control. Said sum shall
be paid in one lump sum within ten (10) days of such termination. The term
"change in control" shall mean (1) an increase in the ownership of, or the
holding of, or the power to vote, by any person, or by any persons acting as a
"group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934), the Association's or Corporation's voting stock, to an amount which is
more than 25% of the issued and outstanding shares thereof, (2) a change in the
ownership of, or possession of, the ability to control the election of a
majority of the Association's or Corporation's directors, (3) a change in the
ownership of, or possession of, the ability to exercise a controlling influence
over the management or policies of the Association or the Corporation, by any
person, or by any persons acting as a "group" within the meaning of Section
13(d) of the Securities Exchange Act of 1934 (except in the case of (1), (2) and
(3) hereof, ownership or control of the Association, or its board of directors,
by the Corporation itself shall not constitute a "change in control"), or (4)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Corporation or the
Association (the "Company Board") (the "Continuing Directors") cease for any
reason to constitute at least two-thirds thereof, provided that any individual
whose election or nomination for election as a member of the Company Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. The term "person" means an
individual (other than the Employee), individuals acting in concert or as a
"group", or a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other form of
entity not specifically listed herein.

                  (b)      Notwithstanding any other provision of this Agreement
to the contrary, the Employee may voluntarily terminate his employment under
this Agreement within twelve (12) months following a change in control of the
Association or the Corporation, and the Employee shall thereupon be entitled to
receive the payment described in Section 11(a) of this Agreement, upon the
occurrence of any of the following events, or within ninety (90) days
thereafter, which have not been consented to in advance by the Employee in
writing: (i) the requirement that the Employee move his personal residence, or
perform his principal executive functions, more than thirty-five (35) miles from
his primary office as of the date of the change in control; (ii) a material
reduction in the Employee's base compensation as in effect on the date of


                                      -5-


the change in control, as the same may be increased from time to time; (iii) the
failure by the Association to continue to provide the Employee with compensation
and benefits provided for under this Agreement, as the same may be increased
from time to time, or with benefits substantially similar to those provided to
him under any of the employee benefit plans in which the Employee now or
hereafter becomes a participant, or the taking of any action by the Association
which would directly or indirectly reduce any of such benefits or deprive the
Employee of any material fringe benefit enjoyed by him at the time of the change
in control; (iv) the assignment to the Employee of duties and responsibilities
materially different from those normally associated with his position as
referenced at Section 1; (v) a failure to elect or reelect the Employee to the
Board of Directors of the Association if the Employee is serving on such Board
on the date of the change in control; or (vi) a material diminution or reduction
in the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Association.

                  (c)      Notwithstanding any other provision of this Agreement
or the employment agreement between the Employee and the Corporation (the
"SouthFirst Contract") to the contrary, the Employee may voluntarily terminate
his employment under this Agreement within twelve (12) months following a change
in control of the Corporation or the Association, and the Employee shall
thereupon be entitled to receive the payment described in Section 11(a) of this
Agreement.

                  (d)      Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

                  (e)      In the event that any dispute arises between the
Employee and the Association as to the terms or interpretation of this
Agreement, including this Section 11, whether instituted by formal legal
proceedings or otherwise, including any action that the Employee takes to
enforce the terms of this Section 11 or to defend against any action taken by
the Association, the Employee shall be reimbursed for all costs and expenses,
including reasonable attorneys' fees, arising from such dispute, proceedings or
actions, provided that the Employee shall have obtained a final judgement by a
court of competent jurisdiction in favor of the Employee. Such reimbursement
shall be paid within ten (10) days of Employee's furnishing to the Association
written evidence, which may be in the form, among other things, of a canceled
check or receipt, of any costs or expenses incurred by the Employee.

                  (f)      Any and all amounts paid to Employee under Section 9
and/or Section 11 of the SouthFirst Contract shall be deemed to be paid in
satisfaction of, and shall therefore offset, any amounts to be paid to Employee
pursuant to Section 9 hereunder or pursuant to this Section 11, to the extent
that any amounts paid under Section 9 and/or 11 of the SouthFirst Contract are
attributable to, or related to, the base salary, or other compensation and
amounts, paid to Employee under this Agreement.

         12.      Requirements of Applicable Regulations of OTS

                  (a)      The Association's board of directors may terminate
the Employee's employment at any time, but any termination by the Association's
board of directors, other than


                                      -6-


termination for cause, shall not prejudice the Employee's right to compensation
or other benefits under this Agreement. The Employee shall have no right to
receive compensation or other benefits for any period after termination for
cause (as defined in Section 9(c) hereof).

                  (b)      If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the Association's affairs by a
notice served under section 8(e)(3) or (g)(1) of Federal Deposit Insurance Act
(12 U.S.C. 1818 (e)(3) and (g)(1)), the Association's obligations under this
Agreement shall be suspended as of the date of service unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations were suspended, and (ii) reinstate
(in whole or in part) any of its obligations which were suspended.

                  (c)      If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Association's affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance
Act (12 U.S.C. 1818 (e)(4) or (g)(1)), all obligations of the Association under
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.

                  (d)      If the Association is in default (as defined in
section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under
this Agreement shall terminate as of the date of default, but this Section 12(d)
shall not affect any vested rights of the parties.

                  (e)      All obligations under this Agreement shall be
terminated, except to the extent determined that the continuation of this
Agreement is necessary of the continued operation of the Association:

                           (i)      By the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Association under the
authority contained in 13(c) of the Federal Deposit Insurance Act; or

                           (ii)     By the Director or his or her designee, at
the time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the association or when the association
is determined by the Director to be in an unsafe or unsound condition.

                  Any rights of the Employee that have already vested, however,
shall not be affected by such action.

                  (f)      Should any provision of this Agreement give rise to a
discrepancy or conflict with respect to any applicable law or regulation, then
the applicable law or regulation shall control the relevant construction and
operation of this Agreement.

         13.      Successors and Assigns.


                                      -7-


                  (a)      This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Association which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association.

                  (b)      since the Association is contracting for the unique
and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Association.

         14.      Amendments. No amendments or additions to this Agreement shall
be binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.

         15.      Applicable Law. Except to the extent preempted by Federal law,
the laws of the State of Delaware shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.

         16.      Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

         17.      Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto.

IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first hereinabove written.


ATTEST:                        FIRST FEDERAL OF THE SOUTH


                               BY:
- ----------------------------      ---------------------------------------
Secretary                         Allen G. McMillan III
                                  Chairman of the Board of Directors

WITNESS:


- -------------------------         ---------------------------------------
                                  Joe K. McArthur ("Employee")




                                      -8-

EX-10.3

                                                                    EXHIBIT 10.3




                                [EXECUTION COPY]



                           FIRST FEDERAL OF THE SOUTH

                              EMPLOYMENT AGREEMENT

                       (Effective as of November 1, 2001)

                              (SANDRA H. STEPHENS)

         THIS AGREEMENT is entered into as of the 1st day of November, 2001 (the
"Effective Date"), by and between First Federal of the South (the "Association")
and Sandra H. Stephens (the "Employee").

         WHEREAS, the Employee has heretofore been employed by the Association
as Executive Vice-President and Chief Operating Officer and is experienced in
all phases of the business of the Association; and

         WHEREAS, the parties desire by this writing to establish and to set
forth the employment relationship between the Association and the Employee.

         NOW, THEREFORE, it is AGREED as follows:

         1.       Employment. The Employee is hereby employed as the Executive
Vice President and Chief Operating Officer. The Employee shall render such
administrative and management services for the Association as are currently
rendered and as are customarily performed by persons situated in a similar
executive capacity. The Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of the
Association. The Employee's other duties shall be such as the Board of Directors
of the Association ("Board") may from time to time reasonably direct, including
normal duties as an officer of the Association.

         2.       Base Compensation. The Association agrees to pay the Employee
during the term of this Agreement a salary at the rate of $115,000 per annum,
payable in cash not less frequently than monthly. The Board shall review, not
less often than annually, the rate of the Employee's salary, and in its sole
discretion may decide to increase her salary.

         3.       Performance Bonus. Beginning on the Effective Date, and in
addition to Employee's base salary, Employee shall be eligible to receive such
performance bonuses as may be determined in the sole discretion of the Board.

         4.       (a)      Participation in Retirement, Medical and Other Plans.
The Employee shall participate in any plan that the Association maintains for
the benefit of its




employees if the plan relates to (i) pension, profit-sharing, or other
retirement benefits, (ii) medical insurance or the reimbursement of medical or
dependent care expenses, or (iii) other group benefits, including disability and
life insurance plans.

                  (b)      Employee Benefits; Expenses. The Employee shall
participate in any fringe benefits which are or may become available to the
Association's senior management employees, including for example: any stock
option or incentive compensation plans, club memberships, and any other benefits
which are commensurate with the responsibilities and functions to be performed
by the Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-pocket business expenses which she shall incur in connection
with her services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Association.

         5.       Term. The Association hereby employs the Employee, and the
Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective Date and ending 24 months thereafter (or such
earlier date as is determined in accordance with Section 9). Additionally, on
each annual anniversary date from the Effective Date, this Agreement and the
Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date, provided the Board determines
in a duly adopted resolution that the performance of the Employee has met the
Board's requirements and standards, and that this Agreement shall be extended.

         6.       Loyalty; Full Time and Attention.

                  (a)      During the period of her employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall devote all her full business time, attention, skill,
and efforts to the faithful performance of her duties hereunder; provided,
however, from time to time, Employee may serve on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which
will not present any conflict of interest with the Association or any of its
subsidiaries or affiliates, or unfavorably affect the performance of Employee's
duties pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of her employment under this Agreement, the Employee shall not
engage in any business or activity contrary to the business affairs or interests
of the Association, or be gainfully employed in any other position or job other
than as provided above.

                  (b)      Nothing contained in this Paragraph 6 shall be deemed
to prevent or limit the Employee's right to invest in the capital stock or other
securities of any business dissimilar from that of the Association, or, solely
as a passive or minority investor, in any business.

         7.       Standards. The Employee shall perform her duties under this
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The



                                      -2-


Association will provide Employee with the working facilities and staff
customary for similar executives and necessary for her to perform her duties.

         8.       Vacation and Sick Leave. The Employee shall be entitled,
without loss of pay, to absent herself voluntarily from the performance of her
duties under this Agreement in accordance with the terms set forth below, all
such voluntary absences to count as vacation time; provided that:

                  (a)      The Employee shall be entitled to an annual vacation
in accordance with the policies that the Board periodically establishes for
senior management employees of the Association.

                  (b)      The Employee shall not receive any additional
compensation from the Association on account of her failure to take a vacation,
and the Employee shall not accumulate unused vacation from one fiscal year to
the next, except in either case to the extent authorized by the Board.

                  (c)      In addition to the aforesaid paid vacations, the
Employee shall be entitled without loss of pay, to absent herself voluntarily
from the performance of her employment obligations with the Association for such
additional periods of time and for such valid and legitimate reasons as the
Board may in its discretion approve. Further, the Board may grant to the
Employee a leave or leaves of absence, with or without pay, at such time or
times and upon such terms and conditions as the Board in its discretion may
determine.

                  (d)      In addition, the Employee shall be entitled to an
annual sick leave benefit as established by the Board.

         9.       Termination and Termination Pay. Subject to the provisions of
Section 11 hereof, the Employee's employment hereunder may be terminated under
the following circumstances:

                  (a)      Death. The Employee's employment under this Agreement
shall terminate upon her death during the term of this Agreement, in which event
the Employee's estate shall be entitled to receive the compensation due the
Employee through the last day of the calendar month in which her death occurred.

                  (b)      Disability. The Association may terminate the
Employee's employment after having established, through a determination by the
Board, the Employee's Disability. For purposes of this Agreement, "Disability"
means a physical or mental infirmity which impairs the Employee's ability to
substantially perform her duties under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits under the
Association's long-term disability plan (or, if the Association has no such plan
in effect, which impairs the Employee's ability to substantially perform her
duties under this Agreement for a period of one hundred eighty (180) consecutive
days). The Employee shall be entitled to the compensation and benefits provided
for under this Agreement for (i) any period during the term



                                      -3-


of this Agreement and prior to the establishment of the Employee's Disability
during which the Employee is unable to work due to the physical or mental
infirmity, or (ii) any period of Disability which is prior to the Executive's
termination of employment pursuant to this Section 9(b).

                  (c)      For Cause. The Board may, by written notice to the
Employee, immediately terminate her employment at any time, for Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Cause. Termination for "Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Cause unless there
shall have been delivered to the Employee a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board (excluding the Employee if a member of the Board) at a meeting of the
Board called and held for the purpose (after reasonable notice to the Employee
and an opportunity for the Employee to be heard before the Board), finding that
in the good faith opinion of the Board the Employee was guilty of conduct set
forth above in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.

                  (d)      Without Cause. Subject to the provisions of Section
11 hereof, the Board may, by written notice to the Employee, immediately
terminate her employment at any time for any reason; provided that if such
termination is for any reason other than pursuant to Sections 9 (a) (b) or (c)
above, the Employee shall be entitled to receive the following compensation and
benefits: (i) the salary provided pursuant to Section 2 hereof, up to the date
of expiration of the term (including any renewal term then in effect) of this
Agreement (the "Termination Date"), plus said salary for an additional 12-month
period, and (ii) the cost to the Employee of obtaining all health, life and
disability benefits which the Employee would have been eligible to participate
in through the Termination Date, based upon the benefit levels substantially
equal to those that the Association provided for the Employee at the date of
termination of employment. Said sum shall be paid, at the option of the
Employee, either (I) in periodic payments over the remaining term of this
Agreement, as if the Employee's employment had not been terminated, or (II) in
one lump sum within ten (10) days of such termination; provided however, that
the amount to be paid by the Association to the Employee hereunder shall not
exceed two (2) times the Employee's "average annual compensation". The
Employee's "average annual compensation" shall be the average of the total
annual "compensation" acquired by the Employee during each of the five (5)
fiscal years (or the number of full fiscal years of employment, if the
Employee's employment is less than five (5) years at the termination thereof)
immediately preceding the date of termination. The term "compensation" shall
mean any payment of money or provision of any other thing of value in
consideration of employment, including, without limitation, base compensation,
bonuses, pension and profit sharing plan, director fees or committee fees,
fringe benefits and deferred compensation accruals.



                                      -4-


                  (e)      Voluntary Termination by Employee. Subject to the
provisions of Section 11 hereof, the Employee may voluntarily terminate
employment with the Association during the term of this Agreement, upon at least
60 days' prior written notice to the Board of Directors, in which case the
Employee shall receive only her compensation, vested rights and employee
benefits accrued up to the date of her termination.

         10.      No Mitigation. The Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Employee in any
subsequent employment.

         11.      Change in Control.

                  (a)      Notwithstanding any provision herein to the contrary,
if the Employee's employment under this Agreement is terminated by the
Association, without the Employee's prior written consent and for a reason other
than for Cause, death or disability in connection with or within twenty-four
(24) months after any change in control of the Association or SouthFirst
Bancshares, Inc. (the "Corporation"), the Employee shall be paid an amount equal
to the difference between (i) the product of 2.99 times her "base amount" as
defined in Section 28OG(b)(3) of the Internal Revenue Code of 1986, as amended
(the "Code") and regulations promulgated thereunder, and (ii) the sum of any
other "parachute payments" (as defined under Section 28OG(b)(2) of the Code)
that the Employee receives on account of the change in control. Said sum shall
be paid in one lump sum within ten (10) days of such termination. The term
"change in control" shall mean (1) an increase in the ownership of, or the
holding of, or the power to vote, by any person, or by any persons acting as a
"group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934), the Association's or Corporation's voting stock, to an amount which is
more than 25% of the issued and outstanding shares thereof, (2) a change in the
ownership of, or possession of, the ability to control the election of a
majority of the Association's or Corporation's directors, (3) a change in the
ownership of, or possession of, the ability to exercise a controlling influence
over the management or policies of the Association or the Corporation, by any
person, or by any persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934) (except in the case of (1), (2)
and (3) hereof, ownership or control of the Association, or its board of
directors, by the Corporation itself shall not constitute a "change in
control"), or (4) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of the
Corporation or the Association (the "Company Board") (the "Continuing
Directors") cease for any reason to constitute at least two-thirds thereof,
provided that any individual whose election or nomination for election as a
member of the Company Board was approved by a vote of at least two-thirds of the
Continuing Directors then in office shall be considered a Continuing Director.
The term "person" means an individual (other than the Employee), individuals
acting in concert or as a "group", or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.



                                      -5-


                  (b)      Notwithstanding any other provision of this Agreement
to the contrary, the Employee may voluntarily terminate her employment under
this Agreement within twelve (12) months following a change in control of the
Association or the Corporation, and the Employee shall thereupon be entitled to
receive the payment described in Section 11(a) of this Agreement, upon the
occurrence of any of the following events, or within ninety (90) days
thereafter, which have not been consented to in advance by the Employee in
writing: (i) the requirement that the Employee move her personal residence, or
perform her principal executive functions, more than thirty-five (35) miles from
her primary office as of the date of the change in control; (ii) a material
reduction in the Employee's base compensation as in effect on the date of the
change in control, as the same may be increased from time to time; (iii) the
failure by the Association to continue to provide the Employee with compensation
and benefits provided for under this Agreement, as the same may be increased
from time to time, or with benefits substantially similar to those provided to
her under any of the employee benefit plans in which the Employee now or
hereafter becomes a participant, or the taking of any action by the Association
which would directly or indirectly reduce any of such benefits or deprive the
Employee of any material fringe benefit enjoyed by her at the time of the change
in control; (iv) the assignment to the Employee of duties and responsibilities
materially different from those normally associated with her position as
referenced at Section 1; (v) a failure to elect or reelect the Employee to the
Board of Directors of the Association if the Employee is serving on such Board
on the date of the change in control; or (vi) a material diminution or reduction
in the Employee's responsibilities or authority (including reporting
responsibilities) in connection with her employment with the Association.

                  (c)      Notwithstanding any other provision of this Agreement
to the contrary, the Employee may voluntarily terminate her employment under
this Agreement within twelve (12) months following a change in control of the
Corporation or the Association, and the Employee shall thereupon be entitled to
receive the payment described in Section 11(a) of this Agreement.

                  (d)      Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

                  (e)      In the event that any dispute arises between the
Employee and the Association as to the terms or interpretation of this
Agreement, including this Agreement, whether instituted by formal legal
proceedings or otherwise, including any action that the Employee takes to
enforce the terms of this Agreement or to defend against any action taken by the
Association, the Employee shall be reimbursed for all costs and expenses,
including reasonable attorneys' fees, arising from such dispute, proceedings or
actions, provided that the Employee shall have obtained a final judgement by a
court of competent jurisdiction in favor of the Employee. Such reimbursement
shall be paid within ten (10) days of Employee's furnishing to the Association
written evidence, which may be in the form, among other things, of a canceled
check or receipt, of any costs or expenses incurred by the Employee.

         12.      Requirements of Applicable Regulations of OTS



                                      -6-


                  (a)      The Association's board of directors may terminate
the Employee's employment at any time, but any termination by the Association's
board of directors, other than termination for cause, shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for cause (as defined in Section 9(c) hereof).

                  (b)      If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the Association's affairs by a
notice served under section 8(e)(3) or (g)(1) of Federal Deposit Insurance Act
(12 U.S.C. 1818 (e)(3) and (g)(1)), the Association's obligations under this
Agreement shall be suspended as of the date of service unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations were suspended, and (ii) reinstate
(in whole or in part) any of its obligations which were suspended.

                  (c)      If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Association's affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance
Act (12 U.S.C. 1818 (e)(4) or (g)(1)), all obligations of the Association under
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.

                  (d)      If the Association is in default (as defined in
section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under
this Agreement shall terminate as of the date of default, but this Section 12(d)
shall not affect any vested rights of the parties.

                  (e)      All obligations under this Agreement shall be
terminated, except to the extent determined that the continuation of this
Agreement is necessary of the continued operation of the Association:

                           (i)      By the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Association under the
authority contained in 13(c) of the Federal Deposit Insurance Act; or

                           (ii)     By the Director or his or her designee, at
the time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the association or when the association
is determined by the Director to be in an unsafe or unsound condition.

                           Any rights of the Employee that have already vested,
however, shall not be affected by such action.

                  (f)      Should any provision of this Agreement give rise to a
discrepancy or conflict with respect to any applicable law or regulation, then
the applicable law or regulation shall control the relevant construction and
operation of this Agreement.



                                      -7-


         13.      Successors and Assigns.

                  (a)      This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Association which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association.

                  (b)      since the Association is contracting for the unique
and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating her rights or duties hereunder without first obtaining
the written consent of the Association.

         14.      Amendments. No amendments or additions to this Agreement shall
be binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.

         15.      Applicable Law. Except to the extent preempted by Federal law,
the laws of the State of Delaware shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.

         16.      Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

         17.      Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto.

                  IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first hereinabove written.


ATTEST:                             FIRST FEDERAL OF THE SOUTH


                                    BY:
- ---------------------------            ----------------------------------------
Secretary                              Joe K. McArthur, President and
                                       Chief Executive Officer



WITNESS:


- -------------------------              ----------------------------------------
                                       Sandra H. Stephens ("Employee")




                                      -8-

EX-10.4.1

                                                                  EXHIBIT 10.4.1


                                [EXECUTION COPY]


                   PENSION & BENEFIT FINANCIAL SERVICES, INC.

                              EMPLOYMENT AGREEMENT

                  (Amended and Restated as of October 1, 2001)

                               (J. MALCOMB MASSEY)


         THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of this
first day of October, 2001 (the "Effective Date"), by and between Pension &
Benefit Financial Services, Inc. (D/B/A "Pension & Benefit Trust Company"), an
Alabama corporation (the "Company") and the wholly-owned operating subsidiary of
First Federal of the South, a federal savings association (the "Bank"), and J.
Malcomb Massey (the "Employee").

         WHEREAS, the Employee has heretofore been employed by the Company and
is experienced in all phases of the planning, designing, implementation,
administration and duties required of a trustee, of employee benefit plans; and

         WHEREAS, the parties desire by this writing to establish and to set
forth the employment relationship between the Company and the Employee.

         NOW, THEREFORE, it is AGREED as follows:

         1.       Employment. The Employee is hereby employed as the President
and Chief Executive Officer of the Company. The Employee shall render such
administrative and management services for the Company as are currently rendered
and as are customarily performed by persons situated in a similar executive
capacity. The Employee shall also promote, by entertainment or otherwise, as and
to the extent permitted by law, the business of the Company. The Employee's
other duties shall be such as the Board of Directors of the Company ("Board")
may from time to time reasonably direct, including normal duties as an officer
of the Company.

         2.       Compensation.

                  (a)      The Company agrees to pay the Employee during the
term of this Agreement a salary at the rate of One Hundred Fifty Thousand
Dollars ($150,000) per annum, payable in cash not less frequently than monthly
(the "Base Salary"). The Board shall review, not less often than annually, the
rate of the Employee's salary, and, in its sole discretion, may decide to
increase his salary;





                  (b)      In further consideration of Employee's services,
Employee has, on April 11, 1997, received Fifteen Thousand Five Hundred Twelve
(15,512) shares (the "Compensatory Shares") of $.01 par value common stock (the
"Common Stock") of SouthFirst Bancshares, Inc., the parent and holding company
of the Bank (the "Corporation"), which shares vest in the Employee at a rate of
one-fifteenth (1/15) per year, beginning on the first anniversary of April 11,
1997, and upon each anniversary of that date, until April 11, 2012, at which
time the Compensatory Shares shall be fully vested; and

                  (c)      The Company further agrees to furnish the Employee a
mutually acceptable automobile. The cost of maintenance, fuel, insurance and
upkeep to be borne by the Company.

         3.       Earnings and Distribution of Compensatory Shares; Voting
Rights.

                  (a)      Compensatory Shares; Forfeitures.

                           (1)      General Rules. The Compensatory Shares
awarded hereunder shall be earned and non-forfeitable by the Employee at the
rate of one-fifteenth per year until April 11, 2012.

                           (2)      Exception for Terminations Due to Death or
Disability. Notwithstanding the general rule contained in Section 3(a)(1) above,
all Compensatory Shares held by the Employee at the date of the termination of
Employee's service with the Company due to death, disability (as determined by
the Board), or the termination of his employment "without cause" under the
provisions of Section 10(d) of this Agreement, shall be deemed earned and fully
vested as of such date and shall be distributed as soon as practicable
thereafter.

                           (3)      Exception for a Change in Control.
Notwithstanding the general rule contained in Section 3(a)(1) above, all
Compensatory Shares held by the Employee shall be deemed to be immediately 100%
earned, fully vested and non-forfeitable in the event of a "change in control"
of the Company, the Bank or the Corporation (collectively and/or separately, as
the context shall require, the "Relevant Corp" ) and shall be distributed as
soon as practicable thereafter. For purposes of this paragraph, "change in
control" shall mean the occurrence of any one of the following events: (1) an
increase in the ownership of, the holding of, or the power to vote, by any
person, or by any persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934), the Relevant Corp's voting stock,
to an amount which is more than 25% of the issued and outstanding shares
thereof, (2) a change in the ownership of, or possession of, the ability to
control the election of a majority of the Relevant Corp's directors, (3) a
change in the ownership of, or the possession of, the ability to exercise a
controlling influence over the management or policies of the Relevant Corp by
any person, or by any persons acting as a "group" within the meaning of Section
13(d) of the Securities Exchange Act of 1934 (except in the case of (1), (2) and
(3) hereof, ownership or control of the Relevant Corp (or its board of
directors) by the Bank or by the Corporation, as the case may be, shall not
constitute a "change in control"), or (4) during any period of two consecutive
years, individuals who at the beginning of such period constitute the board of
directors of the Relevant Corp. (the



                                      -2-



"Continuing Directors") cease for any reason to constitute at least two-thirds
thereof, provided that any individual whose election or nomination for election
as a member of such board of directors was approved by a vote of at least
two-thirds of the Continuing Directors then in office shall be considered a
Continuing Director. For purposes of this subparagraph only, the term "person"
refers to an individual (other than the Employee), individuals acting in concert
or as a "group," a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.

                           (4)      Discretionary Acceleration of Vesting. In
its sole and absolute discretion, the Board may, at any time, with respect to
the Employee, accelerate the vesting schedule according to which the Employee's
Compensatory Shares become earned and become non-forfeitable by the Employee, if
the Board concludes that it is in the best interests of the Company to do so.

                  (b)      Accrual of Dividends. Whenever Compensatory Shares
are distributed to the Employee under Section 3(c) below, the Employee shall
also be entitled to receive, with respect to each Compensatory Share
distributed, an amount equal to any cash dividends and a number of shares of
Common Stock equal to any stock dividends declared and paid with respect to a
share of Common Stock after the date the relevant Compensatory Shares were
awarded.

                  (c)      Distribution of Compensatory Shares.

                           (1)      Timing of Distributions. Except as provided
in Section 3(c)(2) below, the Corporation shall distribute Compensatory Shares
and accumulated cash from dividends and interest, if any, to the Employee or his
Beneficiary, as the case may be, as soon as practicable after they have been
earned. No fractional shares shall be distributed.

                           (2)      Form of Distribution. The Employee may file
a written request with the Corporation to have the Compensatory Shares
distributed, as soon as practicable, in the form of a transfer to the Employee
of Common Stock subject to forfeiture of any portion thereof which does not
become vested under the applicable vesting provisions hereunder. In such event,
the Corporation may, in its sole and absolute discretion, transfer to the
Employee Common Stock certificate(s) in the name of the Employee, whereupon the
Employee shall become a stockholder of the Corporation with respect to such
Common Stock and shall have all the rights of a stockholder, including but not
limited to the right to receive all dividends paid on such shares and the right
to vote such shares. All shares of said Common Stock, which, pursuant to the
provisions of this Agreement, have not become vested on or before the Employee's
termination of services with the Company, shall be forfeited by the Employee and
returned to the Company or the Corporation. The certificate(s) for the shares of
the Common Stock distributed to the Employee hereunder shall bear the following
legend reflecting that the shares represented thereby are subject to
restrictions against transfer and to forfeiture, in accordance with this
Agreement:


                                      -3-


                  "The transferability of this certificate and the shares of
                  stock represented thereby are subject to the terms and
                  conditions (including forfeiture) contained in the Employee's
                  Employment Agreement between Pension & Benefit Financial
                  Services, Inc. and J. Malcomb Massey. Copies of such
                  Employment Agreement are on file in the offices of the
                  Secretary of Pension & Benefit Financial Services, Inc., 260
                  Commerce Street, Montgomery, Alabama 36104."

         As the Employee earns the Common Stock, the Employee (or, in the event
of the Employee's death, the legal representative of his estate, or if the
personal representative of the Employee's estate shall have assigned the
estate's interest in the Common Stock, the person or persons to whom his rights
under such Common Stock shall have passed by assignment pursuant to his will or
to the laws of descent and distribution) may surrender the Common Stock
certificates bearing the foregoing legend, whereupon the Corporation shall cause
such certificate(s) to be reissued without the legend. If the Employee forfeits
any or all of such Common Stock, the Employee shall, within thirty (30) days
after terminating employment, return to the Company or to the Corporation all
shares of the Common Stock which were forfeited and, further, pay to the Company
or the Corporation an amount equal to the dividends paid by the Corporation with
respect to the shares of the forfeited Common Stock.

                           (3)      Acquisition for Investment. Employee
understands and acknowledges that the shares of Common Stock which he may
acquire pursuant to the terms of this Agreement are being acquired by him solely
for his own account, for investment and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act of 1933 (the "Securities Act").

                           (4)      Unregistered Securities. Employee further
understands and acknowledges that the shares of Common Stock which he may
acquire under this Agreement have not been registered under the Securities Act
or the securities laws of any state, and will not at the time of issuance and
delivery of such shares as contemplated by the terms of this Agreement have been
so registered, in reliance upon certain exemptions from the registration and
prospectus delivery requirements of the Securities Act and such laws. Employee
understands that the shares of Common Stock so acquired by him must be held
indefinitely, and that he must therefore bear the economic risk of such
investment indefinitely, unless a subsequent disposition thereof is registered
under the Securities Act and any applicable state securities laws, or is exempt
from such registration to the satisfaction of counsel for the Corporation.
Employee further acknowledges that the availability of the exemptions described
in the first sentence of this Section depend upon, among other things, the bona
fide nature of his investment intent expressed herein, upon which the Company
hereby expressly relies.

                  (d)      Voting of Compensatory Shares. All of the
Compensatory Shares not otherwise distributed to Employee hereunder shall be
voted by the Company as directed by the Employee.

         4.       Discretionary Bonuses. The Employee shall participate in an
equitable manner with all other senior management employees of the Company in
discretionary bonuses that the Board may award from time to time to the
Company's senior management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.



                                      -4-


         5.       Participation in Retirement, Medical and Other Plans.

                  (a)      The Employee shall participate in any plan that the
Company maintains for the benefit of its employees if the plan relates to (i)
pension, profit-sharing, or other retirement benefits, (ii) medical insurance or
the reimbursement of medical or dependent care expenses, or (iii) other group
benefits, including disability and life insurance plans.

                  (b)      The Employee shall participate in any fringe benefits
which are or may become available to the Company's senior management employees,
including for example: any stock option or incentive compensation plans, club
memberships, and any other benefits which are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Company.

         6.       Term. The Company hereby employs the Employee, and the
Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective Date and ending 24 months thereafter (or such
earlier date as is determined in accordance with Section 10). Additionally, on
each annual anniversary date from the Effective Date, this Agreement and the
Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date, provided the Board determines
in a duly adopted resolution that the performance of the Employee has met the
Board's requirements and standards, and that this Agreement shall be extended.

         7.       Loyalty; Full Time and Attention.

                  (a)      During the period of his employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall devote all his full business time, attention, skill,
and efforts to the faithful performance of his duties hereunder; provided,
however, from time to time, Employee may serve on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which
will not present any conflict of interest with the Company, the Bank or the
Corporation or any of their respective subsidiaries or affiliates, or
unfavorably affect the performance of Employee's duties pursuant to this
Agreement, or will not violate any applicable statute or regulation. "Full
business time" is hereby defined as that amount of time usually devoted to like
companies by similarly situated executive officers. During the term of his
employment under this Agreement, the Employee shall not engage in any business
or activity contrary to the business affairs or interests of the Company, the
Bank or the Corporation, or be gainfully employed in any other position or job
other than as provided above.

                  (b)      Nothing contained in this Paragraph 7 shall be deemed
to prevent or limit the Employee's right to invest in the capital stock or other
securities of any business dissimilar from that of the Company, the Bank or the
Corporation or, solely as a passive or minority investor, in any business.



                                      -5-


         8.       Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Company will provide Employee with the working
facilities and staff customary for similar executives and necessary for him to
perform his duties.

         9.       Vacation and Sick Leave. The Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
duties under this Agreement in accordance with the terms set forth below, all
such voluntary absences to count as vacation time; provided that:

                  (a)      The Employee shall be entitled to an annual vacation
in accordance with the policies that the Board periodically establishes for
senior management employees of the Company.

                  (b)      The Employee shall not receive any additional
compensation from the Company on account of his failure to take a vacation, and
the Employee shall not accumulate unused vacation from one fiscal year to the
next, except in either case to the extent authorized by the Board.

                  (c)      In addition to the aforesaid paid vacations, the
Employee shall be entitled without loss of pay, to absent himself voluntarily
from the performance of his employment obligations with the Company for such
additional periods of time and for such valid and legitimate reasons as the
Board may in its discretion approve. Further, the Board may grant to the
Employee a leave or leaves of absence, with or without pay, at such time or
times and upon such terms and conditions as the Board in its discretion may
determine.

                  (d)      In addition, the Employee shall be entitled to an
annual sick leave benefit as established by the Board.

         10.      Termination and Termination Pay. Subject to the provisions of
Section 11 hereof, the Employee's employment hereunder may be terminated under
the following circumstances:

                  (a)      Death. The Employee's employment under this Agreement
shall terminate upon his death during the term of this Agreement, in which event
the Employee's estate shall be entitled to receive the compensation due the
Employee through the last day of the calendar month in which his death occurred.

                  (b)      Disability. The Company may terminate the Employee's
employment after having established, through a determination by the Board, the
Employee's Disability. For purposes of this Agreement, "Disability" means a
physical or mental infirmity which impairs the Employee's ability to
substantially perform his duties under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits under the Company's
long-term disability plan (or, if the Company has no such plan in effect, which
impairs the Employee's ability to substantially perform his duties under this
Agreement for a period of one


                                      -6-


hundred eighty (180) consecutive days). The Employee shall be entitled to the
compensation and benefits provided for under this Agreement for (i) any period
during the term of this Agreement and prior to the establishment of the
Employee's Disability during which the Employee is unable to work due to the
physical or mental infirmity, or (ii) any period of Disability which is prior to
the Executive's termination of employment pursuant to this Section 10(b).

                  (c)      For Cause. The Board may, by written notice to the
Employee, immediately terminate his employment at any time, for Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Cause. Termination for "Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Cause unless there
shall have been delivered to the Employee a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board (excluding the Employee if a member of the Board) at a meeting of the
Board called and held for the purpose (after reasonable notice to the Employee
and an opportunity for the Employee to be heard before the Board), finding that
in the good faith opinion of the Board the Employee was guilty of conduct set
forth above in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.

                  (d)      Without Cause. Subject to the provisions of Section
11 hereof, the Board may, by written notice to the Employee, immediately
terminate his employment at any time for any reason; provided that if such
termination is for any reason other than pursuant to Sections 10 (a), (b) or (c)
above, the Employee shall be entitled to receive the following compensation and
benefits: (i) the salary provided pursuant to Section 2 hereof, up to the date
of expiration of the term (including any renewal term then in effect) of this
Agreement (the "Termination Date"), plus said salary for an additional 12-month
period, and (ii) the cost to the Employee of obtaining all health, life, and
disability benefits which the Employee would have been eligible to participate
in through the Termination Date based upon the benefit levels substantially
equal to those that the Company provided for the Employee at the date of
termination of employment. Said sum shall be paid, at the option of the
Employee, either (I) in periodic payments over the remaining term of this
Agreement, as if the Employee's employment had not been terminated, or (II) in
one lump sum within ten (10) days of such termination; provided however, that
the amount to be paid by the Company to the Employee hereunder shall not exceed
two (2) times the Employee's "average annual compensation". The Employee's
"annual average compensation" shall be the average of the total annual
"compensation" acquired by the Employee during each of the five (5) fiscal years
(or the number of full fiscal years of employment, if the Employee's employment
is less than five (5) years at the termination thereof) immediately preceding
the date of termination. The term "compensation" shall mean any payment of money
or provision of any other thing of value in consideration of employment,
including, without limitation, base


                                      -7-


compensation, bonuses, pension and profit sharing plans, directors fees or
committees fees, fringe benefits and deferred compensation accruals.

                  (e)      Voluntary Termination by Employee. Subject to the
provisions of Section 11 hereof, the Employee may voluntarily terminate
employment with the Company during the term of this Agreement, upon at least 60
days' prior written notice to the Board of Directors, in which case the Employee
shall receive only his compensation, vested rights and employee benefits accrued
up to the date of his termination.

         11.      Change in Control.

                  (a)      Notwithstanding any provision herein to the contrary,
if the Employee's employment under this Agreement is terminated by the Company,
without the Employee's prior written consent and for a reason other than for
Cause, death or disability in connection with or within twenty-four (24) months
after any change in control of the Company, the Bank or the Corporation
(collectively and/or separately, as the context shall require, the "Relevant
Corp"), the Employee shall be paid an amount equal to the difference between (i)
the product of 2.99 times his "base amount" as defined in Section 28OG(b)(3) of
the Internal Revenue Code of 1986, as amended (the "Code") and regulations
promulgated thereunder, and (ii) the sum of any other "parachute payments" (as
defined under Section 28OG(b)(2) of the Code) that the Employee receives on
account of the change in control. Said sum shall be paid in one lump sum within
ten (10) days of such termination. The term "change in control" shall have the
same meaning as contained in Section 3(a)(3) of this Agreement.

                  (b)      Notwithstanding any other provision of this Agreement
to the contrary, the Employee may voluntarily terminate his employment under
this Agreement within twelve (12) months following a change in control of the
Relevant Corp, and the Employee shall thereupon be entitled to receive the
payment described in Section 11(a) of this Agreement, upon the occurrence of any
of the following events, or within ninety (90) days thereafter, which have not
been consented to in advance by the Employee in writing: (i) the requirement
that the Employee move his personal residence, or perform his principal
executive functions, more than thirty-five (35) miles from his primary office as
of the date of the change in control; (ii) a material reduction in the
Employee's base compensation as in effect on the date of the change in control,
as the same may be increased from time to time; (iii) the failure by the Company
to continue to provide the Employee with compensation and benefits provided for
under this Agreement, as the same may be increased from time to time, or with
benefits substantially similar to those provided to him under any of the
employee benefit plans in which the Employee now or hereafter becomes a
participant, or the taking of any action by the Company which would directly or
indirectly reduce any of such benefits or deprive the Employee of any material
fringe benefit enjoyed by him at the time of the change in control; (iv) the
assignment to the Employee of duties and responsibilities materially different
from those normally associated with his position as referenced at Section 1; (v)
a failure to elect or reelect the Employee to the board of directors of the
Company, the Bank or the Corporation, as the case may be, if the Employee is
serving on such board of directors on the date of the change in control; or (vi)
a material diminution or


                                      -8-


reduction in the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Company.

                  (c)      Notwithstanding any other provision of this Agreement
to the contrary, the Employee may voluntarily terminate his employment under
this Agreement within twelve (12) months following a change in control of the
Company, the Bank or the Corporation, and the Employee shall thereupon be
entitled to receive the payment described in Section 11(a) of this Agreement.

                  (d)      Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

                  (e)      In the event that any dispute arises between the
Employee and the Company as to the terms or interpretation of this Agreement,
including this Section 11, whether instituted by formal legal proceedings or
otherwise, including an action that the Employee takes to enforce the terms of
this Section 11 or to defend against any action taken by the Company, the
Employee shall be reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, provided
that the Employee shall have obtained a final judgement by a court of competent
jurisdiction in favor of the Employee. Such reimbursement shall be paid within
ten (10) days of Employee's furnishing to the Company written evidence, which
may be in the form, among other things, of a canceled check or receipt, of any
costs or expenses incurred by the Employee.

         12.      Requirements of Applicable Regulations of OTS.

                  (a)      The Company's board of directors may terminate the
Employee's employment at any time, but any termination by the Company's board of
directors, other than termination for cause, shall not prejudice the Employee's
right to compensation or other benefits under this Agreement. The Employee shall
have no right to receive compensation or other benefits for any period after
termination for cause (as defined in Section 10(c) hereof).

                  (b)      If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the Company's affairs by a
notice served under section 8(e)(3) or (g)(1) of Federal Deposit Insurance Act
(12 U.S.C. 1818 (e)(3) and (g)(1)), the Company's obligations under this
Agreement shall be suspended as of the date of service unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Company
may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations were suspended, and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.

                  (c)      If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Company's affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance
Act (12 U.S.C. 1818 (e)(4) or (g)(1)), all obligations of the Company under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.



                                      -9-


                  (d)      If the Company is in default (as defined in section
3(x)(1) of the Federal Deposit Insurance Act), all obligations under this
Agreement shall terminate as of the date of default, but this Section 12(d)
shall not affect any vested rights of the parties.

                  (e)      All obligations under this Agreement shall be
terminated, except to the extent determined that the continuation of this
Agreement is necessary of the continued operation of the Company:

                           (i)      By the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in 13(c) of the Federal Deposit Insurance Act; or

                           (ii)     By the Director or his or her designee, at
the time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition.

                  Any rights of the Employee that have already vested, however,
shall not be affected by such action.

                  (f)      Should any provision of this Agreement give rise to a
discrepancy or conflict with respect to any applicable law or regulation, then
the applicable law or regulation shall control the relevant construction and
operation of this Agreement.

         13.      Non-Solicitation of Employees. Employee agrees that he will,
for so long as he is engaged hereunder, and for a period of three (3) years
after termination of his employment, refrain from recruiting or hiring, or
attempting to recruit or hire, directly or by assisting others, any other
employee of the Company who is employed by the Company or any successor or
affiliate of the Company; provided, however, that the provisions of this Section
13 shall not apply, and shall terminate, upon a termination of the Employee's
employment without cause, pursuant to Section 10(d) hereof, or upon a "change in
control" of the Company, the Bank and/or the Corporation, as defined in, and
contemplated by, Section 3(a)(3) hereof.

         14.      No Mitigation. The Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Employee in any
subsequent employment.

         15.      Successors and Assigns.

                  (a)      This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Company which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Company.


                                      -10-



                  (b)      Since the Company is contracting for the unique and
personal skills of the Employee, the Employee shall be precluded from assigning
or delegating his rights or duties hereunder without first obtaining the written
consent of the Company.

         16.      Amendments. No amendments or additions to this Agreement
shall be binding unless made in writing and signed by all of the parties, except
as herein otherwise specifically provided.

         17.      Applicable Law. Except to the extent preempted by Federal law,
the laws of the State of Alabama shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.

         18.      Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

         19.      Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto.

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first hereinabove written.


ATTEST:                             PENSION & BENEFIT FINANCIAL
                                    SERVICES, INC.


                                    By:
- -------------------------------        ----------------------------------------
Secretary                              Ruth M. Roper, Executive Vice-President



                                       ----------------------------------------
                                       J. Malcomb Massey ("Employee")




                                      -11-

EX-10.4.2

EXECUTION COPY                                                    EXHIBIT 10.4.2

                           FIRST FEDERAL OF THE SOUTH

                        GUARANTY OF EMPLOYMENT AGREEMENT

                                 OCTOBER 1, 2001

                               (J. MALCOMB MASSEY)

                  THIS AGREEMENT to guarantee and provide certain payments and
obligations under an employment agreement (the "Guaranty") is entered into, as
of the first day of October, 2001 (the "Effective Date"), by and among
SouthFirst Bancshares, Inc. ("SouthFirst'), First Federal of the South (the
"Bank"), Pension & Benefit Financial Services, Inc., f/k/a "Benefit Financial
Services, Inc.," (the "Company") and J. Malcomb Massey (the "Employee").

WHEREAS, in April, 1997, the Company was acquired by SouthFirst, the sole
shareholder of the Bank; and

WHEREAS, upon the grant of limited trust powers from the Office of Thrift
Supervision to the Bank, on September 9, 1998, to be exercised by and through
the Company, as the operating subsidiary of the Bank, SouthFirst, in September,
1998, transferred the ownership of the Company to the Bank; and

WHEREAS, upon such transfer, the Company became the wholly-owned operating
subsidiary of the Bank; and

WHEREAS, the Employee is president and chief executive officer of the Company, a
position he has held since he joined the Company in April, 1997, immediately
following the acquisition by the Company of substantially all of the assets of
Lambert, Massey, Roper & Taylor, Inc., an employee benefits consulting firm
based in Montgomery, Alabama, for which the Employee had served as President
since 1980; and

WHEREAS, the Company and the Employee, in April, 1997, entered into that certain
employment agreement, which was amended and restated as of October 1, 2001, and
as may be hereafter amended (the "Employment Agreement"); and

WHEREAS, it was the intent of the parties hereto, to provide assurances to the
Employee regarding the performance of each obligation of the Company provided
for, and specified in, the Employment Agreement, or amended from time to time;

                  NOW, THEREFORE, it is AGREED as follows:

         1.       SouthFirst and the Bank hereby agree that, to the extent
permitted by law, and subject to the terms and conditions of the Employment
Agreement, each of them shall be jointly and severally liable, with each other
and with the Company, for the payment of all amounts due to the


Employee under the Employment Agreement and for the performance of all
obligations of the Company to, or on behalf of, the Employee under the
Employment Agreement.

         2.       In the event that any dispute arises between the Employee and
the Bank and/or SouthFirst, as to the terms or interpretation of this Guaranty,
whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Guaranty or to
defend against any action taken by the Bank and/or SouthFirst, the Employee
shall be reimbursed for all costs and expenses, including reasonable attorneys'
fees, arising from such dispute, proceedings or actions, provided that the
Employee shall have obtained a final judgement by a court of competent
jurisdiction in favor of the Employee. Such reimbursement shall be paid within
ten (10) days of Employee's furnishing to the Bank and/or SouthFirst appropriate
written evidence of any costs or expenses incurred by the Employee, which
evidence may be in the form, among other things, of a canceled check or receipt.

         3.       This Guaranty shall inure to the benefit of, and be binding
upon, any successor of the Bank and/or SouthFirst which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank and/or SouthFirst.

         4.       No amendments or additions to this Guaranty shall be binding
unless made in writing and signed by each of the parties.

         5.       The laws of the State of Alabama shall govern this Guaranty in
all respects, whether as to its validity, construction, capacity, performance or
otherwise.

         6.       The provisions of this Guaranty shall be deemed severable and
the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof.

         7.       This Guaranty, together with any understanding or
modifications thereof, as agreed to in writing by the parties, shall constitute
the entire agreement between the parties with respect to subject thereof.
Further, should any provision of this Guaranty give rise to a discrepancy or
conflict with respect to any applicable law or regulation, then the applicable
law or regulation shall control the relevant construction and operation of this
Guaranty.



                            [EXECUTION PAGE FOLLOWS]


                                       -2-


                  IN WITNESS WHEREOF, the parties have executed this Guaranty,
as of the day and year first hereinabove written.


ATTEST:                               "SouthFirst"
                                      SOUTHFIRST BANCSHARES, INC.



                                      BY:
- -------------------------------          --------------------------------------
Secretary                                Its:
                                             ----------------------------------


ATTEST:                               "Bank"
                                      FIRST FEDERAL OF THE SOUTH



                                      BY:
- -------------------------------          --------------------------------------
Secretary                                Its:
                                             ----------------------------------


ATTEST:                               "Company"
                                      PENSION & BENEFIT FINANCIAL
                                      SERVICES, INC.



                                      BY:
- -------------------------------          --------------------------------------
Secretary                                Its:
                                             ----------------------------------


WITNESS:                              "Employee"
                                      J. MALCOMB MASSEY



- -------------------------------       -----------------------------------------
                                      J. Malcomb Massey


                                       -3-

EX-10.5.1

                                                                  EXHIBIT 10.5.1

                                [EXECUTION COPY]

                   PENSION & BENEFIT FINANCIAL SERVICES, INC.

                              EMPLOYMENT AGREEMENT

                  (Amended and Restated as of October 1, 2001)

                                 (RUTH M. ROPER)

         THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of this
first day of October, 2001 (the "Effective Date"), by and between Pension &
Benefit Financial Services, Inc. (D/B/A "Pension & Benefit Trust Company"), an
Alabama corporation (the "Company") and the wholly-owned operating subsidiary of
First Federal of the South, a federal savings association (the "Bank"), and Ruth
M. Roper (the "Employee").

         WHEREAS, the Employee has heretofore been employed by the Company and
is experienced in all phases of the planning, designing, implementation,
administration and duties required of a trustee, of employee benefit plans; and

         WHEREAS, the parties desire by this writing to establish and to set
forth the employment relationship between the Company and the Employee.

         NOW, THEREFORE, it is AGREED as follows:

         1.       Employment. The Employee is hereby employed as the Executive
Vice President of the Company. The Employee shall render such administrative and
management services for the Company as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee shall also promote, by entertainment or otherwise, as and to the extent
permitted by law, the business of the Company. The Employee's other duties shall
be such as the Board of Directors of the Company ("Board") may from time to time
reasonably direct, including normal duties as an officer of the Company.

         2.       Compensation.

                  (a)      The Company agrees to pay the Employee during the
term of this Agreement a salary at the rate of Ninety-Eight Thousand Dollars
($98,000) per annum, payable in cash not less frequently than monthly (the "Base
Salary"). The Board shall review, not less often than annually, the rate of the
Employee's salary, and, in its sole discretion, may decide to increase her
salary;

                  (b)      In further consideration of Employee's services,
Employee has, on April 11, 1997, received Five Thousand Six Hundred Twenty-Three
(5,623) shares (the "Compensatory Shares") of $.01 par value common stock (the
"Common Stock") of SouthFirst Bancshares, Inc., the parent and holding company
of the Bank (the "Corporation"), which shares






vest in the Employee at a rate of one-fifteenth (1/15) per year, beginning on
the first anniversary of April 11, 1997, and upon each anniversary of that date,
until April 11, 2012, at which time the Compensatory Shares shall be fully
vested; and

                  (c)      The Company further agrees to furnish the Employee a
mutually acceptable automobile. The cost of maintenance, fuel, insurance and
upkeep to be borne by the Company.

         3.       Earnings and Distribution of Compensatory Shares; Voting
Rights.

                  (a)      Compensatory Shares; Forfeitures.

                           (1)      General Rules. The Compensatory Shares shall
be earned and non-forfeitable by the Employee at the rate of one-fifteenth per
year until April 11, 2012.

                           (2)      Exception for Terminations Due to Death or
Disability. Notwithstanding the general rule contained in Section 3(a)(1) above,
all Compensatory Shares held by the Employee at the date of the termination of
Employee's service with the Company due to death, disability (as determined by
the Board), or the termination of her employment "without cause" under the
provisions of Section 10(d) of this Agreement, shall be deemed earned and fully
vested as of such date and shall be distributed as soon as practicable
thereafter.

                           (3)      Exception for a Change in Control.
Notwithstanding the general rule contained in Section 3(a)(1) above, all
Compensatory Shares held by the Employee shall be deemed to be immediately 100%
earned, fully vested and non-forfeitable in the event of a "change in control"
of the Company, the Bank or the Corporation (collectively and/or separately, as
the context shall require, the "Relevant Corp") and shall be distributed as soon
as practicable thereafter. For purposes of this paragraph, "change in control"
shall mean the occurrence of any one of the following events: (1) an increase in
the ownership of, the holding of, or the power to vote, by any person, or by any
persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), the Relevant Corp's voting stock, to an amount
which is more than 25% of the issued and outstanding shares thereof, (2) a
change in the ownership of, or possession of, the ability to control the
election of a majority of the Relevant Corp's directors, (3) a change in the
ownership of, or the possession of, the ability to exercise a controlling
influence over the management or policies of the Relevant Corp by any person, or
by any persons acting as a "group" within the meaning of Section 13(d) of the
Securities Exchange Act of 1934 (except in the case of (1), (2) and (3) hereof,
ownership or control of the Relevant Corp (or its board of directors) by the
Bank or by the Corporation, as the case may be, shall not constitute a "change
in control"), or (4) during any period of two consecutive years, individuals who
at the beginning of such period constitute the board of directors of the
Relevant Corp. (the "Continuing Directors") cease for any reason to constitute
at least two-thirds thereof, provided that any individual whose election or
nomination for election as a member of such board of directors was approved by a
vote of at least two-thirds of the Continuing Directors then in office shall be
considered a Continuing Director. For purposes of this subparagraph only, the
term "person" refers to an individual (other that the Employee), individuals
acting in concert or as a "group," or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole


                                      -2-




proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.

                           (4)      Discretionary Acceleration of Vesting. In
its sole and absolute discretion, the Board may, at any time, with respect to
the Employee, accelerate the vesting schedule according to which the Employee's
Compensatory Shares become earned and becomes non-forfeitable by the Employee,
if the Board concludes that it is in the best interests of the Company to do so.

                  (b)      Accrual of Dividends. Whenever Compensatory Shares
are distributed to the Employee under Section 3(c) below, the Employee shall
also be entitled to receive, with respect to each Compensatory Share
distributed, an amount equal to any cash dividends and a number of shares of
Common Stock equal to any stock dividends declared and paid with respect to a
share of Common Stock after the date the relevant Compensatory Shares were
awarded.

                  (c)      Distribution of Compensatory Shares.

                           (1)      Timing of Distributions. Except as provided
in Section 3(c)(2) below, the Corporation shall distribute Compensatory Shares
and accumulated cash from dividends and interest, if any, to the Employee or her
Beneficiary, as the case may be, as soon as practicable after they have been
earned. No fractional shares shall be distributed.

                           (2)      Form of Distribution. The Employee may file
a written request with the Corporation to have the Compensatory Shares
distributed, as soon as practicable, in the form of a transfer to the Employee
of Common Stock subject to forfeiture of any portion thereof which does not
become vested under the applicable vesting provisions hereunder. In such event,
the Corporation may, in its sole and absolute discretion, transfer to the
Employee Common Stock certificate(s) in the name of the Employee, whereupon the
Employee shall become a stockholder of the Corporation with respect to such
Common Stock and shall have all the rights of a stockholder, including but not
limited to the right to receive all dividends paid on such shares and the right
to vote such shares. All shares of said Common Stock, which, pursuant to the
provisions of this Agreement, have not become vested on or before the Employee's
termination of services with the Company, shall be forfeited by the Employee and
returned to the Company or the Corporation. The certificate(s) for the shares of
the Common Stock distributed to the Employee hereunder shall bear the following
legend reflecting that the shares represented thereby are subject to
restrictions against transfer and to forfeiture, in accordance with this
Agreement:

                  "The transferability of this certificate and the shares of
                  stock represented thereby are subject to the terms and
                  conditions (including forfeiture) contained in the Employee's
                  Employment Agreement between Pension & Benefit Financial
                  Services, Inc. and Ruth M. Roper. Copies of such Employment
                  Agreement are on file in the offices of the Secretary of
                  Pension & Benefit Financial Services, Inc., 260 Commerce
                  Street, Montgomery, Alabama 36104."


                                      -3-




         As the Employee earns the Common Stock, the Employee (or, in the event
of the Employee's death, the legal representative of her estate, or if the
personal representative of the Employee's estate shall have assigned the
estate's interest in the Common Stock, the person or persons to whom her rights
under such Common Stock shall have passed by assignment pursuant to her will or
to the laws of descent and distribution) may surrender the Common Stock
certificates bearing the foregoing legend, whereupon the Corporation shall cause
such certificate(s) to be reissued without the legend. If the Employee forfeits
any or all of such Common Stock, the Employee shall, within thirty (30) days
after terminating employment, return to the Company or to the Corporation all
shares of the Common Stock which were forfeited and, further, pay to the Company
or the Corporation an amount equal to the dividends paid by the Corporation with
respect to the shares of the forfeited Common Stock.

                           (3)      Acquisition for Investment. Employee
understands and acknowledges that the shares of Common Stock which she may
acquire pursuant to the terms of this Agreement are being acquired by her solely
for her own account, for investment and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act of 1933 (the "Securities Act").

                           (4)      Unregistered Securities. Employee further
understands and acknowledges that the shares of Common Stock which she may
acquire under this Agreement have not been registered under the Securities Act
or the securities laws of any state, and will not at the time of issuance and
delivery of such shares as contemplated by the terms of this Agreement have been
so registered, in reliance upon certain exemptions from the registration and
prospectus delivery requirements of the Securities Act and such laws. Employee
understands that the shares of Common Stock so acquired by her must be held
indefinitely, and that she must therefore bear the economic risk of such
investment indefinitely, unless a subsequent disposition thereof is registered
under the Securities Act and any applicable state securities laws, or is exempt
from such registration to the satisfaction of counsel for the Corporation.
Employee further acknowledges that the availability of the exemptions described
in the first sentence of this Section depend upon, among other things, the bona
fide nature of her investment intent expressed herein, upon which the Company
hereby expressly relies.

                  (d)      Voting of Compensatory Shares. All of the
Compensatory Shares not otherwise distributed to Employee hereunder shall be
voted by the Company as directed by the Employee.

         4.       Discretionary Bonuses. The Employee shall participate in an
equitable manner with all other senior management employees of the Company in
discretionary bonuses that the Board may award from time to time to the
Company's senior management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.


                                      -4-




         5.       Participation in Retirement, Medical and Other Plans.

                  (a)      The Employee shall participate in any plan that the
Company maintains for the benefit of its employees if the plan relates to (i)
pension, profit-sharing, or other retirement benefits, (ii) medical insurance or
the reimbursement of medical or dependent care expenses, or (iii) other group
benefits, including disability and life insurance plans.

                  (b)      The Employee shall participate in any fringe benefits
which are or may become available to the Company's senior management employees,
including for example: any stock option or incentive compensation plans, club
memberships, and any other benefits which are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which she shall incur in connection with her services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Company.

         6.       Term. The Company hereby employs the Employee, and the
Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective Date and ending 24 months thereafter (or such
earlier date as is determined in accordance with Section 10). Additionally, on
each annual anniversary date from the Effective Date, this Agreement and the
Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date, provided the Board determines
in a duly adopted resolution that the performance of the Employee has met the
Board's requirements and standards, and that this Agreement shall be extended.

         7.       Loyalty; Full Time and Attention.

                  (a)      During the period of her employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall devote all her full business time, attention, skill,
and efforts to the faithful performance of her duties hereunder; provided,
however, from time to time, Employee may serve on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which
will not present any conflict of interest with the Company, the Bank or the
Corporation or any of their respective subsidiaries or affiliates, or
unfavorably affect the performance of Employee's duties pursuant to this
Agreement, or will not violate any applicable statute or regulation. "Full
business time" is hereby defined as that amount of time usually devoted to like
companies by similarly situated executive officers. During the term of her
employment under this Agreement, the Employee shall not engage in any business
or activity contrary to the business affairs or interests of the Company, the
Bank or the Corporation, or be gainfully employed in any other position or job
other than as provided above.

                  (b)      Nothing contained in this Paragraph 7 shall be deemed
to prevent or limit the Employee's right to invest in the capital stock or other
securities of any business dissimilar from that of the Company, the Bank or the
Corporation or, solely as a passive or minority investor, in any business.


                                      -5-




         8.       Standards. The Employee shall perform her duties under this
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Company will provide Employee with the working
facilities and staff customary for similar executives and necessary for her to
perform her duties.

         9.       Vacation and Sick Leave. The Employee shall be entitled,
without loss of pay, to absent herself voluntarily from the performance of her
duties under this Agreement in accordance with the terms set forth below, all
such voluntary absences to count as vacation time; provided that:

                  (a)      The Employee shall be entitled to an annual vacation
in accordance with the policies that the Board periodically establishes for
senior management employees of the Company.

                  (b)      The Employee shall not receive any additional
compensation from the Company on account of her failure to take a vacation, and
the Employee shall not accumulate unused vacation from one fiscal year to the
next, except in either case to the extent authorized by the Board.

                  (c)      In addition to the aforesaid paid vacations, the
Employee shall be entitled without loss of pay, to absent herself voluntarily
from the performance of her employment obligations with the Company for such
additional periods of time and for such valid and legitimate reasons as the
Board may in its discretion approve. Further, the Board may grant to the
Employee a leave or leaves of absence, with or without pay, at such time or
times and upon such terms and conditions as the Board in its discretion may
determine.

                  (d)      In addition, the Employee shall be entitled to an
annual sick leave benefit as established by the Board.

         10.      Termination and Termination Pay. Subject to the provisions of
Section 11 hereof, the Employee's employment hereunder may be terminated under
the following circumstances:

                  (a)      Death. The Employee's employment under this Agreement
shall terminate upon her death during the term of this Agreement, in which event
the Employee's estate shall be entitled to receive the compensation due the
Employee through the last day of the calendar month in which her death occurred.

                  (b)      Disability. The Company may terminate the Employee's
employment after having established, through a determination by the Board, the
Employee's Disability. For purposes of this Agreement, "Disability" means a
physical or mental infirmity which impairs the Employee's ability to
substantially perform her duties under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits under the Company's
long-term disability plan (or, if the Company has no such plan in effect, which
impairs the Employee's ability to substantially perform her duties under this
Agreement for a period of one hundred eighty (180) consecutive days). The
Employee shall be entitled to the compensation


                                      -6-




and benefits provided for under this Agreement for (i) any period during the
term of this Agreement and prior to the establishment of the Employee's
Disability during which the Employee is unable to work due to the physical or
mental infirmity, or (ii) any period of Disability which is prior to the
Executive's termination of employment pursuant to this Section 10(b).

                  (c)      For Cause. The Board may, by written notice to the
Employee, immediately terminate her employment at any time, for Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Cause. Termination for "Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Cause unless there
shall have been delivered to the Employee a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board (excluding the Employee if a member of the Board) at a meeting of the
Board called and held for the purpose (after reasonable notice to the Employee
and an opportunity for the Employee to be heard before the Board), finding that
in the good faith opinion of the Board the Employee was guilty of conduct set
forth above in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.

                  (d)      Without Cause. Subject to the provisions of Section
11 hereof, the Board may, by written notice to the Employee, immediately
terminate her employment at any time for any reason; provided that if such
termination is for any reason other than pursuant to Sections 10 (a), (b) or (c)
above, the Employee shall be entitled to receive the following compensation and
benefits: (i) the salary provided pursuant to Section 2 hereof, up to the date
of expiration of the term (including any renewal term then in effect) of this
Agreement (the "Termination Date"), plus said salary for an additional 12-month
period, and (ii) the cost to the Employee of obtaining all health, life, and
disability benefits which the Employee would have been eligible to participate
in through the Termination Date based upon the benefit levels substantially
equal to those that the Company provided for the Employee at the date of
termination of employment. Said sum shall be paid, at the option of the
Employee, either (I) in periodic payments over the remaining term of this
Agreement, as if the Employee's employment had not been terminated, or (II) in
one lump sum within ten (10) days of such termination; provided however, that
the amount to be paid by the Company to the Employee hereunder shall not exceed
two (2) times the Employee's "average annual compensation". The Employee's
"annual average compensation" shall be the average of the total annual
"compensation" acquired by the Employee during each of the five (5) fiscal years
(or the number of full fiscal years of employment, if the Employee's employment
is less than five (5) years at the termination thereof) immediately preceding
the date of termination. The term "compensation" shall mean any payment of money
or provision of any other thing of value in consideration of employment,
including, without limitation, base compensation, bonuses, pension and profit
sharing plans, directors fees or committees fees, fringe benefits and deferred
compensation accruals.


                                      -7-




                  (e)      Voluntary Termination by Employee. Subject to the
provisions of Section 11 hereof, the Employee may voluntarily terminate
employment with the Company during the term of this Agreement, upon at least 60
days' prior written notice to the Board of Directors, in which case the Employee
shall receive only her compensation, vested rights and employee benefits accrued
up to the date of her termination.

         11.      Change in Control.

                  (a)      Notwithstanding any provision herein to the contrary,
if the Employee's employment under this Agreement is terminated by the Company,
without the Employee's prior written consent and for a reason other than for
Cause, death or disability in connection with or within twenty-four (24) months
after any change in control of the Company, the Bank or the Corporation
(collectively and/or separately, as the context shall require, the "Relevant
Corp"), the Employee shall be paid an amount equal to the difference between (i)
the product of 2.99 times her "base amount" as defined in Section 28OG(b)(3) of
the Internal Revenue Code of 1986, as amended (the "Code") and regulations
promulgated thereunder, and (ii) the sum of any other "parachute payments" (as
defined under Section 28OG(b)(2) of the Code) that the Employee receives on
account of the change in control. Said sum shall be paid in one lump sum within
ten (10) days of such termination. The term "change in control" shall have the
same meaning as contained in Section 3(a)(3) of this Agreement.

                  (b)      Notwithstanding any other provision of this Agreement
to the contrary, the Employee may voluntarily terminate her employment under
this Agreement within twelve (12) months following a change in control of the
Relevant Corp, and the Employee shall thereupon be entitled to receive the
payment described in Section 11(a) of this Agreement, upon the occurrence of any
of the following events, or within ninety (90) days thereafter, which have not
been consented to in advance by the Employee in writing: (i) the requirement
that the Employee move her personal residence, or perform her principal
executive functions, more than thirty-five (35) miles from her primary office as
of the date of the change in control; (ii) a material reduction in the
Employee's base compensation as in effect on the date of the change in control,
as the same may be increased from time to time; (iii) the failure by the Company
to continue to provide the Employee with compensation and benefits provided for
under this Agreement, as the same may be increased from time to time, or with
benefits substantially similar to those provided to her under any of the
employee benefit plans in which the Employee now or hereafter becomes a
participant, or the taking of any action by the Company which would directly or
indirectly reduce any of such benefits or deprive the Employee of any material
fringe benefit enjoyed by her at the time of the change in control; (iv) the
assignment to the Employee of duties and responsibilities materially different
from those normally associated with her position as referenced at Section 1; (v)
a failure to elect or reelect the Employee to the board of directors of the
Company, the Bank or the Corporation, as the case may be, if the Employee is
serving on such board of directors on the date of the change in control; or (vi)
a material diminution or reduction in the Employee's responsibilities or
authority (including reporting responsibilities) in connection with her
employment with the Company.


                                      -8-




                  (c)      Notwithstanding any other provision of this Agreement
to the contrary, the Employee may voluntarily terminate her employment under
this Agreement within twelve (12) months following a change in control of the
Company, the Bank or the Corporation, and the Employee shall thereupon be
entitled to receive the payment described in Section 11(a) of this Agreement.

                  (d)      Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

                  (e)      In the event that any dispute arises between the
Employee and the Company as to the terms or interpretation of this Agreement,
including this Section 11, whether instituted by formal legal proceedings or
otherwise, including an action that the Employee takes to enforce the terms of
this Section 11 or to defend against any action taken by the Company, the
Employee shall be reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, provided
that the Employee shall have obtained a final judgement by a court of competent
jurisdiction in favor of the Employee. Such reimbursement shall be paid within
ten (10) days of Employee's furnishing to the Company written evidence, which
may be in the form, among other things, of a canceled check or receipt, of any
costs or expenses incurred by the Employee.

         12.      Requirements of Applicable Regulations of OTS.

                  (a)      The Company's board of directors may terminate the
Employee's employment at any time, but any termination by the Company's board of
directors, other than termination for cause, shall not prejudice the Employee's
right to compensation or other benefits under this Agreement. The Employee shall
have no right to receive compensation or other benefits for any period after
termination for cause (as defined in Section 10(c) hereof).

                  (b)      If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the Company's affairs by a
notice served under section 8(e)(3) or (g)(1) of Federal Deposit Insurance Act
(12 U.S.C. 1818 (e)(3) and (g)(1)), the Company's obligations under this
Agreement shall be suspended as of the date of service unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Company
may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations were suspended, and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.

                  (c)      If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Company's affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance
Act (12 U.S.C. 1818 (e)(4) or (g)(1)), all obligations of the Company under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.


                                      -9-




                  (d)      If the Company is in default (as defined in section
3(x)(1) of the Federal Deposit Insurance Act), all obligations under this
Agreement shall terminate as of the date of default, but this Section 12(d)
shall not affect any vested rights of the parties.

                  (e)      All obligations under this Agreement shall be
terminated, except to the extent determined that the continuation of this
Agreement is necessary of the continued operation of the Company:

                           (i)      By the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in 13(c) of the Federal Deposit Insurance Act; or

                           (ii)     By the Director or his or her designee, at
the time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition.

         Any rights of the Employee that have already vested, however, shall not
be affected by such action.

                  (f)      Should any provision of this Agreement give rise to a
discrepancy or conflict with respect to any applicable law or regulation, then
the applicable law or regulation shall control the relevant construction and
operation of this Agreement.

         13.      Non-Solicitation of Employees. Employee agrees that she will,
for so long as she is engaged hereunder, and for a period of three (3) years
after termination of her employment, refrain from recruiting or hiring, or
attempting to recruit or hire, directly or by assisting others, any other
employee of the Company who is employed by the Company or any successor or
affiliate of the Company; provided, however, that the provisions of this Section
13 shall not apply, and shall terminate, upon a termination of the Employee's
employment without cause, pursuant to Section 10(d) hereof, or upon a "change in
control" of the Company, the Bank and/or the Corporation, as defined in, and
contemplated by, Section 3(a)(3) hereof.

         14.      No Mitigation. The Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Employee in any
subsequent employment.

         15.      Successors and Assigns.

                  (a)      This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Company which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Company.


                                      -10-




                  (b) Since the Company is contracting for the unique and
personal skills of the Employee, the Employee shall be precluded from assigning
or delegating her rights or duties hereunder without first obtaining the written
consent of the Company.

         16.      Amendments. No amendments or additions to this Agreement shall
be binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.

         17.      Applicable Law. Except to the extent preempted by Federal law,
the laws of the State of Alabama shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.

         18.      Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

         19.      Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto.

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first hereinabove written.


ATTEST:                                   PENSION & BENEFIT FINANCIAL
                                          SERVICES, INC.



                                      By:
- --------------------------------         --------------------------------------
Secretary                                 J. Malcomb Massey
                                          President and Chief Executive Officer


                                         --------------------------------------
                                         Ruth M. Roper ("Employee")


                                      -11-

EX-10.5.2

                                                                  EXHIBIT 10.5.2

EXECUTION COPY

                           FIRST FEDERAL OF THE SOUTH

                        GUARANTY OF EMPLOYMENT AGREEMENT

                                 OCTOBER 1, 2000

                                 (RUTH M. ROPER)

                  THIS AGREEMENT to guarantee and provide certain payments and
obligations under an employment agreement (the "Guaranty") is entered into, as
of the first day of October, 2000 (the "Effective Date"), by and among
SouthFirst Bancshares, Inc. ("SouthFirst'), First Federal of the South (the
"Bank"), Pension & Benefit Financial Services, Inc., f/k/a "Benefit Financial
Services, Inc.," (the "Company") and Ruth M. Roper (the "Employee").

WHEREAS, in April, 1997, the Company was acquired by SouthFirst, the sole
shareholder of the Bank; and

WHEREAS, upon the grant of limited trust powers from the Office of Thrift
Supervision to the Bank, on September 9, 1998, to be exercised by and through
the Company, as the operating subsidiary of the Bank, SouthFirst, in September,
1998, transferred the ownership of the Company to the Bank; and

WHEREAS, upon such transfer, the Company became the wholly-owned operating
subsidiary of the Bank; and

WHEREAS, the Employee is Executive Vice President of the Company, a position she
has held since she joined the Company in 1997, immediately following the
acquisition by the Company of substantially all of the assets of Lambert,
Massey, Roper & Taylor, Inc., an employee benefits consulting firm based in
Montgomery, Alabama, for which the Employee had served as an employee and
executive officer since 1983; and

WHEREAS, the Company and the Employee, in April, 1997, entered into that certain
employment agreement, which was amended and restated as of October 1, 2000 (the
"Employment Agreement"); and

WHEREAS, it was the intent of the parties hereto, to provide assurances to the
Employee regarding the performance of each obligation of the Company provided
for, and specified in, the Employment Agreement.

                  NOW, THEREFORE, it is AGREED as follows:

         1.       SouthFirst and the Bank hereby agree that, to the extent
permitted by law, and subject to the terms and conditions of the Employment
Agreement, each of them shall be jointly and


severally liable, with each other and with the Company, for the payment of all
amounts due to the Employee under the Employment Agreement and for the
performance of all obligations of the Company to, or on behalf of, the Employee
under the Employment Agreement.

         2.       In the event that any dispute arises between the Employee and
the Bank and/or SouthFirst, as to the terms or interpretation of this Guaranty,
whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Guaranty or to
defend against any action taken by the Bank and/or SouthFirst, the Employee
shall be reimbursed for all costs and expenses, including reasonable attorneys'
fees, arising from such dispute, proceedings or actions, provided that the
Employee shall have obtained a final judgement by a court of competent
jurisdiction in favor of the Employee. Such reimbursement shall be paid within
ten (10) days of Employee's furnishing to the Bank and/or SouthFirst appropriate
written evidence of any costs or expenses incurred by the Employee, which
evidence may be in the form, among other things, of a canceled check or receipt.

         3.       This Guaranty shall inure to the benefit of, and be binding
upon, any successor of the Bank and/or SouthFirst which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank and/or SouthFirst.

         4.       No amendments or additions to this Guaranty shall be binding
unless made in writing and signed by each of the parties.

         5.       The laws of the State of Alabama shall govern this Guaranty in
all respects, whether as to its validity, construction, capacity, performance or
otherwise.

         6.       The provisions of this Guaranty shall be deemed severable and
the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof.

         7.       This Guaranty, together with any understanding or
modifications thereof, as agreed to in writing by the parties, shall constitute
the entire agreement between the parties with respect to subject thereof.
Further, should any provision of this Guaranty give rise to a discrepancy or
conflict with respect to any applicable law or regulation, then the applicable
law or regulation shall control the relevant construction and operation of this
Guaranty.



                            [EXECUTION PAGE FOLLOWS]


                                        2


                  IN WITNESS WHEREOF, the parties have executed this Guaranty,
as of the day and year first hereinabove written.


ATTEST:                               "SouthFirst"
                                      SOUTHFIRST BANCSHARES, INC.



                                      BY:
- -------------------------------          --------------------------------------
Secretary                                Its:
                                             ----------------------------------


ATTEST:                               "Bank"
                                      FIRST FEDERAL OF THE SOUTH



                                      BY:
- -------------------------------          --------------------------------------
Secretary                                Its:
                                             ----------------------------------


ATTEST:                               "Company"
                                      PENSION & BENEFIT FINANCIAL
                                      SERVICES, INC.



                                      BY:
- -------------------------------          --------------------------------------
Secretary                                Its:
                                             ----------------------------------


WITNESS:                              "Employee"
                                      RUTH M. ROPER



- -------------------------------       -----------------------------------------
                                      Ruth M. Roper


                                        3

EX-10.6

                                                                    EXHIBIT 10.6

                                 EXECUTION COPY
                                 --------------
                                (August 31, 2001)


                SEVERANCE, RELEASE AND STOCK REDEMPTION AGREEMENT

         This Severance, Release and Stock Redemption Agreement (this
"Agreement") is made and entered into as of the 31st day of August, 2001, by and
among Donald C. Stroup (the "Executive"), SouthFirst Bancshares, Inc. (the
"Company") and First Federal of the South (the "Bank") (the Company and each its
subsidiaries, including the Bank, collectively referred to herein as the
"SouthFirst Entities").

                              W I T N E S S E T H:
                               - - - - - - - - - -

         WHEREAS, Executive has heretofore been employed as the President and
Chief Executive Officer of each of the Company and the Bank; and

         WHEREAS, the Company, the Bank and Executive have agreed it is in their
mutual best interests that Executive resign from all positions held with the
Company and its affiliates, on the terms set forth herein, effective as of the
date hereof (the "Termination Date").

         NOW, THEREFORE, for and in consideration of the above premises, the
mutual covenants and agreements hereinafter set forth and other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties hereto covenant and agree as follows:

         1.       Termination of Employment.

         (a)      Executive hereby resigns, effective as of the Termination
Date, all positions he holds as an employee of the Company and the Bank.

         (b)      The Employment Agreement (the "Company Employment Agreement")
entered into by and between the Company and Executive, dated as of October 1,
2000, is hereby terminated and shall no longer be of any force or effect.

         (c)      The Employment Agreement (the "Bank Employment Agreement")
entered into by and between the Bank and Executive, dated as of October 1, 2000,
is hereby terminated and shall no longer be of any force or effect.

         (d)      Notwithstanding anything to the contrary contained herein, the
Deferred Compensation Agreement entered into by and between the Bank and
Executive, dated as of November 16, 1994, shall continue in effect on and after
the date hereof.





         2.       Resignation from Board of Directors.

         Executive hereby resigns, effective as of the Termination Date, from
the Board of Directors of each of the Company and the Bank and of any other
Board of Directors of any affiliate of the Company of which Executive is a
member.

         3.       Payments.

         (a)      Stock Redemption.

                  1.       Purchase Price. The Company agrees to purchase from
         Executive, and Executive agrees to sell, assign, transfer and deliver
         to the Company 44,942 shares of common stock of the Company owned by
         Executive (the "Subject Shares"), for an aggregate cash purchase price
         equal to the sum of (i) $150,000 and (ii) the product of (x) the most
         recent closing price of the Company's common stock as of the Closing
         Date, as reported by the American Stock Exchange, and (y) 44,942.

                  2.       Closing. The closing of the stock redemption provided
         for herein (the "Closing") shall take place at the offices of the
         Company at 126 North Norton Avenue, Sylacauga, Alabama, beginning at
         10:00 a.m. on September 14, 2001 (the "Closing Date"), or at such other
         time and place mutually agreed upon by Executive and the Company prior
         to September 14, 2001.

                  3.       Representations and Warranties of Executive;
         Indemnification. Executive hereby represents and warrants that
         Executive owns the Subject Shares free and clear of all liens,
         encumbrances, equities, restrictions, claims and obligations of every
         kind and character whatsoever. Executive covenants and agrees to defend
         his title to the Subject Shares against any and all claims and agrees
         to indemnify, defend and hold harmless the Company and its officers,
         directors, employees and shareholders and their respective
         representatives, successors and assigns from and against any and all
         losses, damages, claims, demands, liabilities and obligations
         resulting, or alleged to result from, any breach of the foregoing
         representations and warranties or any claims or demands which if proven
         would result in a breach of the foregoing representations and
         warranties. The foregoing representations and warranties shall survive
         the Closing.

                  4.       Stock Certificates. At the Closing, Executive shall
         deliver the certificate(s) evidencing the Subject Shares to the Company
         duly endorsed or accompanied by a duly executed stock power.

                  5.       Additional Stock Redemption. The Company agrees to
         purchase from Executive, and Executive agrees to sell, assign, transfer
         and deliver to the Company, as soon as practicable following September
         30, 2001, those shares of common stock of the Company credited to the
         401(k) plan of Executive for the Company's fiscal year ended September
         30, 2001, at a per share price equal to the


                                       2




         most recent closing price of the Company's common stock as of the
         closing date of such purchase and sale, as reported by the American
         Stock Exchange

         (b)      Legal Fees. The Company shall pay to Executive's counsel a
cash amount equal to the lesser of (x) the amount of all legal fees and expenses
incurred by Executive during the period from July 15, 2001 through the date of
this Agreement in connection with his employment with the Company and the Bank;
or (y) $10,000. The Company shall make such payment to Executive's counsel not
later than the tenth business day following the receipt by the Company from
Executive of a copy of one or more invoices for such legal services.

         (c)      Dividend Incentive Plan. The Company agrees to waive any right
to reimbursement from Executive of any amounts paid to Executive pursuant to the
Company's Dividend Incentive Plan; provided, however, that the maximum amount
waived by the Company pursuant to this Subsection (c) shall be $22,500.

         (d)      Company Automobile. The Company shall cause title to the
automobile presently being provided by the Company for Executive's use to be
transferred to Executive.

         (e)      Full Settlement. The payments to be made by the Company to
Executive pursuant to this Section 3 shall be exclusive and in lieu of any other
compensation, benefits, severance pay or other remuneration or claims arising in
connection with Executive's employment relationship with the Company or the Bank
or the termination of either such relationship.

         4.       Confidentiality.

         (a)      Executive agrees that Executive will hold in a fiduciary
capacity for the benefit of the SouthFirst Entities, and shall not directly or
indirectly use or disclose, except as authorized by the Company in writing, as
required by law or at the request of any regulatory agency, any Confidential
Information, as defined hereinafter, that Executive may have acquired (whether
or not developed or compiled by Executive and whether or not Executive was
authorized to have access to such Confidential Information) during the term of
the Executive's employment with the Company or the Bank. The term "Confidential
Information" as used in this Agreement shall mean and include any information,
data and know-how relating to the business of any of the SouthFirst Entities
that is disclosed to Executive or known by him as a result of his relationship
with the Company or the Bank and not generally within the public domain (whether
constituting a trade secret or not), including without limitation, the following
information:

                  (i)      financial information, such as earning, assets,
         debts, prices, fee structure, volumes of purchases or sales or other
         financial data, relating to any SouthFirst Entity generally, or to
         particular products, services, geographic areas, or time periods;

                  (ii)     supply and service information, such as information
         concerning the goods and services utilized or purchased by any
         SouthFirst Entity, the names and addresses of suppliers, terms of
         supply or service contracts, or of particular transactions, or related
         information about potential suppliers, to the extent that


                                       3




         such information is not generally known to the public, and to the
         extent that the combination of suppliers or use of a particular
         supplier, though generally known or available, yields advantages to any
         SouthFirst Entity the details of which are not generally known;

                  (iii)    marketing information, such as details about ongoing
         or proposed marketing programs or agreements by or on behalf of any
         SouthFirst Entities, marketing forecasts or results of marketing
         efforts or information about impending transactions;

                  (iv)     personnel information, such as employees' personal or
         medical histories, compensation or other terms of employment, actual or
         proposed promotions, hiring, resignations, disciplinary actions,
         terminations or reasons therefor, training methods, performance, or
         other personnel information;

                  (v)      customer information, such as any compilation of
         past, existing or prospective customers, customer proposals or
         agreements between customers any SouthFirst Entity, status of customer
         accounts or credit, or related information about actual or prospective
         customers; and

                  (vi)     plans, processes, tools, mechanisms, compounds,
         technology and know-how used or useful to any SouthFirst Entity in the
         conduct of its business.

         The term "Confidential Information" does not include information that
has become generally available to the public by the act of one who has the right
to disclose such information without violating any right of any SouthFirst
Entity or the customer to which such information pertains.

         (b)      The covenant contained in this Section 4 shall survive the
Termination Date for a period of 12 months; provided, however, that with respect
to those items of Confidential Information which constitute a trade secret under
applicable law, the Executive's obligations of confidentiality and
non-disclosure as set forth in this Section 4 shall continue to survive after
said 12 month period to the greatest extent permitted by applicable law. These
rights of the Company and the Bank are in addition to those rights the Company
and the Bank have under the common law or applicable statutes for the protection
of trade secrets.

         5.       Non-Solicitation of Employees.

         Executive agrees that he will for a period of 12 months following the
Termination Date, refrain from recruiting or hiring, or attempting to recruit or
hire, directly or by assisting others, any employee of any SouthFirst Entity.

         6.       Non-Solicitation of Customers.

         Executive agrees that he will not take any customer lists of any
SouthFirst Entity and that he will, for a period of 12 months following the
Termination Date, refrain from soliciting or


                                       4




attempting to solicit directly or by assisting others, any business from the
customers of any SouthFirst Entity, including actively sought prospective
customers, with whom the Executive had material contact during his employment
for purposes of providing banking services or other products or services
competitive with those sold or provided by any SouthFirst Entity if any
SouthFirst Entity is then still engaged in such business. This restriction shall
apply only to the geographical areas in which Executive has had material contact
with customers.

         7.       Material Contact.

         For the purposes of this Agreement, "material contact" exists between
Executive and each customer or potential customer: (i) with whom Executive
dealt; (ii) whose dealings with a SouthFirst Entity were coordinated or
supervised by Executive; or (iii) about whom Executive obtained confidential
information in the ordinary course of business as a result of Executive's
association with the Company or the Bank.

         8.       Tolling of Period of Restraint.

         Executive hereby expressly agrees that any violation of the restraints
set forth in Sections 4 through 6 shall automatically toll and suspend the
period of the restraint for the amount of time that the violation continues.

         9.       Acknowledgments.

         The Executive hereby acknowledges and agrees that the restrictions
contained in Sections 4 through 6 are fair and reasonable and necessary for the
protection of the legitimate business interests of the Company. Executive
acknowledges that the Executive will be able to earn a livelihood without
violating the restrictions contained in Sections 4 through 6.

         10.      Rights to Materials.

         All records, files, memoranda, reports, price lists, customer lists,
drawings, plans, sketches, documents and the like (together with all copies
thereof) relating to the business of any SouthFirst Entity, which Executive
shall have used or prepared or come in contact with in the course of, or as a
result of, his employment shall, as between the parties hereto, remain the sole
property of such SouthFirst Entity. Upon the termination of his employment or
upon the prior demand of the Company, the Executive shall immediately return all
such materials and shall not thereafter cause removal thereof from the premises
of any SouthFirst Entity.

         11.      Non-Disparagement; Required Assistance.

         (a)      Executive will not make any statements or take any actions
that reasonably could be expected to damage the reputation or business of any
SouthFirst Entity, including, without limitation, any action or statement which
may induce any customers to cease doing business with any SouthFirst Entity. The
Company


                                       5




and the Bank agree not to make any statements or take any actions that
reasonably could be expected to damage the reputation of Executive. The Company
and the Bank agree, in the event either receives inquiries about Executive from
third parties, that the Company and the Bank will provide only a neutral
reference which will consist of the confirmation of the fact and dates of
Executive's prior employment, the positions which he held, and his job duties
and responsibilities. Notwithstanding anything to the contrary contained herein,
no party hereto shall be prohibited from providing any information as required
by law or at the request of any regulatory agency.

         (b)      Executive hereby agrees that, Executive, upon the reasonable
request of the Company, will provide assistance to the Company with respect to
corporate and regulatory matters in which he was involved or which he was
responsible, including required communications and disclosures to existing or
prospective shareholders of the Company.

         12.      Withholding.

         Notwithstanding any other term or provision of this Agreement, all
amounts payable by the Company hereunder shall be subject to withholding of such
sums related to taxes as the Company may reasonably determine it should withhold
pursuant to applicable law or regulation.

         13.      Release.

         The Executive, for himself, his successors and assigns, does hereby,
now and forever, fully and finally release, acquit and discharge the Company and
the Bank and their respective agents, employees, affiliated companies,
subsidiaries, successors and assigns, and all other persons who are or might be
liable, from all past, present and future claims of any kind or character, and
all liability now accrued or hereafter to accrue, which the Executive has or
might have against them or any of them, on account of or because of, all
damages, claims, causes of action, demands and/or losses which relate in any way
whatsoever to the Executive's employment with the Company or the Bank or the
termination thereof, including, but not limited to, pursuant to the Bank
Employment Agreement and the Company Employment Agreement. It is further
understood and agreed that this Agreement is intended to be a total accord,
settlement and satisfaction of any and all claims which Executive has or may
have had against any released party, including, but not limited to, any and all
claims arising under the Age Discrimination Employment Act, 29 U.S.C. ss. 621,
et. seq., Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss. 2000(e), et.
seq., the Civil Rights Act of 1991, or any other applicable state or federal
laws. The Executive acknowledges that the execution of this Agreement, including
the general release set forth above, is knowing and voluntary and that Executive
understands this Agreement, including the general release. Executive further
acknowledges that he does not waive rights or claims that may arise after the
date this Agreement is executed and that claims waived and released by this
Agreement have been so waived and released in exchange for consideration in
addition to anything of value to which Executive is already entitled. Further,
Executive acknowledges that he has been advised to consult with an attorney
prior to executing this Agreement and that he has in fact had an opportunity to
consult with an attorney with respect to the terms of this Agreement, including
the general release set forth above. Executive covenants never to file any
lawsuit or claim, or permit to be prosecuted any lawsuit or claim, that is
released by this Agreement. If Executive violates this covenant, Executive
agrees to pay all costs incurred by the Company or the Bank or any affiliated or
related parties or the directors or


                                       6




employees of any of them, including reasonable attorneys' fees in defending
against any such claim.

         14.      Severability.

         Except as noted below, should any provision of this Agreement be
declared or determined by any court of competent jurisdiction to be
unenforceable or invalid for any reason, the validity of the remaining parts,
terms or provisions of this Agreement shall not be affected thereby and the
invalid or unenforceable part, term or provision shall be deemed not to be a
part of this Agreement. The covenants set forth in this Agreement are to be
reformed pursuant to Section 16 if held to be unreasonable or enforceable, in
whole or in part, and, as written and as reformed, shall be deemed to be part of
this Agreement.

         15.      Reformation.

         If any of the covenants or promises of this Agreement are determined by
any court of law or equity, with jurisdiction over this matter, to be
unreasonable or unenforceable, in whole or in part, as written, Executive hereby
consents to and affirmatively requests that said court reform the covenant or
promise so as to be reasonable and enforceable and that said court enforce the
covenant or promise as so reformed.

         16.      Injunctive Relief.

         Executive understands, acknowledges and agrees that in the event of a
breach or threatened breach of any of the covenants and promises contained in
Sections 4, 5, 6, 10 or 11, the Company will suffer irreparable injury for which
there is no adequate remedy at law and the Company will therefore be entitled to
injunctive relief enjoining said breach or threatened breach. The Executive
further acknowledges, however, that the Company shall have the right to seek a
remedy at law as well as or in lieu of equitable relief in the event of any such
breach.

         17.      Confidentiality of Terms of this Agreement.

         The existence and terms of this Agreement, and all negotiations
relating thereto, shall be kept confidential by the parties hereto and shall not
be disclosed by the parties hereto to any other person or entity. This
confidentiality provision shall not prohibit any party hereto from reporting or
disclosing information (i) as may be required by law or regulation; (ii) upon
the request of any governmental regulatory agency; or (iii) in response to a
valid and enforceable subpoena.

         18.      Assignment.

         The terms and provisions of this Agreement shall inure to the benefit
of and be binding upon the Company and the Bank and their respective successors
and assigns, and upon the Executive and his heirs and personal representatives.


                                       7




         19.      Waiver.

         The waiver by any party to this Agreement of a breach of any of the
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent or simultaneous breach.

         20.      Applicable Law.

         This Agreement has been entered into in and shall be governed by and
construed under the laws of the State of Alabama.

         21.      Headings and Captions.

         The headings and captions used in this Agreement are for convenience of
reference only, and shall in no way define, limit, expand or otherwise affect
the meaning or construction of any provision of this Agreement.

         22.      Notice.

         Any notice required or permitted to be given pursuant to this Agreement
shall be deemed sufficiently given when delivered in person or when deposited in
the United States mail, first class postage prepaid to the address set forth on
the signature page below or to such other address as a party may have designated
with respect to himself or itself by notice given in conformity with this
section.

         23.      Gender.

         All pronouns or any variations thereof contained in this Agreement
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.

         24.      Attorney's Fees.

         If any party to this Agreement breaches any of the terms of this
Agreement, then that party shall pay to the non-defaulting party all of the
non-defaulting party's costs and expenses, including attorney's fees, incurred
by that party in enforcing the terms of this Agreement.

         25.      Entire Agreement.

         This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter of this Agreement and supersedes any
prior agreements or understandings between the parties hereto with respect to
such subject matter. No amendment or waiver of this Agreement or any provision
hereof shall be effective unless in writing signed by each of the parties.


                                       8





         IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement or caused this Agreement to be executed, as of the day and year first
above written.


                                           "COMPANY"

                                           /s/ Allen G. McMillan, III
                                           -------------------------------------
                                           Allen G. McMillan, III
                                           Chairman


                                           "BANK"

                                           /s/ Joe K. McArthur
                                           -------------------------------------
                                           Joe K. McArthur
                                           Chief Financial Officer



                                           "EXECUTIVE"

                                           /s/ Donald C. Stroup
                                           -------------------------------------
                                           Donald C. Stroup



                                       9

EX-10.11.2

                                                                EXHIBIT 10.11.2

                             THIRD AMENDMENT TO THE
                           SOUTHFIRST BANCSHARES, INC.
                          EMPLOYEE STOCK OWNERSHIP PLAN

         This is the Third Amendment to the SouthFirst Bancshares, Inc. Employee
Stock Ownership Plan (the "Plan"), which was adopted effective October 1, 1994,
and subsequently amended effective October 1, 1994.

         Pursuant to Section 11.1 of the Plan, SouthFirst Bancshares, Inc. (the
"Company") has reserved unto itself, by action of its Board of Directors, the
right to amend the Plan. Accordingly, the Company hereby amends the Plan in the
following particulars, effective as of August 29, 2001, unless otherwise
specified herein.

                                       1.

         Section 6.4 of the Plan is amended by deleting Section 6.4 in its
entirety and replacing Section 6.4 as follows:

         6.4   Other Termination of Employment. If a Participant's employment
terminates otherwise than by his death, retirement or disability and the
Participant is not re-employed by an Employer, the Participant will receive a
lump sum distribution of the vested portion of his Account as soon as
administratively feasible after his date of termination unless the Participant
elects a later distribution. Notwithstanding the preceding sentence, if the fair
market value of a Participant's Account attributable to Qualifying Employer
Securities is in excess of $500,000 (multiplied by the Adjustment Factor as
prescribed by the Secretary of the Treasury) as of the date distribution is
required to begin under this Section, distributions shall be made in
substantially equal annual payments over a period not longer than five (5) years
plus an additional one (1) year (up to an additional five (5) years) for each
$100,000 increment, or fraction of such increment, by which the value of the
participant's Account exceeds $500,000. All such distributions shall be made in
accordance with Sections 6.8,6.9, and 6.10, except as specifically noted to the
contrary herein.

         If a Participant separates from service for a reason other than
retirement, death or disability and is re-employed by an Employer prior to the
end of a period of five (5) consecutive one (1) year Breaks in Service, he will
become eligible to receive a distribution in accordance with terms of the Plan
after he separates from service following his date of rehire.


         If the value of a Participant's vested Account is zero on the date he
terminates employment, then the Participant shall be deemed to have received a
total distribution of the vested portion of his Account on such date.

         All other parts of the Plan not inconsistent herewith are hereby
ratified and confirmed.

         IN WITNESS WHEREOF, the Plan Sponsor has caused this Third Amendment to
be executed and its seal affixed by its duly authorized officers as of the 29th
day of September, 2001.



(CORPORATE SEAL)                    COMPANY:

ATTEST:                             SOUTHFIRST BANCSHARES, INC.



By: /s/ J. Malcomb Massy                   By: /s/ Joe K. McArthur
    ---------------------------                --------------------------------
    Duly Authorized Officer                Duly Authorized Officer

EX-10.14

                                                                   EXHIBIT 10.14


                         DEFERRED COMPENSATION AGREEMENT

         This Agreement, entered into this 11th day of April, 1997, by and
between Benefit Financial Services, Inc., an Alabama corporation (hereafter
referred to as the "Company") and Ruth M. Roper (hereafter referred to as the
"Employee").

                             W I T N E S S E T H :

         WHEREAS, the Employee has been employed by Pension & Benefit Financial
Services, Inc. ("Pension Benefit") and has discharged her duties in a capable
and efficient manner to the benefit of Pension Benefit; and

         WHEREAS, it is the desire of the Company to retain the services of the
Employee; and

         WHEREAS, the Employee is willing to provide such services to the
Company, provided that the Company agrees to provide certain benefits
hereinafter described, and in accordance with the terms and conditions
hereinafter set forth;

         NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, as well as other good and valuable consideration it is agreed
as follows:

         1.       DEFERRED COMPENSATION.

                  (a)      The Company hereby agrees that, in addition to the
annual salary and other benefits payable to the Employee during the term of her
employment with the Company pursuant to that certain Employment Agreement
between the Employee and the Company dated April 11, 1997, the Company will
provide to the Employee, as deferred compensation, payable in monthly
installments, beginning upon the earlier of age sixty-five (65) or the
Employee's death, as provided in Section 2, below, an annual amount equal to
Thirty Thousand Dollars ($30,000) per year for fifteen (15) years, the payments
of which, if not made by the Company, shall be made by SouthFirst Bancshares,
Inc., the sole shareholder of the Company.

                  (b)      Vesting of Deferred Compensation Amount.

                  At the time of termination of employment, for any reason, the
Employee shall be fully vested in, and entitled to, the amount of deferred
compensation hereunder this Agreement.

                  (c)      Death of Employee.

                  If the termination of the employment of the Employee is due to
the death of the Employee, then the benefits otherwise payable hereunder at age
sixty-five (65), shall be payable commencing upon said death of the Employee, to
the designated beneficiary of the Employee.





                  (d)      Beneficiary Designation.

                  Employee shall have the right to designate a beneficiary to
receive any amount coming due on account of the death of the Employee, and may,
from time to time, change such designation provided such changes are in writing,
filed with, and in a form acceptable to, the Company. In the absence of an
effective designation of beneficiary, any amounts becoming due and payable upon
the death of the Employee shall be payable to her duly qualified executor or
administrator.

         2.       COMMENCEMENT OF DISTRIBUTION.

         The Employee, or the Employee's duly designated beneficiary (or
qualified executor or administrator), shall receive distributions beginning on
the first day of the first month following the earlier to occur of:

                  (a)      The attainment of age sixty-five (65) by Employee, if
Employee is no longer in the employ of the Company;

                  (b)      The termination of employment of the Employee by the
Company, if subsequent to age sixty-five (65); or

                  (c)      the death of the Employee.

         3.       AMOUNT OF BENEFITS.

         Starting with the first month for which the Employee (or the Employee's
duly designated beneficiary or personal representative) is entitled to payment
hereunder, the Employee (or such beneficiary or representative) shall receive in
monthly installments, the annual amount computed under Section 1(a) above.

         4.       ALIENATION.

         It is agreed that the rights of the Employee or any beneficiary under
this Agreement are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment or garnishment by
creditors of the Employee or the Employee's beneficiary or personal
representative, and in the event of any attempted assignment or transfer, the
Company shall have no further liability hereunder.

         5.       NO TRUST.

         Nothing contained in this Agreement and no action taken pursuant to the
provisions of this Agreement shall create or be construed to create a trust of
any kind, or a fiduciary relationship between the Employer and the Employee, her
designated beneficiary or any other person.


                                       2





         6.       FUNDING.

                  (a)      The Company's obligation under this Agreement shall
be an unfunded and unsecured promise to pay. The Company shall not be obligated
under any circumstances to fund its obligations under this Agreement. The
Company may, however, at its sole and exclusive option, informally fund this
Agreement in whole or in part.

                  (b)      If the Company shall determine to informally fund
this Agreement, in whole or in part, the manner of such informal funding, and
the continuance or discontinuance or such informal funding shall be the sole and
exclusive decision of the Company.

                  (c)      If the Company shall determine to informally fund
this Agreement, in whole or in part, by procuring as owner, life insurance for
its own behalf on the life of the Employee, the form of such insurance and the
amounts shall be the sole and exclusive decision of the Company. The Employee
hereby agrees to submit to medical examinations, supply such information, and
execute such documents as may be required by the insurance company, or companies
to whom the Company may have applied for such insurance if the Company shall
determine to informally fund this Agreement with life insurance.

         7.       EMPLOYEE RIGHT TO ASSETS.

         The rights of the Employee, any designated beneficiary of the Employee,
or any other person claiming through the Employee under this Agreement, shall be
solely those of an unsecured general creditor of the Company. The Employee, the
designated beneficiary of the Employee, or any other person claiming through the
Employee, shall only have the right to receive from the Company those payments
specified under this Agreement. The Employee agrees that she, her designated
beneficiary, and any other person claiming through shall have no rights or
interests whatsoever in any asset of the Company, including any insurance
policies or contracts which the Company may possess or obtain to informally fund
this Agreement. Any assets used or acquired by, the Company in connection with
its contingent liabilities arising under this Agreement shall not be deemed to
be held under any trust for the benefit of the Employee or the Employee's
beneficiaries. Nor shall any such assets be considered security for the
performance of the obligations of the Company. Such assets shall be, and remain,
general and unrestricted assets of the Company.

         8.       NO ASSIGNMENT.

         The rights of the Employee or of any other person to the payment of any
benefits under this Agreement may not be assigned, transferred, pledged or
encumbered except by Will or by the law of descent and distribution.

         9.       INCAPACITY OF BENEFICIARY.

         If the Company shall find that any person to whom any payment is
payable under this Agreement is unable to care for her affairs because of
illness or accident or is a minor, any payment due (unless a prior claim
therefor shall have been made by a duly appointed guardian or other legal
representative) may be paid to the spouse, a child, a parent, or a brother or
sister, or to any person deemed by the Company to have incurred expense for such
person or otherwise entitled to payment. In accordance with the applicable
provisions of paragraph 3 above or, with respect to a minor, to a custodian
selected by Company under the Alabama Uniform Transfers to Minors Act or any
statute of similar import. Any such payment shall be a complete discharge of the
liabilities of Company under this Agreement.


                                       3





         10.      EMPLOYMENT RIGHTS.

         This Agreement shall not be deemed to create a contract of employment
between the Employee and shall create no right in the Employee to continue in
the Company's employ for any specific period of time, or to create any other
rights in the Employee or obligations on the part of the Company, except as are
set forth in this Agreement. This Agreement in no way restricts the right of the
Company to terminate the Employee with or without cause and in no way restricts
the right of the Employee to terminate her employment.

         11.      TAX, ETC. TREATMENT.

         Any deferred compensation payable under this Agreement shall not be
deemed salary and shall not be included in the Employee's taxable income under
Federal or state law until it is actually received by the Employee.

         12.      BINDING EFFECT.

         This Agreement shall be binding upon and inure to the benefit of the
Company, its successors and assigns and the Employee, her heirs, executors,
administrators, and legal representatives.

         13.      GOVERNING LAW.

         This Agreement shall be construed in accordance with and governed by
the laws of the State of Alabama.

         14.      ACCELERATION OF PAYMENTS.

         The Company reserves the right to accelerate the payment of any
benefits payable under this Agreement without the consent of the Employee, her
estate, her designated recipients, or any other person claiming through the
Employee.

         15.      LEAVES OF ABSENCE.

         The Company may, in its sole discretion and in writing, permit the
Employee to take a leave of absence for a period not to exceed one year. During
such leave, the Employee will still be considered to be in the continuous
employment of the Company for purposes of this Agreement.


                                       4





         16.      INTENT OF PARTIES.

         It is intended and understood by the parties hereto that this Agreement
complies with the provisions of the Internal Revenue Code and Regulations in
effect at the time of its execution. If, at a later date, the laws of the United
States or the State of Alabama are construed in such a way as to make this
Agreement void and of no effect, this Agreement will be given effect in such
manner as will best carry out the purposes and intentions of the parties.

         IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officers and the Employee hereunto has set her
hand and seal as of the date first above written.

ATTEST:                                BENEFIT FINANCIAL SERVICES, INC.



/s/ Joe K. McArthur                       By: /s/ Donald C. Stroup
- --------------------------------          --------------------------------------
Secretary                                 President and Chief Executive Officer

                                          /s/ Ruth M. Roper
                                          --------------------------------------
                                          Ruth M. Roper ("Employee")


With Respect to Section 1(a) Only:

SOUTHFIRST BANCSHARES, INC.



By:/s/ Donald C. Stroup
   -------------------------------------
   President and Chief Executive Officer


                                       5

EX-11

                                   EXHIBIT 11

              Statement Regarding Computation of Per Share Earnings


Basic



                                                      Year Ended September 30,
                                           --------------------------------------------
                                             2001              2000             1999
                                           ---------         --------        ----------
                                                                    
Weighted average outstanding shares          903,849          908,020           903,460
Net income (loss)                          $(422,093)        $961,492        $1,299,999
Net income (loss) per common share         $    (.47)        $   1.06        $     1.44




Diluted



                                                      Year Ended September 30,
                                           --------------------------------------------
                                             2001              2000             1999
                                           ---------         --------        ----------
                                                                    
Weighted average outstanding shares          907,765          908,020           903,460
Net income (loss)                          $(422,093)        $961,492        $1,299,999

Net income (loss) per common share         $     .46         $   1.06        $     1.44

EX-21

                                   EXHIBIT 21

                         Subsidiaries of the Registrant


1.       First Federal of the South (federally chartered stock savings
         association), organized under the laws of the United States of America

2.       Magnolia Title Services, Inc. (title insurance and related services)
         (50% ownership interest), organized under the laws of the State of
         Alabama

3.       SouthFirst Financial Services, Inc. (insurance products and financial
         services), organized under the laws of the State of Alabama

4.       SouthFirst Mortgage, Inc. (residential construction lending), organized
         under the laws of the State of Alabama

EX-23.1

                                  EXHIBIT 23.1

           Consent of Jones & Kirkpatrick, P.C., Independent Auditors


We consent to the incorporation by reference in the Registration Statements
(Nos. 333-4534, 333-4536, 333-4538, and 333-85705) on Form S-8 of SouthFirst
Bancshares, Inc. of our report dated November 20, 2001, with respect to the
consolidated financial statements of SouthFirst Bancshares, Inc. included in the
Annual Report (Form 10-KSB) for the year ended September 30, 2001.


                                          /s/ Jones & Kirkpatrick, P.C.


Birmingham, Alabama
December 28, 2001

EX-99.1

                                                                    EXHIBIT 99.1



                           SOUTHFIRST BANCSHARES, INC.

                               SYLACAUGA, ALABAMA

                           SEPTEMBER 30, 2001 AND 2000




                           SOUTHFIRST BANCSHARES, INC.

                               SYLACAUGA, ALABAMA

                           SEPTEMBER 30, 2001 AND 2000


                                TABLE OF CONTENTS

                                                              
INDEPENDENT AUDITORS' REPORT....................................    1


FINANCIAL STATEMENTS:

     Consolidated Statements of Financial Condition.............    2

     Consolidated Statements of Operations......................  3-4

     Consolidated Statements of Stockholders' Equity............  5-6

     Consolidated Statements of Cash Flows......................  7-8

     Notes to Consolidated Financial Statements................. 9-43









                          INDEPENDENT AUDITORS' REPORT


November 20, 2001





Board of Directors
SouthFirst Bancshares, Inc.
Sylacauga, Alabama


We have audited the accompanying consolidated statements of financial condition
of SouthFirst Bancshares, Inc. and subsidiaries (the Company) as of September
30, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SouthFirst
Bancshares, Inc. and subsidiaries as of September 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2001, in conformity with accounting principles
generally accepted in the United States of America.




/s/ Jones & Kirkpatrick, P.C.
- -----------------------------
Certified Public Accountants
Birmingham, Alabama




                                                                               9


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes To Consolidated Financial Statements


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         This summary of significant accounting policies of SouthFirst
         Bancshares, Inc. (the "Company") is presented to assist in
         understanding the Company's financial statements. The financial
         statements and notes are representations of the Company's management
         who is responsible for the integrity and objectivity of the financial
         statements. These accounting policies conform to accounting principles
         generally accepted in the United States of America and have been
         consistently applied in the preparation of the financial statements.

         Basis of Presentation - The accompanying consolidated financial
         statements include the accounts of SouthFirst Bancshares, Inc. (the
         Corporation) and its wholly-owned subsidiaries, First Federal of the
         South (the Bank) (a wholly-owned subsidiary of SouthFirst Bancshares,
         Inc.), Pension & Benefit Trust Company (a wholly-owned subsidiary of
         First Federal of the South, which is an employee benefits consulting
         company), SouthFirst Mortgage, Inc. (a wholly-owned subsidiary of First
         Federal of the South) and SouthFirst Financial Services, Inc. (a
         wholly-owned subsidiary of SouthFirst Bancshares, Inc.), collectively
         as the Company. All significant intercompany accounts and transactions
         have been eliminated in consolidation.

         Business - The Company provides a full range of banking services to
         individual and corporate customers in its primary market area of the
         cities of Sylacauga, Clanton, Talladega and Centreville in the state of
         Alabama, and provides lending services in Birmingham and Dothan,
         Alabama. The Company is subject to competition from other financial
         institutions. The Company is subject to the regulations of certain
         federal agencies and undergoes periodic examinations by those
         regulatory authorities.

         Use of Estimates - The accounting principles and reporting policies of
         the Company, and the methods of applying these principles, conform with
         generally accepted accounting principles and with general practice
         within the savings and loan industry. In preparing the financial
         statements, management is required to make estimates and assumptions
         that affect the reported amounts of assets and liabilities as of the
         date of the balance sheet and revenues and expenses for the period.
         Actual results could differ significantly from those estimates.

         Material estimates that are particularly susceptible to significant
         change in the near-term relate to the determination of the allowance
         for loan losses. In connection with the determination of the allowance
         for loan losses, management obtains independent appraisals for
         properties collateralizing significant troubled loans.



                                   (Continued)





                                                                              10


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         Significant Group Concentrations of Credit Risk - A substantial portion
         of the Company's loans are secured by real estate in the Company's
         primary market area. Note 3 discusses the types of lending that the
         Company engages in. The Company does not have any significant
         concentration to any one industry or customer.

         Cash and Cash Equivalents - For purposes of presentation in the
         consolidated statements of cash flows, cash and cash equivalents
         include cash and balances due from other depository institutions.

         Interest-bearing Deposits in Other Financial Institutions -
         Interest-bearing deposits in other financial institutions mature within
         one year and are carried at cost.

         Investment Securities - The Company classifies its investments in one
         of the following three categories: (i) held-to-maturity securities,
         (ii) securities available for sale, and (iii) trading account
         securities. Investment securities held to maturity represent securities
         which management has the intent and ability to hold to maturity. These
         securities are reported at cost adjusted for amortization of premiums
         and accretion of discounts using the interest method. Investment
         securities available for sale represent securities which management may
         decide to sell prior to maturity for liquidity, tax planning or other
         valid business purposes. Available-for-sale securities are reported at
         fair value with any unrealized gains or losses excluded from earnings
         and reflected as a net amount in a separate component of stockholders'
         equity until realized. Trading account securities represent securities
         which management has purchased and is holding principally for the
         purpose of selling in the near term. Trading account securities are
         reported at fair value with any unrealized gains or losses included in
         earnings.

         Declines in fair value of investment securities (available for sale or
         held to maturity) that are considered other than temporary are charged
         to securities losses, reducing the carrying value of such securities.
         Gains or losses on the sale of investment securities are recorded on
         the trade date and are determined using the specific identification
         method and are shown separately in non-interest income in the
         consolidated statements of operations. No securities were classified as
         trading account securities as of September 30, 2001 or 2000.

         The stock of the Federal Home Loan Bank has no quoted fair value and no
         ready market exists. The investment in the stock is required of insured
         institutions that utilize the services of the Federal Home Loan Bank.
         The Federal Home Loan Bank will purchase the stock at its cost basis
         from the Company in the event the Company ceases to utilize the
         services of the Federal Home Loan Bank.


                                   (Continued)




                                                                              11


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         Loans - The Company grants mortgage, commercial and consumer loans to
         customers. A substantial portion of the loan portfolio is represented
         by mortgage loans throughout the Company's primary market area. The
         ability of the Company's debtors to honor their contracts is dependent
         upon the real estate and general economic conditions in this area.

         Loans that management has the intent and ability to hold for the
         foreseeable future or until maturity or pay-off generally are reported
         at their outstanding unpaid principal balances adjusted for
         charge-offs, the allowance for loan losses, and any deferred fees or
         costs on originated loans. Interest income is accrued on the unpaid
         principal balance.

         The accrual of interest on mortgage and commercial loans is
         discontinued at the time the loan is 90 days delinquent unless the
         credit is well-secured and in process of collection. Credit card loans
         and other personal loans are typically charged off no later than 180
         days past due. In all cases, loans are placed on nonaccrual or
         charged-off at an earlier date if collection of principal or interest
         is considered doubtful.

         All interest accrued but not collected for loans that are placed on
         nonaccrual or charged off is reversed against interest income. The
         interest on these loans is accounted for on the cash-basis or
         cost-recovery method, until qualifying for return to accrual. Loans are
         returned to accrual status when all the principal and interest amounts
         contractually due are brought current and future payments are
         reasonably assured.

         Allowance for Loan Losses - The allowance for loan losses is
         established as losses are estimated to have occurred through a
         provision for loan losses charged to earnings. Loan losses are charged
         against the allowance when management believes the uncollectibility of
         a loan balance is confirmed. Subsequent recoveries, if any, are
         credited to the allowance.

         The allowance for loan losses is evaluated on a regular basis by
         management and is based upon management's periodic review of the
         collectibility of the loans in light of historical experience, the
         nature and volume of the loan portfolio, adverse situations that may
         affect the borrower's ability to repay, estimated value of any
         underlying collateral and prevailing economic conditions. This
         evaluation is inherently subjective as it requires estimates that are
         susceptible to significant revision as more information becomes
         available. In addition, various regulatory agencies, as an integral
         part of their examination process, periodically review the Company's
         allowances for loan losses and foreclosed real estate. Such agencies
         may require the Company to recognize additions to the allowances based
         on their judgments about information available to them at the time of
         their examination.


                                   (Continued)




                                                                              12


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         A loan is considered impaired when, based on current information and
         events, it is probable that the Company will be unable to collect the
         scheduled payments of principal or interest when due according to the
         contractual terms of the loan agreement. Factors considered by
         management in determining impairment include payment status, collateral
         value, and the probability of collecting scheduled principal and
         interest payments when due. Loans that experience insignificant payment
         delays and payment shortfalls generally are not classified as impaired.
         Management determines the significance of payment delays and payment
         shortfalls on a case-by-case basis, taking into consideration all of
         the circumstances surrounding the loan and the borrower, including the
         length of the delay, the reasons for the delay, the borrower's prior
         payment record, and the amount of shortfall in relation to the
         principal and interest owed. Impairment is measured on a loan by loan
         basis for commercial and construction loans by either the present value
         of expected future cash flows discounted at the loan's effective
         interest rate, the loan's obtainable market price, or the fair value of
         the collateral if the loan is collateral dependent.

         Loan Origination Fees, Premiums and Discounts on Loans, Mortgage-Backed
         Securities and Collateralized Mortgage Obligations - Loan origination
         fees and certain direct loan origination costs are deferred and
         recognized over the lives of the related loans as an adjustment of the
         loan yields using the interest method. Premiums or discounts on loans,
         mortgage-backed securities, and collateralized mortgage obligations are
         amortized over the estimated lives of the related mortgage loans,
         adjusted for prepayments, using a method approximating the interest
         method. Premiums and discounts on loans, mortgage-backed securities,
         and collateralized mortgage obligations were insignificant at September
         30, 2001.

         Loans Held for Sale - Loans originated and intended for sale in the
         secondary market are carried at the lower of cost or estimated fair
         value in the aggregate. Net unrealized losses, if any, are recognized
         through a valuation allowance by charges to income. Gains or losses on
         loan sales are recognized at the time of sale and are determined by the
         difference between net sales proceed and the carrying value of the
         loans sold.

         Foreclosed Assets - Assets acquired through, or in lieu of, loan
         foreclosure are held for sale and are initially recorded at fair value
         at the date of foreclosure, establishing a new cost basis. Subsequent
         to foreclosure, valuations are periodically performed by management and
         the assets are carried at the lower of carrying amount or fair value
         less cost to sell. Cost related to the development and improvement of
         property are capitalized, where as costs relating to the holding of the
         property are expensed.


                                   (Continued)



                                                                              13


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         Banking Premises and Equipment - Land is carried at cost. Buildings and
         equipment are carried at cost, less accumulated depreciation computed
         on the straight-line method over the estimated useful lives of the
         assets.

         Income Taxes - The Company provides for income taxes based upon pretax
         income, adjusted for permanent differences between reported and taxable
         earnings. Deferred tax assets and liabilities are recognized for the
         future tax consequences attributable to differences between the
         financial statement carrying amounts of existing assets and liabilities
         and their respective tax basis. Deferred tax assets and liabilities are
         measured using enacted tax rates expected to apply to taxable income in
         the years in which those temporary differences are expected to be
         realized or settled. The effect on deferred tax assets and liabilities
         of a change in tax rates is recognized in the period that includes the
         enactment date.

         Advertising - Advertising costs are charged to operations when
         incurred. Advertising expense was $30,987, $35,508 and $25,323 for the
         years ended September 30, 2001, 2000 and 1999, respectively.

         Earnings per Share - Basic earnings per share of common stock has been
         computed on the basis of the weighted-average number of shares of
         common stock outstanding. Fully diluted earnings per share reflects the
         potential dilution that could occur if the Company's outstanding
         options to acquire common stock were exercised. The exercise of these
         options accounts for the differences between basic and diluted weighted
         average shares outstanding. Options on 104,774 shares in 2001 and 2000
         of common stock were not included in computed diluted earnings per
         share because their effects were antidilutive.

         Reclassification - Certain amounts in the financial statements
         presented have been reclassified from amounts previously reported in
         order to be comparable between years. These reclassifications have no
         effect on previously reported stockholders' equity or net income during
         the periods involved.



                                   (Continued)




                                                                              14


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         Comprehensive Income - The Company adopted Statement of Financial
         Accounting Standards ("SFAS") 130, Reporting Comprehensive Income, as
         of October 1, 1998. Accounting principles generally require that
         recognized revenue, expenses, gains and losses be included in net
         income. Although certain changes in assets and liabilities, such as
         unrealized gains and losses on available-for-sale securities, are
         reported as a separate component of the equity section of the balance
         sheet, such items, along with net income, are components of
         comprehensive income. The adoption of SFAS 130 had no effect on the
         corporation's net income or shareholders' equity.

         The components of other comprehensive income and related tax effects
         are as follows:



                                                            2001              2000              1999
                                                           ------            ------            ------
                                                                                     
         Unrealized holding gains (losses) on
            available-for-sale securities arising
            during the period                            $ 1,374,640         $ 18,185         $  (885,720)

         Reclassification adjustment for losses
            (gains) realized in income                        (4,267)           4,199          (2,402,639)
                                                         -----------         --------         -----------

         Net unrealized gains (losses)                     1,370,373           22,384          (3,288,359)

           Tax effect                                       (520,742)          (8,509)          1,249,577
                                                         -----------         --------         -----------

         Net-of-tax amount                               $   849,631         $ 13,875         $(2,038,782)
                                                         ===========         ========         ===========



         New Accounting Pronouncements - In June 1998, the Financial Accounting
         Standards Board ("FASB") issued Statement of Financial Accounting
         Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
         Hedging Activities. This Statement establishes accounting and reporting
         standards for derivative instruments embedded in other contracts
         (collectively referred to as derivatives) and for hedging activities.
         It requires that an entity recognize all derivatives as either assets
         or liabilities in the statement of financial condition and measure
         those instruments at fair value. Under certain conditions, a derivative
         may be specifically designated as a hedge.


                                   (Continued)




                                                                              15


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         On October 1, 2000, the Company adopted SFAS No. 133 as amended.
         Management assessed the impact of this Statement on the Company's
         consolidated financial position and results of operations and the
         impact was immaterial.

         In September 2000, the FASB issued SFAS No. 140, Accounting for
         Transfers and Servicing of Financial Assets and Extinguishment of
         Liabilities, a replacement of FASB Statement No. 125. This Statement
         revises the standards for accounting for securitizations and other
         transfers of financial assets and collateral, and requires certain
         disclosures. The Statement is effective for transfers and servicing of
         financial assets and extinguishments of liabilities occurring after
         March 31, 2001. The Company adopted SFAS No. 140 on April 1, 2001.
         Accordingly, disclosures pertaining to collateral have been properly
         included in these consolidated financial statements. Transfers and
         servicing of financial assets and extinguishments of liabilities
         occurring after March 31, 2001, have not been material.

         In June 2001, the FASB issued SFAS No. 141, Business Combinations, SFAS
         No. 142, Goodwill and Other Intangible Assets, and SFAS No. 143,
         Accounting for Asset Retirement Obligations. SFAS No. 141 requires that
         the purchase method of accounting be used for all business combinations
         initiated after June 30, 2001. SFAS No. 142 will require that goodwill
         and intangible assets with indefinite useful lives no longer be
         amortized, but instead an entity must perform an assessment of whether
         goodwill is impaired as of the date of adoption and test for impairment
         at least annually in accordance with the provisions of the Statement.
         The new standard will also require that intangible assets with definite
         useful lives be amortized over their respective estimated useful lives
         to their estimated residual values, and reviewed for impairment. SFAS
         No. 143 addresses financial accounting and reporting for obligations
         associated with the retirement of tangible long-lived assets and the
         associated asset retirement costs. It applies to legal obligations
         associated with the retirement of long-lived assets that result from
         the acquisition, construction, development, and/or the normal operation
         of a long-lived asset, except for certain obligations of lessees.

         In August 2001, the FASB issued SFAS No. 144, Accounting for the
         Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
         financial accounting and reporting for the impairment or disposal of
         long-lived assets.

         The Company is required to adopt the provisions of SFAS No. 141
         immediately. SFAS Nos. 142, 143 and 144 are required to be adopted
         October 1, 2002, with earlier application permitted. The impact of
         adopting these standards on the financial condition of the Company has
         not been determined at this time.






                                                                              16


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


2.       INVESTMENT SECURITIES

         Debt and equity securities have been classified in the consolidated
         statements of financial condition according to management's intent. The
         carrying amount of securities and their approximate fair value at
         September 30 were as follows:



                                                                        Gross               Gross
                                                    Amortized         Unrealized         Unrealized
                                                      Cost               Gains              Losses          Fair Value
                                                   -----------        -----------        -----------        -----------
                                                                                                
         Available-for-Sale Securities

         September 30, 2001:
            U.S. Government agency                 $ 9,259,763        $   332,304        $     2,106        $ 9,589,961
            Collateral mortgage obligations
               (CMO's)                              13,485,346             49,477             40,416         13,494,407
            Mortgage-backed securities               8,775,995            352,720              1,473          9,127,242
            Other common stock                         790,385                 --             83,485            706,900
            Other equity securities                    150,000                 --             15,684            134,316
                                                   -----------        -----------        -----------        -----------

                                                   $32,461,489        $   734,501        $   143,164        $33,052,826
                                                   ===========        ===========        ===========        ===========

         September 30, 2000:
            U.S. Treasury securities               $ 2,896,067        $        --        $   135,643        $ 2,760,424
            U.S. Government agency                   9,120,162                 --            218,913          8,901,249
            Collateral mortgage obligations
               (CMO's)                              13,667,965             16,927             82,565         13,602,327
            Mortgage-backed securities              10,401,465             17,967            323,737         10,095,695
            Other common stock                         790,385                 --             53,072            737,313
                                                   -----------        -----------        -----------        -----------

                                                   $36,876,044        $    34,894        $   813,930        $36,097,008
                                                   ===========        ===========        ===========        ===========




                                   (Continued)




                                                                              17


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


2.       INVESTMENT SECURITIES (Continued)


         The Company sold securities available-for-sale for total proceeds of
         $9,696,496, $1,007,841 and $20,968,808, resulting in gross realized
         gains (losses) of $4,267, $(4,199) and $2,402,639 in 2001, 2000 and
         1999, respectively.

         The scheduled maturities at September 30, 2001 of securities (other
         than equity securities) available-for-sale by contractual maturity are
         shown below. Expected maturities will differ from contractual
         maturities because the borrower may have the right to call or prepay
         obligations with or without call or prepayment penalties.



                                                 Available-for-Sale
                                           ------------------------------
                                            Amortized
                                              Cost             Fair Value
                                           -----------        -----------
                                                        
         Due in one year or less           $   500,000        $   513,972
         Due from one to five years          3,326,219          3,464,079
         Due from five to ten years         13,863,788         14,302,491
         Due after ten years                13,831,097         13,931,068
                                           -----------        -----------

                                           $31,521,104        $32,211,610
                                           ===========        ===========



         Investment securities available-for-sale with a carrying amount of
         approximately $5,009,000 and $5,299,000 at September 30, 2001 and 2000,
         respectively, were pledged to secure public deposits as required by law
         and for other purposes required or permitted by law.





                                                                              18


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


3.       LOANS

         Loans consisted of the following at September 30, 2001 and 2000:



                                                                  2001                2000
                                                                 ------              ------
                                                                            
         Real estate mortgage loans:
            First mortgage loans:
               Single family residential                      $ 51,082,708        $ 58,595,477
               Multi-family and commercial real estate          14,205,090          13,789,799
            Second mortgage loans                                7,592,494           7,333,692
            1-4 family construction loans                       25,378,016          24,380,605
            Savings account loans                                1,144,123           1,097,108
            Installment loans                                    3,506,035           4,089,397
                                                              ------------        ------------
                                                               102,908,466         109,286,078
                                                              ------------        ------------

         Deduct:
            Deferred loan fees                                     187,501             192,333
            Undisbursed portion of loans in process                  7,625              39,352
            Allowance for loan losses                            1,577,952             700,620
                                                              ------------        ------------
                                                                 1,773,078             932,305
                                                              ------------        ------------

         Total loans receivable - net                         $101,135,388        $108,353,773
                                                              ============        ============



         Activity in the allowance for loan losses was as follows for the years
         ended September 30, 2001, 2000 and 1999:



                                                             2001               2000                1999
                                                            -------            ------              ------
                                                                                        
         Beginning balance                               $   700,620         $   851,915         $   732,021
         Provision charged to income                         857,688               5,572             587,690
         Recovery of amounts charged off
            in prior years                                    67,606              35,221              38,447
         Loans charged off                                   (47,962)           (192,088)           (506,243)
                                                         -----------         -----------         -----------

         Ending balance                                  $ 1,577,952         $   700,620         $   851,915
                                                         ===========         ===========         ===========




                                   (Continued)




                                                                              19


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


3.       LOANS (Continued)


                  The following is a summary of information pertaining to
                  impaired loans:




                                                                      September 30,
                                                              ------------------------------
                                                                 2001               2000
                                                              -----------        -----------
                                                                           
         Impaired loans without a valuation allowance         $        --        $        --
         Impaired loans with a valuation allowance                647,720              3,742
                                                              -----------        -----------

            Total impaired loans                              $   647,720        $     3,742
                                                              ===========        ===========

         Valuation allowance related to impaired loans        $   647,720        $     3,742
                                                              ===========        ===========





                                                                     Years Ended September 30,
                                                             ----------------------------------------
                                                               2001            2000            1999
                                                             --------        --------        --------
                                                                                    
         Average investment in impaired loans                $ 53,939        $  4,771        $ 78,998
         Interest income recognized on impaired loans              --             373           1,188
         Interest income recognized on a cash
            basis on impaired loans                                --             373           1,188


         Interest on impaired loans is recorded on a "cash basis" and is
         included in earnings only when actually received in cash. No additional
         funds are committed to be advanced in connection with impaired loans.
         See also Note 13 concerning related party impaired loans.

4.       PREMISES AND EQUIPMENT

         Premises and equipment are summarized as follows at September 30, 2001
         and 2000:



                                                     2001               2000
                                                    -------            -------
                                                               
         Land                                     $ 1,848,059        $ 1,848,059
         Buildings and improvements                 3,261,683          3,374,990
         Furniture, fixtures and equipment            961,905          1,187,236
         Automobiles                                  167,307            193,282
                                                  -----------        -----------
                                                    6,238,954          6,603,567
         Less: Accumulated depreciation             1,473,076          1,611,306
                                                  -----------        -----------

         Premises and equipment, net              $ 4,765,878        $ 4,992,261
                                                  ===========        ===========


         Depreciation expense charged to operations was $365,309, $359,661 and
         $343,635 in 2001, 2000 and 1999, respectively.





                                                                              20


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


5.       ACCRUED INTEREST RECEIVABLE

         Accrued interest receivable consists of the following at September 30,
         2001 and 2000:



                                                            2001              2000
                                                           -------           -------
                                                                     
         Loans                                           $  649,969        $  811,252
         Investment securities available-for-sale           310,256           372,233
                                                         ----------        ----------

            Total accrued interest receivable            $  960,225        $1,183,485
                                                         ==========        ==========


6.       INVESTMENTS IN AFFILIATE

         In March 1995, the Company obtained a 50% ownership interest in
         Magnolia Title Services, Inc. (Magnolia) for an investment of $100,000.
         Magnolia provides title insurance and related services to various
         borrowers and lenders in the state of Alabama. The Company accounts for
         this investment under the equity method.

7.       LEASES

         The Company leases certain real estate and office equipment under
         operating leases expiring in various years through 2005. Minimum future
         rental payments under non-cancellable operating leases having remaining
         terms in excess of one year as of September 30, 2001 are as follows:



                          Year Ending
                         September 30,                          Amount
                         -------------                          ------
                                                           
                             2002                             $  54,565
                             2003                                38,611
                             2004                                13,742
                             2005                                 2,030
                                                              ---------

                                                              $ 108,948
                                                              =========


         Lease expense charged to operations was $73,187, $66,229 and $65,359
         for the years ended September 30, 2001, 2000 and 1999, respectively.




                                                                              21


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


8.       GOODWILL

         Goodwill represents the excess of the cost of companies acquired over
         the fair value of their net assets at date of acquisition and is being
         amortized on the straight line method over 15 years. Amortization
         expense charged to operations for 2001, 2000, and 1999 was $53,945,
         $63,128, and $54,772, respectively. Goodwill, net of accumulated
         amortization, is included in other assets on the statement of financial
         condition and amounted to $597,652 and $651,597 at September 30, 2001
         and 2000, respectively.


9.       DEPOSITS

         An analysis of deposit accounts at the end of the period is as follows
         at September 30, 2001 and 2000:



                                                              2001                2000
                                                             ------              ------
                                                                        
         Demand accounts:
            Non interest-bearing checking accounts        $  3,349,326        $  2,990,806
            Interest-bearing:
               NOW accounts                                  9,490,474           9,728,880
               Money market demand                             406,734             632,274
                                                          ------------        ------------
                   Total demand accounts                    13,246,534          13,351,960

         Statement savings accounts                         11,158,100          11,794,425

         Certificate accounts                               74,650,946          80,216,716
                                                          ------------        ------------

               Total                                      $ 99,055,580        $105,363,101
                                                          ============        ============


         Certificate accounts greater than or equal to $100,000 were $18,867,029
         and $19,434,998 at September 30, 2001 and 2000, respectively.


                                   (Continued)



                                                                              22


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


9.       DEPOSITS (Continued)


         Scheduled maturities of certificate accounts were as follows at
         September 30, 2001 and 2000:



                                              2001                2000
                                             -------             ------
                                                        
         Less than one year                $49,029,720        $61,535,297
         One year to two years              16,137,836         11,418,188
         Two years to three years            2,219,300          3,942,230
         Three years to four years           6,060,438            388,595
         Four years to five years            1,203,652          2,932,406
                                           -----------        -----------

              Total                        $74,650,946        $80,216,716
                                           ===========        ===========



         Interest expense on deposits for the years ended September 30, 2001,
         2000 and 1999 were as follows:



                                                   2001               2000               1999
                                                  ------             ------             ------
                                                                            
         Demand accounts                       $   161,731        $   178,910        $   229,810
         Statement savings accounts                216,553            240,270            292,847
         Certificate accounts                    4,599,023          4,439,128          4,866,887
                                               -----------        -----------        -----------

              Total                            $ 4,977,307        $ 4,858,308        $ 5,389,544
                                               ===========        ===========        ===========






                                                                              23


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


10.      BORROWED FUNDS

         The Company was liable to the Federal Home Loan Bank of Atlanta on the
         following advances at September 30, 2001 and 2000:




         Maturity Date    Callable Date      Type        Rate at 9/30          2001                 2000
         -------------    -------------      ----        ------------         ------               ------
                                                                                 
         March 2001                        Fixed Rate         8.68%         $       --          $   257,439
         March 2001                        Adjustable         6.55%                 --           12,336,629
         August 2001                       Adjustable         6.68%                 --            5,250,000
         May 2002                          Adjustable         3.57%          1,660,000            1,660,000
         July 2002                         Adjustable         3.31%          3,000,000                   --
         May 2003                          Adjustable         3.61%          1,670,000            1,670,000
         April 2004       April 2001       Fixed Rate         5.01%                 --            4,000,000
         April 2004       April 2001       Adjustable         3.71%          4,000,000            4,000,000
         May 2005                          Adjustable         3.67%          1,670,000            1,670,000
         August 2007                       Adjustable         3.56%          5,250,000
         March 2010       December 2001    Fixed Rate         5.88%          5,000,000            5,000,000
         November 2010    November 2001    Fixed Rate         5.43%          5,000,000                   --
         January 2011     January 2006     Fixed Rate         5.30%          2,500,000                   --
         January 2011     January 2006     Fixed Rate         4.65%          2,500,000                   --
                                                                            ----------          -----------

                                                                            $32,250,000         $35,844,068
                                                                            ===========         ===========

Weighted average rate                                                              4.43%               6.34%
                                                                            ===========         ===========



         At September 30, 2001 and 2000, the advances were collateralized by
         first-mortgage residential loans with carrying values of approximately
         $51,261,000 and $58,652,000, respectively. The Bank has an approved
         credit availability of approximately $45,000,000 at the Federal Home
         Loan Bank of Atlanta.


                                  (Continued)



                                                                              24


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


10.      BORROWED FUNDS (Continued)


         During fiscal year 2000, the Bank established a discount window
         borrowing agreement with the Federal Reserve Bank of Kansas City with a
         maximum credit availability of $3,000,000. During fiscal years 2001 and
         2000, there were no borrowings on this discount window borrowing
         agreement.

         The Company also has a line-of-credit with a commercial bank of up to
         $4,000,000 which bears interest at the prime lending rate. The
         line-of-credit requires monthly interest payments. At September 30,
         2001, the prime lending rate was 6.00%. The outstanding balance on the
         line-of-credit was $3,355,000 and $3,005,000 at September 30, 2001 and
         2000, respectively. The note is secured by the Company's stock in its
         subsidiary, First Federal of the South. The line-of-credit is due on
         demand, but no later than March 1, 2002.

         The Company had a note payable to an individual in the amount of
         $40,000 at September 30, 2000 which was paid off in April 2001.

         Total borrowed funds at September 30, 2001 have maturities (or call
         dates) in future years as follows:



                  Year Ending
                 September 30,                      Amount
                 -------------                      ------
                                              
                     2002                        $ 18,015,000
                     2003                           4,170,000
                     2004                           4,000,000
                     2005                           1,670,000
                     2006                           2,500,000
                  Thereafter                        5,250,000
                                                 ------------

                                                 $ 35,605,000
                                                 ============





                                                                              25


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


11.      INCOME TAX EXPENSE

         Income tax expense (benefit) for the years ended September 30, 2001,
         2000 and 1999 consists of the following:



                                   2001               2000               1999
                                  ------             ------             -------
                                                              
         Federal:
            Current             $    84,141         $   419,552        $   794,668
            Deferred               (278,226)             66,547            (76,991)
                                -----------         -----------        -----------
                                   (194,085)            486,099            717,677
                                -----------         -----------        -----------

         State:
            Current                 (27,712)            118,384            105,259
            Deferred                (20,458)              4,893             (6,730)
                                -----------         -----------        -----------
                                    (48,170)            123,277             98,529
                                -----------         -----------        -----------

         Total                  $  (242,255)        $   609,376        $   816,206
                                ===========         ===========        ===========



         Income tax expense includes taxes related to investment security gains
         (losses) in the approximate amount of $1,600, $(1,600) and $913,000 in
         2001, 2000 and 1999, respectively.

         The actual income tax expense differs from the "expected" income tax
         expense computed by applying the U.S. federal corporate income tax rate
         of 34% to income before income taxes as follows:



                                                                      2001                 2000                 1999
                                                                     ------               ------               ------
                                                                                                    
         Computed "expected" income tax expense                    $  (225,878)         $   534,095          $   719,510
         Increase (reduction) in income tax resulting from:
            Compensation expense for ESOP                              (19,360)             (22,176)              20,987
            Management Recognition Plan                                     --                  785                1,878
            State tax, net of federal income tax benefit               (57,401)              99,915               71,086
            Other                                                       60,384               (3,243)               2,745
                                                                   -----------          -----------          -----------

                   Total                                           $  (242,255)         $   609,376          $   816,206
                                                                   ===========          ===========          ===========

         Effective tax rate                                                 36%                  39%                  39%
                                                                   ===========          ===========          ===========



                                   (Continued)



                                                                              26


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


11.      INCOME TAX EXPENSE (Continued)


         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         September 30, 2001 and 2000 are as follows:



                                                                                              2001                2000
                                                                                             ------              ------
                                                                                                          
         Deferred taxes:
            Unrealized loss on investment securities available-for-sale                     $       --          $ 296,033
            Bad debts                                                                          466,892            146,666
            Deferred compensation                                                               44,964             43,147
            Investment in equity of affiliate                                                   89,425             89,425
                                                                                            ----------          ---------

                Total deferred tax assets                                                      601,281            575,271
                                                                                            ----------          ---------

         Deferred tax liabilities:
            Management Recognition Plan                                                             --             11,368
            FHLB stock                                                                         237,138            237,138
            Depreciation                                                                       219,222            217,421
            Prepaid expenses                                                                    88,836             92,424
            Foreclosed real estate gain                                                          5,357             13,585
            Federal/state tax deduction on a cash basis                                         13,435              6,896
            Other                                                                               43,112              4,909
            Unrealized gain on investment securities available-for-sale                        224,709                 --
                                                                                            ----------          ---------

               Total deferred tax liabilities                                                  831,809            583,741
                                                                                            ----------          ---------

               Net deferred tax asset (liability)                                           $ (230,528)         $  (8,470)
                                                                                            ==========          =========



         There was no valuation allowance at September 30, 2001 or 2000.







                                                                              27


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS

         Employee Stock Ownership Plan - Effective October 1, 1994, the Bank
         established the SouthFirst Bancshares, Inc. Employee Stock Ownership
         Plan (ESOP). The ESOP is available to all employees who have met
         certain age and service requirements. Contributions to the plan are
         determined by the Board of Directors and may be in cash or in common
         stock. The Corporation loaned $664,000 to the trustee of the ESOP, who
         purchased, on behalf of the trust of the ESOP, 66,400 shares of the
         shares sold by the Corporation in the public offering.

         The common stock of the Corporation acquired for the ESOP is held as
         collateral for the loan and is released for allocation to the ESOP
         participants as principal payments are made on the loan. The Bank makes
         contributions to the ESOP in amounts sufficient to make loan interest
         and principal payments and may make additional discretionary
         contributions. Contributions, which include dividends on ESOP shares,
         of $85,515, $88,478 and $43,518 were made to the ESOP in 2001, 2000 and
         1999, respectively. During 2001 and 2000, the Trustee distributed cash
         of $15,925 and $12,404, respectively, in lieu of shares to retiring
         participants.

         The ESOP's loan is repayable in ten annual installments of principal
         and interest. The interest rate is adjusted annually and is equal to
         the prime rate on each October 1st, beginning with October 1, 1995,
         until the note is paid in full. Principal and interest for the years
         ended September 30, 2001, 2000 and 1999 were $85,515, $88,478 and
         $73,845, respectively. The interest rate and principal outstanding at
         September 30, 2001 were 6.00% and $134,808, respectively. These
         payments resulted in the commitment to release 6,376 shares in 2001,
         6,399 shares in 2000 and 7,056 shares in 1999. The Company has
         recognized compensation expense, equal to the fair value of the
         committed-to-be released shares of $68,413, $63,094 and $105,896 in
         2001, 2000 and 1999, respectively. Excluding committed-to-be released
         shares, suspense shares at September 30, 2001 and 2000 equaled 10,969
         and 17,345, respectively. The fair value of the suspense shares at
         September 30, 2001 and 2000, was $123,950 and $173,450, respectively.
         These suspense shares are excluded from weighted average shares in
         determining earnings per share.

         Stock-based Compensation Plan - During 1995, the Company adopted a
         Stock Option and Incentive Plan for directors and key employees of the
         Company. The exercise price cannot be less than the market price on the
         grant date and number of shares available for options cannot exceed
         83,000. Stock appreciation rights may also be granted under the plan.
         During 1998, the Company adopted the 1998 Stock Option & Incentive Plan
         for directors and key employees of the Company. Under the 1998 plan,
         options to acquire 67,511 shares had been granted. The term of the
         options range from seven to ten years and they vest equally over
         periods from three to five years.


                                   (Continued)







                                                                              28

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS (Continued)


         Following is a summary of the status of the 1995 and 1998 plans:



                                                                     1995 Plan                          1998 Plan
                                                             ------------------------           -----------------------
                                                                             Weighted                          Weighted
                                                                             Average                           Average
                                                               Number        Exercise             Number       Exercise
                                                             of Shares         Price            of Shares       Price
                                                             ---------       --------           ---------      --------
                                                                                                   
         Outstanding at  September 30, 1999                    68,890         $ 14.00              65,001      $ 15.75
         Forfeited                                            (12,450)          14.00             (16,667)       15.75
                                                             --------                           ---------

         Outstanding at  September 30, 2000                    56,440           14.00              48,334        15.75
         Granted                                               14,110            9.75              19,177         9.75
                                                             --------                           ---------

         Outstanding at  September 30, 2001                    70,550           13.15              67,511        14.05
                                                             ========                           =========


         Information pertaining to options outstanding at September 30, 2001 is
         as follows:



                                                          Options Outstanding               Options Exercisable
                                                      ----------------------------      ----------------------------
                                                       Weighted
                                                        Average           Weighted                          Weighted
                                                       Remaining          Average                           Average
               Range of                 Number        Contractual         Exercise          Number          Exercise
            Exercise Prices          Outstanding          Life             Price        Exercisable          Price
            ---------------          -----------      -----------         --------      -----------         --------
                                                                                             
                $9.75                   33,287          6.4 years         $   9.75             --           $     --

            $14.00 - 15.75             104,774          5.1 years            14.81         85,440              14.59
                                       -------                                             ------

          Outstanding at end
               of year                 138,061          5.4 years            13.59         85,440              14.59
                                       =======                                             ======





                                   (Continued)




                                                                              29


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS (Continued)


         The Company applies APB Opinion 25 and related interpretations in
         accounting for its stock option plans. Accordingly, no compensation
         cost has been recognized for the plans in 2001, 2000 or 1999. Had
         compensation cost been determined on the basis of fair value pursuant
         to SFAS No. 123, net income and earnings per share would have been
         adjusted to the pro forma amounts indicated below:



                                                            2001              2000               1999
                                                           ------            ------             ------
                                                                                    
         Net income (loss):
            As reported                                  $ (422,093)        $ 961,492        $ 1,299,999
            Pro forma                                      (437,924)          948,247          1,272,640

         Basic earnings (loss) per share:
            As reported                                       (0.47)             1.06               1.44
            Pro forma                                         (0.47)             1.06               1.43

         Fully diluted earnings (loss) per share:
            As reported                                       (0.46)             1.06               1.44
            Pro forma                                         (0.47)             1.06               1.43


         Because the SFAS No. 123 method of accounting has not been applied to
         options granted prior to October 1, 1995, the resulting pro forma
         compensation costs may not be representative of that to be expected in
         future years.

         The fair value of each option grant is estimated on the date of the
         grant using the Black-Scholes option-pricing model with the following
         weighted average assumptions:



                                                2001             2000              1999
                                               ------           ------            ------
                                                                         
         Dividend yield                          5.01%            3.81%             3.81%
         Expected life                         8 years          9 years           9 years
         Expected volatility                     8.71%            8.63%             8.63%
         Risk-free interest rate                 5.50%            5.77%             5.77%



                                   (Continued)



                                                                              30


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS (Continued)


         Management Recognition Plan - On November 15, 1995, the Company issued
         33,200 shares of common stock (Initial Shares) to key employees under
         the terms of the Company's Management Recognition Plans (MRP's). These
         shareholders receive dividends on the shares and have voting rights.
         However, the sale or transferability of the shares is subject to the
         vesting requirements of the plan. These vesting requirements provide
         for the removal of the transferability restrictions upon the
         performance of employment services. The restrictions were fully removed
         in November 2000. Participants who terminate employment prior to
         satisfying the vesting requirements must forfeit the unvested shares
         and the accumulated dividends on the forfeited shares. The Company has
         recorded compensation expense equal to the fair value of the portion of
         vested shares attributable to 2001, 2000 and 1999. In addition, the
         dividends paid on unvested shares are also reflected as compensation
         expense. Total compensation expense attributable to the MRP's in 2001,
         2000 and 1999 was $5,407, $42,635 and $83,572, respectively.

         During the year ended September 30, 2001, the Company's MRP purchased
         an additional 11,525 shares of common stock at an aggregate price of
         $126,411. Shares held in trust related to the MRP are shown as a
         reduction of stockholders' equity in the accompanying consolidated
         statements of financial condition. As these shares are granted to
         employees, an amount equal to the award is reclassified from shares
         held in trust to unearned compensation.

         401 (k) Plan - The Company also has a 401(k) plan that covers all
         employees who meet minimum age and service requirements. The plan
         provides for elective employee salary deferrals and discretionary
         company matching contributions. Company matching contributions were
         $34,107, $0 and $44,454 in 2001, 2000 and 1999, respectively.

         Deferred Compensation Agreements - The Company has entered into
         deferred compensation agreements with two of its senior officers and
         one former officer, pursuant to which each will receive from the
         Company certain retirement benefits at age 65. Such benefits will be
         payable for 15 years to each officer or, in the event of death, to such
         officer's respective beneficiary. A portion of the retirement benefits
         will accrue each year until age 65 or, if sooner, until termination of
         employment. The annual benefits under these arrangements range from
         approximately $24,000 to $65,000.

         The retirement benefits available under the deferred compensation
         agreements are unfunded. However, the Bank has purchased life insurance
         policies on the lives of these officers that will be available to the
         Company and the Bank to provide, both, for retirement benefits and for
         key man insurance. The costs of these arrangements was $70,713, $73,758
         and $73,481 in 2001, 2000 and 1999, respectively.



                                   (Continued)



                                                                              31


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS (Continued)


         In addition to the deferred compensation arrangements discussed above,
         the Company entered into arrangements with two officers in April 1997,
         under which the Company issued a total of 21,135 shares of common stock
         to these officers. The shares vest ratably over the 15 year term of
         their employment contracts. The Company has recognized compensation
         expense equal to the fair value of the vested shares of $19,902,
         $19,902 and $19,902 in 2001, 2000 and 1999, respectively.

13.      RELATED PARTY TRANSACTIONS

         In the normal course of business, loans are made to officers and
         directors of the Company. These loans are made on substantially the
         same terms, including interest rates and collateral, as those
         prevailing for comparable transactions with others. Total loans
         outstanding to these persons at September 30, 2001 and 2000 amounted to
         $1,025,719 and $2,943,529, respectively. The change from 2000 to 2001
         reflects payments of $605,193 and advances of $90,599 and loans no
         longer related of $1,403,216. Loans that are no longer related include
         loans to a former director of approximately $1,200,000. Of this amount,
         $647,720 was considered to be impaired and a valuation allowance of
         $647,720 was provided on such loan and charged to operations during
         2001.

         Deposits from related parties held by the Bank at September 30, 2001
         and 2000 amounted to $192,774 and $511,182, respectively.

         See also Note 14 for a discussion of payments to former officers and
         directors.

14.      COMMITMENTS AND CONTINGENCIES

         Off Balance Sheet Items - At September 30, 2001, the Bank had
         outstanding loan commitments of approximately $16,331,000 including
         $11,644,000 in undisbursed construction loans in process, $3,518,000 in
         unused lines and letters of credit, and $1,169,000 in commitments to
         originate mortgage loans consisting primarily of 30-day commitments.
         Commitments to originate conventional mortgage loans consisted of fixed
         rate mortgages for which interest rates had not been established, all
         having terms ranging from 15 to 30 years.

         These financial instruments are not reflected on the accompanying
         statements of financial condition, but do expose the Company to credit
         risk. The Company's exposure to credit loss in the event of
         nonperformance by the other party to the financial instrument for
         commitments to extend credit is represented by the contractual amount
         of these instruments. The Company uses the same credit policies in
         making commitments and conditional obligations as it does for on
         balance-sheet instruments.



                                   (Continued)




                                                                              32


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


14.      COMMITMENTS AND CONTINGENCIES (Continued)


         These commitments to extend credit are agreements to lend to a customer
         as long as there is no violation of any condition established in the
         contract. Commitments generally have fixed expiration dates or other
         termination clauses and may require payment of a fee. Since some of the
         commitments are expected to expire without being drawn upon, the total
         commitment amounts do not necessarily represent future cash
         requirements.

         Litigation - During the fiscal year ended September 30, 2001, the
         Company agreed to settle certain legal actions with a former director
         and officer. The terms of the agreement, which have been agreed to in
         principal, but not finalized at September 30, 2001, provide for a
         payment to the former director and officer of $570,000. In exchange for
         the payment, the Company is to receive 13,856 shares of its common
         stock, which are owned by the former director and officer and at the
         time of the agreement had a market value of approximately $160,000. The
         excess of the payment ($410,000) has been accrued by the Company and is
         included in the statement of operations as part of termination
         agreements. When the agreement is finalized and the stock is received,
         management anticipates treating it as treasury stock.

         The Company is involved in various legal actions arising in the normal
         course of business. In the opinion of management, based upon
         consultation with legal counsel, the ultimate resolution of all
         proceedings will not have a material adverse effect upon the financial
         position or operations of the Company.

         Employment Agreements - The Company has employment agreements with
         certain senior officers. The agreements provide for certain salaries
         and benefits for a 24-month period. The agreements further provide that
         if the employee is terminated without cause they will receive payments
         equal to the amount of salary and benefits remaining under the term of
         contract with a minimum amount of 12 months salary and benefits. The
         agreements also provide that if employment is terminated by the Company
         in connection with or within 24 months after any change in control of
         the Company, each employee shall be paid approximately three times
         their salary.

         During 2001, the Company's President and Chairman of the Board of
         Directors resigned and was paid $150,000 plus certain other expenses
         for a release of all of the claims against the Company, including any
         claims under his employment agreement. The payment is included in the
         statement of operations as part of termination agreements.
         Additionally, the Company purchased 44,942 shares of the former
         President's stock in the Company at a market price of approximately
         $519,000, which was treated as treasury stock.

         Significant Group Concentrations of Credit Risk - The Company maintains
         cash balances at several financial institutions. Cash balances at each
         institution are insured by the Federal Deposit Insurance Corporation
         (the "FDIC") up to $100,000. At various times throughout the year cash
         balances held at these institutions will exceed federally insured
         limits. Management monitors such accounts and does not consider that
         such excess expose the Company to any significant risk.





                                                                              33


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


15.      RETAINED EARNINGS AND REGULATORY CAPITAL

         The Bank is subject to various regulatory capital requirements
         administered by the federal banking agencies. Failure to meet minimum
         capital requirements can initiate certain mandatory, and possibly
         additional discretionary actions by regulators that, if undertaken,
         could have a direct material effect on the Bank's financial statements.
         Under capital adequacy guidelines and the regulatory framework for
         prompt corrective action, the Bank must meet specific capital
         guidelines that involve quantitative measures of the Bank's assets,
         liabilities, and certain off-balance-sheet items as calculated under
         regulatory accounting practices. The Bank's capital amounts and
         classification are also subject to qualitative judgments by the
         regulators about components, risk weightings, and other factors.

         Quantitative measures established by regulations to ensure capital
         adequacy require the Bank to maintain minimum amounts and ratios (set
         forth in the table below) of total and Tier I capital to risk-weighted
         assets, and of Tier I capital to average assets. Management believes,
         as of September 30, 2001, that the Bank meets all capital adequacy
         requirements and meets the requirements to be classified as "well
         capitalized."



                                                                         For Capital
                                                 Actual                Adequacy Purposes           Well Capitalized
                                           ------------------         -------------------         -------------------
                                           Amount       Ratio         Amount        Ratio         Amount        Ratio
                                           ------       -----         ------        -----         ------        -----
                                                                                            
      As of September 30, 2001:
        Total capital
           (to risk weighted assets)    $ 14,884,000    16.11%      =>$7,391,000   =>8.00%     =>$9,238,000   =>10.00%
        Tier I capital
           (to risk weighted assets)      13,904,000    15.05%      => 3,695,000   =>4.00%     => 5,543,000   => 6.00%
        Tier I capital
           (to average assets)            13,904,000     8.98%      => 6,190,000   =>4.00%     => 7,738,000   => 5.00%


      As of September 30, 2000:
        Total capital
           (to risk weighted assets)    $ 14,924,000    15.57%      =>$7,666,000   =>8.00%     =>$9,583,000   =>10.00%
        Tier I capital
           (to risk weighted assets)      14,761,000    15.40%      => 3,833,000   =>4.00%     => 5,750,000   => 6.00%
        Tier I capital
           (to average assets)            14,761,000     9.44%      => 6,253,000   =>4.00%     => 7,816,000   => 5.00%




                                   (Continued)





                                                                              34


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


15.      RETAINED EARNINGS AND REGULATORY CAPITAL (Continued)


         Savings institutions with more than a "normal" level of interest rate
         risk are required to maintain additional total capital. A savings
         institution with a greater than normal interest rate risk is required
         to deduct specified amounts from total capital, for purposes of
         determining its compliance with risk-based capital requirements.
         Management believes that the Bank was in compliance with capital
         standards at September 30, 2001 and 2000.

         Retained earnings at September 30, 2001 and 2000, include approximately
         $2,400,000 for which no provision for income tax has been made. This
         amount represents allocations of income to bad debt deductions for tax
         computation purposes. If, in the future, this portion of retained
         earnings is used for any purpose other than to absorb tax bad debt
         losses, income taxes may be imposed at the then applicable rates.
         Retained earnings is also restricted at September 30, 2001, as a result
         of the liquidation account established upon conversion to a stock
         company. No dividends may be paid to stockholders if such dividends
         would reduce the net worth of the Bank below the amount required by the
         liquidation account.

16.      SHAREHOLDERS' RIGHTS PLAN

         In December 1997, the Company adopted a Stock Purchase Rights Plan that
         provides rights to holders of the Company's common stock to receive
         common stock rights under certain circumstances. The rights will become
         exercisable ten days after a person or group acquires 15% or more of
         the company's shares. If, after the rights become exercisable, the
         Company becomes involved in a merger, each right then outstanding
         (other than those held by the 15% holder) would entitle its holder to
         buy common stock of the Company worth twice the exercise price of each
         right. The rights expire in November 2007.

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of a financial instrument is the current amount that
         would be exchanged between willing parties, other than in a forced
         liquidation. Fair value is best determined based upon quoted market
         prices. However, in many instances, there are no quoted market prices
         for the Company's various financial instruments. In cases where quoted
         market prices are not available, fair values are based on estimates
         using present value or other valuation techniques. Those techniques are
         significantly affected by the assumptions used, including the discount
         rate and estimates of future cash flows. Accordingly, the fair value
         estimates may not be realized in an immediate settlement of the
         instrument. Further assets that are not financial instruments are not
         included in the following tables. Accordingly, the aggregate fair value
         amounts presented may not necessarily represent the underlying fair
         value of the Company.


                                   (Continued)



                                                                              35


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


17.      FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)


         The following methods and assumptions were used by the Company in
         estimating the fair value of its financial instruments:

         Cash and Cash Equivalents - Fair value equals the carrying value of
         such assets due to their nature.

         Interest-bearing Deposits in Other Financial Institutions - Fair value
         equals the carrying value of such assets due to their nature.

         Investment Securities and Accrued Interest Receivable - The fair value
         of investments is based on quoted market prices. The carrying amount of
         related accrued interest receivable approximates its fair value.

         Loans Receivable - The fair value of loans is calculated using
         discounted cash flows. The discount rate used to determine the present
         value of the loan portfolio is an estimated market discount rate that
         reflects the credit and interest rate risk inherent in the loan
         portfolio. The estimated maturity is based on the Company's historical
         experience with repayments adjusted to estimate the effect of current
         market conditions. The carrying amount of related accrued interest
         receivable approximates its fair value.

         Deposits - Fair values for certificates of deposit have been determined
         using discounted cash flows. The discount rate used is based on
         estimated market rates for deposits of similar remaining maturities.
         The carrying amount of all other deposits, due to their short-term
         nature, approximate their fair values. The carrying amount of related
         accrued interest payable approximates its fair value.

         Borrowed Funds - Fair value for the fixed-rate borrowings has been
         determined using discounted cash flows. The discount rate used is based
         on estimated current rates for advances with similar maturities. The
         carrying amount of the variable rate borrowings, due to the short
         repricing periods, approximate their fair value.




                                   (Continued)




                                                                              36


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


17.      FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)




                                                               2001                                    2000
                                                  -------------------------------         ------------------------------
                                                   Carrying           Estimated             Carrying         Estimated
                                                     Amount           Fair Value             Amount          Fair Value
                                                  ------------       ------------         ------------      ------------
                                                                                                
       Financial assets:
          Cash and cash equivalents               $  6,020,186       $  6,020,186         $  4,667,295      $  4,667,295
          Interest-bearing deposits                    898,533            898,533            1,737,099         1,737,099
          Investments securities                    33,052,826         33,052,826           36,097,008        36,097,008
          Loans receivable - net                   101,135,388        104,611,041          108,353,773       111,480,637
          Accrued interest receivable                  960,225            960,225            1,183,485         1,183,485

       Financial liabilities:
          Deposits                                  99,055,580        100,646,325          105,363,101       105,610,887
          Borrowed funds                            35,605,000         35,605,000           38,889,068        38,850,183
          Accrued interest payable                   1,328,183          1,328,183            1,403,005         1,403,005












                                                                              37



                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


20.      BUSINESS SEGMENT INFORMATION

         The Company organizes its business units into two reportable segments:
         traditional banking activities and employee benefits consulting. The
         banking segment provides a full range of banking services within its
         primary market areas of central Alabama. The employee benefits
         consulting firm operates primarily in the Montgomery, Alabama area.

         The segments' accounting policies are the same as those described in
         the summary of significant accounting policies. 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 following table presents financial information for each reportable
         segment:



                                                                             September 30, 2001
                                                         --------------------------------------------------------
                                                                                 Employee
                                                           Banking               Benefits
                                                          Activities            Consulting              Total
                                                         -------------         ------------         -------------
                                                                                           
         Interest and dividend income                    $  10,856,911         $     34,957         $  10,891,868
         Interest expenses                                   6,984,203                   --             6,984,203
                                                         -------------         ------------         -------------

         Net interest income                                 3,872,708               34,957             3,907,665
         Provision for loan losses                             857,688                   --               857,688
                                                         -------------         ------------         -------------

         Net interest income after provision for
            loan losses                                      3,015,020               34,957             3,049,977
         Other income                                        1,170,022            1,141,032             2,311,054
         Other expenses                                     (5,024,611)          (1,000,768)           (6,025,379)
                                                         -------------         ------------         -------------

         Income (loss) before income taxes                    (839,569)             175,221              (664,348)
         Income taxes                                         (309,054)              66,799              (242,255)
                                                         -------------         ------------         -------------

         Net income (loss)                               $    (530,515)        $    108,422         $    (422,093)
                                                         =============         ============         =============

         Depreciation and amortization included
            in other expenses                            $     331,973         $     87,281         $     419,254
                                                         =============         ============         =============

         Total assets at year-end                        $ 150,261,418         $  1,682,379         $ 151,943,797
                                                         =============         ============         =============



                                   (Continued)




                                                                              38


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


20.      BUSINESS SEGMENT INFORMATION (Continued)




                                                                             September 30, 2000
                                                         --------------------------------------------------------
                                                                                 Employee
                                                           Banking               Benefits
                                                          Activities            Consulting              Total
                                                         -------------         ------------         -------------
                                                                                           
         Interest and dividend income                    $  11,877,806         $     37,376         $  11,915,182
         Interest expenses                                   7,138,866                   --             7,138,866
                                                         -------------         ------------         -------------

         Net interest income                                 4,738,940               37,376             4,776,316
         Provision for loan losses                               5,572                   --                 5,572
                                                         -------------         ------------         -------------

         Net interest income after provision for
            loan losses                                      4,733,368               37,376             4,770,744
         Other income                                          999,490            1,100,013             2,099,503
         Other expenses                                     (4,387,703)            (911,676)           (5,299,379)
                                                         -------------         ------------         -------------

         Income before income taxes                          1,345,155              225,713             1,570,868
         Income taxes                                          523,427               85,949               609,376
                                                         -------------         ------------         -------------

         Net income                                      $     821,728         $    139,764         $     961,492
                                                         =============         ============         =============

         Depreciation and amortization included
            in other expenses                            $     350,042         $     72,747         $     422,789
                                                         =============         ============         =============

         Total assets at year-end                        $ 160,208,295         $  1,709,831         $ 161,918,126
                                                         =============         ============         =============



                                   (Continued)




                                                                              39


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


20.      BUSINESS SEGMENT INFORMATION (Continued)




                                                                             September 30, 1999
                                                         --------------------------------------------------------
                                                                                 Employee
                                                           Banking               Benefits
                                                          Activities            Consulting              Total
                                                         -------------         ------------         -------------
                                                                                           
             Interest and dividend income                $  10,468,911         $     15,186         $  10,484,097
             Interest expenses                               6,366,823                   --             6,366,823
                                                         -------------         ------------         -------------

             Net interest income                             4,102,088               15,186             4,117,274
             Provision for loan losses                         587,690                   --               587,690
                                                         -------------         ------------         -------------

             Net interest income after provision for
                loan losses                                  3,514,398               15,186             3,529,584
             Other income                                    3,400,441            1,017,296             4,417,737
             Other expenses                                 (4,968,347)            (862,769)           (5,831,116)
                                                         -------------         ------------         -------------

             Income before income taxes                      1,946,492              169,713             2,116,205
             Income taxes                                      752,160               64,046               816,206
                                                         -------------         ------------         -------------

             Net income                                  $   1,194,332         $    105,667         $   1,299,999
                                                         =============         ============         =============

             Depreciation and amortization included
                in other expenses                        $     329,888         $     68,519         $     398,407
                                                         =============         ============         =============

             Total assets at year-end                    $ 159,835,512         $  1,544,517         $ 161,380,029
                                                         =============         ============         =============



         Following are reconciliations (where applicable) to corresponding
         totals in the accompanying consolidated financial statements.





                                                             2001                  2000                  1999
                                                            ------                ------                ------
                                                                                            
         ASSETS

         Total assets for reportable segments            $ 151,943,797         $ 161,918,126         $ 161,380,029
         Elimination of intercompany receivables              (749,582)             (892,492)             (873,664)
                                                         -------------         -------------         -------------

         Consolidated assets                             $ 151,194,215         $ 161,025,634         $ 160,506,365
                                                         =============         =============         =============