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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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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





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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                                                         |  | 





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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

18



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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 Burfordin 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.

30



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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

31



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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

32



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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.

33



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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.
|--- |  | -------------------------------------------

34



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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



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##### 



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



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##### 



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.

38



---



##### 



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.
|--- |  | -------------------------------------------------------------

39



---



##### 



The maturities for the CMOs and mortgage-backed securities presented above
represent contractual maturities of such securities. Due to the nature of
these securities, the timing and the amount of principal repayments is
generally unpredictable. However, assuming current prepayment rates 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



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##### 



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



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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



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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.

45



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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.

47



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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 | %
|                                               |      |      |  |                 |  |                                   |  |         |         |          |  |   |        |   |        |          |       |            |        |  

48



---



##### 



|                                               |      |      |  |                 |  |                                   |  |         |         |          |  |   |        |   |        |          |       |            |        |  
|---------------------------------------------- | ---- | ---- |  | --------------- |  | --------------------------------- |  | ------- | ------- | -------- |  | - | ------ | - | ------ | -------- | ----- | ---------- | ------ | -
|                                               |      |      |  |                 |  | 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 | 
|              |       |      |                          |        |  |      |        |        |  |   |        |       

49



---



##### 



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.

51



---



##### 



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

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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. McArthurhas 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 Masseyhas 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, IIIhas 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. Easterlinghas 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 Bicehas 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. Hardyhas 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. Stephenswas 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. Roperis 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.

57



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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.                                                                                                                                                                                                      

59



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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

66



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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.

68



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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

69



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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



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|                                                            |  |                       |         |                       |  |  |      |  
|----------------------------------------------------------- |  | --------------------- | ------- | --------------------- |  |  | ---- | -
|                                                            |  | 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



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|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | 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.
AND SUBSIDIARIES

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)



---



##### 



17

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.                                                                                                                                                                                                                                                                                                                                                                                              



---



##### 



18

SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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.
AND SUBSIDIARIES

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)



---



##### 



31

SOUTHFIRST BANCSHARES, INC.
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