##### 



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

|                            |  |                       
|--------------------------- |  | ----------------------
|For Quarterly Period Ended: |  | Commission File Number
|June 30, 2002               |  | 1-13640               

SOUTHFIRST BANCSHARES, INC.

---

(Exact name of registrant as specified in its charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Delaware                        |  | 63-1121255         
|                                |  |                    
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

|                                            |  |           
|------------------------------------------- |  | ----------
|126 North Norton Avenue, Sylacauga, Alabama |  | 35150     
|                                            |  |           
|(Address of principal executive offices)    |  | (Zip Code)

Registrants telephone number, including area code: 256-245-4365

Not applicable

---

(Former name, former address and former fiscal year, if changed since last report)


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 the number of shares outstanding of each of the registrants
classes of common stock, as of the latest practicable date:

|                                       |  |                              
|-------------------------------------- |  | -----------------------------
|Common Stock, par value $.01 per share |  | 810,794 shares               
|                                       |  |                              
|Class                                  |  | Outstanding at August 8, 2002





---



##### 

TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART 1: FINANCIAL INFORMATION                                                                
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II. OTHER INFORMATION                                                                   
|Item 1: Legal Proceedings                                                                    
|Item 6: Reports on Form 8-K                                                                  
|SIGNATURES                                                                                   
|INDEX TO EXHIBITS                                                                            
|Section 906 Certification of the CEO and CFO                                                 

SOUTHFIRST BANCSHARES, INC.

TABLE OF CONTENTS

|                                                                                                               |  |     
|-------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                               |  | Page
|                                                                                                               |  |     
|PART I  FINANCIAL INFORMATION                                                                                 |  |     
|                                                                                                               |  |     
|Item 1: Financial Statements                                                                                   |  | 1   
|                                                                                                               |  |     
|Consolidated Statements of Financial Condition at June 30, 2002 (Unaudited)
and September 30, 2001             |  | 1   
|                                                                                                               |  |     
|Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended
June 30, 2002 and 2001   |  | 2   
|                                                                                                               |  |     
|Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the
Nine Months Ended June 30, 2002 |  | 3   
|                                                                                                               |  |     
|Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended
June 30, 2002 and 2001             |  | 4   
|                                                                                                               |  |     
|Notes to Consolidated Financial Statements (Unaudited)                                                         |  | 6   
|                                                                                                               |  |     
|Item 2: Managements Discussion and Analysis of Financial Condition and Results
of Operations                  |  | 8   
|                                                                                                               |  |     
|PART II  OTHER INFORMATION                                                                                    |  | 14  
|                                                                                                               |  |     
|Item 1: Legal Proceedings                                                                                      |  | 14  
|                                                                                                               |  |     
|Item 6: Exhibits and Reports on Form 8-K                                                                       |  | 14  
|                                                                                                               |  |     
|SIGNATURES                                                                                                     |  | 15  





---



##### 



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




PART 1: FINANCIAL INFORMATION

Item 1: Financial
Statements

Consolidated Statements of Financial Condition
June 30, 2002 (Unaudited) and September 30, 2001

|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |               |            |             |            | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------- | ------------------------------------------ | ------------------------------------ | ---------- | ----------- | ----------- | ------------- | ---------- | ----------- | ---------- | 
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            | June 30,    |             | September 30,
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            | 2002        |             | 2001         
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            | (Unaudited) |             |               |            |            
|                                                            |                                                                                                                                                                                                              |                      |                                            | Assets                               |            |             |             |               |            |             |            | 
|Cash and cash equivalents                                   |                                                                                                                                                                                                              | $                    | 5,296,348                                  |                                      |            | $           | 6,020,186   |              
|Interest-bearing deposits in other financial institutions   |                                                                                                                                                                                                              |                      | 1,024,724                                  |                                      |            |             | 898,533     |              
|Investment securities available-for-sale, at fair value     |                                                                                                                                                                                                              |                      | 31,602,080                                 |                                      |            |             | 33,052,826  |              
|Loans receivable                                            |                                                                                                                                                                                                              |                      | 91,607,617                                 |                                      |            |             | 102,713,340 |              
|Less allowance for loan losses                              |                                                                                                                                                                                                              |                      | (1,217,264                                 | )                                    |            |             | (1,577,952  | )            
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            | Net loans                                                                                                                                                                                                    |                      |                                            | 90,390,353                           |            |             |             | 101,135,388   |           
|Loans held for sale at cost (which approximates fair value) |                                                                                                                                                                                                              |                      | 1,013,420                                  |                                      |            |             | 272,350     |              
|Foreclosed real estate, net                                 |                                                                                                                                                                                                              |                      | 378,580                                    |                                      |            |             | 251,183     |              
|Other repossessed assets                                    |                                                                                                                                                                                                              |                      | 20,578                                     |                                      |            |             | 6,700       |              
|Premises and equipment, net                                 |                                                                                                                                                                                                              |                      | 4,882,991                                  |                                      |            |             | 4,765,878   |              
|Federal Home Loan Bank stock, at cost                       |                                                                                                                                                                                                              |                      | 2,229,800                                  |                                      |            |             | 2,229,800   |              
|Accrued interest receivable                                 |                                                                                                                                                                                                              |                      | 777,550                                    |                                      |            |             | 960,225     |              
|Other assets                                                |                                                                                                                                                                                                              |                      | 2,589,043                                  |                                      |            |             | 1,601,146   |              
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            | Total Assets                                                                                                                                                                                                 |                      | $                                          | 140,205,467                          |            |             | $           | 151,194,215   |           
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            |                                                                                                                                                                                                              |                      |                                            | Liabilities And Stockholders Equity |            |             |             |               |            |             |            | 
|Liabilities:                                                |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            | Deposits:                                                                                                                                                                                                    |                      |                                            |                                      |            |             |             |               |           
|                                                            |                                                                                                                                                                                                              | Non-interest bearing |                                            | $                                    | 3,881,805  |             |             | $             | 3,349,326  |            
|                                                            |                                                                                                                                                                                                              | Interest bearing     |                                            |                                      | 94,061,880 |             |             |               | 95,706,254 |            
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            |                                                                                                                                                                                                              |                      |                                            | Total deposits                       |            |             | 97,943,685  |               |            |             | 99,055,580 | 
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            | Advances by borrowers for property taxes and insurance                                                                                                                                                       |                      |                                            | 267,903                              |            |             |             | 404,515       |           
|                                                            | Accrued interest payable                                                                                                                                                                                     |                      |                                            | 989,297                              |            |             |             | 1,328,183     |           
|                                                            | Borrowed funds                                                                                                                                                                                               |                      |                                            | 26,413,861                           |            |             |             | 35,605,000    |           
|                                                            | Accrued expenses and other liabilities                                                                                                                                                                       |                      |                                            | 858,693                              |            |             |             | 518,398       |           
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            |                                                                                                                                                                                                              |                      | Total liabilities                          |                                      |            | 126,473,439 |             |               |            | 136,911,676 |           
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|Stockholders Equity:                                       |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            | Common stock, $.01 par value, 2,000,000 shares authorized, 989,868 shares
issued and 799,824 shares outstanding at June 30, 2002; 988,118
shares issued and 861,130 shares outstanding at September 30, 2001 |                      |                                            | 9,996                                |            |             |             | 9,996         |           
|                                                            | Additional paid-in capital                                                                                                                                                                                   |                      |                                            | 9,814,268                            |            |             |             | 9,814,268     |           
|                                                            | Treasury stock, at cost (179,074 shares at June 30, 2002; 116,018
shares at September 30, 2001)                                                                                                              |                      |                                            | (2,349,039                           | )          |             |             | (1,648,439    | )         
|                                                            | Deferred compensation on common stock employee benefit plans                                                                                                                                                 |                      |                                            | (330,750                             | )          |             |             | (383,442      | )         
|                                                            | Shares held in trust at cost (9,775 shares at June 30, 2002; 11,525
shares at September 30, 2001)                                                                                                            |                      |                                            | (107,161                             | )          |             |             | (126,411      | )         
|                                                            | Retained earnings                                                                                                                                                                                            |                      |                                            | 6,278,228                            |            |             |             | 6,249,938     |           
|                                                            | Accumulated comprehensive other income                                                                                                                                                                       |                      |                                            | 416,486                              |            |             |             | 366,629       |           
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            |                                                                                                                                                                                                              |                      | Total stockholders equity                 |                                      |            | 13,732,028  |             |               |            | 14,282,539  |           
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              
|                                                            |                                                                                                                                                                                                              |                      | Total Liabilities and Stockholders Equity |                                      | $          | 140,205,467 |             |               | $          | 151,194,215 |           
|                                                            |                                                                                                                                                                                                              |                      |                                            |                                      |            |             |             |              



| |  | See accompanying notes to consolidated financial statements.
| |  | ------------------------------------------------------------

-1-



---



##### 



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended June 30, 2002 and 2001

|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |           |           |           | 
|------------------------------------ | --------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------- | --------- | ----------------- | --------- | ------------------ | --------- | --------- | --------- | -------- | --------- | --------- | --------- | ------ | --------- | --------- | --------- | 
|                                     |                                                                 |                                                     |                                    |           | Nine Months Ended |           | Three Months Ended
|                                     |                                                                 |                                                     |                                    |           | June 30,          |           | June 30,          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                   
|                                     |                                                                 |                                                     |                                    |           | 2002              |           | 2001               |           | 2002      |           | 2001    
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |         
|Interest and dividend income:        |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     | Interest and fees on loans                                      |                                                     | $                                  | 5,181,512 |                   |           | $                  | 6,520,783 |           |           | $        | 1,577,904 |           |           | $      | 2,032,590 |          
|                                     | Interest income on deposits in other financial institutions     |                                                     |                                    | 76,810    |                   |           |                    | 246,118   |           |           |          | 23,624    |           |           |        | 86,495    |          
|                                     | Interest and dividend income on investment securities           |                                                     |                                    | 1,198,086 |                   |           |                    | 1,637,259 |           |           |          | 463,184   |           |           |        | 485,698   |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     |                                                                 |                                                     | Total interest and dividend income |           |                   | 6,456,408 |                    |           |           | 8,404,160 |          |           |           | 2,064,712 |        |           |           | 2,604,783 | 
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|Interest expense:                    |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     | Interest on deposits                                            |                                                     |                                    | 2,732,073 |                   |           |                    | 3,837,258 |           |           |          | 795,882   |           |           |        | 1,249,221 |          
|                                     | Interest on borrowed funds                                      |                                                     |                                    | 959,185   |                   |           |                    | 1,598,764 |           |           |          | 313,297   |           |           |        | 445,505   |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     |                                                                 | Total interest expense                              |                                    |           | 3,691,258         |           |                    |           | 5,436,022 |           |          |           | 1,109,179 |           |        |           | 1,694,726 |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     |                                                                 | Net interest income                                 |                                    |           | 2,765,150         |           |                    |           | 2,968,138 |           |          |           | 955,533   |           |        |           | 910,057   |          
|Provision for loan losses (benefit)  |                                                                 |                                                     | (363,266                           | )         |                   |           | (50,000            | )         |           |           | (388,362 | )         |           |           |       |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     |                                                                 | Net interest income after provision for loan losses |                                    |           | 3,128,416         |           |                    |           | 3,018,138 |           |          |           | 1,343,895 |           |        |           | 910,057   |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|Other income:                        |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     | Service charges and other fees                                  |                                                     |                                    | 320,873   |                   |           |                    | 318,301   |           |           |          | 96,760    |           |           |        | 114,569   |          
|                                     | Employee benefit trust and consulting fees                      |                                                     |                                    | 869,731   |                   |           |                    | 876,356   |           |           |          | 310,883   |           |           |        | 301,192   |          
|                                     | Gain on sale of loans                                           |                                                     |                                    | 343,398   |                   |           |                    | 285,367   |           |           |          | 121,084   |           |           |        | 108,102   |          
|                                     | Gain (loss) on sale of foreclosed real estate                   |                                                     |                                    | (14,606   | )                 |           |                    | (5,031    | )         |           |          | (18,780   | )         |           |        | (7,167    | )        
|                                     | Gain (loss) on sale of equipment                                |                                                     |                                    | (4,180    | )                 |           |                    | (1,349    | )         |           |          |          |           |           |        | (1,349    | )        
|                                     | Gain (loss) on sale of investment securities available-for-sale |                                                     |                                    | 163,757   |                   |           |                    | 859       |           |           |          | (6,423    | )         |           |        |          |          
|                                     | Other                                                           |                                                     |                                    | 483,257   |                   |           |                    | 271,318   |           |           |          | 123,923   |           |           |        | 99,806    |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     |                                                                 | Total other income                                  |                                    |           | 2,162,230         |           |                    |           | 1,745,821 |           |          |           | 627,447   |           |        |           | 615,153   |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|Other expenses:                      |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     | Compensation and benefits                                       |                                                     |                                    | 2,641,554 |                   |           |                    | 2,334,035 |           |           |          | 947,127   |           |           |        | 764,200   |          
|                                     | Net occupancy expense                                           |                                                     |                                    | 261,955   |                   |           |                    | 259,197   |           |           |          | 88,714    |           |           |        | 82,721    |          
|                                     | Furniture and fixtures                                          |                                                     |                                    | 340,348   |                   |           |                    | 366,623   |           |           |          | 115,495   |           |           |        | 134,806   |          
|                                     | Data processing                                                 |                                                     |                                    | 241,338   |                   |           |                    | 245,087   |           |           |          | 75,709    |           |           |        | 86,256    |          
|                                     | Office supplies and expense                                     |                                                     |                                    | 301,735   |                   |           |                    | 324,460   |           |           |          | 102,958   |           |           |        | 106,784   |          
|                                     | Deposit insurance premiums                                      |                                                     |                                    | 57,866    |                   |           |                    | 48,783    |           |           |          | 21,069    |           |           |        | 16,020    |          
|                                     | Goodwill amortization                                           |                                                     |                                    | 40,459    |                   |           |                    | 40,459    |           |           |          | 13,485    |           |           |        | 13,487    |          
|                                     | Legal                                                           |                                                     |                                    | 309,067   |                   |           |                    | 102,452   |           |           |          | 217,883   |           |           |        | 26,600    |          
|                                     | Other                                                           |                                                     |                                    | 444,144   |                   |           |                    | 338,588   |           |           |          | 164,453   |           |           |        | 133,917   |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     |                                                                 | Total other expenses                                |                                    |           | 4,638,466         |           |                    |           | 4,059,684 |           |          |           | 1,746,893 |           |        |           | 1,364,791 |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     |                                                                 | Income before income taxes                          |                                    |           | 652,180           |           |                    |           | 704,275   |           |          |           | 224,449   |           |        |           | 160,419   |          
|Income tax expense                   |                                                                 |                                                     | 248,295                            |           |                   |           | 275,314            |           |           |           | 80,971   |           |           |           | 63,513 |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     |                                                                 | Net income                                          |                                    | $         | 403,885           |           |                    | $         | 428,961   |           |          | $         | 143,478   |           |        | $         | 96,906    |          
|                                     |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|Earnings per share:                  |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     | Basic                                                           |                                                     |                                    | 0.49      |                   |           |                    | 0.47      |           |           |          | 0.18      |           |           |        | 0.11      |          
|                                     | Diluted                                                         |                                                     |                                    | 0.49      |                   |           |                    | 0.47      |           |           |          | 0.18      |           |           |        | 0.11      |          
|Cash dividends declared              |                                                                 |                                                     | 0.45                               |           |                   |           | 0.45               |           |           |           | 0.15     |           |           |           | 0.15   |          
|Weighted average shares outstanding: |                                                                 |                                                     |                                    |           |                   |           |                    |           |           |           |          |           |           |           |        |          
|                                     | Basic                                                           |                                                     |                                    | 822,420   |                   |           |                    | 910,102   |           |           |          | 799,824   |           |           |        | 910,102   |          
|                                     | Diluted                                                         |                                                     |                                    | 825,397   |                   |           |                    | 912,242   |           |           |          | 805,971   |           |           |        | 914,540   |          



| |  | See accompanying notes to consolidated financial statements.
| |  | ------------------------------------------------------------

-2-



---



##### 



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders Equity (Unaudited)
for the Nine Months Ended June 30, 2002

|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ----- | ------ |  | ------- | --------- | ---------- |  | ------------- | ---------- | ------- |  | -------- | -------- | ------------- |  | ------------- | -------- | - |  | ----------- | --------- | ----- | ------- | - | ------- |  |  | - | ---------- | - | ------- | 
|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          | Deferred      |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |  
|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          | Compensation  |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |  
|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          | on Common     |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |  
|                                                                                                                                  |  |            |       |        |  |         |           | Additional |  |               |            |         |  | Stock    |          | Shares        |  |               |          |   |  | Accumulated |           | Total
|                                                                                                                                  |  |            |       | Common |  | Paid-in |           | Treasury   |  | Employee      |            | Held in |  | Retained |          | Comprehensive |  | Stockholders'
|                                                                                                                                  |  |            |       | Stock  |  | Capital |           | Stock      |  | Benefit Plans |            | Trust   |  | Earnings |          | Other Income  |  | Equity       
|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |              
|Balance
at September 30,2001                                                                                                      |  | $          | 9,996 |        |  | $       | 9,814,268 |            |  | $             | (1,648,439 | )       |  | $        | (383,442 | )             |  | $             | (126,411 | ) |  | $           | 6,249,938 |       |         | $ | 366,629 |  |  | $ | 14,282,539 |  
|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |  
|Comprehensive income:                                                                                                             |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |  
|                                                                                                                                  |  | Net income |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       | 403,885 |   |         |  |  |   |            |   | 403,885 | 
|Change in net unrealized
gain on available-for-sale
securities, net of reclassi-
fication adjustments and
income taxes of $30,757 |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       |         |   | 49,857  |  |  |   | 49,857     |  
|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |  
|Total comprehensive income                                                                                                        |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   | 453,742    |  
|Issuance of management
recognition plan shares                                                                                    |  |            |       |        |  |         |           |            |  |               |            |         |  |          | (19,250  | )             |  |               | 19,250   |   |  |             |           |       |         |   |         |  |  |   |           |  
|Vesting of deferred
compensation shares                                                                                           |  |            |       |        |  |         |           |            |  |               |            |         |  |          | 71,942   |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   | 71,942     |  
|Acquisition of Treasury
stock                                                                                                     |  |            |       |        |  |         |           |            |  |               | (700,600   | )       |  |          |          |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   | (700,600   | )
|Cash dividends declared                                                                                                           |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             | (375,595  | )     |         |   |         |  |  |   | (375,595   | )
|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |  
|Balance at June 30, 2002                                                                                                          |  | $          | 9,996 |        |  | $       | 9,814,268 |            |  | $             | (2,349,039 | )       |  | $        | (330,750 | )             |  | $             | (107,161 | ) |  | $           | 6,278,228 |       |         | $ | 416,486 |  |  | $ | 13,732,028 |  
|                                                                                                                                  |  |            |       |        |  |         |           |            |  |               |            |         |  |          |          |               |  |               |          |   |  |             |           |       |         |   |         |  |  |   |            |  

-3-



---



##### 



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended June 30, 2002 and 2001

|                      |                                                                                   |                                                                         |                                                  |             |             |            |      |            |             |           | 
|--------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------ | ----------- | ----------- | ---------- | ---- | ---------- | ----------- | --------- | 
|                      |                                                                                   |                                                                         |                                                  |             | 2002        |            | 2001
|                      |                                                                                   |                                                                         |                                                  |             |             |            |     
|Operating activities: |                                                                                   |                                                                         |                                                  |             |             |            |      |           
|                      | Net income                                                                        |                                                                         | $                                                | 403,885     |             |            | $    | 428,961    |            
|                      | Adjustments to reconcile net income to net cash provided by operating
activities: |                                                                         |                                                  |             |             |            |      |            |            
|                      |                                                                                   | Provision for loan losses                                               |                                                  |             | (363,266    | )          |      |            | (50,000     | )        
|                      |                                                                                   | Depreciation and amortization                                           |                                                  |             | 259,911     |            |      |            | 280,523     |          
|                      |                                                                                   | Gain on sale of securities                                              |                                                  |             | (163,757    | )          |      |            | (859        | )        
|                      |                                                                                   | Gain on sale of loans                                                   |                                                  |             | (343,398    | )          |      |            | (285,367    | )        
|                      |                                                                                   | Decrease in deferred loan origination fees                              |                                                  |             | (42,604     | )          |      |            | (2,896      | )        
|                      |                                                                                   | Net amortization of premium on investment securities available-for-sale |                                                  |             | (80,301     | )          |      |            | (84,272     | )        
|                      |                                                                                   | Loss on sale of other property owned                                    |                                                  |             | 4,180       |            |      |            |            |          
|                      |                                                                                   | Loss on sale of foreclosed real estate                                  |                                                  |             | 14,606      |            |      |            | 5,031       |          
|                      |                                                                                   | Loans originated for sale                                               |                                                  |             | (15,926,891 | )          |      |            | (14,889,283 | )        
|                      |                                                                                   | Proceeds from sale of loans                                             |                                                  |             | 15,529,219  |            |      |            | 15,196,312  |          
|                      |                                                                                   | Decrease in accrued interest receivable                                 |                                                  |             | 182,675     |            |      |            | 270,563     |          
|                      |                                                                                   | Increase in other assets                                                |                                                  |             | (987,897    | )          |      |            | (81,400     | )        
|                      |                                                                                   | Deferred compensation expense                                           |                                                  |             | 71,942      |            |      |            | 74,577      |          
|                      |                                                                                   | Increase (decrease) in accrued interest payable                         |                                                  |             | (338,886    | )          |      |            | 77,031      |          
|                      |                                                                                   | Increase in accrued expenses and other liabilities                      |                                                  |             | 309,538     |            |      |            | 133,414     |          
|                      |                                                                                   |                                                                         |                                                  |             |             |            |      |           
|                      |                                                                                   |                                                                         | Net cash provided (used) by operating activities |             |             | (1,471,044 | )    |            |             | 1,072,335 | 
|                      |                                                                                   |                                                                         |                                                  |             |             |            |      |           
|Investing activities: |                                                                                   |                                                                         |                                                  |             |             |            |      |           
|                      | Net change in interest-bearing deposits in other financial institutions           |                                                                         |                                                  | (126,191    | )           |            |      | 843,334    |            
|                      | Proceeds from calls and maturities of investment securities available-for-sale    |                                                                         |                                                  | 2,628,272   |             |            |      | 6,851,586  |            
|                      | Purchase of investment securities available-for-sale                              |                                                                         |                                                  | (14,642,587 | )           |            |      | (6,834,375 | )          
|                      | Proceeds from sale of investment securities available-for-sale                    |                                                                         |                                                  | 13,789,733  |             |            |      | 2,912,387  |            
|                      | Net decrease in loans                                                             |                                                                         |                                                  | 11,146,364  |             |            |      | 7,289,222  |            
|                      | Purchase of premises and equipment                                                |                                                                         |                                                  | (376,863    | )           |            |      | (162,774   | )          
|                      | Proceeds from sale of foreclosed real estate                                      |                                                                         |                                                  | 214,413     |             |            |      | 529,976    |            
|                      | Proceeds from sale of other assets                                                |                                                                         |                                                  | 6,200       |             |            |      | 15,639     |            
|                      | Transfer from loans of real estate owned property                                 |                                                                         |                                                  | (356,416    | )           |            |      | (683,736   | )          
|                      | Transfer from loans of other repossessed assets                                   |                                                                         |                                                  | (19,878     | )           |            |      | (24,079    | )          
|                      |                                                                                   |                                                                         |                                                  |             |             |            |      |           
|                      |                                                                                   | Net cash provided by investing activities                               |                                                  |             | 12,263,047  |            |      |            | 10,737,180  |          
|                      |                                                                                   |                                                                         |                                                  |             |             |            |      |           

(Continued)

See accompanying notes to consolidated financial statements.

-4-



---



##### 



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended June 30, 2002 and 2001

|                                                   |                                                                               |                                       |           |             |             |      |           |             |             |  
|-------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------- | --------- | ----------- | ----------- | ---- | --------- | ----------- | ----------- | -
|                                                   |                                                                               |                                       |           | 2002        |             | 2001
|                                                   |                                                                               |                                       |           |             |             |     
|Financing activities:                              |                                                                               |                                       |           |             |             |      |           |            
|                                                   | Decrease in deposits                                                          |                                       | $         | (1,111,895  | )           |      | $         | (2,993,105  | )          
|                                                   | Proceeds from borrowed funds                                                  |                                       |           | 16,923,861  |             |      |           | 17,450,000  |            
|                                                   | Repayment of borrowed funds                                                   |                                       |           | (26,115,000 | )           |      |           | (24,434,068 | )          
|                                                   | Cash dividends paid                                                           |                                       |           | (375,595    | )           |      |           | (416,362    | )          
|                                                   | Acquisition of management recognition plan shares                             |                                       |           |            |             |      |           | (115,368    | )          
|                                                   | Acquisition of treasury stock                                                 |                                       |           | (700,600    | )           |      |           |            |            
|                                                   | Increase (decrease) in advances by borrowers for property taxes and insurance |                                       |           | (136,612    | )           |      |           | 12,336      |            
|                                                   |                                                                               |                                       |           |             |             |      |           |            
|                                                   |                                                                               | Net cash used in financing activities |           |             | (11,515,841 | )    |           |             | (10,496,567 | )
|                                                   |                                                                               |                                       |           |             |             |      |           |            
|Increase (decrease) in cash and cash equivalents   |                                                                               |                                       | (723,838  | )           |             |      | 1,312,948 |            
|Cash and cash equivalents at beginning of period   |                                                                               |                                       | 6,020,186 |             |             |      | 4,667,295 |            
|                                                   |                                                                               |                                       |           |             |             |      |           |            
|Cash and cash equivalents at end of period         |                                                                               | $                                     | 5,296,348 |             |             | $    | 5,980,243 |            
|                                                   |                                                                               |                                       |           |             |             |      |           |            
|Supplemental information on cash payments:         |                                                                               |                                       |           |             |             |      |           |            
|                                                   | Interest paid                                                                 |                                       | $         | 4,030,144   |             |      | $         | 3,837,258   |            
|                                                   |                                                                               |                                       |           |             |             |      |           |            
|                                                   | Income taxes paid                                                             |                                       | $         | 130,719     |             |      | $         | 254,170     |            
|                                                   |                                                                               |                                       |           |             |             |      |           |            
|Supplemental information on non-cash transactions: |                                                                               |                                       |           |             |             |      |           |            
|                                                   | Change in net unrealized gain on investment securities available-for-sale     |                                       | $         | 49,857      |             |      | $         | 376,569     |            
|                                                   |                                                                               |                                       |           |             |             |      |           |            
|                                                   | Real estate obtained through foreclosure                                      |                                       | $         | 356,416     |             |      | $         | 683,736     |            
|                                                   |                                                                               |                                       |           |             |             |      |           |            



| |  | See accompanying notes to consolidated financial statements.
| |  | ------------------------------------------------------------

-5-



---



##### 



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)
June 30, 2002 and 2001

|    |  |                      
|--- |  | ---------------------
|(1) |  | Basis of Presentation



| |  | Information filed on this Form 10-QSB, as of and for the quarter ended June
30, 2002, was derived from the financial records of SouthFirst Bancshares,
Inc. (SouthFirst) and its wholly-owned subsidiaries, First Federal of the
South (First Federal) and SouthFirst Financial Services, Inc.
(SouthFirst Financial), and First Federals wholly-owned subsidiaries,
Pension & Benefit Trust Company (Pension & Benefit), a Montgomery,
Alabama based employee benefits consulting firm, and SouthFirst Mortgage,
Inc., a Birmingham, Alabama based residential construction loan and
mortgage loan origination office. Collectively, SouthFirst Bancshares,
Inc. and its subsidiaries are referred to herein as the Company and as
SouthFirst.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (none of which
are other than normal recurring accruals) necessary for a fair statement of
the financial position of the Company and the results of operations for the
three and nine month periods ended June 30, 2002 and 2001. The results
contained in the statements herein are not necessarily indicative of the
results which may be expected for the entire year.                                                                                                                                                                                                                                                 

|    |  |                         
|--- |  | ------------------------
|(2) |  | New Accounting Standards



| |  | In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, and SFAS No. 143, Accounting for Asset Retirement Obligations.
SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but, instead, an entity
must perform an assessment of whether goodwill is impaired, as of the date
of adoption, and test for impairment at least annually in accordance with
the provisions of the Statement. The new standard will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No. 143
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. 142, 143 and 144 are required to be adopted October 1, 2002, with
earlier application permitted. At this time, the impact of adopting these
standards on the financial condition of the Company has not been
determined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

-6-



---



##### 



|    |  |                             
|--- |  | ----------------------------
|(3) |  | Business Segment Information



| |  | The Company organizes its business units into two reportable segments:
traditional banking activities and employee benefits consulting and trust
activities. The banking segment provides a full range of banking services
within its primary market areas of central Alabama. The employee benefits
trust company operates primarily in the state of Alabama. The Companys
reportable business segments are strategic business units that offer
different products and services. Each segment is managed separately,
because each unit is subject to different marketing and regulatory
environments.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The accounting policies used by each reportable segment are the same as
those discussed in Note 1 to the Consolidated Financial Statements found in
Exhibit 99.1 of the Annual Report on Form 10-KSB. The following table
presents financial information for each reportable segment:                                                                                                                                                                                                                                                                                                                  

|                                                    |  |                                 |           |                                 |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           |  
|--------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------- |  | -------- | ------- | ---------- |  | ---------- | --------- | -------- |  | - | --------- | -------- |  | - | ------- |  |  | - | --------- | -
|                                                    |  | Nine Months Ended June 30, 2002 |           | Nine Months Ended June 30, 2001
|                                                    |  |                                 |           |                                
|                                                    |  |                                 |           |                                 |  | Employee |         |            |  |            |           |          |  |   |           | Employee |  |   |         | 
|                                                    |  | Banking                         |           | Benefits                        |  |          |         |            |  | Banking    |           | Benefits |  |   |           |         
|                                                    |  | Activities                      |           | Activities                      |  | Total    |         | Activities |  | Activities |           | Total   
|                                                    |  |                                 |           |                                 |  |          |         |            |  |            |           |         
|Interest and dividend
income                        |  | $                               | 6,422,751 |                                 |  | $        | 33,657  |            |  | $          | 6,456,408 |          |  | $ | 8,378,575 |          |  | $ | 25,585  |  |  | $ | 8,404,160 |  
|Interest expenses                                   |  |                                 | 3,691,258 |                                 |  |          |        |            |  |            | 3,691,258 |          |  |   | 5,436,022 |          |  |   |        |  |  |   | 5,436,022 |  
|                                                    |  |                                 |           |                                 |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           |  
|Net interest income                                 |  |                                 | 2,731,493 |                                 |  |          | 33,657  |            |  |            | 2,765,150 |          |  |   | 2,942,553 |          |  |   | 25,585  |  |  |   | 2,968,138 |  
|Provision for loan
losses (benefit)                 |  |                                 | (363,266  | )                               |  |          |        |            |  |            | (363,266  | )        |  |   | (50,000   | )        |  |   |        |  |  |   | (50,000   | )
|                                                    |  |                                 |           |                                 |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           |  
|Net interest income after
provision for loan losses |  |                                 | 3,094,759 |                                 |  |          | 33,657  |            |  |            | 3,128,416 |          |  |   | 2,992,553 |          |  |   | 25,585  |  |  |   | 3,018,138 |  
|Other income                                        |  |                                 | 1,293,378 |                                 |  |          | 868,852 |            |  |            | 2,162,230 |          |  |   | 860,465   |          |  |   | 885,356 |  |  |   | 1,745,821 |  
|Other expenses                                      |  |                                 | 3,821,998 |                                 |  |          | 816,468 |            |  |            | 4,638,466 |          |  |   | 3,315,946 |          |  |   | 743,738 |  |  |   | 4,059,684 |  
|                                                    |  |                                 |           |                                 |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           |  
|Income before income taxes                          |  |                                 | 566,139   |                                 |  |          | 86,041  |            |  |            | 652,180   |          |  |   | 537,072   |          |  |   | 167,203 |  |  |   | 704,275   |  
|Income taxes                                        |  |                                 | 215,420   |                                 |  |          | 32,875  |            |  |            | 248,295   |          |  |   | 211,605   |          |  |   | 63,709  |  |  |   | 275,314   |  
|                                                    |  |                                 |           |                                 |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           |  
|Net income                                          |  | $                               | 350,719   |                                 |  | $        | 53,166  |            |  | $          | 403,885   |          |  | $ | 325,467   |          |  | $ | 103,494 |  |  | $ | 428,961   |  
|                                                    |  |                                 |           |                                 |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           |  



| |  | There have been no variations from the last annual report in the basis of
measuring segment profit or loss. There have been no material changes in
the amount of assets for any operating segment since the last annual
report.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|    |  |                      
|--- |  | ---------------------
|(4) |  | Supervisory Agreement



| |  | On March 22, 2002, First Federal 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
First Federal and the OTS of the actions that First Federal and its board
of directors must undertake to comply with the requirements of the OTS.
Among other things, First Federals board of directors must develop, adopt
and implement certain policies and procedures to ensure appropriate
monitoring of First Federal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.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-7-



---



##### 



|    |  |                                           
|--- |  | ------------------------------------------
|(5) |  | Federal Home Loan Bank of Atlanta Advances



| |  | 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 at June 30, 2002, to a fixed
amount of $22,000,000. At June 30, 2002, First Federal owed the Federal
Home Loan Bank of Atlanta $22,900,000 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 borrowing by First Federal (in excess of $22,000,000 in
the aggregate) 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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|    |  |                 
|--- |  | ----------------
|(6) |  | Subsequent Event



| |  | On July 17, 2002, the Company declared a regular dividend of $0.15 per
share, payable on August 15, 2002 to stockholders of record on August 1,
2002.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations

REVIEW OF RESULTS OF OPERATIONS

Overview

Net income for the three months ended June 30, 2002 increased $46,572, or
48.1%, and decreased for the nine months ended June 30, 2002 by $25,076, or
5.8%, compared to the same periods in fiscal 2001. Net interest income
increased $45,476, or 5.0%, for the three months ended June 30, 2002, and decreased
$202,988, or 6.8%, for the nine month period ending June 30, 2002, compared to
the same periods in fiscal 2001. Non-interest income increased $12,294, or
2.0%, for the three month period ended June 30, 2002, and increased $416,409,
or 23.8%, for the nine-month period ended June 30, 2002, compared to the same
periods in fiscal 2001. Non-interest expense increased $382,102, or 28.0%, for
the three month period ended June 30, 2002, and increased $578,782, or 14.3%,
for the nine month period ended June 30, 2002, compared to the same periods in
fiscal 2001.

Primary earnings per common share, based on weighted average shares
outstanding, was $.18 and $.11 for the three months ended June 30, 2002, and
2001, respectively, and $.49 and $.47 for the nine months ended June 30, 2002
and 2001, respectively.

Those items significantly affecting net earnings are discussed in detail below.

Net Interest Income

Net interest income is the difference between the interest and fees earned on
loans, securities, and other interest-bearing assets (interest income) and the
interest paid on deposits and borrowed funds (interest expense). Net interest
income is directly related to the interest rate spread, which is the difference
between the interest rates on interest-earning assets and interest-bearing
liabilities.

-8-



---



##### 



As of June 30, 2002, the interest rate spread increased 46 basis points as
rates earned on interest-earning assets decreased 105 basis points to 6.53%,
while the cost of funds decreased 151 basis points to 3.61%, compared to the
same period in fiscal year 2001. The average balance of interest-earning
assets decreased $11.0 million, or 8.0%, from $137.4 million to $126.4 million,
while the average balance of interest-bearing liabilities decreased $9.6
million, or 7.2%, from $132.3 million to $122.8 million. The combined effect
of the changes in average balances and the changes in rates discussed resulted
in an increase in the interest rate spread from 2.46% to 2.92%, and resulted in
an increase in net interest income of $45,476, or 5.0%, and a decrease in
net-interest income of $202,988, or 6.8%, for the three months and nine months
ended June 30, 2002, respectively, compared to the same periods in 2001.

Provision for Loan Losses

The provision for loan losses reflects a benefit of approximately $388,000 for
the three month period ended June 30, 2002. This resulted primarily from the
reclassification of a loan from loss to doubtful. The reclassification was
based on a settlement agreement reached with a former director, among
others, concerning this loan (see Part II, Item 1, Legal
Proceedings below). The terms of the settlement agreement were previously disclosed in the
Companys Form 8-K filed with the Securities and Exchange Commission on July 2,
2002.

Non-Interest Income

For the nine months ended June 30, 2002, total non-interest income increased
$416,000 to approximately $2,162,000, compared to the nine months ended June
30, 2001. Employee benefit consulting fees decreased approximately $7,000 as a
result of decreased commission income from Pension and Benefit Trust Company,
while losses from the sale of foreclosed real estate and other assets increased
approximately $12,000. Other non-interest income increased approximately
$435,000, compared to the same period in fiscal 2001. This increase in other
income is a result of the net difference of approximately $189,000 between the
cash value of life insurance and the present value of benefits at retirement
date on deferred compensation agreements with certain key employees, an
increase in gains from sale of investment securities of approximately $163,000,
and an increase in the gain on sale of loans of approximately $58,000. For the
three-month period ended June 30, 2002, total non-interest income increased by
approximately $12,000 to $627,000, compared to the same period in fiscal 2001.
This net increase was primarily the result of an increase of approximately
$13,000 in the gain on sale of loans, and an increase in other income of
approximately $24,000. These increases were partially offset by decreases of
approximately $18,000 in service charges and other fees, increased losses of
approximately $12,000 on the sale of foreclosed real estate, and increased
losses of approximately $6,000 on the sale of investment securities, compared
to the same period in fiscal 2001.

Non-Interest Expense

Total non-interest expense, for the nine months ended June 30, 2002, increased
by approximately $579,000 to $4,638,000, compared to $4,060,000 for the nine
months ended June 30, 2001. This increase is due primarily to increases in
compensation and benefits of $307,000, legal expenses of $207,000 and other
expenses of approximately $106,000. These increases were partially offset by a
decrease of approximately $24,000 in expenses for fixed assets and occupancy,
and a decrease of approximately $23,000 in office supplies and expenses,
compared to the same period in fiscal 2001.

For the three month period ended June 30, 2002, total non-interest expense
increased approximately $382,000, from $1,365,000 for the
three-month period ended June 30, 2001 to $1,747,000. This increase resulted primarily from
an increase of approximately $183,000 in compensation and benefits, an increase
of approximately $191,000 in legal expenses, and an increase in other expenses
of approximately $31,000. This increase encompasses an increase of $6,000 in
fees relative to home equity loans, an

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increase of approximately $11,000 in insurance expenses, and an increase of
approximately $15,000 in miscellaneous operating expenses. These increases
were partially offset by a decrease of approximately $13,000 in expenses
relating to fixed assets and occupancy, and a decrease of approximately $11,000
in data processing expenses. The legal expenses primarily relate to a civil
lawsuit filed by the Company against, among others, a former director of the
Company and First Federal, as described in the Companys Form 8-K filed with
the Securities and Exchange Commission on December 14, 2001, and the subsequent
settlement of this litigation, as described in the Companys Form 8-K filed
with the Securities and Exchange Commission on July 2, 2002 (see
Part II, Item 1, Legal Proceedings below). Legal expenses
were also incurred in connection with the previously disclosed Supervisory
Agreement (see Item 1, Note (4), Supervisory Agreement
above).

Income Taxes

The Companys effective tax rate for the nine month periods ended June 30, 2002
and 2001 was 38.1% and 39.1%, respectively, compared to the federal statutory
rate of 34.0%. Income tax expense decreased approximately $27,000 or 1.0%, to
$248,000 for the nine months ended June 30, 2002, as compared to $275,000 for
the nine months ended June 30, 2001, due to the decrease in pre-tax earnings.

REVIEW OF FINANCIAL CONDITION

Overview

Management continuously monitors the financial condition of SouthFirst in order
to protect depositors, increase retained earnings, and protect current and
future earnings.

Return on average stockholders equity is one way of assessing the return
SouthFirst has generated for its stockholders. The table below sets forth the
return on average stockholders equity and other performance ratios of
SouthFirst for the periods indicated.

|                                                          |  |                       |       |      |  |   |        |  
|--------------------------------------------------------- |  | --------------------- | ----- | ---- |  | - | ------ | -
|                                                          |  | At or for the three  
|                                                          |  | months ended June 30,
|                                                          |  |                      
|                                                          |  | 2002                  |       | 2001
|                                                          |  |                       |       |     
|Return on assets                                          |  |                       | 0.41  | %    |  |   | 0.25   | %
|Return on equity                                          |  |                       | 4.25  | %    |  |   | 2.54   | %
|Equity-to-assets ratio                                    |  |                       | 9.54  | %    |  |   | 10.01  | %
|Interest rate spread                                      |  |                       | 2.92  | %    |  |   | 2.46   | %
|Net interest margin                                       |  |                       | 3.02  | %    |  |   | 2.65   | %
|Total risk-based capital ratio                            |  |                       | 16.62 | %    |  |   | 16.59  | %
|Non-performing loans to loans                             |  |                       | 1.45  | %    |  |   | 0.58   | %
|Allowance for loan losses to loans                        |  |                       | 1.33  | %    |  |   | 0.66   | %
|Allowance for loan losses to average non-performing loans |  |                       | 92.10 | %    |  |   | 113.55 | %
|Ratio of net charge-offs to average loans outstanding     |  |                       | (0.29 | )%   |  |   | 0.02   | %
|Book value per common share outstanding                   |  | $                     | 16.87 |      |  | $ | 16.80  |  

Significant factors affecting SouthFirsts financial condition during the nine
months ended June 30, 2002 are detailed below:

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Assets

Total assets decreased $10,989,000, or 7.3%, from $151,194,000 at September 30,
2001 to $140,205,000 at June 30, 2002. Net loans decreased $10,745,000, or
10.6%, compared to September 30, 2001. This decrease 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 as of
February 28, 2002, and an additional reduction in overall construction loans in
the amount of $1,713,000, as a result of participation loans sold to two other
financial institutions within the state of Alabama. Other decreases are due
to seasonal changes in mortgage loan demand.

Liabilities

Total liabilities decreased approximately $10,438,000, or 7.6%, from
$136,900,000 at September 30, 2001 to $126,473,000 at June 30, 2002. Deposits
decreased approximately $1,100,000 during the period, and borrowed funds
decreased $9,200,000, while accrued expenses and other liabilities decreased
approximately $340,000, compared to September 30, 2001. The decrease in
deposits was primarily attributable to the relatively low interest rate
environment. Many customers with savings deposits have removed these accounts
in search of higher yielding alternatives. The decrease in borrowed funds is
the result of the reduction of Federal Home Loan Bank advances in the amount of
$9,350,000 and a repayment of $3,355,000 on an existing line of credit with
Regions Bank. The repayment of this line of credit was replaced by a new line
of credit with First Commercial Bank in the amount of $2,413,861, of which
$900,000 has been repaid. The decrease in accrued expenses is primarily the
result of fluctuations in accounts payable balances.

Loan Quality

Key to long-term earnings growth is maintenance of a high-quality loan
portfolio. SouthFirsts directive in this regard is carried out through its
policies and procedures for review of loans. The goal and result of these
policies and procedures is to provide a sound basis for new credit extensions
and an early recognition of problem assets to allow the greatest flexibility in
their timely disposition.

At June 30, 2002, the allowance for loan losses was $1,217,264, compared to
$1,577,952 at September 30, 2001. This decrease is due primarily to additional
loan charge-offs of consumer loans, which were offset by a reduction of
approximately $388,000 of the allowance for loan losses (see Provision for
Loan Losses above). Non-performing loans at June 30, 2002 were approximately
$1,322,000, compared to approximately $1,017,000 at September 30, 2001. At
June 30, 2002, and September 30, 2001, the allowance for loan losses
represented 1.33% and 1.52% of average loan balances, respectively. The
allowances for loan losses is based upon managements continuing evaluation of
the collectibility of the loan portfolio under current economic conditions and
includes analysis of underlying collateral value and other factors which could
affect collectibility. Management considers the allowance for loan losses to
be adequate based upon the evaluations of the averages of specific loans,
internal loan rating systems, and guidelines provided by the banking regulatory
authorities governing First Federal.

Interest Rate Sensitivity

Changes in interest rates will not necessarily lead to changes in the net
interest margin. The Companys goal is to minimize volatility in the net
interest margin by taking an active role in managing the level, mix and
maturities of assets and liabilities.

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To reduce the adverse effect of changes in interest rates on its net interest
margin, the Company is pursuing various strategies to improve the rate
sensitivity of its assets and stabilize net interest income.

Liquidity and Funding Sources

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 specific standard or guideline regarding the application of the
current regulatory requirement.

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 June 30, 2002, First Federals average daily balance of liquid assets was
approximately 33% of its March 31, 2002 liquidity base, far exceeding the 4%
requirement set by the previous regulation. These liquid assets included
approximately $2,332,000 in cash and cash equivalents, and approximately
$30,969,000 in other qualifying assets. In addition, as of June 30, 2002, the
fair market value of the Companys investment securities portfolio, which is
held for sale, was $31,602,000. 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 the Companys cash flow needs and continue to provide a relatively stable,
low cost source of funds. As of June 30, 2002, the amount of deposits was
$97,944,000, which amount represented a decrease of $1,112,000 from the amount
of deposits at September 30, 2001.

Other sources of funding used by the Company include commercial lines of credit
and advances from the Federal Home Loan Bank of Atlanta (the FHLBA). As of
June 30, 2002, the Company had a line of credit, based on prime, with First
Commercial Bank in the amount of $2,500,000, which presently is scheduled to
mature on May 24, 2003, and of which $1,514,000 has been borrowed and remains
outstanding at this time. Further, as of April 15, 2002, First Federals
available line of credit from the FHLBA was changed from a variable amount,
equal to 30% of total assets, or approximately $42,000,000
at June 30, 2002, to a fixed amount of $22,000,000. At June 30, 2002,
First Federal owed the FHLBA $22,900,000 in outstanding advances. The FHLBA
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 borrowing by First
Federal (in excess of $22,000,000 in the aggregate) be approved through
application by First Federal to the FHLBAs Credit Committee. SouthFirst and
First Federal currently are in discussions with other financial institutions
with respect to obtaining additional funding sources for the Company.

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Management believes that the Companys significant liquidity and existing
funding sources are more than adequate to ensure sufficient cash flow to
satisfy demand for credit and any deposit withdrawals, to fund operations, and,
otherwise, to meet other Company obligations and commitments on a timely and
cost-effective basis.

Capital Adequacy and Resources

Management is committed to maintaining First Federals capital at a level that
would be sufficient to protect depositors, provide for reasonable growth, and
comply fully with all regulatory requirements. Managements strategy to meet
this commitment is to retain sufficient earnings while providing a reasonable
return on equity.

The Office of Thrift Supervision has issued guidelines identifying minimum
regulatory tangible capital equal to 1.50% of adjusted total assets, a
minimum 4.0% core capital ratio, and a minimum risk-based capital of 8.0% of
risk-weighted assets. First Federal has satisfied its capital
requirements primarily through the retention of earnings.

As of June 30, 2002, First Federal has satisfied all regulatory capital
requirements. First Federals compliance with the current standards is as
follows:

|                   |  |        |            |            |  |            |       |  
|------------------ |  | ------ | ---------- | ---------- |  | ---------- | ----- | -
|                   |  |        |            |            |  | Percent of
|                   |  | Amount |            | Asset Base
|                   |  |        |            |           
|Tangible capital   |  | $      | 13,397,000 |            |  |            | 9.59  | %
|Core capital       |  |        | 13,397,000 |            |  |            | 9.59  | %
|Risk-based capital |  |        | 14,487,000 |            |  |            | 16.62 | %

Cautionary Statement Concerning Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-QSB contain
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,
and are made on the basis of managements plans and current analyses of the
Company, 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, the Companys financial performance
and could cause actual results to differ materially from those expressed or
implied in such forward-looking statements. The Company 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.

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SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1: Legal Proceedings

In the normal course of business, SouthFirst and First Federal from time to
time are involved in legal proceedings. Management believes 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, a description of certain, previously-disclosed
litigation against a former director, and subsequent settlement thereof,
follows:

The Company, in its earnings release on December 4, 2001, announced that First
Federal had filed a complaint to recover the total amount of loss on a loan
made to Vawter Properties and Resources, LP, an Alabama limited partnership
whose general partner is Charles R. Vawter, Jr., a former director of
SouthFirst and First Federal, and personal guarantor of the loan. The Company
previously disclosed the allegations contained in the complaint in its Form
8-K, as filed with the Securities and Exchange Commission on December 14, 2001.

Subsequently, on June 28, 2002, as previously
announced by the Company in its Form 8-K filed with the Securities and
Exchange Commission on July 2, 2002, First Federal entered into a
settlement agreement (the Settlement Agreement) with the parties
against whom the above complaint was filed, including Mr. Vawter
(the
Settling Parties). Under the terms of the Settlement Agreement (a
form of which was filed as an
exhibit to the Companys Form 8-K filed on July 2, 2002), the Settling Parties
collectively will pay the Company approximately $761,000
on or before August 27, 2002 (the Settlement Amount). The Settlement Amount
is secured by four consent judgments, each for $761,000, in favor of First
Federal, executed by four of the five Settling Parties, including Mr. Vawter.
Further, the Settlement Amount is secured by a promissory note in the principal
amount of $761,000, issued by Automatic Gas & Appliance Co., Inc., one of the
Settling Parties, and personally guaranteed by each of the remaining Settling
Parties.

Item 6: Reports on Form 8-K



|(a) |  | Exhibits. The following Exhibit is filed with this report:
|--- |  | ----------------------------------------------------------

| |  |                |  |                                                                                                                        
| |  | -------------- |  | -----------------------------------------------------------------------------------------------------------------------
| |  | Exhibit Number |  | Description                                                                                                            
| |  |                |  |                                                                                                                        
| |  | 99.1           |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.



|(b) |  | Reports on Form 8-K. On July 2, 2002, the Company filed a report on Form
8-K to report, under Item 5 (Other Events), that First Federal had entered
into a Settlement Agreement on June 28, 2002 with Charles R. Vawter, Jr.,
Charles R. Vawter, Sr., Vawter Properties & Resources, LP, Angela H.
Vawter and Automotive Gas & Appliance Co., Inc. A form of the Settlement
Agreement and a related press release were filed with such report as
Exhibit 99.1 and Exhibit 99.2, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.

|                      |  |                            |  |                               
|--------------------- |  | -------------------------- |  | ------------------------------
|                      |  | SOUTHFIRST BANCSHARES, INC |  |                               
|                      |  |                            |  |                               
|Date: August 14, 2002 |  | By:                        |  | /s/ Joe K. McArthur           
|                      |  |                            |  |                               
|                      |  |                            |  | Joe K. McArthur               
|                      |  |                            |  | Chief Executive Officer       
|                      |  |                            |  | (principal executive officer) 
|                      |  |                            |  |                               
|Date: August 14, 2002 |  | By:                        |  | /s/ Janice Browning           
|                      |  |                            |  |                               
|                      |  |                            |  | Janice Browning               
|                      |  |                            |  | Controller, Treasurer         
|                      |  |                            |  | (principal accounting officer)

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INDEX TO EXHIBITS

|             |  |                                                                                                                        
|------------ |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit 99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.