<PAGE>
                                                                    EXHIBIT 99.1



                           SOUTHFIRST BANCSHARES, INC.

                               SYLACAUGA, ALABAMA

                           SEPTEMBER 30, 2001 AND 2000


<PAGE>

                           SOUTHFIRST BANCSHARES, INC.

                               SYLACAUGA, ALABAMA

                           SEPTEMBER 30, 2001 AND 2000


                                TABLE OF CONTENTS

<TABLE>
<S>                                                              <C>
INDEPENDENT AUDITORS' REPORT....................................    1


FINANCIAL STATEMENTS:

     Consolidated Statements of Financial Condition.............    2

     Consolidated Statements of Operations......................  3-4

     Consolidated Statements of Stockholders' Equity............  5-6

     Consolidated Statements of Cash Flows......................  7-8

     Notes to Consolidated Financial Statements................. 9-43
</TABLE>




<PAGE>


                          INDEPENDENT AUDITORS' REPORT


November 20, 2001





Board of Directors
SouthFirst Bancshares, Inc.
Sylacauga, Alabama


We have audited the accompanying consolidated statements of financial condition
of SouthFirst Bancshares, Inc. and subsidiaries (the Company) as of September
30, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SouthFirst
Bancshares, Inc. and subsidiaries as of September 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2001, in conformity with accounting principles
generally accepted in the United States of America.




/s/ Jones & Kirkpatrick, P.C.
-----------------------------
Certified Public Accountants
Birmingham, Alabama


<PAGE>

                                                                               9


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes To Consolidated Financial Statements


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         This summary of significant accounting policies of SouthFirst
         Bancshares, Inc. (the "Company") is presented to assist in
         understanding the Company's financial statements. The financial
         statements and notes are representations of the Company's management
         who is responsible for the integrity and objectivity of the financial
         statements. These accounting policies conform to accounting principles
         generally accepted in the United States of America and have been
         consistently applied in the preparation of the financial statements.

         Basis of Presentation - The accompanying consolidated financial
         statements include the accounts of SouthFirst Bancshares, Inc. (the
         Corporation) and its wholly-owned subsidiaries, First Federal of the
         South (the Bank) (a wholly-owned subsidiary of SouthFirst Bancshares,
         Inc.), Pension & Benefit Trust Company (a wholly-owned subsidiary of
         First Federal of the South, which is an employee benefits consulting
         company), SouthFirst Mortgage, Inc. (a wholly-owned subsidiary of First
         Federal of the South) and SouthFirst Financial Services, Inc. (a
         wholly-owned subsidiary of SouthFirst Bancshares, Inc.), collectively
         as the Company. All significant intercompany accounts and transactions
         have been eliminated in consolidation.

         Business - The Company provides a full range of banking services to
         individual and corporate customers in its primary market area of the
         cities of Sylacauga, Clanton, Talladega and Centreville in the state of
         Alabama, and provides lending services in Birmingham and Dothan,
         Alabama. The Company is subject to competition from other financial
         institutions. The Company is subject to the regulations of certain
         federal agencies and undergoes periodic examinations by those
         regulatory authorities.

         Use of Estimates - The accounting principles and reporting policies of
         the Company, and the methods of applying these principles, conform with
         generally accepted accounting principles and with general practice
         within the savings and loan industry. In preparing the financial
         statements, management is required to make estimates and assumptions
         that affect the reported amounts of assets and liabilities as of the
         date of the balance sheet and revenues and expenses for the period.
         Actual results could differ significantly from those estimates.

         Material estimates that are particularly susceptible to significant
         change in the near-term relate to the determination of the allowance
         for loan losses. In connection with the determination of the allowance
         for loan losses, management obtains independent appraisals for
         properties collateralizing significant troubled loans.



                                   (Continued)



<PAGE>

                                                                              10


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         Significant Group Concentrations of Credit Risk - A substantial portion
         of the Company's loans are secured by real estate in the Company's
         primary market area. Note 3 discusses the types of lending that the
         Company engages in. The Company does not have any significant
         concentration to any one industry or customer.

         Cash and Cash Equivalents - For purposes of presentation in the
         consolidated statements of cash flows, cash and cash equivalents
         include cash and balances due from other depository institutions.

         Interest-bearing Deposits in Other Financial Institutions -
         Interest-bearing deposits in other financial institutions mature within
         one year and are carried at cost.

         Investment Securities - The Company classifies its investments in one
         of the following three categories: (i) held-to-maturity securities,
         (ii) securities available for sale, and (iii) trading account
         securities. Investment securities held to maturity represent securities
         which management has the intent and ability to hold to maturity. These
         securities are reported at cost adjusted for amortization of premiums
         and accretion of discounts using the interest method. Investment
         securities available for sale represent securities which management may
         decide to sell prior to maturity for liquidity, tax planning or other
         valid business purposes. Available-for-sale securities are reported at
         fair value with any unrealized gains or losses excluded from earnings
         and reflected as a net amount in a separate component of stockholders'
         equity until realized. Trading account securities represent securities
         which management has purchased and is holding principally for the
         purpose of selling in the near term. Trading account securities are
         reported at fair value with any unrealized gains or losses included in
         earnings.

         Declines in fair value of investment securities (available for sale or
         held to maturity) that are considered other than temporary are charged
         to securities losses, reducing the carrying value of such securities.
         Gains or losses on the sale of investment securities are recorded on
         the trade date and are determined using the specific identification
         method and are shown separately in non-interest income in the
         consolidated statements of operations. No securities were classified as
         trading account securities as of September 30, 2001 or 2000.

         The stock of the Federal Home Loan Bank has no quoted fair value and no
         ready market exists. The investment in the stock is required of insured
         institutions that utilize the services of the Federal Home Loan Bank.
         The Federal Home Loan Bank will purchase the stock at its cost basis
         from the Company in the event the Company ceases to utilize the
         services of the Federal Home Loan Bank.


                                   (Continued)


<PAGE>

                                                                              11


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         Loans - The Company grants mortgage, commercial and consumer loans to
         customers. A substantial portion of the loan portfolio is represented
         by mortgage loans throughout the Company's primary market area. The
         ability of the Company's debtors to honor their contracts is dependent
         upon the real estate and general economic conditions in this area.

         Loans that management has the intent and ability to hold for the
         foreseeable future or until maturity or pay-off generally are reported
         at their outstanding unpaid principal balances adjusted for
         charge-offs, the allowance for loan losses, and any deferred fees or
         costs on originated loans. Interest income is accrued on the unpaid
         principal balance.

         The accrual of interest on mortgage and commercial loans is
         discontinued at the time the loan is 90 days delinquent unless the
         credit is well-secured and in process of collection. Credit card loans
         and other personal loans are typically charged off no later than 180
         days past due. In all cases, loans are placed on nonaccrual or
         charged-off at an earlier date if collection of principal or interest
         is considered doubtful.

         All interest accrued but not collected for loans that are placed on
         nonaccrual or charged off is reversed against interest income. The
         interest on these loans is accounted for on the cash-basis or
         cost-recovery method, until qualifying for return to accrual. Loans are
         returned to accrual status when all the principal and interest amounts
         contractually due are brought current and future payments are
         reasonably assured.

         Allowance for Loan Losses - The allowance for loan losses is
         established as losses are estimated to have occurred through a
         provision for loan losses charged to earnings. Loan losses are charged
         against the allowance when management believes the uncollectibility of
         a loan balance is confirmed. Subsequent recoveries, if any, are
         credited to the allowance.

         The allowance for loan losses is evaluated on a regular basis by
         management and is based upon management's periodic review of the
         collectibility of the loans in light of historical experience, the
         nature and volume of the loan portfolio, adverse situations that may
         affect the borrower's ability to repay, estimated value of any
         underlying collateral and prevailing economic conditions. This
         evaluation is inherently subjective as it requires estimates that are
         susceptible to significant revision as more information becomes
         available. In addition, various regulatory agencies, as an integral
         part of their examination process, periodically review the Company's
         allowances for loan losses and foreclosed real estate. Such agencies
         may require the Company to recognize additions to the allowances based
         on their judgments about information available to them at the time of
         their examination.


                                   (Continued)


<PAGE>

                                                                              12


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         A loan is considered impaired when, based on current information and
         events, it is probable that the Company will be unable to collect the
         scheduled payments of principal or interest when due according to the
         contractual terms of the loan agreement. Factors considered by
         management in determining impairment include payment status, collateral
         value, and the probability of collecting scheduled principal and
         interest payments when due. Loans that experience insignificant payment
         delays and payment shortfalls generally are not classified as impaired.
         Management determines the significance of payment delays and payment
         shortfalls on a case-by-case basis, taking into consideration all of
         the circumstances surrounding the loan and the borrower, including the
         length of the delay, the reasons for the delay, the borrower's prior
         payment record, and the amount of shortfall in relation to the
         principal and interest owed. Impairment is measured on a loan by loan
         basis for commercial and construction loans by either the present value
         of expected future cash flows discounted at the loan's effective
         interest rate, the loan's obtainable market price, or the fair value of
         the collateral if the loan is collateral dependent.

         Loan Origination Fees, Premiums and Discounts on Loans, Mortgage-Backed
         Securities and Collateralized Mortgage Obligations - Loan origination
         fees and certain direct loan origination costs are deferred and
         recognized over the lives of the related loans as an adjustment of the
         loan yields using the interest method. Premiums or discounts on loans,
         mortgage-backed securities, and collateralized mortgage obligations are
         amortized over the estimated lives of the related mortgage loans,
         adjusted for prepayments, using a method approximating the interest
         method. Premiums and discounts on loans, mortgage-backed securities,
         and collateralized mortgage obligations were insignificant at September
         30, 2001.

         Loans Held for Sale - Loans originated and intended for sale in the
         secondary market are carried at the lower of cost or estimated fair
         value in the aggregate. Net unrealized losses, if any, are recognized
         through a valuation allowance by charges to income. Gains or losses on
         loan sales are recognized at the time of sale and are determined by the
         difference between net sales proceed and the carrying value of the
         loans sold.

         Foreclosed Assets - Assets acquired through, or in lieu of, loan
         foreclosure are held for sale and are initially recorded at fair value
         at the date of foreclosure, establishing a new cost basis. Subsequent
         to foreclosure, valuations are periodically performed by management and
         the assets are carried at the lower of carrying amount or fair value
         less cost to sell. Cost related to the development and improvement of
         property are capitalized, where as costs relating to the holding of the
         property are expensed.


                                   (Continued)

<PAGE>

                                                                              13


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         Banking Premises and Equipment - Land is carried at cost. Buildings and
         equipment are carried at cost, less accumulated depreciation computed
         on the straight-line method over the estimated useful lives of the
         assets.

         Income Taxes - The Company provides for income taxes based upon pretax
         income, adjusted for permanent differences between reported and taxable
         earnings. Deferred tax assets and liabilities are recognized for the
         future tax consequences attributable to differences between the
         financial statement carrying amounts of existing assets and liabilities
         and their respective tax basis. Deferred tax assets and liabilities are
         measured using enacted tax rates expected to apply to taxable income in
         the years in which those temporary differences are expected to be
         realized or settled. The effect on deferred tax assets and liabilities
         of a change in tax rates is recognized in the period that includes the
         enactment date.

         Advertising - Advertising costs are charged to operations when
         incurred. Advertising expense was $30,987, $35,508 and $25,323 for the
         years ended September 30, 2001, 2000 and 1999, respectively.

         Earnings per Share - Basic earnings per share of common stock has been
         computed on the basis of the weighted-average number of shares of
         common stock outstanding. Fully diluted earnings per share reflects the
         potential dilution that could occur if the Company's outstanding
         options to acquire common stock were exercised. The exercise of these
         options accounts for the differences between basic and diluted weighted
         average shares outstanding. Options on 104,774 shares in 2001 and 2000
         of common stock were not included in computed diluted earnings per
         share because their effects were antidilutive.

         Reclassification - Certain amounts in the financial statements
         presented have been reclassified from amounts previously reported in
         order to be comparable between years. These reclassifications have no
         effect on previously reported stockholders' equity or net income during
         the periods involved.



                                   (Continued)


<PAGE>

                                                                              14


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         Comprehensive Income - The Company adopted Statement of Financial
         Accounting Standards ("SFAS") 130, Reporting Comprehensive Income, as
         of October 1, 1998. Accounting principles generally require that
         recognized revenue, expenses, gains and losses be included in net
         income. Although certain changes in assets and liabilities, such as
         unrealized gains and losses on available-for-sale securities, are
         reported as a separate component of the equity section of the balance
         sheet, such items, along with net income, are components of
         comprehensive income. The adoption of SFAS 130 had no effect on the
         corporation's net income or shareholders' equity.

         The components of other comprehensive income and related tax effects
         are as follows:

<TABLE>
<CAPTION>
                                                            2001              2000              1999
                                                           ------            ------            ------
         <S>                                             <C>                 <C>              <C>
         Unrealized holding gains (losses) on
            available-for-sale securities arising
            during the period                            $ 1,374,640         $ 18,185         $  (885,720)

         Reclassification adjustment for losses
            (gains) realized in income                        (4,267)           4,199          (2,402,639)
                                                         -----------         --------         -----------

         Net unrealized gains (losses)                     1,370,373           22,384          (3,288,359)

           Tax effect                                       (520,742)          (8,509)          1,249,577
                                                         -----------         --------         -----------

         Net-of-tax amount                               $   849,631         $ 13,875         $(2,038,782)
                                                         ===========         ========         ===========
</TABLE>


         New Accounting Pronouncements - In June 1998, the Financial Accounting
         Standards Board ("FASB") issued Statement of Financial Accounting
         Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
         Hedging Activities. This Statement establishes accounting and reporting
         standards for derivative instruments embedded in other contracts
         (collectively referred to as derivatives) and for hedging activities.
         It requires that an entity recognize all derivatives as either assets
         or liabilities in the statement of financial condition and measure
         those instruments at fair value. Under certain conditions, a derivative
         may be specifically designated as a hedge.


                                   (Continued)


<PAGE>

                                                                              15


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


         On October 1, 2000, the Company adopted SFAS No. 133 as amended.
         Management assessed the impact of this Statement on the Company's
         consolidated financial position and results of operations and the
         impact was immaterial.

         In September 2000, the FASB issued SFAS No. 140, Accounting for
         Transfers and Servicing of Financial Assets and Extinguishment of
         Liabilities, a replacement of FASB Statement No. 125. This Statement
         revises the standards for accounting for securitizations and other
         transfers of financial assets and collateral, and requires certain
         disclosures. The Statement is effective for transfers and servicing of
         financial assets and extinguishments of liabilities occurring after
         March 31, 2001. The Company adopted SFAS No. 140 on April 1, 2001.
         Accordingly, disclosures pertaining to collateral have been properly
         included in these consolidated financial statements. Transfers and
         servicing of financial assets and extinguishments of liabilities
         occurring after March 31, 2001, have not been material.

         In June 2001, the FASB issued SFAS No. 141, Business Combinations, SFAS
         No. 142, Goodwill and Other Intangible Assets, and SFAS No. 143,
         Accounting for Asset Retirement Obligations. SFAS No. 141 requires that
         the purchase method of accounting be used for all business combinations
         initiated after June 30, 2001. SFAS No. 142 will require that goodwill
         and intangible assets with indefinite useful lives no longer be
         amortized, but instead an entity must perform an assessment of whether
         goodwill is impaired as of the date of adoption and test for impairment
         at least annually in accordance with the provisions of the Statement.
         The new standard will also require that intangible assets with definite
         useful lives be amortized over their respective estimated useful lives
         to their estimated residual values, and reviewed for impairment. SFAS
         No. 143 addresses financial accounting and reporting for obligations
         associated with the retirement of tangible long-lived assets and the
         associated asset retirement costs. It applies to legal obligations
         associated with the retirement of long-lived assets that result from
         the acquisition, construction, development, and/or the normal operation
         of a long-lived asset, except for certain obligations of lessees.

         In August 2001, the FASB issued SFAS No. 144, Accounting for the
         Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
         financial accounting and reporting for the impairment or disposal of
         long-lived assets.

         The Company is required to adopt the provisions of SFAS No. 141
         immediately. SFAS Nos. 142, 143 and 144 are required to be adopted
         October 1, 2002, with earlier application permitted. The impact of
         adopting these standards on the financial condition of the Company has
         not been determined at this time.




<PAGE>

                                                                              16


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


2.       INVESTMENT SECURITIES

         Debt and equity securities have been classified in the consolidated
         statements of financial condition according to management's intent. The
         carrying amount of securities and their approximate fair value at
         September 30 were as follows:

<TABLE>
<CAPTION>
                                                                        Gross               Gross
                                                    Amortized         Unrealized         Unrealized
                                                      Cost               Gains              Losses          Fair Value
                                                   -----------        -----------        -----------        -----------
         <S>                                       <C>                <C>                <C>                <C>
         Available-for-Sale Securities

         September 30, 2001:
            U.S. Government agency                 $ 9,259,763        $   332,304        $     2,106        $ 9,589,961
            Collateral mortgage obligations
               (CMO's)                              13,485,346             49,477             40,416         13,494,407
            Mortgage-backed securities               8,775,995            352,720              1,473          9,127,242
            Other common stock                         790,385                 --             83,485            706,900
            Other equity securities                    150,000                 --             15,684            134,316
                                                   -----------        -----------        -----------        -----------

                                                   $32,461,489        $   734,501        $   143,164        $33,052,826
                                                   ===========        ===========        ===========        ===========

         September 30, 2000:
            U.S. Treasury securities               $ 2,896,067        $        --        $   135,643        $ 2,760,424
            U.S. Government agency                   9,120,162                 --            218,913          8,901,249
            Collateral mortgage obligations
               (CMO's)                              13,667,965             16,927             82,565         13,602,327
            Mortgage-backed securities              10,401,465             17,967            323,737         10,095,695
            Other common stock                         790,385                 --             53,072            737,313
                                                   -----------        -----------        -----------        -----------

                                                   $36,876,044        $    34,894        $   813,930        $36,097,008
                                                   ===========        ===========        ===========        ===========
</TABLE>



                                   (Continued)


<PAGE>

                                                                              17


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


2.       INVESTMENT SECURITIES (Continued)


         The Company sold securities available-for-sale for total proceeds of
         $9,696,496, $1,007,841 and $20,968,808, resulting in gross realized
         gains (losses) of $4,267, $(4,199) and $2,402,639 in 2001, 2000 and
         1999, respectively.

         The scheduled maturities at September 30, 2001 of securities (other
         than equity securities) available-for-sale by contractual maturity are
         shown below. Expected maturities will differ from contractual
         maturities because the borrower may have the right to call or prepay
         obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                 Available-for-Sale
                                           ------------------------------
                                            Amortized
                                              Cost             Fair Value
                                           -----------        -----------
         <S>                               <C>                <C>
         Due in one year or less           $   500,000        $   513,972
         Due from one to five years          3,326,219          3,464,079
         Due from five to ten years         13,863,788         14,302,491
         Due after ten years                13,831,097         13,931,068
                                           -----------        -----------

                                           $31,521,104        $32,211,610
                                           ===========        ===========
</TABLE>


         Investment securities available-for-sale with a carrying amount of
         approximately $5,009,000 and $5,299,000 at September 30, 2001 and 2000,
         respectively, were pledged to secure public deposits as required by law
         and for other purposes required or permitted by law.



<PAGE>

                                                                              18


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


3.       LOANS

         Loans consisted of the following at September 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                  2001                2000
                                                                 ------              ------
         <S>                                                  <C>                 <C>
         Real estate mortgage loans:
            First mortgage loans:
               Single family residential                      $ 51,082,708        $ 58,595,477
               Multi-family and commercial real estate          14,205,090          13,789,799
            Second mortgage loans                                7,592,494           7,333,692
            1-4 family construction loans                       25,378,016          24,380,605
            Savings account loans                                1,144,123           1,097,108
            Installment loans                                    3,506,035           4,089,397
                                                              ------------        ------------
                                                               102,908,466         109,286,078
                                                              ------------        ------------

         Deduct:
            Deferred loan fees                                     187,501             192,333
            Undisbursed portion of loans in process                  7,625              39,352
            Allowance for loan losses                            1,577,952             700,620
                                                              ------------        ------------
                                                                 1,773,078             932,305
                                                              ------------        ------------

         Total loans receivable - net                         $101,135,388        $108,353,773
                                                              ============        ============
</TABLE>


         Activity in the allowance for loan losses was as follows for the years
         ended September 30, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                             2001               2000                1999
                                                            -------            ------              ------
         <S>                                             <C>                 <C>                 <C>
         Beginning balance                               $   700,620         $   851,915         $   732,021
         Provision charged to income                         857,688               5,572             587,690
         Recovery of amounts charged off
            in prior years                                    67,606              35,221              38,447
         Loans charged off                                   (47,962)           (192,088)           (506,243)
                                                         -----------         -----------         -----------

         Ending balance                                  $ 1,577,952         $   700,620         $   851,915
                                                         ===========         ===========         ===========
</TABLE>



                                   (Continued)


<PAGE>

                                                                              19


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


3.       LOANS (Continued)


                  The following is a summary of information pertaining to
                  impaired loans:


<TABLE>
<CAPTION>
                                                                      September 30,
                                                              ------------------------------
                                                                 2001               2000
                                                              -----------        -----------
         <S>                                                  <C>                <C>
         Impaired loans without a valuation allowance         $        --        $        --
         Impaired loans with a valuation allowance                647,720              3,742
                                                              -----------        -----------

            Total impaired loans                              $   647,720        $     3,742
                                                              ===========        ===========

         Valuation allowance related to impaired loans        $   647,720        $     3,742
                                                              ===========        ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                     Years Ended September 30,
                                                             ----------------------------------------
                                                               2001            2000            1999
                                                             --------        --------        --------
         <S>                                                 <C>             <C>             <C>
         Average investment in impaired loans                $ 53,939        $  4,771        $ 78,998
         Interest income recognized on impaired loans              --             373           1,188
         Interest income recognized on a cash
            basis on impaired loans                                --             373           1,188
</TABLE>

         Interest on impaired loans is recorded on a "cash basis" and is
         included in earnings only when actually received in cash. No additional
         funds are committed to be advanced in connection with impaired loans.
         See also Note 13 concerning related party impaired loans.

4.       PREMISES AND EQUIPMENT

         Premises and equipment are summarized as follows at September 30, 2001
         and 2000:

<TABLE>
<CAPTION>
                                                     2001               2000
                                                    -------            -------
         <S>                                      <C>                <C>
         Land                                     $ 1,848,059        $ 1,848,059
         Buildings and improvements                 3,261,683          3,374,990
         Furniture, fixtures and equipment            961,905          1,187,236
         Automobiles                                  167,307            193,282
                                                  -----------        -----------
                                                    6,238,954          6,603,567
         Less: Accumulated depreciation             1,473,076          1,611,306
                                                  -----------        -----------

         Premises and equipment, net              $ 4,765,878        $ 4,992,261
                                                  ===========        ===========
</TABLE>

         Depreciation expense charged to operations was $365,309, $359,661 and
         $343,635 in 2001, 2000 and 1999, respectively.



<PAGE>

                                                                              20


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


5.       ACCRUED INTEREST RECEIVABLE

         Accrued interest receivable consists of the following at September 30,
         2001 and 2000:

<TABLE>
<CAPTION>
                                                            2001              2000
                                                           -------           -------
         <S>                                             <C>               <C>
         Loans                                           $  649,969        $  811,252
         Investment securities available-for-sale           310,256           372,233
                                                         ----------        ----------

            Total accrued interest receivable            $  960,225        $1,183,485
                                                         ==========        ==========
</TABLE>

6.       INVESTMENTS IN AFFILIATE

         In March 1995, the Company obtained a 50% ownership interest in
         Magnolia Title Services, Inc. (Magnolia) for an investment of $100,000.
         Magnolia provides title insurance and related services to various
         borrowers and lenders in the state of Alabama. The Company accounts for
         this investment under the equity method.

7.       LEASES

         The Company leases certain real estate and office equipment under
         operating leases expiring in various years through 2005. Minimum future
         rental payments under non-cancellable operating leases having remaining
         terms in excess of one year as of September 30, 2001 are as follows:

<TABLE>
<CAPTION>
                          Year Ending
                         September 30,                          Amount
                         -------------                          ------
                         <S>                                  <C>
                             2002                             $  54,565
                             2003                                38,611
                             2004                                13,742
                             2005                                 2,030
                                                              ---------

                                                              $ 108,948
                                                              =========
</TABLE>

         Lease expense charged to operations was $73,187, $66,229 and $65,359
         for the years ended September 30, 2001, 2000 and 1999, respectively.


<PAGE>

                                                                              21


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


8.       GOODWILL

         Goodwill represents the excess of the cost of companies acquired over
         the fair value of their net assets at date of acquisition and is being
         amortized on the straight line method over 15 years. Amortization
         expense charged to operations for 2001, 2000, and 1999 was $53,945,
         $63,128, and $54,772, respectively. Goodwill, net of accumulated
         amortization, is included in other assets on the statement of financial
         condition and amounted to $597,652 and $651,597 at September 30, 2001
         and 2000, respectively.


9.       DEPOSITS

         An analysis of deposit accounts at the end of the period is as follows
         at September 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                              2001                2000
                                                             ------              ------
         <S>                                              <C>                 <C>
         Demand accounts:
            Non interest-bearing checking accounts        $  3,349,326        $  2,990,806
            Interest-bearing:
               NOW accounts                                  9,490,474           9,728,880
               Money market demand                             406,734             632,274
                                                          ------------        ------------
                   Total demand accounts                    13,246,534          13,351,960

         Statement savings accounts                         11,158,100          11,794,425

         Certificate accounts                               74,650,946          80,216,716
                                                          ------------        ------------

               Total                                      $ 99,055,580        $105,363,101
                                                          ============        ============
</TABLE>

         Certificate accounts greater than or equal to $100,000 were $18,867,029
         and $19,434,998 at September 30, 2001 and 2000, respectively.


                                   (Continued)

<PAGE>

                                                                              22


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


9.       DEPOSITS (Continued)


         Scheduled maturities of certificate accounts were as follows at
         September 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                              2001                2000
                                             -------             ------
         <S>                               <C>                <C>
         Less than one year                $49,029,720        $61,535,297
         One year to two years              16,137,836         11,418,188
         Two years to three years            2,219,300          3,942,230
         Three years to four years           6,060,438            388,595
         Four years to five years            1,203,652          2,932,406
                                           -----------        -----------

              Total                        $74,650,946        $80,216,716
                                           ===========        ===========
</TABLE>


         Interest expense on deposits for the years ended September 30, 2001,
         2000 and 1999 were as follows:

<TABLE>
<CAPTION>
                                                   2001               2000               1999
                                                  ------             ------             ------
         <S>                                   <C>                <C>                <C>
         Demand accounts                       $   161,731        $   178,910        $   229,810
         Statement savings accounts                216,553            240,270            292,847
         Certificate accounts                    4,599,023          4,439,128          4,866,887
                                               -----------        -----------        -----------

              Total                            $ 4,977,307        $ 4,858,308        $ 5,389,544
                                               ===========        ===========        ===========
</TABLE>



<PAGE>

                                                                              23


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


10.      BORROWED FUNDS

         The Company was liable to the Federal Home Loan Bank of Atlanta on the
         following advances at September 30, 2001 and 2000:


<TABLE>
<CAPTION>
         Maturity Date    Callable Date      Type        Rate at 9/30          2001                 2000
         -------------    -------------      ----        ------------         ------               ------
         <S>              <C>              <C>           <C>                <C>                 <C>
         March 2001                        Fixed Rate         8.68%         $       --          $   257,439
         March 2001                        Adjustable         6.55%                 --           12,336,629
         August 2001                       Adjustable         6.68%                 --            5,250,000
         May 2002                          Adjustable         3.57%          1,660,000            1,660,000
         July 2002                         Adjustable         3.31%          3,000,000                   --
         May 2003                          Adjustable         3.61%          1,670,000            1,670,000
         April 2004       April 2001       Fixed Rate         5.01%                 --            4,000,000
         April 2004       April 2001       Adjustable         3.71%          4,000,000            4,000,000
         May 2005                          Adjustable         3.67%          1,670,000            1,670,000
         August 2007                       Adjustable         3.56%          5,250,000
         March 2010       December 2001    Fixed Rate         5.88%          5,000,000            5,000,000
         November 2010    November 2001    Fixed Rate         5.43%          5,000,000                   --
         January 2011     January 2006     Fixed Rate         5.30%          2,500,000                   --
         January 2011     January 2006     Fixed Rate         4.65%          2,500,000                   --
                                                                            ----------          -----------

                                                                            $32,250,000         $35,844,068
                                                                            ===========         ===========

Weighted average rate                                                              4.43%               6.34%
                                                                            ===========         ===========
</TABLE>


         At September 30, 2001 and 2000, the advances were collateralized by
         first-mortgage residential loans with carrying values of approximately
         $51,261,000 and $58,652,000, respectively. The Bank has an approved
         credit availability of approximately $45,000,000 at the Federal Home
         Loan Bank of Atlanta.


                                  (Continued)

<PAGE>

                                                                              24


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


10.      BORROWED FUNDS (Continued)


         During fiscal year 2000, the Bank established a discount window
         borrowing agreement with the Federal Reserve Bank of Kansas City with a
         maximum credit availability of $3,000,000. During fiscal years 2001 and
         2000, there were no borrowings on this discount window borrowing
         agreement.

         The Company also has a line-of-credit with a commercial bank of up to
         $4,000,000 which bears interest at the prime lending rate. The
         line-of-credit requires monthly interest payments. At September 30,
         2001, the prime lending rate was 6.00%. The outstanding balance on the
         line-of-credit was $3,355,000 and $3,005,000 at September 30, 2001 and
         2000, respectively. The note is secured by the Company's stock in its
         subsidiary, First Federal of the South. The line-of-credit is due on
         demand, but no later than March 1, 2002.

         The Company had a note payable to an individual in the amount of
         $40,000 at September 30, 2000 which was paid off in April 2001.

         Total borrowed funds at September 30, 2001 have maturities (or call
         dates) in future years as follows:

<TABLE>
<CAPTION>
                  Year Ending
                 September 30,                      Amount
                 -------------                      ------
                 <S>                             <C>
                     2002                        $ 18,015,000
                     2003                           4,170,000
                     2004                           4,000,000
                     2005                           1,670,000
                     2006                           2,500,000
                  Thereafter                        5,250,000
                                                 ------------

                                                 $ 35,605,000
                                                 ============
</TABLE>


<PAGE>

                                                                              25


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


11.      INCOME TAX EXPENSE

         Income tax expense (benefit) for the years ended September 30, 2001,
         2000 and 1999 consists of the following:

<TABLE>
<CAPTION>
                                   2001               2000               1999
                                  ------             ------             -------
         <S>                    <C>                 <C>                <C>
         Federal:
            Current             $    84,141         $   419,552        $   794,668
            Deferred               (278,226)             66,547            (76,991)
                                -----------         -----------        -----------
                                   (194,085)            486,099            717,677
                                -----------         -----------        -----------

         State:
            Current                 (27,712)            118,384            105,259
            Deferred                (20,458)              4,893             (6,730)
                                -----------         -----------        -----------
                                    (48,170)            123,277             98,529
                                -----------         -----------        -----------

         Total                  $  (242,255)        $   609,376        $   816,206
                                ===========         ===========        ===========
</TABLE>


         Income tax expense includes taxes related to investment security gains
         (losses) in the approximate amount of $1,600, $(1,600) and $913,000 in
         2001, 2000 and 1999, respectively.

         The actual income tax expense differs from the "expected" income tax
         expense computed by applying the U.S. federal corporate income tax rate
         of 34% to income before income taxes as follows:

<TABLE>
<CAPTION>
                                                                      2001                 2000                 1999
                                                                     ------               ------               ------
         <S>                                                       <C>                  <C>                  <C>
         Computed "expected" income tax expense                    $  (225,878)         $   534,095          $   719,510
         Increase (reduction) in income tax resulting from:
            Compensation expense for ESOP                              (19,360)             (22,176)              20,987
            Management Recognition Plan                                     --                  785                1,878
            State tax, net of federal income tax benefit               (57,401)              99,915               71,086
            Other                                                       60,384               (3,243)               2,745
                                                                   -----------          -----------          -----------

                   Total                                           $  (242,255)         $   609,376          $   816,206
                                                                   ===========          ===========          ===========

         Effective tax rate                                                 36%                  39%                  39%
                                                                   ===========          ===========          ===========
</TABLE>


                                   (Continued)

<PAGE>

                                                                              26


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


11.      INCOME TAX EXPENSE (Continued)


         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         September 30, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                                              2001                2000
                                                                                             ------              ------
         <S>                                                                                <C>                 <C>
         Deferred taxes:
            Unrealized loss on investment securities available-for-sale                     $       --          $ 296,033
            Bad debts                                                                          466,892            146,666
            Deferred compensation                                                               44,964             43,147
            Investment in equity of affiliate                                                   89,425             89,425
                                                                                            ----------          ---------

                Total deferred tax assets                                                      601,281            575,271
                                                                                            ----------          ---------

         Deferred tax liabilities:
            Management Recognition Plan                                                             --             11,368
            FHLB stock                                                                         237,138            237,138
            Depreciation                                                                       219,222            217,421
            Prepaid expenses                                                                    88,836             92,424
            Foreclosed real estate gain                                                          5,357             13,585
            Federal/state tax deduction on a cash basis                                         13,435              6,896
            Other                                                                               43,112              4,909
            Unrealized gain on investment securities available-for-sale                        224,709                 --
                                                                                            ----------          ---------

               Total deferred tax liabilities                                                  831,809            583,741
                                                                                            ----------          ---------

               Net deferred tax asset (liability)                                           $ (230,528)         $  (8,470)
                                                                                            ==========          =========
</TABLE>


         There was no valuation allowance at September 30, 2001 or 2000.





<PAGE>

                                                                              27


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS

         Employee Stock Ownership Plan - Effective October 1, 1994, the Bank
         established the SouthFirst Bancshares, Inc. Employee Stock Ownership
         Plan (ESOP). The ESOP is available to all employees who have met
         certain age and service requirements. Contributions to the plan are
         determined by the Board of Directors and may be in cash or in common
         stock. The Corporation loaned $664,000 to the trustee of the ESOP, who
         purchased, on behalf of the trust of the ESOP, 66,400 shares of the
         shares sold by the Corporation in the public offering.

         The common stock of the Corporation acquired for the ESOP is held as
         collateral for the loan and is released for allocation to the ESOP
         participants as principal payments are made on the loan. The Bank makes
         contributions to the ESOP in amounts sufficient to make loan interest
         and principal payments and may make additional discretionary
         contributions. Contributions, which include dividends on ESOP shares,
         of $85,515, $88,478 and $43,518 were made to the ESOP in 2001, 2000 and
         1999, respectively. During 2001 and 2000, the Trustee distributed cash
         of $15,925 and $12,404, respectively, in lieu of shares to retiring
         participants.

         The ESOP's loan is repayable in ten annual installments of principal
         and interest. The interest rate is adjusted annually and is equal to
         the prime rate on each October 1st, beginning with October 1, 1995,
         until the note is paid in full. Principal and interest for the years
         ended September 30, 2001, 2000 and 1999 were $85,515, $88,478 and
         $73,845, respectively. The interest rate and principal outstanding at
         September 30, 2001 were 6.00% and $134,808, respectively. These
         payments resulted in the commitment to release 6,376 shares in 2001,
         6,399 shares in 2000 and 7,056 shares in 1999. The Company has
         recognized compensation expense, equal to the fair value of the
         committed-to-be released shares of $68,413, $63,094 and $105,896 in
         2001, 2000 and 1999, respectively. Excluding committed-to-be released
         shares, suspense shares at September 30, 2001 and 2000 equaled 10,969
         and 17,345, respectively. The fair value of the suspense shares at
         September 30, 2001 and 2000, was $123,950 and $173,450, respectively.
         These suspense shares are excluded from weighted average shares in
         determining earnings per share.

         Stock-based Compensation Plan - During 1995, the Company adopted a
         Stock Option and Incentive Plan for directors and key employees of the
         Company. The exercise price cannot be less than the market price on the
         grant date and number of shares available for options cannot exceed
         83,000. Stock appreciation rights may also be granted under the plan.
         During 1998, the Company adopted the 1998 Stock Option & Incentive Plan
         for directors and key employees of the Company. Under the 1998 plan,
         options to acquire 67,511 shares had been granted. The term of the
         options range from seven to ten years and they vest equally over
         periods from three to five years.


                                   (Continued)





<PAGE>

                                                                              28

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS (Continued)


         Following is a summary of the status of the 1995 and 1998 plans:

<TABLE>
<CAPTION>
                                                                     1995 Plan                          1998 Plan
                                                             ------------------------           -----------------------
                                                                             Weighted                          Weighted
                                                                             Average                           Average
                                                               Number        Exercise             Number       Exercise
                                                             of Shares         Price            of Shares       Price
                                                             ---------       --------           ---------      --------
         <S>                                                 <C>             <C>                <C>            <C>
         Outstanding at  September 30, 1999                    68,890         $ 14.00              65,001      $ 15.75
         Forfeited                                            (12,450)          14.00             (16,667)       15.75
                                                             --------                           ---------

         Outstanding at  September 30, 2000                    56,440           14.00              48,334        15.75
         Granted                                               14,110            9.75              19,177         9.75
                                                             --------                           ---------

         Outstanding at  September 30, 2001                    70,550           13.15              67,511        14.05
                                                             ========                           =========
</TABLE>

         Information pertaining to options outstanding at September 30, 2001 is
         as follows:

<TABLE>
<CAPTION>
                                                          Options Outstanding               Options Exercisable
                                                      ----------------------------      ----------------------------
                                                       Weighted
                                                        Average           Weighted                          Weighted
                                                       Remaining          Average                           Average
               Range of                 Number        Contractual         Exercise          Number          Exercise
            Exercise Prices          Outstanding          Life             Price        Exercisable          Price
            ---------------          -----------      -----------         --------      -----------         --------
          <S>                        <C>              <C>                 <C>           <C>                 <C>
                $9.75                   33,287          6.4 years         $   9.75             --           $     --

            $14.00 - 15.75             104,774          5.1 years            14.81         85,440              14.59
                                       -------                                             ------

          Outstanding at end
               of year                 138,061          5.4 years            13.59         85,440              14.59
                                       =======                                             ======
</TABLE>




                                   (Continued)


<PAGE>

                                                                              29


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS (Continued)


         The Company applies APB Opinion 25 and related interpretations in
         accounting for its stock option plans. Accordingly, no compensation
         cost has been recognized for the plans in 2001, 2000 or 1999. Had
         compensation cost been determined on the basis of fair value pursuant
         to SFAS No. 123, net income and earnings per share would have been
         adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                            2001              2000               1999
                                                           ------            ------             ------
         <S>                                             <C>                <C>              <C>
         Net income (loss):
            As reported                                  $ (422,093)        $ 961,492        $ 1,299,999
            Pro forma                                      (437,924)          948,247          1,272,640

         Basic earnings (loss) per share:
            As reported                                       (0.47)             1.06               1.44
            Pro forma                                         (0.47)             1.06               1.43

         Fully diluted earnings (loss) per share:
            As reported                                       (0.46)             1.06               1.44
            Pro forma                                         (0.47)             1.06               1.43
</TABLE>

         Because the SFAS No. 123 method of accounting has not been applied to
         options granted prior to October 1, 1995, the resulting pro forma
         compensation costs may not be representative of that to be expected in
         future years.

         The fair value of each option grant is estimated on the date of the
         grant using the Black-Scholes option-pricing model with the following
         weighted average assumptions:

<TABLE>
<CAPTION>
                                                2001             2000              1999
                                               ------           ------            ------
         <S>                                   <C>              <C>               <C>
         Dividend yield                          5.01%            3.81%             3.81%
         Expected life                         8 years          9 years           9 years
         Expected volatility                     8.71%            8.63%             8.63%
         Risk-free interest rate                 5.50%            5.77%             5.77%
</TABLE>


                                   (Continued)


<PAGE>
                                                                              30


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS (Continued)


         Management Recognition Plan - On November 15, 1995, the Company issued
         33,200 shares of common stock (Initial Shares) to key employees under
         the terms of the Company's Management Recognition Plans (MRP's). These
         shareholders receive dividends on the shares and have voting rights.
         However, the sale or transferability of the shares is subject to the
         vesting requirements of the plan. These vesting requirements provide
         for the removal of the transferability restrictions upon the
         performance of employment services. The restrictions were fully removed
         in November 2000. Participants who terminate employment prior to
         satisfying the vesting requirements must forfeit the unvested shares
         and the accumulated dividends on the forfeited shares. The Company has
         recorded compensation expense equal to the fair value of the portion of
         vested shares attributable to 2001, 2000 and 1999. In addition, the
         dividends paid on unvested shares are also reflected as compensation
         expense. Total compensation expense attributable to the MRP's in 2001,
         2000 and 1999 was $5,407, $42,635 and $83,572, respectively.

         During the year ended September 30, 2001, the Company's MRP purchased
         an additional 11,525 shares of common stock at an aggregate price of
         $126,411. Shares held in trust related to the MRP are shown as a
         reduction of stockholders' equity in the accompanying consolidated
         statements of financial condition. As these shares are granted to
         employees, an amount equal to the award is reclassified from shares
         held in trust to unearned compensation.

         401 (k) Plan - The Company also has a 401(k) plan that covers all
         employees who meet minimum age and service requirements. The plan
         provides for elective employee salary deferrals and discretionary
         company matching contributions. Company matching contributions were
         $34,107, $0 and $44,454 in 2001, 2000 and 1999, respectively.

         Deferred Compensation Agreements - The Company has entered into
         deferred compensation agreements with two of its senior officers and
         one former officer, pursuant to which each will receive from the
         Company certain retirement benefits at age 65. Such benefits will be
         payable for 15 years to each officer or, in the event of death, to such
         officer's respective beneficiary. A portion of the retirement benefits
         will accrue each year until age 65 or, if sooner, until termination of
         employment. The annual benefits under these arrangements range from
         approximately $24,000 to $65,000.

         The retirement benefits available under the deferred compensation
         agreements are unfunded. However, the Bank has purchased life insurance
         policies on the lives of these officers that will be available to the
         Company and the Bank to provide, both, for retirement benefits and for
         key man insurance. The costs of these arrangements was $70,713, $73,758
         and $73,481 in 2001, 2000 and 1999, respectively.



                                   (Continued)


<PAGE>
                                                                              31


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


12.      EMPLOYEE BENEFIT PLANS (Continued)


         In addition to the deferred compensation arrangements discussed above,
         the Company entered into arrangements with two officers in April 1997,
         under which the Company issued a total of 21,135 shares of common stock
         to these officers. The shares vest ratably over the 15 year term of
         their employment contracts. The Company has recognized compensation
         expense equal to the fair value of the vested shares of $19,902,
         $19,902 and $19,902 in 2001, 2000 and 1999, respectively.

13.      RELATED PARTY TRANSACTIONS

         In the normal course of business, loans are made to officers and
         directors of the Company. These loans are made on substantially the
         same terms, including interest rates and collateral, as those
         prevailing for comparable transactions with others. Total loans
         outstanding to these persons at September 30, 2001 and 2000 amounted to
         $1,025,719 and $2,943,529, respectively. The change from 2000 to 2001
         reflects payments of $605,193 and advances of $90,599 and loans no
         longer related of $1,403,216. Loans that are no longer related include
         loans to a former director of approximately $1,200,000. Of this amount,
         $647,720 was considered to be impaired and a valuation allowance of
         $647,720 was provided on such loan and charged to operations during
         2001.

         Deposits from related parties held by the Bank at September 30, 2001
         and 2000 amounted to $192,774 and $511,182, respectively.

         See also Note 14 for a discussion of payments to former officers and
         directors.

14.      COMMITMENTS AND CONTINGENCIES

         Off Balance Sheet Items - At September 30, 2001, the Bank had
         outstanding loan commitments of approximately $16,331,000 including
         $11,644,000 in undisbursed construction loans in process, $3,518,000 in
         unused lines and letters of credit, and $1,169,000 in commitments to
         originate mortgage loans consisting primarily of 30-day commitments.
         Commitments to originate conventional mortgage loans consisted of fixed
         rate mortgages for which interest rates had not been established, all
         having terms ranging from 15 to 30 years.

         These financial instruments are not reflected on the accompanying
         statements of financial condition, but do expose the Company to credit
         risk. The Company's exposure to credit loss in the event of
         nonperformance by the other party to the financial instrument for
         commitments to extend credit is represented by the contractual amount
         of these instruments. The Company uses the same credit policies in
         making commitments and conditional obligations as it does for on
         balance-sheet instruments.



                                   (Continued)


<PAGE>

                                                                              32


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


14.      COMMITMENTS AND CONTINGENCIES (Continued)


         These commitments to extend credit are agreements to lend to a customer
         as long as there is no violation of any condition established in the
         contract. Commitments generally have fixed expiration dates or other
         termination clauses and may require payment of a fee. Since some of the
         commitments are expected to expire without being drawn upon, the total
         commitment amounts do not necessarily represent future cash
         requirements.

         Litigation - During the fiscal year ended September 30, 2001, the
         Company agreed to settle certain legal actions with a former director
         and officer. The terms of the agreement, which have been agreed to in
         principal, but not finalized at September 30, 2001, provide for a
         payment to the former director and officer of $570,000. In exchange for
         the payment, the Company is to receive 13,856 shares of its common
         stock, which are owned by the former director and officer and at the
         time of the agreement had a market value of approximately $160,000. The
         excess of the payment ($410,000) has been accrued by the Company and is
         included in the statement of operations as part of termination
         agreements. When the agreement is finalized and the stock is received,
         management anticipates treating it as treasury stock.

         The Company is involved in various legal actions arising in the normal
         course of business. In the opinion of management, based upon
         consultation with legal counsel, the ultimate resolution of all
         proceedings will not have a material adverse effect upon the financial
         position or operations of the Company.

         Employment Agreements - The Company has employment agreements with
         certain senior officers. The agreements provide for certain salaries
         and benefits for a 24-month period. The agreements further provide that
         if the employee is terminated without cause they will receive payments
         equal to the amount of salary and benefits remaining under the term of
         contract with a minimum amount of 12 months salary and benefits. The
         agreements also provide that if employment is terminated by the Company
         in connection with or within 24 months after any change in control of
         the Company, each employee shall be paid approximately three times
         their salary.

         During 2001, the Company's President and Chairman of the Board of
         Directors resigned and was paid $150,000 plus certain other expenses
         for a release of all of the claims against the Company, including any
         claims under his employment agreement. The payment is included in the
         statement of operations as part of termination agreements.
         Additionally, the Company purchased 44,942 shares of the former
         President's stock in the Company at a market price of approximately
         $519,000, which was treated as treasury stock.

         Significant Group Concentrations of Credit Risk - The Company maintains
         cash balances at several financial institutions. Cash balances at each
         institution are insured by the Federal Deposit Insurance Corporation
         (the "FDIC") up to $100,000. At various times throughout the year cash
         balances held at these institutions will exceed federally insured
         limits. Management monitors such accounts and does not consider that
         such excess expose the Company to any significant risk.



<PAGE>

                                                                              33


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


15.      RETAINED EARNINGS AND REGULATORY CAPITAL

         The Bank is subject to various regulatory capital requirements
         administered by the federal banking agencies. Failure to meet minimum
         capital requirements can initiate certain mandatory, and possibly
         additional discretionary actions by regulators that, if undertaken,
         could have a direct material effect on the Bank's financial statements.
         Under capital adequacy guidelines and the regulatory framework for
         prompt corrective action, the Bank must meet specific capital
         guidelines that involve quantitative measures of the Bank's assets,
         liabilities, and certain off-balance-sheet items as calculated under
         regulatory accounting practices. The Bank's capital amounts and
         classification are also subject to qualitative judgments by the
         regulators about components, risk weightings, and other factors.

         Quantitative measures established by regulations to ensure capital
         adequacy require the Bank to maintain minimum amounts and ratios (set
         forth in the table below) of total and Tier I capital to risk-weighted
         assets, and of Tier I capital to average assets. Management believes,
         as of September 30, 2001, that the Bank meets all capital adequacy
         requirements and meets the requirements to be classified as "well
         capitalized."

<TABLE>
<CAPTION>
                                                                         For Capital
                                                 Actual                Adequacy Purposes           Well Capitalized
                                           ------------------         -------------------         -------------------
                                           Amount       Ratio         Amount        Ratio         Amount        Ratio
                                           ------       -----         ------        -----         ------        -----
<S>                                     <C>             <C>         <C>            <C>         <C>            <C>
      As of September 30, 2001:
        Total capital
           (to risk weighted assets)    $ 14,884,000    16.11%      =>$7,391,000   =>8.00%     =>$9,238,000   =>10.00%
        Tier I capital
           (to risk weighted assets)      13,904,000    15.05%      => 3,695,000   =>4.00%     => 5,543,000   => 6.00%
        Tier I capital
           (to average assets)            13,904,000     8.98%      => 6,190,000   =>4.00%     => 7,738,000   => 5.00%


      As of September 30, 2000:
        Total capital
           (to risk weighted assets)    $ 14,924,000    15.57%      =>$7,666,000   =>8.00%     =>$9,583,000   =>10.00%
        Tier I capital
           (to risk weighted assets)      14,761,000    15.40%      => 3,833,000   =>4.00%     => 5,750,000   => 6.00%
        Tier I capital
           (to average assets)            14,761,000     9.44%      => 6,253,000   =>4.00%     => 7,816,000   => 5.00%
</TABLE>



                                   (Continued)



<PAGE>

                                                                              34


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


15.      RETAINED EARNINGS AND REGULATORY CAPITAL (Continued)


         Savings institutions with more than a "normal" level of interest rate
         risk are required to maintain additional total capital. A savings
         institution with a greater than normal interest rate risk is required
         to deduct specified amounts from total capital, for purposes of
         determining its compliance with risk-based capital requirements.
         Management believes that the Bank was in compliance with capital
         standards at September 30, 2001 and 2000.

         Retained earnings at September 30, 2001 and 2000, include approximately
         $2,400,000 for which no provision for income tax has been made. This
         amount represents allocations of income to bad debt deductions for tax
         computation purposes. If, in the future, this portion of retained
         earnings is used for any purpose other than to absorb tax bad debt
         losses, income taxes may be imposed at the then applicable rates.
         Retained earnings is also restricted at September 30, 2001, as a result
         of the liquidation account established upon conversion to a stock
         company. No dividends may be paid to stockholders if such dividends
         would reduce the net worth of the Bank below the amount required by the
         liquidation account.

16.      SHAREHOLDERS' RIGHTS PLAN

         In December 1997, the Company adopted a Stock Purchase Rights Plan that
         provides rights to holders of the Company's common stock to receive
         common stock rights under certain circumstances. The rights will become
         exercisable ten days after a person or group acquires 15% or more of
         the company's shares. If, after the rights become exercisable, the
         Company becomes involved in a merger, each right then outstanding
         (other than those held by the 15% holder) would entitle its holder to
         buy common stock of the Company worth twice the exercise price of each
         right. The rights expire in November 2007.

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of a financial instrument is the current amount that
         would be exchanged between willing parties, other than in a forced
         liquidation. Fair value is best determined based upon quoted market
         prices. However, in many instances, there are no quoted market prices
         for the Company's various financial instruments. In cases where quoted
         market prices are not available, fair values are based on estimates
         using present value or other valuation techniques. Those techniques are
         significantly affected by the assumptions used, including the discount
         rate and estimates of future cash flows. Accordingly, the fair value
         estimates may not be realized in an immediate settlement of the
         instrument. Further assets that are not financial instruments are not
         included in the following tables. Accordingly, the aggregate fair value
         amounts presented may not necessarily represent the underlying fair
         value of the Company.


                                   (Continued)

<PAGE>

                                                                              35


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


17.      FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)


         The following methods and assumptions were used by the Company in
         estimating the fair value of its financial instruments:

         Cash and Cash Equivalents - Fair value equals the carrying value of
         such assets due to their nature.

         Interest-bearing Deposits in Other Financial Institutions - Fair value
         equals the carrying value of such assets due to their nature.

         Investment Securities and Accrued Interest Receivable - The fair value
         of investments is based on quoted market prices. The carrying amount of
         related accrued interest receivable approximates its fair value.

         Loans Receivable - The fair value of loans is calculated using
         discounted cash flows. The discount rate used to determine the present
         value of the loan portfolio is an estimated market discount rate that
         reflects the credit and interest rate risk inherent in the loan
         portfolio. The estimated maturity is based on the Company's historical
         experience with repayments adjusted to estimate the effect of current
         market conditions. The carrying amount of related accrued interest
         receivable approximates its fair value.

         Deposits - Fair values for certificates of deposit have been determined
         using discounted cash flows. The discount rate used is based on
         estimated market rates for deposits of similar remaining maturities.
         The carrying amount of all other deposits, due to their short-term
         nature, approximate their fair values. The carrying amount of related
         accrued interest payable approximates its fair value.

         Borrowed Funds - Fair value for the fixed-rate borrowings has been
         determined using discounted cash flows. The discount rate used is based
         on estimated current rates for advances with similar maturities. The
         carrying amount of the variable rate borrowings, due to the short
         repricing periods, approximate their fair value.




                                   (Continued)


<PAGE>

                                                                              36


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


17.      FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)


<TABLE>
<CAPTION>
                                                               2001                                    2000
                                                  -------------------------------         ------------------------------
                                                   Carrying           Estimated             Carrying         Estimated
                                                     Amount           Fair Value             Amount          Fair Value
                                                  ------------       ------------         ------------      ------------
       <S>                                        <C>                <C>                  <C>               <C>
       Financial assets:
          Cash and cash equivalents               $  6,020,186       $  6,020,186         $  4,667,295      $  4,667,295
          Interest-bearing deposits                    898,533            898,533            1,737,099         1,737,099
          Investments securities                    33,052,826         33,052,826           36,097,008        36,097,008
          Loans receivable - net                   101,135,388        104,611,041          108,353,773       111,480,637
          Accrued interest receivable                  960,225            960,225            1,183,485         1,183,485

       Financial liabilities:
          Deposits                                  99,055,580        100,646,325          105,363,101       105,610,887
          Borrowed funds                            35,605,000         35,605,000           38,889,068        38,850,183
          Accrued interest payable                   1,328,183          1,328,183            1,403,005         1,403,005
</TABLE>









<PAGE>

                                                                              37



                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


20.      BUSINESS SEGMENT INFORMATION

         The Company organizes its business units into two reportable segments:
         traditional banking activities and employee benefits consulting. The
         banking segment provides a full range of banking services within its
         primary market areas of central Alabama. The employee benefits
         consulting firm operates primarily in the Montgomery, Alabama area.

         The segments' accounting policies are the same as those described in
         the summary of significant accounting policies. The Company's
         reportable business segments are strategic business units that offer
         different products and services. Each segment is managed separately
         because each unit is subject to different marketing and regulatory
         environments.

         The following table presents financial information for each reportable
         segment:

<TABLE>
<CAPTION>
                                                                             September 30, 2001
                                                         --------------------------------------------------------
                                                                                 Employee
                                                           Banking               Benefits
                                                          Activities            Consulting              Total
                                                         -------------         ------------         -------------
         <S>                                             <C>                   <C>                  <C>
         Interest and dividend income                    $  10,856,911         $     34,957         $  10,891,868
         Interest expenses                                   6,984,203                   --             6,984,203
                                                         -------------         ------------         -------------

         Net interest income                                 3,872,708               34,957             3,907,665
         Provision for loan losses                             857,688                   --               857,688
                                                         -------------         ------------         -------------

         Net interest income after provision for
            loan losses                                      3,015,020               34,957             3,049,977
         Other income                                        1,170,022            1,141,032             2,311,054
         Other expenses                                     (5,024,611)          (1,000,768)           (6,025,379)
                                                         -------------         ------------         -------------

         Income (loss) before income taxes                    (839,569)             175,221              (664,348)
         Income taxes                                         (309,054)              66,799              (242,255)
                                                         -------------         ------------         -------------

         Net income (loss)                               $    (530,515)        $    108,422         $    (422,093)
                                                         =============         ============         =============

         Depreciation and amortization included
            in other expenses                            $     331,973         $     87,281         $     419,254
                                                         =============         ============         =============

         Total assets at year-end                        $ 150,261,418         $  1,682,379         $ 151,943,797
                                                         =============         ============         =============
</TABLE>


                                   (Continued)


<PAGE>

                                                                              38


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


20.      BUSINESS SEGMENT INFORMATION (Continued)


<TABLE>
<CAPTION>
                                                                             September 30, 2000
                                                         --------------------------------------------------------
                                                                                 Employee
                                                           Banking               Benefits
                                                          Activities            Consulting              Total
                                                         -------------         ------------         -------------
         <S>                                             <C>                   <C>                  <C>
         Interest and dividend income                    $  11,877,806         $     37,376         $  11,915,182
         Interest expenses                                   7,138,866                   --             7,138,866
                                                         -------------         ------------         -------------

         Net interest income                                 4,738,940               37,376             4,776,316
         Provision for loan losses                               5,572                   --                 5,572
                                                         -------------         ------------         -------------

         Net interest income after provision for
            loan losses                                      4,733,368               37,376             4,770,744
         Other income                                          999,490            1,100,013             2,099,503
         Other expenses                                     (4,387,703)            (911,676)           (5,299,379)
                                                         -------------         ------------         -------------

         Income before income taxes                          1,345,155              225,713             1,570,868
         Income taxes                                          523,427               85,949               609,376
                                                         -------------         ------------         -------------

         Net income                                      $     821,728         $    139,764         $     961,492
                                                         =============         ============         =============

         Depreciation and amortization included
            in other expenses                            $     350,042         $     72,747         $     422,789
                                                         =============         ============         =============

         Total assets at year-end                        $ 160,208,295         $  1,709,831         $ 161,918,126
                                                         =============         ============         =============
</TABLE>


                                   (Continued)


<PAGE>

                                                                              39


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


20.      BUSINESS SEGMENT INFORMATION (Continued)


<TABLE>
<CAPTION>
                                                                             September 30, 1999
                                                         --------------------------------------------------------
                                                                                 Employee
                                                           Banking               Benefits
                                                          Activities            Consulting              Total
                                                         -------------         ------------         -------------
             <S>                                         <C>                   <C>                  <C>
             Interest and dividend income                $  10,468,911         $     15,186         $  10,484,097
             Interest expenses                               6,366,823                   --             6,366,823
                                                         -------------         ------------         -------------

             Net interest income                             4,102,088               15,186             4,117,274
             Provision for loan losses                         587,690                   --               587,690
                                                         -------------         ------------         -------------

             Net interest income after provision for
                loan losses                                  3,514,398               15,186             3,529,584
             Other income                                    3,400,441            1,017,296             4,417,737
             Other expenses                                 (4,968,347)            (862,769)           (5,831,116)
                                                         -------------         ------------         -------------

             Income before income taxes                      1,946,492              169,713             2,116,205
             Income taxes                                      752,160               64,046               816,206
                                                         -------------         ------------         -------------

             Net income                                  $   1,194,332         $    105,667         $   1,299,999
                                                         =============         ============         =============

             Depreciation and amortization included
                in other expenses                        $     329,888         $     68,519         $     398,407
                                                         =============         ============         =============

             Total assets at year-end                    $ 159,835,512         $  1,544,517         $ 161,380,029
                                                         =============         ============         =============
</TABLE>


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


<TABLE>
<CAPTION>

                                                             2001                  2000                  1999
                                                            ------                ------                ------
         <S>                                             <C>                   <C>                   <C>
         ASSETS

         Total assets for reportable segments            $ 151,943,797         $ 161,918,126         $ 161,380,029
         Elimination of intercompany receivables              (749,582)             (892,492)             (873,664)
                                                         -------------         -------------         -------------

         Consolidated assets                             $ 151,194,215         $ 161,025,634         $ 160,506,365
                                                         =============         =============         =============
</TABLE>