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, 2003
(   )	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, 2003: $11,178,389

     The aggregate market value of the common equity held by non-affiliates of the Registrant (522,857 shares), computed using the closing price as reported on the American Stock Exchange for the Registrant’s Common Stock on December 12, 2003 was $8,888,569. For the purposes of this response, officers, directors and holders of 10% 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 12, 2003: 708,706 shares of $.01 par value Common Stock.

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

DOCUMENTS INCORPORATED BY REFERENCE: None

SOUTHFIRST BANCSHARES, INC.

FORM 10-KSB

FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2003

Index

	PART I
Item 1.	Business
Item 2.	Property
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
	PART II
Item 5.	Market for Common Equity and Related Stockholder Matters
Item 6.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7.	Financial Statements
Item 8.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 8A.	Controls and Procedures
	PART III
Item 9.	Directors, Executive Officers and Control Persons of the Registrant
Item 10.	Executive Compensation
Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12.	Certain Relationships and Related Transactions
Item 13.	Exhibits and Reports on Form 8-K
Item 14	Principal Accountant Fees and Services

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,” or the “Company”) 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 2004 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

     General

     SouthFirst Bancshares, Inc. (“SouthFirst” or the “Company”) 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 residential mortgage and construction lending operation located in Hoover, Alabama. 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, instead, has 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.

     Sarbanes-Oxley Act of 2002

     On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”), which sets forth broad accounting and corporate governance reforms intended to restore confidence in the integrity of public-company disclosure and accounting practices. The Act is expected to have a significant impact on public companies, their officers, directors and stockholders, and the accounting and legal professions. Some provisions of the Act are effective immediately, while others will be effective as soon as the Securities and Exchange

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Commission (the “SEC”) adopts the relevant rules, which the SEC must do within mandated time periods. Until all of these rules are adopted, the Company will be unable to determine whether the Act will have a material impact on the operations of the Company and First Federal.

     CEO and CFO Certifications. The Act contains two separate provisions requiring principal executive officers and principal financial officers of public companies to make certifications with respect to such companies’ periodic reports to the SEC. One provision imposes criminal penalties and became immediately effective upon passage of the Act, while the other imposes civil penalties for certifications pursuant to recently adopted SEC rules. The Company’s Chief Executive Officer and Controller (principal financial officer), each, have submitted both certifications in connection with this Annual Report on Form 10-KSB. See Exhibits 31.1, 31.2, 32.1 and 32.2 attached hereto.

     Evaluation of disclosure controls and procedures, and changes in internal controls. SEC rules implementing the Act further require that public companies maintain disclosure controls and procedures that are designed to ensure that principal executive officers and principal financial officers are timely alerted to material information required to be disclosed by such companies in reports filed under the Securities Exchange Act of 1934. Thus, a new item has been added to periodic reports filed by public companies with the SEC, such as this Annual Report on Form 10-KSB, requiring that such companies describe officers’ conclusions regarding the effectiveness of disclosure controls and procedures, based on their evaluation made within the past 90 days, and whether there were significant changes in the company’s internal controls that could significantly affect these controls after the date of such officers’ evaluations. See “Item 8A. CONTROLS AND PROCEDURES.”

     USA Patriot Act

     The USA Patriot Act establishes a wide variety of new and enhanced ways of combating international terrorism. The provisions that affect financial institutions most directly provide the Secretary of Treasury and other departments and agencies of the federal government with enhanced authority to identify, deter and punish international money laundering and other crimes.

     Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign “shell” banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions will have to follow new minimum verification of identity standards for all new accounts and will be permitted to share information with law enforcement authorities under circumstances that were not previously permitted.

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, 2003, First Federal conducted business from three full-service locations in Alabama. These locations included its main office in Sylacauga and branches in Talladega and Clanton. 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. First Federal also pursues other types of loans, such as consumer and commercial loans, in the Birmingham market area, as demands dictate.

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     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 and Chilton 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 accounts, money-market accounts, passbook savings accounts 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.

     Market Area

     First Federal’s primary deposit gathering and lending area covers Talladega and Chilton 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 had a population of approximately 40,000, 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 the city of Talladega is situated approximately 55 miles east of Birmingham. First Federal’s Clanton office is located approximately 55 miles north of Montgomery. The loan production office of SouthFirst Mortgage, located in the city of Hoover, is situated within the Birmingham metropolitan area.

     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 the 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., Sullivan Graphics, Inc., Avondale Mills, Blue Bell Ice Cream, Pursell Industries and Georgia Marble. Bowater, Inc., a paper manufacturer, is a major employer in Childersburg, Alabama, located 10 miles from Sylacauga in Talladega County. Teksid, Inc., another major employer in the region, recently completed construction on a new aluminum casting manufacturing facility. The new plant, operated by Teksid Automotive Components, Inc., is located in Sylacauga, and employs approximately 400 skilled workers.

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     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. American Honda Motor Co., Inc. (“Honda”) operates a comprehensive automobile manufacturing facility near the town of Lincoln, Talladega County, Alabama that was completed in the Fall of 2001. The plant is located on a 1,350-acre tract, approximately forty miles east of Birmingham and 20 miles north of the city of Talladega. Honda currently employs approximately 2,300 persons at the plant and has already begun construction on a second assembly line, scheduled to begin production in April 2004, that is expected to boost employment to approximately 4,300 persons when the plant reaches its full annual production capacity of 300,000 engines and vehicles per year. In addition, Talladega is the home of the Talladega Superspeedway which hosts the EA Sports 500 and other NASCAR events and attracts individuals to Talladega County primarily from the southeast region of the United States.

     Although Chilton County is generally a rural area in which the economy is largely based on the growth and harvesting of peaches, this county has been experiencing relatively higher growth rates than Talladega County in terms of population and households. Chilton County employers include GulfStates Paper Corp., International Paper Corp. and Union Camp Corp.

     Residential Lending

     General

     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 lending personnel. No loan brokers are used. Conventional residential loans are priced based on rates offered by the local competition and in the secondary market. At September 30, 2003, First Federal had $39.8 million, or 46% 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 according to, either, 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, 2003, First Federal held approximately $28.3 million ARMs, which represented approximately 33.0% of First Federal’s total loan portfolio. First Federal’s ARM loans are subject to a limitation of 2.0% per year 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

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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.

     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. At September 30, 2003, such loans amounted to $13.4 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.

     Residential Lending - Birmingham Market Area

     Residential Lending in the Birmingham area was particularly strong during fiscal year 2003. With interest rates dropping to a forty year low refinances and purchases increased significantly. The bank continues to restructure and hire experienced personnel to manage and increase the growth of the Birmingham office. Curt Reamer was appointed as the Vice President of Mortgage Originations and Construction Lending. Mr. Reamer has many years of residential and construction lending experience in the Birmingham housing market. In addition, Anna Vanderford was appointed Vice President of Loan Production and Business Development. A full-time underwriter, Renea Bush, was hired to complete the staffing of the Loan Production Office in Birmingham. During the quarter ended September 30, 2003, SouthFirst Mortgage had 67 residential loan originations totaling $8,342,815. For the years ended September 30, 2003 and September 30, 2002, First Federal had total residential loan originations (including the originations by SouthFirst Mortgage) of $53,635,000 and $28,568,000, respectively.

     Construction Lending

     SouthFirst Mortgage, Inc.

     The majority of the residential construction lending of First Federal is conducted in the Birmingham metropolitan area, through its wholly-owned subsidiary, SouthFirst Mortgage, located in Hoover, Alabama, a

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suburb of Birmingham. At September 30, 2003, committed construction loans secured by single-family residential property totaled $24.2 million; of this amount, approximately $7.9 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.

     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.

     During fiscal year ending September 30, 2003, the Construction Loan Division of SouthFirst Mortgage continued to operate under the supervisory agreement imposed by the OTS on First Federal in fiscal year 2002 (See, “Construction Lending – Supervisory Agreement and Organizational Restructure” below). Subsequent to fiscal year end, Dan McArthur, Vice President of Construction Lending left the employment of the company. Curt Reamer, was appointed Vice President of Mortgage Originations and Construction Lending for SouthFirst Mortgage. While Mr. Reamer manages both areas of the mortgage company the divisions continue to operate separately. Wayne Cole and Nita Robison both serve as Assistant Vice Presidents in the Construction Lending Division. Senior management of First Federal has oversight of both lending groups as set forth by the Board of Directors. The organizational structure for SouthFirst Mortgage is set forth below.

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Supervisory Agreement and Organizational Restructure

     The construction-lending activity of SouthFirst Mortgage was placed under certain loan-amount restrictions, and related requirements, as a result of a supervisory agreement imposed on First Federal (the “Supervisory Agreement”), in March, 2002, by the OTS. See also “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS - Supervisory Agreement.” Subsequently, on August 8, 2002, Margie Bryant resigned as President and CEO of SouthFirst Mortgage.

     Pursuant to the requirements of the Supervisory Agreement, and in light of the resignation of Ms. Bryant, it was determined by the Board of Directors of First Federal that Senior Management of First Federal should provide direct managerial oversight of SouthFirst Mortgage. Thereafter, Joe K. McArthur, President and Chief Executive Office of First Federal, was appointed as the Chief Executive Officer of SouthFirst Mortgage, Sandra Stephens, Executive Vice President and Chief Operating Officer of First Federal, was appointed as President of SouthFirst Mortgage, and Janice Browning, Vice President and Controller of First Federal, was appointed as Vice President and Controller of SouthFirst Mortgage.

     Further, certain Vice Presidents of First Federal were appointed as additional Vice Presidents of SouthFirst Mortgage, in order to perform credit review analysis and assist in certain administrative functions within the SouthFirst Mortgage construction lending and permanent mortgage lending operations. Any Vice President of SouthFirst Mortgage with construction lending authority can originate construction loans up to $350,000 with co-approval of another Vice President. Any construction loan between $350,000 and $500,000 must be presented to the loan committee of First Federal for approval. All construction loans greater than $500,000 require approval of the Board of Directors of First Federal.

     To further enhance the overall organizational structure of SouthFirst Mortgage, in, both, the residential lending and construction lending functions, SouthFirst Mortgage has also named a Vice President of Billing and Collections who has many years of experience in the collection function with another financial institution.

     First Federal, pursuant to the provisions of the Supervisory Agreement, has instituted a system of internal procedures to help ensure that construction loan interest, construction loan balances, and other provisions set forth in the Supervisory Agreement regarding construction lending are met and fairly stated.

     Commercial Lending

     At September 30, 2003, commercial lending totaled $11.4 million, or 13.5%, 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, 2003, consumer loans totaled $4.8 million, or 5.7% of First Federal’s total loan portfolio. This amount includes $0.9 million of loans secured by savings accounts, $2.4 million of loans secured by vehicles, and $1.5 million in other secured loans.

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     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 permanent residential mortgage loans, other than residential construction loans less than $350,000, are underwritten and approved by the loan committee of First Federal. Any Vice President of SouthFirst Mortgage with construction lending authority, with the co-approval of another Vice President, has underwriting and loan approval authority for any construction loan up to $350,000. Construction loans in amounts greater than $350,000, but less than $500,000, must be approved by the loan committee of the First Federal Board of Directors. All permanent residential mortgage loans and residential construction loans in excess of $500,000 require approval of the Board of Directors of First Federal.

     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.

     Competition

     First Federal has significant competition for its loan products in Talladega, Jefferson and Chilton Counties and in the Birmingham market area. The cities of Birmingham, 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 also faces significant competition in attracting deposits in its relevant market areas. First Federal’s competition for its loan products 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 is a community and retail-oriented financial institution serving its relevant market areas with deposit services and loan services. 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 areas.

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     Data Processing

     During fiscal 2003 First Federal began the process of evaluating the data processing services presently provided by Kirchman Corp since the contractual agreement with Kirchman was set to expire in 2004. After thorough research and review of several data processing firms, including Kirchman, First Federal entered into a contractual agreement with FISERV effective September 26, 2003 to convert the bank’s data processing function to the FISERV Vision system.

     FISERV will provide First Federal a full range of data processing services, including an automated general ledger, deposit accounting, commercial, real estate and consumer lending data processing platforms, central information file, investment portfolio accounting, and ATM processing. Conversion to the FISERV data processing platform is scheduled for spring 2004 following the expiration of the Kirchman contract.

     Employees

     First Federal presently employs 78 individuals on a full-time basis, including 22 officers, and 8 individuals on a part-time basis. First Federal will hire additional persons as needed, including additional tellers and financial service representatives.

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, a 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

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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, 2003, 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. In November 2003, SouthFirst sold its entire interest back to Magnolia for $25,000.

     SouthFirst Financial Services, Inc.

     SouthFirst Financial was incorporated on June 16, 2000, as a 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

     SouthFirst and First Federal are subject to regulations, supervision and examination by the OTS, the FDIC and other state and federal regulators. These 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 SouthFirst and First Federal establishes a comprehensive framework for the operations of SouthFirst and First Federal, 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

     USA Patriot Act

     See “Item 1. BUSINESS – Business of SouthFirst – USA Patriot Act.”

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 SEC. As such, SouthFirst is required to register and file reports with the OTS and the SEC and is subject to regulation and examination by the OTS. In addition, the OTS’s 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.

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     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 or multiple savings and loan holding companies, provided that First Federal continues to qualify as a “qualified thrift lender” (see “- Regulation of First Federal — Qualified Thrift Lender Test” below). Although the Gramm-Leach-Bliley Act, enacted in November 1999, prohibits new unitary thrift holding companies from engaging in nonfinancial activities or affiliating with nonfinancial entities, such prohibition does not apply, for a period of 10 years if the non-financial activities constitute no more than 15% of its business, to companies, such as SouthFirst, which became unitary thrift holding companies pursuant to applications filed with the OTS prior to May 4, 1999. Because SouthFirst filed its application prior to this date, it is considered a “grandfathered” unitary thrift holding company; as such, SouthFirst retains the authority to engage in nonfinancial activities, but SouthFirst cannot be acquired by a nonfinancial company. In the event that SouthFirst acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company and would thereafter be subject to further restrictions on its activities.

     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 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 of 1991 (“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.

     As discussed above, 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 “new” unitary thrift holding companies (formed after May 4, 1999) by nonfinancial companies.

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     Federal Securities Laws

     Shares of common stock of SouthFirst (“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 of Common Stock in any three-month period.

Regulation of First Federal

     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 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.

     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).

     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 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.

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     As a result of the recapitalization of the SAIF implemented by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the “EGRPRA”), 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 were assessed at the same rate for FICO obligations.

     The EGRPRA 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. 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 smaller savings institutions, whose total assets never exceeded $100 million, the OTS 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.

     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 under capitalized. At September 30, 2003, 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

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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, 2003, First Federal’s ratio of tangible and core capital to total adjusted assets was 9.99%.

     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, 2003, First Federal’s ratio of total capital to total risk-weighted assets was 16.43%.

     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 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.

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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 “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Capital Resources” for tables setting forth First Federal’s compliance with its regulatory capital requirements as of September 30, 2003.

     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 Tier 1 leverage capital ratio of 5.0% or greater and is not subject to any order or capital 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 a Tier 1 leverage ratio of 4.0% or greater (3% under certain circumstances) 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 a Tier 1 leverage ratio that is less than 4.0% (3% under certain circumstances); (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 Tier 1 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 equal to or less than 2.0%. However, under certain circumstances, 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, 2003, 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 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.

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     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 impose limitations upon savings associations’ capital distributions, such as cash dividends, payments to repurchase or otherwise acquire its shares and other distributions charged against capital. Under the 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 application or notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Company, will continue to have to file a notice and to receive the approval of the OTS. The OTS may disapprove a notice or deny an application regarding a proposed capital distribution, if the OTS determines that the proposed distribution by a savings association would constitute an unsafe or unsound practice or that, after making the distribution, the savings association would be “undercapitalized” under the OTS regulations.

     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, as amended (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 savings 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” include (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) shares of stock issued by any Federal home loan bank, (vi) loans for educational purposes, (vii) loans to small business, and (viii) loans made through credit cards or credit card accounts. In addition, subject to a limit of 20% of portfolio assets, savings associations are able to treat as Qualified Thrift Investments 200% of their investments in loans to finance “starter homes” and loans for construction,

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development or improvement of housing and community service facilities or for financing small business in “credit needy” areas. At September 30, 2003, 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 to become one or more banks 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 has 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 fails the QTL test, it is 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 prudently can be 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.

     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 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. Prior to March 2002, First Federal had permission from the OTS to increase its loans to one borrower limit for single-family, residential builders, as permitted under applicable federal law and regulations. The increased limit for these borrowers was 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. As a result of the Supervisory Agreement between First Federal and the OTS, entered into in March 2002, the 30% limit was revoked. See, also, “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS - Supervisory Agreement.”

     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.

     Such real estate lending 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%); improved property (85.0%). There is no maximum LTV limit for one-to-four family

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residential (owner occupied); however, any LTV ratio in excess of 90.0% requires appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.

     Certain institutions may make real estate loans that do not conform with established LTV limits, up to 100.0% of the institution’s 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 (the “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 this record into account in its evaluation of certain applications by the institution. FIRREA amended the CRA to require public disclosure of an institution’s CRA rating and to 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 December 2, 2002.

     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 in 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 of the Federal Reserve Act.

     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

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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 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

     The Asset and Liability Committee of First Federal’s Board of Directors monitors and manages the liquidity needs of the Company to ensure that there is sufficient cash flow to satisfy demand for credit and deposit withdrawals, to fund operations and to meet other Company obligations and commitments on a timely and cost effective basis. Under current regulations, First Federal is required to maintain sufficient liquidity to assure its safe and sound operation. The requirement to maintain a specific minimum amount of liquid assets, established by previous regulation, has been eliminated. Presently, there is no objective standard or guideline regarding the application of the current regulatory requirement that a savings association maintain a liquidity sufficient to ensure its safe and sound operation.

     Under the previous regulation, First Federal was required to maintain an average daily balance of liquid assets, in each calendar quarter, of not less than 4% of (i) the amount of its liquidity base at the end of the preceding calendar quarter, or (ii) the average daily balance of its liquidity base during the preceding quarter. For purposes of this computation, liquid assets included specified short-term assets (e.g., cash, certain time deposits, certain banker’s acceptances and short-term U.S. Government, state or federal agency obligations), and long-term assets (e.g., U. S. Government obligations of more than one and less than five years and state agency obligations maturing in two years or less).

     As of September 30, 2003, First Federal’s average daily balance of liquid assets was approximately 37.1% of its June 30, 2003 liquidity base, far exceeding the 4% requirement set by the previous regulation. These liquid assets included approximately $7,680,000 in cash and cash equivalents, and approximately $28,939,000 in other qualifying assets. As of September 30, 2003, the fair market value of the Company’s investment securities portfolio, which is held for sale, was $32,600,000. The Company uses its investment securities portfolio to manage liquidity and interest rate risk, whereby liquidity is available through those securities that are not pledged. Further, cash flows from operations, resulting primarily from net income adjusted for certain items such as interest expense and provision for loan losses, are an additional source of liquidity for the Company.

     With respect to current funding sources, deposits provide a significant portion of SouthFirst’s cash flow needs and continue to provide a relatively stable, low cost source of funds. Other sources of funding used by SouthFirst include commercial lines of credit and advances from the Federal Home Loan Bank of Atlanta. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION – Liquidity.”

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     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, 2003, of $1,117,000.

     Federal Home Loan Bank Advances

     Each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is funded from proceeds derived from the sale of consolidated obligations of the FHLB system. FHLB 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.

     On April 15, 2002, First Federal was notified that the amount available under its credit line with the Federal Home Loan Bank of Atlanta had been changed from a variable amount, equal to 30% of total assets. or approximately $42,000,000, to a fixed amount of $22,000,000. This amount was subsequently changed to an amount equal to 10% of its total assets. At September 30, 2003, First Federal owed the Federal Home Loan Bank of Atlanta $22,340,000 in outstanding advances. The Federal Home Loan Bank of Atlanta has notified First Federal that it will not require First Federal’s existing borrowings to be reduced to the new fixed amount prior to the existing advance maturities, but that it will require that any additional borrowings by First Federal be approved through application by First Federal to the Federal Home Loan Bank of Atlanta’s Credit Committee. Management believes that this reduction in the amount available under this credit line, because of the existing liquidity and other funding sources available to SouthFirst and First Federal, will have no adverse impact on the operations of SouthFirst or First Federal.

     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, 2003 and September 30, 2002, dividends were paid by the FHLB to First Federal in the amounts of $54,302 and $125,434, respectively. Were these dividends to be reduced, or were interest subsidies on future FHLB advances were to increase, First Federal’s net interest income likely would be reduced.

     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 $6.6 million of transaction accounts, while reserves equal to 3% must be maintained on the next $45.4 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 depository institutions’ interest-earning assets. At September 30, 2003, First Federal was in compliance with the reserve requirements of the Federal Reserve Board.

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     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, 2003.

ITEM 2. PROPERTIES.

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

     The following table sets forth information relating to the offices of SouthFirst, First Federal and Pension & Benefit at September 30, 2003. The total net book value of these properties at September 30, 2003 was approximately $3,738,000.

					Net Book Value		Deposits
			Leased		as of		as of
Location			or Owned	Date Opened	Sept. 30, 2003		Sept. 30, 2003
					(In thousands)
SouthFirst and First Federal
	Main Office
		126 North Norton Avenue Sylacauga, Alabama 35150	Owned	April 1966	$	719	$	45,682
	Office/Storage Building
		North Norton Avenue Sylacauga, Alabama 35150	Owned	November 1995		221		N/A
	First Federal Branch Offices
		301 West North Street Talladega, Alabama 35160	Owned	April 1961		193		13,423
		102 Fifth Street North Clanton, Alabama 35045	Owned	November 1997		1,072		34,453
SouthFirst Mortgage
	Loan Production Offices
		2159 Rocky Ridge Road Birmingham, Alabama 35216	Leased	March 1994		1,257		N/A
Pension & Benefit
		260 Commerce Street Third Floor Montgomery, Alabama 36101	Owned	April 1997		276		N/A
Total					$	3,738	$	93,558

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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 that there are no pending or threatened legal proceedings which, upon resolution, are expected to have a material effect upon SouthFirst’s or First Federal’s financial condition. Nonetheless, descriptions of certain legal proceedings, including previously-disclosed legal procedings, follow:

     Pending Legal Proceedings

     First Federal is currently involved in four (4) pending legal proceedings, descriptions of which are set forth below. The first three (3) pending lawsuits have been consolidated before Chilton County Circuit Court Judge Sibley Reynolds. First Federal’s insurance carrier has been notified of the precedings.

     1.     In a lawsuit brought by Mike Burford and his company styled Burford, d/b/a Burford’s Wood Waste and also Burford’s Tree Surgeons v. Harry Eugene Hammock and Janice C. Hammock, in the Circuit Court of Chilton County, CV 03-337, First Federal is not a named defendant. However, in a hearing before Judge Reynolds on December 8, 2003, a party threatened to make First Federal a party to the lawsuit for what was claimed at that time to be First Federal’s liability for allegedly improperly cashing checks presented by the Hammocks to First Federal, but made payable to Burford and/or his company. Since Mr. Burford claims the Hammocks have engaged in these types of improper activities since at least 1996, the only way for First Federal to determine if this activity has been engaged in is for First Federal to review every single check that has passed through its hands since 1996. Currently, First Federal is under no obligation to Burford to conduct this inquiry since no claims have been formally filed against First Federal by Burford or any of his affiliates. However, First Federal is subject to a subpoena issued by the Chilton County District Attorney’s Office investigating this matter. First Federal has turned over copies of all checks it was able to find that were deposited directly either into the Hammocks’ checking and/or savings accounts. First Federal has advised the Chilton County District Attorney’s Office that there would be tremendous time and expense involved in responding to the rest of the subpoena. At this time the Chilton County District Attorney has indicated that he does not intend to make First Federal bear the costly burden of responding fully to the subpoena issued by his office. The plaintiff, on the other hand, has threatened to make First Federal a party to this lawsuit and to demand the same documentation from First Federal. Consequently, there can be no assurance that First Federal will not be required to conduct such a review in the future. Furthermore, if a claim is brought against First Federal, damages could be assessed against First Federal if it is ultimately held liable for improperly cashing and/or improperly depositing checks. While no claim has yet been filed against First Federal, Mr. Buford has estimated his total damages in the existing lawsuit to fall in the broad range of between $250,000 and $650,000.

     On Tuesday, November 4, 2003, Judge Reynolds issued a Temporary Restraining Order enjoining the Hammocks from disposing of any assets acquired before November 4, 2003, including any funds held in any checking or savings accounts on December 8, 2003. That Order was extended indefinitely by Judge Reynolds.

     2.     First Federal is a plaintiff in an interpleader action filed by it styled First Federal of the South v. Danny E. Hammock, Janice Hammock, Burford Tree Surgeons and Mike Burford in the Circuit Court of Chilton County, Alabama, CV 03-338. A hearing was held in this matter on December 8, 2003 before Judge Reynolds. At the conclusion of the hearing, Judge Reynolds granted First Federal’s request that it be allowed to pay into the Circuit Court Clerk’s Office those funds held in checking and savings accounts in the names of Janice Hammock and/or her husband, Danny Hammock. Pursuant to the Court’s Order, First Federal has deposited those funds with the Chilton County Circuit Court Clerk’s Office. Burford Tree Surgeons and Mike Burford have filed an Answer to First Federal’s Complaint, claiming that they are entitled to the funds. The Hammocks, who were just served with the lawsuit on December 6, have not yet responded, but it is anticipated that they will claim the funds belong to them. No claims have been made against First Federal in this action.

     3.     In the suit styled Danny E. Hammock and Janice Hammock v. First Federal and Sandra Stephens (CV 03-347), the Hammocks requested that the Court issue an order directing First Federal to unfreeze the Hammocks’ accounts. That request was denied. The Hammocks have also made monetary claims, for unspecified amounts, against First Federal for negligence, wantonness, and recklessness in freezing the accounts. First Federal received the Chilton County District Attorney’s subpoena on Wednesday, October 29, 2003, and froze the Hammocks’ accounts on that date.

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Any allegedly “improper freezing” of assets took place at most for only six days because the assets were frozen by Court Order in case number CVO3-337 on November 4, 2003.

     4.     On or about October 14, 2003, First Federal filed suit against Ruby M. Glass, Elnora Green and Flora Jones, which case is styled, First Federal Bank v. Glass, Green and Jones, in Talladega County. First Federal seeks the repayment of money improperly deposited into a joint account of the defendants. Defendants were served at end of October, 2003, and no appearance has been made. No further action has occurred in this case.

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

     No matter was submitted during the fourth quarter ended September 30, 2003 to a vote of security holders of SouthFirst.

PART II

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

     As of December 12, 2003, SouthFirst’s Common Stock was held by approximately 307 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 sale prices, as well as cash dividends declared for each quarter from October 1, 2001 through September 30, 2003:

					Cash
					Dividends
	High Sale		Low Sale		Declared(1)
Fiscal Year Ended September 30, 2003
First Quarter ended December 31, 2002		14		11 3/5	$	121,076
Second Quarter ended March 31, 2003		15		13 5/9		116,876
Third Quarter ended June 30, 2003		15 1/7		13 4/9		107,801
Fourth Quarter ended September 30, 2003		15 1/3		14		107,794
Fiscal Year Ended September 30, 2002
First Quarter ended December 31, 2001		11		9 1/3		130,948
Second Quarter ended March 31, 2002		11 2/3		11		122,894
Third Quarter ended June 30, 2002		13		12 5/9		121,752
Fourth Quarter ended September 30, 2002		12 1/3		11 6/7		121,751

⁽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 “Item 10. EXECUTIVE COMPENSATION — Management Recognition Plans” and “— Employee Stock Ownership Plan.”

     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 “Item 1. 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 “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Capital Resources” and “Item 1. 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 that affected SouthFirst’s results of operations and financial condition for the referenced periods.

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     The purpose of this discussion is to focus on significant changes in the financial condition and results of SouthFirst’s operations during the two-year period ended September 30, 2003 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.

Forward Looking Statements

     As stated in the opening paragraph to this Annual Report on Form 10-KSB, entitled “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995,” this Annual Report on Form 10-KSB contains certain forward-looking statements, including management’s discussion and analysis of financial condition and results of operation under this Item 6. While SouthFirst believes that the statements contained in this Item 6, and throughout this Annual Report on Form 10-KSB, are accurate, SouthFirst’s business is dependent upon general economic conditions and various conditions specific to its industry. Future trends and conditions could cause actual results to differ materially from the forward-looking statements made herein.

Results of Operations

     Net Income

     For the fiscal year ended September 30, 2003, net income decreased $554,941 (82.73%) from net income of $670,805 in fiscal 2002. Earnings per common share were $0.16 and $0.82 for the fiscal years ended September 30, 2003 and 2002, respectively. The decrease in net income for fiscal 2003 was due primarily to an increase in the provision for loan losses and an increase in non-interest expense. First Federal’s net interest income after provision for loan losses decreased $1,122,197 (25.1%) during fiscal 2003, from $4,465,046 to $3,342,849. This decrease was primarily attributable to an increase in the provision for loan losses of $1,217,253, from a benefit of $667,650 to an expense of $549,603, the reasons for which are discussed below under the heading “Provision for Loan Losses.” This decrease in net interest income was partially offset by an increase in net interest income before provision for loan losses in the amount of $95,056 (2.5%), resulting primarily from the effect in the changes in interest rates between interest-earning assets and interest-bearing liabilities. Fee income received by Pension and Benefit Trust Company increased $58,994 (5.0%) during fiscal 2003, from $1,172,628 to $1,231,622. Other expenses increased $490,680 (7.7%) during fiscal 2003 from $6,406,731 to $6,897,411.

     For the fiscal year ended September 30, 2002, net income increased $1,092,898 (258.0%) from a net loss of $422,093 to a net income of $670,805. Earnings per common share were $0.82 for the fiscal year ended September 30, 2002. The increase in net income in fiscal 2002 was due primarily to a decrease in the provision for loan losses, an increase in gain on sale of loans, an increase in the sale of investment securities available for sale and an increase in other income.

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

     Net Interest Income

     Net interest income was $3,892,452 for the twelve months ended September 30, 2003, which represents an increase of $95,056 (2.5%) from fiscal 2002. Net interest income is the difference between the interest earned on loans, investment securities and other interest-earning assets and the interest cost associated with deposits and borrowed funds. The increase in 2003 is primarily due to an increase in the net interest rate spread. The net interest rate spread increased as rates on interest-earning assets decreased fifty-four (54) basis points to 6.09%, while the cost of funds decreased eighty-four (84) basis points to 2.93%. The combined effect of the changes in average balances and the changes in rates above resulted in an increase in net interest income.

     Net interest income was $3,797,396 for the twelve months ended September 30, 2002. The decrease of $110,000 (2.8%) over the comparable twelve months of 2001 was primarily the result of a decrease in the average balance of interest-earning assets from $141.6 million to $128.6 million, while the average balance of interest-bearing liabilities decreased from $136.0 million to $125.4 million. The combined effect of the changes in

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average balances and the increase in the net interest rate spread resulted in the $110,000 decrease in net interest income for fiscal 2002.

     First Federal’s Asset/Liability Committee (“ALCO”) conducts a gap analysis 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 affect earnings positively.

     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,
		2003 vs. 2002									2002 vs. 2001									2001 vs. 2000
		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	$	(215	)	$	4		$	(211	)	$	(286	)	$	(400	)	$	(686	)	$	(167	)	$	(20	)	$	(187	)
	Loans receivable		(154	)		(726	)		(880	)		(534	)		(1,145	)		(1,679	)		(542	)		(294	)		(836	)
Total interest income			(369	)		(722	)		(1,091	)		(820	)		(1,545	)		(2,365	)		(709	)		(314	)		(1,023	)
Interest expense:
	NOW accounts		1			(81	)		(80	)		14			(31	)		(17	)		(10	)		(5	)		(15	)
	Money market demand		—			(1	)		(1	)		(1	)		—			(1	)		(1	)		—			(1	)
	Passbook savings		1			(106	)		(105	)		4			(41	)		(37	)		(15	)		(8	)		(23	)
	CDs other than Jumbos		(57	)		(749	)		(806	)		(314	)		(899	)		(1,213	)		(158	)		151			(7	)
	Jumbos		68			(46	)		22			(10	)		(208	)		(218	)		59			107			166
	Borrowed funds		(194	)		(22	)		(216	)		(185	)		(584	)		(769	)		(213	)		(61	)		(274	)
Total interest expense			(181	)		(1,005	)		(1,186	)		(492	)		(1,763	)		(2,255	)		(338	)		184			(154	)
	Change in net interest income	$	(188	)	$	283		$	95		$	(328	)	$	218		$	(110	)	$	(371	)	$	(498	)	$	(869	)

     Interest Income

     Interest income is a function of both the volume of interest earning assets and their related yields. Interest income was $7,436,000, $8,527,000 and $10,892,000 for the twelve months ended September 30, 2003, September 30, 2002 and September 30, 2001, respectively. Average interest earning assets decreased $6,472,000 (5.0%) during fiscal 2003, decreased $12,945,000 (9.1%) during fiscal 2002 and decreased $9,269,000 (6.1%) during fiscal 2001. The yield for fiscal years 2003, 2002 and 2001 decreased primarily due to rates on mortgage and residential construction loans decreasing during the year. Interest and fees on loans were $5,948,000, $6,828,000 and $8,506,000 for the twelve months ended September 30, 2003, September 30, 2002, and September 30, 2001, respectively. The decrease in average loans receivable in fiscal 2003 was largely due to the sale of approximately $6,400,000 in commercial, residential mortgage and other consumer loans in connection with the sale of First Federal’s branch office in Centreville, Alabama to First Financial Bank in Bessemer, Alabama during fiscal 2003.

     Interest income on total investment securities available for sale, decreased $203,000 (12.7%) to $1,397,000 in 2003. The average balance outstanding of investment securities available for sale decreased $3,670,000 (11.9%) to $27,238,000 in 2003, decreased $5,612,000 (15.4%) to $30,907,000 in 2002 and decreased $2,373,000 (6.1%) to $36,519,000 in 2001. The yields on investment securities were 5.13% in 2003

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and 5.18% in 2002. Interest income on total investment securities available for sale decreased $509,000 (24.1%) in 2002.

     Interest Expense

     Total average interest-bearing liabilities were $120,924,000, $125,364,000 and $136,000,000 for fiscal years 2003, 2002, and 2001, respectively. Interest bearing liabilities decreased by $4,439,000 (3.5%) in 2003, decreased by $10,636,000 (7.8%) in 2002, and decreased $7,213,000 (5.0%) in 2001. The rates paid on these liabilities decreased by 84 basis points to 2.93% in 2003, decreased by 137 basis points to 3.77% in 2002 and increased by 16 basis points to 5.14% in 2001. Total interest expense was $3,544,000, $4,730,000 and $6,984,000 for 2003, 2002, and 2001, respectively, which represents a decrease of $1,186,000 (25.1%), a decrease of $2,254,000 (32.3%), and a decrease of $155,000 (2.2%), during fiscal years 2003, 2002, and 2001, respectively. The decrease in 2003 and 2002 was primarily due to the decrease in interest-bearing liabilities, along with the reduction in interest rates. 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.

     Interest on deposits, the primary component of total interest expense decreased to $2,521,000 in 2003, decreased to $3,491,000 in 2002 and increased to $4,977,000 in 2001. The average balance of interest-bearing deposits increased to $95,707,000 in 2003 from $95,363,000 in 2002, representing an increase of $344,000 (0.4%). In 2002, the balance of $95,363,000 represented a decrease of $6,165,000 (6.1%) from the balance of $101,528,000 in 2001.

     Interest expense on borrowed funds, including both short-term and other borrowed funds, was $1,023,000, $1,239,000 and $2,007,000 for fiscal 2003, 2002 and 2001, respectively. The decrease in 2003 and 2002 was primarily due to lower interest rates, along with principal reduction in average borrowings of approximately $4,800,000 and $4,500,000, 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 average balance of FHLB advances outstanding was $22,340,000, $27,044,000 and $31,717,000 for 2003, 2002, and 2001, respectively. The average balance of total borrowed funds, including both short-term and other borrowed funds was $25,218,000 for 2003, $30,001,000 for 2002, and $34,471,000 for 2001.

     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 (benefit) was $549,603, ($667,650), and $857,688 for fiscal 2003, 2002 and 2001, respectively. The amount of the provision for loan losses for fiscal 2003 is primarily the result of a specific reserve for approximately $525,000 relative to an acquisition and development loan, with a commitment of $2,250,000, which, as of September 30, 2003, had a disbursed balance of approximately $1,790,000. (See “Financial Condition — Allowance for Loan Losses and Risk Elements” below for further discussion.) The amount of the provision for loan losses for fiscal 2002 was primarily the result of a reversal of an additional provision for a loan that defaulted in the fourth quarter of fiscal 2001 in the principal amount of $657,000. This loan 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. The total of the loan loss and the related expenses associated with this loan in the fourth quarter of 2001 was $713,000, including the loss of principal and unpaid interest, as well as related legal and accounting expenses. The Bank 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. A settlement was reached on August 28, 2002, for which the bank received $761,000.

     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.

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     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.

     Significant write-offs in fiscal 2003 consisted primarily of a commercial real estate loan in Clanton, Alabama, which was foreclosed and subsequently sold in 2003. There were no significant charge-offs in 2002 and 2001. In 2001, a provision was made in the amount of $654,746 for the previously mentioned Vawter loan, which was recovered in fiscal 2002. In addition to the acquisition and development loan mentioned above, management has also specifically reserved approximately $371,000, of which approximately $316,000 is reserved on a commercial loan to a used automobile dealership, and approximately $55,000 on other types of consumer loans. Management believes the allowances for loan losses at September 30, 2003 ($1,191,033) to be 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.

     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 $708,000 (23.3%) in 2003 from $3,033,000 in 2002. Other income increased $722,000 (31.3%) in 2002 from $2,311,000 in 2001. The increase in 2003 was due to an increase in fee income from Pension & Benefit Trust Company from $1,173,000 to $1,232,000, an increase in the gain on the sale of mortgage loans from $612,000 to $1,170,000, and a gain from service charges and other fees from $448,000 to $569,000. Additionally, First Federal recorded a one-time profit from the sale of deposits of approximately $250,000, which is the equivalent to a 3% premium on the sale of $8,300,000 of deposits upon completion of the sale of its Centreville branch location in the fourth quarter of fiscal 2003. The increase in 2002 was due to an increase in fee income from Pension & Benefit Trust Company from $1,129,000 to $1,173,000, an increase in the gain on the sale of mortgage loans, from $394,000 to $612,000, and an increase in the gain from the sale of certain investment securities available for sale, from $4,000 to $236,000.

     Service charges and other fees were $569,000, $448,000 and $443,000 in fiscal 2003, 2002 and 2001, respectively. The fluctuations are primarily due to changes in overdraft and non-sufficient charges.

     The gain on sale of mortgage loans increased $558,000 (91.3%) in 2003, increased $218,000 (55.4%) in 2002 and increased $82,000 (26.2%) in 2001. The restructuring process in the mortgage banking division with the addition of mortgage loan originators, along with the decrease in mortgage loan rates, has resulted in an increase in the volume of originations and sales of mortgage loans in fiscal 2003 and 2002. The increase in 2001 was also the result of lower mortgage loan rates, which increased volumes, and increased sales of mortgage loans.

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     The gain on sale of investment securities available for sale remained approximately the same for fiscal 2003 and 2002 at approximately $238,000 and $236,000, respectively. In 2002 and 2001, the gain on sale of investment securities available for sale increased $232,000 and $8,000, respectively.

     Other Expense

     Total other expense increased to $6,897,000 in 2003 from $6,407,000 in 2002. Other expense increased in 2001 to $6,025,000. This represented an increase of $490,000 (7.7%) in 2003, an increase of $382,000 (6.3%) in 2002, and an increase of $726,000 (13.7%) in 2001.

     Compensation and benefits totaled $4,279,000, $3,636,000 and $3,118,000 for fiscal years 2003, 2002 and 2001, respectively. These levels reflect an increase of $644,000 (17.7%) in 2003, an increase of $518,000 (16.6%) in 2002 and an increase of $217,000 (7.5%) in 2001. The increases in each year was primarily attributable to new salaries associated with the restructuring process, particularly in the mortgage banking division, along with merit and cost of living raises and the costs of benefits associated with such increases.

     Increases in other expenses during fiscal 2003 occurred in occupancy, office supplies and related expenses, deposit insurance premiums and other operating expense of approximately $34,000, $16,000, $22,000 and $110,000, respectively. These increases in other expenses were partially offset with decreases in expenses related to data processing, goodwill amortization and legal matters in the amount of $57,000, $54,000 and $190,000, respectively.

     Termination agreements expense was $560,000 for 2001. The expense in 2001 was related to the settlement of certain legal actions with a former director and officer as well as other expenses under the employment contract of the Company’s President and Chairman of the Board of Directors who resigned.

     Income Tax Expense

     Income tax expenses (benefits) were $71,000, 421,000 and ($242,000) for fiscal 2003, 2002 and 2001, respectively. These levels represent an effective tax rate on pre-tax earnings (losses) of 38% in 2003, 39% in 2002 and 36% in 2001.

Supervisory Agreement

     On March 29, 2002, SouthFirst announced that First Federal, on March 22, 2002, had entered into a Supervisory Agreement with the OTS. A copy of the press release announcing the Supervisory Agreement and a copy of the Supervisory Agreement were included with SouthFirst’s Form 8-K filed with the SEC on March 29, 2002.

     The Supervisory Agreement formalized certain understandings between First Federal and the OTS with respect to actions that First Federal and its Board of Directors had to undertake to comply with the requirements of the OTS.

     Under the Supervisory Agreement, First Federal’s Board of Directors was required, among other things, to develop, adopt and implement appropriate lending policies and procedures before beginning any new types of lending activities or increasing the amounts of existing construction-lending activities.

     Further, the Board of Directors was required to review First Federal’s residential construction loan portfolio and establish limits on its residential construction lending practices in compliance with federal regulations and the Supervisory Agreement. As a result of the requirements set forth in the Supervisory Agreement and based upon further communications with the OTS, First Federal’s speculative construction lending, in the aggregate, is limited to 120% of First Federal’s tangible capital, which aggregate portfolio limit, as of September 30, 2003, was $15,990,000. The total amount of First Federal’s speculative construction loan

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portfolio, as of September 30, 2003, was equal to $11,652,000, which was 87% of First Federal’s tangible capital and, thus, well within the 120% limit. Management believes that this aggregate portfolio limit, as required by the Supervisory Agreement, will not have a material adverse effect on the amount of First Federal’s future net income to be derived from its construction-lending activities, as contemplated in the relevant projections included in the Business Plan and Strategic Plan of First Federal.

     Further, under the Supervisory Agreement, First Federal’s limits on loans to one borrower were reduced. Under federal law, the aggregate amount of loans that First Federal and SouthFirst Mortgage are permitted to make to any one borrower (in the aggregate) 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. Prior to the effective date of the Supervisory Agreement, First Federal and SouthFirst Mortgage had received permission from the OTS to increase the applicable loans to one borrower limits for single-family residential builders, as permitted under applicable federal law and regulations. The increased limit for these borrowers was 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.

     As a result of the Supervisory Agreement, however, the 30% limit was revoked, and First Federal and SouthFirst Mortgage now are required to comply with the normal regulatory limit of 15% of unimpaired capital and surplus of First Federal. At September 30, 2003, this 15% limit was equal to $2,113,000, and there was one (1) construction loan commitment from First Federal and/or SouthFirst Mortgage which remained in excess of this newly imposed loan limit, with the largest commitment being $2,334,000. The OTS has previously indicated to First Federal that the balance of the remaining non-compliant loans will be allowed to pay out through the ordinary course of loan payment collection, thus avoiding having to sell such loans.

     Most of First Federal’s construction lending relationships have been well below the 15% loan-to-one-borrower limit. As of March 22, 2002, the effective date of the Supervisory Agreement, there were only three (3) construction loan commitments in excess of that limit. Therefore, management believes that this reduction in individual loan-to-one-borrower limits will not have a material adverse effect on the amount of future net-income of First Federal to be derived from its construction lending activities, as contemplated in the relevant projections included in the Business Plan and Strategic Plan of First Federal.

     First Federal remains a well-capitalized institution, and the Supervisory Agreement has not resulted in any interruption of its day-to-day operations. The Supervisory Agreement will remain in place until modified, terminated or suspended by the OTS. A failure to comply with the Supervisory Agreement could result in the initiation of a formal enforcement action by the OTS, including the imposition of civil money penalties.

     New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which changed the accounting for goodwill from an amortization method to an impairment only approach. Upon adoption of SFAS No. 142 on October 1, 2002, the Company ceased amortizing goodwill. Based upon the initial goodwill impairment test completed October 1, 2002, as required by SFAS No. 142, no goodwill impairment was indicated. In addition, the goodwill impairment testing completed at September 30, 2003 indicated there was no goodwill impairment. Therefore, the Company had no changes in the carrying amount of goodwill from September 30, 2002 to September 30, 2003.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. The statement 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.

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     The Company adopted the requirements of SFAS Nos. 143 and 144 on October 1, 2002. The effects of these statements did not have a material impact on the Company’s consolidated financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This statement also amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The effects of this statement did not have a material impact on the Company’s consolidated financial position or results of operations upon adoption January 1, 2003.

     In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This statement removes acquisitions of financial institutions from the scope of both SFAS No. 72, Accounting for Certain Acquisitions of Banking and Thrift Institutions, and FASB Interpretation (“FIN”) No.9, Applying APB Opinion No. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method, and requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The provisions of this statement were effective as of October 1, 2002, with earlier application permitted. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or result of operations.

     In December 2002, the FASB issued SFAS 148, Accounting for Stock Based Compensation-Transition and Disclosure, which provides alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, this statement amends APB Opinion 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. This statement is effective for fiscal and interim periods ending after December 15, 2002. The Company adopted the disclosure requirements of this statement on December 31, 2002. Adoption of the disclosure requirements did not have a material impact to the consolidated financial statements.

     In November 2002, The FASB issued FIN 45, Guarantor’s Accounting Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others, which elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provision of this Interpretation are applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of these recognition provisions will result in recording liabilities associated with certain guarantees provided by the Company. These currently include standby letters of credit. The disclosure requirements of this Interpretation are effective for financial statements of interim or annual periods

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ending after December 15, 2002. The effects of this Interpretation did not have a material impact on the consolidated financial statements.

     In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, which clarifies the application of ARB 51 to certain entities (called variable interest entities) in which equity investors do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition, public companies must apply the consolidated requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on the consolidated financial statements.

     In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities”. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivation Instruments and Hedging Activities”. It also applies to loan commitments that relate to the origination of mortgage loans that will be held for sale. This statement is generally effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify the fair value of financial instruments issued in the form of shares that are mandatorily redeemable as liabilities. It also requires that payments or accruals and other amounts to be paid to holder of the financial instruments be reported separately as interest cost. SFAS No. 150 is effective for the Company at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations.

     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, First Federal’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. This 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, 2003, First Federal had a positive one-year cumulative ratio of 8.82% and a five-year cumulative ratio of 4.13%, as a result of which its net interest income could be positively affected by rising interest rates and negatively affected by falling interest rates. At September 30, 2002, First Federal had a negative one-year cumulative ratio of 1.69% and a positive five-year cumulative ratio of 7.40%. During the declining interest rate

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environment for the early months of fiscal year 2003, and most of fiscal year 2002, First Federal’s interest rate spread decreased.

     Other factors 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 a loan. First Federal’s portfolio of one-to-four family residential mortgage loans included $22.5 million and $24.4 million (26.7% and 26.3% of First Federal’s total loan portfolio) of adjustable rate loans at September 30, 2003 and September 30, 2002, 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. 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, 2003 and September 30, 2002. At a 300 basis point increase, First Federal’s MVPE decreased approximately $2,288,000 and $5,165,000 at September 30, 2003 and 2002, respectively, and at a 300 basis point decrease, First Federal’s MVPE increased approximately $1,377,000 and $8,631,000 at September 30, 2003 and 2002, respectively. Management determined that these changes in MVPE were acceptable.

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, 2003, and September 30, 2002. The projected maturity and repricing dates were arrived at by applying the assumptions set forth below. 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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Interest Rate Sensitivity Gap

			At September 30, 2003
			One year			One to			Three to			Over
			or less			three years			five years			five years			Total
Interest-earning assets:
	Mortgage loans		$	51,969		$	13,066		$	8,099		$	3,395		$	76,529
	All other loans			5,080			2,645			1,283			1,173			10,181
	Collateralized mortgage obligations			1,440			—			—			—			1,440
	Mortgage-backed securities			2,578			2,947			1,349			1,043			7,917
	Other Investments (1)			29,247			—			—			—			29,247
Total interest- earning assets			$	90,314		$	18,658		$	10,731		$	5,611		$	125,314
Interest-bearing liabilities:
		Deposits	$	54,848		$	24,079		$	11,307		$	4,820		$	95,054
		Borrowed funds		24,412			673			—			—			25,085
Total interest-bearing liabilities			$	79,260		$	24,752		$	11,307		$	4,820		$	120,139
Interest sensitivity gap			$	11,054		$	(6,094	)	$	(576	)	$	791		$	5,175
Cumulative interest sensitivity gap			$	11,054		$	4,960		$	4,384		$	5,175		$	—
Ratio of cumulative interest sensitivity gap to total interest earning assets				8.82	%		3.96	%		3.50	%		4.13	%		—
Ratio of cumulative interest sensitivity gap to total assets of $134,032				8.25	%		3.70	%		3.27	%		3.86	%		—

[Additional columns below]

[Continued from above table, first column(s) repeated]

			At September 30, 2002
			One year			One to			Three to			Over
			Or less			three years			five years			five years			Total
Interest-earning assets:
	Mortgage loans		$	54,649		$	15,060		$	10,616		$	7,095		$	87,420
	All other loans			4,168			2,507			1,126			989			8,790
	Collateralized mortgage obligations			5,140			—			—			—			5,140
	Mortgage-backed securities			2,193			2,873			2,086			4,086			11,238
	Other Investments (1)			12,450			—			—			6,121			18,571
Total interest- earning assets			$	78,600		$	20,440		$	13,828		$	18,291		$	131,159
Interest-bearing liabilities:
		Deposits	$	56,007		$	23,332		$	8,012		$	5,746		$	93,097
		Borrowed funds		24,805			1,055			2,500			—			28,360
Total interest-bearing liabilities			$	80,812		$	24,387		$	10,512		$	5,746		$	121,457
Interest sensitivity gap			$	(2,212	)	$	(3,947	)	$	3,316		$	12,545		$	9,702
Cumulative interest sensitivity gap			$	(2,212	)	$	(6,159	)	$	(2,843	)	$	9,702		$	—
Ratio of cumulative interest sensitivity gap to total interest earning assets				(1.69	)%		(4.70	)%		(2.17	)%		7.40	%		—
Ratio of cumulative interest sensitivity gap to total assets of $134,032				(1.57	)%		(4.36	)%		(2.01	)%		6.87	%		—

⁽¹⁾ Includes investments in overnight deposits.

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     The Farin & Associates analysis for 2003 and the preceding table were based upon the contractual terms of the asset or liability and in consideration of 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 50% each year. The decay rates for passbook accounts are assumed to be 33% each year, and the decay rates for NOW accounts are assumed to be 25% each year. 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 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 attempting to balance the interest rate sensitivities 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 $22,392,000 at September 30, 2003 and $23,916,000 at September 30, 2002. 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 securities 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 that 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 likely would decrease if interest rates increased.

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 following 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

35

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 reflect or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

36

Average Balance, Interest, Yields and Rates

			Year Ended September 30,
			2003								2002
			Average					Yield/			Average					Yield/
			Balance			Interest		Cost			Balance			Interest		Cost
Interest Earning Assets:
	Interest earnings deposited in other financial institutions		$	761,750		$	91,223		11.98	%	$	1,131,360		$	99,189		8.77	%
	Total investment securities			27,237,544			1,397,105		5.13	%		30,907,198			1,600,346		5.18	%
	Loans receivable			94,166,707			5,948,317		6.32	%		96,599,905			6,827,657		7.07	%
Total interest earning assets				122,166,001			7,436,645		6.09	%		128,638,463			8,527,192		6.63	%
	Allowance for loan losses			(927,683	)							(1,386,892	)
	Cash and amounts due from depository institutions			8,364,641								6,341,587
	Premises and equipment			4,507,558								4,881,979
	FHLB stock, at cost			1,262,833								2,229,800
	Foreclosed real estate			420,213								226,899
	Accrued interest receivable			605,552								783,703
	Other assets			2,650,805								2,532,819
	Investments in Affiliates			—								—
Total Assets			$	139,049,920							$	144,248,358
Interest Bearing Liabilities:
	Deposits:
		NOW accounts	$	11,208,905		$	63,071		.56	%	$	10,968,447		$	142,688		1.30	%
		Money market demand		46,293			161		.35	%		66,441			850		1.28	%
		Statement savings		12,142,016			74,506		.61	%		11,946,198			179,579		1.50	%
		CDs, other than Jumbos		63,192,912			2,024,399		3.20	%		64,985,484			2,830,798		4.36	%
		Jumbo certificates		9,116,476			358,691		3.93	%		7,396,298			336,800		4.55	%
Total interest-bearing deposits				95,706,602			2,520,828		2.63	%		95,362,868			3,490,715		3.66	%
	Borrowed funds			25,217,611			1,023,365		4.06	%		30,000,755			1,239,081		4.13	%
Total interest-bearing liabilities				120,924,213			3,544,193		2.93	%		125,363,623			4,729,796		3.77	%
	Non-interest bearing demand accounts			3,585,780								3,472,967
	Advances by borrowers for property taxes			208,122								258,250
	Accrued interest payable			726,747								1,032,802
	Income taxes payable			447,058								9,084
	Accrued expenses and other liabilities			431,172								381,893
Total liabilities				126,323,092								130,518,619
	Stockholders’ equity			12,726,828								13,729,739
Total liabilities & stockholders’ equity equity			$	139,049,920							$	144,248,358
Net interest income						$	3,892,451							$	3,797,396
Interest rate spread									3.16	%							2.86	%
Net yield on total interest earning assets									3.19	%							2.95	%
Average interest-earning assets to average total interest-bearing liabilities ratio									101.03	%							102.61	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

			Year Ended September 30,
			2001
			Average					Yield/
			Balance			Interest		Cost
Interest Earning Assets:
	Interest earnings deposited in other financial institutions		$	916,802		$	276,257		30.13	%
	Total investment securities			36,518,896			2,109,156		5.78	%
	Loans receivable			104,148,074			8,506,455		8.17	%
Total interest earning assets				141,583,772			10,891,868		7.69	%
	Allowance for loan losses			(770,245	)
	Cash and amounts due from depository institutions			7,237,695
	Premises and equipment			4,938,849
	FHLB stock, at cost
	Foreclosed real estate			535,006
	Accrued interest receivable			965,109
	Other assets			1,504,934
	Investments in Affiliates			4,116
Total Assets			$	155,999,236
Interest Bearing Liabilities:
	Deposits:
		NOW accounts	$	9,929,758		$	159,740		1.61	%
		Money market demand		144,497			1,992		1.38	%
		Statement savings		11,650,760			216,553		1.86	%
		CDs, other than Jumbos		72,197,589			4,044,144		5.60	%
		Jumbo certificates		7,605,523			554,878		7.30	%
Total interest-bearing deposits				101,528,127			4,977,307		4.90	%
	Borrowed funds			34,471,370			2,006,896		5.82	%
Total interest-bearing liabilities				135,999,497			6,984,203		5.14	%
	Non-interest bearing demand accounts			2,836,095
	Advances by borrowers for property taxes			310,794
	Accrued interest payable			1,342,510
	Income taxes payable			231,595
	Accrued expenses and other liabilities			286,462
Total liabilities				141,006,953
	Stockholders’ equity			14,992,283
Total liabilities & stockholders’ equity equity			$	155,999,236
Net interest income						$	3,907,665
Interest rate spread									2.56	%
Net yield on total interest earning assets									2.76	%
Average interest-earning assets to average total interest-bearing liabilities ratio									104.11	%

37

Financial Condition

     Investment Securities

     First Federal’s portfolio of investment securities available for sale totaled $32,600,000 and $26,768,000 at September 30, 2003, and September 30, 2002, 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 1997, 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 CMOs that reprice to LIBOR on a monthly basis. These CMOs were funded by FHLB advances that also reprice each month to LIBOR.

     During fiscal year 2002, as interest rates declined, First Federal sold $7,750,000 of FNMA adjustable rate CMOs and repaid FHLB advances in an attempt to reduce the risk associated with having the repricing of long-term investments and shorter-term liabilities. A pre-tax loss occurred from the sale of these investments during such fiscal year in the amount of $8,485. As of September 30, 2003, First Federal has approximately $3,000,000 in adjustable rate FNMA CMOs and FHLB advances outstanding in the original arbitrage.

     During fiscal year 2003, First Federal re-invested available liquidity in purchases of FNMA and FHLMC fixed rate callable notes and bonds in the amount of approximately $35,000,000. In an interest rate environment of record lows, the yield on these investments was higher than normal, therefore enhancing the overall yield of First Federal’s investment portfolio. Of this amount, First Federal sold $8,000,000 in callable bonds, and realized a gain from the sale of $83,750. In addition, First Federal purchased a mortgage-backed security in the amount of $3,425,000 during fiscal 2003.

     Principal repayments on both CMOs and mortgage-backed securities for the years ended September 30, 2003, 2002 and 2001 were $10,041,000, $674,700 and $1,774,000, respectively. As of September 30, 2003, First Federal had an investment in U. S. Government agencies of $22,608,000 compared to $9,867,000 as of September 30, 2002. At September 30, 2003, First Federal had investments of approximately $1,122,400 in equity securities, such as FHLB stock and other common stock.

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     The following table indicates the fair value of the portfolio of investment securities available for sale at September 30, 2003, 2002 and 2001.

			Total Fair Value
			2003		2002		2001
					(in thousands)
Investment Securities AFS:
	U.S. Government agencies		$	22,608	$	9,867	$	9,590
	Corporate obligations			355		98		—
	Mortgage-backed securities			8,175		11,679		9,127
	Collateralized mortgage obligations			1,456		5,115		13,495
	Other investments			6		8		841
		Total Investment Securities Available for Sale	$	32,600	$	26,767	$	33,053

     At September 30, 2003, First Federal owned CMOs totaling $1,456,000. These securities are all backed by federal agency guaranteed mortgages.

     The mortgage backed securities portfolio, consists of fixed rate mortgages totaling $8,175,000 at September 30, 2003. Adjustable rate mortgage-backed securities totaling $357,240 were sold during fiscal year 2003. When purchasing these securities, 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.

     The following tables present the contractual maturities and weighted average yields of investment securities, other than equity securities, available for sale at September 30, 2003.

		Maturities of
		Investment Securities
				After one		After five
		Within		through		through		After
		one year		five years		ten years		ten years
U.S. Government agencies, excluding mortgage-backed securities		$	—	$	201	$	—	$	22,407
Mortgage-backed securities			55		85		658		7,377
Collateralized mortgage obligations			—		—		1,456		—
Corporate obligations			—		253		102		—
	Total Investment Securities Available for Sale	$	55	$	539	$	2,216	$	29,784

		Weighted Average Yields
		(Taxable-equivalent basis) (1)
					After one			After five
		Within			through			through			After
		one year			five years			ten years			Ten years
U.S. Government agencies, excluding mortgage-backed securities			—			6.800	%		—			5.521	%
Mortgage-backed securities			6.120	%		6.434	%		6.203	%		5.241	%
Collateralized mortgage obligations			—			—			2.946	%		—
Corporate obligations			—			4.370	%		7.231	%		—
	Total Weighted Average Yield		6.120	%		5.602	%		4.110	%		5.452	%

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

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     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 are based on 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, 2003.

Principal Payments Expected During the Year Ended September 30,
(Dollars in thousands)

																	Weighted
													Amortized		Fair		Average
	2004		2005		2006		2007		2008		Thereafter		Cost		Value		Yield
Collateralized mortgage Obligations	$	394	$	378	$	325	$	223	$	120	$	—	$	1,440	$	1,456		2.95	%
Mortgage-backed securities		1,443		1,146		950		791		645		2,895		7,916		8,175		5.35	%
Agencies		5,000		—		200		—		—		18,045		22,237		22,608		5.54	%
Corporate obligations		100		100		100		50		—		—		350		355		5.19	%

Loans

     Total loans of $84,383,000 at September 30, 2003 reflected a decrease of $8,602,000 (9.2%) compared to September 30, 2002. Total loans of $92,985,000 at September 2002 reflected a decrease of 8.1% from total loans of $101,135,000 at September 30, 2001. The decrease in the volume of loans for fiscal 2003 was due primarily to the sale of loans of approximately $6,400,000 to First Financial Bank, Bessemer, Alabama, as result of closing the Centreville branch location in September 2003. The decrease in the volume of loans for fiscal 2002 was due primarily to the sale of loans in the amount of $8,392,000 to another financial institution in Dothan, Alabama, as a result of closing the Dothan loan production office in February 2002. Other decreases are due to seasonal changes in mortgage and construction lending demand. First Federal has experienced strong demand in its one-to-four family construction loan portfolio since First Federal’s purchase of a construction loan portfolio and the opening of its loan production office in Birmingham in 1994.

     One-to-four family real estate mortgage loans decreased $6,736,000 (13.2%) from September 30, 2001 to September 30, 2002 and decreased $4,508,000 (10.2%) from September 20, 2002 to September 30, 2003. First Federal aggressively pursues real estate mortgage loans within its 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 $55,990,000, $27,159,000, and $19,731,000 for the years ended September 30, 2003, 2002, and 2001, respectively. Had First Federal not sold residential mortgage loans over the last several years, the one-to-four family real estate mortgage loan portfolio would have increased by a larger margin (or decreased by lesser margin) than the percentage indicated above. The declining interest rate market for much of 2003, 2002 and 2001 resulted in an increase in the volume of loans sold during the period compared to previous years, which had a higher 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)
			2003						2002						2001
						Percent						Percent						Percent
			Amount			of Total			Amount			of Total			Amount			of Total
Real estate mortgage loans:
	One-to four family		$	39,839			47.21	%	$	44,347			47.69	%	$	51,083			50.51	%
	Multi-family and commercial			11,407			13.52	%		13,490			14.51	%		14,205			14.05	%
	Construction loans			12,629			14.97	%		16,621			17.87	%		25,378			25.09	%
	Land			3,635			4.31	%		5,077			5.46	%		—			—
Savings account loans				881			1.04	%		1,190			1.28	%		1,144			1.13	%
Installment loans				3,921			4.65	%		3,599			3.87	%		3,507			3.47	%
Second mortgage loans				13,404			15.88	%		9,665			10.39	%		7,593			7.51	%
		Total loans		85,716						93,989						102,910
Less:
	Loans in process			—			—			—			—			(8	)		(.01	)%
	Discounts and other, net			(142	)		(0.17	)%		(149	)		(.16	)%		(189	)		(.19	)%
	Allowance for loan losses			(1,191	)		(1,41	)%		(855	)		(.92	)%		(1,578	)		(1.56	)%
		Total loans, net	$	84,383			100.00	%	$	92,985			100.00	%	$	101,135			100.00	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

			Loan Portfolio Composition
			At September 30,
			(Dollars in thousands)
			2000						1999
						Percent						Percent
			Amount			of Total			Amount			of Total
Real estate mortgage loans:
	One-to four family		$	58,595			54.08	%	$	65,637			61.74	%
	Multi-family and commercial			13,790			12.73	%		8,330			7.84	%
	Construction loans			24,381			22.50	%		17,510			16.47	%
	Land			—			—			—			—
Savings account loans				1,097			1.01	%		1,267			1.19	%
Installment loans				4,089			3.77	%		5,616			5.28	%
Second mortgage loans				7,334			6.77	%		9,046			8.51	%
		Total loans		109,286						107,406
Less:
	Loans in process			(39	)		(.03	)%		—			—
	Discounts and other, net			(192	)		(.18	)%		(242	)		(.23	)%
	Allowance for loan losses			(701	)		(.65	)%		(852	)		(.80	)%
		Total loans, net	$	108,354			100.00	%	$	106,312			100.00	%

41

     The following table shows the maturity of First Federal’s loan portfolio at September 30, 2003, 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, 2003. 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 be different from the table set forth below.

		Loan Maturities
		Due during the
		year ending Sept 30,
								Due after		Due after		Due After		Due After
		2004		2005		2006		3-5 years		5-10 years		10-15 years		15 years		Total
		(Dollars in thousands)
Residential loans		$	1,368	$	806	$	1,156	$	6,861	$	8,457	$	13,702	$	16,269	$	48,619
Commercial loans			1,135		664		158		1,521		1,273		3,711		1,941		10,403
Construction loans			16,263		—		—		—		—		—		—		16,263
Consumer loans			2,132		546		692		1,852		2,210		1,604		1,395		10,431
	Total	$	20,898	$	2,016	$	2,006	$	10,234	$	11,940	$	19,017	$	19,605	$	85,716

(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 that will pay off the construction loan.

     The following tables set forth, at September 30, 2003 and 2002, the dollar amount of loans due after September 30, 2003 and 2002, respectively, based upon whether such loans have fixed interest rates or adjustable interest rates:

		September 30, 2003
		Fixed		Floating or
		Rates		Adjustable Rate		Total
		(Dollars in thousands)
Residential loans		$	26,129	$	22,490	$	48,619
Commercial loans			4,611		5,792		10,403
Construction loans			16,263		—		16,263
Consumer loans			10,431		—		10,431
	Total	$	57,434	$	28,282	$	85,716

		September 30, 2002
		Fixed		Floating or
		Rates		Adjustable Rate		Total
		(Dollars in thousands)
Residential loans		$	26,587	$	24,433	$	51,020
Commercial loans			3,613		7,862		11,475
Construction loans			21,696		—		21,696
Consumer loans			8,794		—		8,794
	Total	$	60,690	$	32,295	$	92,985

42

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

				Year ended September 30,
				2003		2002		2001
				(Dollars in thousands)
Loan Originations:
	Real estate mortgage loans			$	101,134	$	87,131	$	67,995
	All other loans				4,407		6,790		4,407
			Total	$	105,541	$	93,921	$	72,402
Portfolio Loan Purchases:
	Real estate mortgage loans			$	—	$	—	$	—
Portfolio Loan Sales Proceeds:
	Real estate mortgage loans			$	55,222	$	32,346	$	19,731
Principal Repayments:
	Real estate mortgage loans			$	53,222	$	46,578	$	54,071
		All other loans			4,394		6,652		4,964
		Total		$	57,616	$	53,230	$	59,035

     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 a 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” below.

     The Asset Classification committee is responsible for the on going review and administration of each particular loan. As such, it makes the initial identification of loans that present some difficulty in collection or where circumstances indicate that the probability of loss exists. Once the committee determines there is a potential collection problem, the loan is turned over to First Federal’s collections officer. It is the responsibility of the collections officer to coordinate all collection efforts on troubled and delinquent loans. 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 Board as to loan charge – offs on a monthly basis.

     At September 30, 2003, September 30, 2002, and September 30, 2001, loans accounted for on a non-accrual basis were approximately $2,149,000, $764,000, and $742,000, respectively, or 2.6%, 0.8%, and 0.7% 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, 2003, 2002, and 2001.

     The allowance for loan losses represents management’s assessment of the risk associated with extended 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 all 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 1994. At September 30, 2003, First Federal has one Acquisition and Development loan that is classified as a non-performing loan. This loan was originated on November 5, 2001 in the Birmingham office. The property is located in Columbiana, Alabama, which is in Shelby County. The bank committed to loan $2,250,000, which was 65% of the appraised value of the property once it was developed. The development originally appraised for approximately $3,500,000. The proposed development includes 128 single-family lots and 12 acres of commercial property.

     In December 2002, it became apparent that the borrower was not developing the property in a timely manner. This note and mortgage only requires interest payments monthly and the borrower has not been delinquent, however, the performance of the borrower as it relates to completing the project is questionable. In December 2002, the bank classified the loan as substandard and set up a 10% loan loss allowance on the amount of funds that were disbursed, which equated to $158,725.

     As of September 30, 2003, the bank has reserved approximately $525,000 on this loan. In addition, the loan has been placed on a non-accrual status. This amount represents a 29% allowance on the outstanding balance of the loan.

     Subsequent to September 30, 2003, the Board of Directors of First Federal made the decision to call the note due and payable in full. If the borrower does not satisfy the note, the bank will take further action to remedy the issue as it relates to this loan.

     While it is First Federal’s policy to charge off loans in the period in which the loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to the 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 the on going review of the loan portfolio, which is undertaken both to ascertain whether there are probable losses that 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 is utilized 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, that are classified are loans which are greater than 90 days delinquent. However, the Board of Directors may classify loans less than 90 days delinquent should such classification be deemed necessary.

     First Federal’s allowance for loan losses is also subject to regulatory examinations and determinations as to their 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 a 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 the 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 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 $1,191,000 allowance for loan losses, at September 30, 2003, 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, 2003, $738,000 of the

44

allowance for loan losses was reserved for possible losses on real estate mortgage loans and $453,000 was reserved for possible losses on all other loans.

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

			Year Ended September 30,
			2003			2002			2001			2000			1999
						(Dollars in thousands)
Balance at beginning of period			$	854		$	1,578		$	701		$	852		$	732
Charge-offs:
	Real estate			219			—			—			54			216
	Installment			22			79			49			138			290
		Total charge-offs		241			79			49			192			506
Recoveries:
	Real estate mortgage			1			—			—			—			—
	Installment			27			23			68			35			38
		Total recoveries		28			23			68			35			38
Net loans (recovered) charged off				213			56			(19	)		157			468
Provisions for loan losses (benefit)				550			(668	)		858			6			588
Balance at end of period			$	1,191		$	854		$	1,578		$	701		$	852
Ratio of net charge-offs to total loans outstanding, net of unearned income				0.25	%		0.06	%		( .02	)%		0.14	%		0.44	%
Ratio of allowance for loan losses to loans outstanding, net of unearned income				1.41	%		0.92	%		1.56			0.65	%		0.80	%
Total Loans Outstanding			$	84,383		$	92,985		$	101,135		$	108,354		$	106,312

     As indicated in the above table, First Federal decreased its loan loss allowance in fiscal year 2002 from the level reported in 2001. This decrease in loss allowance is primarily due to the successful repayment of the Vawter loan in 2002, which had been classified in the loan loss reserve in 2001.

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     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,
	2003					2002					2001
			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
						(Dollars in thousands)
Real estate mortgage loans	$	738		61.96	%	$	303		35.48	%	$	886		56.15	%
All other loans		453		38.04	%		551		64.52	%		692		43.85	%
Total allowance for loan losses	$	1,191		100.00	%	$	854		100.00	%	$	1,578		100.00	%

     At September 30, 2003 and 2002, the total recorded investment in impaired loans was approximately $2,393,000 and $874,000, respectively. The average recorded investment in impaired loans amounted to approximately $413,387 and $890,000 for the years ended September 30, 2003 and 2002, respectively. The allowance for loan losses related to impaired loans was approximately $895,900 and $495,000 for fiscal 2003 and 2002, respectively. Interest income on impaired loans of approximately $23,000 and $65,000 was recognized in 2003 and 2002, respectively. Loans impaired at September 30, 2001 were $648,000.

     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 delinquency levels for any adverse trends. Non-performing assets consist of loans on non-accrual status, accruing loans, which are 90 days or more past due 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 for 90 days or more creates reasonable doubt as to repayment. At the time the 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 $2,217,000, $844,000, and $1,000,000 at September 30, 2003, September 30, 2002, and September 30, 2001, respectively. As a percentage of total loans, non-performing assets continued to be at levels that management considers to be acceptable and commensurate with First Federal’s conservative lending policies.

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     An analysis of the components of non-performing assets at September 30, 2003, September 30, 2002, and September 30, 2001 is presented in the following table:

			At September 30,
			2003			2002			2001
			(Dollars in thousands)
Loans accounted for on a non-accrual basis:
	Real estate mortgage loans		$	2,077		$	762		$	735
	All other loans			72			2			7
		Total		2,149			764			742
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				2,149			764			742
Foreclosed real estate (net of related loss provisions)				68			80			258
	Total non-performing assets		$	2,217		$	844		$	1,000
Non-accrual and 90 days past due loans as a percent of total loans				2.55	%		0.82	%		0.73	%
Non-performing assets as a percent of total loans				2.63	%		0.91	%		0.99	%
	Total loans outstanding		$	84,383		$	92,985		$	101,135

     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 $2,925,000 (3.0%) in fiscal 2003 to $93,558,000, and decreased $2,572,000 (2.6%) to $96,483,000 in fiscal 2002. In fiscal 2001 deposits decreased $6,307,000 (6.0%) to $99,055,000. Non interest-bearing deposits were $3,657,000, $2,850,000, and $3,349,000, while total interest-bearing deposits were $89,901,000, $93,632,000, and $95,706,000 at September 30, 2003, 2002, and 2001, respectively.

     First Federal’s deposit mix, at September 30, 2003, changed when compared to that at September 30, 2002. NOW accounts decreased $231,000 (2.2%), while money-market demand accounts decreased $313,000 (66.9%). 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 $2,828,000 (4.5%). Non-interest bearing demand deposits increased $807,000 (28.3%). During 2003, certificates of deposit, excluding Jumbos, comprised approximately 64.7% of total deposits, while low cost of funds, including NOW accounts, money market demand accounts, and passbook savings accounts made up 27.1% of First Federal’s total deposits. Jumbos comprised 8.2% of total deposits as of September 30, 2003.

In order to offset the sale of deposits at the Centreville branch to First Financial Bank in September 2003, First Federal purchased $7,382,000 of brokered certificates of deposit with a weighted average rate of 2.1%. The brokered certificates of deposit vary in term from nine months to twenty-four months.

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

			September 30,
			2003					2002							2001
					Percent					Percent					Percent
					change					change					change
					from prior					from prior					from prior
			Amount		year-end			Amount		year-end			Amount		year-end
			(Dollars in thousands)
Non-interest bearing demand deposits			$	3,657		28.32	%	$	2,850		(14.90	)%	$	3,349		11.97	%
Interest bearing deposits:
	NOW accounts			10,064		(2.24	)%		10,295		8.48	%		9,490		(2.46	)%
	Money market demand			155		(66.88	)%		468		14.99	%		407		(35.60	)%
	Passbook savings			11,497		(5.37	)%		12,149		8.88	%		11,158		(5.39	)%
	CDs other than Jumbos			60,518		(4.46	)%		63,346		(5.82	)%		67,265		(6.05	)%
	Jumbos			7,667		3.97	%		7,374		( .18	)%		7,387		(14.34	)%
		Total interest bearing deposits		89,901		(3.98	)%		93,632		(2.17	)%		95,707		(6.51	)%
Total deposits			$	93,558		(3.03	)%	$	96,483		(2.60	)%	$	99,056		(5.99	)%

     The following tables set forth the distribution of First Federal’s deposit accounts, at the dates indicated and the weighted average nominal interest rates on each category of deposits presented, based on average balances:

				At September 30, 2003
									Percentage
Interest									of Total
Rate			Term	Category	Minimum		Balance		Balances
(Dollars in thousands, except minimum balance)
	0.00	%	None	Non-interest bearing demand	$	50	$	3,657		3.91	%
	0.10	%	None	NOW accounts		250		9,956		10.64	%
	0.10	%	None	Non-profit		100		108		.12	%
	0.10	%	None	Money market checking		50		155		.17	%
	0.15	%	None	Statement savings		100		11,497		12.29	%
	0.50	%	3 months	Fixed-term fixed rate certificate		2,500		138		.15	%
	1.20	%	6 months	Fixed-term fixed rate certificate		2,500		8,613		9.21	%
	1.30	%	12 months	Fixed-term fixed rate certificate		500		16,915		18.08	%
	1.50	%	18 months	Fixed-term fixed rate certificate		500		3,604		3.85	%
	1.25	%	18 mth Roth IRA	Fixed-term fixed rate certificate		250		74		.08	%
	1.25	%	18 mth IRA	Fixed-term fixed rate certificate		250		9,452		10.10	%
	2.75	%	60 mth IRA	Fixed-term fixed rate certificate		250		1,798		1.92	%
	2.00	%	30 months	Fixed-term fixed rate certificate		500		7,439		7.95	%
	2.50	%	4 year	Fixed-term fixed rate certificate		1,500		332		.35	%
	3.00	%	5 year	Fixed-term fixed rate certificate		1,500		4,771		5.10	%
	1.30	%	Jumbo	Fixed-term fixed rate certificate		100,000		7,667		8.19	%
	1.40	%	9 months	9 month brokered TD		0		2,495		2.67	%
	1.50	%	12 months	12 month brokered TD		0		1,693		1.81	%
	1.60	%	14 months	14 month brokered TD		0		1,466		1.57	%
	2.10	%	24 months	24 month brokered TD		0		1,728		1.85	%
							$	93,558		100.00	%

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				At September 30, 2002
									Percentage
Interest									of Total
Rate			Term	Category	Minimum		Balance		Balances
(Dollars in thousands, except minimum balance)
	0.00	%	None	Non-interest bearing demand	$	50	$	2,850		2.95	%
	1.00	%	None	NOW accounts		250		10,156		10.53	%
	1.00	%	None	Non-profit		100		141		.15	%
	1.00	%	None	Money market checking		50		467		.48	%
	1.00	%	None	Statement savings		50		12,149		12.59	%
	1.25	%	3 months	Fixed-term fixed rate certificate		250		230		.24	%
	2.75	%	6 months	Fixed-term fixed rate certificate		250		10,239		10.61	%
	3.20	%	12 months	Fixed-term fixed rate certificate		250		17,596		18.24	%
	2.85	%	18 months	Fixed-term fixed rate certificate		250		4,393		4.55	%
	2.85	%	18 mth Roth IRA	Fixed-term fixed rate certificate		250		92		.10	%
	2.85	%	18 mth IRA	Fixed-term fixed rate certificate		250		13,293		13.78	%
	4.50	%	60 mth IRA	Fixed-term fixed rate certificate		250		1,135		1.18	%
	3.00	%	30 months	Fixed-term fixed rate certificate		250		11,612		12.04	%
	3.50	%	4 year	Fixed-term fixed rate certificate		1,500		479		.50	%
	4.50	%	5 year	Fixed-term fixed rate certificate		1,500		4,277		4.43	%
	4.36	%	Jumbo	Fixed-term fixed rate certificate		100,000		7,374		7.64	%
							$	96,483		100.00	%

     The following table provides information about the average balances of interest-bearing demand deposits and time deposits, for the periods indicated, based upon average balances:

	Year ended September 30,
	2003						2002						2001
							(Dollars in thousands)
	Interest bearing			Time			Interest bearing			Time			Interest bearing			Time
	demand deposits			Deposits			demand deposits			deposits			demand deposits			deposits
Average balance	$	23,397		$	72,309		$	22,981		$	72,382		$	21,725		$	79,803
Average rate		.59	%		3.29	%		1.41	%		4.38	%		1.83	%		5.34	%

     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		2003		2002		2001
		(Dollars in thousands)
0.00 - 1.99%		$	24,554	$	2,775	$	—
2.00 - 2.99%			21,937		22,060		—
3.00 - 3.99%			11,570		18,771		7,077
4.00 - 4.99%			3,520		11,694		25,368
5.00 - 5.99%			2,411		3,922		9,623
6.00 - 6.99%			626		5,471		22,998
7.00 - 7.99%			3,567		6,028		9,585
	Total	$	68,185	$	70,721	$	74,651

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     At September 30, 2003, First Federal had approximately $68.2 million outstanding in certificate accounts that mature as follows:

		Amount due
		Less than		One to		Two to		Three to		Four to
		one year		two years		three years		Four years		five years		Thereafter		Total
						(Dollars in thousands)
Interest Rate
	0.00 - 1.99%	$	18,914	$	3,208	$	—	$	—	$	—	$	2,432	$	24,554
	2.00 - 2.99%		15,714		4,232		1,849		141		—		—		21,936
	3.00 - 3.99%		8,857		1,417		19		—		1,277		—		11,570
	4.00 - 4.99%		1,864		435		44		736		441		—		3,520
	5.00 - 5.99%		231		23		302		1,740		115		—		2,411
	6.00 - 6.99%		102		273		252		—		—		—		627
	7.00 - 7.99%		41		3,163		363		—		—		—		3,567
	Total	$	45,723	$	12,751	$	2,829	$	2,617	$	1,833	$	2,432	$	68,185

     At September 30, 2003, First Federal had approximately $25.3 million outstanding in certificate accounts of $100,000 or more, that mature as follows:

	Amount
Maturity Period	(In Thousands)
Three months or less	$	4,043
After three within six months		5,501
After six within twelve months		2,953
Over twelve months		12,757
	$	25,254

     The following table presents the maturities of certificates of deposit, as of September 30, 2003, 2002 and 2001:

		Maturities of Time Deposits
		September 30,
		2003			2002			2001
		(Dollars in thousands)
Three months or less		$	13,566		$	13,824		$	12,281
After three within six months			12,736			16,557			15,765
After six within twelve months			19,421			19,772			20,984
One year to two years			12,750			8,941			16,138
Two years to three years			2,830			7,593			2,219
Three years to four years			2,617			1,357			6,060
Four years to five years			1,833			2,677			1,204
Over five years			2,432			—			—
	Total	$	68,185		$	70,721		$	74,651
Weighted average rate on all certificates of deposit at period-end			2.64	%		3.74	%		5.34	%

Short-Term Borrowings

     SouthFirst has a line of credit of up to $2,500,000, which bears interest at the prime lending rate, plus 25 basis points. Accrued interest on the unpaid balance of the principal is due monthly and continuing until June

50

2004, at which time the entire unpaid balance along with any unpaid accrued interest is due. The prime-lending rate was 4.00% at September 30, 2003.

     Borrowings also include borrowings from the FHLB of Atlanta. These borrowings included advances with both fixed and variable interest rates.

     First Federal also has short term borrowings through reverse repurchase agreements with Morgan Keegan.

     A summary of these borrowings is as follows:

		At or for the Year Ended
		September 30,
		2003			2002
		(Dollars in Thousands)
Amounts outstanding at end of period:
	Line of credit	$	1,918		$	699
	FHLB advances		22,340			24,340
	Reverse repurchase agreements		2,743			4,019
Weighted average rate paid at period-end:
	Line of credit		4.25	%		4.75	%
	FHLB advances		4.04	%		4.09	%
	Reverse repurchase agreements		1.22	%		1.87	%
Maximum amount of borrowings outstanding at any month-end:
	Line of credit		2,118			3,355
	FHLB advances		22,340			33,250
	Reverse repurchase agreements		5,347			4,083
Approximate average amount outstanding for period:
	Line of credit		1,558			2,071
	FHLB advances		22,340			27,044
	Reverse repurchase agreements		1,335			1,000
Approximate weighted average rate paid during period (1):
	Line of credit		4.36	%		6.28	%
	FHLB advances		4.19	%		4.03	%
	Reverse repurchase agreements		1.35	%		1.90	%

(1) The approximate weighted average rate paid during the period was computed by dividing the average amounts outstanding into the related interest expense for the period.

Capital Resources

     Stockholders’ Equity

     SouthFirst’s consolidated stockholders’ equity was $11,677,000 and $13,878,000 at September 30, 2003 and September 30, 2002, respectively. The 2003 decrease was due primarily to the repurchase, by SouthFirst, of shares of its Common Stock, in the amount of $1,403,000, pursuant to its previously announced stock repurchase program, and the change in “accumulated other comprehensive income,” in the amount of $647,000, resulting from the decrease in unrealized holding gains on available-for-sale securities.

     Cash dividends were declared on SouthFirst Common Stock in the amount of $453,547, $497,345 and $554,051 for the years ended September 30, 2003, September 30, 2002 and September 30, 2001, respectively. Management believes that a strong capital position is vital to the continued profitability of First Federal and SouthFirst and provides a foundation for future growth, as well as promoting depositor and investor confidence.

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     The following table provides certain financial ratios for SouthFirst, as of the end of the most recent three fiscal years:

	Equity and Asset Ratios
	September 30,
	2003			2002			2001
Return on average assets		0.08	%		0.47	%		(0.27	)%
Return on average stockholder’s equity		0.91	%		4.89	%		(2.82	)%
Common dividend payout ratio		391.45	%		74.14	%		N/A
Average stockholders’ equity to average assets ratio		9.15	%		9.52	%		9.61	%
Net Income (Loss)	$	115,864		$	670,805		$	(422,093	)
Average Assets		138,049,920			144,248,358			155,999,236
Average Equity		12,726,828			13,729,739			14,992,282
Cash Dividends Paid		453,547			497,345			554,051

    Capital

     The regulations of the OTS provide certain capital requirements applicable to thrifts, including First Federal, and the consequences for failing to comply with such requirements (as amended from time to time, the “OTS Capital Regulations). The regulatory capital standards contained in the OTS Capital Regulations include (i) a core capital requirement, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement and identity certain minimum regulatory capital requirements, including a tangible capital ratio equal to 1.50% of adjusted total assets, a core capital ratio equal to 4.0% of adjusted total assets, and a minimum risk-based capital ratio 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, 2003 and September 30, 2002.

		At September 30, 2003									At September 30, 2002
		Tangible			Core			Risk-based			Tangible			Core			Risk-based
		Capital			Capital			Capital			Capital			Capital			Capital
Capital		$	13,651,000		$	13,651,000		$	13,651,000		$	14,606,000		$	14,606,000		$	14,606,000
Adjustments:
	General valuation allowance		—			—			295,000			—			—			361,000
	Goodwill		(544,000	)		(544,000	)		(544,000	)		(511,000	)		(511,000	)		(511,000	)
	Unrealized Losses (Gains)		218,000			218,000			218,000			(479,000	)		(479,000	)		(479,000	)
Regulatory capital		$	13,325,000		$	13,325,000		$	13,620,000		$	13,616,000		$	13,616,000		$	13,977,000
Regulatory asset base		$	133,400,000		$	133,400,000		$	82,915,000		$	140,500,000		$	140,500,000		$	87,853,000
Capital ratio			9.99	%		9.99	%		16.43	%		9.69	%		9.69	%		15.91	%
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	%

Liquidity

First Federal

     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

52

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 10% of its total assets, based on the most recent quarterly financial information submitted to the appropriate regulatory agency. At September 30, 2003, First Federal had outstanding FHLB advances in the amount of $22,340,000, which exceeds the present credit availability described previously in ITEM 1, “Business - Regulation of First Federal - Federal Home Loan Bank Advance". The bank is not required to re-pay the existing advances to an amount equivalent to 10% of its current assets, however, new requested advances would be subject to approval from the FHLB credit review committee.

     On a consolidated basis, net cash provided by operating activities in fiscal 2003 was $1,733,000, a $4,262,000 increase from 2002. The $3,008,000 in net cash provided by investing activities during 2003 consisted primarily of a $7,443,000 decrease in loan funding activities. Net cash decreased for the purchase of investment securities available for sale to $38,713,000 from $15,573,000 in 2002. Cash provided by calls and maturities of investment securities available for sale decreased to $16,590,000 from $18,598,000 in 2002. The $6,815,000 in net cash used by financing activities resulted from a decrease of $2,535,000 in certificates of deposits, and a decrease of $390,000 in demand accounts. Borrowed funds decreased $2,057,000; payments for common stock dividends totaled $425,000, and the acquisition of treasury stock totaled $1,344,000.

     First Federal’s “liquidity ratio” (as defined under the previous OTS liquidity regulations) at September 30, 2003 was 37.05% and at September 30, 2002 was 24.74%. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives, management’s expectations of 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 $500,000 and $1,100,000 to SouthFirst during 2003 and 2002, respectively.

SouthFirst

     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 of the OTS Capital Regulations for classification as a “well capitalized” institution and, thereby, enable First Federal to pay dividends to SouthFirst. In addition to dividends, SouthFirst has access to various capital markets and other sources of borrowings, including a line of credit in the amount of $2,500,000, from First Commercial Bank in Birmingham, Alabama. The line of credit is renewable annually and is secured by all of the issued and outstanding shares of First Federal, pledged by SouthFirst. SouthFirst, at September 30, 2003, has drawn $1,918,000 against the line of credit.

     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) to repurchase SouthFirst Common Stock, to invest in affiliates and to pay general corporate expenses. Accordingly, SouthFirst likely will 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 and to repurchase shares of SouthFirst pursuant to the current repurchase program announced by SouthFirst in January 2003, authorizing the Company to repurchase up to 77,000 shares, or approximately ten percent (10%) of its outstanding common stock. As of December 9, 2003, SouthFirst has repurchased 69,588 shares of the intended repurchase of up to 77,000 shares of Common Stock. Under the previous stock repurchase program, which commenced in January,

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2002, the Company repurchased 81,700 shares of the intended repurchase of up to 85,000 shares of Common Stock, which concluded in January, 2003.

ITEM 7. FINANCIAL STATEMENTS

     The following financial statements are included as part of this Form 10KSB following the signature page of this Form 10KSB.

Independent Auditors’ Report of Jones & Kirkpatrick, P.C.
Consolidated Statements of Financial Condition as of September 30, 2003 and 2002
Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2003, 2002 and
2001
Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001
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.

ITEM 8A. CONTROLS AND PROCEDURES

     Within 90 days prior to the filing date of this annual report, pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), SouthFirst’s Chief Executive Officer and Controller (principal financial officer) evaluated the effectiveness of the design and operation of SouthFirst’s disclosure controls and procedures (as defined in Rule 13a-14(c) of the Exchange Act). Based on their evaluation, the Chief Executive Officer and Controller have concluded that SouthFirst’s disclosure controls and procedures are effective in timely alerting them to material information, relating to SouthFirst and SouthFirst’s consolidated subsidiaries, required to be included in periodic reports, including this annual report, filed by SouthFirst with the SEC.

     There have not been any significant changes in SouthFirst’s internal controls, or in other factors that could significantly affect these controls, subsequent to the date of the Chief Executive Officer’s and Controller’s evaluation.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE REGISTRANT

     Management of SouthFirst

     The SouthFirst Board of Directors currently consists of eight persons and is divided into three classes, each of which contains approximately one-third of the members. The directors of SouthFirst are elected by the stockholders of SouthFirst for staggered, three-year terms, so that approximately one-third of the directors are 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.

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     The direction and control of First Federal is vested in the First Federal Board of Directors, which currently consists of eight 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 are elected at each annual meeting of stockholders. Since SouthFirst owns all of the issued and outstanding shares of common stock of First Federal, SouthFirst elects 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 or among such persons.

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

				Year First
				Elected as a		Year
				Director of		Term
Name	Age(1)		Position Held	SouthFirst		Expires
Joe K. McArthur		52	Chief Executive Officer of SouthFirst and First Federal; President of First Federal; Director of SouthFirst and First Federal		1996		2005
J. Malcomb Massey		54	President of SouthFirst; Director of SouthFirst and First Federal; President and Chief Executive Officer of Pension & Benefit		1997		2006
Allen Gray McMillan, III		46	Chairman of SouthFirst and First Federal; Director of SouthFirst and First Federal		1994		2005
H. David Foote, Jr.		54	Director of SouthFirst and First Federal		1994		2004
Kenneth E. Easterling		60	Director of SouthFirst and First Federal		2001		2004
L. Neal Bice		63	Director of SouthFirst and First Federal		2001		2004
Donald R. Hardy		53	Director of SouthFirst and First Federal		2001		2005
Sandra H. Stephens		44	Executive Vice President and Chief Operating Officer of SouthFirst and First Federal; Director of SouthFirst and First Federal		2002		2006
Ruth M. Roper		53	Executive Vice President of Pension & Benefit

⁽¹⁾ At September 30, 2003

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     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 from 1992 and 1994, respectively. Mr. McArthur has over 27 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 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 presently serves on the board of directors of the Community Bankers Association of Alabama and 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, 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 also currently serves as a member of the audit committee of SouthFirst. 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 also currently serves as a member of the audit committee of SouthFirst. 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 also currently serves as a member of the audit committee of SouthFirst. 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, a member of the Board of Directors of Chilton County Cattlemen’s Association, 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 also currently serves as a member of the audit committee of SouthFirst. 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

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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 also currently serves as a member of the audit committee of SouthFirst. 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.

     Sandra H. Stephens was elected as director of SouthFirst and First Federal, effective November 12, 2002, and Ms. Stephens was elected as 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, from 1997 to 2001, and Chief Financial Officer, from 1992 to 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, Atlanta, Georgia from 1990 until 1992, and with Pinnacle Bank, Jasper, Alabama from 1981 until 1990. Ms. Stephens is a member of the American Society of Women Accountants, and she is a member of Saint Mark United Methodist Church in Birmingham, Alabama and serves on the Board of Trustees of the North Alabama Conference of the United Methodist Church..

     Ruth M. Roper is Executive Vice President of Pension & Benefit, First Federal’s wholly-owned, operating subsidiary. This is a position she 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 Securities Exchange Act of 1934 requires SouthFirst’s directors, certain of SouthFirst’s officers and persons who own more than 10% of the outstanding Common Stock of SouthFirst (“Reporting Persons”) to file with the SEC reports of changes in ownership of the Common Stock of SouthFirst held by such persons (“Section 16(a) Reports”). Reporting Persons are also required to furnish SouthFirst with copies of all Section 16(a) Reports that they file. SouthFirst has been subject to this regulation since February 13, 1995.

     To SouthFirst’s knowledge, based solely on a review of copies of Section 16(a) Reports furnished to SouthFirst and representations that no other Section 16(a) Reports were required, all Section 16(a) filing requirements applicable to such Reporting Persons were complied with during fiscal 2003.

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ITEM 10. EXECUTIVE COMPENSATION

     The following table provides certain summary information for fiscal 2003, 2002, and 2001 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 2003 (the “Named Executive Officers”):

Summary Compensation Table

											Long Term
				Annual Compensation (1)							Compensation
											Securities
Name and		Fiscal							Other Annual		Underlying			All Other
Principal Position		Year		Salary		Bonus			Compensation (2)		Options (No.)			Compensation
Joe K. McArthur			2003	$	150,000	$	26,669	(3)	$	24,000		4,300	(4)	$	2,451	(5)
	Chief Executive		2002		142,917		25,439	(6)		22,995		0			2,451	(7)
	Officer of		2001		107,916		22,314	(8)		19,725		5,024	(9)		1,414	(10)
	SouthFirst and First Federal, President of First Federal
J. Malcomb Massey (1)			2003	$	150,000	$	5,850	(11)	$	24,000		4,300	(12)	$	2,488	(13)
	President of		2002		150,000		13,270	(14)		22,995		0			2,488	(15)
	SouthFirst,		2001		130,000		9,270	(16)		16,725		1,724	(17)		1,819	(18)
	President and Chief Executive Officer of Pension & Benefit
Sandra H. Stephens			2003	$	125,000	$	14,290	(19)	$	22,500		4,300	(20)	$	1,537	(21)
	Executive		2002		105,417		39,500	(22)		4,500		7,500	(23)		1,537	(24)
	Vice President, and Chief Operating Officer of SouthFirst and First Federal
Ruth M. Roper			2003	$	100,000	$	5,598	(25)	$	3,000		1,950	(26)	$	2,744	(27)
	Executive Vice		2002		98,000		5,778	(28)		3,000		0			2,744	(29)
	President of Pension & Benefit

(1)	All compensation received by the Named Executive Officers was paid by First Federal and Pension & Benefit, except for an annual salary, in the amount of $20,000, paid by SouthFirst to its President, J. Malcomb Massey.
(2)	Fees received as a member of the Board of Directors of SouthFirst, First Federal, Pension & Benefit and/or SouthFirst Mortgage.
(3)	Consists of a regular bonus of $8,650 as well as $18,019 of compensation consisting of dividends paid under SouthFirst’s Dividend Investment Plan on unexercised stock options. See “– Compensation of Directors” below.
(4)	On October 16, 2002, SouthFirst issued 4,300 options under the 1998 plan to Mr. McArthur at an exercise price of $12.10 per share. These options vest in equal increments commencing October 16, 2002 through October 16, 2007.
(5)	Represents a $1,485 automobile allowance and income of $966 recognized on employer provided group term life insurance in excess of $50,000.
(6)	Consists of a regular bonus of $10,000 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” below.

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(7)	Represents a $1,485 automobile allowance and income of $966 recognized on employer provided group term life insurance in excess of $50,000.
(8)	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” below.
(9)	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 options vest in equal annual increments commencing on November 4, 2001 through November 4, 2003.
(10)	Represents a $964 automobile allowance and income of $450 recognized on employer provided group term life insurance in excess of $50,000.
(11)	Consists of dividends paid under SouthFirst’s Dividend Investment Plan on unexercised stock options. See “ – Compensation of Directors” below.
(12)	On October 16, 2002, SouthFirst issued 4,300 options under the 1995 plan to Mr. Massey at an exercise price of $12.10 per share. These options vest in equal annual increments commencing October 16, 2002 through October 16, 2007.
(13)	Represents a $1,522 automobile allowance and income of $966 recognized on employer provided group term life insurance in excess of $50,000.
(14)	Consists of a regular bonus of $10,000 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” below.
(15)	Represents a $1,522 automobile allowance and income of $966 recognized on employer provided group term life insurance in excess of $50,000.
(16)	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” below.
(17)	On January 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 relatively equal annual increments commencing on November 4, 2001 through November 4, 2003.
(18)	Represents a $1,405 automobile allowance and income of $414 recognized on employer provided group term life insurance in excess of $50,000.
(19)	Consists of a regular bonus of $7,210 as well as $7,080 of compensation consisting of dividends paid under SouthFirst’s Dividend Investment Plan on unexercised stock options. See “ – Compensation of Directors” below.
(20)	On October 16, 2002, SouthFirst issued 2,589 options under the 1995 plan and 1,711 options under the 1998 plan to Ms. Stephens at an exercise price of $12.10 per share. These options vest in equal annual increments commencing October 16, 2002 through October 16, 2007.
(21)	Represents a $1,117 automobile allowance and income of $420 recognized on employer provided group term life insurance in excess of $50,000.
(22)	Consists of a signing bonus of $17,500, a regular bonus of $10,000, a tax bonus, with respect to MRP shares (see “ – Management Recognition Plans” below), of $7,500, and $4,500 of compensation consisting of dividends paid under SouthFirst’s Dividend Investment Plan on unexercised stock options. See “ – Compensation of Directors” below.
(23)	On December 1, 2001, SouthFirst issued 7,500 options under the 1995 plan to Ms. Stephens at an exercise price of $9.92 per share. These options vest in equal annual increments commencing on December 1, 2002 through December 1, 2006.
(24)	Represents a $1,117 automobile allowance and income of $420 recognized on employer provided group term life insurance in excess of $50,000.
(25)	Consists of a regular bonus of $2,650 as well as $2,948 of compensation consisting of dividends paid under SouthFirst’s Dividend Investment Plan on unexercised stock options. See “ – Compensation of Directors” below.
(26)	On October 16, 2002, SouthFirst issued 1,950 options under the 1998 plan to Ms. Roper at an exercise price of $12.10 per share. These options vest in equal annual increments commencing October 16, 2002 through October 16, 2007.
(27)	Represents a $1,778 automobile allowance and income of $966 recognized on employer provided group term life insurance in excess of $50,000.

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(28)	Consists of a regular bonus of $4,000 as well as $1,778 of compensation consisting of dividends paid under SouthFirst’s Dividend Investment Plan on unexercised stock options. See “ – Compensation of Directors” below.
(29)	Represents a $1,778 automobile allowance and income of $966 recognized on employer provided group term life insurance in excess of $50,000.

Employment Agreements

     SouthFirst, First Federal and Pension & Benefit 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 amended and restated employment agreement by and between First Federal and Mr. McArthur was effective as of October 1, 2003, 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 First Federal 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.

     SouthFirst is jointly and severally liable for the payment of all amounts due under Mr. McArthur’s employment agreement pursuant to a separate employment agreement entered into with SouthFirst, which was previously filed by SouthFirst as part of its Annual Report on Form 10 KSB for the year ended September 30, 2001. Under the terms of the employment agreement with First Federal, First Federal agrees to pay Mr. McArthur a salary at the rate of $150,000 per annum, 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 First Federal 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 terminate 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. The total amount of such payments would be required to be paid, at the option of Mr. McArthur, either (i) in periodic payments over the remaining term of the employment agreement, as if Mr. McArthur’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 First Federal to Mr. McArthur shall not exceed two (2) times his “average annual compensation” (as defined in the employment agreement). 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 Code, and (ii) the sum of any other “parachute payments,” as defined under Section 280G(b)(2) of the 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

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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 amended and restated employment agreement by and between First Federal and Ms. Stephens was effective as of October 1, 2003 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 First Federal 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 $125,000, 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 First Federal 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 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 Code, and (ii) the sum of any other “parachute payments,” as defined under Section 280G(b)(2) of the 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.

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     J.     Malcomb Massey

     President and Chief Executive Officer of Pension & Benefit

     The amended and restated employment agreement by and between Pension & Benefit and Mr. Massey was effective as of October 1, 2003 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 Pension & Benefit Board determines in a duly adopted resolution that the performance of Mr. Massey has met the Pension & Benefit 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 Pension & Benefit 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 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 voluntarily terminate his employment agreement by providing sixty days written notice to the Pension & Benefit 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.

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     Ruth M. Roper

     Executive Vice President of Pension & Benefit

     The amended and restated employment agreement by and between Pension & Benefit and Ms. Roper was effective as of October 1, 2003 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 Pension & Benefit Board determines in a duly adopted resolution that the performance of Ms. Roper has met the Pension & Benefit 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 $100,000, 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 Pension & Benefit 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.

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Deferred Compensation Agreements

     First Federal previously entered into deferred compensation agreements (collectively, the “Deferred Compensation Agreements”) with each of 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. 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 Mr. McArthur and Ms. Roper that will be available to SouthFirst and First Federal to provide, both, for retirement benefits and for “key man” insurance. The costs of these arrangements was $35,719 for each of 2003, 2002, and 2001.

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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 “MRP Plans”). The objective of the MRP 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.

     Except for the fact that Plan B provides for awards only to employees of SouthFirst and First Federal, while Plan A provides for awards to employees as well as to non-employee directors of SouthFirst and First Federal, the terms of the MRP Plans are the same. The MRP Plans are administered by a committee (the “Committee”) of the SouthFirst Board of Directors. Awards under the MRP Plans are in the form of restricted stock grants (“MRP grants”). Each MRP 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 MRP 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 MRP 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 MRP 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 MRP 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 Code.

     During the year ended September 30, 2001, SouthFirst repurchased 11,525 shares of its Common Stock, which shares subsequently were designated MRP shares. During 2002, 1,750 shares were issued to employees under MRP grants, leaving 9,775 shares in trust at September 30, 2003, which the Committee may issue in its sole discretion.

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 Plan”), and the second was adopted on January 28, 1998 and is denominated the 1998 Stock Option and Incentive Plan (the “1998 Plan”) (collectively, the “Stock Option Plans”). 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 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 Plan. As of September 30, 1996, options to purchase a total of 83,000 shares

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had been issued under the 1995 Stock Option Plan, and, as of that date, no other shares were available for future issuance. Subsequently, options to purchase 8,300 shares were exercised, which shares are no longer available for issuance under the 1995 Plan; options to purchase 56,649 shares expired prior to being exercised, which shares then became available for re-issuance under the 1995 Plan; and additional options to purchase 55,649 shares were issued. Thus, at September 30, 2003, 1,000 shares were available for issuance under the 1995 Plan.

     The 1998 Plan authorizes the grant of up to 63,361 shares of Common Stock to select officers and employees in the form of (i) Options or (ii) SARs, all of which shares were granted under the 1998 Plan. Subsequently, options to purchase 36,798 shares expired prior to being exercised, which shares then became available for re-issuance under the 1998 Plan, and additional options to purchase 35,388 shares were issued. Thus, at September 30, 2003, 1,390 shares were available for issuance under the 1998 Plan.

     The terms and conditions of the 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 Plans, 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, as such term is defined in the respective Stock Option Plan.

     Under the 1995 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 to purchase 4,150 shares, which options had an exercise price of $14.00 per share, the fair market value of SouthFirst Common Stock on the date of grants. Likewise, under the 1998 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 to purchase 2,700 shares, which options had an exercise price of $21.25 per share, the fair market value of SouthFirst Common Stock on the date of grants.

     See also, “Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.”

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 7,428 and 3,726 options to Joe K. McArthur and J. Malcomb Massey, respectively (i.e., the Named Executive Officers at that time). Options to purchase an aggregate of 50,597 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 at 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, 1998 options, the Board of Directors elected to reprice all such options by

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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 per share, which was equal to the fair market value of SouthFirst’s Common Stock on the date of grants. 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, 2003:

Ten-Year Option/SAR Repricings

		Number of
		Securities						Length of Original
		Underlying						Option Term
		Options		Original Exercise		New Exercise		Remaining at Date
Name	Date	Repriced(1)		Price ($)		Price ($)		of Repricing
Joe K. McArthur (1998 Plan)	November 4, 1998		7,428		21.25		15.75	9.2 years
J. Malcomb Massey (1998 Plan)	November 4, 1998		3,726		21.25		15.75	9.2 years

(1) The 1998 Plan authorizes the grant of up to 63,361 shares of Common Stock to select officers and employees in the form of (i) Options or (ii) SARs, all of which shares were granted under the 1998 Plan. Subsequently, options to purchase 36,778 shares expired prior to being exercised, which shares then became available for re-issuance under the 1998 Plan, and additional options to purchase 35,388 shares were issued. Thus, at September 30, 2003, 1,390 shares were available for issuance under the 1998 Plan.

     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, 2003, 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)
Joe K. McArthur			0	$	0		24,057 / 5,975	$	35,583 / $23,054
J. Malcomb Massey			0	$	0		4,875/4,875	$	6,379 / $16,949
Sandra H. Stephens			0	$	0		1,500/10,300	$	8,070 / $46,040
Ruth M. Roper			0	$	0		2,643/2,271	$	3,567 / $8,023

(1) Represents the value of unexercised, in-the-money stock options on September 30, 2003, using the $15.30 closing price of SouthFirst Common Stock on that date.

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     The following table provides certain information concerning the grants of certain options to executive officers during fiscal 2003:

OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants) (1)

	Number of		Percent of Total
	Securities		Options/SARS
	Underlying		Granted to
	Options/SARS		Employees in			Exercise Price
Name	Granted (#)		Fiscal Year			($/share)		Expiration Date
Joe K. McArthur		4,300		9.64	%	$	12.10	October 16, 2012
J. Malcomb Massey		4,300		9.64	%		12.10	October 16, 2012
Sandra Stephens		4,300		9.64	%		12.10	October 16, 2012
Ruth M. Roper		1,950		4.37	%		12.10	October 16, 2012

(1) Options include those issued from the 1995 plan and the 1998 plan. All options vest in equal increments commencing October 16, 2002 through October 16, 2007.

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 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 $13,000 of their gross salary to the plan. Currently, all contributions are fully vested under the 401(k) Plan at the time of contribution. Prior to April 1, 2003, all contributions up to 3% by eligible employees were 100% matched. However, since 401(k) matching is discretionary, upon review by the board of directors, effective April 1, 2003, all matching contributions were temporarily suspended. The board of directors will review the 401(k) Plan on an annual basis and implement any changes as appropriate.

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 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. All loan proceeds had been repaid at September 30, 2003.

     Contributions to the ESOP were used to repay the ESOP loan. Shares released from the suspense account, as the ESOP loan was repaid, any contributions to the ESOP that were 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 ESOP plan year and must 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 were 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 a participant has served for two years. Participant’s benefits also become fully vested upon his or her 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.

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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 reemployed 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 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

     Director Fees and Dividends

     Each member of the First Federal Board of Directors, with the exception of the Chairman of the Board, receives a fee of $750 for each board meeting attended (with one excused absence). The Chairman of the Board receives a fee of $1,500 for each board meeting attended. 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 receive a fee in the amount of $750 for each board meeting attended.

     During fiscal 2003, each non-employee director was paid from $852 to $5,030 under the Dividend Incentive Plan with respect to the shares of Common Stock underlying the stock options held by each non-employee director. Further, certain SouthFirst directors, during fiscal 2003, received a cash dividend in the amount of $996 with respect to the restricted shares held by such directors, as granted under Management Recognition Plans “A” and “B.”

     Director Retirement Benefits

     The Board of Directors of First Federal has adopted, effective as of October 1, 2001, the Bank Director Supplemental Retirement Plan (the “Director Plan”), under which First Federal will make certain payments to each participating director, upon the director’s retirement, or to the director’s beneficiary(ies) in the event of the director’s death. The Director Plan is an unfunded arrangement maintained primarily to provide supplemental retirement benefits for each participating director and constitutes a non-qualified benefit plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). A “pre-retirement account” is

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established under the Director Plan, as a liability reserve account on the books of First Federal for the benefit of each participating director. Such liability reserve account shall be increased or decreased each plan year, until the participating director either retires, or has a termination of service, as a director of First Federal.

     The annual increase or decrease in this liability reserve account is determined by an index which, generally, measures the amount of aggregate annual after-tax income from certain life insurance contracts, owned by First Federal on the lives of each participating director, against the annual cost of funds of First Federal represented by the net premiums paid on these life insurance policies. Each participating director of First Federal will receive, on a monthly basis beginning at retirement or termination of service, as a supplemental retirement benefit, the amount attributed to their liability service account, adjusted, as applicable, under the terms of the Director Plan. The cost of the Director Plan was $33,869 and $18,646 for fiscal years 2003 and 2002, respectively. However, no benefits were paid under the Director Plan in fiscal year 2003 or 2002.

Compensation Committee Interlocks and Insider Participation

     SouthFirst presently does not have a compensation committee because, except for an annual salary, in the amount of $20,000, paid by SouthFirst to its President, J. Malcomb Massey, 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, 2003 in which (i) any executive officer was a member of the board of directors/trustees of another entity, one of whose executive officers was a member of the First Federal Board of Directors, or where (ii) any executive officer was a member of the compensation committee of another entity, one of whose executive officers was a member of the First Federal Board of Directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The following table sets forth certain information as of December 12, 2003 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 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.

	Shares of
	Common Stock		Percent of
Beneficial Owner	Beneficially Owned(1)		Outstanding Shares(2)
Joe K. McArthur(3)		39,813		5.4	%
H. David Foote, Jr.(4)		15,253		2.1	%
J. Malcomb Massey(5)		30,061		4.2	%
Allen Gray McMillan, III(6)		20,753		2.9	%
Kenneth E. Easterling(7)		27,043		3.8	%
L. Neal Bice(8)		32,624		4.6	%
Donald R. Hardy(9)		2,443		0.3	%
Jeffrey L. Gendell, et. al.(10)		71,600		10.1	%
Robert J. Salmon and Mary Anne J. Salmon(11)		47,600		6.7	%
Sandra H. Stephens(12)		4,560		0.6	%

70

	Shares of
	Common Stock			Percent of
Beneficial Owner	Beneficially Owned(1)			Outstanding Shares(2)
Ruth M. Roper(13)		12,130			1.7	%
Pension & Benefit Financial Services, Inc.(14)		44,182			6.2	%
All directors and executive officers as a group (9 persons)		184,680	(15)		23.7	%

(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 708,706 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 708,706 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, 5,751 shares are held in Mr. McArthur’s account under SouthFirst’s 401(k) Plan, 6,526 shares are held in his account under First Federal’s ESOP, 26,592 shares are subject to presently exercisable options and 944 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, 9,093 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 Pension & Benefit, vesting in equal increments over a period of 15 years beginning on April 11, 1997, 3,687 shares are held in his account under SouthFirst’s 401(k) plan, 2,642 shares are held in an Individual Retirement Account, 1,901 shares are held in his account under First Federal’s ESOP, and 6,310 shares are subject to exercisable options.
(6)	Of the amount shown, 10,000 shares are held jointly by Mr. McMillan and his wife, 9,093 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, 21,099 shares are held jointly by Mr. Easterling and his wife, 1,001 shares are held individually by Mr. Easterling and 4,943 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 4,943 shares are subject to exercisable options.
(9)	Of the amount shown, 200 shares are held jointly by Mr. Hardy and his wife and 2,243 shares are subject to exercisable options.
(10)	Of the amount shown, Jeffrey L. Gendell has shared voting power with respect to 71,600 shares, Tontine Management, L.L.C. (“TM”) has shared voting power with respect to 71,600 shares, and Tontine Financial Partners, L.P. (“TFP”) has shared voting power with respect to 71,600 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 237 Park Avenue, 9th Floor, New York, New York 10017. The foregoing information is based on a Schedule 13F, dated November 14, 2003 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,

71

	Maryland, 20815. SouthFirst makes no representation as to the accuracy or completeness of the information reported therein.
(12)	Of the amount shown, 3,860 shares are subject to presently exercisable options, and 700 shares represent restricted stock granted under SouthFirst’s Management Recognition Plan(s), all of which shares are fully vested.
(13)	Of the amount shown, 1,914 shares are owned jointly by Ms. Roper and her husband, 5,623 shares are restricted stock acquired pursuant to that certain employment agreement between Ms. Roper and Pension & Benefit, vesting in equal increments over a period of 15 years beginning on April 11, 1997, 1,239 shares are held in her account in First Federal’s ESOP, and 3,354 shares are subject to presently exercisable options.
(14)	These shares are held in trust by Pension & Benefit as trustee of First Federal’s ESOP. See “Item 10. EXECUTIVE COMPENSATION - Employee Stock Ownership Plan.”
(15)	Of the amount shown, 70,431 shares are subject to exercisable options.

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

     The following table provides information with respect to shares of SouthFirst Common Stock authorized for issuance under equity compensation plans:

Equity Compensation Plan Information (1)

					Number of securities
					remaining available for
	Number of securities		Weighted-average		future issuance under
	to be issued upon exercise		exercise price of		equity compensation plans
	of outstanding options,		outstanding options,		(excluding securities
	warrants and rights		warrants and rights		reflected in column (a))
Plan category	(a)		(b)		(c)
Equity compensation plans approved by security holders(2)		135,671	$	12.84		2,390
Equity compensation plans not approved by security holders		0	$	0		0

(1)	The term “equity compensation plan,” as used in this table, refers to compensation plans and individual compensation arrangements for employees and directors of the Company and its affiliates, which authorize the issuance of equity securities of the Company, excluding all compensation plans and arrangements which meet the qualification requirements under Section 401(a) of the Code.
(2)	Includes the SouthFirst Bancshares, Inc. Stock Option and Incentive Plan, the 1998 Stock Option and Incentive Plan, the SouthFirst Bancshares, Inc. Management Recognition Plan “A” and the SouthFirst Bancshares, Inc. Management Recognition Plan “B.” See, also, “Item 10. EXECUTIVE COMPENSATION – Management Recognition Plans, and – Stock Option Plans.”

72

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, 2003, the aggregate of all loans by First Federal to its officers, directors, and related interests was $851,000.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Financial Statements

     The following financial statements are included as part of this Form 10KSB following the signature page of this Form 10KSB.

	Independent Auditors’ Report of Jones & Kirkpatrick, P.C.
	Consolidated Statements of Financial Condition as of           September 30, 2003 and 2002
	Consolidated Statements of Operations for the years ended           September 30, 2003, 2002 and 2001
	Consolidated Statements of Stockholders’ Equity for the years ended           September 30, 2003, 2002 and 2001
	Consolidated Statements of Cash Flows for the years ended           September 30, 2003, 2002 and 2001
	Notes to Consolidated Financial Statements
(2)	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 with the SEC 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”); Annual Report on Form 10-KSB for the year ended September 30, 2001 (“2001 Form 10-KSB”); Annual Report on Form 10-KSB for the year ended September 30, 2002 (“2002 Form 10-KSB”); Other Event on Form 8-K, filed on March 29, 2002 (“March 29, 2002 Form 8-K”); Quarterly Report on Form 10-QSB for the period ended December 31, 2001 (“December 31, 2001 10-QSB”); Other Event on Form 8-K, filed on July 2, 2002 (“July 2, 2002 Form 8-K”). Unless otherwise indicated, the exhibit number corresponds to the exhibit number in the referenced document.

73

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).
3.3*	Amendment to Article III, Section 2 of the Bylaws (2002 Form 10-KSB).
4*	Form of Common Stock Certificate (1994 S-1).
10.1*	Form of Employment Agreement between SouthFirst Bancshares, Inc. and Joe K. McArthur (2001 Form 10-KSB).
10.2	Form of Amended and Restated Employment Agreement effective as of October 1, 2003 between First Federal of the South and Joe K. McArthur.
10.3	Form of Amended and Restated Employment Agreement effective as of October 1, 2003 between First Federal of the South and Sandra H. Stephens.
10.4	Form of Amended and Restated Employment Agreement effective as of October 1, 2003 between Pension & Benefit Financial Services, Inc. and J. Malcomb Massey.
10.5*	Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., First Federal of the South, Pension & Benefit Financial Services, Inc. and J. Malcomb Massey (2001 Form 10-KSB, Exhibit 10.4.2).
10.6	Form of Amended and Restated Employment Agreement effective as of October 1, 2003 between Pension & Benefit Financial Services, Inc. and Ruth M. Roper.
10.7*	Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., First Federal of the South, Pension & Benefit Financial Services, Inc. and Ruth M. Roper (2001 Form 10-KSB, Exhibit 10.5.2).
10.8*	Form of Management Recognition Plan A (1994 S-1, Exhibit 10.5).
10.9*	Form of Management Recognition Plan A, as amended (1995 Form 10-K, Exhibit 10.8.2).
10.10*	Management Recognition Plan A Restated and Continued (Plan “A” S-8, Exhibit 4.1).
10.11*	Form of Management Recognition Plan B (1994 S-1, Exhibit 10.6).
10.12*	Form of Management Recognition Plan B, as amended (1995 Form 10-K, Exhibit 10.9.2).
10.13*	Management Recognition Plan B, Restated and Continued (Plan “B” S-8, Exhibit 4.1).
10.14*	Form of Stock Option and Incentive Plan (1994 S-1, Exhibit 10.7) (1995 Form 10-K, Exhibit 10.10.1).
10.15*	Form of Stock Option and Incentive Plan, as amended (1995 Form 10-K, Exhibit 10.10.2).
10.16 *	From of Stock Option and Incentive Plan, Restated and Continued (Option Plan S-8, Exhibit 4.1).

74

Exhibit No.	Description of Exhibit
10.17*	Form of Stock Option and Incentive Plan, as Amended (Amended Option Plan S-8, Exhibit 10.10.4).
10.18*	Form of Incentive Stock Option Agreement (Option Plan S-8, Exhibit 4.2).
10.19*	Form of Incentive Stock Option Agreement, as Amended (Amended Option Plan S-8, Exhibit 10.10.6)
10.20 *	Form of SouthFirst Bancshares, Inc. Employee Stock Ownership Plan (1994 S-1, Exhibit 10.8).
10.21*	Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership Plan executed as of September 29, 2001 (2001 Form 10-KSB, Exhibit 10.11.2).
10.22*	Deferred Compensation Agreement between First Federal of the South and Joe K. McArthur (1995 Form 10-K, Exhibit 10.12).
10.23*	Deferred Compensation Agreement between Pension & Benefit and Ruth M. Roper (2001 Form 10-KSB, Exhibit 10.14).
10.24*	Stock Option Agreement between SouthFirst Bancshares, Inc. and Sandra H. Stephens (December 31, 2001 10-QSB, Exhibit 10.16).
10.25*	Supervisory Agreement dated March 22, 2002, by and between First Federal of the South and the Office of Thrift Supervision (March 29, 2002 Form 8-K, Exhibit 99.1).
10.26*	Form of Settlement Agreement dated June 28, 2002, by and between First Federal of the South and Charles R. Vawter, Jr., Charles R. Vawter, Sr., Vawter Properties & Resources, LP, Angela H. Vawter and Automatic Gas & Appliance Co., Inc. (July 2, 2002 Form 8-K, Exhibit 99.1)
11	Statement Regarding Computation of Per Share Earnings.
14	Code of Ethics for Principal Executive Officers and Senior Financial Officers
21	Subsidiaries of Registrant.
23.1	Consent of Jones & Kirkpatrick, P.C.
31.1	Rule 13a - 14a Certification of the Chief Executive Officer
31.2	Rule 13a - 14a Certification of the Controller (Chief Financial Officer)
32.1	Written Statement of the Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350
32.2	Written Statement of the Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350

(b) Reports on Form 8-K during the fourth quarter

     There was one report on Form 8-K, filed by SouthFirst during the last quarter of fiscal year 2003. This report, filed on September 26, 2003, included a press release announcing that SouthFirst had completed the sale of its Centreville branch office.

75

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Fees billed by our independent accounting firm, Jones & Kirkpatrick, P.C., for audit services, SEC compliance reviews and tax preparation services for the SouthFirst were as follows, for the fiscal years ending September 30, 2003 and 2002:

	Audit		Audit-Related		Tax		Other		Total
	Fees		Fees(1)		Fees(2)		Fees (3)		Fees
Fiscal Year 2003	$	91,988	$	24,862	$	10,190	$	2,470	$	129,510
Fiscal Year 2002	$	93,860	$	27,580	$	10,580	$	5,975	$	137,995

(1)	Audit related fees are for SEC compliance reviews of Form 10-QSB.
(2)	Tax fees are for preparation of federal and state income tax returns.
(3)	“Other Fees” included primarily assistance with OTS accounting consultation. No financial information systems implementation or design services were rendered by Jones & Kirkpatrick, P.C. during fiscal year 2002 or 2003.

     In addition to the foregoing, Jones & Kirkpatrick, P.C., performed audit services and tax preparation services for Pension & Benefit during the fiscal year ending September 30, 2003 consisting of $8,500 for audit fees and $185 for tax fees.

     Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our independent auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:

• approved by our audit committee; or

• entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.

     The audit committee pre-approves all services provided by our independent auditors, including those set forth above. The audit committee has considered the nature and amount of fees billed by Jones & Kirkpatrick, P.C. and believes that the provision of services for activities unrelated to the audit is compatible with maintaining Jones & Kirkpatrick, P.C.’s independence.

[signatures on following page]

76

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 29th day of December 2003.

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 &
	Director (principal executive
Joe K. McArthur	officer)	December 29, 2003
/s/ Sandra H. Stephens	Executive Vice President,
	Chief Operating Officer,
Sandra H. Stephens	Secretary & Director	December 29, 2003
/s/ Janice Browning	Controller, Treasurer
	(Principal Accounting
Janice Browning	Officer)	December 29, 2003
/s/ Allen Gray McMillan, III	Chairman and Director	December 29, 2003
Allen Gray McMillan, III
/s/ J. Malcomb Massey	President and Director	December 29, 2003
J. Malcomb Massey
/s/ Kenneth E. Easterling	Director	December 29, 2003
Kenneth E. Easterling
/s/ H. David Foote, Jr.	Director	December 29, 2003
H. David Foote, Jr.
/s/ L. Neal Bice	Director	December 29, 2003
L. Neal Bice
/s/ Donald R. Hardy	Director	December 29, 2003
Donald R. Hardy

77

SOUTHFIRST BANCSHARES, INC.

SYLACAUGA, ALABAMA

SEPTEMBER 30, 2003 AND 2002

SOUTHFIRST BANCSHARES, INC.

SYLACAUGA, ALABAMA

SEPTEMBER 30, 2003 AND 2002

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	9-47

INDEPENDENT AUDITORS’ REPORT

December 4, 2003

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, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2003. 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, on October 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

Certified Public Accountants

/s/  Jones & Kirkpatrick, P.C.

2

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Financial Condition
September 30, 2003 and 2002

				2003			2002
ASSETS
Cash and cash equivalents				$	6,049,325		$	8,122,898
Interest-bearing deposits in other financial institutions					533,003			883,262
Investment securities available for sale, at fair value					32,599,988			26,768,039
Loans receivable, net of allowance for loan losses of $1,191,033 in 2003 and $854,013 in 2002					84,382,703			92,984,822
Loans held for sale at cost (which approximates fair value)					1,107,805			2,292,400
Foreclosed assets, net					77,680			79,983
Premises and equipment, net					4,298,889			4,867,235
Federal Home Loan Bank stock, at cost					1,117,000			2,229,800
Goodwill					543,706			543,706
Accrued interest receivable					679,402			734,168
Other assets					2,264,952			2,108,531
			Total Assets	$	133,654,453		$	141,614,844
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposits:
		Non-interest bearing		$	3,657,079		$	2,849,970
		Interest bearing			89,900,902			93,633,292
			Total deposits		93,557,981			96,483,262
	Advances by borrowers for property taxes and insurance				213,042			276,909
	Accrued interest payable				576,676			825,850
	Borrowed funds				27,000,861			29,057,611
	Accrued expenses and other liabilities				628,522			1,092,829
			Total liabilities		121,977,082			127,736,461
Stockholders’ equity:
	Common stock, $.01 par value, 2,000,000 shares authorized; 989,868 shares issued and 713,944 shares outstanding in 2003; 989,868 shares issued and 800,911 shares outstanding in 2002				9,996			9,996
	Additional paid-in capital				9,837,058			9,819,676
	Treasury stock, at cost (275,924 shares in 2003; 183,574 shares in 2002)				(3,809,839	)		(2,407,231	)
	Deferred compensation on common stock employee benefit plans				(183,179	)		(324,060	)
	Shares held in trust, at cost (9,775 shares in 2003 and 2002)				(107,161	)		(107,161	)
	Retained earnings				6,148,255			6,457,443
	Accumulated other comprehensive income (loss)				(217,759	)		429,720
			Total stockholders’ equity		11,677,371			13,878,383
	Commitments and contingencies (Note 13)				—			—
	Total Liabilities and Stockholders’ equity			$	133,654,453		$	141,614,844

See accompanying notes to consolidated financial statements.

3

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations
Years Ended September 30, 2003, 2002 and 2001

			2003		2002			2001
Interest and dividend income:
	Interest and fees on loans		$	5,948,317	$	6,827,657		$	8,506,455
	Interest and dividend income on investment securities			1,488,328		1,699,535			2,385,413
		Total interest and dividend income		7,436,645		8,527,192			10,891,868
Interest expense:
	Interest on deposits			2,520,828		3,490,715			4,977,307
	Interest on borrowed funds			1,023,365		1,239,081			2,006,896
		Total interest expense		3,544,193		4,729,796			6,984,203
		Net interest income		3,892,452		3,797,396			3,907,665
Provision for loan losses (benefit)				549,603		(667,650	)		857,688
	Net interest income after provision for loan losses			3,342,849		4,465,046			3,049,977
Other income:
	Service charges and other fees			568,701		447,728			442,979
	Employee benefit trust and consulting fees			1,231,622		1,172,628			1,128,996
	Gain on sale of loans			1,170,453		611,971			393,875
	Gain (loss) on sales and calls of investment securities available-for-sale			238,291		236,414			4,267
	Gain (loss) on sale of premises and equipment			7,759		162			(12,860	)
	Insurance benefits in excess of related compensation costs			—		186,727			—
	Net premium on transfer of deposits			249,769		—			—
	Other			275,149		377,824			353,797
		Total other income		3,741,744		3,033,454			2,311,054

(Continued)

     See accompanying notes to consolidated financial statements.

4

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations (Continued)
Years Ended September 30, 2003, 2002 and 2001

			2003		2002		2001
Other expenses:
	Compensation and benefits		$	4,279,501	$	3,635,805	$	3,118,111
	Net occupancy expense			392,354		358,244		344,899
	Furniture and fixtures			451,577		459,314		487,760
	Data processing			259,685		317,093		331,310
	Office supplies and expenses			436,677		420,272		402,568
	Deposit insurance premiums			107,706		85,610		64,460
	Legal expenses			214,261		404,203		161,752
	Other professional services			259,913		286,068		126,083
	Goodwill amortization			—		53,946		53,945
	Termination agreements			—		—		560,000
	Other			495,737		386,176		374,491
		Total other expenses		6,897,411		6,406,731		6,025,379
Income (loss) before income taxes				187,182		1,091,769		(664,348	)
Income tax expense (benefit)				71,318		420,964		(242,255	)
	Net income (loss)		$	115,864	$	670,805	$	(422,093	)
Earnings (loss) per share:
	Basic		$	0.16	$	0.82	$	(0.47	)
	Diluted		$	0.15	$	0.82	$	(0.46	)
Weighted average shares outstanding:
	Basic			744,641		819,260		903,849
	Diluted			759,550		822,631		907,765

See accompanying notes to consolidated financial statements.

5

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity
Years Ended September 30, 2003, 2002 and 2001

												Deferred
												Compensation
												on Common
						Additional						Stock
				Common		Paid-in			Retained			Employee
				Stock		Capital			Earnings			Benefit Plans
	Balance - September 30, 2000			$	9,996	$	9,835,352		$	7,186,244		$	(482,325	)
Comprehensive Income:
		Net income (loss)			—		—			(422,093	)		—
		Change in net unrealized gain (loss) on available-for-sale securities, net of reclassification adjustments and tax effect			—		—			—			—
			Total comprehensive income
Release of unallocated ESOP shares					—		4,654			—			63,760
Acquisition of ESOP shares					—		—			—			(15,925	)
Vesting of shares on Management Recognition Plans							(25,738	)		—			31,146
Acquisition of Management Recognition Plan shares					—		—			—			—
Vesting of deferred compensation shares					—		—			—			19,902
Acquisition of Treasury stock					—		—			—			—
Cash dividends declared ($ .60/share)					—		—			(514,213	)		—
Balance - - September 30, 2001					9,996		9,814,268			6,249,938			(383,442	)
Comprehensive Income:
		Net income			—		—			670,805			—
		Change in net unrealized gain (loss) on available-for-sale securities, net of reclassification adjustments and tax effect			—		—			—			—
			Total comprehensive income
Release of unallocated ESOP shares					—		5,419			—			55,871
Acquisition of ESOP shares					—		—			—			(188	)
Vesting of shares on Management Recognition Plans					—		(11	)		—			3,047
Issue of Management Recognition Plan shares					—		—			—			(19,250	)
Vesting of deferred compensation shares					—		—			—			19,902
Acquisition of Treasury stock					—		—			—			—
Cash dividends declared ($ .60/share)					—		—			(463,300	)		—
Balance - September 30, 2002					9,996		9,819,676			6,457,443			(324,060	)

[Additional columns below]

[Continued from above table, first column(s) repeated]

										Accumulated
										Other
										Compre-
										hensive
				Shares Held			Treasury			Income
				in Trust			Stock			(Loss)			Total
	Balance - September 30, 2000			$	—		$	(1,140,781	)	$	(483,002	)	$	14,925,484
Comprehensive Income:
		Net income (loss)			—			—			—			(422,093	)
		Change in net unrealized gain (loss) on available-for-sale securities, net of reclassification adjustments and tax effect			—			—			849,631			849,631
			Total comprehensive income											427,538
Release of unallocated ESOP shares					—			—			—			68,414
Acquisition of ESOP shares					—			—			—			(15,925	)
Vesting of shares on Management Recognition Plans					—			—			—			5,408
Acquisition of Management Recognition Plan shares					(126,411	)		—			—			(126,411	)
Vesting of deferred compensation shares					—			—			—			19,902
Acquisition of Treasury stock					—			(507,658	)		—			(507,658	)
Cash dividends declared ($ .60/share)					—			—			—			(514,213	)
Balance - September 30, 2001					(126,411	)		(1,648,439	)		366,629			14,282,539
Comprehensive Income:
		Net income			—			—			—			670,805
		Change in net unrealized gain (loss) on available-for-sale securities, net of reclassification adjustments and tax effect			—			—			63,091			63,091
			Total comprehensive income											733,896
Release of unallocated ESOP shares					—			—			—			61,290
Acquisition of ESOP shares					—			—			—			(188	)
Vesting of shares on Management Recognition Plans					—			—			—			3,036
Issue of Management Recognition Plan shares					19,250			—			—			—
Vesting of deferred compensation shares					—			—			—			19,902
Acquisition of Treasury stock					—			(758,792	)		—			(758,792	)
Cash dividends declared ($ .60/share)					—			—			—			(463,300	)
Balance - September 30, 2002					(107,161	)		(2,407,231	)		429,720			13,878,383

(Continued)

     See accompanying notes to consolidated financial statements.

6

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Continued)
Years Ended September 30, 2003, 2002 and 2001

										Deferred
										Compensation
										on Common
					Additional					Stock
			Common		Paid-in		Retained			Employee
			Stock		Capital		Earnings			Benefit Plans
Balance - September 30, 2002			$	9,996	$	9,819,676	$	6,457,443		$	(324,060	)
Comprehensive Income:
	Net income			—		—		115,864			—
	Change in net unrealized gain (loss) on available-for-sale securities, net of reclassification adjustments and tax effect			—		—		—			—
		Total comprehensive income
Release of unallocated ESOP shares				—		16,349		—			58,730
Acquisition of ESOP shares											58,399
Vesting of shares on Management Recognition Plans				—		1,033		—			3,850
Vesting of deferred compensation shares				—		—		—			19,902
Acquisition of Treasury stock				—		—		—			—
Cash dividends declared ($ .60/share)				—		—		(425,052	)		—
Balance - September 30, 2003			$	9,996	$	9,837,058	$	6,148,255		$	(183,179	)

[Additional columns below]

[Continued from above table, first column(s) repeated]

									Accumulated
									Other
									Compre-
									hensive
			Shares Held			Treasury			Income
			in Trust			Stock			(Loss)			Total
Balance - September 30, 2002			$	(107,161	)	$	(2,407,231	)	$	429,720		$	13,878,383
Comprehensive Income:
	Net income			—			—			—			115,864
	Change in net unrealized gain (loss) on available-for-sale securities, net of reclassification adjustments and tax effect			—			—			(647,479	)		(647,479	)
		Total comprehensive income											(531,615	)
Release of unallocated ESOP shares				—			—			—			75,079
Acquisition of ESOP shares							(58,363	)					36
Vesting of shares on Management Recognition Plans				—			—			—			4,883
Vesting of deferred compensation shares				—			—			—			19,902
Acquisition of Treasury stock				—			(1,344,245	)		—			(1,344,245	)
Cash dividends declared ($ .60/share)				—			—			—			(425,052	)
Balance - September 30, 2003			$	(107,161	)	$	(3,809,839	)	$	(217,759	)	$	11,677,371

     See accompanying notes to consolidated financial statements.

7

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years Ended September 30, 2003, 2002 and 2001

			2003			2002			2001
OPERATING ACTIVITIES
Net income (loss)			$	115,864		$	670,805		$	(422,093	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Provision for loan losses (benefit)			549,603			(667,650	)		857,688
	Depreciation and amortization			331,198			406,184			419,254
	Proceeds from sales of loans			55,989,812			27,159,678			19,731,460
	Loans originated for sale			(53,634,764	)		(28,567,757	)		(19,428,273	)
	Gain on sale of loans			(1,170,453	)		(611,971	)		(393,875	)
	(Gain) loss on sale of premises and equipment			(7,759	)		(162	)		11,511
	Loss on sale of foreclosed assets			69,885			41,566			7,437
	Compensation expense on ESOP and MRPs			99,864			84,228			82,681
	Gain on sale of investment securities available-for-sale			(238,291	)		(236,414	)		(4,267	)
	Net amortization of premium on investment securities			46,663			38,126			21,916
	(Increase) decrease in accrued interest receivable			54,766			226,057			223,260
	(Increase) decrease in other assets			(156,421	)		(1,105,037	)		(247,340	)
	Increase (decrease) in accrued interest payable			(249,174	)		(502,333	)		(74,822	)
	Increase (decrease) in accrued expenses and other liabilities			(67,463	)		535,771			(150,316	)
		Net cash provided (used) by operating activities		1,733,330			(2,528,909	)		634,221
INVESTING ACTIVITIES
Net change in interest-bearing deposits in other financial institutions				350,259			15,271			838,566
Proceeds from calls and maturities of investment securities available-for-sale				15,438,689			3,559,206			1,754,784
Proceeds from sales of investment securities available-for-sale				16,589,714			18,598,208			9,696,496
Proceeds from redemption of Federal Home Loan Bank stock				1,112,800			—			—
Purchase of investment securities available-for-sale				(38,713,047	)		(15,572,588	)		(7,054,375	)
Net decrease in loans				7,443,226			8,441,922			5,683,933
Proceeds from sale of premises and equipment				452,058			10,095			15,000
Purchase of premises and equipment				(207,151	)		(463,528	)		(165,437	)
Proceeds from sale of foreclosed assets				541,708			512,628			586,944
	Net cash provided by investing activities			3,008,256			15,101,214			11,355,911

(Continued)

See accompanying notes to consolidated financial statements.

8

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)
Years Ended September 30, 2003, 2002 and 2001

			2003			2002			2001
FINANCING ACTIVITIES
Net increase (decrease) in demand accounts and savings accounts			$	(390,261	)	$	1,358,136		$	(771,750	)
Net increase (decrease) in certificates of deposit				(2,535,020	)		(3,930,454	)		(5,535,771	)
Proceeds from borrowed funds				18,588,000			32,091,611			31,400,000
Repayment of borrowed funds				(20,644,750	)		(38,639,000	)		(34,684,068	)
Cash dividends paid				(425,052	)		(463,300	)		(514,213	)
Acquisition of ESOP and MRP shares				36			(188	)		(131,292	)
Acquisition of treasury stock				(1,344,245	)		(758,792	)		(507,658	)
(Increase) decrease in advances by borrowers for property taxes and insurance				(63,867	)		(127,606	)		107,511
		Net cash used in financing activities		(6,815,159	)		(10,469,593	)		(10,637,241	)
Increase (decrease) in cash and cash equivalents				(2,073,573	)		2,102,712			1,352,891
Cash and cash equivalents - beginning of year				8,122,898			6,020,186			4,667,295
Cash and cash equivalents - end of year			$	6,049,325		$	8,122,898		$	6,020,186
Supplemental information on cash payments:
	Interest paid		$	3,793,367		$	5,232,129		$	7,059,025
	Income taxes paid		$	210,320		$	31,857		$	360,107
Supplemental information on non - cash transactions:
	Real estate owned, obtained through foreclosure		$	609,290		$	376,294		$	676,764

See accompanying notes to consolidated financial statements.

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 and Talladega in the state of Alabama, and provides lending services in Birmingham, 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 statement of financial condition 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 held to maturity or trading account securities as of September 30, 2003 or 2002.
	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 periodically reviews the required investment and will redeem any excess stock at cost. The Federal Home Loan Bank will also 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, 2003.
	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 proceeds and the carrying value of the loans sold.
	Goodwill – In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which changed the accounting for goodwill from an amortization method to an impairment only approach. Upon adoption of SFAS No. 142 on October 1, 2002, the Company ceased amortizing goodwill. Based upon the initial goodwill impairment test completed October 1, 2002, as required by SFAS No. 142, no goodwill impairment was indicated. In addition, the goodwill impairment testing completed at September 30, 2003 indicated there was no goodwill impairment. Therefore, the Company had no changes in the carrying amount of goodwill from September 30, 2002 to September 30, 2003.

(Continued)

13

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
	The following is a reconciliation of net income (loss), basic earnings per share and diluted earnings per share with and without goodwill amortization:

		For the Year Ended September 30,
		2003		2002		2001
Reported net income (loss)		$	115,864	$	670,805	$	(422,093	)
Add back: Goodwill amortization (net of taxes)			—		33,447		33,446
Adjusted net income (loss)		$	115,864	$	704,252	$	(388,647	)
Basic earnings per share:
	Reported net income (loss)		.16		.82		(.47	)
	Goodwill amortization		.00		.04		.04
Adjusted net income (loss)			.16		.86		(.43	)
Diluted earnings per share:
	Reported net income (loss)		.15		.82		(.46	)
	Goodwill amortization		.00		.04		.04
Adjusted net income (loss)			.15		.86		(.42	)

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.

Long-Lived Assets – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation computed on a straight-line basis over the estimated service lives of the related assets (30 to 50 years for buildings and 3 to 10 years for equipment). Expenditures for maintenance and repairs are charged to operations as incurred; expenditures for renewals and improvements are capitalized and written off through depreciation and amortization charges. Equipment retired or sold is removed from the asset and related accumulated depreciation amounts and any gain or loss resulting therefrom is reflected in the accompanying consolidated statements of operations.

(Continued)

14

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
	The Company continually evaluates whether events and circumstances have occurred that indicate such long-lived assets have been impaired. Measurement of any impairment of such long-lived assets is based on those assets’ fair values and is recognized through a valuation allowance with the resulting charge reflected in the accompanying consolidated statements of operations. There were no impairment losses recorded during any period reported herein.
	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 $84,259, $59,431 and $30,987 for the years ended September 30, 2003, 2002 and 2001, 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 60,834 shares in 2003 and 2002 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.
	Comprehensive Income – 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.

(Continued)

15

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
	The components of other comprehensive income and related tax effects are as follows:

		2003			2002			2001
Unrealized holding gains (losses) on available-for-sale securities arising during the period		$	(806,032	)	$	338,161		$	1,374,640
Reclassification adjustment for losses (gains) realized in income			(238,291	)		(236,414	)		(4,267	)
Net unrealized gains (losses)			(1,044,323	)		101,747			1,370,373
	Tax effect		396,844			(38,656	)		(520,742	)
Net-of-tax amount		$	(647,479	)	$	63,091		$	849,631

New Accounting Pronouncements – In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. The statement 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.

SFAS Nos. 143 and 144 were adopted October 1, 2002. The effects of these statements did not have a material impact on the Company’s consolidated financial position or results of operations.

In May 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This statement also amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This

(Continued)

16

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
	statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations.
	In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The effects of this statement did not have a material impact on the Company’s consolidated financial position or results of operations upon adoption January 1, 2003.
	In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This statement removes acquisitions of financial institutions from the scope of both SFAS No. 72, Accounting for Certain Acquisitions of Banking and Thrift Institutions, and FASB Interpretation (“FIN”) No.9, Applying APB Opinion No. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method, and requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The provisions of this statement were effective as of October 1, 2002, with earlier application permitted. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or result of operations.
	In December 2002, the FASB issued SFAS 148, Accounting for Stock Based Compensation-Transition and Disclosure, which provides alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, this statement amends APB Opinion 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. This statement is effective for fiscal and interim periods ending after December 15, 2002. The Company adopted the disclosure requirements of this statement on December 31, 2002. Adoption of the disclosure requirements did not have a material impact to the consolidated financial statements.

(Continued)

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
	In November 2002, The FASB issued FIN 45, Guarantor’s Accounting Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others, which elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provision of this Interpretation are applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of these recognition provisions will result in recording liabilities associated with certain guarantees provided by the Company. These currently include standby letters of credit. The disclosure requirements of this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The effects of this Interpretation did not have a material impact on the consolidated financial statements.
	In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, which clarifies the application of ARB 51 to certain entities (called variable interest entities) in which equity investors do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition, public companies must apply the consolidated requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on the consolidated financial statements.
	In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement No. 133 on Derivation Instruments and Hedging Activities”. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivation Instruments and Hedging Activities”. It also applies to loan commitments that relate to the origination of mortgage loans that will be held for sale. This statement is generally effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations.

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SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
	In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify the fair value of financial instruments issued in the form of shares that are mandatorily redeemable as liabilities. It also requires that payments or accruals and other amounts to be paid to holder of the financial instruments be reported separately as interest cost. SFAS No. 150 is effective for the Company at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations.
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
Available-for-Sale Securities		Cost		Gains		Losses		Fair Value
September 30, 2003:
	U.S. Government agency	$	23,236,750	$	109,238	$	738,052	$	22,607,936
	Collateral mortgage obligations (CMO’s)		1,439,648		16,441		—		1,456,089
	Mortgage-backed securities		7,915,826		259,598		—		8,175,424
	Corporate obligations		350,000		6,131		992		355,139
	Other common stock		9,000		—		3,600		5,400
		$	32,951,224	$	391,408	$	742,644	$	32,599,988
September 30, 2002:
	U.S. Government agency	$	9,507,187	$	367,281	$	7,229	$	9,867,239
	Collateral mortgage obligations (CMO’s)		5,140,557		11,474		36,746		5,115,285
	Mortgage-backed securities		11,239,597		439,574		138		11,679,033
	Corporate obligations		100,000		—		1,918		98,082
	Other common stock		87,610		—		79,210		8,400
		$	26,074,951	$	818,329	$	125,241	$	26,768,039

(Continued)

19

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

2.	INVESTMENT SECURITIES (Continued)
	The Company sold securities available-for-sale for total proceeds of $16,589,714, $18,598,208, and $9,696,496, resulting in gross realized gains of $238,291, $236,414 and $4,267 in 2003, 2002 and 2001, respectively.
	At September 30, 2003, certain securities classified as available-for-sale were written down to their estimated realizable values because, in the opinion of management, the decline in market value of those securities is considered to be other than temporary.
	The scheduled maturities at September 30, 2003 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	$	55,189	$	55,662
Due from one to five years		530,415		538,895
Due from five to ten years		2,166,645		2,216,117
Due after ten years		30,189,975		29,783,914
	$	32,942,224	$	32,594,588

Investment securities available-for-sale with a carrying amount of approximately $2,535,000 and $4,736,000 at September 30, 2003 and 2002, respectively, were pledged to secure public deposits as required by law and for other purposes required or permitted by law.

20

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

3.	LOANS
	Loans consisted of the following at September 30, 2003 and 2002:

			2003		2002
Real estate mortgage loans:
	First mortgage loans:
		Single family residential	$	39,838,693	$	44,346,682
		Multi-family and commercial real estate		11,407,220		13,489,827
	Second mortgage loans			13,404,006		9,665,096
	1-4 family construction loans			16,264,065		21,698,381
Savings account loans				881,192		1,190,189
Installment loans				3,920,955		3,598,408
				85,716,131		93,988,583
Deduct:
	Deferred loan fees			142,395		148,893
	Undisbursed portion of loans in process			—		855
	Allowance for loan losses			1,191,033		854,013
				1,333,428		1,003,761
Total loans receivable – net			$	84,382,703	$	92,984,822

Activity in the allowance for loan losses was as follows for the years ended September 30, 2003, 2002 and 2001:

	2003			2002			2001
Beginning balance	$	854,013		$	1,577,952		$	700,620
Provision (benefit) charged to income		549,603			(667,650	)		857,688
Recovery of amounts charged off in prior years		27,930			22,585			67,606
Loans charged off		(240,513	)		(78,874	)		(47,962	)
Ending balance	$	1,191,033		$	854,013		$	1,577,952

(Continued)

21

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,
		2003		2002
Impaired loans without a valuation allowance		$	—	$	—
Impaired loans with a valuation allowance			2,393,009		873,633
	Total impaired loans	$	2,393,009	$	873,633
Valuation allowance related to impaired loans		$	895,856	$	495,296

	Years Ended September 30,
	2003		2002		2001
Average investment in impaired loans	$	413,387	$	890,066	$	53,939
Interest income recognized on impaired loans		23,068		65,022		—
Interest income recognized on a cash basis on impaired loans		23,068		61,994		—

Interest on impaired loans is generally recorded on a “cash basis” and is included in earnings only when actually received in cash.

At September 30, 2003 and 2002, the total recorded investment in loans on non-accrual amounted to approximately $2,149,000 and $764,000, respectively, and the total recorded investment in loans past due ninety days or more and still accruing interest was $0 for each year.

In January 2002, the Company modified the terms of a loan receivable from a customer. The modified terms included a reduction in interest rate from 13% to 7%. The recorded investment in the loan was approximately $235,000 and $254,000 at September 30, 2003 and 2002, respectively. No additional funds are committed to be advanced in connection with this loan.

The Company sells loans to third party investors with limited recourse, primarily related to prepayment. The total amount of recourse liability at September 30, 2003 was approximately $252,000. Because historical losses related to these guarantees have been insignificant, no liability has been recorded for these at September 30, 2003 or 2002.

22

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

4.	PREMISES AND EQUIPMENT
	Premises and equipment are summarized as follows at September 30, 2003 and 2002:

	2003		2002
Land	$	1,610,559	$	1,848,059
Buildings and improvements		3,136,659		3,303,397
Furniture, fixtures and equipment		830,695		1,204,508
Automobiles		179,620		220,601
		5,757,533		6,576,565
Less: Accumulated depreciation		1,458,644		1,709,330
Premises and equipment, net	$	4,298,889	$	4,867,235

	Depreciation expense charged to operations was $331,198, $352,238 and $365,309 in 2003, 2002 and 2001, respectively.
5.	ACCRUED INTEREST RECEIVABLE
	Accrued interest receivable consists of the following at September 30, 2003 and 2002:

		2003		2002
Loans		$	338,537	$	462,797
Investment securities available-for-sale			340,865		271,371
	Total accrued interest receivable	$	679,402	$	734,168

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. As of September 30, 2003 and 2002, the Company had written down its investment to $0.

23

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

7.	LEASES
	The Company leases certain real estate and office equipment under operating leases expiring in various years through 2007. Minimum future rental payments under non-cancellable operating leases having remaining terms in excess of one year as of September 30, 2003 are as follows:

Year Ending
September 30,	Amount
2004	$	114,569
2005		108,063
2006		101,479
2007		76,561
Total	$	400,672

Lease expense charged to operations was $127,930, $101,768 and $73,187 for the years ended September 30, 2003, 2002 and 2001, respectively.

The Company is also the lessor of a portion of its office space under a lease expiring in 2007.

Minimum future rentals to be received on non-cancelable leases as of September 30, 2003 for each of the next five years and in the aggregate are as follows:

Year Ending
September 30,		Amount
	2004	$	12,000
	2005		12,000
	2006		12,000
	2007		12,000
	2008		3,000
Total minimum future rentals		$	51,000

24

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

8.	DEPOSITS
	An analysis of deposit accounts at the end of the period is as follows at September 30, 2003 and 2002:

				2003		2002
Demand accounts:
	Non interest-bearing checking accounts			$	3,657,079	$	2,849,970
	Interest-bearing:
		NOW accounts			10,063,517		10,295,914
		Money market demand			155,217		467,543
			Total demand accounts		13,875,813		13,613,427
Statement savings accounts					11,496,696		12,149,343
Certificate accounts					68,185,472		70,720,492
		Total		$	93,557,981	$	96,483,262

Certificate accounts greater than or equal to $100,000 were $25,253,505 and $18,473,485 at September 30, 2003 and 2002, respectively. Overdrafts of demand deposits in the amounts of $163,042 and $10,101 have been reclassified as loan balances at September 30, 2003 and 2002, respectively.

Scheduled maturities of certificate accounts were as follows at September 30, 2003:

Year		Amount
	2004	$	45,711,003
	2005		12,762,276
	2006		2,829,909
	2007		2,617,372
2008 and thereafter			4,264,912
	Total	$	68,185,472

(Continued)

25

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

8.	DEPOSITS (Continued)
	Interest expense on deposits for the years ended September 30, 2003, 2002 and 2001 was as follows:

		2003		2002		2001
Demand accounts		$	63,232	$	143,538	$	161,731
Statement savings accounts			74,506		179,579		216,553
Certificate accounts			2,383,090		3,167,598		4,599,023
	Total	$	2,520,828	$	3,490,715	$	4,977,307

9.	BORROWED FUNDS
	Federal Home Loan Bank Advances The Company was liable to the Federal Home Loan Bank of Atlanta on the following advances at September 30, 2003 and 2002:

Maturity Date	Callable Date	Type	Rate at 9/30			2003			2002
May 2003		Adjustable		1.96	%	$	—		$	1,670,000
July 2003		Adjustable		1.96	%		—			2,000,000
April 2004		Adjustable		1.11	%		4,000,000			4,000,000
July 2004		Adjustable		1.21	%		1,670,000			—
May 2005		Adjustable		1.39	%		1,670,000			1,670,000
August 2007		Adjustable		3.56	%		—			—
March 2010	December 2003	Fixed Rate		5.88	%		5,000,000			5,000,000
November 2010	November 2003	Fixed Rate		5.43	%		5,000,000			5,000,000
January 2011	October 2003	Fixed Rate		4.65	%		2,500,000			2,500,000
January 2011	January 2006	Fixed Rate		5.30	%		2,500,000			2,500,000
						$	22,340,000		$	24,340,000
Weighted average rate							4.04	%		4.09	%

(Continued)

26

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

9.	BORROWED FUNDS (Continued)
	At September 30, 2003 and 2002, the advances were collateralized by first-mortgage residential loans with carrying values of approximately $33,349,000 and $42,042,000, respectively
	On April 15, 2002, the Bank was notified that the amount available under its credit line with the Federal Home Loan Bank of Atlanta had been changed from a variable amount, equal to 30% of total assets to a fixed amount of $22,000,000. This amount was subsequently changed to an amount equal to 10% of its total assets. The Federal Home Loan Bank of Atlanta has notified the Bank that it will not require the Bank’s existing borrowings to be reduced to the new amount prior to the existing advance maturities, but that it will require that any additional borrowing by the Bank be approved through application by the Bank to the Federal Home Loan Bank of Atlanta’s Credit Committee.
	Line of Credit The Corporation also has a line of credit with a commercial bank. A summary of this line of credit at September 30, 2003 and 2002 is as follows:

	Outstanding Balance
	at September 30,
	2003		2002
$2,500,000 line of credit, due June 1, 2004, interest at prime plus .25% (4.25% at September 30, 2003), secured by the Company’s stock in its subsidiary, First Federal of the South	$	1,917,861	$	698,861

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase, which are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. A summary of such agreements is as follows:

(Continued)

27

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

9. BORROWED FUNDS (Continued)

	2003		2002
Agreement to repurchase on October 7, 2002, plus interest at 1.88%	$	—	$	1,041,250
Agreement to repurchase on October 21, 2002, plus interest at 1.90%		—		1,027,500
Agreement to repurchase on October 24, 2002, plus interest at 1.84%		—		1,950,000
Agreement to repurchase on October 15, 2003, plus interest at 1.23%		1,743,000		—
Agreement to repurchase on October 20, 2003, plus interest at 1.21%		534,109		—
Agreement to repurchase on October 20, 2003, plus interest at 1.21%		465,891		—
	$	2,743,000	$	4,018,750

Securities underlying such borrowings had a carrying value of $4,077,854 and $5,020,440 at September 30, 2003 and 2002, respectively.

Total borrowed funds at September 30, 2003 have maturities (or call dates) in future years as follows:

Year Ending September 30,	Amount
2004	$	22,830,861
2005		1,670,000
2006		2,500,000
	$	27,000,861

28

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

10.	INCOME TAX EXPENSE
	Income tax expense (benefit) for the years ended September 30, 2003, 2002 and 2001 consists of the following:

		2003			2002		2001
Federal:
	Current	$	272,976		$	305,068	$	84,141
	Deferred		(237,810	)		87,242		(278,226	)
			35,166			392,310		(194,085	)
State:
	Current		53,638			22,239		(27,712	)
	Deferred		(17,486	)		6,415		(20,458	)
			36,152			28,654		(48,170	)
Total		$	71,318		$	420,964	$	(242,255	)

Income tax expense includes taxes related to investment security gains in the approximate amount of $91,000, $90,000 and $1,600 in 2003, 2002 and 2001, 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:

			2003			2002			2001
Computed “expected” income tax expense			$	63,642		$	371,201		$	(225,878	)
Increase (reduction) in income tax resulting from:
	Compensation expense for ESOP			(8,260	)		(15,734	)		(19,360	)
	Management Recognition Plan			265			329			—
	State tax, net of federal income tax benefit			12,527			12,937			(57,401	)
	Other - net			3,144			52,231			60,384
		Total	$	71,318		$	420,964		$	(242,255	)
Effective tax rate				38	%		39	%		36	%

(Continued)

29

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

10.	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, 2003 and 2002 are as follows:

			2003		2002
Deferred taxes:
	Foreclosed real estate gain		$	55,869	$	14,299
	Bad debts			325,666		202,654
	Accrued salaries			41,062		51,081
	Investment in equity of affiliate			89,425		89,425
	Deferred compensation			136,795		108,028
	Unrealized loss on investment securities available-for-sale			133,478		—
		Total deferred tax assets		782,295		465,487
Deferred tax liabilities:
	Management Recognition Plan			3,446		5,228
	FHLB stock			237,138		237,138
	Depreciation			135,627		221,346
	Prepaid expenses			58,538		54,458
	Federal/state tax deduction on a cash basis			1,852		6,844
	Goodwill			56,397		39,949
	Unrealized gain on investment securities available-for-sale			—		263,364
		Total deferred tax liabilities		492,998		828,327
		Net deferred tax asset (liability)	$	289,297	$	(362,840	)

There was no valuation allowance at September 30, 2003 or 2002.

30

SOUTHFIRST BANCSHARES, INC.
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Notes to Consolidated Financial Statements (Continued)

11.	EMPLOYEE BENEFIT PLANS
	Employee Stock Ownership Plan - Effective October 1, 1994, the Corporation 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 $71,657, $74,488 and $85,515 were made to the ESOP in 2003, 2002 and 2001, respectively. During 2003 and 2002, the Trustee distributed cash of $55,744 and $57,723, 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, 2003, 2002 and 2001 were $71,657, $74,488 and $85,515, respectively. The loan was paid in full at September 30, 2003. These payments resulted in the commitment to release 5,383 shares in 2003, 5,587 shares in 2002 and 6,376 shares in 2001. The Company has recognized compensation expense, equal to the fair value of the committed-to-be released shares of $75,079, $61,290 and $68,413 in 2003, 2002 and 2001, respectively. Excluding committed-to-be released shares, suspense shares at September 30, 2003 and 2002 equaled 0 and 5,382, respectively. The fair value of the suspense shares at September 30, 2003 and 2002, was $0 and $64,584, 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 63,361 shares had been granted. The term of the options range from seven to ten years and they vest equally over periods from three to five years.

(Continued)

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

11.	EMPLOYEE BENEFIT PLANS (Continued)
	Following is a summary of the status of the 1995 and 1998 plans:

	1995 Plan					1998 Plan
	Number			Weighted		Number			Weighted
	of Shares			Average		of Shares			Average
	Under			Exercise		Under			Exercise
	Option			Price		Option			Price
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
Granted		9,000			9.92		—			.00
Forfeited		(34,239	)		13.05		(20,423	)		14.86
Outstanding at September 30, 2002		45,311			12.59		47,088			13.69
Granted		28,389			12.10		16,211			12.10
Forfeited		—			—		(1,328	)		9.75
Outstanding at September 30, 2003		73,700			12.40		61,971			13.36

     Information pertaining to options outstanding at September 30, 2003 is as follows:

				Options Outstanding			Options Exercisable
				Weighted
				Average	Weighted				Weighted
				Remaining	Average				Average
		Number		Contractual	Exercise		Number		Exercise
Exercise Price		Outstanding		Life	Price		Exercisable		Price
	9.75		21,237	4.10 years				14,159
	9.92		9,000	8.17 years				1,800
	12.10		44,600	9.04 years				—
	14.00		29,880	1.93 years				29,880
	15.75		30,954	4.33 years				30,954
Outstanding at end of year			135,671	5.57 years	$	12.84		76,793	$	13.83

(Continued)

32

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

11.	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 2003, 2002 or 2001. 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:

		2003		2002		2001
Net income (loss):
	As reported	$	115,864	$	670,805	$	(422,093	)
	Pro forma		108,785		659,986		(437,924	)
Basic earnings (loss) per share:
	As reported		.16		.82		(0.47	)
	Pro forma		.15		.79		(0.47	)
Fully diluted earnings (loss) per share:
	As reported		.15		.82		(0.46	)
	Pro forma		.14		.79		(0.47	)

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:

	2003			2002			2001
Dividend yield		5.38	%		5.20	%		5.01	%
Expected life	9 years			8 years			8 years
Expected volatility		8.10	%		8.72	%		8.71	%
Risk-free interest rate		4.73	%		5.39	%		5.50	%

(Continued)

33

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

11.	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 2003, 2002 and 2001. In addition, the dividends paid on unvested shares are also reflected as compensation expense. Total compensation expense attributable to the MRP’s in 2003, 2002 and 2001 was $5,662, $3,036 and $5,407, 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 accompaning 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. Of these shares, 1,750 were issued to key employees during the year ended September 30, 2002. No additional shares were issued during the year ended September 30, 2003.
	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 $28,324, $52,540 and $34,107 in 2003, 2002 and 2001, 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 $45,000.
	The retirement benefits available under the deferred compensation agreements are unfunded. However, the Company has purchased life insurance policies on the lives of these officers that will be available to the Company to provide, both, for retirement benefits and for key man insurance. The costs of these arrangements was $44,945, $42,758 and $70,713 in 2003, 2002 and 2001, respectively.

(Continued)

34

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

11.	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 in 2003, 2002 and 2001.
	Directors’ Retirement Agreements - The Bank has also entered into supplemental retirement agreements with its directors. The agreements provide for certain benefits payable to the directors based on the earnings of certain life insurance policies in excess of the Bank’s cost of funds, as defined under the agreements. The cost of these agreements was $33,869 and $18,646 in 2003 and 2002, respectively.
	Bank Owned Life Insurance - As discussed above, the Company has purchased approximately $3.7 million of Company owned life insurance on certain key officers (current and former) and directors. (The policies had a cash surrender value of approximately $1.6 and $1.4 million at September 30, 2003 and 2002, respectively.) The life insurance policies were purchased to offset liabilities associated with certain employee and director benefits. Income earned on the policies will offset the corresponding benefit expenses on these employees and directors as the Company is the beneficiary of the insurance policies. Increases in the cash surrender value of the policies are recorded as a component of non-interest income.
12.	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, 2003 and 2002 amounted to $850,666 and $1,024,309, respectively. The change from 2002 to 2003 reflects payments of $668,365 and advances of $494,722.
	Deposits from related parties held by the Bank at September 30, 2003 and 2002 amounted to $155,372 and $123,850, respectively.
13.	COMMITMENTS AND CONTINGENCIES
	Off Balance Sheet Items - At September 30, 2003, the Bank had outstanding loan commitments of approximately $15,076,000 including $7,908,000 in undisbursed construction loans in process, $5,803,000 in unused lines and letters of credit, $1,184,000 in commitments to originate mortgage loans consisting primarily of 30-day commitments, and $181,000 in undisbursed participation loan

(Continued)

35

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

13.	COMMITMENTS AND CONTINGENCIES (Continued)
	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.
	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 settlement agreement, which were reduced to writing and executed as of December 11, 2001, provided for a payment to the former director and officer of $570,000. In exchange for the payment, the Company received 13,856 shares of its common stock, which were owned by the former director and officer and at the time of the agreement had a market value of approximately $160,000. Such stock has been accounted for as Treasury stock by the Company. The excess of the payment ($410,000) is included in the statement of operations under “other expenses” as part of the termination agreements in the fiscal year ended September 30, 2001.
	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.

(Continued)

36

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

13.	COMMITMENTS AND CONTINGENCIES (Continued)
	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 exposes the Company to any significant risk.
	Supervisory Agreement - On March 22, 2002, the Bank entered into a supervisory agreement (the “Supervisory Agreement”) with the Office of Thrift Supervision (the “OTS”). The Supervisory Agreement formalizes the current understanding of both the Bank and the OTS of the actions that the Bank and its board of directors must undertake to comply with the requirements of the OTS. Among other things, the Bank’s board of directors must develop, adopt and implement certain policies and procedures to ensure appropriate monitoring of the Bank’s internal audit and control functions, management, asset quality, and transactions with affiliates and insiders. Additionally, the OTS revoked the expanded, loans-to-one-borrower lending authority originally granted by the OTS on July 26, 1994. The Supervisory Agreement will remain in effect until modified or terminated by the OTS.
14.	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.

(Continued)

37

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

14.

RETAINED EARNINGS AND REGULATORY CAPITAL (Continued)

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, 2003, 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, 2003:
	Total risk-based capital (to risk weighted assets)	$	13,620,000		16.43	%	³$	6,633,000	³	8.00	%	³$	8,292,000	³	10.00	%
	Tier I capital (to risk weighted assets)		13,325,000		16.07	%	³	3,317,000	³	4.00	%	³	4,975,000	³	6.00	%
	Tier I capital (to adjusted total assets)		13,325,000		9.99	%	³	5,336,000	³	4.00	%	³	6,670,000	³	5.00	%
	Tangible equity (to adjusted total assets)		13,325,000		9.99	%	³	2,668,000	³	2.00	%
	Tangible capital (to adjusted total assets)		13,325,000		9.99	%	³	2,001,000	³	1.50	%
As of September 30, 2002:
	Total risk-based capital (to risk weighted assets)	$	13,977,000		15.91	%	³$	7,028,000	³	8.00	%	³$	8,785,000	³	10.00	%
	Tier I capital (to risk weighted assets)		13,616,000		15.50	%	³	3,514,000	³	4.00	%	³	5,271,000	³	6.00	%
	Tier I capital (to adjusted total assets)		13,616,000		9.69	%	³	5,621,000	³	4.00	%	³	7,026,000	³	5.00	%
	Tangible equity (to adjusted total assets)		13,616,000		9.69	%	³	2,810,000	³	2.00	%
	Tangible capital (to adjusted total assets)		13,616,000		9.69	%	³	2,108,000	³	1.50	%

(Continued)

38

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

14.	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, 2003 and 2002.
	Retained earnings at September 30, 2003 and 2002, 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, 2003, 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.
15.	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.
16.	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)

39

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

16.	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)

40

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

		2003				2002
		Carrying		Estimated		Carrying		Estimated
		Amount		Fair Value		Amount		Fair Value
Financial assets:
	Cash and cash equivalents	$	6,049,325	$	6,049,325	$	8,122,898	$	8,122,898
	Interest-bearing deposits		533,003		533,003		883,262		883,262
	Investments securities		32,599,988		32,599,988		26,768,039		26,768,039
	Loans receivable – net		84,382,703		85,652,394		92,984,822		94,492,837
	Accrued interest receivable		679,402		679,402		734,168		734,168
Financial liabilities:
	Deposits		93,557,981		94,883,381		96,483,262		97,575,765
	Borrowed funds		27,000,861		28,209,972		29,057,611		29,057,611
	Accrued interest payable		576,676		576,676		825,850		825,850

41

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

17.	PARENT COMPANY
	The condensed financial information for SouthFirst Bancshares, Inc. (Parent Company) is presented below:

Parent Company
Condensed Balance Sheets
September 30, 2003 and 2002

			2003			2002
ASSETS
Cash and cash equivalents			$	35,351		$	88,942
Investment securities available for sale				5,400			8,400
Investment in financial institution subsidiary				12,793,544			13,826,833
Investment in other subsidiaries				859,591			779,216
Other assets				78,805			98,903
	Total Assets		$	13,772,691		$	14,802,294
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Borrowed funds		$	1,917,861		$	698,861
	Other liabilities			177,459			225,050
		Total liabilities		2,095,320			923,911
Stockholders’ equity:
	Common stock, $ .01 par value, 2,000,000 shares authorized; 989,868 shares issued and 713,944 shares outstanding in 2003 989,868 shares issued and 800,911 shares outstanding in 2002;			9,996			9,996
	Additional paid-in capital			9,837,058			9,819,676
	Treasury stock			(3,809,839	)		(2,407,231	)
	Deferred compensation on common stock employee benefit plans			(183,179	)		(324,060	)
	Shares held in trust			(107,161	)		(107,161	)
	Retained earnings			6,148,255			6,457,443
	Accumulated other comprehensive income (loss)			(217,759	)		429,720
		Total stockholders’ equity		11,677,371			13,878,383
		Total Liabilities and Stockholders’ Equity	$	13,772,691		$	14,802,294

(Continued)

42

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

17. PARENT COMPANY (Continued)

Parent Company
Condensed Statements of Operations
Years Ended September 30, 2003, 2002 and 2001

		2003			2002			2001
Cash dividends from financial institution subsidiary		$	500,000		$	1,100,000		$	771,990
Interest and dividend income			10,986			31,785			37,268
Gain (loss) on sale of investment securities available-for-sale			(78,610	)		47,553			—
Commission income			95,015			—			—
	Total income		527,391			1,179,338			809,258
Expenses:
	Interest on borrowed funds		67,914			130,208			248,860
	Compensation and benefits		62,000			44,585			—
	Management fee		30,000			30,000			30,000
	Other		70,029			13,800			215,550
			229,943			218,593			494,410
Income before income taxes			297,448			960,745			314,848
Income tax benefit			76,971			47,913			163,682
Income before equity in undistributed earnings of subsidiaries			374,419			1,008,658			478,530
Equity in undistributed earnings of subsidiaries (dividends in excess of earnings):
	Financial institution		(335,185	)		(364,604	)		(1,009,045	)
	Other		76,630			26,751			108,422
			(258,555	)		(337,853	)		(900,623	)
Net income (loss)		$	115,864		$	670,805		$	(422,093	)

(Continued)

43

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

17. PARENT COMPANY (Continued)

Parent Company
Condensed Statements of Cash Flows
Years Ended September 30, 2003, 2002 and 2001

			2003			2002			2001
Operating Activities:
	Net income (loss)		$	115,864		$	670,805		$	(422,093	)
	Adjustments to reconcile net income (loss) to cash from operating activities:
		Equity in undistributed earnings of subsidiaries		258,555			337,853			900,623
		Compensation expense on ESOP and MRP		99,864			84,228			82,681
		Gain (loss) on sale of investment securities available-for-sale		78,610			(47,553	)		—
		(Increase) decrease in other assets		20,098			1,940,038			(255,850	)
		Increase (decrease) in other liabilities		(47,591	)		220,392			(71,684	)
		Net cash provided by operating activities		525,400			3,205,763			233,677
Investing Activities:
	Investment in subsidiaries, net of dividends received			(28,730	)		(2,937	)		11,562
	Proceeds from sales of investment securities available-for-sale			—			751,640			—
		Net cash provided (used) by investing activities		(28,730	)		748,703			11,562
Financing Activities:
	Acquisition of ESOP and MRP shares			36			(188	)		(131,292	)
	Proceeds from borrowed funds			1,519,000			2,563,861			1,150,000
	Repayment on borrowed funds			(300,000	)		(5,220,000	)		(800,000	)
	Cash dividends paid			(425,052	)		(463,300	)		(514,213	)
	Acquisition of treasury stock			(1,344,245	)		(758,792	)		(507,658	)
		Net cash provided (used) by financing activities		(550,261	)		(3,878,419	)		(803,163	)
Net increase (decrease) in cash and cash equivalents				(53,591	)		76,047			(557,924	)
Cash and cash equivalents - beginning of year				88,942			12,895			570,819
Cash and cash equivalents - end of year			$	35,351		$	88,942		$	12,895

44

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

18. SELECTED QUARTERLY INFORMATION (UNAUDITED)

		Year Ended September 30, 2003
		Three Months Ended
		September 30,			June 30,		March 31,		December 31,
Interest and dividend income		$	1,877,285		$	1,812,930	$	1,824,613	$	1,921,817
Interest expense			785,127			864,317		893,439		1,001,310
Net interest income			1,092,158			948,613		931,174		920,507
Provision for loan losses			431,152			29,488		13,963		75,000
Net interest income after provision for loan losses			661,006			919,125		917,211		845,507
Non-interest income			1,072,286			927,624		829,139		912,695
Non-interest expenses			1,873,816			1,721,630		1,685,664		1,616,301
Income (loss) before taxes			(140,524	)		125,119		60,686		141,901
Provision for income taxes			(53,279	)		47,485		22,705		54,407
Net income		$	(87,245	)	$	77,634	$	37,981	$	87,494
Earnings (loss) per share:
	Basic	$	(0.12	)	$	0.11	$	0.05	$	0.11
	Diluted	$	(0.12	)	$	0.11	$	0.05	$	0.11
Dividends per share		$	0.15		$	0.15	$	0.15	$	0.15

		Year Ended September 30, 2002
		Three Months Ended
		September 30,			June 30,			March 31,		December 31,
Interest and dividend income		$	2,070,784		$	2,064,712		$	2,070,312		$	2,321,384
Interest expense			1,038,538			1,109,179			1,186,713			1,395,366
Net interest income			1,032,246			955,533			883,599			926,018
Provision for loan losses (benefit)			(304,384	)		(388,362	)		25,096			—
Net interest income after provision for loan losses			1,336,630			1,343,895			858,503			926,018
Non-interest income			871,224			627,447			913,495			621,288
Non-interest expenses			1,768,265			1,746,893			1,503,240			1,388,333
Income before taxes			439,589			224,449			268,758			158,973
Provision for income taxes			172,612			80,971			104,404			62,977
Net income		$	266,977		$	143,478		$	164,354		$	95,996
Earnings per share:
	Basic	$	0.33		$	0.18		$	0.20		$	0.11
	Diluted	$	0.33		$	0.18		$	0.20		$	0.11
Dividends per share		$	0.15		$	0.15		$	0.15		$	0.15

45

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

19.	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, 2003
			Employee
	Banking		Benefits
	Activities		Consulting		Total
Interest and dividend income	$	7,416,268	$	20,377	$	7,436,645
Interest expenses		3,544,193		—		3,544,193
Net interest income		3,872,075		20,377		3,892,452
Provision for loan losses		549,603		—		549,603
Net interest income after provision for loan losses		3,322,472		20,377		3,342,849
Other income		2,498,122		1,243,622		3,741,744
Other expenses		5,757,392		1,140,019		6,897,411
Income before income taxes		63,202		123,980		187,182
Income taxes		23,968		47,350		71,318
Net income	$	39,234	$	76,630	$	115,864
Depreciation and amortization included in other expenses	$	269,584	$	61,614	$	331,198
Total assets at year-end	$	132,459,815	$	1,512,626	$	133,972,441

(Continued)

46

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

19. BUSINESS SEGMENT INFORMATION (Continued)

	September 30, 2002
				Employee
	Banking			Benefits
	Activities			Consulting		Total
Interest and dividend income	$	8,476,404		$	50,788	$	8,527,192
Interest expenses		4,729,796			—		4,729,796
Net interest income		3,746,608			50,788		3,797,396
Provision for loan losses (benefit)		(667,650	)		—		(667,650	)
Net interest income after provision for loan losses		4,414,258			50,788		4,465,046
Other income		1,858,705			1,174,749		3,033,454
Other expenses		5,224,580			1,182,151		6,406,731
Income before income taxes		1,048,383			43,386		1,091,769
Income taxes		404,329			16,635		420,964
Net income	$	644,054		$	26,751	$	670,805
Depreciation and amortization included in other expenses	$	313,669		$	92,515	$	406,184
Total assets at year-end	$	140,547,478		$	2,257,518	$	142,804,996

(Continued)

47

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

19. BUSINESS SEGMENT INFORMATION (Continued)

	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

Following are reconciliations (where applicable) to corresponding totals in the accompanying consolidated financial statements.

	2003			2002			2001
ASSETS
Total assets for reportable segments	$	133,972,441		$	142,804,996		$	151,943,797
Elimination of intercompany receivables		(317,988	)		(1,190,152	)		(749,582	)
Consolidated assets	$	133,654,453		$	141,614,844		$	151,194,215

Exhibit Index

Exhibit No.	Description of Exhibit
10.2	Form of Amended and Restated Employment Agreement effective as of October 1, 2003 between First Federal of the South and Joe K. McArthur.
10.3	Form of Amended and Restated Employment Agreement effective as of October 1, 2003 between First Federal of the South and Sandra H. Stephens.
10.4	Form of Amended and Restated Employment Agreement effective as of October 1, 2003 between Pension & Benefit Financial Services, Inc. and J. Malcomb Massey.
10.6	Form of Amended and Restated Employment Agreement effective as of October 1, 2003 between Pension & Benefit Financial Services, Inc. and Ruth M. Roper.
11	Statement Regarding Computation of Per Share Earnings.
14	Code of Ethics for Principal Executive Officers and Senior Financial Officers
21	Subsidiaries of Registrant.
23.1	Consent of Jones & Kirkpatrick, P.C.
31.1	Rule 13a - 14a Certification of the Chief Executive Officer
31.2	Rule 13a - 14a Certification of the Controller (Chief Financial Officer)
32.1	Written Statement of the Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350
32.2	Written Statement of the Chief Financial Officer, Pursuant to 18 U.S.C. Section 13

EX-10.2 3 g86488exv10w2.txt EX-10.2 AMENDED & RESTATED EMPLOYMENT AGREEMENT Exhibit 10.2 FIRST FEDERAL OF THE SOUTH AMENDED AND RESTATED EMPLOYMENT AGREEMENT (Effective as of October 1, 2002) (JOE K. MCARTHUR) THIS AGREEMENT is entered into as of the 1st day of October, 2003 (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 President and Chief Executive 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 $150,000 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) [Execution Copy] -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. [Execution Copy] -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). [Execution Copy] -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. [Execution Copy] -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 [Execution Copy] -5- 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 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 [Execution Copy] -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. [Execution Copy] -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 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. [Remainder of Page Intentionally Left Blank.] [Signatures Begin on the Following Page.] [Execution Copy] -8- 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 ATTEST: FIRST FEDERAL OF THE SOUTH ______________________________ BY: _____________________________________ Secretary Sandra H. Stephens Executive Vice President WITNESS: ______________________________ _____________________________________ Joe K. McArthur ("Employee") [Execution Copy] -9- EX-10.3 4 g86488exv10w3.txt EX-10.3 AMENDED & RESTATED EMPLOYMENT AGREEMENT Exhibit 10.3 FIRST FEDERAL OF THE SOUTH AMENDED AND RESTATED EMPLOYMENT AGREEMENT (Effective as of October 1, 2003) (SANDRA H. STEPHENS) THIS AGREEMENT is entered into as of the 1st day of October, 2003 (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 $125,000 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) [Execution Copy] 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 Association will provide Employee with the working facilities and staff customary for similar executives and necessary for her to perform her duties. [Execution Copy] -2- 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 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 [Execution Copy] -3- 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. (e) Voluntary Termination by Employee. Subject to the provisions of Section 11 hereof, the Employee may voluntarily terminate employment with the Association [Execution Copy] -4- 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. (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 [Execution Copy] -5- 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 (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 [Execution Copy] -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. [Execution Copy] -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 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. [Remainder of Page Intentionally Left Blank.] [Signatures Begin on the Following Page.] [Execution Copy] -8- 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 Allen G. McMillan III Chairman of the Board of Directors ATTEST: FIRST FEDERAL OF THE SOUTH ______________________________ BY: _____________________________________ Secretary Joe K. McArthur, President and Chief Executive Officer WITNESS: ______________________________ _____________________________________ Sandra H. Stephens ("Employee") [Execution Copy] -9- EX-10.4 5 g86488exv10w4.txt EX-10.4 AMENDED & RESTATED EMPLOYMENT AGREEMENT Exhibit 10.4 PENSION & BENEFIT FINANCIAL SERVICES, INC. EMPLOYMENT AGREEMENT (Amended and Restated as of October 1, 2002) (J. MALCOMB MASSEY) THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of this first day of October, 2003 (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. Further, the Employee may, from time to time, with the approval of the Board of Directors of the Company (the "Board"), in his individual capacity as a licensed insurance broker or insurance agent, enter into agreements with insurance companies and insurance agencies (each an "Insurance Agreement") and, thereby and thereunder, provide insurance brokerage or insurance agency services and, further, may undertake to perform his obligations under any such Insurance Agreement during Company business hours or otherwise; provided that, during the term of this Agreement and thereafter, all compensation to which Employee is, or becomes, entitled to receive under any such Insurance Agreement, for services rendered or insurance products sold during the term of his employment with the Company, shall be for the benefit of the Company and shall be either assigned to the Company (if permissible), paid over to the Company by the Employee upon receipt, or, with explicit and particular approval of the Board, offset against the Employee's salary (as set forth in Section 2 of this Agreement). The Employee shall report on a monthly basis, for so long as any Insurance Agreement is in effect, all such compensation earned by Employee during the previous month. The Employee's other duties shall be such as the Board may from time to time reasonably direct, including normal duties as an officer of the Company. The Employee's obligations under this Section 1 shall survive termination of this Agreement. 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"); provided, however, that the Company shall be entitled to offset against the Employee's salary, by up to $150,000 per annum, that amount of compensation which the Employee receives under any Insurance Agreements, and which is neither assigned to the Company nor paid over to the Company by the Employee upon receipt (the "Salary Offset"). If the Salary Offset shall equal $150,000 for any one year, the Employee shall be obligated to assign or pay over to the Company the excess of $150,000 of compensation received which otherwise would have been offset against the Employee's salary as a Salary Offset. For purposes of Sections 10 and 11 of this Agreement, regardless of whether the Company offsets any amount against the Employee's salary as a Salary Offset, the Employee's Base Salary shall equal $150,000. 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 - 2 - "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 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. - 3 - (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: "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 - 4 - 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. 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 - 5 - 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. 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 - 6 - 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 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 - 7 - 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 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 the Base Salary for an additional 12-month period, and (ii) the cost to the Employee of obtaining all health, life, and disability benefits in 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 "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 Salary (less any Salary Offset), compensation received under any Insurance Agreements against which the Employee's Base Salary is offset by a Salary Offset, 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 - 8 - times his "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), whereby, for purposes of this Section 11, the Employee's gross income for taxable years in the "base period" (as defined in Section 280G(d)(2) of the Code) shall include compensation received under any Insurance Agreements against which the Employee's Base Salary was offset by a Salary Offset, and (ii) the sum of any other "parachute payments" (as defined under Section 280G(b)(2) of the Code) that the Employee receives based on 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 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 - 9 - 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. (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 - 10 - (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. (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. - 11 - 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. [SIGNATURES ON FOLLOWING PAGE] - 12 - 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") CORP/912197.4 - 13 - EX-10.6 6 g86488exv10w6.txt EX-10.6 AMENDED & RESTATED EMPLOYMENT AGREEMENT Exhibit 10.6 PENSION & BENEFIT FINANCIAL SERVICES, INC. EMPLOYMENT AGREEMENT (Amended and Restated as of October 1, 2002) (RUTH M. ROPER) THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of this first day of October, 2003 (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. Further, the Employee may, from time to time, with the approval of the Board of Directors of the Company (the "Board"), in her individual capacity as a licensed insurance broker or insurance agent, enter into agreements with insurance companies and insurance agencies (each an "Insurance Agreement") and, thereby and thereunder, provide insurance brokerage or insurance agency services and, further, may undertake to perform her obligations under any such Insurance Agreement during Company business hours or otherwise; provided that, during the term of this Agreement and thereafter, all compensation to which Employee is, or becomes, entitled to receive under any such Insurance Agreement, for services rendered or insurance products sold during the term of her employment with the Company, shall be for the benefit of the Company and shall be either assigned to the Company (if permissible), paid over to the Company by the Employee upon receipt, or, with explicit and particular approval of the Board, offset against the Employee's salary (as set forth in Section 2 of this Agreement). The Employee shall report on a monthly basis, for so long as any Insurance Agreement is in effect, all such compensation earned by Employee during the previous month. The Employee's other duties shall be such as the Board may from time to time reasonably direct, including normal duties as an officer of the Company. The Employee's obligations under this Section 1 shall survive termination of this Agreement. 2. Compensation. (a) The Company agrees to pay the Employee during the term of this Agreement, a salary at the rate of One Hundred Thousand Dollars ($100,000) per annum, payable in cash not less frequently than monthly (the "Base Salary"), provided, however that the Company shall be entitled to offset against the Employee's salary, by up to $100,000 per annum, that amount of compensation which the Employee receives under any Insurance Agreements, and which is neither assigned to the Company nor paid over to the Company by the Employee upon receipt (the "Salary Offset"). If the Salary Offset shall equal $100,000 for any one year, the Employee shall be obligated to assign or pay over to the Company the excess of $100,000 of compensation received which otherwise would have been offset against the Employee's salary as a Salary Offset. For the purposes of Section 10 and 11 of this Agreement, regardless of whether the Company offsets any amount against the Employee's salary as a Salary Offset, the Employee's Base Salary shall equal $100,000. 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. - 2 - (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 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. - 3 - (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." 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 - (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. 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 - 5 - 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. 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 - 6 - 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 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 - 7 - 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 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 the Base Salary for an additional 12-month period, and (ii) the cost to the Employee of obtaining all health, life, and disability benefits in which the Employee would have been eligible to participate 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 "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 Salary (less any Salary Offset), compensation received under any Insurance Agreements against which the Employee's Base Salary is offset by a Salary Offset, 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 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 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), whereby, for purposes of this Section 11, the Employee's gross income for taxable years in the "base period" (as defined under Section 280G(d)(2) of the Code) shall include compensation received under any Insurance Agreements against which the - 8 - Employee's Base Salary was offset by a Salary Offset, and (ii) the sum of any other "parachute payments" (as defined under Section 280G(b)(2) of the Code) that the Employee receives based on 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. (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 - 9 - 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. (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. - 10 - 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. (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. - 11 - 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. [SIGNATURES ON FOLLOWING PAGE] - 12 - 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") CORP/912201.4 - 13 - EX-11 7 g86488exv11.txt EX-11 COMPUTATION OF PER SHARE EARNINGS . . . EXHIBIT 11 Statement Regarding Computation of Per Share Earnings Basic

Year Ended September 30, ------------------------------------- 2003 2002 2001 ---- ---- ---- Weighted average outstanding shares 744,641 819,260 903,849 Net income (loss) $ 115,864 $ 670,805 $(422,093) Net income (loss) per common share $ .16 $ .82 $ (.47)

Diluted

Year Ended September 30, ------------------------------------- 2003 2002 2001 ---- ---- ---- Weighted average outstanding shares 759,550 822,631 907,765 Net income (loss) $ 115,864 $ 670,805 $(422,093) Net income (loss) per common share $ .15 $ .82 $ (.46)

EX-14 8 g86488exv14.txt EX-14 CODE OF ETHICS Exhibit 14 SOUTHFIRST BANCSHARES, INC. CODE OF ETHICS FOR PRINCIPAL EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS DECEMBER 29, 2003 The Boards of Directors of SouthFirst Bancshares, Inc. (the "Company") has adopted this Code of Ethics for the Principal Executive Officer and Senior Financial Officers (the "Code") to supplement the Company's General Code of Ethics (the "General Code"). The Company expects the highest possible ethical conduct from its principal executive officer and senior financial officers. Your full compliance with this Code and with the Company's General Code of Ethics is mandatory. You are expected to promote a culture of honest and ethical conduct and to ensure that everyone in the Company fully complies with this Code and the General Code of Ethics. You must take all reasonable measures to protect the confidentiality of non-public information about the Company or its subsidiaries and their customers obtained or created in connection with your activities and prevent the unauthorized disclosure of such information unless required by applicable law or regulation or legal or regulatory process. You are prohibited from directly or indirectly taking any action to fraudulently influence, coerce, manipulate or mislead the Company or its subsidiaries' independent public auditors for the purpose of rendering the financial statements of the Company or its subsidiaries misleading. You understand that you will be held accountable for your adherence to this Code. Your failure to observe the terms of this Code may result in disciplinary action, up to and including termination of employment. Violations of this Code may also constitute violations of law and may result in civil and criminal penalties for you, your supervisors and/or the Company. If you have any questions regarding the best course of action in a particular situation, you should promptly contact the Audit Committee or Director of Compliance. You may choose to remain anonymous in reporting any possible violation of this Code. CONFLICTS OF INTERESTS As a Company principal executive officer or senior financial officer, it is imperative that you avoid any investment, interest or association that interferes, might interfere, or might appear to interfere, with your independent exercise of judgment in the Company's best interests. Engaging in any conduct that represents a conflict of interest is strictly prohibited. You must also avoid any personal activity, investment or association that could appear to interfere with good judgment concerning the Company's best interests. You may not exploit your position or relationship with the Company for personal gain. You should avoid even the appearance of such a conflict. For example, there is a likely conflict of interest if you: - - Cause the Company to engage in business transactions with relatives or friends; - - Use nonpublic Company, client or vendor information for personal gain by you, relatives or friends (including securities transactions based on such information); - - Have more than a modest financial interest in the Company's vendors, clients or competitors; receive a loan, or guarantee of obligations, from the Company or a third party as a result of your position at the Company; or - - Compete, or prepare to compete, with the Company while still employed by the Company. There are other situations in which a conflict of interest may arise. If you have concerns about any situation, follow the steps outlined in the Section on "Reporting Violations of the Code." ACCURATE AND TIMELY PERIODIC REPORTS Full, fair, accurate, timely and understandable disclosures in all of the Company's periodic reports, filed documents and other public communications is legally required and is essential to the success of its business. All officers must exercise the highest standard of care in preparing such reports in accordance with the following guidelines: - - All Company accounting records, as well as reports produced from those records, must be in accordance with the laws of each applicable jurisdiction; - - All records must fairly and accurately reflect the transactions or occurrences to which they relate; - - All records must fairly and accurately reflect, in reasonable detail, the Company's assets, liabilities, revenues and expenses; - - The Company's accounting records must not contain any false or intentionally misleading entries; - - No transactions should be intentionally misclassified as to accounts, departments or accounting periods; - - All transactions must be supported by accurate documentation in reasonable detail and recorded in the proper account and in the proper accounting period; - - No information should be concealed from the internal auditors or the independent auditors; and - - Compliance with the Company's system of internal accounting controls is required COMPLIANCE WITH APPLICABLE GOVERNMENTAL LAW, RULES AND REGULATIONS You are expected to comply with both the letter and spirit of all applicable governmental laws, rules and regulations. If you fail to comply (or you prevent or penalize a subordinate for complying) with the ethical standards in this Code, the Company's General Code of Ethics and/or with any applicable laws, you will be subject to disciplinary measures, up to and including immediate dismissal from the Company. PROMPT INTERNAL REPORTING OF VIOLATIONS OF CODE The prompt internal reporting of violations of the Code or General Code to an appropriate person or persons identified in the Code or General Code. Your conduct can reinforce an ethical atmosphere and positively influence the conduct of fellow associates. If you are powerless to stop suspected misconduct or discover it after it has occurred, you must promptly report the violation of the Code or the General Code to Joe K. McArthur, J. Malcomb Massey, or Sandra H. Stephens. However, if you feel uncomfortable speaking with them (for whatever reason), you must (anonymously, if you wish) directly contact the Audit Committee of the Company's Board of Directors by sending a detailed note, with relevant documents, to L. Neal Bice, H. David Foote, Jr. or any other member of the Audit Committee. Self-Reporting. If you believe that you may have violated one of these standards, you are encouraged to report it immediately. The Company will consider the fact that you reported yourself in determining what action is appropriate. Confidentiality. The Company will protect confidentiality to the extent practicable in the context of investigating your allegations and will inform only those individuals with a need to know in order for the Company to investigate and respond appropriately. Anonymity. There may be instances where you want to report issues while remaining anonymous. The Company will consider information provided anonymously, but it is most helpful if you provide your name so that the Company may obtain additional information from you and inform you that it has responded to your complaint. Protection of Those Who Report Concerns or Assist in an Investigation. No one who in good faith reports a concern under this policy or provides information during an investigation will be subjected to retaliation for doing so. Any employee who retaliates or attempts to retaliate against an employee for reporting or providing information in good faith under this policy will be subject to disciplinary action, up to and including immediate termination of employment and in some cases could further be subject to criminal penalties (including imprisonment). Duty to Cooperate. When the Company conducts an investigation, all employees have a duty to cooperate in providing complete and accurate information. Failing to cooperate in an investigation or providing false or misleading information will subject an employee to disciplinary action, up to and including termination of employment. Destruction of Documents. You should also be aware that under the new corporate accountability laws, you could be subject to criminal penalties for tampering with, or destroying, documents or any other evidence related to an official investigation or inquiry regarding any of the Company's activities. The same is true for documents relating to any threatened or pending litigation. Your calls, detailed notes and/or emails will be dealt with confidentially. You have the commitment of the Company and of the Audit Committee of the Company's Board of Directors that you will be protected from retaliation. EX-21 9 g86488exv21.txt EX-21 SUBSIDIARIES OF REGISTRANT 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 * Entire interest sold back to Magnolia Title Services, Inc. in November 2003. EX-23.1 10 g86488exv23w1.txt EX-23.1 CONSENT OF JONES & KIRKPATRICK, P.C. 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 December 4, 2003, 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, 2003. /s/ Jones & Kirkpatrick, P.C. Birmingham, Alabama December 29, 2003 EX-31.1 11 g86488exv31w1.txt EX-31.1 CERTIFICATION OF THE CEO Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joe K. McArthur, Chief Executive Officer of the registrant, certify that: 1. I have reviewed this annual report on Form 10-KSB of SouthFirst Bancshares, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. December 29, 2003 /s/ Joe K. McArthur - ---------------------------- Joe K. McArthur Chief Executive Officer EX-31.2 12 g86488exv31w2.txt EX-31.2 CERTIFICATION OF THE CFO Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Janice R. Browning, Controller (principal financial officer) of the registrant, certify that: 1. I have reviewed this annual report on Form 10-KSB of SouthFirst Bancshares, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. December 29, 2003 /s/ Janice R. Browning - ------------------------------------------- Janice R. Browning Controller (principal financial officer) EX-32.1 13 g86488exv32w1.txt EX-32.1 WRITTEN STATEMENT OF THE CEO Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of SouthFirst Bancshares, Inc. (the "Company") on Form 10-KSB for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joe K. McArthur, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. IN WITNESS WHEREOF, the undersigned has executed this certification as of the 29th day of December 2003. /s/ Joe K. McArthur - ----------------------- Joe K. McArthur Chief Executive Officer EX-32.2 14 g86488exv32w2.txt EX-32.2 WRITTEN STATEMENT OF THE CFO Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of SouthFirst Bancshares, Inc. (the "Company") on Form 10-KSB for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Janice R. Browning, Controller (principal financial officer) Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. IN WITNESS WHEREOF, the undersigned has executed this certification as of the 29th day of December 2003. /s/ Janice R. Browning - ------------------------------------------ Janice R. Browning Controller (principal financial officer) -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.2

                                                                    Exhibit 10.2

                           FIRST FEDERAL OF THE SOUTH

                    AMENDED AND RESTATED EMPLOYMENT AGREEMENT

                        (Effective as of October 1, 2002)

                                (JOE K. MCARTHUR)

                  THIS AGREEMENT is entered into as of the 1st day of October,
2003 (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 President and Chief Executive 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 $150,000 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)

                                                                [Execution Copy]

                                       -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.

                                                                [Execution Copy]

                                       -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).

                                                                [Execution Copy]

                                       -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.

                                                                [Execution Copy]

                                       -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

                                                                [Execution Copy]

                                       -5-



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 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

                                                                [Execution Copy]

                                       -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.

                                                                [Execution Copy]

                                       -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 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.

                  [Remainder of Page Intentionally Left Blank.]
                    [Signatures Begin on the Following Page.]

                                                                [Execution Copy]

                                       -8-



         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

ATTEST:                                FIRST FEDERAL OF THE SOUTH

______________________________         BY: _____________________________________
Secretary                                  Sandra H. Stephens
                                           Executive Vice President

WITNESS:

______________________________             _____________________________________
                                           Joe K. McArthur ("Employee")

                                                                [Execution Copy]

                                       -9-

EX-10.3

                                                                    Exhibit 10.3

                           FIRST FEDERAL OF THE SOUTH

                    AMENDED AND RESTATED EMPLOYMENT AGREEMENT

                        (Effective as of October 1, 2003)

                              (SANDRA H. STEPHENS)

                  THIS AGREEMENT is entered into as of the 1st day of October,
2003 (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 $125,000 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)

                                                                [Execution Copy]



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

                                                                [Execution Copy]

                                       -2-



                  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 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

                                                                [Execution Copy]

                                       -3-



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.

                           (e) Voluntary Termination by Employee. Subject to the
provisions of Section 11 hereof, the Employee may voluntarily terminate
employment with the Association

                                                                [Execution Copy]

                                       -4-



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.

                           (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

                                                                [Execution Copy]

                                       -5-



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

                  (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

                                                                [Execution Copy]

                                       -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.

                                                                [Execution Copy]

                                       -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 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.

                  [Remainder of Page Intentionally Left Blank.]
                    [Signatures Begin on the Following Page.]

                                                                [Execution Copy]

                                       -8-



                  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                                  Allen G. McMillan III
                                           Chairman of the Board of Directors

ATTEST:                                FIRST FEDERAL OF THE SOUTH

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

WITNESS:

______________________________             _____________________________________
                                           Sandra H. Stephens ("Employee")

                                                                [Execution Copy]

                                       -9-

EX-10.4

                                                                    Exhibit 10.4

                   PENSION & BENEFIT FINANCIAL SERVICES, INC.

                              EMPLOYMENT AGREEMENT

                  (Amended and Restated as of October 1, 2002)

                               (J. MALCOMB MASSEY)

         THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of this
first day of October, 2003 (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. Further, the
Employee may, from time to time, with the approval of the Board of Directors of
the Company (the "Board"), in his individual capacity as a licensed insurance
broker or insurance agent, enter into agreements with insurance companies and
insurance agencies (each an "Insurance Agreement") and, thereby and thereunder,
provide insurance brokerage or insurance agency services and, further, may
undertake to perform his obligations under any such Insurance Agreement during
Company business hours or otherwise; provided that, during the term of this
Agreement and thereafter, all compensation to which Employee is, or becomes,
entitled to receive under any such Insurance Agreement, for services rendered or
insurance products sold during the term of his employment with the Company,
shall be for the benefit of the Company and shall be either assigned to the
Company (if permissible), paid over to the Company by the Employee upon receipt,
or, with explicit and particular approval of the Board, offset against the
Employee's salary (as set forth in Section 2 of this Agreement). The Employee
shall report on a monthly basis, for so long as any Insurance Agreement is in
effect, all such



compensation earned by Employee during the previous month. The Employee's other
duties shall be such as the Board may from time to time reasonably direct,
including normal duties as an officer of the Company. The Employee's obligations
under this Section 1 shall survive termination of this Agreement.

         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"); provided, however, that the Company shall be entitled to
offset against the Employee's salary, by up to $150,000 per annum, that amount
of compensation which the Employee receives under any Insurance Agreements, and
which is neither assigned to the Company nor paid over to the Company by the
Employee upon receipt (the "Salary Offset"). If the Salary Offset shall equal
$150,000 for any one year, the Employee shall be obligated to assign or pay over
to the Company the excess of $150,000 of compensation received which otherwise
would have been offset against the Employee's salary as a Salary Offset. For
purposes of Sections 10 and 11 of this Agreement, regardless of whether the
Company offsets any amount against the Employee's salary as a Salary Offset, the
Employee's Base Salary shall equal $150,000. 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

                                     - 2 -


"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 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.

                                     - 3 -


                  (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:

                  "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

                                     - 4 -


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.

         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

                                     - 5 -


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.

         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

                                     - 6 -


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 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

                                     - 7 -


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 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 the Base Salary for an additional
12-month period, and (ii) the cost to the Employee of obtaining all health,
life, and disability benefits in 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
"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 Salary (less any Salary Offset),
compensation received under any Insurance Agreements against which the
Employee's Base Salary is offset by a Salary Offset, 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

                                     - 8 -


times his "base amount" as defined in Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended (the "Code"), whereby, for purposes of this Section 11,
the Employee's gross income for taxable years in the "base period" (as defined
in Section 280G(d)(2) of the Code) shall include compensation received under any
Insurance Agreements against which the Employee's Base Salary was offset by a
Salary Offset, and (ii) the sum of any other "parachute payments" (as defined
under Section 280G(b)(2) of the Code) that the Employee receives based on 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 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

                                     - 9 -


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.

         (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

                                     - 10 -


                  (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.

                  (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.

                                     - 11 -


         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.

                         [SIGNATURES ON FOLLOWING PAGE]

                                     - 12 -


         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")

                                                                   CORP/912197.4

                                     - 13 -

EX-10.6

                                                                   Exhibit  10.6

                   PENSION & BENEFIT FINANCIAL SERVICES, INC.

                              EMPLOYMENT AGREEMENT

                  (Amended and Restated as of October 1, 2002)

                                 (RUTH M. ROPER)

         THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of this
first day of October, 2003 (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. Further, the Employee may, from
time to time, with the approval of the Board of Directors of the Company (the
"Board"), in her individual capacity as a licensed insurance broker or insurance
agent, enter into agreements with insurance companies and insurance agencies
(each an "Insurance Agreement") and, thereby and thereunder, provide insurance
brokerage or insurance agency services and, further, may undertake to perform
her obligations under any such Insurance Agreement during Company business hours
or otherwise; provided that, during the term of this Agreement and thereafter,
all compensation to which Employee is, or becomes, entitled to receive under any
such Insurance Agreement, for services rendered or insurance products sold
during the term of her employment with the Company, shall be for the benefit of
the Company and shall be either assigned to the Company (if permissible), paid
over to the Company by the Employee upon receipt, or, with explicit and
particular approval of the Board, offset against the Employee's salary (as set
forth in Section 2 of this Agreement). The Employee shall report on a monthly
basis, for so long as any Insurance Agreement is in effect, all such
compensation earned by Employee during the previous month. The Employee's other
duties shall be such as the Board may from time to time



reasonably direct, including normal duties as an officer of the Company. The
Employee's obligations under this Section 1 shall survive termination of this
Agreement.

         2.       Compensation.

                  (a)      The Company agrees to pay the Employee during the
term of this Agreement, a salary at the rate of One Hundred Thousand Dollars
($100,000) per annum, payable in cash not less frequently than monthly (the
"Base Salary"), provided, however that the Company shall be entitled to offset
against the Employee's salary, by up to $100,000 per annum, that amount of
compensation which the Employee receives under any Insurance Agreements, and
which is neither assigned to the Company nor paid over to the Company by the
Employee upon receipt (the "Salary Offset"). If the Salary Offset shall equal
$100,000 for any one year, the Employee shall be obligated to assign or pay over
to the Company the excess of $100,000 of compensation received which otherwise
would have been offset against the Employee's salary as a Salary Offset. For the
purposes of Section 10 and 11 of this Agreement, regardless of whether the
Company offsets any amount against the Employee's salary as a Salary Offset, the
Employee's Base Salary shall equal $100,000. 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.

                                     - 2 -


                           (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 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.

                                     - 3 -


                           (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."

         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 -


                           (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.

         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

                                     - 5 -


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.

         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

                                     - 6 -


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 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

                                     - 7 -


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 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 the Base Salary for an additional
12-month period, and (ii) the cost to the Employee of obtaining all health,
life, and disability benefits in which the Employee would have been eligible to
participate 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
"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 Salary (less any Salary Offset),
compensation received under any Insurance Agreements against which the
Employee's Base Salary is offset by a Salary Offset, 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 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 280G(b)(3) of
the Internal Revenue Code of 1986, as amended (the "Code"), whereby, for
purposes of this Section 11, the Employee's gross income for taxable years in
the "base period" (as defined under Section 280G(d)(2) of the Code) shall
include compensation received under any Insurance Agreements against which the

                                     - 8 -


Employee's Base Salary was offset by a Salary Offset, and (ii) the sum of any
other "parachute payments" (as defined under Section 280G(b)(2) of the Code)
that the Employee receives based on 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.

                  (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

                                     - 9 -


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.

         (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.

                                     - 10 -


         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.

                  (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.

                                     - 11 -


         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.

                         [SIGNATURES ON FOLLOWING PAGE]

                                     - 12 -


         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")

                                                                   CORP/912201.4

                                     - 13 -

EX-11

                                                                               .
                                                                               .
                                                                               .

                                   EXHIBIT 11

              Statement Regarding Computation of Per Share Earnings

Basic



                                                   Year Ended September 30,
                                           -------------------------------------
                                              2003          2002         2001
                                              ----          ----         ----
                                                              
Weighted average outstanding shares          744,641       819,260       903,849
Net income (loss)                          $ 115,864     $ 670,805     $(422,093)
Net income (loss) per common share         $     .16     $     .82     $    (.47)


Diluted



                                                   Year Ended September 30,
                                           -------------------------------------
                                              2003          2002         2001
                                              ----          ----         ----
                                                             
Weighted average outstanding shares          759,550       822,631      907,765
Net income (loss)                          $ 115,864     $ 670,805    $(422,093)
Net income (loss) per common share         $     .15     $     .82    $    (.46)

EX-14

                                                                      Exhibit 14

                           SOUTHFIRST BANCSHARES, INC.

                               CODE OF ETHICS FOR
                         PRINCIPAL EXECUTIVE OFFICER AND
                            SENIOR FINANCIAL OFFICERS

                                DECEMBER 29, 2003

         The Boards of Directors of SouthFirst Bancshares, Inc. (the "Company")
has adopted this Code of Ethics for the Principal Executive Officer and Senior
Financial Officers (the "Code") to supplement the Company's General Code of
Ethics (the "General Code"). The Company expects the highest possible ethical
conduct from its principal executive officer and senior financial officers. Your
full compliance with this Code and with the Company's General Code of Ethics is
mandatory. You are expected to promote a culture of honest and ethical conduct
and to ensure that everyone in the Company fully complies with this Code and the
General Code of Ethics.

         You must take all reasonable measures to protect the confidentiality of
non-public information about the Company or its subsidiaries and their customers
obtained or created in connection with your activities and prevent the
unauthorized disclosure of such information unless required by applicable law or
regulation or legal or regulatory process.

         You are prohibited from directly or indirectly taking any action to
fraudulently influence, coerce, manipulate or mislead the Company or its
subsidiaries' independent public auditors for the purpose of rendering the
financial statements of the Company or its subsidiaries misleading.

         You understand that you will be held accountable for your adherence to
this Code. Your failure to observe the terms of this Code may result in
disciplinary action, up to and including termination of employment. Violations
of this Code may also constitute violations of law and may result in civil and
criminal penalties for you, your supervisors and/or the Company.

     If you have any questions regarding the best course of action in a
particular situation, you should promptly contact the Audit Committee or
Director of Compliance. You may choose to remain anonymous in reporting any
possible violation of this Code.

CONFLICTS OF INTERESTS

     As a Company principal executive officer or senior financial officer, it is
imperative that you avoid any investment, interest or association that
interferes, might interfere, or might appear to interfere, with your independent
exercise of judgment in the Company's best interests. Engaging in any conduct
that represents a conflict of interest is strictly prohibited. You must also
avoid any personal activity, investment or association that



could appear to interfere  with good  judgment  concerning  the  Company's  best
interests.  You may not exploit your position or  relationship  with the Company
for personal gain. You should avoid even the appearance of such a conflict.  For
example, there is a likely conflict of interest if you:

- -        Cause the Company to engage in business transactions with relatives or
         friends;

- -        Use nonpublic Company, client or vendor information for personal gain
         by you, relatives or friends (including securities transactions based
         on such information);

- -        Have more than a modest financial interest in the Company's vendors,
         clients or competitors; receive a loan, or guarantee of obligations,
         from the Company or a third party as a result of your position at the
         Company; or

- -        Compete, or prepare to compete, with the Company while still employed
         by the Company.

         There are other situations in which a conflict of interest may arise.
If you have concerns about any situation, follow the steps outlined in the
Section on "Reporting Violations of the Code."

ACCURATE AND TIMELY PERIODIC REPORTS

         Full, fair, accurate, timely and understandable disclosures in all of
the Company's periodic reports, filed documents and other public communications
is legally required and is essential to the success of its business. All
officers must exercise the highest standard of care in preparing such reports in
accordance with the following guidelines:

- -        All Company accounting records, as well as reports produced from those
         records, must be in accordance with the laws of each applicable
         jurisdiction;

- -        All records must fairly and accurately reflect the transactions or
         occurrences to which they relate;

- -        All records must fairly and accurately reflect, in reasonable detail,
         the Company's assets, liabilities, revenues and expenses;

- -        The Company's accounting records must not contain any false or
         intentionally misleading entries;

- -        No transactions should be intentionally misclassified as to accounts,
         departments or accounting periods;

- -        All transactions must be supported by accurate documentation in
         reasonable detail and recorded in the proper account and in the proper
         accounting period;

- -        No information should be concealed from the internal auditors or the
         independent auditors; and

- -        Compliance with the Company's system of internal accounting controls is
         required



COMPLIANCE WITH APPLICABLE GOVERNMENTAL LAW, RULES AND REGULATIONS

         You are expected to comply with both the letter and spirit of all
applicable governmental laws, rules and regulations. If you fail to comply (or
you prevent or penalize a subordinate for complying) with the ethical standards
in this Code, the Company's General Code of Ethics and/or with any applicable
laws, you will be subject to disciplinary measures, up to and including
immediate dismissal from the Company.

PROMPT INTERNAL REPORTING OF VIOLATIONS OF CODE

         The prompt internal reporting of violations of the Code or General Code
to an appropriate person or persons identified in the Code or General Code.

         Your conduct can reinforce an ethical atmosphere and positively
influence the conduct of fellow associates. If you are powerless to stop
suspected misconduct or discover it after it has occurred, you must promptly
report the violation of the Code or the General Code to Joe K. McArthur, J.
Malcomb Massey, or Sandra H. Stephens.

         However, if you feel uncomfortable speaking with them (for whatever
reason), you must (anonymously, if you wish) directly contact the Audit
Committee of the Company's Board of Directors by sending a detailed note, with
relevant documents, to L. Neal Bice, H. David Foote, Jr. or any other member of
the Audit Committee.

         Self-Reporting. If you believe that you may have violated one of these
standards, you are encouraged to report it immediately. The Company will
consider the fact that you reported yourself in determining what action is
appropriate.

         Confidentiality. The Company will protect confidentiality to the extent
practicable in the context of investigating your allegations and will inform
only those individuals with a need to know in order for the Company to
investigate and respond appropriately.

         Anonymity. There may be instances where you want to report issues while
remaining anonymous. The Company will consider information provided anonymously,
but it is most helpful if you provide your name so that the Company may obtain
additional information from you and inform you that it has responded to your
complaint.

         Protection of Those Who Report Concerns or Assist in an Investigation.
No one who in good faith reports a concern under this policy or provides
information during an investigation will be subjected to retaliation for doing
so. Any employee who retaliates or attempts to retaliate against an employee for
reporting or providing information in good faith under this policy will be
subject to disciplinary action, up to and including immediate termination of
employment and in some cases could further be subject to criminal penalties
(including imprisonment).

         Duty to Cooperate. When the Company conducts an investigation, all
employees have a duty to cooperate in providing complete and accurate
information. Failing to



cooperate in an investigation or providing false or misleading information will
subject an employee to disciplinary action, up to and including termination of
employment.

         Destruction of Documents. You should also be aware that under the new
corporate accountability laws, you could be subject to criminal penalties for
tampering with, or destroying, documents or any other evidence related to an
official investigation or inquiry regarding any of the Company's activities. The
same is true for documents relating to any threatened or pending litigation.

         Your calls, detailed notes and/or emails will be dealt with
confidentially. You have the commitment of the Company and of the Audit
Committee of the Company's Board of Directors that you will be protected from
retaliation.

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


*        Entire interest sold back to Magnolia Title Services, Inc. in November
         2003.

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 December 4, 2003, 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, 2003.

                                                   /s/ Jones & Kirkpatrick, P.C.

Birmingham, Alabama
December 29, 2003

EX-31.1

                                                                    Exhibit 31.1

                            CERTIFICATION PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

         I, Joe K. McArthur, Chief Executive Officer of the registrant, certify
that:

         1. I have reviewed this annual report on Form 10-KSB of SouthFirst
Bancshares, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

         b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

         c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

         a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

December 29, 2003

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

EX-31.2

                                                                    Exhibit 31.2

                            CERTIFICATION PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

         I, Janice R. Browning, Controller (principal financial officer) of the
registrant, certify that:

         1. I have reviewed this annual report on Form 10-KSB of SouthFirst
Bancshares, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

         b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

         c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

         a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

December 29, 2003

 /s/ Janice R. Browning
- -------------------------------------------
Janice R. Browning
Controller (principal financial officer)

EX-32.1

                                                                    Exhibit 32.1

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                       PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Annual Report of SouthFirst Bancshares, Inc.
(the "Company") on Form 10-KSB for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Joe K. McArthur, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

         (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.

         IN WITNESS WHEREOF, the undersigned has executed this certification as
of the 29th day of December 2003.

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

EX-32.2

                                                                    Exhibit 32.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
                       PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Annual Report of SouthFirst Bancshares, Inc.
(the "Company") on Form 10-KSB for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Janice R. Browning, Controller (principal financial officer) Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

         (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.

         IN WITNESS WHEREOF, the undersigned has executed this certification as
of the 29th day of December 2003.

/s/ Janice R. Browning
- ------------------------------------------
Janice R. Browning
Controller (principal financial officer)