##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

|                            |  |                       
|--------------------------- |  | ----------------------
|For Quarterly Period Ended: |  | Commission File Number
|December 31, 2001           |  | 1-13640               

SOUTHFIRST BANCSHARES, INC.




(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 63-1121255                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
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 o

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 |  | 815,794 shares                 
|                                       |  |                                
|Class                                  |  | Outstanding at February 7, 2002





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TABLE OF CONTENTS



|                                                                                              |                                                                                                                     |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART 1: FINANCIAL INFORMATION                                                                
|Item 1: Financial Statements                                                                 
|                                                                                              | Consolidated Statements of Financial Condition December 31, 2001 (Unaudited) and September 30, 2001                
|                                                                                              | Consolidated Statements of Operations (Unaudited) for the Three Months Ended December 31, 2001 and 2000            
|                                                                                              | Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the Three Months Ended December 31, 2001
|                                                                                              | Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended December 31, 2001 and 2000            
|                                                                                              | Notes to Consolidated Financial Statements (Unaudited)                                                             
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II. OTHER INFORMATION                                                                   
|Item 1: Legal Proceedings                                                                    
|Item 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|Stock Option Agreement for Sandra H. Stephens                                                



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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.

TABLE OF CONTENTS

|                                                                                              |                                                                                                                     |  |      |     | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                              |                                                                                                                     |  | Page
|                                                                                              |                                                                                                                     |  |     
|PART I  FINANCIAL INFORMATION                                                                |                                                                                                                     |  |      |    
|Item 1: Financial Statements (unaudited)                                                      |                                                                                                                     |  | 1    |    
|                                                                                              | Consolidated Statements of Financial Condition at December 31, 2001 (Unaudited)
and September 30, 2001              |  |      | 1   | 
|                                                                                              | Consolidated Statements of Operations (Unaudited) for the Three Months Ended
December 31, 2001 and 2000             |  |      | 2   | 
|                                                                                              | Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the
Three Months Ended December 31, 2001 |  |      | 3   | 
|                                                                                              | Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended
December 31, 2001 and 2000             |  |      | 4   | 
|                                                                                              | Notes to Consolidated Financial Statements (Unaudited)                                                              |  |      | 5-6 | 
|Item 2: Managements Discussion and Analysis of Financial Condition and Results
of Operations |                                                                                                                     |  | 7-11 |    
|PART II  OTHER INFORMATION                                                                   |                                                                                                                     |  | 12   |    
|Item 1: Legal Proceedings                                                                     |                                                                                                                     |  | 12   |    
|Item 6: Exhibits and Reports on Form 8-K                                                      |                                                                                                                     |  | 12   |    
|SIGNATURES                                                                                    |                                                                                                                     |  | 13   |    





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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




PART 1:  FINANCIAL INFORMATION




Item 1:  Financial Statements




Consolidated Statements of Financial Condition
December 31, 2001 (Unaudited) and September 30, 2001

|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |               |            |             |            | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------ | ------------------------------------ | ---------- | ------------ | ----------- | ------------- | ---------- | ----------- | ---------- | 
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            | December 31, |             | September 30,
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            | 2001         |             | 2001         
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            | (Unaudited)  |             |               |            |            
|                                                            |                                                                                                                                                                                                                  |                      |                                            | Assets                               |            |              |             |               |            |             |            | 
|Cash and cash equivalents                                   |                                                                                                                                                                                                                  | $                    | 5,238,165                                  |                                      |            | $            | 6,020,186   |              
|Interest-bearing deposits in other financial institutions   |                                                                                                                                                                                                                  |                      | 1,162,533                                  |                                      |            |              | 898,533     |              
|Investment securities available-for-sale, at fair value     |                                                                                                                                                                                                                  |                      | 31,868,344                                 |                                      |            |              | 33,052,826  |              
|Loans receivable                                            |                                                                                                                                                                                                                  |                      | 102,848,051                                |                                      |            |              | 102,713,340 |              
|Less allowance for loan losses                              |                                                                                                                                                                                                                  |                      | (1,587,638                                 | )                                    |            |              | (1,577,952  | )            
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Net loans                                                                                                                                                                                                        |                      |                                            | 101,260,413                          |            |              |             | 101,135,388   |           
|Loans held for sale at cost (which approximates fair value) |                                                                                                                                                                                                                  |                      | 167,300                                    |                                      |            |              | 272,350     |              
|Foreclosed real estate, net                                 |                                                                                                                                                                                                                  |                      | 251,183                                    |                                      |            |              | 251,183     |              
|Other repossessed assets                                    |                                                                                                                                                                                                                  |                      | 700                                        |                                      |            |              | 6,700       |              
|Premises and equipment, net                                 |                                                                                                                                                                                                                  |                      | 4,834,191                                  |                                      |            |              | 4,765,878   |              
|Federal Home Loan Bank stock, at cost                       |                                                                                                                                                                                                                  |                      | 2,229,800                                  |                                      |            |              | 2,229,800   |              
|Accrued interest receivable                                 |                                                                                                                                                                                                                  |                      | 786,819                                    |                                      |            |              | 960,225     |              
|Other assets                                                |                                                                                                                                                                                                                  |                      | 2,468,894                                  |                                      |            |              | 1,601,146   |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Total Assets                                                                                                                                                                                                     |                      | $                                          | 150,268,342                          |            |              | $           | 151,194,215   |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            | Liabilities And Stockholders Equity |            |              |             |               |            |             |            | 
|Liabilities:                                                |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Deposits:                                                                                                                                                                                                        |                      |                                            |                                      |            |              |             |               |           
|                                                            |                                                                                                                                                                                                                  | Non-interest bearing |                                            | $                                    | 3,435,718  |              |             | $             | 3,349,326  |            
|                                                            |                                                                                                                                                                                                                  | Interest bearing     |                                            |                                      | 96,740,809 |              |             |               | 95,706,254 |            
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            | Total deposits                       |            |              | 100,176,527 |               |            |             | 99,055,580 | 
|                                                            | Advances by borrowers for property taxes and insurance                                                                                                                                                           |                      |                                            | 180,255                              |            |              |             | 404,515       |           
|                                                            | Accrued interest payable                                                                                                                                                                                         |                      |                                            | 1,214,162                            |            |              |             | 1,328,183     |           
|                                                            | Borrowed funds                                                                                                                                                                                                   |                      |                                            | 34,505,000                           |            |              |             | 35,605,000    |           
|                                                            | Accrued expenses and other liabilities                                                                                                                                                                           |                      |                                            | 128,768                              |            |              |             | 518,398       |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      | Total liabilities                          |                                      |            | 136,204,712  |             |               |            | 136,911,676 |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|Stockholders Equity:                                       |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            | Common stock, $.01 par value, 2,000,000 shares authorized, 989,868 shares
issued and 849,024 shares outstanding at December 31, 2001; 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 (129,874 shares at December 31, 2001; 116,018
shares at September 30, 2001)                                                                                                              |                      |                                            | (1,808,439                           | )          |              |             | (1,648,439    | )         
|                                                            | Deferred compensation on common stock employee benefit plans                                                                                                                                                     |                      |                                            | (379,716                             | )          |              |             | (383,442      | )         
|                                                            | Shares held in trust at cost (9,775 shares at December 31, 2001; 11,525
shares at September 30, 2001)                                                                                                            |                      |                                            | (107,161                             | )          |              |             | (126,411      | )         
|                                                            | Retained earnings                                                                                                                                                                                                |                      |                                            | 6,208,247                            |            |              |             | 6,249,938     |           
|                                                            | Accumulated comprehensive other income                                                                                                                                                                           |                      |                                            | 326,435                              |            |              |             | 366,629       |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      | Total stockholders equity                 |                                      |            | 14,063,630   |             |               |            | 14,282,539  |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              
|                                                            |                                                                                                                                                                                                                  |                      | Total Liabilities and Stockholders Equity |                                      | $          | 150,268,342  |             |               | $          | 151,194,215 |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                                      |            |              |             |              

See accompanying notes to consolidated financial statements.

1



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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Operations (Unaudited)
for the Three Months Ended December 31, 2001 and 2000

|                                     |                                                                 |                                                     |                                    |           |           |           |         |           |           |           | 
|------------------------------------ | --------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------- | --------- | --------- | --------- | ------- | --------- | --------- | --------- | 
|                                     |                                                                 |                                                     |                                    |           | 2001      |           | 2000   
|                                     |                                                                 |                                                     |                                    |           |           |           |        
|Interest and dividend income:        |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     | Interest and fees on loans                                      |                                                     | $                                  | 1,897,638 |           |           | $       | 2,328,269 |          
|                                     | Interest income on deposits in other financial institutions     |                                                     |                                    | 23,460    |           |           |         | 53,715    |          
|                                     | Interest and dividend income on investment securities           |                                                     |                                    | 400,286   |           |           |         | 607,561   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     |                                                                 |                                                     | Total interest and dividend income |           |           | 2,321,384 |         |           |           | 2,989,545 | 
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|Interest expense:                    |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     | Interest on deposits                                            |                                                     |                                    | 1,041,336 |           |           |         | 1,299,462 |          
|                                     | Interest on borrowed funds                                      |                                                     |                                    | 354,030   |           |           |         | 621,490   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     |                                                                 | Total interest expense                              |                                    |           | 1,395,366 |           |         |           | 1,920,952 |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     |                                                                 | Net interest income                                 |                                    |           | 926,018   |           |         |           | 1,068,593 |          
|Provision for loan losses            |                                                                 |                                                     |                                   |           |           |           |        |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     |                                                                 | Net interest income after provision for loan losses |                                    |           | 926,018   |           |         |           | 1,068,593 |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|Other income:                        |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     | Service charges and other fees                                  |                                                     |                                    | 118,757   |           |           |         | 104,195   |          
|                                     | Employee benefit trust and consulting fees                      |                                                     |                                    | 297,361   |           |           |         | 292,045   |          
|                                     | Gain on sale of loans                                           |                                                     |                                    | 128,388   |           |           |         | 75,703    |          
|                                     | Gain (loss) on sale of foreclosed real estate                   |                                                     |                                    |          |           |           |         | 2,136     |          
|                                     | Gain (loss) on sale of equipment                                |                                                     |                                    | 361       |           |           |         |          |          
|                                     | Gain (loss) on sale of investment securities available-for-sale |                                                     |                                    |          |           |           |         | 859       |          
|                                     | Other                                                           |                                                     |                                    | 76,421    |           |           |         | 91,434    |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     |                                                                 | Total other income                                  |                                    |           | 621,288   |           |         |           | 566,372   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|Other expenses:                      |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     | Compensation and benefits                                       |                                                     |                                    | 810,949   |           |           |         | 768,972   |          
|                                     | Net occupancy expense                                           |                                                     |                                    | 83,437    |           |           |         | 87,896    |          
|                                     | Furniture and fixtures                                          |                                                     |                                    | 111,829   |           |           |         | 111,215   |          
|                                     | Data processing                                                 |                                                     |                                    | 86,718    |           |           |         | 75,828    |          
|                                     | Office supplies and expense                                     |                                                     |                                    | 98,136    |           |           |         | 108,110   |          
|                                     | Deposit insurance premiums                                      |                                                     |                                    | 15,587    |           |           |         | 16,435    |          
|                                     | Goodwill amortization                                           |                                                     |                                    | 13,487    |           |           |         | 13,487    |          
|                                     | Legal                                                           |                                                     |                                    | 45,300    |           |           |         | 46,800    |          
|                                     | Other                                                           |                                                     |                                    | 122,890   |           |           |         | 114,705   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     |                                                                 | Total other expenses                                |                                    |           | 1,388,333 |           |         |           | 1,343,448 |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     |                                                                 | Income before income taxes                          |                                    |           | 158,973   |           |         |           | 291,517   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|Income tax expense                   |                                                                 |                                                     | 62,977                             |           |           |           | 113,341 |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     |                                                                 | Net income                                          |                                    | $         | 95,996    |           |         | $         | 178,176   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |         |          
|Earnings per share:                  |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     | Basic                                                           |                                                     |                                    | 0.11      |           |           |         | 0.20      |          
|                                     | Diluted                                                         |                                                     |                                    | 0.11      |           |           |         | 0.20      |          
|Cash dividends declared              |                                                                 |                                                     | 0.15                               |           |           |           | 0.15    |          
|Weighted average shares outstanding: |                                                                 |                                                     |                                    |           |           |           |         |          
|                                     | Basic                                                           |                                                     |                                    | 858,647   |           |           |         | 910,102   |          
|                                     | Diluted                                                         |                                                     |                                    | 859,869   |           |           |         | 910,102   |          

See accompanying notes to consolidated financial statements.

2



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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Changes in Stockholders Equity (Unaudited)
for the Three Months Ended December 31, 2001

|                                                                                                                                          |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   |           |        |  |   |         |   |  |   |            |        | 
|----------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | - | ----------- |  | ------------------------ | - | ------------- |  | -------------------------------------------------------- | - | ------------------ | - | ---------------- | - | ------------------------------------- | - | ------------------------ | - | -------- | - |  | - | --------- | ------ |  | - | ------- | - |  | - | ---------- | ------ | 
|                                                                                                                                          |                            |   | CommonStock |  | AdditionalPaid-inCapital |   | TreasuryStock |  | DeferredCompensation
on CommonStockEmployeeBenefit Plans |   | SharesHeld inTrust |   | RetainedEarnings |   | AccumulatedComprehensive
Other Income |   | TotalStockholders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                 |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   |           | 95,996 |  |   |         |   |  |   |            | 95,996 | 
|Change in net unrealized
gain (loss) on available-
for-sale securities, net
of
reclassification adjust-
ments and income taxes
of $24,634 |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   |           |        |  |   | (40,194 | ) |  |   | (40,194    | )     
|                                                                                                                                          |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   |           |        |  |   |         |   |  |   |            |       
|                                                                                                                                          | Total comprehensive
income |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   |           |        |  |   |         |   |  |   |            | 55,802 | 
|                                                                                                                                          |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   |           |        |  |   |         |   |  |   |            |       
|Issuance of management
recognition plan shares                                                                                            |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   | (19,250                               | ) |                          |   | 19,250   |   |  |   |           |        |  |   |         |   |  |   |            |       
|Vesting of deferred
compensation shares                                                                                                   |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   | 22,976                                |   |                          |   |          |   |  |   |           |        |  |   |         |   |  |   | 22,976     |       
|Acquisition of Treasury
stock                                                                                                             |                            |   |             |  |                          |   |               |  |                                                          |   | (160,000           | ) |                  |   |                                       |   |                          |   |          |   |  |   |           |        |  |   |         |   |  |   | (160,000   | )     
|Cash dividends declared                                                                                                                   |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   | (137,687  | )      |  |   |         |   |  |   | (137,687   | )     
|                                                                                                                                          |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   |           |        |  |   |         |   |  |   |            |       
|Balance at December 31, 2001                                                                                                              |                            | $ | 9,996       |  |                          | $ | 9,814,268     |  |                                                          | $ | (1,808,439         | ) |                  | $ | (379,716                              | ) |                          | $ | (107,161 | ) |  | $ | 6,208,247 |        |  | $ | 326,435 |   |  | $ | 14,063,630 |       
|                                                                                                                                          |                            |   |             |  |                          |   |               |  |                                                          |   |                    |   |                  |   |                                       |   |                          |   |          |   |  |   |           |        |  |   |         |   |  |   |            |       

See accompanying notes to consolidated financial statements.

3



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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended December 31, 2001 and 2000

|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |             |            |            |         | 
|-------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------ | ---------- | -------- | --------- | ----------- | ---------- | ---------- | ------- | 
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            | 2001     |           | 2000       
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|Operating activities:                              |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|                                                   | Net income                                                                        |                                                                         | $                                          | 95,996                                           |            |          | $         | 178,176     |           
|                                                   | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                         |                                            |                                                  |            |          |           |             |           
|                                                   |                                                                                   | Depreciation and amortization                                           |                                            |                                                  | 80,932     |          |           |             | 99,396     |           
|                                                   |                                                                                   | Gain on sale of securities                                              |                                            |                                                  |           |          |           |             | (859       | )         
|                                                   |                                                                                   | Gain on sale of loans                                                   |                                            |                                                  | (128,388   | )        |           |             | (75,703    | )         
|                                                   |                                                                                   | Decrease in deferred loan origination fees                              |                                            |                                                  | (18,684    | )        |           |             | 15,729     |           
|                                                   |                                                                                   | Net amortization of premium on investment securities available-for-sale |                                            |                                                  | 6,733      |          |           |             | (98,310    | )         
|                                                   |                                                                                   | Gain on sale of foreclosed assets                                       |                                            |                                                  |           |          |           |             | (2,136     | )         
|                                                   |                                                                                   | Gain on sale of premises and equipment                                  |                                            |                                                  | (361       | )        |           |             |           |           
|                                                   |                                                                                   | Loans originated for sale                                               |                                            |                                                  | (5,013,962 | )        |           |             | (3,247,853 | )         
|                                                   |                                                                                   | Proceeds from sale of loans                                             |                                            |                                                  | 5,247,400  |          |           |             | 3,473,218  |           
|                                                   |                                                                                   | (Increase) decrease in accrued interest receivable                      |                                            |                                                  | 173,406    |          |           |             | 160,308    |           
|                                                   |                                                                                   | Increase (decrease) in other assets                                     |                                            |                                                  | (867,748   | )        |           |             | 64,134     |           
|                                                   |                                                                                   | Deferred compensation expense                                           |                                            |                                                  | 22,976     |          |           |             | 28,626     |           
|                                                   |                                                                                   | Increase (decrease) in accrued interest payable                         |                                            |                                                  | (114,021   | )        |           |             | 192,548    |           
|                                                   |                                                                                   | Increase (decrease) in accrued expenses and other liabilities           |                                            |                                                  | (364,996   | )        |           |             | (191,531   | )         
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|                                                   |                                                                                   |                                                                         |                                            | Net cash provided (used) by operating activities |            |          | (880,717  | )           |            |            | 595,743 | 
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|Investing activities:                              |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|                                                   | Net change in interest-bearing deposits in other financial institutions           |                                                                         |                                            | (264,000                                         | )          |          |           | 915,463     |           
|                                                   | Proceeds from calls and maturities of investment securities available-for-sale    |                                                                         |                                            | 1,112,921                                        |            |          |           | 511,245     |           
|                                                   | Purchase of investment securities available-for-sale                              |                                                                         |                                            |                                                 |            |          |           | (770,000    | )         
|                                                   | Proceeds from sale of investments available-for-sale                              |                                                                         |                                            |                                                 |            |          |           | 2,912,387   |           
|                                                   | Net (increase) decrease in loans                                                  |                                                                         |                                            | (106,341                                         | )          |          |           | 3,603,531   |           
|                                                   | Purchase of premises and equipment                                                |                                                                         |                                            | (149,084                                         | )          |          |           | (75,777     | )         
|                                                   | Proceeds from sale of foreclosed real estate                                      |                                                                         |                                            |                                                 |            |          |           | 114,624     |           
|                                                   | Proceeds from sale of other assets                                                |                                                                         |                                            | 6,200                                            |            |          |           |            |           
|                                                   | Transfer from loans of real estate owned property                                 |                                                                         |                                            |                                                 |            |          |           | (575,670    | )         
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|                                                   |                                                                                   |                                                                         | Net cash provided by investment activities |                                                  |            | 599,696  |           |             |            | 6,635,803  |        
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|Financing activities:                              |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|                                                   | Increase (decrease) in deposits                                                   |                                                                         |                                            | 1,120,947                                        |            |          |           | (1,556,923  | )         
|                                                   | Proceeds from borrowed funds                                                      |                                                                         |                                            | 5,000,000                                        |            |          |           | 8,000,000   |           
|                                                   | Repayment of borrowed funds                                                       |                                                                         |                                            | (6,100,000                                       | )          |          |           | (10,000,000 | )         
|                                                   | Cash dividends paid                                                               |                                                                         |                                            | (137,687                                         | )          |          |           | (139,362    | )         
|                                                   | Acquisition of Treasury shares                                                    |                                                                         |                                            | (160,000                                         | )          |          |           |            |           
|                                                   | Decrease in advances by borrowers for property taxes and insurance                |                                                                         |                                            | (224,260                                         | )          |          |           | (73,106     | )         
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|                                                   |                                                                                   |                                                                         | Net cash used in financing activities      |                                                  |            | (501,000 | )         |             |            | (3,769,391 | )      
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|Increase (decrease) in cash and cash equivalents   |                                                                                   |                                                                         | (782,021                                   | )                                                |            |          | 3,462,155 |            
|Cash and cash equivalents at beginning of period   |                                                                                   |                                                                         | 6,020,186                                  |                                                  |            |          | 4,667,295 |            
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|Cash and cash equivalents at end of period         |                                                                                   | $                                                                       | 5,238,165                                  |                                                  |            | $        | 8,129,450 |            
|                                                   |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|Supplemental information on cash payments:         |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|                                                   | Interest paid                                                                     |                                                                         | $                                          | 1,509,387                                        |            |          | $         | 1,852,776   |           
|                                                   | Income taxes paid                                                                 |                                                                         |                                            | 129,985                                          |            |          |           | 214,050     |           
|Supplemental information on non-cash transactions: |                                                                                   |                                                                         |                                            |                                                  |            |          |           |            
|                                                   | Change in net unrealized gain on investment securities available-for-sale         |                                                                         | $                                          | (40,194                                          | )          |          | $         | 477,678     |           
|                                                   | Real estate obtained through foreclosure                                          |                                                                         |                                            |                                                 |            |          |           | 575,670     |           

See accompanying notes to consolidated financial statements.

4



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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Notes to Consolidated Financial Statements (Unaudited)
December 31, 2001 and 2000

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Information filed on this Form 10-QSB as of and for the quarter ended
December 31, 2001, 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-month periods ended December 31, 2001 and 2000. The results
contained in these statements 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. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
|   
|    |  | In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | SFAS Nos. 142, 143 and 144 are required to be adopted October 1, 2002, with
earlier application permitted. The impact of adopting these standards on
the financial condition of the Company has not been determined at this
time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 included
under Exhibit 99.1 of the Annual Report on Form 10-KSB. The following
table presents financial information for each reportable segment:                                                                                                                                                                                                                                                                                                            

|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|--------------------------------------------------- |  | ------------------------------------ | --------- | ------------------------------------ |  | -------- | ------- | ---------- |  | ---------- | --------- | -------- |  | - | --------- | -------- |  | - | ------- |  |  | - | --------- | 
|                                                    |  | Three Months Ended December 31, 2001 |           | Three Months Ended December 31, 2000
|                                                    |  |                                      |           |                                     
|                                                    |  |                                      |           |                                      |  | Employee |         |            |  |            |           |          |  |   |           | Employee |  |   |         | 
|                                                    |  | Banking                              |           | Benefits                             |  |          |         |            |  | Banking    |           | Benefits |  |   |           |         
|                                                    |  | Activities                           |           | Activities                           |  | Total    |         | Activities |  | Activities |           | Total   
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |         
|Interest and dividend
income                        |  | $                                    | 2,312,158 |                                      |  | $        | 9,226   |            |  | $          | 2,321,384 |          |  | $ | 2,977,998 |          |  | $ | 11,547  |  |  | $ | 2,989,545 | 
|Interest expenses                                   |  |                                      | 1,395,366 |                                      |  |          |        |            |  |            | 1,395,366 |          |  |   | 1,920,952 |          |  |   |        |  |  |   | 1,920,952 | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net interest income                                 |  |                                      | 916,792   |                                      |  |          | 9,226   |            |  |            | 926,018   |          |  |   | 1,057,046 |          |  |   | 11,547  |  |  |   | 1,068,593 | 
|Provision for loan losses                           |  |                                      |          |                                      |  |          |        |            |  |            |          |          |  |   |          |          |  |   |        |  |  |   |          | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net interest income after
provision for loan losses |  |                                      | 916,792   |                                      |  |          | 9,226   |            |  |            | 926,018   |          |  |   | 1,057,046 |          |  |   | 11,547  |  |  |   | 1,068,593 | 
|Other income                                        |  |                                      | 320,927   |                                      |  |          | 300,361 |            |  |            | 621,288   |          |  |   | 271,327   |          |  |   | 295,045 |  |  |   | 566,372   | 
|Other expenses                                      |  |                                      | 1,124,891 |                                      |  |          | 263,442 |            |  |            | 1,388,333 |          |  |   | 1,097,729 |          |  |   | 245,719 |  |  |   | 1,343,448 | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Income before income taxes                          |  |                                      | 112,828   |                                      |  |          | 46,145  |            |  |            | 158,973   |          |  |   | 230,644   |          |  |   | 60,873  |  |  |   | 291,517   | 
|Income taxes                                        |  |                                      | 45,382    |                                      |  |          | 17,595  |            |  |            | 62,977    |          |  |   | 90,149    |          |  |   | 23,192  |  |  |   | 113,341   | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net income                                          |  | $                                    | 67,446    |                                      |  | $        | 28,550  |            |  | $          | 95,996    |          |  | $ | 140,495   |          |  | $ | 37,681  |  |  | $ | 178,176   | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | There have been no differences 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) |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | On January 16, 2002, the Company declared a regular dividend of $0.15 per
share, payable on February 15, 2002 to stockholders of record on February
1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | On January 7, 2002, the Board of Directors of SouthFirst
Bancshares, Inc. approved a stock repurchase program authorizing the
Company to repurchase up to 85,000 shares, or 10 percent (10%), of
its outstanding common stock. The repurchases will be made from time
to time, in the open market or through negotiated transactions, at
the discretion of the management of the Company. The timing of the
repurchases will depend on market conditions and corporate
requirements. The Company intends to hold the repurchased common
shares as treasury shares.

-6-



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##### Table of Contents






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

REVIEW OF RESULTS OF OPERATIONS

Overview

Net income for the first quarter of fiscal 2002, which ended December 31, 2001,
decreased $82,180 or 46.1% to $95,996 when compared to the same period in
fiscal 2001. Net interest income decreased $142,575 or 13.3% for the
three-month period ended December 31, 2001, compared to the same period in
fiscal 2001. Non-interest income increased $54,916 or 9.7% for the three-month
period ended December 31, 2001, compared to the same period in fiscal 2001,
while non-interest expenses increased $44,885 or 3.3%.

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, the difference between
the interest rates on interest-earning assets and interest-bearing liabilities.

As of December 31, 2001, the interest rate spread decreased 22 basis points as
rates earned on interest-earning assets decreased 150 basis points to 6.70%
while the cost of funds decreased 128 basis points to 4.24%. The decrease in
rates paid and the decrease in rates received during this three-month interval
reflects the downward trend in the repricing of higher yielding certificates of
deposit, as well as a downward trend of the overall interest rate environment.
While the cost of funds has been steadily decreasing over the past several
months, interest rates on consumer loans, construction loans and mortgages have
also decreased. The average balance of interest-earning assets decreased $7.2
million, or 4.9% from 145.8 million to $138.6 million while the average balance
of interest-bearing liabilities decreased $7.5 million, or 5.4% from $139.1
million to $131.6 million. The combined effect of the decreases in average
balances and the changes in rates discussed above resulted in a decrease in net
interest income of approximately $143,000, or 13.3%, and a decrease in the
interest rate spread from 2.68% to 2.46% for the three months ended December
31, 2001, as compared to the three months ended December 31, 2000.

Other Income

Total other income for the three months ended
December 31, 2001, increased approximately $55,000 to $621,000
compared to $566,000 for the three months ended December 31,
2000. A portion of the increase in total non-interest income was
attributable to an increase of approximately $5,000 in employee
benefit trust and consulting fees and an increase of approximately
$53,000 in gains on sales of loans during the first three months of
fiscal 2002. Service charges and other fees increased approximately
$15,000, while other income decreased by approximately $15,000
compared to the three months ended December 31, 2000.

Other Expense

Total other expense for the three months ended
December 31, 2001, increased by approximately $45,000 to $1,388,000
as compared to $1,343,000 for the three months ended December 31, 2000.
Most of the increase is due to increases in compensation and benefits
in the amount of $42,000, data processing in the amount of $11,000,
and other non-interest expenses in the amount of $8,000, while office
supplies and expenses decreased by approximately $10,000.

-7-



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##### Table of Contents



Income Taxes

The Companys effective tax rate for the three-month periods ended December 31,
2001 and 2000 was 39.6% and 38.8%, respectively, compared to the federal
statutory rate of 34.0%. SouthFirsts effective tax rate was higher than the
statutory rate due primarily to state income taxes. Income tax expense
decreased approximately $50,000 or 44.4%, to $63,000 for the three months ended
December 31, 2001, as compared to $113,300 for the three months ended December
31, 2000, 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 December 31,
|                                                          |  |                          
|                                                          |  | 2001                      |       | 2000
|                                                          |  |                           |       |     
|Return on assets                                          |  |                           | 0.25  | %    |  |   | 0.45   | % 
|Return on equity                                          |  |                           | 2.68  | %    |  |   | 4.72   | % 
|Equity-to-assets ratio                                    |  |                           | 9.49  | %    |  |   | 9.68   | % 
|Interest rate spread                                      |  |                           | 2.46  | %    |  |   | 2.68   | % 
|Net interest margin                                       |  |                           | 2.67  | %    |  |   | 2.93   | % 
|Total risk-based capital ratio                            |  |                           | 15.96 | %    |  |   | 16.76  | % 
|Non-performing loans to loans                             |  |                           | 1.58  | %    |  |   | 0.37   | % 
|Allowance for loan losses to loans                        |  |                           | 1.54  | %    |  |   | 0.69   | % 
|Allowance for loan losses to average non-performing loans |  |                           | 97.34 | %    |  |   | 183.22 | % 
|Ratio of net charge-offs to average loans outstanding     |  |                           | (0.01 | )%   |  |   | (0.03  | )%
|Book value per common share outstanding                   |  | $                         | 16.87 |      |  | $ | 16.80  |   

Significant factors affecting the SouthFirsts financial condition during the
three months ended December 31, 2001 are detailed below:

Assets

Total assets decreased approximately $926,000, or 0.6% from $151,194,000 at
September 30, 2001, to $150,268,000 at December 31, 2001. Net loans increased
approximately $125,000 compared to September 30, 2001, primarily due to
seasonal fluctuations. Investment securities available for sale decreased
$1,184,000 or 3.6%.

-8-



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##### Table of Contents



Liabilities

Total liabilities decreased approximately $707,000, or 0.5%, from $136,912,000
at September 30, 2001, to $136,205,000 at December 31, 2001. Deposits
increased approximately $1,121,000 during the period, borrowed funds decreased
$1,100,000, while accrued expenses and other liabilities decreased
approximately $390,000 compared to September 30, 2001. The increase in
deposits was attributable to an increase in checking and savings account
balances of approximately $1.2 million, and a decline in certificates of
deposits of approximately $.1 million. While the increase in checking account
balances is reflective of monthly fluctuations and seasonal trends, the decline
in certificates of deposit reflects a continued trend of funds going into
higher yielding investments.

Loan Quality

A major 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 most flexibility in
their timely disposition.

At December 31, 2001, the allowance for loan losses was $1,587,638 as compared
to $1,577,952 at September 30, 2001. The increase is primarily due to
recoveries of loans which had been previously charged off. SouthFirst recorded
provisions for loan losses of $-0- and $-0- in the three month periods ended
December 31, 2001, and 2000, respectively. Nonperforming loans at December 31,
2001 were approximately $1,631,000 as compared to approximately $1,017,000 at
September 30, 2001. At December 31, 2001, and September 30, 2001, the
allowance for loan losses represented 1.54% 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.

Liquidity

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

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

-9-



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##### Table of Contents



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

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

Interest Rate Sensitivity

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

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.

Capital Adequacy and Resources

Management is committed to maintaining First Federals capital at a level
sufficient to protect depositors, provide for reasonable growth, and fully
comply with all regulatory requirements. Managements strategy to achieve this
goal 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 the majority of its capital
requirements through the retention of earnings.

As of December 31, 2001, 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   |  | $      | 14,056,000 |            |  |            | 9.44  | %
|Core capital       |  |        | 14,056,000 |            |  |            | 9.44  | %
|Risk-based capital |  |        | 14,909,000 |            |  |            | 15.96 | %

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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 follows:

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




Item 6: Exhibits and Reports on Form 8-K



|(a) |  | Exhibits. The Following Exhibits are filed with this report.
|--- |  | ------------------------------------------------------------

|               |  |                                              
|-------------- |  | ---------------------------------------------
|Exhibit Number |  | Description                                  
|               |  |                                              
|10.16          |  | Stock Option Agreement for Sandra H. Stephens



|(b) |  | Reports on Form 8-K. On
December 14, 2001, the Company filed a report on Form 8-K to report,
under Item 5 (Other Events), a press release regarding an unexpected
loss, circumstances to which the loss were attributable, and a
related lawsuit filed against a former director. The press release
and accompanying financial statements 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 thereunto duly authorized.

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

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INDEX TO EXHIBITS

|              |  |                                              
|------------- |  | ---------------------------------------------
|Exhibit 10.16 |  | Stock Option Agreement for Sandra H. Stephens

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