##### Table of Contents



UNITED STATES
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, 2002           |  | 1-13640               

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

|                                                                                   |  |                    
|---------------------------------------------------------------------------------- |  | -------------------
|Delaware                                                                           |  | 63-1121255         
|                                                                                  
|(State or other jurisdiction of                                                    |  | (I.R.S. Employer   
|incorporation or organization)                                                     |  | Identification No.)
|                                                                                  
|126 North Norton Avenue, Sylacauga, Alabama                                        |  | 35150              
|                                                                                  
|(Address of principal executive offices)                                           |  | (Zip Code)         
|                                                                                  
|                                                                                  
|Registrants telephone number, including area code:                                |  | 256-245-4365       
|                                                                                  
|                                                                                  
|Not applicable                                                                     |  |                    
|                                                                                  
|(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

Yes [X]            No [  ]

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

|                                       |  |                                 
|-------------------------------------- |  | --------------------------------
|Common Stock, par value $.01 per share |  | 743,294 shares                  
|                                       |  |                                 
|Class                                  |  | Outstanding at February 10, 2003

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





---

TABLE OF CONTENTS



|                                                                                              |                                                                                                                          |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART 1: FINANCIAL INFORMATION                                                                
|Item 1: Financial Statements                                                                 
|                                                                                              | Consolidated Statements of Financial Condition                      December 31, 2002 (Unaudited) and September 30, 2002
|                                                                                              | Consolidated Statements of Operations (Unaudited) for the Three Months Ended December 31, 2002 and 2001                 
|                                                                                              | Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the Three Months Ended December 31, 2002     
|                                                                                              | Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended December 31, 2002 and 2001                 
|                                                                                              | Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended December 31, 2002 and 2001                 
|                                                                                              | Notes to Consolidated Financial Statements (Unaudited) December 31, 2002 and 2001                                       
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 3: Controls and Procedures                                                              
|PART II. OTHER INFORMATION                                                                   
|Item 1: Legal Proceedings                                                                    
|Item 5: Other Information                                                                    
|Item 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|CERTIFICATION                                                                                
|CERTIFICATION                                                                                
|EX-3.4 AMENDMENT TO ARTICLE V                                                                
|EX-10.1 EMPLOYMENT AGREEMENT, JOE K. MCARTHUR                                                
|EX-10.2 EMPLOYMENT AGREEMENT, JOE K. MCARTHUR                                                
|EX-10.3 EMPLOYMENT AGREEMENT, SANDRA H. STEPHENS                                             
|EX-10.4 EMPLOYMENT AGREEMENT,J. MALCOMB MASSEY                                               
|EX-10.6 EMPLOYMENT AGREEMENT, RUTH M. ROPER                                                  
|EX-10.27 DIRECTOR SUPPLEMENTAL RETIREMENT PLAN                                               
|EX-99.1 SECTION 906 CERTIFICATION OF CEO AND CFO                                             



---



##### 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, 2002 (Unaudited)
and September 30, 2002              |  |       | 1   | 
|                                                                                              | Consolidated Statements of Operations (Unaudited) for the Three Months Ended
December 31, 2002 and 2001             |  |       | 2   | 
|                                                                                              | Consolidated Statements of Changes in Stockholders Equity (Unaudited) for the
Three Months Ended December 31, 2002 |  |       | 3   | 
|                                                                                              | Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended
December 31, 2002 and 2001             |  |       | 4-5 | 
|                                                                                              | Notes to Consolidated Financial Statements (Unaudited)  December 31, 2002 and 2001                                 |  |       | 6-8 | 
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                     |  | 8-12  |    
|Item 3: Controls and Procedures                                                               |                                                                                                                     |  | 12    |    
|PART II  OTHER INFORMATION                                                                   |                                                                                                                     |  | 13    |    
|Item 1: Legal Proceedings                                                                     |                                                                                                                     |  | 13    |    
|Item 5: Other Information                                                                     |                                                                                                                     |  | 13    |    
|Item 6: Exhibits and Reports on Form 8-K                                                      |                                                                                                                     |  | 13-14 |    
|SIGNATURES                                                                                    |                                                                                                                     |  | 14    |    
|CERTIFICATIONS                                                                                |                                                                                                                     |  | 15-16 |    





---



##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




PART 1: FINANCIAL INFORMATION




Item 1: Financial Statements




Consolidated Statements of Financial Condition
December 31, 2002 (Unaudited) and September 30, 2002

|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |               |            |             |            | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------ | -------------- | ---------- | ------------ | ---------- | ------------- | ---------- | ----------- | ---------- | 
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            | December 30, |            | September 30,
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            | 2002         |            | 2002         
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            | (Unaudited)  |            |               |            |            
|Assets                                                      |                                                                                                                                                                                                                  |                      |                                            |                |            |              |           
|Cash and cash equivalents                                   |                                                                                                                                                                                                                  | $                    | 5,963,823                                  |                |            | $            | 8,122,898  |              
|Interest-bearing deposits in other financial institutions   |                                                                                                                                                                                                                  |                      | 875,083                                    |                |            |              | 883,262    |              
|Investment securities available-for-sale, at fair value     |                                                                                                                                                                                                                  |                      | 26,261,807                                 |                |            |              | 26,768,039 |              
|Loans receivable                                            |                                                                                                                                                                                                                  |                      | 92,204,969                                 |                |            |              | 93,838,835 |              
|Less allowance for loan losses                              |                                                                                                                                                                                                                  |                      | (923,996                                   | )              |            |              | (854,013   | )            
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            | Net loans                                                                                                                                                                                                        |                      |                                            | 91,280,973     |            |              |            | 92,984,822    |           
|Loans held for sale at cost (which approximates fair value) |                                                                                                                                                                                                                  |                      | 3,072,172                                  |                |            |              | 2,292,400  |              
|Foreclosed assets, net                                      |                                                                                                                                                                                                                  |                      | 513,630                                    |                |            |              | 79,983     |              
|Premises and equipment, net                                 |                                                                                                                                                                                                                  |                      | 4,614,666                                  |                |            |              | 4,867,235  |              
|Federal Home Loan Bank stock, at cost                       |                                                                                                                                                                                                                  |                      | 1,367,000                                  |                |            |              | 2,229,800  |              
|Accrued interest receivable                                 |                                                                                                                                                                                                                  |                      | 607,870                                    |                |            |              | 734,168    |              
|Other assets                                                |                                                                                                                                                                                                                  |                      | 2,389,091                                  |                |            |              | 2,652,237  |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            | Total Assets                                                                                                                                                                                                     |                      | $                                          | 136,946,115    |            |              | $          | 141,614,844   |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|Liabilities And Stockholders Equity                        |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|Liabilities:                                                |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |               |            |             |            | 
|                                                            | Deposits:                                                                                                                                                                                                        |                      |                                            |                |            |              |            |               |           
|                                                            |                                                                                                                                                                                                                  | Non-interest bearing |                                            | $              | 2,052,697  |              |            | $             | 2,849,970  |            
|                                                            |                                                                                                                                                                                                                  | Interest bearing     |                                            |                | 96,038,062 |              |            |               | 93,633,292 |            
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            |                                                                                                                                                                                                                  |                      |                                            | Total deposits |            |              | 98,090,759 |               |            |             | 96,483,262 | 
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            | Advances by borrowers for property taxes and insurance                                                                                                                                                           |                      |                                            | 170,994        |            |              |            | 276,909       |           
|                                                            | Accrued interest payable                                                                                                                                                                                         |                      |                                            | 821,304        |            |              |            | 825,850       |           
|                                                            | Borrowed funds                                                                                                                                                                                                   |                      |                                            | 23,163,861     |            |              |            | 29,057,611    |           
|                                                            | Accrued expenses and other liabilities                                                                                                                                                                           |                      |                                            | 945,373        |            |              |            | 1,092,829     |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            |                                                                                                                                                                                                                  |                      | Total liabilities                          |                |            | 123,192,291  |            |               |            | 127,736,461 |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|Stockholders Equity:                                       |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            | Common stock, $.01 par value, 2,000,000 shares authorized, 989,868 shares
issued and 797,911 shares outstanding at December 31, 2002;
989,868 shares issued and 800,911 shares outstanding at September 30, 2002 |                      |                                            | 9,996          |            |              |            | 9,996         |           
|                                                            | Additional paid-in capital                                                                                                                                                                                       |                      |                                            | 9,819,676      |            |              |            | 9,819,676     |           
|                                                            | Treasury stock, at cost (186,574 shares at December 31, 2002;
183,574 shares at September 30, 2002)                                                                                                              |                      |                                            | (2,444,791     | )          |              |            | (2,407,231    | )         
|                                                            | Deferred compensation on common stock employee benefit plans                                                                                                                                                     |                      |                                            | (300,121       | )          |              |            | (324,060      | )         
|                                                            | Shares held in trust at cost (9,775 shares at December 31, 2002
and September 30, 2002)                                                                                                                          |                      |                                            | (107,161       | )          |              |            | (107,161      | )         
|                                                            | Retained earnings                                                                                                                                                                                                |                      |                                            | 6,423,862      |            |              |            | 6,457,443     |           
|                                                            | Accumulated comprehensive other income                                                                                                                                                                           |                      |                                            | 352,363        |            |              |            | 429,720       |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            |                                                                                                                                                                                                                  |                      | Total stockholders equity                 |                |            | 13,753,824   |            |               |            | 13,878,383  |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              
|                                                            |                                                                                                                                                                                                                  |                      | Total Liabilities and Stockholders Equity |                | $          | 136,946,115  |            |               | $          | 141,614,844 |           
|                                                            |                                                                                                                                                                                                                  |                      |                                            |                |            |              |            |              

See accompanying notes to consolidated financial statements.

-1-



---



##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Operations (Unaudited)
for the Three Months Ended December 31, 2002 and 2001

|                                     |                                                                 |                                                     |                                    |           |           |           |        |           |           |           | 
|------------------------------------ | --------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------- | --------- | --------- | --------- | ------ | --------- | --------- | --------- | 
|                                     |                                                                 |                                                     |                                    |           | 2002      |           | 2001  
|                                     |                                                                 |                                                     |                                    |           |           |           |       
|Interest and dividend income:        |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     | Interest and fees on loans                                      |                                                     | $                                  | 1,554,040 |           |           | $      | 1,897,638 |          
|                                     | Interest income on deposits in other financial institutions     |                                                     |                                    | 30,128    |           |           |        | 23,460    |          
|                                     | Interest and dividend income on investment securities           |                                                     |                                    | 337,649   |           |           |        | 400,286   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     |                                                                 |                                                     | Total interest and dividend income |           |           | 1,921,817 |        |           |           | 2,321,384 | 
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|Interest expense:                    |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     | Interest on deposits                                            |                                                     |                                    | 744,685   |           |           |        | 1,041,336 |          
|                                     | Interest on borrowed funds                                      |                                                     |                                    | 256,625   |           |           |        | 354,030   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     |                                                                 | Total interest expense                              |                                    |           | 1,001,310 |           |        |           | 1,395,366 |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     |                                                                 | Net interest income                                 |                                    |           | 920,507   |           |        |           | 926,018   |          
|Provision for loan losses            |                                                                 |                                                     | 75,000                             |           |           |           |       |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     |                                                                 | Net interest income after provision for loan losses |                                    |           | 845,507   |           |        |           | 926,018   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|Other income:                        |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     | Service charges and other fees                                  |                                                     |                                    | 134,440   |           |           |        | 118,757   |          
|                                     | Employee benefit trust and consulting fees                      |                                                     |                                    | 285,591   |           |           |        | 297,361   |          
|                                     | Gain on sale of loans                                           |                                                     |                                    | 295,536   |           |           |        | 128,388   |          
|                                     | Gain (loss) on sale of foreclosed assets                        |                                                     |                                    | (1,895    | )         |           |        |          |          
|                                     | Gain (loss) on sale of equipment                                |                                                     |                                    | 11,165    |           |           |        | 361       |          
|                                     | Gain (loss) on sale of investment securities available-for-sale |                                                     |                                    | 131,644   |           |           |        |          |          
|                                     | Other                                                           |                                                     |                                    | 56,214    |           |           |        | 76,421    |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     |                                                                 | Total other income                                  |                                    |           | 912,695   |           |        |           | 621,288   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|Other expenses:                      |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     | Compensation and benefits                                       |                                                     |                                    | 1,032,977 |           |           |        | 810,949   |          
|                                     | Net occupancy expense                                           |                                                     |                                    | 92,236    |           |           |        | 83,437    |          
|                                     | Furniture and fixtures                                          |                                                     |                                    | 119,232   |           |           |        | 111,829   |          
|                                     | Data processing                                                 |                                                     |                                    | 75,846    |           |           |        | 86,718    |          
|                                     | Office supplies and expense                                     |                                                     |                                    | 104,033   |           |           |        | 98,136    |          
|                                     | Deposit insurance premiums                                      |                                                     |                                    | 27,555    |           |           |        | 15,587    |          
|                                     | Goodwill amortization                                           |                                                     |                                    |          |           |           |        | 13,487    |          
|                                     | Legal                                                           |                                                     |                                    | 30,000    |           |           |        | 45,300    |          
|                                     | Other                                                           |                                                     |                                    | 134,422   |           |           |        | 122,890   |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     |                                                                 | Total other expenses                                |                                    |           | 1,616,301 |           |        |           | 1,388,333 |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     |                                                                 | Income before income taxes                          |                                    |           | 141,901   |           |        |           | 158,973   |          
|Income tax expense                   |                                                                 |                                                     | 54,407                             |           |           |           | 62,977 |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     |                                                                 | Net income                                          |                                    | $         | 87,494    |           |        | $         | 95,996    |          
|                                     |                                                                 |                                                     |                                    |           |           |           |        |          
|Earnings per share:                  |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     | Basic                                                           |                                                     |                                    | 0.11      |           |           |        | 0.11      |          
|                                     | Diluted                                                         |                                                     |                                    | 0.11      |           |           |        | 0.11      |          
|Cash dividends declared              |                                                                 |                                                     | 0.15                               |           |           |           | 0.15   |          
|Weighted average shares outstanding: |                                                                 |                                                     |                                    |           |           |           |        |          
|                                     | Basic                                                           |                                                     |                                    | 799,533   |           |           |        | 858,647   |          
|                                     | Diluted                                                         |                                                     |                                    | 807,215   |           |           |        | 859,647   |          

See accompanying notes to consolidated financial statements.

-2-



---



##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Changes in Stockholders Equity (Unaudited)
for the Three Months Ended December 31, 2002

|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |            |        | 
|------------------------------------------------------------------------------------------------------------------------------- | ---------- | - | ------ |  | ------- | - | ---------- |  | ------------- | - | ---------- | - | -------- | - | ------------- | - | ------------- | - | -------- | - | ----------- | - | --------- | ------ |  | - | ------- | - |  | - | ---------- | ------ | 
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   | Deferred      |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |           
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   | Compensation  |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |           
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   | on Common     |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |           
|                                                                                                                                |            |   |        |  |         |   | Additional |  |               |   |            |   | Stock    |   | Shares        |   |               |   |          |   | Accumulated |   | Total    
|                                                                                                                                |            |   | Common |  | Paid-in |   | Treasury   |  | Employee      |   | Held in    |   | Retained |   | Comprehensive |   | Stockholders'
|                                                                                                                                |            |   | Stock  |  | Capital |   | Stock      |  | Benefit Plans |   | Trust      |   | Earnings |   | Other Income  |   | Equity       
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |              
|Balance at September 30,
2002                                                                                                   |            | $ | 9,996  |  |         | $ | 9,819,676  |  |               | $ | (2,407,231 | ) |          | $ | (324,060      | ) |               | $ | (107,161 | ) |             | $ | 6,457,443 |        |  | $ | 429,720 |   |  | $ | 13,878,383 |       
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |            |       
|Comprehensive income:                                                                                                           |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |            |       
|                                                                                                                                | Net income |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           | 87,494 |  |   |         |   |  |   |            | 87,494 | 
|Change in net unrealized
gain on available-for-sale
securities, net of reclassification adjustments and
income taxes of $47,412 |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   | (77,357 | ) |  |   | (77,357    | )     
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |            |       
|Total comprehensive income                                                                                                      |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   | 10,137     |       
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |            |       
|Vesting of deferred
compensation shares                                                                                         |            |   |        |  |         |   |            |  |               |   |            |   |          |   | 23,939        |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   | 23,939     |       
|Acquisition of Treasury
stock                                                                                                   |            |   |        |  |         |   |            |  |               |   | (37,560    | ) |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   | (37,560    | )     
|Cash dividends declared                                                                                                         |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   | (121,075  | )      |  |   |         |   |  |   | (121,075   | )     
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |            |       
|Balance at December 31,
2002                                                                                                    |            | $ | 9,996  |  |         | $ | 9,819,676  |  |               | $ | (2,444,791 | ) |          | $ | (300,121      | ) |               | $ | (107,161 | ) |             | $ | 6,423,862 |        |  | $ | 352,363 |   |  | $ | 13,753,824 |       
|                                                                                                                                |            |   |        |  |         |   |            |  |               |   |            |   |          |   |               |   |               |   |          |   |             |   |           |        |  |   |         |   |  |   |            |       

-3-



---



##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended December 31, 2002 and 2001

|                      |                                                                                   |                                                                         |                                       |            |             |          |      |           |            |          |  
|--------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------- | ---------- | ----------- | -------- | ---- | --------- | ---------- | -------- | -
|                      |                                                                                   |                                                                         |                                       |            | 2002        |          | 2001
|                      |                                                                                   |                                                                         |                                       |            |             |          |     
|Operating activities: |                                                                                   |                                                                         |                                       |            |             |          |      |          
|                      | Net income                                                                        |                                                                         | $                                     | 87,494     |             |          | $    | 95,996    |           
|                      | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                         |                                       |            |             |          |      |           |           
|                      |                                                                                   | Provision for loan losses                                               |                                       |            | 75,000      |          |      |           |           |         
|                      |                                                                                   | Depreciation and amortization                                           |                                       |            | 91,138      |          |      |           | 80,932     |         
|                      |                                                                                   | Gain on sale of securities                                              |                                       |            | (131,644    | )        |      |           |           |         
|                      |                                                                                   | Gain on sale of loans                                                   |                                       |            | (295,536    | )        |      |           | (128,388   | )       
|                      |                                                                                   | Decrease in deferred loan origination fees                              |                                       |            | (42,604     | )        |      |           | (18,684    | )       
|                      |                                                                                   | Net amortization of premium on investment securities available-for-sale |                                       |            | (9,125      | )        |      |           | 6,733      |         
|                      |                                                                                   | Loss on sale of foreclosed assets                                       |                                       |            | 1,895       |          |      |           |           |         
|                      |                                                                                   | Gain on sale of premises and equipment                                  |                                       |            | (11,165     | )        |      |           | (361       | )       
|                      |                                                                                   | Loans originated for sale                                               |                                       |            | (14,047,780 | )        |      |           | (5,013,962 | )       
|                      |                                                                                   | Proceeds from sale of loans                                             |                                       |            | 13,563,544  |          |      |           | 5,247,400  |         
|                      |                                                                                   | (Increase) decrease in accrued interest receivable                      |                                       |            | 126,298     |          |      |           | 173,406    |         
|                      |                                                                                   | Increase (decrease) in other assets                                     |                                       |            | 263,146     |          |      |           | (867,748   | )       
|                      |                                                                                   | Deferred compensation expense                                           |                                       |            | 23,939      |          |      |           | 22,976     |         
|                      |                                                                                   | Increase (decrease) in accrued interest payable                         |                                       |            | (4,546      | )        |      |           | (114,021   | )       
|                      |                                                                                   | Increase (decrease) in accrued expenses and other liabilities           |                                       |            | (100,044    | )        |      |           | (364,996   | )       
|                      |                                                                                   |                                                                         |                                       |            |             |          |      |          
|                      |                                                                                   |                                                                         | Net cash used by operating activities |            |             | (409,990 | )    |           |            | (880,717 | )
|                      |                                                                                   |                                                                         |                                       |            |             |          |      |          
|Investing activities: |                                                                                   |                                                                         |                                       |            |             |          |      |          
|                      | Net change in interest-bearing deposits in other financial institutions           |                                                                         |                                       | 8,179      |             |          |      | (264,000  | )         
|                      | Proceeds from calls and maturities of investment securities available-for-sale    |                                                                         |                                       | 2,629,011  |             |          |      | 1,112,921 |           
|                      | Purchase of investment securities available-for-sale                              |                                                                         |                                       | (5,544,884 | )           |          |      |          |           
|                      | Proceeds from sale of investments available-for-sale                              |                                                                         |                                       | 3,438,105  |             |          |      |          |           
|                      | Proceeds from sale of Federal Home Loan Bank stock                                |                                                                         |                                       | 862,800    |             |          |      |          |           
|                      | Net (increase) decrease in loans                                                  |                                                                         |                                       | 1,671,453  |             |          |      | (106,341  | )         
|                      | Purchase of premises and equipment                                                |                                                                         |                                       | (20,522    | )           |          |      | (149,084  | )         
|                      | Proceeds from sale of foreclosed assets                                           |                                                                         |                                       | 2,249      |             |          |      | 6,200     |           
|                      | Proceeds from sale of other assets                                                |                                                                         |                                       | 193,118    |             |          |      |          |           
|                      | Transfer from loans of repossessed assets                                         |                                                                         |                                       | (437,791   | )           |          |      |          |           
|                      |                                                                                   |                                                                         |                                       |            |             |          |      |          
|                      |                                                                                   | Net cash provided by investing activities                               |                                       |            | 2,801,718   |          |      |           | 599,696    |         
|                      |                                                                                   |                                                                         |                                       |            |             |          |      |          

(Continued)

See accompanying notes to consolidated financial statements.

-4-



---



##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended December 31, 2002 and 2001

|                                                   |                                                                               |                                       |            |            |            |      |           |            |          |  
|-------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------- | ---------- | ---------- | ---------- | ---- | --------- | ---------- | -------- | -
|                                                   |                                                                               |                                       |            | 2002       |            | 2001
|                                                   |                                                                               |                                       |            |            |            |     
|Financing activities:                              |                                                                               |                                       |            |            |            |      |           |           
|                                                   | Increase (decrease) in deposits                                               |                                       | $          | 1,607,497  |            |      | $         | 1,120,947  |         
|                                                   | Proceeds from borrowed funds                                                  |                                       |            | 125,000    |            |      |           | 5,000,000  |         
|                                                   | Repayment of borrowed funds                                                   |                                       |            | (6,018,750 | )          |      |           | (6,100,000 | )       
|                                                   | Cash dividends paid                                                           |                                       |            | (121,075   | )          |      |           | (137,687   | )       
|                                                   | Acquisition of Treasury shares                                                |                                       |            | (37,560    | )          |      |           | (160,000   | )       
|                                                   | Increase (decrease) in advances by borrowers for property taxes and insurance |                                       |            | (105,915   | )          |      |           | (224,260   | )       
|                                                   |                                                                               |                                       |            |            |            |      |           |           
|                                                   |                                                                               | Net cash used in financing activities |            |            | (4,550,803 | )    |           |            | (501,000 | )
|                                                   |                                                                               |                                       |            |            |            |      |           |           
|Increase (decrease) in cash and cash equivalents   |                                                                               |                                       | (2,159,075 | )          |            |      | (782,021  | )         
|Cash and cash equivalents at beginning of period   |                                                                               |                                       | 8,122,898  |            |            |      | 6,020,186 |           
|                                                   |                                                                               |                                       |            |            |            |      |           |           
|Cash and cash equivalents at end of period         |                                                                               | $                                     | 5,963,823  |            |            | $    | 5,238,165 |           
|                                                   |                                                                               |                                       |            |            |            |      |           |           
|Supplemental information on cash payments:         |                                                                               |                                       |            |            |            |      |           |           
|                                                   | Interest paid                                                                 |                                       | $          | 1,005,856  |            |      | $         | 1,509,387  |         
|                                                   |                                                                               |                                       |            |            |            |      |           |           
|                                                   | Income taxes paid                                                             |                                       | $          | 18,500     |            |      | $         | 129,985    |         
|                                                   |                                                                               |                                       |            |            |            |      |           |           
|Supplemental information on non-cash transactions: |                                                                               |                                       |            |            |            |      |           |           
|                                                   | Change in net unrealized gain on investment securities available-for-sale     |                                       | $          | (77,357    | )          |      | $         | (40,194    | )       
|                                                   |                                                                               |                                       |            |            |            |      |           |           
|                                                   | Real estate obtained through foreclosure                                      |                                       | $          | 432,834    |            |      | $         |           |         
|                                                   |                                                                               |                                       |            |            |            |      |           |           

See accompanying notes to consolidated financial statements.

-5-



---



##### Table of Contents



SOUTHFIRST BANCSHARES, INC.
AND SUBSIDIARIES




Notes to Consolidated Financial Statements (Unaudited)
December 31, 2002 and 2001



|(1) |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Information filed on this Form 10-QSB as of and for the quarter ended
December 31, 2002, was derived from the financial records of SouthFirst
Bancshares, Inc. (SouthFirst) and its wholly-owned subsidiaries, First
Federal of the South (First Federal), and SouthFirst Financial Services,
Inc. (SouthFirst Financial) and First Federals wholly-owned
subsidiaries, Pension & Benefit Trust Company (Pension & Benefit), a
Montgomery, Alabama-based employee benefits consulting firm, and SouthFirst
Mortgage, Inc., a Birmingham, Alabama-based residential construction loan
and mortgage loan origination office. Collectively, SouthFirst Bancshares,
Inc. and its subsidiaries are referred to herein as the Company and as
SouthFirst.
|   
|    |  | In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (none of which
are other than normal recurring accruals) necessary for a fair statement of
the financial position of the Company and the results of operations for the
three-month periods ended December 31, 2002 and 2001. The results
contained in these statements are not necessarily indicative of the results
which may be expected for the entire year.                                                                                                                                                                                                                                                              
|   
|(2) |  | New Accounting Standard                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible Assets. Statement 142
provides guidance for the amortization of goodwill arising from the use of
the purchase method to account for business combinations. Goodwill arising
from purchase business combinations completed after June 30, 2001 will not
be amortized. The accounting for goodwill and other intangible assets
required under Statement 142 is effective for the fiscal year beginning
October 1, 2002.                                                                                                                                                                                                              
|   
|    |  | The following table illustrates the impact of the adoption of SFAS 142:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                                      |                                                                |   |                    |      |      |   |         |      | 
|--------------------------------------------------------------------- | -------------------------------------------------------------- | - | ------------------ | ---- | ---- | - | ------- | ---- | 
|                                                                      |                                                                |   | Three Months Ended
|                                                                      |                                                                |   | December 31,      
|                                                                      |                                                                |   |                   
|                                                                      |                                                                |   | 2002               |      | 2001
|                                                                      |                                                                |   |                    |      |     
|Net income                                                            |                                                                | $ | 87,494             |      |      | $ | 95,996  |     
|Add back: excess purchase price amortization
(net of taxes of $5,125) |                                                                |   |                   |      |      |   | 8,362   |     
|                                                                      |                                                                |   |                    |      |      |   |         |     
|Net income as adjusted for the adoption of SFAS 142                   |                                                                |   | 87,494             |      |      |   | 104,358 |     
|                                                                      |                                                                |   |                    |      |      |   |         |     
|Per share:                                                            |                                                                |   |                    |      |      |   |         |     
|                                                                      | Net income                                                     |   | $                  | 0.11 |      |   | $       | 0.11 | 
|                                                                      | Net income  diluted                                           |   |                    | 0.11 |      |   |         | 0.11 | 
|                                                                      | Net income, as adjusted for the adoption of SFAS 142           |   |                    | 0.11 |      |   |         | 0.12 | 
|                                                                      | Net income  diluted, as adjusted for the adoption of
SFAS 142 |   |                    | 0.11 |      |   |         | 0.12 | 

-6-



---



##### Table of Contents





|(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, 2002 |           | Three Months Ended December 31, 2001
|                                                    |  |                                      |           |                                     
|                                                    |  |                                      |           |                                      |  | Employee |         |            |  |            |           |          |  |   |           | Employee |  |   |         | 
|                                                    |  | Banking                              |           | Benefits                             |  |          |         |            |  | Banking    |           | Benefits |  |   |           |         
|                                                    |  | Activities                           |           | Activities                           |  | Total    |         | Activities |  | Activities |           | Total   
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |         
|Interest and dividend
income                        |  | $                                    | 1,916,119 |                                      |  | $        | 5,698   |            |  | $          | 1,921,817 |          |  | $ | 2,312,158 |          |  | $ | 9,226   |  |  | $ | 2,321,384 | 
|Interest expenses                                   |  |                                      | 1,001,310 |                                      |  |          |        |            |  |            | 1,001,310 |          |  |   | 1,395,366 |          |  |   |        |  |  |   | 1,395,366 | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net interest income                                 |  |                                      | 914,809   |                                      |  |          | 5,698   |            |  |            | 920,507   |          |  |   | 916,792   |          |  |   | 9,226   |  |  |   | 926,018   | 
|Provision for loan losses                           |  |                                      | 75,000    |                                      |  |          |        |            |  |            | 75,000    |          |  |   |          |          |  |   |        |  |  |   |          | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net interest income after
provision for loan losses |  |                                      | 839,809   |                                      |  |          | 5,698   |            |  |            | 845,507   |          |  |   | 916,792   |          |  |   | 9,226   |  |  |   | 926,018   | 
|Other income                                        |  |                                      | 624,104   |                                      |  |          | 288,591 |            |  |            | 912,695   |          |  |   | 320,927   |          |  |   | 300,361 |  |  |   | 621,288   | 
|Other expenses                                      |  |                                      | 1,341,078 |                                      |  |          | 275,223 |            |  |            | 1,616,301 |          |  |   | 1,124,891 |          |  |   | 263,442 |  |  |   | 1,388,333 | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Income before income taxes                          |  |                                      | 122,835   |                                      |  |          | 19,066  |            |  |            | 141,901   |          |  |   | 112,828   |          |  |   | 46,145  |  |  |   | 158,973   | 
|Income taxes                                        |  |                                      | 47,038    |                                      |  |          | 7,369   |            |  |            | 54,407    |          |  |   | 45,382    |          |  |   | 17,595  |  |  |   | 62,977    | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 
|Net income                                          |  | $                                    | 75,797    |                                      |  | $        | 11,697  |            |  | $          | 87,494    |          |  | $ | 67,446    |          |  | $ | 28,550  |  |  | $ | 95,996    | 
|                                                    |  |                                      |           |                                      |  |          |         |            |  |            |           |          |  |   |           |          |  |   |         |  |  |   |           | 



|    |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | As previously announced, on January 21, 2003, the Company declared a
regular $0.15 per share cash dividend on the Companys outstanding stock,
payable on February 14, 2003, to stockholders of record as of January 31,
2003.                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | Also, as previously announced, on January 21, 2003, the board of directors
of SouthFirst Bancshares, Inc. approved a new stock repurchase program,
authorizing the Company to repurchase up to 77,000 shares, or approximately
ten 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, and will
be held by the Company as treasury shares. The timing of the repurchases
will depend on market conditions and corporate

-7-



---



##### Table of Contents





| |  | requirements. As of February 10, 2003, under this stock repurchase
program, as previously announced, the Company has repurchased 35,000 shares
of its common stock, all of which shares were acquired through a privately
negotiated transaction, at a purchase price of $15.00 per share.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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 2003, which ended December 31, 2002,
decreased $8,502 or 8.9% to $87,494 when compared to the same period in fiscal
2002. Net interest income decreased $5,511 or 0.6% for the three-month period
ended December 31, 2002, compared to the same period in fiscal 2002.
Non-interest income increased $291,407 or 46.9% for the three-month period
ended December 31, 2002 compared to the same period in fiscal 2002, while
non-interest expenses increased $227,968 or 16.4%.

Net income per common share, based on weighted average shares outstanding, was
$0.11 for each of the three-month periods ended December 31, 2002 and December
31, 2001.

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

Net Interest Income

As of December 31, 2002, the interest rate spread increased 55 basis points as
rates earned on interest-earning assets decreased 36 basis points to 6.34%
while the cost of funds decreased 91 basis points to 3.33%. 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 $17.3
million or 12.5%, from $138.6 million to $121.3 million, while the average
balance of interest-bearing liabilities decreased $11.3 million or 8.6%, from
$131.6 million to $120.3 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 $6,000 or 0.6%, and an
increase in the interest rate spread from 2.46% to 3.01% for the three months
ended December 31, 2002, as compared to the three months ended December 31,
2001.

Provision for Loan Losses

Provision for loan losses reflects an increase in the amount of $75,000 for the
three-month period ending December 31, 2002. This increase is the result of
additional reserves required to cover certain asset quality concerns within the
construction loan portfolio.

Other Income

Total other income, for the three months ended December 31, 2002, increased
approximately $292,000, to $913,000, compared to $621,000 for the three months
ended December 31, 2001. A portion of the increase in total non-interest
income was attributable to an increase of approximately $167,000 in gains

-8-



---



##### Table of Contents



on sales of loans, an increase of approximately $132,000 in gains on sale of
investment securities available for sale, and an increase in service charges
and other fees of approximately $16,000 during the first three months of fiscal
2003. Fee income generated from employee benefit trust and consulting decreased
approximately $12,000, while the gain from the sale of equipment increased by
approximately $11,000, as compared to the three months ended December 31, 2001.

Other Expense

Total other expense, for the three months ended December 31, 2002, increased by
approximately $228,000, to $1,616,000, as compared to $1,388,000 for the three
months ended December 31, 2001. The change in other non-interest expense is
attributable to an increase in compensation and benefits of approximately
$222,000, an increase in deposit insurance premiums of approximately $12,000
and an increase in other expenses of approximately $12,000, while data
processing fees decreased approximately $11,000, goodwill amortization
decreased approximately $13,000 and legal expenses decreased approximately
$15,000, as compared to the three-month period ended December 31, 2001.

Income Taxes

The Companys effective tax rates, for the three-month periods ended December
31, 2002 and 2001, were 38.3% and 39.6%, 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 $9,000 or 13.6% to $54,000 for the three months ended
December 31, 2002, as compared to $63,000 for the three months ended December
31, 2001, due to the decrease in pre-tax earnings.

REVIEW OF FINANCIAL CONDITION

Overview

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

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

|                                                          |  |                           |        |      |  |   |       |   
|--------------------------------------------------------- |  | ------------------------- | ------ | ---- |  | - | ----- | --
|                                                          |  | At or for the three      
|                                                          |  | months ended December 31,
|                                                          |  |                          
|                                                          |  | 2002                      |        | 2001
|                                                          |  |                           |        |     
|Return on assets                                          |  |                           | 0.25   | %    |  |   | 0.25  | % 
|Return on equity                                          |  |                           | 2.54   | %    |  |   | 2.68  | % 
|Equity to asset ratio                                     |  |                           | 9.99   | %    |  |   | 9.49  | % 
|Interest rate spread                                      |  |                           | 3.01   | %    |  |   | 2.46  | % 
|Net interest margin                                       |  |                           | 3.04   | %    |  |   | 2.67  | % 
|Total risk-based capital                                  |  |                           | 16.44  | %    |  |   | 15.96 | % 
|Non-performing loans to loans                             |  |                           | 0.75   | %    |  |   | 1.58  | % 
|Allowance for loan losses to loans                        |  |                           | 0.98   | %    |  |   | 1.54  | % 
|Allowance for loan losses to average non-performing loans |  |                           | 130.42 | %    |  |   | 97.34 | % 
|Ratio of net charge-offs to average loans outstanding     |  |                           | 0.01   | %    |  |   | (0.01 | )%
|Book value per common share outstanding                   |  | $                         | 17.23  |      |  | $ | 16.87 |   

-9-



---



##### Table of Contents



Significant factors affecting SouthFirsts financial condition during the three
months ended December 31, 2002 are detailed below:

Assets

Total assets decreased approximately $4,669,000 or 3.3%, from $141,615,000 at
September 30, 2002 to $136,946,000 at December 31, 2002. Cash and amounts due
from banks decreased approximately $2,159,000, which was used primarily for the
purpose of repaying short-term borrowed funds. Net loans decreased
approximately $1,704,000,or 1.8%. This decrease occurred primarily in
residential construction loans, which is a result of the limitations placed on
construction lending by the Office of Thrift Supervision (OTS), as outlined
in the Supervisory Agreement entered into between OTS and First Federal as of
March 22, 2002.

Liabilities

Total liabilities decreased approximately $4,500,000 or 3.6%, from $127,736,000
at September 30, 2002 to $123,192,000 at December 31, 2002. Deposits increased
approximately $1,600,000 during the period, which represents an increase in
certificates of deposit of approximately $2.3 million and a decrease in
checking and other savings accounts of approximately $0.7 million. Borrowed
funds decreased approximately $6,000,000, which represents the repayment of
short-term daily rate credit advances with the Federal Home Loan Bank of $2.0
million, and the repayment of short-term reverse repurchase agreements with
Morgan Keegan and Company of approximately $4.0 million.

Loan Quality

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

At December 31, 2002, the allowance for loan losses was $923,996, compared to
$854,013 at September 30, 2002. This increase is due primarily to an additional
reserve in the amount of $75,000. (See Allowance for Loan Losses above).
Non-performing loans at December 31, 2002 were approximately $708,000, as
compared to approximately $764,000 at September 30, 2002. At December 31, 2002
and September 30, 2002, the allowance for loan losses represented 0.98% and
0.88% of average loan balances, respectively. The allowance 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 and Funding Sources

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

-10-



---



##### Table of Contents



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

As of December 31, 2002, First Federals average daily balance of liquid assets
was approximately 28% of its September 30, 2002 liquidity base, far exceeding
the 4% requirement set by the previous regulation. These liquid assets included
approximately $1,896,000 in cash and cash equivalents, and approximately
$26,249,000 in other qualifying assets. In addition, as of December 31, 2002,
the fair market value of the Companys investment securities portfolio, which
is held for sale, was $26,262,000. The Company uses its investment securities
portfolio to manage liquidity and interest rate risk, whereby liquidity is
available through those securities that are not pledged. Further, cash flows
from operations, resulting primarily from net income adjusted for certain items
such as interest expense and provision for loan loss, are an additional source
of liquidity for the Company.

With respect to current funding sources, deposits provide a significant portion
of the Companys cash flow needs and continue to provide a relatively stable,
low cost source of funds. As of December 31, 2002, the amount of deposits was
$98,091,000, which represents an increase of $1,607,000 from the amount of
deposits at September 30, 2002.

Other sources of funding used by the Company include commercial lines of credit
and advances from the Federal Home Loan Bank of Atlanta (the FHLBA). At
December 31, 2002, the Company had outstanding balances with the FHLBA totaling
$22,340,000. Further, the Company has a line of credit, based on prime, with
First Commercial Bank in the amount of $2,500,090, which presently is scheduled
to mature on May 24, 2003, and of which, at December 31, 2002, there was an
outstanding balance of approximately $824,000.

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

Capital Adequacy and Resources

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

OTS has issued guidelines identifying minimum regulatory tangible capital
equal to 1.50% of adjusted total assets, a minimum of 4.0% core capital ratio,
and a minimum risk-based capital of 8.0% of risk-weighted assets. First
Federal has satisfied such capital requirements primarily through the retention
of earnings. First Federals compliance with these standards, as of December
31, 2002, is indicated by the following chart:

-11-



---



##### Table of Contents



|                   |  |        |                       |  |  |  |       |  
|------------------ |  | ------ | --------------------- |  |  |  | ----- | -
|Category           |  | Amount | Percent of Asset Base
|                   |  |        |                      
|Tangible capital   |  | $      | 13,682,000            |  |  |  | 10.07 | %
|Core capital       |  |        | 13,682,000            |  |  |  | 10.07 | %
|Tier-based capital |  |        | 14,110,000            |  |  |  | 16.44 | %

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.




Item 3: Controls and Procedures

Within 90 days prior to the filing date of this quarterly report, pursuant to
Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange Act), the
Companys Chief Executive Officer and Controller (principal financial officer)
evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in Rule13a-14(c) of the Exchange
Act). Based on their evaluation, the Chief Executive Officer and Controller
have concluded that the Companys disclosure controls and procedures are
effective in timely alerting them to material information, relating to the
Company and the Companys consolidated subsidiaries, required to be included in
periodic reports, including this quarterly report, filed by the Company with
the SEC.

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

-12-



---



##### Table of Contents



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.




Item 5: Other Information

On January 21, 2003, the Companys board of directors authorized and approved
an amendment to the Companys bylaws, whereby the position of chairman of the
board of directors was removed from the list of named officers of the Company
(see Exhibit 3.4 hereto), making the position of chairman a non-officer
position for the Company. This action was taken in the interest of proper
corporate governance, specifically, to allow the chairman to serve on the board
of directors audit committee without violating the Sarbanes-Oxley Act of 2002.

As set forth in the related resolutions of the board of directors (see Exhibit
3.4 hereto), Section 10A of the Securities Exchange Act of 1934 was amended by
Section 301 of the Sarbanes-Oxley Act of 2002, whereby, not later than April
26, 2003, each member of the Companys audit committee is required to be an
independent director of the Company. In light of this new requirement, the
board of directors has determined that it is in the Companys best interests to
enable the chairman to serve on the audit committee. Therefore, based on this
amendment of the Companys bylaws, the chairman of the board of directors is no
longer an officer of the Company and, thus, may continue to serve on the audit
committee.

Further, as disclosed in the Companys most recent Annual Report on
Form 10-KSB, filed with the SEC on December 24, 2002, the board of directors
of First Federal has adopted, effective as of October 1, 2001, the Bank Director
Supplemental Retirement Plan (the Director Plan), under which First Federal
will make certain payments to each participating director, upon the directors retirement
or to the directors beneficiary(ies) in the event of the directors death.
The Director Plan is an unfunded arrangement maintained primarily to provide supplemental
retirement benefits for each participating director and constitutes a non-qualified
benefit plan for purposes of the Employee Retirement Income Security Act of 1974,
as amended (ERISA). Under the Director Plan, First Federal has entered
into an agreement with each participating director, a form of which agreements is
attached hereto as Exhibit 10.27.




Item 6: Exhibits and Reports on Form 8-K

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

|               |  |                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                    
|               |  |                                                                                                                                                
|3.4            |  | Amendment to Article V, Section 1 of the Bylaws.                                                                                               
|               |  |                                                                                                                                                
|10.1           |  | Form of Employment Agreement between SouthFirst Bancshares, Inc.
and Joe K. McArthur, as amended and restated, effective as of October
1, 2002.
|               |  |                                                                                                                                                

-13-



---



##### Table of Contents



|               |  |                                                                                                                                                                 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                     
|               |  |                                                                                                                                                                 
|10.2           |  | Form of Employment Agreement between First Federal of the South and
Joe K. McArthur, as amended and restated, effective as of October 1,
2002.                  
|               |  |                                                                                                                                                                 
|10.3           |  | Form of Employment Agreement between First Federal of the South and
Sandra H. Stephens, as amended and restated, effective as of October 1,
2002.               
|               |  |                                                                                                                                                                 
|10.4           |  | Form of Employment Agreement between Pension & Benefit Financial
Services, Inc. and J. Malcomb Massey, as amended and restated,
effective as of October 1, 2002.
|               |  |                                                                                                                                                                 
|10.6           |  | Form of Employment Agreement between Pension & Benefit Financial
Services, Inc. and Ruth M. Roper, as amended and restated, effective as
of October 1, 2002.    
|               |  |                                                                                                                                                                 
|10.27          |  | Form of Director Supplemental Retirement Plan Director Agreement.                                                                                               
|               |  |                                                                                                                                                                 
|99.1           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                         

|    |  |                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------
|(b) |  | Reports on Form 8-K. No report on Form 8-K was filed during the quarter
ended December 31, 2002.




SIGNATURES

In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                        |  |                             |  |                                                                                             
|----------------------- |  | --------------------------- |  | --------------------------------------------------------------------------------------------
|                        |  | SOUTHFIRST BANCSHARES, INC.
|                       
|                        |  |                             |  |                                                                                             
|                       
|Date: February 14, 2003 |  | By:                         |  | /s/ Joe K. McArthurJoe K. McArthur
Chief Executive Officer
(principal executive officer)    
|                       
|                        |  |                             |  |                                                                                             
|                       
|Date: February 14, 2003 |  | By:                         |  | /s/ Janice R. BrowningJanice R. Browning
Controller, Treasurer
(principal financial officer)

-14-



---



##### Table of Contents






CERTIFICATION

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



|1. |  | I have reviewed this quarterly report on Form 10-QSB of SouthFirst
Bancshares, Inc.;                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



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



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



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

|                  |  |                                                           
|----------------- |  | ----------------------------------------------------------
|February 14, 2003 |  | /s/ Joe K. McArthurJoe K. McArthur
Chief Executive Officer

-15-



---



##### Table of Contents






CERTIFICATION

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



|1. |  | I have reviewed this quarterly report on Form 10-QSB of SouthFirst
Bancshares, Inc.;                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



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



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



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

|                  |  |                                                    
|----------------- |  | ---------------------------------------------------
|February 14, 2003 |  | /s/ Janice R. BrowningJanice R. Browning
Controller

-16-



---



##### Table of Contents



Exhibit Index

|               |  |                                                                                                                                                                 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                     
|               |  |                                                                                                                                                                 
|3.4            |  | Amendment to Article V, Section 1 of the Bylaws.                                                                                                                
|               |  |                                                                                                                                                                 
|10.1           |  | Form of Employment Agreement between SouthFirst Bancshares, Inc.
and Joe K. McArthur, as amended and restated, effective as of October
1, 2002.                 
|               |  |                                                                                                                                                                 
|10.2           |  | Form of Employment Agreement between First Federal of the South and
Joe K. McArthur, as amended and restated, effective as of October 1,
2002.                  
|               |  |                                                                                                                                                                 
|10.3           |  | Form of Employment Agreement between First Federal of the South and
Sandra H. Stephens, as amended and restated, effective as of October 1,
2002.               
|               |  |                                                                                                                                                                 
|10.4           |  | Form of Employment Agreement between Pension & Benefit Financial
Services, Inc. and J. Malcomb Massey, as amended and restated,
effective as of October 1, 2002.
|               |  |                                                                                                                                                                 
|10.6           |  | Form of Employment Agreement between Pension & Benefit Financial
Services, Inc. and Ruth M. Roper, as amended and restated, effective as
of October 1, 2002.    
|               |  |                                                                                                                                                                 
|10.27          |  | Form of Director Supplemental Retirement Plan Director Agreement.                                                                                               
|               |  |                                                                                                                                                                 
|99.1           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                         

-17-