<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                             -----------------------

                                   FORM 10-KSB
(Mark One)
(X)             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended September 30, 2001

( )             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                                     OF THE
                         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from               to
                                       --------------    -----------------
                         Commission File Number: 1-13640

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

                             A Delaware Corporation
                  I.R.S. Employer Identification No. 63-1121255
                              126 North Norton Ave.
                            Sylacauga, Alabama 35150
                                 (256) 245-4365

                 Securities Registered Pursuant to Section 12(b)
                              of the Exchange Act:

                                                     Name of Each Exchange
     Title of Each Class                              on Which Registered
-----------------------------                     -----------------------------
Common Stock, $ .01 par value                     American Stock Exchange, Inc.

                 Securities Registered Pursuant to Section 12(g)
                            of the Exchange Act: None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB, or any
amendment to this Form 10-KSB. [ ]

         Issuer's Revenues for the fiscal year ended September 30, 2001:
$13,202,922

         The aggregate market value of the common equity held by non-affiliates
of the Registrant (751,402 shares), computed using the closing price as reported
on the American Stock Exchange for the Registrant's Common Stock on December 27,
2001 was $7,251,029. For the purposes of this response, officers, directors and
holders of 5% or more of the Registrant's Common Stock are considered the
affiliates of the Registrant.

         The number of shares outstanding of the Registrant's Common Stock as of
December 15, 2001: 858,244 shares of $.01 par value Common Stock.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

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



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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         Management has endeavored in its communications, in its Annual Report,
and in this Form 10-KSB to highlight the trends and factors that might have an
impact on SouthFirst Bancshares, Inc. ("SouthFirst") and the industry in which
SouthFirst competes. Any "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which statements generally can
be identified by the use of forward-looking terminology, such as "may," "will,"
"expect," "estimate," "anticipate," "believe," "target," "plan," "project," or
"continue" or the negatives thereof or other variations thereon or similar
terminology, are made on the basis of management's plans and current analyses of
SouthFirst, its business and the industry as a whole. These forward-looking
statements are subject to risks and uncertainties, including, but not limited
to, economic conditions, competition, interest rate sensitivity and exposure to
regulatory and legislative changes. The above factors, in some cases, have
affected, and in the future could affect, SouthFirst's financial performance and
could cause actual results for fiscal year 2002 and beyond to differ materially
from those expressed or implied in such forward-looking statements. SouthFirst
does not undertake to publicly update or revise its forward-looking statements
even if experience or future changes make it clear that any projected results
expressed or implied therein will not be realized.

                                     PART I

ITEM 1. BUSINESS

BUSINESS OF SOUTHFIRST

         SouthFirst Bancshares, Inc. ("SouthFirst") was formed in April of 1994,
at the direction of the Board of Directors of First Federal of the South ("First
Federal"), a federally chartered savings association subject to the regulatory
oversight of the Office of Thrift Supervision ("OTS") for the purpose of
becoming a holding company to own all of the outstanding Common Stock of First
Federal. On February 13, 1995, First Federal was converted from a mutual to a
stock form of ownership (the "Conversion"), whereupon SouthFirst, approved by
the OTS as a thrift holding company, acquired all of the issued and outstanding
shares of First Federal. SouthFirst's business primarily involves directing,
planning and coordinating the business activities of its wholly owned
subsidiary, First Federal, along with First Federal's two wholly owned operating
subsidiaries, (i) Pension & Benefit Financial Services, Inc., d/b/a Pension &
Benefit Trust Company ("Pension & Benefit"), an employee benefit plan consulting
firm and trust company, located in Montgomery, Alabama, and (ii) SouthFirst
Mortgage, Inc. ("SouthFirst Mortgage"), a subsidiary, through which First
Federal conducts a residential mortgage and construction lending operation.
Further, SouthFirst organized, as a wholly owned subsidiary, SouthFirst
Financial Services, Inc. ("SouthFirst Financial"), located in Montgomery and
Sylacauga, Alabama, through which SouthFirst provides insurance products and
other financial services to the customers of First Federal. In the future,
SouthFirst may acquire or organize other operating affiliates or subsidiaries,
including other financial institutions.

         To date, SouthFirst has neither owned nor leased any property, but has
instead used the premises, equipment and furniture of First Federal. At the
present time, because SouthFirst does not intend to employ any persons other
than officers, it will continue utilizing the support staff of First Federal
from time to time. Additional employees may be hired as appropriate to the
extent SouthFirst expands in the future.


                                       1


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BUSINESS OF FIRST FEDERAL

         GENERAL

         First Federal was organized in 1949 as a federally chartered mutual
savings and loan association under the name Sylacauga Federal Savings and Loan
Association. In 1959, First Federal changed its name to First Federal Savings
and Loan Association of Sylacauga. In the Conversion, First Federal changed its
name to First Federal of the South. First Federal is a member of the Federal
Home Loan Bank (the "FHLB") System and its deposit accounts are insured up to
the maximum amount allowable by the FDIC.

         At September 30, 2001, First Federal conducted business from four (4)
full-service locations in Alabama. These locations included its main office in
Sylacauga and branches in Talladega, Clanton, and Centreville. In addition,
SouthFirst Mortgage, the wholly owned subsidiary of First Federal, operates a
loan production office in the Alabama city of Hoover (a suburb of metropolitan
Birmingham), primarily to enhance First Federal's construction lending
activities in the growing residential markets of metropolitan Birmingham.
Further, First Federal operates a loan production office in Dothan, Alabama, to
enhance residential mortgage and construction lending in the fast growing "wire
grass" region of southern Alabama and northwest Florida. First Federal also
pursues other types of loans such as consumer and commercial loans in the
Birmingham and Dothan market areas, as demands dictate.

         First Federal's principal business has been, and continues to be,
attracting retail deposits from the general public and investing those deposits,
together with funds generated from operations, primarily in one-to-four family
mortgage loans, residential constructions loans, mortgage-backed securities,
collateralized mortgage obligations ("CMOs") and investment securities.

         First Federal's revenues are derived principally from interest and fees
on loans in its portfolio and from mortgage-backed securities, CMOs, investment
securities portfolios and customer service fees. First Federal's primary sources
of funds are deposits and proceeds from principal and interest payments on
loans, mortgage-backed securities, CMOs, FHLB advances and other investment
securities. First Federal's primary expense is interest paid on deposits.

         First Federal markets its one-to-four family residential loans and
deposit accounts primarily to persons in Talladega, Chilton, and Bibb Counties
in Alabama. Mortgage loans are generated from depositors, walk-in customers,
referrals from local real estate brokers and developers and, to a limited
extent, local radio and newspaper advertising. Construction loan originations
are attributable largely to First Federal's lending officers' reputations and
their long-standing relationships with builders and developers in the market
areas they serve. See "-- Construction Lending."

         First Federal offers its customers fixed-rate and adjustable-rate
residential mortgage loans, residential construction loans, as well as other
consumer loans, including savings account loans. Fixed-rate mortgage loans are
generally sold upon origination to the secondary market. One-year adjustable
rate loans with 30-year maturities are generally originated for retention in
First Federal's loan portfolio. All consumer loans are retained in First
Federal's portfolio.

         To attract deposits, First Federal offers a selection of deposit
accounts including NOW, money market, passbook savings and certificates of
deposit. First Federal offers competitive rates and relies substantially on
customer service, advertising and long-standing relationships with customers to
attract and retain deposits.


                                       2


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         MARKET AREA

         First Federal's primary deposit gathering and lending area covers
Talladega, Chilton and Bibb Counties in central Alabama. To a lesser extent,
First Federal's deposit gathering and lending area covers the adjoining Alabama
counties of Coosa, Shelby, Clay, Cleburne, Calhoun, St. Clair and Jefferson.
Talladega County has a population of approximately 80,000 and Chilton County and
Bibb County had populations of approximately 40,000 and 21,000, respectively,
based on 2000 census data as published by the U.S. Bureau of Vital Statistics.
First Federal's main office in Sylacauga is situated approximately 38 miles
southeast of Birmingham, the largest city in Alabama. First Federal's branch
office in Talladega is situated approximately 55 miles east of Birmingham. First
Federal's Clanton office is located approximately 55 miles north of Montgomery.
First Federal's Centreville office is located approximately 25 miles south of
Tuscaloosa. The loan production office of SouthFirst Mortgage in Hoover is
situated within the Birmingham metropolitan area. The Dothan loan production
office is located approximately 191 miles southeast of Birmingham.

         First Federal is the largest financial institution headquartered in
Sylacauga and is the second largest in Talladega County. Talladega County has a
diversified economy based primarily on textile and other manufacturing,
wholesale, retail, mining, service, government, agriculture and tourism.
Manufacturing accounts for approximately one-third of total employment in
Talladega County. The economy is generally stable and there has been no
substantial increase or decrease in the population in the last five years.

         Sylacauga's economy is based primarily on major industrial employers
such as ECC International, Inc., American Color Graphics, Inc., Avondale Mills,
Blue Bell Ice Cream, Pursell Industries and Georgia Marble. U.S. Alliance
Corporation, a paper manufacturer, is a major employer in Childersburg,
Alabama, located 10 miles from Sylacauga in Talladega County. On November 1,
1999, Teksid, Inc. announced plans to build a new aluminum casting
manufacturing facility. The new plant, to be operated by Teksid Automotive
Components, Inc., will be located in Sylacauga, and will employ, upon
completion in calendar year 2002, approximately 400 skilled workers.

         Talladega's economy is based largely on major textile manufacturing
employers such as Brecon Knitting Mills, Wehadkee Yarn Mills, and Image
Industries, Inc. Georgia-Pacific Corporation also employs a number of persons in
Talladega. On May 6, 1999, American Honda Motor Co., Inc. ("Honda") announced
plans to construct a comprehensive automobile manufacturing facility near the
town of Lincoln, Talladega County, Alabama. The plant has been built on a
1,350-acre tract forty miles east of Birmingham and will employ approximately
1,500 associates when it reaches its twin annual capacities of 120,000 vehicles,
and 120,000 engines. Production began in the last quarter of 2001. In addition,
Talladega is the home of the Talladega Superspeedway which hosts the Winston 500
and other NASCAR events and attracts individuals to Talladega County primarily
from the southeast region of the United States.

         First Federal's Clanton office, in Chilton County, and Centreville
office, in Bibb County, were each acquired by First Federal on October 31, 1997.
Although Chilton and Bibb Counties are generally rural areas in which the
economy is largely based on the growth and harvesting of peaches, each of these
counties has been experiencing relatively higher growth rates than Talladega
County in terms of population and households. Chilton County's employers include
GulfStates Paper Corp., International Paper Corp. and Union Camp Corp. Both
counties are in close proximity to the Birmingham metropolitan area. Bibb County
is located near Tuscaloosa and the fast-growing town of Vance, the location of
the Mercedes-Benz manufacturing plant.


                                       3


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         RESIDENTIAL LENDING

         First Federal's primary lending activity consists of the origination of
one-to-four family, owner-occupied, residential mortgage loans secured by
property located in First Federal's market area. Originations for such loans are
generally obtained from existing or past customers, realtors, referrals,
walk-ins, and, to a lesser extent, local newspaper and radio advertising. Loans
are originated by First Federal personnel. No loan brokers or commissioned loan
officers are used. Conventional residential loans are priced based on rates
offered by the local competition and the secondary market. At September 30,
2001, First Federal had $51.1 million, or 51% of its loan portfolio, invested in
one-to-four family residential mortgage loans. Management believes that this
policy of focusing on one-to-four family lending has been effective in
contributing to net interest income while reducing credit risk by keeping loan
delinquencies and losses to a minimum.

         First Federal offers conventional fixed rate one-to-four family
mortgage loans with terms of 15 and 30 years. Fixed rate loans are generally
underwritten either according to Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA") guidelines,
utilizing their approved documents so that the loans qualify for sale in the
secondary mortgage market. Generally, First Federal holds a portion of its fixed
rate mortgage loans with maturities not exceeding 15 years in its portfolio as
long-term investments.

         Adjustable rate mortgage ("ARM") loans originated by First Federal
consist of one, three, five, and seven-year ARMs that are indexed to the
comparable maturity Treasury index or various cost of funds indexes. At
September 30, 2001, First Federal held approximately $35.6 million ARMs, which
represented approximately 35.2% of First Federal's total loan portfolio. First
Federal's ARM loans are subject to a limitation of 2.0% per adjustment for
interest rate increases and decreases. In addition, ARM loans currently
originated by First Federal typically have a lifetime cap of 6.0% on increases
in the interest rate. These limits, based on the initial rate, may reduce the
interest rate sensitivity of such loans during periods of changing interest
rates. The repayment terms of ARM loans may increase the likelihood of
delinquencies during periods of rising interest rates. First Federal offers
teaser rates on ARM loans to remain competitive. Adjustable-rate loans which
provide for teaser rates may be subject to increased risk of delinquency or
default as the higher, fully indexed rate of interest subsequently replaces the
lower, initial rate.

         Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. First Federal's lending policies, however,
generally limit the maximum loan-to-value ratio to 95% of the appraised value of
the property, based on an independent appraisal. For Federal Housing
Administration ("FHA"), Veterans' Administration ("VA") and Farmers' Home Loans,
First Federal generally limits the maximum loan-to-value ratio to 100% of the
appraised value of the property. When First Federal makes a loan in excess of
80% of the appraised value or purchase price, private mortgage insurance is
required.

         The loan-to-value ratio, maturity and other provisions of the
residential real estate loans made by First Federal reflect the policy of making
loans generally below the maximum limits permitted under applicable regulations.
For all residential mortgage loans originated by First Federal, upon receipt of
a completed loan application from a prospective borrower, a credit report is
ordered, income, employment and certain other information are verified, and, if
necessary, additional financial information is requested. First Federal requires
an independent appraisal, title insurance (or an attorney's opinion), flood
hazard insurance (if applicable), and fire and casualty insurance on all
properties securing real estate loans made by First Federal. First Federal
reserves the right to approve the selection of which title insurance companies'
policies are acceptable to insure the real estate in the loan transactions.


                                       4


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         Members of the First Federal Board of Directors receive a monthly
summary of all loans which are closed. Construction loans in excess of $350,000
require authorizations by the Loan Committee of the First Federal Board prior to
closing. First Federal issues written, formal commitments as to interest rates
to prospective borrowers upon request on real estate loans at the date of
application. The interest rate commitment remains valid for 30 to 60 days (the
"lock-in period") from the date of the application. Upon receipt of loan
approval, the borrower has the balance of the lock-in period to close the loan
at the interest rate committed.

         Originated mortgage loans held in First Federal's portfolio generally
include due-on-sale clauses which provide First Federal with the contractual
right to deem the loan immediately due and payable in the event that the
borrower transfers ownership of the property without First Federal's consent. It
is First Federal's policy to enforce due-on-sale provisions or to require that
the interest rate be adjusted to the current market rate when ownership is
transferred.

         First Federal also offers loans secured by second mortgages on real
estate, such as home improvement and home equity loans. On September 30, 2001,
such loans amounted to $7.6 million. Second mortgage loans are extended for up
to 80% of the appraised value of the property, less existing liens, at an
adjustable or fixed interest rate. Home equity loans are extended in amounts up
to 90% of the appraised value of the property. First Federal generally holds the
first mortgage loans on the properties securing the second mortgages.

         CONSTRUCTION LENDING - SOUTHFIRST MORTGAGE, INC.

         Although First Federal does make certain residential construction loans
through its loan production office in Dothan, Alabama, the majority of the
residential construction lending of First Federal is conducted by its wholly
owned subsidiary, SouthFirst Mortgage, located in Hoover, Alabama, a suburb of
Birmingham. At September 30, 2001, committed construction loans secured by
single-family residential property totaled $37.0 million; of this amount,
approximately $11.6 million was not disbursed. SouthFirst Mortgage makes
construction loans primarily to builders for the construction of single-family
residences, on both a pre-sold and speculative basis. SouthFirst Mortgage also
makes construction loans on single-family residences to individuals who will
ultimately be the owner-occupant of the house.

         Construction loan proceeds are disbursed in increments as construction
progresses. Disbursements are scheduled by contract, with SouthFirst Mortgage
reviewing the progress of the underlying construction project prior to each
disbursement. The construction loan agreements of SouthFirst Mortgage with
builders generally provide that principal repayments are required as individual
units are sold to third parties.

         Construction loans are principally made to builders who have an
established credit history with SouthFirst Mortgage and First Federal, as well
as to builders who are referred by such borrowers. New builders must be approved
by First Federal's Loan Committee and, further, must display the same levels of
knowledge and financial strength similar to that of existing builders. The
application process includes a submission to SouthFirst Mortgage of plans,
specifications and costs of the project to be constructed or developed.
SouthFirst Mortgage and the Loan Committee of First Federal also review the
borrower's existing financial condition and total debt outstanding. All borrower
relationships are reviewed annually by the SouthFirst Mortgage and the Loan
Committee. The residential construction loans are originated with adjustable or
fixed rates of interest that are negotiated with the builders, but typically
will be tied to the prime rate plus a spread and have terms of 12 months or
less. Construction loans generally have a maximum loan-to-value ratio of 80% on
an "as completed" basis. SouthFirst Mortgage generally obtains personal
guarantees for all of its construction loans and converts many of its
construction loans to permanent loans upon completion of the construction phase.



                                       5


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         Construction loans generally involve a higher level of credit risk than
permanent single-family residential lending, due to the concentration of
principal in a limited number of borrowers and the effects of changing economic,
governmental and weather conditions. The nature of these loans is such that they
require a sophisticated knowledge of building standards, material costs, union
rules, real estate values and housing demand, and, thus, are more difficult to
evaluate and monitor. The risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. If the estimate of construction cost proves to be inaccurate,
SouthFirst Mortgage may be required to advance funds beyond the amount
originally committed in order to permit completion of the project and will be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.

         Margie R. Bryant, President and CEO of SouthFirst Mortgage Construction
Lending Division, manages the Hoover loan production office. Her primary
responsibility is to manage the construction lending portfolio of SouthFirst
Mortgage. Ms. Bryant performs all underwriting of the construction loans and has
the authority to originate construction loans up to $350,000. No other loan
officer of First Federal or its affiliates has this amount of lending authority.
Loans in excess of $350,000 must be approved by the Board of Directors of
SouthFirst Mortgage and the Loan Committee of the First Federal Board of
Directors. Funds are disbursed based upon percentage of completion as verified
by on-site inspections performed by Ms. Bryant and other qualified employees of
SouthFirst Mortgage.

         Ms. Bryant is responsible for soliciting business, performing
credit-risk assessments and annual credit reviews, preparing loan origination
documents, maintaining loan files, performing site inspections and disbursing
loan proceeds. SouthFirst Mortgage is heavily dependent on Ms. Bryant for
determining the quality of the construction loan portfolio and the accuracy of
the recorded balances. Ms. Bryant reports loan information to the SouthFirst
Mortgage Board and the First Federal Board on a monthly basis. In addition,
First Federal has instituted a system of internal procedures to help ensure that
construction loan interest, construction loan balances and other related
construction loan accounts of SouthFirst Mortgage are fairly stated. Over time,
these procedures have been developed and closely coordinated with First
Federal's independent auditors and First Federal's Internal Control Review
Committee, which reports to the First Federal Board of Directors on a quarterly
basis.

         At September 30, 2001, 25 borrowers had construction loan commitments
from SouthFirst Mortgage in excess of $500,000 with the largest commitment being
$2,913,600. The majority of loans in the construction loan portfolio were made
on a speculative basis. As previously discussed, construction loans are
typically outstanding for a period of 12 months or less. If the loan is not paid
within the original 12 month period, it is renewed for a six month period. All
renewals are approved by SouthFirst Mortgage and First Federal's Loan Committee.
At September 30, 2001, there were 21 such renewal loans totaling $2,651,140.

         Under federal law, the aggregate amount of loans that SouthFirst
Mortgage and First Federal are permitted to make to any one borrower is
generally limited to the greater of 15% (25% if the security has a readily
ascertainable value) of unimpaired capital and surplus of First Federal, or
$500,000. First Federal and SouthFirst Mortgage have received permission from
the OTS to increase the applicable loan-to-one-borrower limits for single-family
residential builders, as permitted under applicable federal law and regulations.
The increased limit for these borrowers is 30% of unimpaired capital and surplus
of First Federal, with an aggregate limit to all such borrowers equal to 150% of
First Federal's unimpaired capital and surplus.


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         COMMERCIAL LENDING

         At September 30, 2001, commercial lending totaled $14.2 million, or
14.1%, of First Federal's total loan portfolio. First Federal's commercial loans
are secured by real estate or other acceptable collateral. In addition,
borrowers generally must personally guarantee loans secured by commercial real
estate. Commercial loans are mostly made at adjustable rates.

         Commercial loans generally involve a greater degree of risk than
residential mortgage loans. Because payments on loans are often dependent on
successful operation or management of business, repayment of such loans may be
subject to a greater extent to adverse economic conditions. First Federal seeks
to minimize these risks by lending to established customers and generally
restricting such loans to its primary market area. Due to the growth in
commercial lending in recent years, First Federal has increased its commercial
loan portfolio.

         CONSUMER LENDING AND OTHER LENDING

         As a community-oriented financial institution, First Federal offers
certain consumer loans, including both unsecured loans and loans secured by
assets such as deposits, vehicles, and heavy equipment. At September 30, 2001,
consumer loans totaled $4.7 million, or 4.6% of First Federal's total loan
portfolio. This amount includes $1.1 million in loans secured by savings
accounts, $2.3 million in loans secured by vehicles, and $1.3 million in other
secured loans.

         The underwriting standards employed by First Federal for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the underwriting process. Creditworthiness of
the applicant is of primary consideration; however, the underwriting process
also includes a comparison of the value of the security, if any, in relation to
the proposed loan amount.

         LOAN APPROVAL

         All first-mortgage loans, other than construction loans less than
$350,000, are underwritten and approved by the Loan Committee of the First
Federal Board of Directors. Ms. Bryant has underwriting and loan approval
authority for any construction loan up to $350,000. See "-- Construction Lending
- SouthFirst Mortgage, Inc." First Federal has implemented a second loan review
policy applicable to all loans that are brought before the Loan Committee that
the Loan Committee has not yet approved or denied. The second loan review for
loans that have not yet been approved or denied is performed by designated
members of First Federal's Internal Control Review Committee on a timely basis
following the initial meeting of the Loan Committee. After the second loan
review, the Loan Committee makes a final determination as to whether the loan
application will be denied or approved.

         LOAN ORIGINATION, COMMITMENT AND OTHER FEES AND COMMISSIONS

         In addition to interest earned on loans, First Federal charges fees for
originating and making loan commitments, prepayments of non-residential loans,
late payments, changes in property ownership and other miscellaneous services.
The income realized from such fees varies with the volume of loans made or
repaid, and the fees vary from time to time depending upon the supply of funds
and other competitive conditions in the mortgage markets. Loan demand and the
availability of money also affect these conditions. Fees, net of related
origination costs, are deferred as an adjustment to yield. First Federal also
charges commissions on the sale of credit life insurance and fees in connection
with retail banking activities which are reflected in First Federal's
non-interest operations income.


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         COMPETITION

         First Federal has significant competition for its residential real
estate mortgage loans, construction loans and other loans and deposits in
Talladega, Jefferson, Chilton and Bibb Counties. The cities of Sylacauga,
Talladega and Clanton have a high density of financial institutions, some of
which are larger, have a state-wide or regional presence and have greater
financial resources than First Federal. First Federal faces significant
competition both in originating mortgage loans and other loans and in attracting
deposits. First Federal's competition for loans comes principally from savings
and loan associations and commercial banks. In addition, there are a number of
mortgage bankers, mortgage brokers, finance companies and insurance companies
that compete with First Federal for loan customers. Credit unions, securities
firms and mutual funds compete with First Federal in raising deposits. Many of
these institutions also seek to provide the same community-oriented services as
First Federal. First Federal competes for deposit accounts by offering
depositors competitive interest rates and a high level of personal service.
First Federal competes for loans primarily through the interest rates and loan
fees it charges and the efficiency and quality of service it provides borrowers
and contractors. Competition in the financial services industry has increased
significantly within the past several years as a result of federal and state
legislation which has, in several respects, deregulated financial institutions.
The full impact of this legislation and subsequent laws cannot be fully assessed
or predicted.

         First Federal also faces significant competition for originations of
residential construction loans. First Federal's competition for these loans
comes principally from larger savings associations and commercial banks who have
greater financial resources than First Federal. First Federal competes for
residential construction loans primarily through the quality of service it
provides borrowers and the long-standing business relationships that First
Federal has with builders and developers in the area.

         First Federal is a community and retail-oriented financial institution
serving its market area with deposit services, residential and commercial real
estate loans and consumer loans. Management considers First Federal's reputation
for financial strength and quality customer service to be its major competitive
advantage in attracting and retaining customers in its market area. While First
Federal is subject to competition from other financial institutions which may
have greater financial and marketing resources, management believes First
Federal benefits from its community orientation and its long-standing
relationship with many of its customers.

         DATA PROCESSING

         First Federal has entered into a data processing servicing agreement
with Kirchman Corp. This servicing agreement provides for First Federal to
receive a full range of data processing services, including an automated general
ledger, deposit accounting, commercial, real estate and installment lending data
processing, central information file and ATM processing and investment portfolio
accounting.

         EMPLOYEES

         First Federal presently employs 62 individuals on a full-time basis,
including 14 officers, and 4 individuals on a part-time basis. First Federal
will hire additional persons as needed, including additional tellers and
financial service representatives.




                                      8
<PAGE>


BUSINESS OF SUBSIDIARIES

         SOUTHFIRST MORTGAGE, INC.

         SouthFirst Mortgage was incorporated on July 23, 1999, as a wholly
owned operating subsidiary of First Federal. Through SouthFirst Mortgage, First
Federal is conducting residential mortgage and construction lending activities
in Birmingham, Alabama, and intends to pursue such activities in other markets
(See "Business of First Federal - Construction Lending - SouthFirst Mortgage,
Inc." above).

         PENSION & BENEFIT TRUST COMPANY

         Pension & Benefit was acquired by SouthFirst in April of 1997, and was,
initially, the wholly owned subsidiary thereof. On April 27, 1998, SouthFirst
and First Federal submitted an application to the OTS, seeking approval to
exercise limited trust powers through Pension & Benefit and to establish Pension
& Benefit as an operating subsidiary. Upon being granted limited trust powers
from the OTS, SouthFirst transferred the ownership of Pension & Benefit to First
Federal. Upon the transfer, Pension & Benefit became the wholly owned subsidiary
of First Federal.

         The primary business of Pension & Benefit is rendering actuarial and
administrative services to employee benefit plans of corporate employers,
including their plan administrators and plan trustees, and, under appropriate
circumstances, serving as an employee benefit plan trustee. These actuarial,
administrative and trust services are rendered to approximately 200 retirement
plans, and, generally, are, as follows:

                  ACTUARIAL SERVICES

         The actuarial services include: the computation of retirement benefits,
the determination of plan costs, the projection of benefit payments,
contributions, and non-income, and the analysis of turnover rates and other
contingencies for specific groups of plan participants.

                  ADMINISTRATIVE SERVICES

         The administrative services include: the preparation of the annual
returns and reports for retirement plans (including Form 5500, or 5500-C/R, and
related schedules and attachments), the preparation of summary plan
descriptions, summary annual reports, statements of accrued benefits and various
other notices and reports required under ERISA, and the preparation of
accounting records for plan trustees, including the preparation and maintenance
of participants' accounts.

                     TRUST SERVICES

         The trust services rendered by Pension & Benefit are limited to those
trust services required by self-directed profit sharing plans, 401(k) plans and
Employee Stock Ownership Plans.

         MAGNOLIA TITLE SERVICE, INC.

         At September 30, 2001, SouthFirst owned a 50% interest in Magnolia
Title Services, Inc. ("Magnolia"), a company which provides title insurance and
related services to borrowers and lenders. Start-up losses at Magnolia have
resulted in a write-off of SouthFirst's investment, in the amount of $245,000.
As a consequence, SouthFirst has undertaken programs to re-evaluate its
ownership interest in Magnolia.


                                       9


<PAGE>


         SOUTHFIRST FINANCIAL SERVICES, INC.

         SouthFirst Financial was incorporated on June 16, 2000, as the wholly
owned subsidiary of SouthFirst. Through SouthFirst Financial, SouthFirst
provides insurance products and other financial services to the customers of
First Federal and to others.

SUPERVISION AND REGULATION

GENERAL

         First Federal derives its lending and investing powers, as a federal
savings association, from the Home Owners' Loan Act, as amended ("HOLA"), which
is implemented by regulations adopted and administered by the OTS. As a federal
savings association, First Federal is subject to regulation, supervision and
regular examination by the OTS. Federal banking laws and regulations control,
among other things, First Federal's required reserves, investments, loans,
mergers and consolidations, payment of dividends and other aspects of First
Federal's operations. First Federal's deposits are insured by the Savings
Association Insurance Fund (the "SAIF"), which is administered by the FDIC, to
the maximum extent provided by law ($100,000 for each depositor). In addition,
the FDIC has certain regulatory and examination authority over OTS-regulated
savings associations and may recommend enforcement actions against savings
associations to the OTS.

         SouthFirst, as a savings and loan holding company (a "thrift holding
company"), is also required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS and of the Securities and Exchange
Commission (the "Commission"), under the federal securities laws. Certain of the
regulatory requirements applicable to First Federal and to SouthFirst are
referred to below or elsewhere herein.

         As a federally insured depository institution, First Federal is subject
to various regulations promulgated by the Federal Reserve Board, including
Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements),
Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending),
Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD
(Truth in Savings).

         The OTS and the FDIC, along with other state and federal regulators,
have significant discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. The system of regulation and supervision applicable to
First Federal and SouthFirst establishes a comprehensive framework for the
operations of First Federal and SouthFirst, and is intended primarily for the
protection of the FDIC and the depositors of First Federal. Changes in the
regulatory framework could have a material adverse effect on First Federal and
its operations that, in turn, could have a material adverse effect on
SouthFirst. To the extent that the following information describes certain
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of SouthFirst.

RECENTLY ENACTED LEGISLATION

         On November 12, 1999, the Gramm-Leach-Bliley Act, previously known as
the Financial Services Modernization Act of 1999 ("Act"), was signed into law by
President Clinton. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also permits bank holding companies to engage in a
statutorily-provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are related and incidental to these financial activities.

         The Act contains a number of provisions specifically applicable to
savings associations, such as First Federal. For example, the Act repeals the
Savings Association Insurance Fund special reserve, modernizes the Federal Home
Loan Bank System, provides regulatory relief for community banks with
satisfactory or


                                       10

<PAGE>


outstanding Community Reinvestment Act ratings, in the form of less frequent
compliance examinations, and creates privacy provisions that address consumer
needs without disrupting necessary information sharing between community banks
and their financial services partners.

         Further, the Act prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or affiliating with nonfinancial entities.
The prohibition applies to a company that becomes a unitary thrift holding
company pursuant to an application filed with the OTS after May 4, 1999. A
"grandfathered" unitary thrift holding company, such as SouthFirst, retains its
authority to engage in nonfinancial activities, but does not retain its ability
to be acquired by a nonfinancial company. See "Regulation of SouthFirst -
Restrictions on Acquisitions."

         The Act is intended to grant to community banks certain powers, as a
matter of right, that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that SouthFirst faces from larger institutions and other types of
companies. In fact, it is not possible to predict the full effect that the Act
will have on SouthFirst.

REGULATION OF SOUTHFIRST

         GENERAL

         As the owner of all of the stock of only one federal savings
association, First Federal, SouthFirst is a "unitary" thrift holding company
subject to regulatory oversight by the OTS and the Commission. As such,
SouthFirst is required to register and file reports with the OTS and the
Commission and is subject to regulation and examination by the OTS. In addition,
the OTS' enforcement authority over SouthFirst and its non-savings association
subsidiaries permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of First Federal rather than for the benefit of stockholders of
SouthFirst.

         QUALIFIED THRIFT LENDER TEST

         As a unitary thrift holding company, SouthFirst generally is allowed to
engage and invest in a broad range of business activities not permitted to
commercial bank holding companies (see "Supervision and Regulation - Recently
Enacted Legislation") or multiple savings and loans holding companies, provided
that First Federal continues to qualify as a "qualified thrift lender." See
"Regulation of First Federal -- Qualified Thrift Lender Test." In the event
SouthFirst acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of SouthFirst and any of its subsidiaries (other than First Federal
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a Qualified Thrift Lender and were acquired in a
supervisory acquisition.

         RESTRICTIONS ON ACQUISITIONS

         SouthFirst must obtain approval from the OTS before acquiring control
of any other SAIF-insured association or savings and loan holding company.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally insured savings
association without giving at least 60 days' written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. Such
acquisition of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings association or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Control of a savings association or a savings and loan
holding company is conclusively presumed to exist if, among other things, a
person or group of persons acting in concert, directly or indirectly, acquires
more than 25.0% of any class of voting stock of the


                                       11

<PAGE>

institution or holding company or controls in any manner the election of a
majority of the directors of the insured institution or the holding company.
Control is rebuttably presumed to exist if, among other things, a person
acquires 10.0% or more of any class of voting stock (or 25.0% of any class of
stock) and is subject to any of certain specified "control factors."

         The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") amended provisions of the Bank Holding Company Act of 1956 (the
"BHCA") to specifically authorize the Federal Reserve Board to approve an
application by a bank holding company to acquire control of a savings
association. FIRREA also authorized a bank holding company that controls a
savings association to merge or consolidate the assets and liabilities of the
savings association with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the Bank Insurance Fund ("BIF") with the approval of
the appropriate federal banking agency and the Federal Reserve Board. The
Federal Deposit Insurance Corporation Improvement Act ("FDICIA") further amended
the BHCA to permit federal savings associations to acquire or be acquired by any
insured depository institution. As a result of these provisions, there have been
a number of acquisitions of savings associations by bank holding companies and
other financial institutions in recent years.

         The Gramm-Leach-Bliley Act has further restricted the acquisitions of
nonfinancial companies by unitary thrift holding companies formed after May 4,
1999, and has eliminated the acquisition of "grandfathered" unitary thrift
holding companies, such as SouthFirst, as well as the "new" unitary thrift
holding companies (formed after May 4, 1999) by nonfinancial companies. See
"Supervision and Regulation - Recently Enacted Legislation."

         FEDERAL SECURITIES LAWS

         Common Stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of SouthFirst may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
SouthFirst meets specified current public information requirements, however,
each affiliate of SouthFirst is able to sell in the public market, without
registration, a limited number of shares in any three-month period.

REGULATION OF FIRST FEDERAL

         INSURANCE OF DEPOSIT ACCOUNTS

         First Federal's deposit accounts are insured by the SAIF to a maximum
of $100,000 for each insured member (as defined by law and regulation). Insured
institutions are members of either the SAIF or the BIF. Pursuant to FIRREA, an
insured institution may not convert from one insurance fund to the other without
the advance approval of the FDIC.

         Under FIRREA, the FDIC is given the authority, should it initiate
proceedings to terminate an institution's deposit insurance, to suspend the
insurance of any such institution without tangible capital. However, if a
savings association has positive capital when it includes qualifying intangible
assets, the FDIC cannot suspend deposit insurance unless capital declines
materially or the institution fails to enter into and remain in compliance with
an approved capital plan.

         Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of First Federal is unaware of any practice, condition or violation
that might lead to termination of its deposit insurance.

         As an insurer, the FDIC issues regulations, conducts examinations and
generally supervises the operations of its insured members. FDICIA directed the
FDIC to establish a risk-based premium system under which the FDIC is directed
to charge an annual assessment for the insurance of deposits based on the risk a
particular institution poses to its deposit insurance fund. Under the FDIC's
risk-related insurance regulations, an institution


                                       12
<PAGE>


is classified according to capital and supervisory factors. Institutions are
assigned to one of three capital groups: "well capitalized," "adequately
capitalized" or "undercapitalized." Within each capital group, institutions are
assigned to one of three supervisory subgroups. There are nine combinations of
groups and subgroups (or assessment risk classifications) to which varying
assessment rates are applicable.

         As a result of the recapitalization of the SAIF implemented by the
Economic Growth and Regulatory Paperwork Reduction Act (the "Economic Growth
Act") (see " -- Special FDIC Assessment"), the FDIC reduced the insurance
assessment rate for SAIF-assessable deposits for periods beginning on October 1,
1996. For the first half of 1997, the FDIC set the effective insurance
assessment rates for SAIF-insured institutions, such as First Federal, at zero
to 27 basis points. In addition, SAIF-insured institutions were required, until
December 31, 1999, to pay assessments to the FDIC at an annual rate of between
6.0 and 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO"), an agency of the federal government
established to recapitalize the predecessor to the SAIF. During this period, BIF
member banks were assessed for payment of the FICO obligations at one-fifth the
annual rate applicable to SAIF member institutions. After December 31, 1999, BIF
and SAIF members have been assessed at the same rate for FICO obligations.

         The Economic Growth Act also provides that the FDIC may not assess
regular insurance assessments for the SAIF unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except for such assessments on
those institutions that are not classified as "well-capitalized" or that have
been found to have "moderately severe" or "unsatisfactory" financial,
operational or compliance weaknesses. First Federal is classified as
"well-capitalized" and has not been found by the OTS to have such supervisory
weaknesses.

         OTS SUPERVISORY ASSESSMENTS

         In addition to federal deposit insurance premiums, savings associations
like First Federal are required by OTS regulations to pay assessments to the OTS
to fund the operations of the OTS. The general assessment is paid on either a
semi-annual or quarterly basis, as determined by the OTS on an annual basis, and
is computed based on total assets of the institution, including consolidated
subsidiaries, as reported in the association's latest quarterly Thrift Financial
Report. The OTS has adopted amendments to its regulations, effective January 1,
1999, that are intended to assess savings associations on a more equitable
basis. The regulations base the assessment for an individual savings association
on three components: the size of the association, on which the basic assessment
is based; the association's supervisory condition, which results in percentage
increases for any savings association with a composite rating of 3, 4, or 5 in
its most recent safety and soundness examination; and the complexity of the
savings association's operations, which results in a percentage increase for a
savings association that manages over $1 billion in trust assets, provides
services for other loans aggregating more than $1 billion, or has certain
off-balance sheet assets aggregating more than $1 billion. In order to avoid a
disproportionate impact upon the smaller savings institutions, which are those
whose total assets never exceeded $100 million, the new regulations provide that
the portion of the assessment based on asset size will be the lesser of the
assessment under the amended regulations or the regulations before the
amendment.

         REGULATORY CAPITAL REQUIREMENTS

         General. The OTS has adopted capital regulations which establish
capital standards applicable to all savings associations. To meet its regulatory
capital requirements, a savings association must satisfy each of the following
capital requirements: (i) a risk-based capital requirement, where a savings
association's minimum risk-based capital requirement shall be an amount equal to
8% of its risk-weighted assets; (ii) a leverage ratio requirement, where a
savings association's minimum leverage ratio requirement shall be: (a) for a
savings association assigned a composite rating of 1 on the CAMELS financial
institutions rating system, equal to a ratio of core capital to adjusted total
assets of 3%; (b) for all other savings associations which are assigned a value
lower than 1 on the CAMELS financial institutions rating system, equal to a
ratio of core capital to adjusted total assets of 4%; and (iii) a tangible
capital requirement, where the savings association's minimum tangible capital
requirement shall be an amount equal to at least 1.5% of adjusted total assets.


                                       13

<PAGE>


         The OTS, also, has established, pursuant to FDICIA, five
classifications for institutions based upon the capital requirements: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. At September 30, 2001, First
Federal was "well capitalized." Failure to maintain that status could result in
greater regulatory oversight or restrictions on First Federal's activities.

         Core Capital and Tangible Capital. The OTS requires savings
associations receiving a composite examination rating of "1," the best possible
rating under the CAMELS examination rating system, to maintain a ratio of core
capital to adjusted total assets of 3.0%. All other savings associations are
required to maintain minimum core capital of at least 4.0% of total adjusted
assets. "Core capital" includes, generally, (i) common stockholders' equity
(including retained earnings), (ii) non-cumulative perpetual preferred stock and
related surplus, (iii) non-withdrawable accounts and certain pledged deposits of
mutual savings associations, (iv) minority interests in fully-consolidated
subsidiaries, and (v) the remaining goodwill resulting from certain prior
regulatory accounting practices, less a savings association's (A) investments in
certain "non-includable" subsidiaries (as determined by regulation) and (B)
intangible assets (with limited exceptions for purchased mortgage servicing
rights, purchased credit card relationships and certain intangible assets
arising from prior regulatory accounting practices). At September 30, 2001,
First Federal's ratio of tangible and core capital to total adjusted assets was
9.28%.

         The "tangible capital" requirement requires a savings association to
maintain tangible capital in an amount not less than 1.5% of its adjusted total
assets. "Tangible capital" means (i) common stockholders' equity (including
retained earnings), (ii) non-cumulative perpetual preferred stock and related
earnings, (iii) non-withdrawable accounts and pledged deposits that qualify as
core capital and (iv) minority interests in equity accounts of
fully-consolidated subsidiaries, less (A) any intangible assets (except for
purchased mortgage servicing rights and purchased credit card relationships
included in core capital), and (B) investments, both equity and debt, in certain
subsidiaries that are not "includable subsidiaries."

         Risk-Based Capital. The risk-based capital standard for savings
associations requires the maintenance of total regulatory capital (which is
defined as core capital plus supplementary capital) of 8.0% of risk-weighted
assets. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock and the general
allowance for credit losses. The portion of the allowance for credit losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, supplementary capital is limited to 100.0% of
core capital. Risk-weighted assets equal assets plus consolidated off-balance
sheet items where each asset or item is multiplied by the appropriate risk
weight. The risk weight assigned to a particular asset or on-balance sheet
credit equivalent amount determines the percentage of that asset/credit
equivalent amount that is included in the calculation of risk-weighted assets.
Thus, to determine the ratio of total capital to total risk-weighted asset: (i)
each off-balance sheet item must be converted to an on-balance sheet credit
equivalent amount by multiplying the face amount of such item by a credit
conversion factor ranging from 0.0% to 100.0% (depending upon the nature of the
item); (ii) the credit equivalent amount of each off-balance sheet item and each
on-balance sheet asset must be multiplied by a risk factor ranging from 0% to
100.0% (again depending on the nature of the item); and (iii) the resulting
amounts are added together and constitute total risk-weighted assets. At
September 30, 2001, First Federal's ratio of total capital to total
risk-weighted assets was 16.01%.

         The OTS and other federal banking regulators adopted, effective October
1, 1998, an amendment to their risk-based capital guidelines that permits
insured depository institutions to include in supplementary capital up to 45% of
the pretax net unrealized holding gains on certain available-for-sale equity
securities, as such gains are computed under the guidelines.

         The OTS regulations require a savings association with "above normal"
interest rate risk to deduct a portion of such capital from its total capital to
account for the "above normal" interest rate risk. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e. the difference between incoming and outgoing discounted cash flows
from assets, liabilities, and off-balance sheet contracts) that would result
from a hypothetical 200 basis point increase or decrease in market rates of
interest (whichever


                                       14

<PAGE>


results in a lower net portfolio value), divided by the estimated economic value
of the savings association's assets, as calculated in accordance with guidelines
set forth by the OTS. A savings association's interest rate risk exposure is
measured by the decline in the net portfolio value that would result from a 200
basis point increase or decrease in market interest rates, except when the
3-month Treasury bond equivalent yield falls below 400 basis points. In that
case, the decrease would be equal to one-half of that Treasury rate.

         A savings association whose measured interest rate risk exposure
exceeds 0.02 (2%) must deduct an interest rate risk component in calculating its
total capital for purposes of determining whether it meets its risk-based
capital requirement. The interest rate risk component is an amount equal to
one-half of the difference between its measured interest rate risk and 0.02,
multiplied by the estimated economic value of its total assets. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the association's financial data on
which the interest rate risk was computed.

         The OTS has indefinitely deferred the implementation of the interest
rate risk component in the computation of an institution's risk-based capital
requirements. The OTS continues to monitor the interest rate risk of individual
institutions and retains the right to impose additional capital requirements on
individual institutions.

         See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --
Capital Resources" for tables setting forth First Federal's compliance with its
regulatory capital requirements as of September 30, 2001.

         PROMPT CORRECTIVE ACTION

         Under the OTS final rule implementing the prompt corrective action
provisions of FDICIA, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or greater, has
a Tier 1 risk-based capital ratio (ratio of Tier 1 capital (core capital) to
risk-weighted assets) of 6.0% or greater, has a leverage capital ratio of 5.0%
or greater and is not subject to any order, capital directive or prompt
correction action directive to meet and maintain a specific capital level for
any capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or
greater and has either a leverage ratio of 4.0% or greater or has a leverage
ratio that is 3.0% or greater, if the savings association receives a composite
rating of 1 on the CAMEL financial institutions rating system, and does not meet
the definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, or has a Tier 1 risk-based
capital ratio that is less than 4.0% or has either a leverage ratio that is less
than 4.0% or has a leverage ratio that is less than 3.0% if the savings
association receives a composite rating of 1 on the CAMEL financial institutions
rating system; (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, or a Tier 1 risk-based capital
ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v)
"critically undercapitalized" if the financial association has a ratio of
tangible equity to total assets that is less than 2.0%. Under certain
circumstances, however, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At September 30, 2001, First Federal was
classified as a "well capitalized" institution.

         The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person, if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of


                                       15

<PAGE>

compensation during the 12 months preceding the month when the association
became undercapitalized. A significantly undercapitalized association may also
be subject, among other things, to forced changes in the composition of its
board of directors or senior management, additional restrictions on transactions
with affiliates, restrictions on acceptance of deposits from correspondent
associations, further restrictions on asset growth, restrictions on rates paid
on deposits, forced termination or reduction of activities deemed risky, and any
further operational restrictions deemed necessary by the OTS.

         When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.

         STANDARDS FOR SAFETY AND SOUNDNESS

         Under FDICIA, as amended by the Riegle Community Development and
Regulatory Improvements Act of 1994, the federal banking agencies were required
to establish safety and soundness standards for institutions under its
authority. The federal banking agencies, including the OTS, have adopted
interagency guidelines establishing standards for safety and soundness and final
rules establishing deadlines for submission and review of safety and soundness
compliance plans. The guidelines require savings associations to maintain
internal controls and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's business. The
guidelines also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings associations should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
compensation practices at comparable institutions. Additionally, the OTS
guidelines require savings associations to maintain internal controls over their
asset quality and earnings. Under the guidelines, a savings association should
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. If the OTS determines that
a savings association is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A savings association must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
institution to regulatory sanctions.

         DIVIDENDS AND OTHER CAPITAL DISTRIBUTION LIMITATIONS

         OTS regulations currently impose limitations upon savings associations'
capital distributions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. Effective
April 1, 1999, the OTS amended its capital distribution regulations to reduce
regulatory burdens on savings associations. Under the amended OTS regulations
governing capital distributions, certain savings associations are permitted to
pay capital distributions during a calendar year that do not exceed the
association's net income for the year plus its retained net income for the prior
two years, without notice to, or the approval of, the OTS. However, a savings
association subsidiary of a savings and loan holding company, such as
SouthFirst, will continue to have to file an application to receive the approval
of the OTS. These new regulations are more restrictive to SouthFirst than
regulations being replaced based upon SouthFirst's historical dividend
declaration activities.

         OTS regulations impose limitations upon all capital distributions by
savings associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger and other distributions charged against capital. The
regulations establish three tiers of institutions, based primarily on an
institution's capital level. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution (Tier 1
institution) and has not been advised by the OTS that it is in need of more than
normal supervision can, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (i)
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the percentage by which an
association's capital-to-assets ratio exceeds the ratio of its fully phased-in
capital requirement to its


                                       16

<PAGE>


assets) at the beginning of the calendar year, or (ii) 75% of its net income
over the most recent four quarter period. Any additional capital distributions
require prior regulatory approval. A Tier 2 association is an association that
has capital equal to or in excess of its minimum capital requirements but does
not meet the fully phased-in capital requirement both before and after the
proposed distribution. A Tier 3 association is defined as an association that
has capital less than its minimum capital requirement before or after the
proposed distribution. At September 30, 2001, First Federal was rated a Tier 1
institution. In the event First Federal's capital falls below its fully
phased-in requirement or the OTS notifies it that it is in need of more than
normal supervision, First Federal's ability to make capital distributions could
be restricted. In addition, the OTS could prohibit a proposed capital
distribution, otherwise permissible under the regulations, if the OTS determines
that the proposed distribution by a savings association would constitute an
unsafe or unsound practice. Finally, under FDICIA, a savings association is
prohibited from making a capital distribution if, after making the distribution,
the savings association would be "undercapitalized" (i.e., not meet any one of
its minimum regulatory capital requirements).

         QUALIFIED THRIFT LENDER TEST

         HOLA requires savings associations to meet the Qualified Thrift Lender
("QTL") test, or suffer a number of regulatory sanctions, including restrictions
on business activities and on FHLB advances. To qualify as a QTL, a savings
association must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code (the "Code") by maintaining at least 60% of its
total assets in specified types of assets, including cash, certain government
securities, loans secured by and other assets related to residential real
property, educational loans, and investments in premises of the institution or
(ii) maintain at least 65% of its "portfolio assets" in certain "qualified
thrift investments" in at least nine months of the most recent twelve-month
period. "Portfolio assets" means, in general, a saving's association's total
assets less the sum of (a) certain intangible assets, including goodwill and
credit card and purchased mortgage servicing rights, (b) the value of property
used by a savings association in its business, and (c) specified liquid assets
up to 20% of total assets. "Qualified thrift investments" includes (i) various
types of loans made to finance, construct, improve or repair domestic
residential or manufactured housing, (ii) home equity loans, (iii) securities
backed by or representing interest in mortgages or domestic residential or
manufactured housing, (iv) obligations issued by the federal deposit insurance
agencies, (v) small business loans, (vi) credit card loans, (vii) education
loans and (viii) shares in the FNMA, FHLMC and FHLB owned by the savings
association. In addition, subject to a 20% of portfolio assets limit, savings
associations are able to treat as Qualified Thrift Investments 200% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small business in "credit needy" areas. At September 30, 2001, First
Federal was a Qualified Thrift Lender.

         A savings association that does not maintain its status as a QTL in at
least nine out of every 12 months must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the savings
association may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank and for a savings association; (ii) the branching powers of the
savings association are restricted to those of a national bank in the savings
association's home state; (iii) the savings association is not eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the savings
association are subject to the rules regarding payment of dividends by a
national bank. In addition, within one year of the date a savings association
ceases to meet the QTL test, any company controlling the association would have
to register under, and become subject to, the requirements of the Bank Holding
Company Act of 1956, as amended. If the savings association does not requalify
as a QTL within the three year period after it failed the QTL test, it would be
required to cease any activity and not retain any investment not permissible for
a national bank and immediately repay any outstanding FHLB advances as promptly
as can be prudently done consistent with the safe and sound operation of the
savings association. A savings association that has failed the QTL test may
requalify as a QTL and be free of such limitations, but it may do so only once.

         LOANS TO ONE BORROWER

         Under HOLA, savings associations are subject to the national bank
limits on loans to one borrower. Generally, a savings association may not make a
loan or extend credit to a single or related group of borrowers in


                                       17

<PAGE>


excess of 15.0% of unimpaired capital and surplus. An additional amount, not in
excess of 10.0% of unimpaired capital and surplus, may be loaned, if such loan
is secured by readily-marketable collateral, which is defined to include certain
debt and equity securities and bullion, but generally does not include real
estate. First Federal currently has permission from the OTS to increase its loan
to one borrower limits for single-family residential builders, as permitted
under applicable federal law and regulations. The increased limit for these
borrowers is 30.0% of unimpaired capital and surplus of First Federal, with an
aggregate limit to all such borrowers equal to 150.0% of First Federal's
unimpaired capital and surplus.

         LENDING GUIDELINES

         All financial institutions must adopt and maintain comprehensive
written real estate lending policies that are consistent with safe and sound
banking practices. These lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies adopted by the federal
banking agencies (the "Guidelines"). The Guidelines set forth, pursuant to the
mandates of FDICIA, uniform regulations prescribing standards for real estate
lending. Real estate lending is defined as the extension of credit secured by
liens on interests in real estate or made for the purpose of financing the
construction of a building or other improvements to real estate, regardless of
whether a lien has been taken on the property.

         The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being the
total amount of credit to be extended divided by the appraised value of the
property securing or being improved by the extension of credit plus the amount
of readily-marketable collateral or other acceptable collateral, must be
established for each category of real estate loans. If not a first lien, the
lender must combine all senior liens when calculating this ratio. The
Guidelines, among other things, establish the following supervisory LTV limits:
raw land (65.0%); land development (75.0%); construction (commercial,
multifamily and nonresidential) (80.0%); and improved property (85.0%).
One-to-four family residential (owner occupied) requires no maximum ratio,
however, any LTV ratio in excess of 90.0% should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.

         Certain institutions can make real estate loans that do not conform
with the established LTV ratio limits up to 100.0% of the institutions total
capital. Within this aggregate limit, total loans for all commercial,
agricultural, multi-family and other non-one-to-four family residential
properties should not exceed 30.0% of total capital. An institution will come
under increased supervisory scrutiny as the total of such loans approaches these
levels. Certain loans are also exempt from the LTV ratios, such as loans
guaranteed by a government agency, loans to facilitate the sale of real estate
owned, and loans renewed, refinanced or restructured by the original lender(s)
to the same borrower(s) where there is no advancement of new funds.

         COMMUNITY REINVESTMENT

         Under the Community Reinvestment Act of 1977 ("CRA"), as implemented by
OTS regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings association, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. FIRREA amended the CRA to require public disclosure of an
institution's CRA rating and require the OTS to provide a written evaluation of
an institution's CRA performance utilizing a four-tiered descriptive rating
system in lieu of the existing five-tiered numerical rating system. First
Federal received a satisfactory rating as a result of its latest evaluation on
June 30, 1998.


                                       18

<PAGE>


         CONSUMER CREDIT REGULATION

         First Federal's mortgage lending activities are subject to the
provisions of various federal and state statutes, including, among others, the
Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate
Settlement Procedures Act, the Fair Housing Act, and the regulations promulgated
thereunder. These statutes and regulations, among other provisions, prohibit
discrimination, prohibit unfair and deceptive trade practices, require the
disclosure of certain basic information to mortgage borrowers concerning credit
terms and settlement costs, and otherwise regulate terms and conditions of
credit and the procedures by which credit is offered and administered. Many of
the above regulatory requirements are designed to protect the interests of
consumers, while others protect the owners or insurers of mortgage loans.
Failure to comply with these requirements can lead to administrative enforcement
actions, class action lawsuits and demands for restitution or loan rescission.

         TRANSACTIONS WITH AFFILIATES

         Generally, statutory restrictions, promulgated by OTS regulations and
by Section 23A and 23B of the Federal Reserve Act, limit the authority of First
Federal to engage in transactions with affiliates. These restrictions require
that transactions between a savings association or its subsidiaries and its
affiliates be on terms as favorable to the institution as comparable
transactions with non-affiliates. In addition, extensions of credit and certain
other transactions with affiliates are restricted to an aggregate percentage of
a savings association's capital, and collateral in specified amounts must
usually be provided by affiliates to receive loans from the institution.
Affiliates of First Federal include, among others, SouthFirst and any company
which would be under common control with First Federal. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of any affiliate which is
not a subsidiary. Currently, a subsidiary of a savings association that is not
also a depository institution is not treated as an affiliate of the savings
association for purposes of Section 23A and 23B.

         A savings association's authority to extend credit to its officers,
directors and 10% stockholders, as well as to entities that such persons
control, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O promulgated by the Federal Reserve Board. Among other things, these
laws and regulations require such loans to be made on terms substantially
similar to those offered to unaffiliated individuals, place limits on the amount
of loans a savings association may make to such persons based, in part, on the
institution's capital position, and require certain approval procedures to be
followed. OTS regulations, with minor variations, apply Regulation O to savings
associations.

         BRANCHING BY FEDERAL ASSOCIATIONS

         Subject to certain limitations, HOLA and the OTS regulations permit
federally chartered savings associations to establish branches in any state of
the United States. The authority to establish such a branch is available (a) in
states that expressly authorize branches of savings associations located in
another state and (b) to an association that either satisfies the QTL test or
qualifies as a "domestic building and loan association" under the Internal
Revenue Code, which imposes qualification requirements similar to those for a
"qualified thrift lender" under HOLA. The authority for a federal savings
association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities. This authority under
HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.

         LIQUIDITY REQUIREMENTS

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


                                       19

<PAGE>


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

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

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

         FEDERAL HOME LOAN BANK SYSTEM

         General. First Federal is a member of the FHLB System, which consists
of twelve regional FHLBs subject to supervision and regulation by the Federal
Housing Finance Board (the "FHFB"). The FHLBs maintain central credit facilities
primarily for member institutions.

         First Federal, as a member of the FHLB of Atlanta, is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of: (i) one percent of the aggregate outstanding
principal amount of its unpaid home mortgage loans, home purchase contracts and
similar obligations as of the beginning of each year or (ii) $500. First Federal
is in compliance with this requirement with an investment in stock of the FHLB
of Atlanta at September 30, 2001 of $2,229,800.

         Advances from Federal Home Loan Bank. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances (i.e., loans) to members in accordance with policies and
procedures established by the Board of Directors of the FHLB. Long term advances
may only be made for the purpose of providing funds for residential housing. At
September 30, 2001, First Federal had $32.25 million of advances outstanding
from the FHLB.

         As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low and moderate income housing projects. These
contributions have adversely affected the level of dividends paid on FHLB stock
and could continue to do so in the future. For the years ended September 30,
2001 and September 30, 2000, dividends were paid by the FHLB to First Federal in
the amount of $158,762 and $150,603, respectively. If the dividends were
reduced, or interest subsidies on future FHLB advances were to increase, First
Federal's net interest income would likely be reduced.


                                       20

<PAGE>


         FEDERAL RESERVE SYSTEM

         The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their deposit
transaction accounts (e.g., primarily checking, NOW and Super NOW checking
accounts) and non-personal time deposits. Under current Federal Reserve Board
regulations, no reserves are required to be maintained on the first $4.4 million
of transaction accounts, while reserves equal to 3% must be maintained on the
next $49.3 million of transaction accounts, plus reserves equal to 10% of the
remainder. Because required reserves must be maintained in the form of vault
cash or in a non-interest bearing account at a Federal Reserve Bank, the reserve
requirement has the effect of reducing the amount of the institution's
interest-earning assets. At September 30, 2001, First Federal was in compliance
with the reserve requirements of the Federal Reserve Board.

         Savings associations have authority to borrow from the Federal Reserve
Bank's "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. First Federal did not have any such borrowings at September 30,
2001.

ITEM 2.  PROPERTIES

         First Federal conducts its business through its main office located in
Sylacauga, Alabama, branch offices located in Talladega, Clanton and
Centreville, Alabama, and loan production offices in Hoover, and Dothan,
Alabama. In addition, on November 24, 1998, First Federal purchased a parcel of
land in Birmingham, Alabama at a price of $1,250,000, and on January 20, 1999,
First Federal purchased a parcel of land in Dothan, Alabama at a price of
$180,000.

         The following table sets forth information relating to the offices of
SouthFirst, First Federal and Pension & Benefit at September 30, 2001. The total
net book value of these properties at September 30, 2001 was approximately
$4,266,000.

             [The remainder of this page intentionally left blank.]


                                       21
<PAGE>



<TABLE>
<CAPTION>
                                                                                    NET BOOK VALUE              DEPOSITS
                                                   LEASED                               AS OF                     AS OF
                      LOCATION                    OR OWNED      DATE OPENED         SEPT. 30, 2001           SEPT. 30, 2001
                      --------                    --------      -----------         --------------           --------------
                                                                                                 (In thousands)
<S>                                               <C>           <C>                 <C>                      <C>
SOUTHFIRST AND FIRST FEDERAL
  MAIN OFFICE
         126 North Norton Avenue
         Sylacauga, Alabama  35150                 Owned        April 1966             $     705                  $ 40,530
  OFFICE/STORAGE BUILDING
         North Norton Avenue
         Sylacauga, Alabama  35150                 Owned        November 1995                228                       N/A
  FIRST FEDERAL BRANCH OFFICES
         301 West North Street
         Talladega, Alabama  35160                 Owned        April 1961                   186                    14,155

         102 Fifth Street North
         Clanton, Alabama 35045                    Owned        November 1997              1,407                    36,383

         125 Olan Heights Shopping Center
         Centreville, Alabama 35042                Leased       November 1997                N/A                     7,974

SOUTHFIRST MORTGAGE
      LOAN PRODUCTION OFFICES
         3055 Lorna Road
         Birmingham, Alabama 35216                 Leased       March 1994                 1,257                       N/A

         BrightLeaf Court
         25 Honeysuckle Rd., Suite 20
         Dothan, Alabama 36305                     Leased       April 1998                   180                        13

PENSION & BENEFIT
         260 Commerce Street
         Third Floor
         Montgomery, Alabama 36101                 Owned        April 1997                   303                       N/A
                                                                                       ---------                  --------

TOTAL                                                                                  $   4,266                  $ 99,055
                                                                                       =========                  ========
</TABLE>


             [The remainder of this page intentionally left blank.]


                                       22


<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

         In the normal course of business, SouthFirst and First Federal from
time to time are involved in legal proceedings. SouthFirst and First Federal
management believe there are no pending or threatened legal proceedings which,
upon resolution, are expected to have a material adverse effect upon
SouthFirst's or First Federal's financial condition. Nonetheless, descriptions
of certain, previously disclosed legal proceedings follow:

         Settlement of Legal Proceeding

         Bobby R. Cook, President of the Western Division of First Federal and
member of the Board of Directors of SouthFirst and First Federal, filed a
lawsuit in Chilton County, Alabama, on January 19, 2000, against First Federal,
SouthFirst and Donald C. Stroup (President, Chief Executive Officer, and
Chairman of SouthFirst and First Federal at that time), alleging wrongful
termination of his employment as President of the Western Division and other
claims. Mr. Cook was terminated for cause by the Board of Directors of First
Federal, pursuant to the provisions of Mr. Cook's employment agreement with
First Federal. Further, Mr. Cook, on January 25, 2000, was removed for cause as
a member of the Board of Directors of First Federal, upon the unanimous written
consent of SouthFirst, the sole shareholder of First Federal. Mr. Cook continued
to serve as a member of the Board of Directors of SouthFirst until April, 2001.

         SouthFirst, on August 20, 2001, agreed to settle these claims with Mr.
Cook. The proposed terms of the settlement agreement provide for a payment of
$570,000 to Mr. Cook. In exchange for the payment, SouthFirst will receive
13,856 shares of its common stock, which Mr. Cook owns and which had a market
value of approximately $160,000 at the time of the settlement agreement. Based
on this settlement agreement, SouthFirst accrued the excess of the proposed
payment ($410,000) and included this excess in the statement of operations under
"other expenses," as part of the "termination agreements" item, therein. The
settlement agreement was reduced to writing and executed by the parties as of
December 11, 2001. When received, management anticipates treating the common
stock as treasury stock.

         Litigation Against Former Director

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


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was submitted during the fourth quarter ended September 30,
2001 to a vote of security holders of SouthFirst.


                                       23


<PAGE>


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

         As of December 15, 2001, SouthFirst's Common Stock was held by
approximately 349 persons. SouthFirst's Common Stock trades on the American
Stock Exchange, under the symbol "SZB." The following data reflects, by fiscal
quarter, the high and low sales price as well as cash dividends declared for
each quarter from October 1, 1999 through September 30, 2001:

<TABLE>
<CAPTION>
                                                                                                       Cash
                                                                                                     Dividends
                                                                       High Sale      Low Sale       Declared(1)
                                                                       ---------      --------       ----------
         <S>                                                          <C>             <C>            <C>
         FISCAL YEAR ENDED SEPTEMBER 30, 2001
         First Quarter ended December 31, 2000                           10 1/8         8 4/9        $ 139,362
         Second Quarter ended March 31, 2001                                 11         9 2/3          139,312
         Third Quarter ended June 30, 2001                               11 4/5        10 1/2          137,689
         Fourth Quarter ended September 30, 2001                         11 3/4        10 5/7          137,689

         FISCAL YEAR ENDED SEPTEMBER 30, 2000
         First Quarter ended December 31, 1999                           11 1/8         9 3/8          139,362
         Second Quarter ended March 31, 2000                             11 3/8        10 5/8          139,362
         Third Quarter ended June 30, 2000                                9 3/4         9 1/4          139,362
         Fourth Quarter ended September 30, 2000                         10             9 3/4          139,362

</TABLE>


(1)      Certain cash dividends associated with SouthFirst's Management
         Recognition Plans and Employee Stock Option Plan shares are reflected
         as compensation expense in the consolidated financial statements. See
         "EXECUTIVE COMPENSATION -- Management Recognition Plans" and "--
         Employee Stock Ownership Plan."


                                       24


<PAGE>


         Holders of SouthFirst Common Stock are entitled to receive such
dividends as may be declared by SouthFirst's Board of Directors. The amount and
frequency of cash dividends will be determined in the judgment of SouthFirst's
Board of Directors based upon a number of factors, including the company's
earnings, financial condition, capital requirements, and other relevant factors.
SouthFirst management presently intends to continue its present dividend
policies. See "BUSINESS -- Supervision and Regulation -- Regulation of First
Federal -- Dividends and Other Capital Distribution Limitations."

           The amount of dividends payable by First Federal is limited by law
and regulation. The need for First Federal to maintain adequate capital also
limits dividends that may be paid to SouthFirst. Although Federal Reserve policy
could restrict future dividends on SouthFirst Common Stock, such policy places
no current restrictions on such dividends. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Capital Resources"
and "BUSINESS -- Supervision and Regulation -- Regulation of First Federal --
Dividends and Other Capital Distribution Limitations."

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following discussion and analysis is designed to provide a better
understanding of the major factors which affected SouthFirst's results of
operations and financial condition for the referenced periods.

         The purpose of this discussion is to focus on significant changes in
the financial condition and results of SouthFirst during the two year period
ended September 30, 2001. This discussion and analysis is intended to supplement
and highlight information contained in the accompanying consolidated financial
statements and the selected financial data presented elsewhere herein.

RESULTS OF OPERATIONS

         NET INCOME

         For the fiscal year ended September 30, 2001, net income decreased
$1,383,585 from $961,492 to a loss of $422,093. Earnings/(loss) per common share
was ($ .47) and $1.06 for the fiscal years ended September 30, 2001 and 2000,
respectively. The decrease in net income for fiscal 2001 was due primarily to an
increase in loan loss reserves, the settlement and termination of certain
employment contracts and the decrease in interest rates. First Federal's net
interest income after provision for loan losses decreased $1,720,767 (36.1%)
during fiscal 2001, from $4,770,744 to $3,049,977. This decrease was
attributable to a decrease of $1,023,314 in interest income, resulting primarily
from a decrease in interest rates on loans and investments, a decrease in the
loan portfolio and an increase in the provision for loan losses of $852,116,
from $5,572 to $857,688, the reasons for which are discussed below under the
heading "Provision for Loan Losses." Fee income received by Pension and Benefit
increased $41,112 (3.8%) during fiscal 2001, from $1,087,884 to $1,128,996.
Other expenses increased $726,000 (13.7%) from $5,299,379 to $6,025,379 during
fiscal 2001.

         For the fiscal year ended September 30, 2000, net income decreased
$338,507, or 26%, to $961,492. Earnings per common share were $1.06 for the
fiscal year ended September 30, 2000. The decrease in net income in fiscal 2000
was due primarily to a one-time gain of approximately $2,265,000 realized on the
sale by First Federal of FHLMC stock and an increase in the provision for loan
losses of $543,000 in 1999.

         The components of net income discussed in the preceding paragraphs are
discussed more fully below.


                                       25


<PAGE>


         NET INTEREST INCOME

         Net interest income was $3,908,000 for the twelve months ended
September 30, 2001, which represents a decrease of $868,651 (18.18%) from fiscal
2000. Net interest income is the difference between the interest earned on
loans, investment securities and other earning assets and the interest cost
associated with deposits and borrowed funds. The decrease in 2001 is primarily
due to a decrease in the net interest rate spread. The net interest rate spread
decreased as rates on interest-earning assets decreased twenty-one basis points
to 7.69% and the cost of funds also increased sixteen basis points to 5.14%. The
combined effect of the changes in average balances and the changes in rates
above resulted in a decrease in net interest income.

         Net interest income was $4,776,000 for the twelve months ended
September 30, 2000. This increase of $659,000, or 16%, over the comparable
twelve months of 1999 was primarily the result of the increase in the average
balance of interest-earning assets from $142.2 million to $150.9 million, where
the average balance of interest-bearing liabilities increased from $134.2
million to $143.2 million. The combined effect of the changes in average balance
and the increase in the net interest rate spread resulted in the $659,000
increase in net interest income for fiscal 2000.

         First Federal's Asset/Liability Committee ("ALCO") conducts a gap
analysis in order to assist in analyzing the yields on earning assets and the
rates paid on interest-bearing liabilities. There can be no assurance, however,
that such analysis will positively affect earnings.

         RATE/VOLUME VARIANCE ANALYSIS

         The following table sets forth information regarding the extent to
which changes in interest rates, changes in volume of interest assets, and
changes in volume of interest related assets and liabilities have affected First
Federal's interest income and expense during the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided for changes attributable to (i) changes in volume (change in volume
multiplied by old rate), (ii) changes in rates (change in rate multiplied by old
volume) and (iii) changes in rate/volume (change in rate multiplied by change in
volume). Changes in rate/volume have been allocated proportionately between
changes in volume and changes in rates.


<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                    ----------------------------------------------------------------------------------------------
                                              2001 vs. 2000               2000 vs. 1999                    1999 vs. 1998
                                           Increase (Decrease)          Increase (Decrease)              Increase (Decrease)
                                                 Due to                        Due to                          Due to
                                    ------------------------------  ------------------------------  ------------------------------
                                     Volume      Rate      Total     Volume      Rate      Total     Volume     Rate       Total
                                    --------   --------   --------  --------   --------   --------  --------   --------   --------
                                                                    (Dollar amounts in thousands)
<S>                                 <C>        <C>        <C>       <C>        <C>        <C>       <C>        <C>        <C>
Interest income:
     Investment securities          $   (167)  $    (20)  $   (187) $    346   $    204   $    550  $   (113)  $   (689)  $   (802)
     Loans receivable                   (542)      (294)      (836)      278        603        881       531       (343)       188
                                    --------   --------   --------  --------   --------   --------  --------   --------   --------
Total interest income                   (709)      (314)    (1,023)      624        807      1,431       418     (1,032)      (614)
                                    --------   --------   --------  ========   ========   ========  ========   ========   ========

Interest expense:
     NOW accounts                        (10)        (5)       (15)      (21)       (27)       (48)       23        (80)       (57)
     Money market demand                  (1)        --         (1)       (1)        (1)        (2)       (1)        (1)        (2)
     Passbook savings                    (15)        (8)       (23)      (33)       (20)       (53)       --        (35)       (35)
     CDs other than Jumbos              (158)       151         (7)     (555)       (52)      (607)     (222)       139        (83)
     Jumbos                               59        107        166       167         12        179        92         58        150
     Borrowed funds                     (213)       (61)      (274)    1,165        138      1,303        44       (215)      (171)
                                    --------   --------   --------  --------   --------   --------  --------   --------   --------
Total interest expense                  (338)       184       (154)     (722)        50        772       (64)      (134)      (198)
                                    --------   --------   --------  --------   --------   --------  --------   --------   --------
     Change in net interest income  $   (371)  $   (498)  $   (869) $    (98)  $    757   $    659  $    482   $   (898)  $   (416)
                                    ========   ========   ========  ========   ========   ========  ========   ========   ========
</TABLE>


                                       26

<PAGE>
         INTEREST INCOME

         Interest income is a function of both the volume of interest earning
assets and their related yields. Interest income was $10,892,000, $11,915,000
and $10,484,000 for the twelve months ended September 30, 2001, September 30,
2000 and September 30, 1999, respectively. Average interest earning assets
decreased $9,269,000 (6.14%) during 2001, increased $8,682,000 (6.1%) during
2000 and increased $4,821,000 (3.5%) during 1999. The 2001 yield decreased
primarily due to rates on mortgage loans and residential construction loans
decreasing during the year, while the 2000 yield increased, primarily due to
rates on residential construction loans increasing during the year, while the
1999 yield decreased due to a declining interest rate environment during that
period. Interest and fees on loans were $8,506,000, $9,342,000 and $8,461,000
for the twelve months ended September 30, 2001, September 30, 2000, and
September 30, 1999, respectively. The decrease in loans receivable in 2001 was
due to a decreasing rate environment with customers refinancing higher rate
mortgages. The increase in average loans receivable in 2000 and 1999 was largely
due to increases in residential construction loans, home equity loans, as well
as residential mortgage loans.

         Interest income on total investment securities, including those held to
maturity and those available for sale, decreased $188,000 (7.3%) to $2,385,000
in 2001. The average balance outstanding of investment securities, including
those held to maturity and those available for sale, decreased $2,373,000 (6.1%)
to $36,519,000 in 2001, increased $4,212,000 (12.2%) to $38,891,000 in 2000, and
decreased $1,930,000 (5.3%) to $34,679,000 in 1999. The yields on investment
securities were 5.78% in 2001 and 6.26% in 2000. Interest income on total
investment securities, including those held to maturity and those available for
sale, increased $550,000 (27.2%) in 2000.

         INTEREST EXPENSE

         Total average interest-bearing liabilities were $136,000,000,
$143,213,000 and $134,177,000 for fiscal years 2001, 2000 and 1999,
respectively. Interest bearing liabilities decreased by $9,592,000 (6.6%) in
2001, increased by $9,036,000 (6.7%) in 2000, and decreased by $326,000 (0.24%)
in 1999. The rates paid on these liabilities increased by 16 basis points to
5.14% in 2001, increased 23 basis points to 4.98% in 2000, and decreased 13
basis points to 4.75% in 1999. Total interest expense was $6,984,000 for 2001,
$7,139,000 for 2000, and $6,367,000 for 1999, which represent a decrease of
$155,000 (2.2%), an increase of $772,000 (12.1%) and a decrease of $198,000
(3.02%) during 2001, 2000 and 1999, respectively. The decrease in 2001 was
primarily the result of a decrease in interest-bearing liabilities, which was
partially offset by an increase in interest rates. The increase in 2000 was
primarily the result of an increase in interest-bearing liabilities. The
decrease in 1999 resulted from a decrease in the cost of funds.

         Interest on deposits, the primary component of total interest expense,
increased to $4,977,000 in 2001, while interest on deposits decreased to
$4,858,000 in 2000 and decreased to $5,399,000 in 1999. The average balance of
interest-bearing deposits decreased to $101,528,000 in 2001 from $105,088,000 in
2000 and from $115,533,000 in 1999.

         Interest expense on borrowed funds, including both short-term and other
borrowed funds, was $2,007,000, $2,281,000 and $977,000 for fiscal 2001, 2000
and 1999, respectively. The decrease in 2001 was due to the repayment of FHLB
advances with funds received from investments maturing and principal repayment
of mortgage loans. The increase in 2000 was due to the replacement of
certificates of deposit with FHLB Advances, as well as for the funding of
additional investments. The decrease in 1999 was due to lower FHLB advance
rates. The average balance of FHLB advances outstanding was $31,717,000 for
2001, $34,861,000 for 2000, and $17,596,000 for 1999. The average balance of
borrowed funds outstanding was $34,471,000 for 2001, $38,125,000 for 2000, and
$18,644,000 for 1999.


                                       27
<PAGE>

         PROVISION FOR LOAN LOSSES

         The provision for loan losses is based on management's current
assessment of the risk in the loan portfolio and is influenced primarily by the
amount of recent loan losses. The provision for loan losses was $857,688,
$5,572, and $587,690 for fiscal 2001, 2000 and 1999, respectively. The amount of
the provision for loan losses for fiscal 2001 is primarily the result of an
additional provision for a loan, which defaulted in the fourth quarter. The
loan, in the principal amount of $657,000, was made to Vawter Properties and
Resources, LP, an Alabama limited partnership whose general partner is Charles
R. Vawter, Jr., a former director of the Company and the Bank, and who also
personally guaranteed the loan. Mr. Vawter resigned his position as director,
vice-chairman of the Board and member of the Bank's loan committee on August 13,
2001. The total of the loan loss and the fourth-quarter expenses associated with
this loan is $713,000, including the loss of principal and unpaid interest, as
well as related legal and accounting expenses. The Bank has brought suit against
Mr. Vawter, Vawter Properties and Resources, LP, and other related parties to
recover the total amount of the loan loss and related expenses. See "Item 3 -
Legal Proceedings."

         The amount of the provision for loan losses for fiscal 1999 was
primarily the result of additional provisions for loan losses in the amount of
$451,593. This provision for loan losses was attributable in significant part
($346,507) to certain loan quality problems observed in internal audits, and in
other reviews by management, of the loan assets for First Federal's Western
Division.

         First Federal's provision for loan losses also reflects management's
current assessment of economic and other factors which management deems relevant
to its risk analysis, including loan concentrations in particular markets,
economic activity in particular markets, certain regulatory requirements
regarding loan loss reserves and related safety and soundness issues, as well as
management's view of the general economic outlook.

         As previously discussed, the loan portfolio is comprised primarily of
one-to-four family residential mortgage loans and residential construction
loans. The one-to-four family residential mortgage loans are originated in First
Federal's primary market area of Talladega and Chilton County, Alabama.
Management believes that the credit risks associated with this type of loan are
significantly lower than other loan types.

         Although residential construction loans have characteristics of
relatively higher credit risks, such as concentrations of amounts due from a
smaller number of borrowers and dependence on the expertise of the builder,
management believes that its residential construction lending policies and
procedures reduce the credit risks associated with this type of loan, and that
its current provisions for loan losses in the construction loan portfolio (1%)
is adequate in light of these policies and procedures. First Federal entered the
residential construction lending area in 1994 by purchasing the portfolio of
another Alabama thrift. A significant portion of First Federal's residential
construction loans were originated in Hoover, Alabama, a suburb of Birmingham
and one of the most affluent areas of the state. Since acquiring the portfolio,
First Federal has not suffered a significant loss on a residential construction
loan.

         Charge-offs in the total loan portfolio, net of recoveries, averaged
approximately, $6,000 from 1994 through 1997. In 1999, net charge-offs increased
from approximately $85,000 to approximately $468,000, due in significant part,
to the previously mentioned loan quality problems occurring in the Western
Division of First Federal. There were no significant charge-offs in 2000. In
2001, a provision was made in the amount of $654,746, for the previously
mentioned Vawter loan. Management also reserved approximately $200,000 on a
commercial loan to a used automobile dealership. The loan to the dealership was
originated in 1998 and the bank has classified the loan as doubtful. Management
believes the allowances for loan losses at September 30, 2001 ($1,577,952) to be
at an adequate level relative to the total loan portfolio and to non-performing
loans, and in light of the other factors, which are relevant to the assessment
of risks in the loan portfolio.


                                       28
<PAGE>

         Future additions to the allowance may be necessary based on changes in
economic conditions and other factors. In addition, various regulatory agencies
periodically review First Federal's allowance for loan losses and may require
First Federal to recognize additions to the allowance based upon and analysis of
information available at the time of their review.

         OTHER INCOME

         Other income increased $212,000 (10.1%) in 2001, from $2,100,000 in
2000. Other income decreased $2,318,000 (52.5%) in 2000 from $4,418,000 in 1999.
The increase in 2001 was due to an increase in fee income from Pension and
Benefit from $1,087,000 to $1,129,000 as well as an increase in the gain on the
sale of mortgage loans and other income from $592,000 to $748,000. The decrease
in 2000 was largely due to an increase of $2,279,000 in gain on sale of
investment securities available for sale, which was primarily the result of
selling FHLMC stock at a gain of approximately $2,265,000 in 1999.

         Service charges and other fees were $443,000, $440,000, and $502,000 in
fiscal 2001, 2000, and 1999, respectively. The fluctuations are primarily due to
changes in overdraft fees and NSF charges.

         Gain on sale of loans increased $82,000 (26.2%) in 2001, decreased
$130,000 (29.5%) in 2000, and increased $203,000 (85.1%) in 1999. The increase
in 2001 was primarily due to a decrease in mortgage loan rates, which resulted
in more originations and sales of mortgage loans. The decrease in 2000 was
primarily due to a decreased mortgage loan demand as a result of higher interest
rates from the prior years of 1999 and 1998.

         OTHER EXPENSE

         Total other expense increased to $6,025,000 in 2001 from $5,299,000 in
2000. Other expense had increased in 1999 to $5,831,000. This represented an
increase of $726,000 (13.7%) in 2001, a decrease of $532,000 (9.1%) in 2000 and
an increase of $621,000 (11.9%) in 1999.

         Compensation and benefits totaled $3,118,000, $2,901,000, and
$3,268,000 for 2001, 2000, and 1999, respectively. These levels reflect an
increase of $217,000 (7.5%) in 2001, a decrease of $367,000 (11.2%) in 2000, and
an increase of $140,000 (4%) in 1999. The increase in 2001 was primarily
attributable to merit and cost of living raises and the cost of benefits
associated with such increases. The decrease in 2000 is the result of
streamlining operations and the reduction of employees through attrition. The
increase in 1999 was also associated with merit and cost-of-living increases.

         Termination agreements expense was $560,000 in 2001 and zero in both
2000 and 1999, respectively. This expense is related to the settlement of
certain legal actions with a former director and officer as well as other
expense under the employment contract of the Company's President and Chairman of
the Board of Directors who resigned. See "ITEM 3. LEGAL PROCEEDINGS" and "ITEM
10. EXECUTIVE COMPENSATION."

         INCOME TAX EXPENSE

         Income tax benefit for 2001 was $242,000 while income tax expense was
$609,000 and $816,000 for fiscal years 2000 and 1999, respectively. These levels
represent an effective tax rate on pre-tax earnings (losses) of 36% for the
fiscal year ended September 30, 2001 and 38% for each of the fiscal years ended
September 30, 2000 and September 30, 1999. For 2001, 2000, and 1999, First
Federal's effective tax rate was slightly higher than the statutory rate due to
state income taxes and differences between taxable income for financial
reporting and income tax purposes.

         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


                                       29
<PAGE>

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.

         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; 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 the 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.


                                       30
<PAGE>

ASSET/LIABILITY MANAGEMENT

         INTEREST RATE SENSITIVITY

         An integral aspect of the funds management of First Federal is the
maintenance of a reasonably balanced position between interest rate sensitive
assets and liabilities. ALCO is charged with the responsibility of managing, to
the degree prudently possible, the bank's exposure to "interest rate risk,"
while attempting to provide a stable and steadily increasing flow of depositors
and borrowers and to seek earnings enhancement opportunities. An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. First Federal measures its interest
rate risk as the ratio of cumulative interest sensitivity gap to total interest
earning assets ("ratio"). The ratio is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that same time period, divided by the total interest earning assets. The
ratio is positive when the amount of interest rate sensitive assets exceeds the
amount of interest sensitive liabilities, and is negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative ratio would adversely affect net interest income, while a positive
ratio would result in an increase in net interest income. Conversely, during a
period of falling interest rates, a negative ratio would result in an increase
in net interest income and a positive ratio would adversely affect net interest
income. Due to the nature of First Federal's balance sheet structure and its use
of the market approach to pricing liabilities, First Federal's management and
the First Federal Board of Directors recognize that achieving a perfectly
matched gap position in any given time frame would be extremely rare. At
September 30, 2001, First Federal had a negative one-year cumulative ratio of
(12.68%) and a five-year cumulative ratio of 6.89%, as a result of which its net
interest income could be negatively affected by rising interest rates and
positively affected by falling interest rates. At September 30, 2000, First
Federal had a negative one-year cumulative ratio of (16.46%) and a positive
five-year cumulative ratio of 6.16%. During the declining interest environment
of 2001, First Federal's interest rate spread decreased while during the rising
interest rate environment of 2000 and 1999, First Federal's interest rate spread
remained fairly constant. Consistent with a positive ratio during the increasing
interest rate environment experienced in late 1994 and 1995, when interest rates
increased further and more rapidly on interest-bearing liabilities than on
interest-earning assets, First Federal experienced a decrease in its interest
rate spread. Conversely, consistent with a negative ratio, during the declining
interest rate environment experienced from 1991 through late 1994, when interest
rates declined further and more rapidly on interest-bearing liabilities than on
interest-earning assets, First Federal experienced an increase in its interest
rate spread.

         There are other factors that may affect the interest rate sensitivity
of First Federal's assets and liabilities. These factors generally are difficult
to quantify but can have a significant impact on First Federal when interest
rates change. Such factors include features in adjustable rate loans that limit
the changes in interest rates on a short-term basis and over the life of the
loan. First Federal's portfolio of one-to-four family residential mortgage loans
included $30.0 million and $32.7 million (29.7% and 30.1% of First Federal's
total loan portfolio) of adjustable rate loans at September 30, 2001 and
September 30, 2000, respectively. These loans have restrictions limiting
interest rate changes to 1.0% or 2.0% per year and 6.0% over the life of the
loan. In a rapidly declining or rising interest rate environment, these
restrictions could have a material effect on interest income by slowing the
overall response of the portfolio to market movements. ALCO utilizes the "Asset
and Liability Management Report" prepared by Farin & Associates (the Strategic
Asset Liability Management) in order to assist First Federal in determining
First Federal's gap and interest rate position. (In prior years ALCO utilized a
similar report prepared by Morgan Keegan & Company, Inc.) Through use of the
Farin & Associates analysis, ALCO analyzed the effect of an increase or decrease
of up to 300 basis points on the market value of First Federal's portfolio
equity ("MVPE") at September 30, 2001 and September 30, 2000. At a 300 basis
point increase, First Federal's MVPE decreased approximately $5,628,000 and
decreased $4,383,000 at September 30, 2001 and September 30, 2000, respectively,
and, at a 300 basis point decrease, First Federal's MVPE increased approximately
$7,290,000 and increased $5,772,000 at September 30, 2001 and September 30,
2000, respectively. Management determined that these changes in MVPE were
acceptable.


                                       31
<PAGE>

         The following table sets forth information regarding the projected
maturities and repricing of the major asset and liability categories of First
Federal as of September 30, 2001 and September 30, 2000. Maturity and repricing
dates have been projected by applying the assumptions set forth below as to
contractual maturity and repricing dates. Classifications of items in the table
are different from those presented in other tables and the financial statements
and accompanying notes included therein.

              [The remainder of this page intentionally left blank]


                                       32
<PAGE>

                          INTEREST RATE SENSITIVITY GAP

<TABLE>
<CAPTION>
                                                                                At September 30, 2001
                                                     ------------------------------------------------------------------------------
                                                     One year           One to           Three to           Over
                                                      or less         three years       five years       five years          Total
                                                     --------         -----------       ----------       ----------        --------
                                                                                 (Dollars in thousands)
<S>                                                  <C>              <C>               <C>              <C>               <C>
INTEREST-EARNING ASSETS:
  Mortgage loans                                     $ 50,888          $ 17,074          $ 10,341          $17,103         $ 95,406
  All other loans                                       4,103             2,012               565              206            6,886
  Collateralized mortgage
    obligations                                         2,075             1,932             1,727            7,752           13,486
  Mortgage-backed
    securities                                          2,337             2,359             1,564            2,518            8,778
  Other Investments(1)                                 13,742                --                --            2,574           16,316
                                                     --------          --------          --------          -------         --------

 Total interest-earning assets                       $ 73,145          $ 23,377          $ 14,197          $30,153         $140,872
                                                     ========          ========          ========          =======         ========

INTEREST-BEARING LIABILITIES:
    Deposits                                         $ 55,397          $ 25,618          $ 10,905          $ 3,645         $ 95,565
    Borrowed funds                                     35,605                --                --               --           35,605
                                                     --------          --------          --------          -------         --------

Total interest-bearing liabilities                   $ 91,002          $ 25,618          $ 10,905          $ 3,645         $131,170
                                                     ========          ========          ========          =======         ========

Interest sensitivity gap                             $(17,857)         $ (2,241)         $  3,292          $26,508         $  9,702

Cumulative interest sensitivity gap                  $(17,857)         $(20,098)         $(16,806)         $ 9,702

Ratio of cumulative interest sensitivity
gap to total interest earning assets                   (12.68)%          (14.27)%          (11.93)%           6.89%

Ratio of cumulative interest sensitivity
gap to total assets of $151,194                        (11.81)%          (13.29)%          (11.12)%           6.42%

<CAPTION>

                                                                                At September 30, 2000
                                                     ------------------------------------------------------------------------------
                                                     One year           One to           Three to           Over
                                                      or less         three years       five years       five years          Total
                                                     --------         -----------       ----------       ----------        --------
                                                                                 (Dollars in thousands)
<S>                                                  <C>              <C>               <C>              <C>               <C>

INTEREST-EARNING ASSETS:
  Mortgage loans                                     $  59,551          $ 14,988         $11,204           $ 9,165         $ 94,908
  All other loans                                        2,488             4,807           4,617                --           11,912
  Collateralized mortgage
    obligations                                         13,602                --              --                --           13,602
  Mortgage-backed
    securities                                           1,823             1,973           1,752             4,548           10,096
   Other Investments(2)                                  4,138             3,000           6,148             6,732           20,018
                                                     ---------          --------         -------           -------         --------

 Total interest- earning assets                      $  81,602          $ 24,768         $23,721           $20,445         $150,536
                                                     =========          ========         =======           =======         ========

INTEREST-BEARING LIABILITIES:
    Deposits                                         $  67,486          $ 15,336         $ 3,320           $16,230         $102,372
    Borrowed funds                                      38,889                --              --                --           38,889
                                                     ---------          --------         -------           -------         --------

  Total interest-bearing liabilities                 $ 106,375          $ 15,336         $ 3,320           $16,230         $141,261
                                                     =========          ========         =======           =======         ========

Interest sensitivity gap                             $ (24,773)         $  9,432         $20,401           $ 4,215         $  9,275

Cumulative interest sensitivity gap                  $ (24,773)         $(15,341)        $ 5,060           $ 9,275

Ratio of cumulative interest sensitivity
gap to total interest earning assets                    (16.46)%          (10.19)%          3.36%             6.16%

Ratio of cumulative interest sensitivity
 gap  to total assets of $151,194                       (15.43)%           (9.56)%          3.15%             5.78%
</TABLE>

---------------------
(1)      Includes investments in overnight deposits.
(2)      Includes investments in overnight deposits.

                                       33
<PAGE>

         The Farin & Associates analysis for 2001 and the preceding table were
prepared based upon the contractual terms of the asset or liability and with the
following assumptions regarding prepayment of loans, collateralized mortgage
obligations ("CMOs") and mortgage-backed securities, and decay rates of
deposits. These prepayment and decay rate assumptions are management's estimates
based on expectations of future interest rates. Fixed rate mortgage loans are
assumed to prepay at approximately 8%. Adjustable rate loans, CMOs and
mortgage-backed securities are presented in the period in which they next
reprice. All other loans (principally consumer installment loans) are presented
at their contractual maturities. Fixed rate CMOs are assumed to prepay at rates
ranging from 15% to 20%. The decay rates for money market demand accounts are
assumed to be 47% for the first year and 40% for the second year. The decay
rates for passbook accounts are assumed to be 22% for the first year and 22%
thereafter and the decay rates for NOW accounts are assumed to be 23% for the
first year and approximately 22% thereafter. Certificate accounts and borrowed
funds are presented at their contractual maturities. Certain shortcomings are
inherent in the method of analysis presented in the table above. Although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in the market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets and liabilities may lag behind changes in market interest rates.
Certain assets, such as ARMs, generally have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayments and early withdrawal levels
would cause significant deviations in the table. Additionally, an increased
credit risk may result if the ability of many borrowers to service their debt
decreases in the event of an interest rate increase. A majority of the
adjustable rate loans in First Federal's portfolio contain conditions which
restrict the periodic change in interest rates.

         INTEREST RATE RISK STRATEGY

         First Federal has employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations by providing a better
match between the interest rate sensitivity of its assets and liabilities. First
Federal's strategies are intended to stabilize long term net interest income by
protecting its interest rate spread against decreases and increases in interest
rates. To offset the interest rate risk associated with holding a substantial
amount of fixed rate loans and having a predominantly short-term certificate of
deposit base, First Federal maintains a portfolio of residential adjustable-rate
mortgage loans that reprice in less than one year. The amount of loans in this
portfolio was equal to $32,652,000 at September 30, 2001 and $28,989,000 at
September 30, 2000. First Federal also sells a significant portion of its fixed
rate loan originations in the secondary markets, and directs excess cash flow
into short-term and adjustable rate investment securities. Diversification into
more interest-sensitive mortgage loans and construction loans in the Birmingham
area has also served to reduce First Federal's interest rate risk exposure.

         EFFECTS OF INFLATION AND CHANGING PRICES

         Inflation generally increases the costs of funds and operating
overhead, and, to the extent loans and other assets bear variable rates, the
yields on such assets. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on the
performance of a financial institution than the effects of general levels of
inflation. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. In addition,
inflation affects a financial institution's cost of goods and services
purchased, the cost of salaries and benefits, occupancy expense, and similar
items. Inflation and related increases in interest rates generally decrease the
market value of investments and loans held and may adversely affect liquidity,
earnings, and stockholders' equity. Mortgage originations and refinancings tend
to slow as interest rates increase and would likely reduce First Federal's
earnings from such activities. Further, First Federal's income from the sale of
residential mortgage loans in the secondary market would also likely decrease if
interest rates increased.


                                       34
<PAGE>

AVERAGE BALANCE, INTEREST, YIELDS AND RATES

         The following table sets forth certain information relating to First
Federal's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. Average balances are derived from month-end-balances.
Management does not believe that the use of month-end balances instead of daily
balances has caused any material difference in the information presented.

         The table also presents information for the periods indicated with
respect to the difference between the average yield earned on interest-earning
assets and average rate paid on interest-bearing liabilities, or "interest rate
spread," which savings associations have traditionally used as an indicator of
profitability. Another indicator of an institution's net interest income is its
"net yield on total interest-earning assets," which is its net interest income
divided by the average balance of interest-earning assets. Net interest income
is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.

              [The remainder of this page intentionally left blank]


                                       35
<PAGE>

                   AVERAGE BALANCE, INTEREST, YIELDS AND RATES

<TABLE>
<CAPTION>
                                                                               Year Ended September 30,
                                                 ---------------------------------------------------------------------------------
                                                                  2001                                       2000
                                                 --------------------------------------     --------------------------------------
                                                    Average                      Yield/        Average                      Yield/
                                                    Balance        Interest       Cost         Balance        Interest       Cost
                                                 ------------     -----------    ------     ------------     -----------    ------
<S>                                              <C>              <C>            <C>        <C>              <C>            <C>
INTEREST EARNING ASSETS:
     Interest earnings deposited
        in other financial institutions          $    916,802     $   276,257     30.13%    $  1,171,156     $   138,758
     Total investment securities                   36,518,896       2,109,156      5.78%      38,891,644       2,433,984      6.26%
     Loans receivable                             104,148,074       8,506,455      8.17%     110,789,666       9,342,440      8.43%
                                                 ------------     -----------    ------     ------------     -----------    ------
TOTAL INTEREST EARNING ASSETS                     141,583,772      10,891,868      7.69%     150,852,466      11,915,182      7.90%

   Allowance for loan losses                         (770,245)                                  (736,726)
   Cash and amounts due from
       depository institutions                      7,237,695                                  4,404,043
   Premises and equipment                           4,938,849                                  5,054,685
   Foreclosed real estate                             535,006                                    383,862
   Accrued interest receivable                        965,109                                  1,055,087
   Other assets                                     1,504,934                                  1,714,340
   Investments in Affiliates                            4,116                                     14,006
                                                 ------------                               ------------
 TOTAL ASSETS                                    $155,999,236                               $162,741,763
                                                 ============                               ============

INTEREST BEARING LIABILITIES:
   Deposits:
      NOW accounts                                  9,929,758         159,740      1.61%    $ 10,581,025     $   175,539      1.66%
      Money market demand                             144,497           1,992      1.38%         219,418           3,371      1.54%
      Statement savings                            11,650,760         216,553      1.86%      12,476,710         240,270      1.93%
      CDs, other than Jumbos                       72,197,589       4,044,144      5.60%      75,020,005       4,050,687      5.40%
      Jumbo certificates                            7,605,523         554,878      7.30%       6,790,810         388,441      5.72%
                                                 ------------     -----------    ------     ------------     -----------    ------
TOTAL INTEREST-BEARING DEPOSITS                   101,528,127       4,977,307      4.90%     105,087,968       4,858,308      4.62%
    Borrowed funds                                 34,471,370       2,006,896      5.82%      38,124,848       2,280,558      5.98%
                                                 ------------     -----------    ------     ------------     -----------    ------
TOTAL INTEREST-BEARING LIABILITIES                135,999,497       6,984,203      5.14%     143,212,816       7,138,866      4.98%
Non-interest bearing demand accounts                2,836,095                                  3,128,850
Advances by borrowers for property taxes              310,794                                    323,424
Accrued interest payable                            1,342,510                                  1,113,935
Income taxes payable                                  231,595                                    111,491
Accrued expenses and other liabilities                286,462                                    495,292
                                                 ------------                               ------------
   TOTAL LIABILITIES                              141,006,953                                148,385,808
Stockholders' equity                               14,992,283                                 14,355,955
                                                 ------------                               ------------
   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY      $155,999,236                               $162,741,763
                                                 ============                               ============

Net interest income                                               $ 3,907,665                                $ 4,776,316
                                                                  ===========                                ===========
Interest rate spread                                                               2.56%                                      2.91%
Net yield on total interest earning assets                                         2.76%                                      3.17%
Average interest-earning assets to
   average total interest-bearing
   liabilities ratio                                                             104.11%                                    105.33%
                                                                                 ======                                     ======

<CAPTION>

                                                         Year Ended September 30,
                                                 --------------------------------------
                                                                  1999
                                                 --------------------------------------
                                                   Average                       Yield/
                                                   Balance         Interest       Cost
                                                 ------------     -----------    ------
<S>                                              <C>              <C>            <C>
INTEREST EARNING ASSETS:
     Interest earnings deposited
        in other financial institutions
     Total investment securities                 $ 34,679,305     $ 2,023,243      5.83%
     Loans receivable                             107,491,039       8,460,854      7.87%
                                                 ------------     -----------    ------
TOTAL INTEREST EARNING ASSETS                     142,170,344      10,484,097      7.37%

   Allowance for loan losses                         (648,011)
   Cash and amounts due from
       depository institutions                      5,831,483
   Premises and equipment                           5,091,035
   Foreclosed real estate                             497,565
   Accrued interest receivable                        957,191
   Other assets                                     1,781,940
      Investments in Affiliates                       138,089
                                                 ------------
 TOTAL ASSETS                                    $155,819,636
                                                 ============

INTEREST BEARING LIABILITIES:
   Deposits:
      NOW accounts                               $ 11,879,338     $   224,338      1.89%
          Money market demand                         297,113           5,471      1.84%
          Statement savings                        14,185,017         292,846      2.06%
          CDs, other than Jumbos                   85,308,830       4,657,951      5.46%
         Jumbo certificates                         3,862,585         208,938      5.41%
                                                 ------------     -----------    ------
TOTAL INTEREST-BEARING DEPOSITS                   115,532,883       5,389,544      4.66%
    Borrowed funds                                 18,644,068         977,279      5.24%
                                                 ------------     -----------    ------
TOTAL INTEREST-BEARING LIABILITIES                134,176,951       6,366,823      4.75%
Non-interest bearing demand accounts                3,266,569
Advances by borrowers for property taxes              322,996
Accrued interest payable                            1,042,165
Income taxes payable                                1,274,069
Accrued expenses and other liabilities                404,940
                                                 ------------
   TOTAL LIABILITIES                              140,487,690
Stockholders' equity                               15,331,946
                                                 ------------
   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY      $155,819,636
                                                 ============

Net interest income                                               $ 4,117,275
                                                                  ===========
Interest rate spread                                                               2.63%
Net yield on total interest earning assets                                         2.90%
Average interest-earning assets to
   average total interest-bearing
   liabilities ratio                                                             105.96%
                                                                                 ======
</TABLE>


                                       36
<PAGE>

FINANCIAL CONDITION

         INVESTMENT SECURITIES

         Investment securities held to maturity were $0, $0 and $29,000 at
September 30, 2001, September 30, 2000 and September 30, 1999, respectively. The
decrease of $29,000 in 2000 was the result of principal repayments and scheduled
maturities. First Federal's portfolio of investment securities available for
sale totaled $33,053,000 and $36,097,000 at September 30, 2001 and September 30,
2000, respectively.

         The composition of First Federal's total investment securities
portfolio partly reflects First Federal's former investment strategy of
providing acceptable levels of interest income from portfolio yields while
maintaining a level of liquidity allowing First Federal a degree of control over
its interest rate position. In previous years, First Federal invested primarily
in investment grade CMOs and mortgage-backed securities because of their
liquidity, credit quality and yield characteristics. The yields, values and
duration of such securities generally vary with interest rates, prepayment
levels, and general economic conditions and, as a result, the values of such
instruments may be more volatile than other instruments with similar maturities.
Such securities also may have longer stated maturities than other securities,
which may result in further price volatility.

         With First Federal's purchase of the construction loan portfolio of
another Alabama thrift institution in April of 1994, First Federal revised its
investment strategy, curtailing its purchases of CMOs and mortgage-backed
securities and utilizing principal repayments on these securities to fund
construction loans. Accordingly, First Federal did not purchase any CMOs or
mortgage-backed securities from 1994 through 1997. However, as a result of First
Federal's acquisition of Chilton County in October 1998, First Federal acquired
approximately $466,000 in CMOs and $16,101,000 in mortgage-backed securities. In
addition, as a result of the excess cash on hand from the Chilton County
acquisition, First Federal purchased approximately $18,670,000 in
mortgage-backed securities in 1998. During 1999, First Federal purchased
approximately $10,500,000 of FNMA and FHLMC adjustable rate CMO's that reprice
to LIBOR on a monthly basis. These CMO's were funded by FHLB advances that also
reprice each month to LIBOR. This investment arbitrage is projected to produce a
positive interest rate spread of approximately 1%.

         Principal repayments on both CMOs and mortgage-backed securities for
the years ended September 30, 2001, 2000 and 1999 were $1,774,867, $1,938,438
and $17,884,113, respectively. As of September 30, 2001, First Federal had an
investment in U.S. Government agencies of $9,590,000 compared to $8,901,000 as
of September 30, 2000. At September 30, 2001, First Federal had investments of
approximately $3,071,000 in equity securities such as FHLB stock, other Common
Stock and mutual funds. FHLMC stock was sold in the last quarter of 1999 at a
pre-tax gain of approximately $2,265,000. The proceeds were reinvested in U.S.
Government agencies which resulted in higher investment yields.

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                                       37
<PAGE>

         The following table indicates the amortized cost of the portfolio of
investment securities held to maturity at September 30, 2001, September 30, 2000
and September 30, 1999:

<TABLE>
<CAPTION>
                                                                                Amortized Cost
                                                                    -------------------------------------
                                                                      2001           2000           1999
                                                                    -------        -------        -------
                                                                               (in thousands)
<S>                                                                 <C>            <C>            <C>
Investments Securities HTM:
   U.S. Government Agency                                           $    --        $    --        $    --
   Mortgage-backed securities                                            --             --             29
   Collateralized mortgage obligations                                   --             --             --
   Other investments                                                     --             --             --
                                                                    -------        -------        -------

          Total Investment Securities Held to Maturity              $    --        $    --        $    29
                                                                    =======        =======        =======
</TABLE>

         The following table indicates the fair value of the portfolio of
investment securities available for sale at September 30, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                              Total Fair Value
                                                                    -------------------------------------
                                                                      2001           2000           1999
                                                                    -------        -------        -------
                                                                               (in thousands)
<S>                                                                 <C>            <C>            <C>
Investment Securities AFS:
   U.S. Government Agency                                           $ 9,590        $ 8,901        $ 8,915
   Mortgage-backed securities                                         9,127         10,096         11,979
   Collateralized mortgage obligations                               13,495         13,602         13,232
   Other investments                                                    841          3,498          3,790
                                                                    -------        -------        -------

          Total Investment Securities Available for Sale            $33,053        $36,097        $37,916
                                                                    =======        =======        =======
</TABLE>

         At September 30, 2001, First Federal owned CMOs totaling $13,495,000.
These securities were all backed by federal agency guaranteed mortgages except
for two issues, in the aggregate amount of $27,000, which are privately issued
mortgage pass-through certificates. All CMO's presently owned are variable rate
instruments.

         The mortgage-backed securities portfolio, totaling $9,127,000 at
September 30, 2001, consists of fixed rate mortgages in the amount of $8,376,000
and ARMs in the amount of $751,000. At the time of purchase, First Federal looks
at various prepayment speeds and makes the purchase based on the ability to
accept the yield and average life based on both increasing and decreasing
prepayment speeds.

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                                       38
<PAGE>

         The following tables present the contractual maturities and weighted
average yields of investment securities, other than equity securities, available
for sale at September 30, 2001:

<TABLE>
<CAPTION>
                                                                           Maturities of
                                                                       Investment Securities
                                                        ---------------------------------------------------
                                                                    After one     After five
                                                         Within      through        through         After
                                                        one year    five years     ten years      ten years
                                                        --------    ----------    ----------      ---------
                                                                            (In thousands)
<S>                                                     <C>         <C>           <C>             <C>
U.S. Government agencies, excluding
    mortgage-backed securities                            $514        $2,381        $ 3,363        $    --
U.S. Government agencies - Callable bonds                   --           214          3,118             --
Mortgage-backed securities                                  --           869          5,527          2,732
Collateralized mortgage obligations                         --            --          2,295         11,199
                                                          ----        ------        -------        -------

      Total Investment Securities
           Available for Sale                             $514        $3,464        $14,303        $13,931
                                                          ====        ======        =======        =======

<CAPTION>

                                                                      Weighted Average Yields
                                                                   (Taxable-equivalent basis)(1)
                                                        ---------------------------------------------------
                                                                    After one     After five
                                                         Within      through        through         After
                                                        one year    five years     ten years      ten years
                                                        --------    ----------    ----------      ---------
                                                                            (In thousands)
<S>                                                     <C>         <C>           <C>             <C>
U.S. Government agencies, excluding
   mortgage-backed securities                             5.687%       6.038%         6.729%            --
U.S. Government agencies - Callable bonds                   --         6.800%         5.765%            --
Mortgage-backed securities                                  --         6.496%         6.069%         7.227%
Collateralized mortgage obligations                         --            --          5.283%         4.432%

      Total Weighted Average Yield                        5.687%       6.200%         6.032%         4.980%
</TABLE>

-------------------
(1)      None of First Federal's investment securities are tax exempt.

              [The remainder of this page intentionally left blank]


                                       39
<PAGE>

         The maturities for the CMOs and mortgage-backed securities presented
above represent contractual maturities of such securities. Due to the nature of
these securities, the timing and the amount of principal repayments is generally
unpredictable. However, assuming current prepayment rates and normal, required
principal repayments, the following table sets forth certain information
regarding the expected principal payments, carrying values, fair values, and
weighted average yields of First Federal's CMOs and mortgage-backed securities
at September 30, 2001.

         PRINCIPAL PAYMENTS EXPECTED DURING THE YEAR ENDED SEPTEMBER 30,
                             (Dollars in thousands)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Weighted
                                                                                                   Amortized      Fair     Average
                                 2002        2003        2004       2005      2006    Thereafter     Cost         Value     Yield
                                ------      ------      ------      ----      ----    ----------   ---------    --------  --------
<S>                             <C>         <C>         <C>         <C>       <C>     <C>          <C>          <C>       <C>
Collateralized mortgage
   obligations                  $5,751      $2,498      $1,238      $629      $448      $3,131      $13,485      $13,494      4.57%

Mortgage-backed securities       1,898       1,202         958       495       381       4,097        8,776        9,128      6.70%

Agencies                         3,960         194       2,000        --        --          --        6,065        6,258      5.97%

Agencies - Callable bonds           --       3,332          --        --        --          --        3,194        3,332      5.83%
</TABLE>

LOANS

         Total loans of $101,135,000 at September 30, 2001 reflected a decrease
of $7,219,000 (6.7%) compared to September 30, 2000. Total loans of $108,354,000
at September 30, 2000 reflected an increase of 1.9% from total loans of
$106,312,000 at September 30, 1999. The increase from fiscal 1999 to fiscal 2000
was due to the loans generated in the normal course of business. First Federal
has experienced strong loan demand in its one-to-four family construction loan
portfolio since First Federal's purchase of the construction loan portfolio of
Chilton County, and the opening of a loan production office in 1994.

         One-to-four family real estate mortgage loans decreased $7,042,000
(10.7%) from September 30, 1999 to September 30, 2000, and decreased $7,512,000
(12.8%) from September 30, 2000 to September 30, 2001. First Federal
aggressively pursues real estate mortgage loans within its own market area. In
addition to originating mortgage loans for its own portfolio, First Federal also
actively originates residential mortgage loans which are sold in the secondary
market, with servicing released. First Federal sells a significant portion of
all fixed rate residential mortgage loans. For the most part, such sales are
composed of residential mortgage loans with terms of 30 years. Proceeds from
loan sales were $19,731,000, $15,092,000 and $23,424,000 for the years ended
September 30, 2001, 2000 and 1999, respectively. Had First Federal not sold
residential mortgage loans over the past several years, the one-to-four family
real estate mortgage loan portfolio would have increased by a larger margin (or
decreased by a lesser margin) than the percentage indicated above. The declining
interest rate market for much of 2001 resulted in an increase in volume of loans
sold during the period over fiscal year 2000 during a rising interest rate
environment. The following table presents the composition of the loan portfolio
for each of the past five years:


                                       40
<PAGE>

<TABLE>
<CAPTION>
                                                                       Loan Portfolio Composition
                                                                            At September 30,
                                          -------------------------------------------------------------------------------------
                                                                         (Dollars in thousands)
                                                   2001                           2000                           1999
                                          -----------------------        -----------------------        -----------------------
                                                         Percent                        Percent                        Percent
                                           Amount        of Total         Amount        of Total         Amount        of Total
                                          --------       --------        --------       --------        --------       --------
<S>                                       <C>            <C>             <C>            <C>             <C>            <C>
Real estate mortgage loans:
    One-to four family                    $ 51,083         50.51%        $ 58,595         54.08%        $ 65,637         61.74%
    Multi-family and
       commercial                           14,205         14.05%          13,790         12.73%           8,330          7.84%
   Construction loans                       25,378         25.09%          24,381         22.50%          17,510         16.47%
Savings account loans                        1,144          1.13%           1,097          1.01%           1,267          1.19%
Installment loans                            3,507          3.47%           4,089          3.77%           5,616          5.28%
Second mortgage loans                        7,593          7.51%           7,334          6.77%           9,046          8.51%
                                          --------                       --------                       --------

        Total loans                        102,910                        109,286                        107,406

Less:
    Loans in process                            (8)         (.01)%            (39)         (.03)%             --           .00%
    Discounts and other, net                  (189)         (.19)%           (192)         (.18)%           (242)         (.23)%
    Allowance for loan losses               (1,578)        (1.56)%           (701)         (.65)%           (852)         (.80)%
                                          --------        ------         --------        ------         --------        ------

        Total loans, net                  $101,135        100.00%        $108,354        100.00%        $106,312        100.00%
                                          ========        ======         ========        ======         ========        ======

<CAPTION>

                                                        Loan Portfolio Composition
                                                             At September 30,
                                          ------------------------------------------------------
                                                          (Dollars in thousands)
                                                   1998                           1997
                                          -----------------------        -----------------------
                                                         Percent                        Percent
                                           Amount        of Total         Amount        of Total
                                          --------       --------        --------       --------
<S>                                       <C>            <C>             <C>            <C>
Real estate mortgage loans:
    One-to four family                    $ 73,239         70.02%        $ 52,855         73.74%
    Multi-family and
       commercial                            1,837          1.76%             390           .54%
   Construction loans                       14,731         14.09%          16,102         22.46%
Savings account loans                        1,988          1.90%             826          1.15%
Installment loans                            7,593          7.26%           2,044          2.85%
Second mortgage loans                        6,216          5.94%              --            --
                                          --------                       --------

        Total loans                        105,604                         72,217

Less:
    Loans in process                            --           .00%              --           .00)%
    Discounts and other, net                  (282)         (.27)%           (251)         (.35)%
    Allowance for loan losses                 (732)         (.70)%           (284)         (.40)%
                                          --------        ------         --------        ------

        Total loans, net                  $104,590        100.00%        $ 71,682        100.00%
                                          ========        ======         ========        ======
</TABLE>


                                       41
<PAGE>

         The following table shows the maturity of First Federal's loan
portfolio at September 30, 2001, based upon contractual maturity dates. Demand
loans, loans having no schedule of repayment and no stated maturity and
overdrafts are reflected as due during the twelve months ended September 30,
2001. The table below does not include an estimate of prepayments, the
occurrence of which would significantly shorten the average life of all mortgage
loans and cause First Federal's actual repayment to differ from that shown
below.

<TABLE>
<CAPTION>
                                                                          Loan Maturities
                                    ------------------------------------------------------------------------------------------------
                                          Due during the year
                                             ending Sept 30,
                                    -------------------------------
                                                                       Due after   Due after     Due After    Due After
                                      2002        2003        2004     3-5 years   5-10 years   10-15 years   15 years       Total
                                    -------      ------      ------    --------    ---------    -----------   ---------     --------
                                                                        (Dollars in thousands)
<S>                                 <C>          <C>         <C>       <C>         <C>          <C>           <C>           <C>
Real estate mortgage loans          $   481      $  526      $  871      $1,808      $11,299      $16,564      $18,694      $ 50,243
Construction loans(1)                24,563         306         290          --           --           --          219        25,378
Business loans                          979         855         550         657        2,304        2,378        2,855        10,578
All other loans                       6,102       2,042       1,568       2,558        2,157          509       14,936
                                    -------      ------      ------      ------      -------      -------      -------      --------
     Total                          $32,125      $3,729      $3,279      $5,023      $15,760      $19,451      $21,768      $101,135
                                    =======      ======      ======      ======      =======      =======      =======      ========
</TABLE>

--------------------
(1)      The maturity period for construction loans is typically one year. If
the home is not sold at the maturity date, however, the loan may be extended for
an additional six months provided that the builder restructures the loan to
provide for principal reduction or arranges for permanent financing which will
pay off the construction loan.

         The following tables set forth, at September 30, 2001 and September 30,
2000, the dollar amount of loans due after September 30, 2001 and September 30,
2000, respectively, based upon whether such loans have fixed interest rates or
adjustable interest rates:

<TABLE>
<CAPTION>
                                                              September 30, 2001
                                                  --------------------------------------------
                                                   Fixed         Floating or
                                                   Rates       Adjustable Rate        Total
                                                  -------      ---------------     -----------
<S>                                               <C>          <C>                 <C>
Real estate mortgage loans                        $28,266          $29,987          $ 58,253
Commercial loans                                    4,916            5,654            10,570
Construction loans                                 25,378                0            25,378
Savings and installments loans                      6,935                0             6,935
                                                  -------          -------          --------

   Total                                          $65,495          $35,641          $101,136
                                                  =======          =======          ========

<CAPTION>

                                                              September 30, 2000
                                                  --------------------------------------------
                                                   Fixed         Floating or
                                                   Rates       Adjustable Rate        Total
                                                  -------      ---------------     -----------
<S>                                               <C>          <C>                 <C>
Real estate mortgage loans                        $33,913          $32,667          $ 66,580
Commercial loans                                    4,694            5,208             9,902
Construction loans                                 24,381                0            24,381
Savings and installments loans                      7,491                0             7,491
                                                  -------          -------          --------

   Total                                          $70,479          $37,875          $108,354
                                                  =======          =======          ========
</TABLE>


                                       42
<PAGE>

         The following table sets forth First Federal's loan originations, sales
and principal repayments for the periods indicated.

<TABLE>
<CAPTION>
                                                            Year ended September 30,
                                                  ------------------------------------------
                                                    2001             2000             1999
                                                  -------          -------          --------
                                                                (In thousands)
<S>                                               <C>              <C>              <C>
Loan Originations:
    Real estate mortgage loans                    $67,995          $68,671          $ 76,383
    All other loans                                 4,407            5,457             7,012
                                                  -------          -------          --------
        Total                                     $72,402          $74,128          $ 83,395
                                                  =======          =======          ========
Portfolio Loan Purchases:
    Real estate mortgage loans                    $     0          $     0          $      0
                                                  =======          =======          ========
Portfolio Loan Sales Proceeds:
    Real estate mortgage loans                    $19,731          $15,092          $ 23,424
                                                  =======          =======          ========
Principal Repayments:
    Real estate mortgage loans                    $54,071           51,636            49,190
     All other loans                                4,964            6,821            10,429
                                                  -------          -------          --------
     Total                                        $59,035          $58,457          $ 59,619
                                                  =======          =======          ========
</TABLE>

         ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS

         The performance of loans is evaluated primarily on the basis of a
review of each customer relationship over a period of time and the judgment of
lending officers as to the ability of borrowers to meet the repayment terms of
loans. If there is reasonable doubt as to the repayment of a loan in accordance
with the agreed terms, the loan may be placed on a non-accrual basis pending the
sale of any collateral or a determination as to whether sources of repayment
exist. Generally, delinquency of 90 days or more creates reasonable doubt as to
repayment. This action may be taken even though the financial condition of the
borrower or the collateral may be sufficient to ultimately reduce or satisfy the
obligation. Generally, when a loan is placed on a non-accrual basis, all
payments are applied to reduce principal to the extent necessary to eliminate
doubt as to the repayment of the loan. Interest income on a non-accrual loan is
recognized only on a cash basis. See "--Non-performing Assets."

         Lending officers are responsible for the ongoing review and
administration of each particular loan. As such, they make the initial
identification of loans which present some difficulty in collection or where
circumstances indicate that the probability of loss exists. The responsibilities
of the lending officers include the collection effort on a delinquent loan.
Senior management and the First Federal Board are informed of the status of
delinquent loans on a monthly basis. Senior management reviews the allowance for
loan losses and makes recommendations to the First Federal Board as to loan
charge-offs on a monthly basis.

         At September 30, 2001, September 30, 2000 and September 30, 1999, loans
accounted for on a non-accrual basis were approximately $742,000, $1,064,000 and
$1,214,000, respectively, or 0.7%, 0.9% and 1.1% of the total loans outstanding,
net of unearned income. The balances of accruing loans past due 90 days or more
as to principal and interest payments were $0 at September 30, 2001, September
30, 2000 and September 30, 1999.

         The allowance for loan losses represents management's assessment of the
risk associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for loan losses and the appropriate provision required to
maintain a level considered adequate to absorb anticipated loan losses. In
assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans in the portfolio. Management also considers such factors as
First Federal's historical loan loss experience, the level, severity, and trend
of criticized assets, the distribution of loans by risk class, and various
qualitative factors such as current and anticipated economic conditions.


                                       43
<PAGE>

         First Federal began construction lending activities in March of 1994.
As of September 30, 2001, First Federal has not experienced any significant
losses on the construction loan portfolio. Due to the concentration of these
loans, a default by certain construction loan borrowers, or other financial
difficulty, could result in a significant addition to the allowance for loan
losses.

         While it is First Federal's policy to charge off loans in the period in
which a loss is considered probable, there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.

         In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged off
and to assess the risk characteristics of the portfolio in the aggregate. This
review takes into consideration the judgments of the responsible lending
officers, senior management and those of bank regulatory agencies that review
the loan portfolio as part of First Federal's examination process. Specific
percentages are allocated to each loan type. Management recognizes that there is
more risk traditionally associated with commercial and consumer lending as
compared to real estate mortgage lending; correspondingly, a greater allocation
is made for commercial and consumer loans than real estate mortgage loans. While
all information available is used by management to recognize losses in the loan
portfolio, there can be no assurances that future additions to the allowance
will not be necessary. First Federal's Board of Directors reviews the
assessments of management in determining the adequacy of the allowance for loan
losses. Generally, the only loans, including construction loans, which are
classified are loans which are greater than 90 days delinquent. However, the
Board of Directors may also classify loans less than 90 days delinquent should
such classification be considered necessary.

         First Federal's allowance for loan losses is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the allowance for loan loss
reserves and the size of the loan loss reserve in comparison to a group of peer
banks identified by the regulators. During its routine examinations of banks,
the OTS has, from time to time, required additions to banks' provisions for loan
losses and allowances for loan losses as the regulators' credit evaluations and
allowance for loan loss methodology have differed from those of the management
of such banks. Such regulatory examinations have focused on loan quality,
particularly that of real estate loans. First Federal attempts to reduce the
risks of real estate lending through maximum loan-to-value requirements as well
as systematic cash flow and initial customer credit history analyses.

         Management believes that the $1,578,000 allowance for loan losses, at
September 30, 2001, is adequate to absorb known risks in the portfolio. No
assurance can be given, however, that adverse economic circumstances will not
result in increased losses in First Federal's loan portfolio. At September 30,
2001, $250,000 of the allowance for loan losses was reserved for possible losses
on construction real estate loans, $380,000 was reserved for possible losses on
other real estate mortgage loans, $655,000 was reserved for a loan made to
Vawter Properties & Resources, LLP (see additional discussion of this in "ITEM
3. LEGAL PROCEEDINGS" and in "Results of Operations - Provision for Loan
Losses"), and the remaining $293,000 was reserved for all other loan
classifications.


                                       44
<PAGE>

         The following table summarizes the levels of the allowance for loan
losses at the end of the last five years:

<TABLE>
<CAPTION>
                                                                            Year Ended September 30,
                                                     ----------------------------------------------------------------------------
                                                       2001              2000             1999             1998             1997
                                                     --------          --------         --------         --------         -------
                                                                         (Dollar amounts in thousands)
<S>                                                  <C>               <C>              <C>              <C>              <C>
Balance at beginning of period                       $    701          $    852         $    732         $    284         $   251
                                                     --------          --------         --------         --------         -------

Clanton balance at acquisition                              0                 0                0              488               0
Charge-offs:
   Real estate                                             --                54              216               16              --
   Installment                                             49               138              290               82               4
                                                     --------          --------         --------         --------         -------
      Total charge-offs                                    49               192              506               98               4
                                                     --------          --------         --------         --------         -------

Recoveries:
   Real estate mortgage                                    --                --               --                4              --
   Installment                                             68                35               38               39               1
                                                     --------          --------         --------         --------         -------
      Total recoveries                                     68                35               38               13               1
                                                     --------          --------         --------         --------         -------

Net loans (recovered) charged off                         (19)              157              468               85               3
Provisions for loan losses                                858                 6              588               45              36
                                                     --------          --------         --------         --------         -------

Balance at end of period                             $  1,578          $    701         $    852         $    732         $   284
                                                     ========          ========         ========         ========         =======

Ratio of net charge-offs to total loans
   outstanding, net of unearned income                   (.02)%            0.14%            0.44%            0.08%           0.00%
                                                     ========          ========         ========         ========         =======

Ratio of allowance for loan losses
   to loans outstanding, net of
   unearned income                                       1.56              0.65%            0.80%            0.70%           0.39%
                                                     ========          ========         ========         ========         =======

Total Loans Outstanding                              $101,135          $108,354         $106,312         $104,590         $71,967
</TABLE>

         As indicated in the above table, First Federal substantially increased
its loan loss allowance in fiscal 2001 and 1998 from the levels of the preceding
years. The increase in 1998 was primarily due to the acquisition of Chilton
County, and the increase in 2001 was due primarily to the Vawter Properties &
Resources, LLP loan as discussed above.

              [The remainder of this page intentionally left blank]


                                       45
<PAGE>

         The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily an indication of
future losses and does not restrict the use of the allowance to absorb losses in
any category.

<TABLE>
<CAPTION>
                                                                               At September 30,
                                                ------------------------------------------------------------------------------
                                                          2001                       2000                       1999
                                                ------------------------    -----------------------    -----------------------
                                                           Percent of                 Percent of                 Percent of
                                                          loans in each              loans in each              loans in each
                                                            category                   category                   category
                                                Amount    to total loans    Amount   to total loans    Amount   to total loans
                                                ------    --------------    ------   --------------    ------   --------------
                                                               (Dollar amounts in thousands)
<S>                                             <C>       <C>               <C>      <C>               <C>      <C>
Real estate mortgage loans                      $  630         39.92%        $584         83.31%        $513         60.21%

All other loans                                    948         60.08%         117         16.69%         339         39.79%
                                                ------        ------         ----        ------         ----        ------

Total allowance for loan losses                 $1,578        100.00%        $701        100.00%        $852        100.00%
                                                ======        ======         ====        ======         ====        ======
</TABLE>

         At September 30, 2001 and 2000, the total recorded investment in
impaired loans was approximately $648,000 and $4,000, respectively. The average
recorded investment in impaired loans amounted to approximately $54,000 and
$5,000 for the years ended September 30, 2001 and 2000, respectively. The
allowance for loan losses related to impaired loans was approximately $648,000
and $4,000 for fiscal years 2001 and 2000, respectively. Interest income on
impaired loans of approximately $0 and $400 was booked in 2001 and 2000,
respectively. Loans impaired at September 30, 1999 were $75,000.

         NON-PERFORMING ASSETS

         First Federal has policies, procedures and underwriting guidelines
intended to assist in maintaining the overall quality of its loan portfolio.
First Federal monitors its delinquency levels for any adverse trends.
Non-performing assets consist of loans on non-accrual status, accruing loans
which are past due 90 days or more, and foreclosed real estate.

         First Federal's policy generally is to place a loan on non-accrual
status when there is reasonable doubt as to the repayment of the loan in
accordance with the agreed terms. Generally, delinquency of 90 days or more
creates reasonable doubt as to repayment. At the time a loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current earnings. Income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower is able to make periodic interest and principal payments and the loan
is no longer delinquent and is returned to accrual status.

         Non-performing assets were $1,000,000, $1,240,000 and $1,782,000, at
September 30, 2001, September 30, 2000 and September 30, 1999, respectively. As
a percentage of total loans, non-performing assets continue to be at levels
which management considers to be acceptable and commensurate with First
Federal's conservative lending policies.


                                       46
<PAGE>

         An analysis of the components of non-performing assets at September 30,
2001, September 30, 2000 and September 30, 1999 is presented in the following
table:

<TABLE>
<CAPTION>
                                                                                     At September 30,
                                                                      ----------------------------------------------
                                                                        2001               2000               1999
                                                                      --------           --------           --------
                                                                                   (Dollar amounts in thousands)
<S>                                                                   <C>                <C>                <C>
Loans accounted for on a non-accrual basis:
   Real estate mortgage loans                                         $    735           $  1,039           $  1,089
   All other loans                                                           7                 25                125
                                                                      --------           --------           --------
      Total                                                                742              1,064              1,214
                                                                      --------           --------           --------

Accruing loans which are past due 90 days or more:
   Real estate mortgage loans                                               --                 --                 --
   All other loans                                                          --                 --                 --
                                                                      --------           --------           --------
      Total                                                                 --                 --                 --
                                                                      --------           --------           --------

Total of non-accrual and 90 days past due loans                            742              1,064              1,214

Foreclosed real estate (net of related loss provisions)                    258                176                568
                                                                      --------           --------           --------

   Total non-performing assets                                        $  1,000           $  1,240           $  1,782
                                                                      ========           ========           ========

Non-accrual and 90 days past due loans as a
   percent of total loans                                                  .73%               .98%              1.14%
                                                                      ========           ========           ========

Non-performing assets as a percent of total loans                          .99%              1.14%              1.68%
                                                                      ========           ========           ========

   Total loans outstanding                                            $101,135           $108,354           $106,312
                                                                      ========           ========           ========
</TABLE>

         Management regularly reviews and monitors the loan portfolio in an
effort to identify borrowers experiencing financial difficulties, but such
measures are subject to uncertainties that cannot be predicted.

         DEPOSITS

         Total deposits decreased in fiscal 2001 by $6,307,000 (6.0%) to
$99,056,000 and decreased in fiscal 2000 by $9,359,000 (8.1%) to $105,363,000.
In fiscal 1999, total deposits decreased 7.4% from $123,883,000 to $114,722,000.
Non-interest-bearing demand deposits were $3,349,000, $2,991,000 and $3,838,000,
while total interest-bearing deposits were $95,706,000, $102,371,000 and
$110,883,000, at September 30, 2001, September 30, 2000, and September 30, 1999,
respectively.

         First Federal's deposit mix at September 30, 2001 changed compared to
September 30, 2000. NOW accounts decreased $239,000 (2.5%), while money market
demand accounts decreased $225,000 (35.6%). Certificates of deposit other than
jumbo certificates of deposit, which are certificates of deposit greater than or
equal to $100,000 with specially negotiated rates ("Jumbos"), decreased
$4,327,000 (6.0%). Non-interest-bearing demand deposits increased $358,000
(12.0%). During 2001, certificates of deposit, excluding Jumbos, comprised
approximately 67.9% of total deposits while low cost funds, including NOW
accounts, money market demand accounts, and passbook savings accounts, made up
24.6% of First Federal's total deposits. Jumbos comprised 7.4% of total deposits
at September 30, 2001.


                                       47
<PAGE>

         The composition of total deposits for the last three fiscal years is
presented in the following table:

<TABLE>
<CAPTION>
                                                                         September 30,
                                         -----------------------------------------------------------------------------
                                                 2001                       2000                       1999
                                         ----------------------    ------------------------    -----------------------
                                                       Percent                     Percent                    Percent
                                                       change                      change                     change
                                                     from prior                  from prior                 from prior
                                          Amount      year-end      Amount        year-end      Amount       year-end
                                         --------    ----------    --------      ----------    ---------    ----------
<S>                                      <C>         <C>           <C>           <C>           <C>          <C>
Non-interest bearing
    demand deposits                      $  3,349       11.97%     $  2,991      (22.07)%      $   3,838      11.70%
Interest bearing deposits:
   NOW accounts                             9,490       (2.46)%       9,729      (19.79)%         12,129       6.83%
   Money market demand                        407      (35.60)%         632        9.53%             577      78.09%
   Passbook savings                        11,158       (5.39)%      11,794      (12.12)%         13,420      (9.13)%
   CDs other than Jumbos                   67,265       (6.05)%      71,592      (11.01)%         80,448     (11.30)%
   Jumbos                                   7,387      (14.34)%       8,624      100.14%           4,309      30.50%
                                         --------                  --------                    ---------
      Total interest bearing deposits      95,707       (6.51)%     102,371       (7.68)%        110,883      (7.94)%
                                         --------                  --------                    ---------
Total deposits                           $ 99,056       (5.99)%    $105,363       (8.16)%      $ 114,722      (7.39)%
                                         ========                  ========                    =========
</TABLE>



              [The remainder of this page intentionally left blank]


                                       48


<PAGE>


         The following tables set forth the distribution of First Federal's
deposit accounts at the dates indicated and the nominal interest rates offered
on each category of deposits at September 30, 2001 and September 30, 2000,
based on actual balances:


<TABLE>
<CAPTION>
                                                                  At September 30, 2001
                            -----------------------------------------------------------------------------------------------
                                                                                                                 Percentage
 Interest                                                                                                         of Total
   Rate         Term                    Category                               Minimum           Balance          Balances
 --------       ----                    --------                              ---------          --------        ----------
                                        (In thousands except minimum balance)
<S>           <C>           <C>                                               <C>                <C>             <C>
   0.00%        None        Non-interest bearing demand                       $      50          $  3,349            3.38%
   1.50%        None        NOW accounts                                            250             9,385            9.48%
   1.50%        None        Non-profit                                              100               105             .11%
   1.50%        None        Money market checking                                    50               407             .41%
   1.80%        None        Statement savings                                        50            11,158           11.26%
   3.00%      3 months      Fixed-term fixed rate certificate                       250               377             .38%
   3.50%      6 months      Fixed-term fixed rate certificate                       250            10,966           11.07%
   3.75%      12 months     Fixed-term fixed rate certificate                       250            17,227           17.39%
   4.00%      18 months     Fixed-term fixed rate certificate                       250             5,650            5.70%
   4.00%         IRA        Fixed-term fixed rate certificate                       250            14,777           14.92%
   4.25%      30 months     Fixed-term fixed rate certificate                       250            14,702           14.84%
   4.50%       4 year       Fixed-term fixed rate certificate                     1,500               731             .74%
   4.75%       5 year       Fixed-term fixed rate certificate                     1,500             2,835            2.86%
   7.00%        Jumbo       Fixed-term fixed rate certificate                   100,000             7,387            7.46%
                                                                                                 --------          ------
                                                                                                 $ 99,056          100.00%
                                                                                                 ========          ======
</TABLE>


<TABLE>
<CAPTION>
                                                               At September 30, 2000
                            -----------------------------------------------------------------------------------------------
                                                                                                                 Percentage
 Interest                                                                                                         of Total
   Rate         Term                    Category                              Minimum            Balance          Balances
 --------       ----                    --------                             -- -------         ---------        ---------
                                        (In thousands except minimum balance)
<S>           <C>           <C>                                              <C>                <C>              <C>
   0.00%        None        Non-interest bearing demand                      $       50         $   2,991            2.84%
   1.50%        None        NOW accounts                                            250             9,528            9.04%
   1.50%        None        Non-profit                                              100               201            0.19%
   2.53%        None        Money market checking                                    50               632            0.60%
   1.93%        None        Statement savings                                        50            11,794           11.19%
   4.50%      3 months      Fixed-term fixed rate certificate                       250               400            0.38%
   5.50%      6 months      Fixed-term fixed rate certificate                       250            11,422           10.84%
   6.00%      12 months     Fixed-term fixed rate certificate                       250            19,433           18.44%
   6.25%      18 months     Fixed-term fixed rate certificate                       250             6,172            5.86%
   6.50%         IRA        Fixed-term fixed rate certificate                       250            15,685           14.89%
   6.25%      30 months     Fixed-term fixed rate certificate                       250            15,277           14.50%
   5.00%       1 month      Fixed-term fixed rate certificate                     1,000                26            0.02%
   6.50%       4 year       Fixed-term fixed rate certificate                     1,500               918            0.87%
   6.75%       5 year       Fixed-term fixed rate certificate                     1,500             2,260            2.14%
   7.00%        Jumbo       Fixed-term fixed rate certificate                   100,000             8,624            8.19%
                                                                                                ---------          ------
                                                                                                $ 105,363          100.00%
                                                                                                =========          ======
</TABLE>


                                       49



<PAGE>


         Information about the average balances of interest-bearing demand
deposits and time deposits for the periods indicated based upon average balances
is provided below:


<TABLE>
<CAPTION>
                                                              Year ended September 30,
                             ----------------------------------------------------------------------------------------------
                                        2001                             2000                             1999
                             ----------------------------    ----------------------------     -----------------------------
                                                            (Dollar amounts in thousands)

                             Interest bearing      Time      Interest bearing      Time       Interest bearing       Time
                              demand deposits    deposits     demand deposits    deposits      demand deposits     deposits
                             ----------------    --------    ----------------    --------     ----------------     ---------
<S>                          <C>                 <C>         <C>                 <C>          <C>                  <C>
         Average balance          $ 21,725       $ 79,803       $ 23,277         $ 81,811         $ 26,361         $ 89,172

         Average rate                 1.83%          5.34%          1.80%            5.76%            1.81%           5.23%
</TABLE>


         The following table presents changes in deposits for the periods
indicated:

<TABLE>
<CAPTION>
                                                                           Year ended September 30,
                                                            ------------------------------------------------------
                                                               2001          2000           1999           1998
                                                            ---------      ---------      ---------      ---------
                                                                            (Dollars in thousands)
         <S>                                                <C>            <C>            <C>            <C>
         Opening balance                                    $ 105,363      $ 114,722      $ 123,884      $  60,552
         Deposits acquired in Chilton County Acquisition           --             --             --         64,608
         Net deposits (withdrawals)                            (9,864)       (12,623)       (13,168)        (4,331)
         Interest credited on deposits                          3,557          3,264          4,006          3,055
                                                            ---------      ---------      ---------      ---------
         Ending balance                                     $  99,056      $ 105,363      $ 114,722      $ 123,884
                                                            =========      =========      =========      =========

         Total decrease (increase) in deposits              $  (6,307)     $  (9,359)     $  (9,162)     $  63,332
                                                            =========      =========      =========      =========

         Percentage decrease (increase)                         (5.99)%        (8.16)%        (7.40)%       104.59%
                                                            =========      =========      =========      =========
</TABLE>


         The following table presents, by various interest rate categories, the
amount of certificate accounts outstanding at the end of the last three fiscal
years:

<TABLE>
<CAPTION>
                                         Year ended September 30,
                                  --------------------------------------
         Interest Rate              2001           2000           1999
         -------------            --------       --------      ---------
                                         (Dollars in thousands)
         <S>                      <C>            <C>           <C>
         3.00.-3.99%              $  7,077       $    373      $     399
         4.00-4.99%                 25,368          9,489         35,608
         5.00.-5.99%                 9,623         34,239         33,660
         6.00-6.99%                 22,998         24,581         13,964
         7.00.-7.99%                 9,585         11,535          1,126
                                  --------       --------      ---------

               Total              $ 74,651       $ 80,217      $  84,757
                                  ========       ========      =========
</TABLE>


                                       50

<PAGE>


         There were no certificates of deposit bearing an interest rate less
than 3% at September 30, 2001. At September 30, 2001, First Federal had
outstanding approximately $74.7 million in certificate accounts that mature as
follows:

<TABLE>
<CAPTION>
                                                                         Amount due
                           ----------------------------------------------------------------------------------------------------
                                                           Two to
                            Less than      One to          three         Three to       Four to
                            one year      two years        years        four years     five years     Thereafter       Total
                           ----------     ----------     ----------     ----------     ----------     ----------     ----------
                                                                     (In thousands)
         <S>               <C>            <C>            <C>            <C>            <C>            <C>            <C>
         Interest Rate
         3.00-3.99%        $    7,077     $       --     $       --     $       --     $       --     $       --     $    7,077
         4.00-4.99%            15,297          8,175          1,865             25              5             --         25,367
         5.00.-5.99%            7,566          1,343            236             12            467             --          9,624
         6.00-6.99%            15,113          4,845             80          2,698            262             --         22,998
         7.00.-7.99%            3,977          1,775             38          3,325            470             --          9,585
                           ----------     ----------     ----------     ----------     ----------     ----------     ----------
              Total        $   49,030     $   16,138     $    2,219     $    6,060     $    1,204     $       --     $   74,651
                           ==========     ==========     ==========     ==========     ==========     ==========     ==========
</TABLE>


         Certificates of deposit, other than Jumbos, mature as follows as of
September 30, 2001:

<TABLE>
<CAPTION>
                                                                Amount due
                           -------------------------------------------------------------------------------------
                                                          Two to
                            Less than       One to         three         Three to       Four to
                            one year      two years        years        four years     five years       Total
                           ----------     ----------     ----------     ----------     ----------     ----------
         <S>               <C>            <C>            <C>            <C>            <C>            <C>
         Interest Rate                                   (Dollars in thousands)
         3.00-3.99%        $    6,969     $       --     $       --     $       --     $       --     $    6,969
         4.00-4.99%            14,697          8,175          1,865             25              5         24,767
         5.00.-5.99%            7,359          1,343            236             12            467          9,417
         6.00-6.99%            14,913          4,845             80            256            262         20,356
         7.00.-7.99%            2,846          1,542             39          1,112            216          5,755
                           ----------     ----------     ----------     ----------     ----------     ----------
              Total        $   46,784     $   15,905     $    2,220     $    1,405     $      950     $   67,264
                           ==========     ==========     ==========     ==========     ==========     ==========
</TABLE>


         Jumbos mature as follows as of September 30, 2001:

<TABLE>
<CAPTION>
                                                                Amount due
                           -------------------------------------------------------------------------------------
                                                           Two to
                            Less than      One to          three         Three to       Four to
                            one year      two years        years        four years     five years       Total
                           ----------     ----------     ----------     ----------     ----------     ----------
         Interest Rate                                    (Dollars in thousands)
         <S>               <C>            <C>            <C>            <C>            <C>            <C>
         3.00-3.99%        $      108     $       --     $       --     $       --     $       --     $      108
         4.00-4.99%               600             --             --             --             --            600
         5.00.-5.99%              207             --             --             --             --            207
         6.00-6.99%               200             --             --          2,442             --          2,642
         7.00.-7.99%            1,131            233             --          2,213            253          3,830
                           ----------     ----------     ----------     ----------     ----------     ----------

              Total        $    2,246     $      233     $       --     $    4,655     $      253     $    7,387
                           ==========     ==========     ==========     ==========     ==========     ==========
</TABLE>


                                       51


<PAGE>


         The following table presents the maturities of certificates of deposit
as of September 30, 2001, September 30, 2000 and September 30, 1999:

<TABLE>
<CAPTION>
                                                              Maturities of Time Deposits
                                                                     September 30,
                                                          ------------------------------------
                                                            2001          2000          1999
                                                          --------      --------      --------
                                                                      (In thousands)
<S>                                                       <C>           <C>           <C>
         Three months or less                             $ 12,281      $ 15,541      $ 17,476
         After three within six months                      15,765        18,979        23,768
         After six within twelve months                     20,984        27,015        24,517
         One year to two years                              16,138        11,418        15,262
         Two years to three years                            2,219         3,943         2,875
         Three years to four years                           6,060           389           594
          Four years to five years                           1,204         2,932           265
                                                          --------      --------      --------
             Total                                        $ 74,651      $ 80,217      $ 84,757
                                                          ========      ========      ========

         Weighted average rate on all certificates of
             deposit at period-end                            5.34%         5.76%         5.23%
                                                          ========      ========      ========
</TABLE>


SHORT-TERM BORROWINGS

         First Federal has a line of credit of up to $4,000,000 which bears
interest at the prime lending rate. The line of credit requires monthly interest
payments and a payment of the outstanding balance on an annual basis, in March
of each year. However, the line of credit can be automatically-renewed for an
additional one year period. The prime lending rate was 6.0% at September 30,
2001, and the outstanding balance on the line of credit was $3,355,000.

         Borrowings also include borrowings from the FHLB of Atlanta (See "--
Liquidity"). The balances outstanding at September 30, 2001, and September 30,
2000 were $32,250,000 and $35,844,000, respectively. These balances included
advances with both fixed and variable interest rates, which averaged 4.43% and
6.34% at September 30, 2001 and September 30, 2000, respectively.

CAPITAL RESOURCES

         STOCKHOLDERS' EQUITY

         SouthFirst's consolidated stockholders' equity was $14,282,000 and
$14,925,000 at September 30, 2001 and September 30, 2000, respectively. The 2001
decrease was primarily due to net loss from operations in the amount of $422,000
and the purchase of treasury stock in the amount of $508,000, which were
partially offset by the change in accumulated other comprehensive income of
$850,000 resulting from the increase in unrealized holding gains on available,
for-sale securities.

         During 2001, cash dividends of $554,051, or $0.60 per share, were
declared on SouthFirst Common Stock. During 2000, cash dividends of $557,446, or
$0.60 per share, were declared. During 1999, cash dividends of $571,846, or
$0.60 per share, were declared. Management believes that a strong capital
position is vital to the continued profitability of First Federal and provides a
foundation for future growth as well as promoting depositor and investor
confidence in the institution.



                                       52


<PAGE>


         Certain financial ratios for SouthFirst as of the end of the most
recent three fiscal years are presented in the following table:

<TABLE>
<CAPTION>
                                                                                  Equity and Asset Ratios
                                                                     ---------------------------------------------------
                                                                                         September 30,
                                                                                         -------------
                                                                        2001                 2000                1999
                                                                     -----------          -----------         ----------
         <S>                                                         <C>                  <C>                 <C>
         Return on average assets                                          (0.27)%               0.59%               0.83%
         Return on average stockholder's equity                            (2.82)%               6.70%               8.48%
         Common dividend payout ratio                                        N/A                57.98%              43.99%
         Average stockholders' equity to average assets ratio               9.61%                8.82%               9.84%

         Net Income (Loss)                                              (422,093)             961,492           1,299,999
         Average Assets                                              155,999,236          162,741,763         155,819,636
         Average Equity                                               14,992,282           14,355,955          15,331,948
         Cash Dividends Paid                                             554,051              557,446             571,846
</TABLE>


         FIRREA and the implementing regulations of the OTS, which became
effective on December 7, 1989, changed the capital requirements applicable to
thrifts, including First Federal, and the consequences for failing to comply
with such standards. The capital standards include (i) a core capital
requirement, (ii) a tangible capital requirement, and (iii) a risk-based capital
requirement. FIRREA specifies such capital requirements and states that such
standards shall be no less stringent than the capital standards applicable to
national banks. The OTS has issued guidelines identifying minimum regulatory
tangible capital equal to 1.50% of adjusted total assets, a minimum 3.0% core
capital ratio, and a minimum risk-based capital of 8.0% of risk-weighted assets.
As shown in the table below, First Federal was in compliance with these
regulatory capital requirements at September 30, 2001 and September 30, 2000.

<TABLE>
<CAPTION>
                                            At September 30, 2001                              At September 30, 2000
                             ------------------------------------------------     -------------------------------------------------
                                Tangible            Core         Risk-based         Tangible           Core            Risk-based
                                Capital           Capital          Capital          Capital           Capital            Capital
                             -------------     -------------     ------------     -------------     -------------     -------------
<S>                          <C>               <C>               <C>              <C>               <C>               <C>
Capital                      $  14,883,000     $  14,883,000     $ 14,883,000     $  14,889,000     $  14,889,000     $  14,889,000
Adjustments
   General valuation
       allowance                        --                --          852,000                --                --           625,000
   Goodwill                       (562,000)         (562,000)        (562,000)         (613,000)         (613,000)         (613,000)
   Unrealized Gains               (418,000)         (418,000)        (418,000)          450,000           450,000           450,000

Regulatory capital              13,903,000        13,903,000       14,755,000        14,726,000        14,726,000        15,351,000

Regulatory asset base          150,798,000       150,798,000       92,155,000       161,319,000       161,319,000        95,827,000
Capital ratio                         9.28%             9.28%           16.01%             9.14%             9.14%            16.02%
Minimum required ratio                1.50%             4.00%            8.00%             1.50%             4.00%             8.00%
Capital ratio required for
   "well-capitalized"
   designation                          --              5.00%           10.00%               --              5.00%            10.00%
</TABLE>


                                       53


<PAGE>


LIQUIDITY

         Liquidity is a bank's ability to convert assets into cash equivalents
in order to meet daily cash flow requirements, primarily for deposit
withdrawals, loan demand, and maturing liabilities. Without proper management,
First Federal could experience higher costs of obtaining funds due to
insufficient liquidity. On the other hand, excessive liquidity could lead to a
decline in earnings due to the cost of foregoing alternative higher-yielding
investment opportunities.

         Asset liquidity is provided primarily through the repayment and
maturity of investment securities, and the sale and repayment of loans.

         Sources of liability liquidity include customer deposits and
participation in the FHLB advance program. Although deposit growth historically
has been a primary source of liquidity, such balances may be influenced by
changes in the banking industry, interest rates available on other investments,
general economic conditions, competition and other factors. FHLB advances
include both fixed and variable terms and are taken out with varying maturities.
First Federal can borrow an amount equal to 75% of its mortgage loans which are
backed by one-to-four family residential properties. At September 30, 2001,
First Federal had credit available, net of advances drawn down, of approximately
$6 million. First Federal has drawn down such advances in order to fund dividend
payments to stockholders and to pay various holding company expenses.

         On a consolidated basis, net cash provided by operating activities in
fiscal 2001 was $634,000, a $551,000 decrease from 2000. The $11,356,000 in net
cash provided by investing activities during 2001 consisted primarily of a
$5,684,000 decrease in loan funding activities. Net cash decreased for the
purchase of investment securities available for sale to $7,054,000 from
$1,568,000 in 2000. Cash provided by calls and maturities of investment
securities available for sale and held to maturity increased to $1,755,000 from
$1,550,000, while cash provided from the sale of investment securities available
for sale increased to $9,696,000 from $1,008,000 in 2000. The $10,637,000 in net
cash used by financing activities resulted from a decrease of $5,536,000 in
certificates of deposits, and a decrease of $772,000 in demand accounts, coupled
with a net decrease of $3,284,000 in borrowed funds, payment of $514,000 in
common stock dividends and the acquisition of treasury stock of $508,000.

         First Federal's liquidity ratio at September 30, 2001 was 25.29% and at
September 30, 2000 was 25.17%. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, management's expectations
to the level of yield that will be available in the future, and management's
projections as to the short-term demand for funds to be used in loan
origination. First Federal is subject to certain regulatory limitations with
respect to the payment of dividends to SouthFirst. First Federal paid $771,900
to SouthFirst during 2001 and none during 2000.

         SouthFirst also requires cash for various purposes including servicing
debt, paying dividends to stockholders and paying general corporate expenses.
The primary source of funds for SouthFirst is dividends from First Federal.
First Federal's capital levels meet the requirements for a "well capitalized"
institution and enable First Federal to pay dividends to SouthFirst. In addition
to dividends, SouthFirst has access to various capital markets and other sources
of borrowings.

         SouthFirst retained $3,624,000 of the net proceeds from the initial
public offering of Common Stock in 1994. Substantially all of those funds have
been used to pay dividends, (including a special $2.00 per share dividend in
1996), acquire treasury stock, invest in affiliates and pay general corporate
expenses. Accordingly, SouthFirst will likely rely on dividends from First
Federal to repay borrowings under its line of credit, which has been used, in
part, to pay dividends to Stockholders.


                                       54


<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

         The following financial statements are filed with this report as
Exhibit 99.1:

          Independent Auditors' Report
               1.        Jones & Kirkpatrick, P.C.

          Consolidated Statements of Financial Condition as of
               September 30, 2001 and 2000
          Consolidated Statements of Operations for the years ended
               September 30, 2001, 2000 and 1999
          Consolidated Statements of Stockholders' Equity for the years ended
               September 30, 2001, 2000 and 1999
          Consolidated Statements of Cash Flows for the years ended
               September 30, 2001, 2000 and 1999
          Notes to Consolidated Financial Statements


ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

         There have been no changes in, or disagreements with, the Company's
accountants on accounting and financial disclosure in the preceding two fiscal
years.

                                    PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         MANAGEMENT OF SOUTHFIRST

         The SouthFirst Board of Directors currently consists of seven persons
and is divided into three classes, each of which contains approximately
one-third of the SouthFirst Board of Directors. The directors of SouthFirst are
elected by the stockholders of SouthFirst for staggered, three-year terms, so
that approximately one-third of the directors will be elected at each annual
meeting of stockholders to hold office until their successors are elected and
qualified. The executive officers of SouthFirst are elected annually by the
Board of Directors of SouthFirst and hold office until their successors are
elected and qualified.

         The direction and control of First Federal is vested in the First
Federal Board of Directors, which currently consists of seven members and is
divided into three classes, each of which contains approximately one-third of
the members. The directors of First Federal serve three-year terms. The terms of
the directors of First Federal are staggered (as in the case of SouthFirst), so
that approximately one-third of the directors will be elected at each annual
meeting of stockholders. Since SouthFirst owns all of the issued and outstanding
shares of Common Stock of First Federal, SouthFirst will elect the directors of
First Federal, in accordance with applicable law.

         There are no arrangements or understandings pursuant to which the
directors or executive officers of SouthFirst or First Federal were elected and
there are no family relationships between any of such persons.

         The following table sets forth certain information regarding the
executive officers and directors of SouthFirst and First Federal.


                                       55


<PAGE>


<TABLE>
<CAPTION>
                                                                                             YEAR FIRST
                                                                                             ELECTED AS A           YEAR
                                                                                             DIRECTOR OF            TERM
               NAME                    AGE(1)                 POSITION HELD                   SOUTHFIRST           EXPIRES
               ----                    ------                 -------------                  -------------         -------
<S>                                    <C>            <C>                                    <C>                   <C>
      Joe K. McArthur                    50           Chief Executive Officer of                  1995              2002
                                                      SouthFirst and First Federal,
                                                      President of First Federal

      J. Malcomb Massey(2)               52           President of SouthFirst,                    1997              2003
                                                      Director of SouthFirst and
                                                      First Federal

      Allen Gray McMillan, III           44           Chairman of SouthFirst and                  1995              2002
                                                      First Federal, Director of
                                                      SouthFirst and First Federal

      H. David Foote, Jr.                52           Director of SouthFirst and                  1994              2004
                                                      First Federal

      Kenneth E. Easterling              58           Director of SouthFirst and                  2001              2004
                                                      First Federal

      L. Neal Bice                       61           Director of SouthFirst and                  2001              2004
                                                      First Federal

      Donald R. Hardy                    51           Director of SouthFirst and                  2001              2002
                                                      First Federal

      Sandra H. Stephens                 42           Executive Vice President and
                                                      Chief Operating Officer of
                                                      SouthFirst and First Federal

      Ruth M. Roper                      51           Executive Vice President of
                                                      Pension & Benefit
</TABLE>

---------------

         (1)      At September 30, 2001

         (2)      Mr. Massey is also Chief Executive Officer and President of
                  Pension and Benefit Trust Company.

         Set forth below is certain information with respect to the directors
and executive officers of SouthFirst and First Federal. Unless otherwise
indicated, the principal occupation listed for each person below has been his or
her principal occupation for the past five years.

         JOE K. MCARTHUR has served as a director of First Federal and
SouthFirst since February 1996. Effective September 1, 2001, Mr. McArthur was
elected President and Chief Executive Officer of SouthFirst and First Federal.
Thereafter, as part of the Company's restructuring efforts, Mr. McArthur
resigned as President of SouthFirst to allow J. Malcomb Massey to assume that
office, as of October 1, 2001. Prior to assuming his current positions, Mr.
McArthur served as the Executive Vice President, Chief Financial Officer and
Secretary of First Federal and SouthFirst since 1992 and 1994, respectively. Mr.
McArthur has over 25 years of experience in the banking industry and received a
B.S. in Accounting from the University of Alabama-Birmingham and a Masters of
Business Administration equivalent from the National School of Finance and
Management. He has also completed all courses with the Institute of Financial
Education. Prior to joining First Federal, Mr. McArthur was Assistant Executive
Director of Finance of Humana, a hospital, from 1990 to 1992, and Senior Vice
president



                                       56

<PAGE>


of First Federal of Alabama from 1983 to 1990. He has also served as a manager
of various Little League and Babe Ruth Baseball teams, as well as Boys' Club
basketball teams. Mr. McArthur is a member of the First United Methodist Church
of Sylacauga.

         J. MALCOMB MASSEY has served as a director of First Federal and
SouthFirst since May, 1997. On September 26, 2001, Mr. Massey was elected
President of SouthFirst to be effective October 1, 2001. In addition, Mr. Massey
is President and Chief Executive Officer of Pension & Benefit, First Federal's
wholly owned, operating subsidiary. This is a position he has held since he
joined Pension & Benefit in 1997, after it acquired substantially all of the
assets of Lambert, Massey, Roper & Taylor, Inc., an employee benefits consulting
firm, based in Montgomery, for which Mr. Massey had served as President since
1980. Mr. Massey is a member of the American Society of Pension Actuaries, the
South Central Alabama Association of Insurance and Financial Advisors, Life and
Qualifying Member of Million Dollar Roundtable, Top of the Table, Montgomery
Lions Club and Young Meadows Presbyterian Church.

         ALLEN GRAY MCMILLAN, III has served as a director of First Federal
since 1993 and of SouthFirst since 1994. On August 15, 2001, Mr. McMillan was
elected Chairman of SouthFirst and First Federal. Mr. McMillan is also President
of Brecon Knitting Mill, where he has been employed since 1979. Mr. McMillan has
been active in the Kiwanis Club, United Way, and Boy Scouts of America. He is a
member of the First United Methodist Church.

         H. DAVID FOOTE, JR. has served as a director of First Federal since
1988 and of SouthFirst since 1994. Mr. Foote has been President and owner of
Foote Bros. Furniture since 1973. Mr. Foote has been a director of the Sylacauga
Chamber of Commerce, the Coosa Valley Country Club and Talladega County E-911.
He has served as President of Wesley Chapel Methodist Men's Club and head of the
Wesley Chapel Methodist Administrative Board.

         KENNETH E. EASTERLING has served as a director of First Federal since
1997 and of SouthFirst since 2001. Mr. Easterling previously served as a member
of the Board of Directors of First Federal Savings and Loan of Chilton County
from 1992 to 1997. Mr. Easterling is the owner of Home Printing Company, located
in Clanton, Alabama, which was established in 1969. Mr. Easterling served in the
Army National Guard from 1963 to 1969, is a Charter member of the Exchange Club
of Chilton County, is a member of the Board of Directors of Chilton County
Cattlemen's Association, is a member of the Board of Directors of Alfa, and has
served as a Deacon of the West End Baptist Church from 1969 to the present.

         L. NEAL BICE has served as a director of First Federal since 1997 and
of SouthFirst since 2001. Mr. Bice previously served as a director of First
Federal Savings and Loan of Chilton County, from 1989 to 1997. Mr. Bice is an
owner and a director of Chilton County Feed and Seed Company, located in
Clanton, Alabama. Mr. Bice presently is a professor of economics and business at
the Clanton extension of the George C. Wallace State Community College. Mr. Bice
is a past professor of finance at Auburn University, a past professor of
economics, finance and banking at the University of Southwestern Louisiana, and
a past professor of finance at the University of Alabama. Mr. Bice is a member
of the Chilton County Board of Education, the Alabama Education Association, the
Southern School Board Association, Omicron Delta Epsilon Society in Economics,
the Chilton County High School Athletic Association, and the Chilton County
Cattlemen's Association. He is a past President of the Chilton County Board of
Education, and serves as director of the Chilton County Chamber of Commerce, the
President of the Chilton County University of Alabama Alumni Association, the
Zone Chairman of the Clanton Lion's Club, and the President of the War Eagle
Lion's Club, Auburn, Alabama. Mr. Bice is a member of the Concord Baptist
Church.

         DONALD R. HARDY has served as a director of First Federal and
SouthFirst since January, 2001. Mr. Hardy is the owner, President and CEO of H &
B Builders, Inc., located in Sylacauga, Alabama. He is a member of the Business
Council of Alabama, Sylacauga Chamber of Commerce and has served on the
Sylacauga Planning Commission since 1992. Mr. Hardy is an active member of the
First Baptist Church of Sylacauga.


                                       57

<PAGE>


         SANDRA H. STEPHENS was elected Executive Vice President and Chief
Operating Officer of SouthFirst and First Federal, effective November 1, 2001.
Ms. Stephens previously served as the Chief Operating Officer (1997-2001) and
Chief Financial Officer (1992-1997) of First Federal Bank, in Tuscaloosa,
Alabama. Prior to her employment with First Federal Bank, Ms. Stephens held
various executive positions with Federal Home Loan Mortgage Corporation in
Atlanta, Georgia, from 1990 until 1992, and with Pinnacle Bank in Jasper,
Alabama from 1981 until 1990. Ms. Stephens is a member of the American Society
of Women Accountants, and she is a member of the First United Methodist Church
in Tuscaloosa, Alabama.

         RUTH M. ROPER is Executive Vice President of Pension & Benefit, First
Federal's wholly owned, operating subsidiary. This is a position Ms. Roper has
held since she joined Pension & Benefit in 1997, after it acquired substantially
all of the assets of Lambert, Massey, Roper & Taylor, Inc., a Montgomery based
employee benefits consulting firm of which Ms. Roper was a named shareholder.
Since 1983, when Ms. Roper first joined Lambert, Massey & Associates, Inc., she
has served in various capacities related to qualified plan and employee benefit
consulting, including qualified plan administration activities and the provision
of employee benefit consulting services. Ms. Roper is a member of the American
Society of Pension Actuaries and the Montgomery Association of Life
Underwriters.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Exchange Act requires SouthFirst's directors and
certain of SouthFirst's officers and persons who own more than 10% of the
outstanding Common Stock of SouthFirst to file with the Securities and Exchange
Commission reports of changes in ownership of the Common Stock of SouthFirst
held by such persons. Officers, directors and greater than 10% stockholders are
also required to furnish SouthFirst with copies of all forms they file under
this regulation. SouthFirst has been subject to this regulation since February
13, 1995. With the exceptions of two late filings, those being the Initial
Statement of Beneficial Ownership of Securities (Form 3) for both Donald R.
Hardy and Sandra H. Stephens, to SouthFirst's knowledge, based solely on a
review of copies of such reports furnished to SouthFirst and representations
that no other reports were required, all Section 16(a) filing requirements
applicable to its officers, directors and 10% holders were complied with during
fiscal 2001.

         Although SouthFirst has no obligation to make filings pursuant to
Section 16 of the Exchange Act, SouthFirst has adopted a policy requiring all
Section 16 reporting persons to report monthly to a designated employee of
SouthFirst as to whether any transactions in SouthFirst's Common Stock occurred
during the previous month.

ITEM 10. EXECUTIVE COMPENSATION

         The following table provides certain summary information for fiscal
2001, 2000, and 1999 concerning compensation paid or accrued by SouthFirst and
First Federal to or on behalf of SouthFirst's Chief Executive Officer and the
other executive officers of SouthFirst whose total annual salary and bonus
exceeded $100,000 during fiscal 2001 (the "Named Executive Officers"):


                                       58


<PAGE>



                           SUMMARY COMPENSATION TABLE



<TABLE>
<CAPTION>
                                                                   Annual                           Long Term Compensation
                                                             Compensation(1)

                                                                                                  Securities
   Name and Principal              Fiscal                                       Other Annual      Underlying        All Other
       Position(2)                  Year          Salary        Bonus          Compensation(3)    Options (#)     Compensation
<S>                                <C>          <C>           <C>              <C>                <C>             <C>
Joe K. McArthur                     2001        $ 107,916     $ 22,314(5)         $ 19,725         5,024(6)         $ 1,414(7)
      Chief Executive Officer       2000          105,000       29,490(8)           13,155             0              1,624(9)
      of SouthFirst and First       1999          105,000       24,104(10)          12,250         7,428(11)          1,624(12)
      Federal, President of
      First Federal

J. Malcomb Massey                   2001        $ 130,000     $  9,270(13)        $ 16,725         3,131(14)        $ 1,819(15)
      President of                  2000          130,000       17,069(16)          13,155             0              1,873(17)
      SouthFirst, Director          1999          130,000        2,236              13,250         3,726(18)          1,873(19)
      and
      President of
      Pension & Benefit

Donald C. Stroup(4)                 2001        $ 128,333     $ 25,565(20)        $ 16,980         7,679(21)        $ 2,526(22)
      President,                    2000          140,000       43,605(23)          13,155             0              2,901(24)
      Chief                         1999          140,000       35,812(25)          12,250        14,180(26)          2,901(27)
      Executive Officer
      and Chairman
</TABLE>

-----------------

(1)      All compensation received by the Named Executive Officers was paid by
         First Federal and Pension & Benefit.

(2)      On August 31, 2001, Donald C. Stroup, the former Chairman, President
         and Chief Executive Officer of SouthFirst and First Federal, resigned
         from all positions that he previously held as an officer and director
         of SouthFirst, First Federal, and their respective affiliates.
         Following the resignation of Mr. Stroup, effective September 1, 2001,
         Joe K. McArthur was elected President of First Federal and Chief
         Executive Officer of both SouthFirst and First Federal. Prior to this,
         Mr. McArthur served as the Executive Vice-President, and Chief
         Financial Officer of both entities. Thereafter, effective October 1,
         2001, J. Malcomb Massey, Chief Executive Officer and President of
         Pension and Benefit Trust Company, a subsidiary of First Federal, was
         elected as President of SouthFirst. Finally, effective November 1,
         2001, Sandra H. Stephens, who had previously served as the Chief
         Operating Officer and Chief Financial Officer of First Federal Bank,
         Tuscaloosa, Alabama was elected as Executive Vice President and Chief
         Operating Officer of SouthFirst and First Federal.

(3)      Fees received as member of the Board of Directors of SouthFirst, First
         Federal and/or Pension & Benefit.

(4)      On August 31, 2001, Donald C. Stroup, SouthFirst and First Federal
         entered into a Severance, Release and Stock Redemption Agreement (the
         "severance agreement") by which Mr. Stroup resigned all positions he
         held as an employee and director of SouthFirst and First Federal. Mr.
         Stroup's employment agreements with SouthFirst and First Federal, both
         dated October 1, 2000, consequently were terminated; however, the
         Deferred Compensation Agreement entered into by and between Mr. Stroup
         and First Federal, dated November 16, 1994, remains in effect.

         Under the terms of the severance agreement, SouthFirst agreed to
         purchase from Mr. Stroup, and Mr. Stroup agreed to sell, assign,
         transfer and deliver to SouthFirst 44,942 shares of common stock of
         SouthFirst owned


                                       59

<PAGE>


         by Mr. Stroup for an aggregate cash purchase price of $668,700.
         SouthFirst also agreed to pay to Mr. Stroup's counsel $10,000 for legal
         fees and expenses incurred by Mr. Stroup during the period from July
         15, 2001 through August 31, 2001 in connection with his employment with
         SouthFirst and First Federal. In addition, SouthFirst agreed to waive
         any right to reimbursement from Mr. Stroup of any amounts paid to Mr.
         Stroup pursuant to SouthFirst's Dividend Incentive Plan; provided,
         however, that the maximum amount waived by SouthFirst would be $22,500.
         Finally, SouthFirst transferred title to the automobile then provided
         by SouthFirst for Mr. Stroup's use. These payments by SouthFirst to Mr.
         Stroup were exclusive and in lieu of any other compensation, benefits,
         severance pay or other remuneration or claims arising in connection
         with Mr. Stroup's employment relationship with SouthFirst or First
         Federal or the termination of either such relationship.

(5)      Consists of a regular bonus of $6,875 as well as $15,439 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options. See "-- Compensation of
         Directors."

(6)      On February 17, 2001, SouthFirst issued 5,024 options under the 1995
         plan to Mr. McArthur at an exercise price of $9.75 per share. These
         option's vest in equal annual increments commencing on November 4, 2001
         through November 4, 2003.

(7)      Represents a $964 automobile allowance and income of $450 recognized on
         employer provided group term life insurance in excess of $50,000.

(8)      Consists of a regular bonus of $17,065 as well as $12,425 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options. See "-- Compensation of
         Directors."

(9)      Represents a $964 automobile allowance and income of $660 recognized on
         employer provided group term life insurance in excess of $50,000.

(10)     Consisted of a regular bonus of $13,125 as well as $10,979 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options and a bonus paid to assist
         in the payment of applicable federal taxes due in connection with such
         dividend payments. See "-- Compensation of Directors."

(11)     On November 4, 1998, SouthFirst canceled all options granted to Mr.
         McArthur in 1998, and issued these options to purchase the same number
         of shares at a lower exercise price. These options vest in equal annual
         increments commencing on 11/4/99. See "-- Repricing of Stock Options
         under the Stock Option Plans."

(12)     Represents a $964 automobile allowance and income of $660 recognized on
         employer provided group term life insurance in excess of $50,000.

(13)     Consists of a regular bonus of $6,000 as well as $3,270 of compensation
         consisting of dividends paid under SouthFirst's Dividend Investment
         Plan on unexercised stock options. See "-- Compensation of Directors."

(14)     On February 17,2001, SouthFirst issued 1,407 options under the 1995
         plan and 317 options under the 1998 plan to Mr. Massey at an exercise
         price of $9.75 per share. These options vest in equal annual increments
         commencing on November 4, 2001 through November 4, 2003.

(15)     Represents a $1,405 automobile allowance and income of $414 recognized
         on employer provided group term life insurance in excess of $50,000.

(16)     Consists of a regular bonus of $14,833 as well as $2,236 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options. See "-- Compensation of
         Directors."

(17)     Represents a $1,405 automobile allowance and income of $468 recognized
         on employer provided group term life insurance in excess of $50,000.


                                       60
<PAGE>


(18)     On November 4, 1998, SouthFirst canceled all options granted to Mr.
         Massey in 1998, and issued options to purchase the same number of
         shares at a lower exercise price. These options vest in equal annual
         increments commencing on 11/4/99. See "---Repricing of Stock Options
         under the Stock Option Plans."

(19)     Represents a $1,405 automobile allowance and income of $468 recognized
         on employer provided group term life insurance in excess of $50,000.

(20)     Consists of dividends paid under SouthFirst's Dividend Investment Plan
         on unexercised stock options. See "--Compensation of Directors."

(21)     On February 17, 2001, SouthFirst issued 7,679 options under the 1995
         plan to Mr. Stroup at an exercise price of $9.75 per share. Due to Mr.
         Stroup's resignation on August 31, 2001, these options expired on
         November 29, 2001.

(22)     Represents a $1,836 automobile allowance and income of $690 recognized
         on employer provided group term life insurance in excess of $50,000.

(23)     Consists of a regular bonus of $22,647 as well as $20,958 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options. See "-- Compensation of
         Directors."

(24)     Represents a $1,836 automobile allowance and income of $1,065
         recognized on employer provided group term life insurance in excess of
         $50,000.

(25)     Consists of a regular bonus of $17,500 as well as $18,312 of
         compensation consisting of dividends paid under SouthFirst's Dividend
         Investment Plan on unexercised stock options and a bonus paid to assist
         in the payment of applicable federal taxes due in connection with such
         dividend payments. See "-- Compensation of Directors."

(26)     On November 4, 1998, SouthFirst canceled all options granted to Mr.
         Stroup in 1998, and issued these options to purchase the same number of
         shares at a lower exercise price. These options vest in equal annual
         increments commencing on 11/4/99. See "---Repricing of Stock Options
         under the Stock Option Plans."

(27)     Represents a $1,836 automobile allowance and income of $1,065
         recognized on employer provided group term life insurance in excess of
         $50,000.

EMPLOYMENT AGREEMENTS

         SouthFirst and First Federal have entered into employment agreements
with each of the following executive officers (including each of the Named
Executive Officers). The terms and conditions of these employment contracts are
described below.

Joe K. McArthur, Chief Executive Officer of SouthFirst and First Federal,
President of First Federal.

         The employment agreement with Mr. McArthur was effective as of
September 1, 2001 and is for a term of two years. On each anniversary of the
effective date, Mr. McArthur's term of employment shall be extended for an
additional one-year period beyond the then effective expiration date, provided
the Board determines, in a duly adopted resolution, that the performance of Mr.
McArthur has met the Board's requirements and standards, and that such
employment agreement shall be extended.

         Pursuant to Mr. McArthur's employment agreement, SouthFirst shall be
jointly and severally liable for the payment of all amounts due under a separate
employment agreement with First Federal, which is of even date with the
employment agreement with SouthFirst. Under the terms of the employment
agreement with First Federal, SouthFirst and First Federal agree to pay Mr.
McArthur a salary at the rate of $140,000 per annum,


                                       61

<PAGE>


payable in cash not less frequently than monthly. Beginning on the Effective
Date, Mr. McArthur shall be eligible to receive such performance bonuses as may
be determined in the sole discretion of the Board. In addition, Mr. McArthur
shall participate in standard retirement and medical plans, and is entitled to
customary fringe benefits, vacation and sick leave.

         Mr. McArthur's employment agreement terminates upon his death or
disability, and is terminable for "cause" as defined in the employment
agreement. In the event of termination for cause, no severance benefits are
payable to Mr. McArthur. If SouthFirst or First Federal terminates Mr. McArthur
without cause, he will be entitled to a continuation of his salary from the date
of termination through the remaining term of the employment agreements plus an
additional twelve-month period, and he will be entitled to the cost of obtaining
benefits in which Mr. McArthur would have been eligible to participate through
the termination date. Mr. McArthur may voluntarily terminate his employment
agreement by providing sixty days written notice to the Boards of Directors of
SouthFirst and First Federal, in which case he is entitled to receive only his
compensation, vested rights and benefits up to the date of termination.

         Mr. McArthur's employment agreement further provides that, in the event
of Mr. McArthur's involuntary termination in connection with, or within two
years after any change in control of First Federal or SouthFirst, other than for
"cause," or death or disability, Mr. McArthur will be paid, within 10 days of
such termination, an amount equal to the difference between (i) 2.99 times his
"base amount," as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code"), and (ii) the sum of any other
"parachute payments," as defined under Section 280G(b)(2) of the Internal
Revenue Code, that Mr. McArthur receives on account of the change in control.
Under Mr. McArthur's employment agreement, a "change in control" generally
refers to a change in ownership, holding or power to vote more than 25% of
SouthFirst's or First Federal's voting stock, a change in the ownership or
possession of the ability to control the election of a majority of First
Federal's or SouthFirst's directors or the exercise of a controlling influence
over the management or policies of SouthFirst or First Federal. In addition,
under Mr. McArthur's employment agreement, a change in control occurs when,
during any consecutive two-year period, the directors of SouthFirst or First
Federal, at the beginning of such period, cease to constitute two-thirds of the
Boards of Directors of SouthFirst or First Federal, unless the election of
replacement directors was approved by a two-thirds (66 2/3%) vote of the initial
directors then in office. Mr. McArthur's employment agreement also provides for
a similar lump sum payment to be made in the event of his voluntary termination
of employment within one year following a change in control of First Federal or
SouthFirst.

Sandra H. Stephens, Executive Vice President and Chief Operating Officer.

         The employment agreement with Ms. Stephens was effective as of November
1, 2001 and is for a term of two years. On each annual anniversary date from the
effective date, Ms. Stephens' term of employment shall be extended for an
additional one-year period beyond the then effective expiration date, provided
the Board determines in a duly adopted resolution that the performance of Ms.
Stephens has met the Board's requirements and standards, and that such
employment agreement should be extended.

         Pursuant to Ms. Stephens' employment agreement, First Federal pays Ms.
Stephens an annual base salary of $115,000, payable in cash not less frequently
than monthly. Beginning on the Effective Date, Ms. Stephens shall be eligible to
receive such performance bonuses as may be determined in the sole discretion of
the Board. In addition, Ms. Stephens shall participate in standard retirement
and medical plans, and is entitled to customary fringe benefits, vacation and
sick leave.

         Ms. Stephens' employment agreement terminates upon her death or
disability, and is terminable for "cause" as defined in the employment
agreement. In the event of termination for cause, no severance benefits are
payable to Ms. Stephens. If First Federal terminates Ms. Stephens without cause,
she will be entitled to a continuation of her salary from the date of
termination through the remaining term of the employment agreement plus an
additional twelve-month period, and she will be entitled to the cost of
obtaining benefits in which Ms. Stephens would have been eligible to participate
through the termination date. Ms. Stephens may voluntarily terminate her
employment agreement by providing sixty days written notice to the Board of
Directors of First


                                       62

<PAGE>


Federal, in which case she is entitled to receive only her compensation, vested
rights and benefits up to the date of termination.

         Ms. Stephens' employment agreement further provides that, in the event
of her involuntary termination in connection with, or within two years after any
change in control of First Federal or SouthFirst, other than for "cause," or
death or disability, Ms. Stephens will be paid, within 10 days of such
termination, an amount equal to the difference between (i) 2.99 times her "base
amount," as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"), and (ii) the sum of any other
"parachute payments," as defined under Section 280G(b)(2) of the Internal
Revenue Code, that Ms. Stephens receives on account of the change in control.
Under Ms. Stephens' employment agreement, a "change in control" generally refers
to a change in ownership, holding or power to vote more than 25% of First
Federal's or SouthFirst's voting stock, a change in the ownership or possession
of the ability to control the election of a majority of First Federal's or
SouthFirst's directors, or the exercise of a controlling influence over the
management or policies of First Federal or SouthFirst. In addition, under Ms.
Stephens' employment agreement, a change in control occurs when, during any
consecutive two-year period, the directors of First Federal or SouthFirst, at
the beginning of such period, cease to constitute two-thirds of the Board of
Directors of First Federal or SouthFirst, unless the election of replacement
directors was approved by a two-thirds (66 2/3%) vote of the initial directors
then in office. Ms. Stephens' employment agreement also provides for a similar
lump sum payment to be made in the event of her voluntary termination of
employment within one year following a change in control of First Federal or
SouthFirst.

J. Malcomb Massey, President and Chief Executive Officer of Pension & Benefit.

         The employment agreement by and between Pension & Benefit and Mr.
Massey was effective as of October 1, 2001 and provides for a term of two years.
On each annual anniversary date from the effective date, Mr. Massey's term of
employment shall be extended for an additional one-year period beyond the then
effective expiration date, provided the Board determines in a duly adopted
resolution that the performance of Mr. Massey has met the Board's requirements
and standards, and that such employment agreement should be extended.

         The employment agreement with Mr. Massey provides for an annual base
salary of $150,000, payable in cash not less frequently than monthly. In
addition, as a provision of a prior employment agreement, Mr. Massey received
15,512 shares of restricted SouthFirst Common Stock, one-fifteenth of which vest
on each of the first fifteen anniversaries of April 11, 1997. Should Mr.
Massey's employment be terminated due to death, disability or the termination of
his employment "without cause," as defined in the employment agreement, all
unvested shares shall be deemed earned and fully vested as of such date and
shall be distributed as soon as practicable thereafter. All unvested shares will
also vest upon a "change in control" of Pension & Benefit, First Federal or
SouthFirst. Under Mr. Massey's employment agreement, "change in control"
generally refers to a change in ownership, holding or power to vote more than
25% of Pension & Benefit's, First Federal's or SouthFirst's voting stock, a
change in the ownership or possession of the ability to control the election of
a majority of Pension & Benefit's, First Federal's or SouthFirst's directors, or
the exercise of a controlling influence over the management or policies of
Pension & Benefit, First Federal or SouthFirst. In addition, under Mr. Massey's
employment agreement, a change in control occurs when, during any consecutive
two-year period, directors of Pension & Benefit, First Federal or SouthFirst, at
the beginning of such period, cease to constitute two-thirds of the Boards of
Directors of Pension & Benefit, First Federal or SouthFirst, unless the election
of replacement directors was approved by a two-thirds (66 2/3%) vote of the
initial directors then in office.

         Mr. Massey's employment agreement entitles him to participate in an
equitable manner with all other senior management employees of Pension & Benefit
in discretionary bonuses that the Board may award from time to time to senior
management employees. Mr. Massey may also participate in standard retirement and
medical plans, and is entitled to customary fringe benefits, vacation and sick
leave.

         Mr. Massey's employment agreement terminates upon his death or
disability, and is terminable for "cause," as defined in the employment
agreement. In the event of termination for cause, no severance benefits are
payable to Mr. Massey. If Mr. Massey is terminated without cause, he will be
entitled to severance pay equal to the amount of his salary and benefits from
the date of termination through the remaining term of the employment


                                       63

<PAGE>


agreement plus an additional twelve-month period. Mr. Massey has the option to
receive this payment either (i) in periodic payments, as if the termination had
not occurred, or (ii) in one lump sum payment within ten days of the termination
of his employment. In either case, however, the severance pay shall not exceed
two (2) times Mr. Massey's "average annual compensation," which is the average
total annual compensation received by Mr. Massey under the employment agreement
over the five full fiscal years preceding the termination, or, if Mr. Massey has
been employed less than five full fiscal years, over each full fiscal year
preceding the termination. Mr. Massey may terminate voluntarily his employment
agreement by providing sixty days written notice to the Board, in which case he
is entitled to receive only his compensation, vested rights and benefits up to
the date of termination.

         In addition to Mr. Massey's employment agreement, SouthFirst, First
Federal, Pension & Benefit and Mr. Massey have entered into a guaranty of
employment agreement pursuant to which SouthFirst and First Federal have
guaranteed the performance of Pension & Benefit under the terms of the
employment agreement by and between Pension & Benefit and Mr. Massey.

Ruth M. Roper, Executive Vice President of Pension & Benefit.

         The employment agreement with Ms. Roper was effective as of October 1,
2001 and provides for a term of two years. On each annual anniversary date from
the effective date, Ms. Roper's term of employment shall be extended for an
additional one-year period beyond the then effective expiration date, provided
the Board determines in a duly adopted resolution that the performance of Ms.
Roper has met the Board's requirements and standards, and that such employment
agreement should be extended.

         The employment agreement with Ms. Roper provides for an annual base
salary of $98,000, payable in cash not less frequently than monthly. In
addition, as a provision of a prior employment agreement, Ms. Roper received
5,623 shares of restricted SouthFirst Common Stock, one-fifteenth of which vest
on each of the first fifteen anniversaries of April 11, 1997. Should Ms. Roper's
employment be terminated due to death, disability or the termination of her
employment "without cause," as defined in the employment agreement, all unvested
shares shall be deemed earned and fully vested as of such date and shall be
distributed as soon as practicable thereafter. All unvested shares will also
vest upon a "change in control" of Pension & Benefit, First Federal or
SouthFirst. Under Ms. Roper's employment agreement, "change in control"
generally refers to a change in ownership, holding or power to vote more than
25% of Pension & Benefit's, First Federal's or SouthFirst's voting stock, a
change in the ownership or possession of the ability to control the election of
a majority of Pension & Benefit's, First Federal's or SouthFirst's directors, or
the exercise of a controlling influence over the management or policies of
Pension & Benefit, First Federal or SouthFirst. In addition, under Ms. Roper's
employment agreement, a change in control occurs when, during any consecutive
two-year period, directors of Pension & Benefit, First Federal or SouthFirst, at
the beginning of such period, cease to constitute two-thirds of the Boards of
Directors of Pension & Benefit, First Federal or SouthFirst, unless the election
of replacement directors was approved by a two-thirds (66 2/3%) vote of the
initial directors then in office.

         Ms. Roper's employment agreement entitles her to participate in an
equitable manner with all other senior management employees of Pension & Benefit
in discretionary bonuses that the Board may award from time to time to senior
management employees. Ms. Roper may also participate in standard retirement and
medical plans, and is entitled to customary fringe benefits, vacation and sick
leave.

         Ms. Roper's employment agreement terminates upon her death or
disability, and is terminable for "cause," as defined in the employment
agreement. In the event of termination for cause, no severance benefits are
payable to Ms. Roper. If Ms. Roper is terminated without cause, she will be
entitled to severance pay equal to the amount of her salary and benefits from
the date of termination through the remaining term of the employment agreement
plus an additional twelve-month period. Ms. Roper has the option to receive this
payment either (i) in periodic payments, as if the termination had not occurred,
or (ii) in one lump sum payment within ten days of the termination of her
employment. In either case, however, the severance pay shall not exceed two (2)
times Ms. Roper's "average annual compensation," which is the average total
annual compensation received by Ms. Roper under the employment agreement over
the five full fiscal years preceding the termination, or if Ms. Roper has been
employed less than five full fiscal years, over each full fiscal year preceding
the termination. Ms. Roper may voluntarily terminate her employment agreement by
providing sixty days written notice to the Board, in which case she is entitled
to receive only her compensation, vested rights and benefits up to the date of
termination.

         In addition to Ms. Roper's employment agreement, SouthFirst, First
Federal, Pension & Benefit and Ms. Roper have entered into a guaranty of
employment agreement pursuant to which SouthFirst and First Federal have
guaranteed the performance of Pension & Benefit under the terms of the
employment agreement by and between Pension & Benefit and Ms. Roper.


                                       64
<PAGE>


Donald C. Stroup - Severance Agreement

         On August 31, 2001, Donald C. Stroup, SouthFirst and First Federal
entered into a Severance, Release and Stock Redemption Agreement (the "Severance
Agreement") by which Mr. Stroup resigned all positions he held as an employee
and director of SouthFirst and First Federal. Mr. Stroup's employment agreements
with SouthFirst and First Federal, both dated October 1, 2000, consequently were
terminated; however, the Deferred Compensation Agreement entered into by and
between Mr. Stroup and First Federal, dated November 16, 1994, remains in
effect.

         Under the terms of the Severance Agreement, SouthFirst agreed to
purchase from Mr. Stroup, and Mr. Stroup agreed to sell, assign, transfer and
deliver to SouthFirst 44,942 shares of common stock of SouthFirst owned by Mr.
Stroup for an aggregate cash purchase price of $668,700. SouthFirst also agreed
to pay to Mr. Stroup's counsel $10,000 for legal fees and expenses incurred by
Mr. Stroup during the period from July 15, 2001 through August 31, 2001 in
connection with his employment with SouthFirst and First Federal. In addition,
SouthFirst agreed to waive any right to reimbursement from Mr. Stroup of any
amounts paid to Mr. Stroup pursuant to SouthFirst's Dividend Incentive Plan;
provided, however, that the maximum amount waived by SouthFirst would be
$22,500. Finally, SouthFirst transferred title to the automobile then provided
by SouthFirst for Mr. Stroup's use. These payments by SouthFirst to Mr. Stroup
were exclusive and in lieu of any other compensation, benefits, severance pay or
other remuneration or claims arising in connection with Mr. Stroup's employment
relationship with SouthFirst or First Federal or the termination of either such
relationship.

DEFERRED COMPENSATION AGREEMENTS

         First Federal has previously entered into deferred compensation
agreements (collectively, the "Deferred Compensation Agreements") with Mr.
Stroup, Mr. McArthur, and Ms. Roper, pursuant to which each would receive
certain retirement benefits at age 65. Under the Deferred Compensation
Agreements, benefits would be payable for 15 years. A portion of the retirement
benefits would accrue each year until age 65 or, if sooner, until termination of
employment. Had Mr. Stroup remained in the employment of First Federal until age
65, his annual benefit would have been $65,000. Mr. Stroup, however, resigned on
August 31, 2001, and, pursuant to such resignation, his accrual of annual
benefits has ceased. Mr. Stroup's current annual benefit, to be received at age
65, now is fixed at approximately $25,000.

         If Mr. McArthur remains in the employment of First Federal until age
65, his annual benefit will be $45,000. If Mr. McArthur dies prior to age 65,
while in the employment of First Federal, the full retirement benefits available
under the deferred compensation agreement will accrue and will, thereupon, be
payable to his beneficiaries. Similarly, if Ms. Roper remains in the employment
of First Federal until age 65, her annual benefit will be $30,000. If Ms. Roper
dies prior to age 65, while in the employment of First Federal, the full
retirement benefits available under the deferred compensation agreement will
accrue and will, thereupon, be payable to her beneficiaries.

         The retirement benefits available under the Deferred Compensation
Agreements are unfunded. However, First Federal has purchased life insurance
policies on the lives of these officers that will be available to SouthFirst and
First Federal to provide for both retirement benefits and key man insurance. The
costs of these arrangements was $57,075 for each of 2001, 2000, and 1999.

MANAGEMENT RECOGNITION PLANS

         The SouthFirst Board of Directors has adopted two management
recognition plans ("MRPs"), denominated SouthFirst Bancshares, Inc. Management
Recognition Plan "A" ("Plan A") and SouthFirst Bancshares, Inc. Management
Recognition Plan "B" ("Plan B") (collectively, the "Plans"). The objective of
the Plans is to enable SouthFirst and First Federal to reward and retain
personnel of experience and ability in key positions of responsibility by
providing such personnel with a proprietary interest in SouthFirst and by
recognizing their past contributions to SouthFirst and First Federal, and to act
as an incentive to make such contributions in the future.


                                       65

<PAGE>


         Plan A and Plan B are identical except that while Plan B provides for
awards only to employees of SouthFirst and First Federal, Plan A provides for
awards to employees, as well as to non-employee directors. The Plans are
administered by a committee (the "Committee") of the SouthFirst Board of
Directors. Awards under the Plans are in the form of restricted stock grants
("MRP grants"). Each Plan has reserved a total of 16,600 shares of SouthFirst
Common Stock for issuance pursuant to awards made by the Committee. Such shares,
with respect to each Plan, are held in trust until awards are made by the
Committee, at which time the shares are distributed from the trust to the award
recipient. Such shares will bear restrictive legends until vested, as described
below. The Committee may make awards to eligible participants under the Plans in
its discretion, from time to time. Under Plan A, on November 15, 1995, each
non-employee director serving in such capacity on February 13, 1995 (the
effective date of the conversion of SouthFirst from a mutual to a stock form of
ownership) automatically received an award of 1,660 shares. In selecting the
employees to whom awards are granted under the Plans, the Committee considers
the position, duties and responsibilities of the employees, the value of their
services to SouthFirst and First Federal and any other factors the Committee may
deem relevant.

         Awards under the Plans vest at the rate of 20% per year, commencing on
the first anniversary of the date of the award. The Committee may, however, from
time to time and in its sole discretion, accelerate the vesting with respect to
any participant, if the Committee determines that such acceleration is in the
best interest of SouthFirst. If a participant terminates employment for reasons
other than death or disability, the participant forfeits all rights to any
shares which have not vested, including the dividends received with respect to
such non-vested shares. If the participant's termination is caused by death or
disability, all shares become vested. Participants will recognize compensation
income on the date their interests vest, or at such earlier date pursuant to a
participant's election to accelerate recognition pursuant to Section 83(b) of
the Internal Revenue Code.

         As of September 30, 1996, a total of 33,200 shares had been awarded
under the Plans. During the year-ended September 30, 2001, SouthFirst
re-purchased 11,525 shares of its common stock which shares subsequently were
designated MRP shares and are currently held in trust. As of September 30, 2001,
a total of 33,200 shares have been awarded under the Plans.

         STOCK OPTION PLANS

         The SouthFirst Board of Directors has adopted two Stock Option Plans.
The first was adopted November 15, 1995 and is denominated the SouthFirst
Bancshares, Inc. Stock Option and Incentive Plan (the "1995 Stock Option Plan"),
and the second was adopted on January 28, 1998 and is denominated the 1998 Stock
Option and Incentive Plan ("the 1998 Stock Option Plan"). The objective of each
of the Stock Option Plans is to attract, retain, and motivate the best possible
personnel for positions of substantial responsibility with SouthFirst and First
Federal. In order to attract and retain members of the Board of Directors of
SouthFirst who contribute to SouthFirst's success, each of the Stock Option
Plans also provides for the award of non-qualified stock options to non-employee
directors of SouthFirst.

         The 1995 Stock Option Plan authorizes the grant of up to 83,000 shares
of Common Stock to select officers and employees in the form of (i) incentive
and non-qualified stock options ("Options") or (ii) Stock Appreciation Rights
("SARs") (Options and SARs are referred to herein collectively as "Awards"), as
determined by the committee administering the 1995 Stock Option Plan. As of
September 30, 1996, options to purchase a total of 83,000 shares had been issued
under the 1995 Stock Option Plan, and, as of that date, no other shares were
available for future issuance. After September 30, 1996, grants to purchase
4,150 shares of Common Stock expired prior to being exercised, and,
consequently, the 4,150 shares reserved to be issued pursuant to such expired
options became available for re-issuance under the 1995 Stock Option Plan. In
1998, the Board of Directors of First Federal granted options to purchase these
4,150 shares available under the 1995 Stock Option Plan but they again expired
prior to being exercised.

         The 1998 Stock Option Plan authorizes the grant of up to 63,361 shares
of Common Stock to select officers and employees in the form of (i) incentive
and non-qualified stock options ("Options") or (ii) Stock


                                       66

<PAGE>


Appreciation Rights ("SARs"). As of September 30, 2001, options to purchase a
total of 63,361 shares had been issued under the 1998 Stock Option Plan.

         The terms and conditions of the two Stock Option Plans are
substantially the same. The exercise price for Options and SARs granted under
the Stock Option Plans may not be less than the fair market value of the shares
on the day of the grant, and no Awards shall be exercisable after the expiration
of ten years from the date of this grant. Each Stock Option Plan has a term of
10 years unless earlier terminated by the SouthFirst Board of Directors. The
Stock Option Plans are administered by a committee of the directors of
SouthFirst (the "Option Plan Committee"). Except as discussed below with respect
to non-employee directors, the Option Plan Committee has complete discretion to
make Awards to persons eligible to participate in the Stock Option Plans, and
determines the number of shares to be subject to such Awards, and the terms and
conditions of such Awards. In selecting the persons to whom Awards are granted
under the Stock Option Plan, the Option Plan Committee considers the position,
duties, and responsibilities of the employees, the value of their services to
SouthFirst and First Federal, and any other factor the Option Plan Committee may
deem relevant to achieving the stated purpose of the Stock Option Plan.

         Options granted under the Stock Option Plans become exercisable at
rates ranging from 20% to 33% per year commencing one year from the date of
grant, with the exception that all options will become immediately exercisable
in the event the optionee's employment is terminated due to the optionee's
death, disability or retirement, or in the event of a change in control of First
Federal or SouthFirst.

          Under the 1995 Stock Option Plan, all directors who were not employees
of SouthFirst as of November 15, 1995 (the date of the approval of the Stock
Option Plan by the stockholders of SouthFirst and the OTS), received
non-qualified stock options for the purchase of 4,150 shares with an exercise
price equal to $14.00 per share, the fair market value of SouthFirst Common
Stock on the date of grant. Likewise, under the 1998 Stock Option Plan, all
directors who were not employees of SouthFirst as of January 28, 1998 (the date
of the approval of the Stock Option Plan by the Board of Directors of
SouthFirst) received non-qualified stock options for the purchase of 2,700
shares with an exercise price equal to $21.25 per share, the fair market value
of SouthFirst Common Stock on the date of grant.

REPRICING OF STOCK OPTIONS UNDER THE STOCK OPTION PLANS

         On January 28, 1998, the Wage and Compensation Committee, acting on the
approval of the Board of Directors, granted incentive stock options to purchase
14,180; 7,428; and 3,726 options to Donald C. Stroup, Joe K. McArthur and J.
Malcomb Massey, respectively (i.e., the Named Executive Officers at that time).
Options to purchase an aggregate of 36,777 shares were concurrently granted to
approximately 19 non-executive employees of SouthFirst and/or First Federal and
two former executive officers. Such options were granted at an exercise price of
$21.25 per share, which was equal to the fair market value of SouthFirst's
Common Stock on the date of grant. During the ensuing nine and one half months,
the market price of SouthFirst's Common Stock declined significantly to a point
below which such options no longer served the intended purpose for which they
were issued. In order to protect the intended value of the January 28 options,
the Board of Directors elected to reprice all of such options by the
cancellation of such options and the regrant of an equal number of new options
at the then current lower market price. Such replacement options were granted on
November 4, 1998 at an exercise price of $15.75 a share, which was equal to the
fair market value of SouthFirst's Common Stock on the date of grant. The
following table provides, with respect to the Named Executive Officers, the name
of grantee, number of securities underlying the options repriced, the original
exercise price, the new exercise price, and the length of original option term
remaining after the repricing, as of September 30, 2001:


                                       67

<PAGE>

                         TEN-YEAR OPTION/SAR REPRICINGS

<TABLE>
<CAPTION>
Name                       Date           Number of             Original         New Exercise           Length of
                                          Securities         Exercise Price         Price ($)        Original Option
                                          Underlying               ($)                              Term Remaining at
                                            Options                                                 Date of Repricing
                                          Repriced(1)
<S>                   <C>                 <C>                <C>                 <C>                <C>
Donald Stroup(2)      November 4, 1998         4150               21.25              15.75              9.2  years
(1995 Plan)

Donald Stroup(2)      November 4, 1998        10030               21.25              15.75              9.2 years
(1998 Plan)

Joe McArthur          November 4, 1998         7428               21.25              15.75              9.2 years
(1998 Plan)

Malcomb Massey        November 4, 1998         3726               21.25              15.75              9.2 years
(1998 Plan)
</TABLE>


         (1) As of September 30, 1996, options to purchase a total of 83,000
shares had been issued under the 1995 Stock Option Plan, and, as of that date,
no other shares were available for future issuance. Since September 30, 1996,
grants to purchase 4,150 shares of Common Stock expired prior to being exercised
and, consequently, the 4,150 shares reserved to be issued pursuant to such
expired options became available for re-issuance under the 1995 Stock Option
Plan. On January 28, 1998, the Board of Directors of First Federal granted to
Donald C. Stroup options to purchase 4,150 shares available under the 1995 Stock
Option Plan in conjunction with certain additional stock option grants made
pursuant to the 1998 Stock Option Plan. These options were issued pursuant to
the vesting schedule utilized for the 1998 Stock Option Plan. Subsequently, as
of September 30, 2001, 12,450 options have expired and remain unissued under the
1995 Stock Option Plan and 0 options have expired and remain unissued under the
1998 Stock Option Plan.

         (2) Effective August 31, 2001, Donald C. Stroup resigned from all
positions previously held by him as an officer and director of SouthFirst and
its affiliates, including First Federal. Mr. Stroup's options expired on
November 29, 2001 after his resignation on August 31, 2001.

         The following table provides certain information concerning the
exercise of stock options under SouthFirst's Stock Option Plans during the
fiscal year ended September 30, 2001, by the Named Executive Officers and the
fiscal-year-end value of unexercised options held by those individuals:


                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                          Number of Securities           Value of
                                                               Underlying               Unexercised
                                                           Unexercised Options         In-the-Money
                                                                  at                 Options at Fiscal
                            Shares                          Fiscal Year End              Year End
                           Acquired          Value            Exercisable/              Exercisable/
        Name              on Exercise       Realized          Unexercisable           Unexercisable(1)
<S>                       <C>               <C>           <C>                        <C>
Donald C. Stroup(2)            0               $0            26,422 / 16,187            $0 / $11,902

Joe K. McArthur                0               $0            16,251 /  9,481            $0 / $ 7,787

J. Malcomb Massey              0               $0             1,490 /  3,960            $0 / $ 2,672
</TABLE>

--------------

         (1) Represents the value of unexercised, in-the-money stock options on
September 30, 2001, using the $11.30 closing price of SouthFirst Common Stock on
that date.

         (2) Effective August 31, 2001, Donald C. Stroup resigned from all
positions previously held by him as an officer and director of SouthFirst and
its affiliates, including First Federal. Mr. Stroup's options expired 90 days
after his resignation, on November 29, 2001.



                                       68
<PAGE>

EMPLOYEE RETIREMENT SAVINGS PLAN

         First Federal has established a savings and profit-sharing Plan that
qualifies as a tax-deferred savings Plan under Section 401(k) of the Internal
Revenue Code (the "401(k) Plan") for its salaried employees who are at least 21
years old and who have completed one year of service with First Federal. Under
the 401(k) Plan, eligible employees may contribute up to 14% of their gross
salary to the 401(k) Plan or $10,500, whichever is less. Currently, all
contributions are fully vested under the 401(k) Plan at the time of the
contribution. Prior to First Federal's adoption of an Employee Stock Ownership
Plan (see "--Employee Stock Ownership Plan"), the first 1% to 3% of employee
compensation was matched by a First Federal contribution of $0.50 for each $1.00
of employee contribution and contributions from 4% to 6% were 100% matched.
Effective October 1, 2000, the first 1% to 3% of employee compensation was
matched by a First Federal contribution of $0.25 for each $1.00 of employee
contribution and contributions from 4% to 6% were matched by a contribution of
$0.50 for each $1.00 of employee contribution. During these periods,
contributions were 100% vested following the completion of five years of service
and were invested in one or more investment accounts administered by the Plan
administrator.

EMPLOYEE STOCK OWNERSHIP PLAN

         First Federal has adopted an Employee Stock Ownership Plan (the "ESOP")
for the exclusive benefit of participating employees. All employees of First
Federal who are at least 21 years old and who have completed a year of service
with First Federal are eligible to participate in the ESOP. SouthFirst has
loaned the ESOP $664,000, which the ESOP used to purchase 66,400 shares of
SouthFirst Common Stock. This loan is secured by the shares purchased with the
proceeds of the loan. Shares purchased with the loan proceeds are held in a
suspense account for allocation among participants as the loan is repaid.

         Contributions to the ESOP are expected to be used to repay the ESOP
loan. Shares released from the suspense account as the ESOP loan is repaid, any
contributions to the ESOP that are not used to repay the ESOP loan, and
forfeitures will be allocated among participants on the basis of their relative
compensation. With the exception of terminations due to death, disability or
retirement, a participant must be employed by First Federal on the last day of
the Plan year and have completed 1,000 hours of service during the Plan year in
order to share in the allocation for the Plan year. Any dividends paid on
unallocated shares of SouthFirst Common Stock are to be used to repay the ESOP
loan; any dividends paid on shares of SouthFirst Common Stock allocated to
participant accounts will be credited to said accounts.

         Benefits under the ESOP vest at a rate of 20% per year of service, with
the first 20% vesting after the Participant has served for two years.
Participant's benefits also become fully vested upon the Participant's death,
disability, attainment of normal retirement age, or the termination of the ESOP.
For vesting purposes, a year of service means any Plan year in which an employee
completes at least 1,000 hours of service with First Federal. An employee's
years of service prior to the ESOP's effective date will be considered for
purposes of determining vesting under the ESOP.

         A participant who separates from service because of death, disability
or retirement will be entitled to receive an immediate distribution of his or
her benefits. A participant who separates from service for any other reason and
who is not re-employed by an employer will receive a lump sum distribution of
the vested portion of his account as soon as administratively feasible after his
date of termination, unless the participant elects a later distribution.
Distributions generally will be made in whole shares of SouthFirst Common Stock,
with the value of fractional shares being paid in cash. Although accounts
generally will be distributed in a lump sum, if the fair market value of a
participant's account is in excess of $500,000 as of the date distribution is
required to begin, distributions will be made in substantially equal annual
payments over a period not longer than five (5) years plus an additional one (1)
year (up to an additional five (5) years) for each $100,000 increment, or
fraction of such increment, by which the value of the participant's Account
exceeds $500,000.

         Pension & Benefit serves as the plan administrator and trustee of the
ESOP (the "ESOP Trustee"). Participants may vote the shares of SouthFirst Common
Stock that are allocated to their account. Any unallocated


                                       69
<PAGE>

shares of SouthFirst Common Stock and allocated shares of SouthFirst Common
Stock for which no timely direction is received are voted by the ESOP Trustee in
accordance with its fiduciary obligations.

DIVIDEND INCENTIVE PLAN

         SouthFirst, in November, 1995, adopted, by resolution of the Board of
Directors of SouthFirst, a dividend incentive plan (the "Dividend Incentive
Plan"), pursuant to which each director and/or employee in the SouthFirst
family, who holds options to purchase SouthFirst Common Stock under the Stock
Option Plans is paid an amount equal to the number of shares underlying the
stock options held by him or her, multiplied by the amount of dividends
SouthFirst pays to the holders of its Common Stock. If the service of an
employee or director is terminated prior to the full vesting of his or her stock
options, then the employee or director immediately forfeits, and must repay to
SouthFirst, all amounts received under the Dividend Incentive Plan with respect
to the non-vested options.

COMPENSATION OF DIRECTORS

         Each member of the First Federal Board of Directors receives a fee of
$915 for each board meeting attended (with one excused absence), and each
non-employee director of First Federal, if a member of a committee, receives
$500 for each committee meeting attended. The members of the SouthFirst Board of
Directors do not receive a fee for board meeting attendance.

         During fiscal 2001, each non-employee director was paid from $830 to
$4,940 under the Dividend Incentive Plan with respect to the shares of Common
Stock underlying the stock options held by him. Further, certain SouthFirst
directors, during fiscal 2001, received a cash dividend in the amount of $996
with respect to the restricted shares held by him, as granted under Management
Recognition Plans "A" and "B."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         SouthFirst presently does not have a compensation committee because no
officers of SouthFirst receive any compensation for services to SouthFirst. All
officers of SouthFirst are compensated by First Federal solely for their
services to First Federal. In addition, directors are paid for attendance at
First Federal committee meetings, but employee members of committees are not
paid. Joe K. McArthur, Chief Executive Officer of First Federal and SouthFirst,
and President of First Federal and J. Malcomb Massey, President of SouthFirst
and Pension & Benefit serve as members of the Wage and Compensation Committee of
First Federal. First Federal's Wage and Compensation Committee is responsible
for reviewing salaries and benefits of directors, officers, and employees of
First Federal. SouthFirst had no "interlocking" relationships existing at or
before the year ended September 30, 2001 in which (i) any executive officer is a
member of the board of directors/trustees of another entity, one of whose
executive officers is a member of the First Federal Board of Directors, or where
(ii) any executive officer is a member of the compensation committee of another
entity, one of whose executive officers is a member of the First Federal Board
of Directors.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information as of December 26,
2001 with respect to the beneficial ownership of SouthFirst's Common Stock by
(i) each person known by SouthFirst to own beneficially more than five percent
(5%) of SouthFirst Common Stock, (ii) each director of SouthFirst, (iii) each of
the Named Executive Officers (as defined at herein) and (iv) all directors and
executive officers of SouthFirst as a group. Unless otherwise indicated, each of
the stockholders has sole voting and investment power with respect to the shares
beneficially owned.



                                       70
<PAGE>

<TABLE>
<CAPTION>
                                                         Shares of
                                                        Common Stock                        Percent of
         Beneficial Owner                           Beneficially Owned(1)              Outstanding Shares(2)
         ----------------                           ---------------------              ---------------------
         <S>                                        <C>                                <C>
         Joe K. McArthur(3)                               36,734                               4.2%
         H. David Foote, Jr.(4)                           12,386                               1.4%
         J. Malcomb Massey(5)                             26,107                               3.0%
         Allen Gray McMillan, III(6)                      17,886                               2.1%
         Kenneth E. Easterling(7)                         22,576                               2.6%
         L. Neal Bice(8)                                  29,757                               3.5%
         Donald R. Hardy(9)                                  656                               0.1%
         Jeffrey L. Gendell, et. al.(10)                  87,700                              10.2%
         Robert J. Salmon and
            Mary Anne J. Salmon(11)                       47,600                               5.6%
         Pension & Benefit Financial
            Services, Inc.(12)                            66,400                               7.7%
         All directors and
            executive officers
            as a group (9 persons)                       153,243(13)                            17%
</TABLE>

-------------------

(1)      "Beneficial Ownership" includes shares for which an individual,
         directly or indirectly, has or shares voting or investment power or
         both and also includes options which are exercisable within sixty days
         of the date hereof. Beneficial ownership as reported in the above table
         has been determined in accordance with Rule 13d-3 of the Exchange Act.

(2)      The percentages are based upon 858,244 shares outstanding, except for
         certain parties who hold presently exercisable options to purchase
         shares. The percentages for those parties holding presently exercisable
         options are based upon the sum of 858,244 shares plus the number of
         shares subject to presently exercisable options held by them, as
         indicated in the following notes.

(3)      Of the amount shown, 1,500 shares are owned jointly by Mr. McArthur and
         his wife, 5,373 shares are held in his account under SouthFirst's
         401(k) Plan, 5,154 shares are held in his account under First Federal's
         ESOP, 19,395 shares are subject to presently exercisable options and
         5,312 shares represent restricted stock granted under SouthFirst's
         Management Recognition Plans "A" and "B," all of which are fully
         vested.

(4)      Of the amount shown, 3,000 shares are owned jointly by Mr. Foote and
         his wife, 1,500 shares are held by Mr. Foote as custodian for each of
         his two minor children, 6,226 shares are subject to presently
         exercisable options and 1,660 shares represent restricted stock granted
         under SouthFirst's Management Recognition Plan "A," all of which are
         fully vested.

 (5)     Of the amount shown, 15,521 shares are restricted stock acquired
         pursuant to that certain employment agreement between Mr. Massey and
         Benefit Financial, vesting in equal increments over a period of 15
         years beginning on April 11, 1997, 3,399 shares are held in a profit
         sharing account, and 2,234 shares are held in an Individual Retirement
         Account, and 1,058 shares are held in his account under First Federal's
         ESOP, 2,805 shares are subject to exercisable options, and 1,090 shares
         are owned jointly by Mr. Massey and his wife.

(6)      Of the amount shown, 10,000 shares are held jointly by Mr. McMillan and
         his wife, 6,226 shares are subject to presently exercisable options and
         1,660 shares represent restricted stock granted under SouthFirst's
         Management Recognition Plan "A," all of which are fully vested.

(7)      Of the amount shown, 19,499 shares are held jointly by Mr. Easterling
         and his wife, 1,001 shares are held individually by Mr. Easterling and
         2,076 shares are subject to exercisable options.

(8)      Of the amount shown, 13,332 shares are held by Mr. Bice, as the
         Executor of the Estate of H. D. Bice, his father, 14,349 are held
         individually by Mr. Bice and 2,076 shares are subject to exercisable
         options.



                                       71
<PAGE>

(9)      Of the amount shown, 200 shares are held jointly by Mr. Hardy and his
         wife and 456 shares are subject to exercisable options.

(10)     Of the amount shown, Jeffrey L. Gendell has shared voting power with
         respect to 87,700 shares, Tontine Management, L.L.C. ("TM") has shared
         voting power with respect to 87,700 shares, and Tontine Financial
         Partners, L.P. ("TFP") has shared voting power with respect to 87,700
         shares. TM, the general partner of TFP, has the power to direct the
         affairs of TFP. Mr. Gendell is the Managing Member of Tontine
         Management, L.L.C. and, in that capacity, directs its operations. The
         business address of Mr. Gendell and TFP is 200 Park Avenue, Suite 3900,
         New York, New York 10166. The foregoing information is based on a
         Schedule 13G, dated May 10, 2000 filed by Mr. Gendell, TM, and TFP.
         SouthFirst makes no representation as to the accuracy or completeness
         of the information reported.

(11)     Robert J. Salmon and Mary Anne J. Salmon beneficially own and have
         shared voting and dispositive power with respect to 47,600 shares. The
         foregoing information is based on a Schedule 13G, dated October 8, 1998
         received by SouthFirst from Mr. and Mrs. Salmon. Mr. and Mrs. Salmon's
         address is 3623 Raymond Street, Chevy Chase, Maryland, 20815.
         SouthFirst makes no representation as to the accuracy or completeness
         of the information reported therein.

(12)     These shares are held in trust by Pension & Benefit Financial Services,
         Inc as trustee of First Federal's ESOP. See "Employee Stock Ownership
         Plan."

(13)     Of the amount shown, 40,778 shares are subject to exercisable options.

         There are no arrangements known to SouthFirst pursuant to which a
change in control of SouthFirst would result.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         First Federal, like many financial institutions, has followed a policy
of granting various types of loans to officers, directors and employees. The
loans have been made in the ordinary course of business and on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with First Federal's other customers, and do
not involve more than the normal risk of collectibility, nor present other
unfavorable features. All loans by First Federal to its officers and executive
officers are subject to OTS regulations restricting loans and other transactions
with affiliated persons of First Federal. In addition, all future credit
transactions with such directors, officers and related interests of SouthFirst
and First Federal will be on substantially the same terms as, and following
credit underwriting procedures that are not less stringent than, those
prevailing at the time for comparable transactions with unaffiliated persons and
must be approved by a majority of the directors of SouthFirst, including a
majority of the disinterested directors. At September 30, 2001, the aggregate of
all loans by First Federal to its officers, directors, and related interests was
$1,026,000.



                                       72
<PAGE>


ITEM 13.   EXHIBITS

         The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference, from
SouthFirst's: Registration Statement on Form S-1 under the Securities Act of
1933 Registration No. 33-80730 ("1994 S-1"); Registration Statement on Form S-8
under the Securities Act of 1933, Registration No. 333-4534 ("Plan `A' S-8");
Registration Statement on From S-8 under the Securities Act of 1933,
Registration No. 333-4536 ("Plan `B' S-8"); Registration Statement on Form S-8,
Registration No. 333-4538 ("Option Plan S-8"); Registration Statement on Form
S-8, Registration No. 333-85705 ("Amended Option Plan S-8"); Annual Report on
Form 10-K for the year ended September 30, 1995 ("1995 10-K"); Annual Report on
Form 10-K for the year ended September 30, 1998 (1998 Form 10-K). Unless
otherwise indicated, the exhibit number corresponds to the exhibit number in the
referenced document.

<TABLE>
<CAPTION>
         Exhibit No.       Description of Exhibit

         <S>               <C>
             3.1*          Amended and Restated Certificate of Incorporation (1994 S-1).

             3.2*          Bylaws (1994 S-1, Exhibit 3.2).

             4*            Form of Common Stock Certificate (1994 S-1).

             10.1          Form of Employment Agreement between SouthFirst Bancshares, Inc.
                           and Joe K. McArthur.

             10.2          Form of Employment Agreement between First Federal of the South
                           and Joe K. McArthur.

             10.3          Form of Employment Agreement between First Federal of the South
                           and Sandra H. Stephens.

             10.4.1        Form of Employment Agreement between Pension & Benefit Financial Services, Inc.
                           and J. Malcomb Massey.

             10.4.2        Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc.,
                           First Federal of the South, Pension & Benefit Financial Services, Inc., and J. Malcomb Massey.

             10.5.1        Form of Employment Agreement between Pension & Benefit Financial Services, Inc.
                           and Ruth M. Roper.

             10.5.2        Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc.,
                           First Federal of the South, Pension & Benefit Financial Services, Inc., and Ruth M. Roper.

             10.6          Severance Agreement dated as of August 31, 2001 by and among SouthFirst Bancshares, Inc., First
                           Federal of the South and Donald C. Stroup.

             10.7*         Employment Agreement dated as of October 31, 1997 between First Federal of the South
                           and Bobby R. Cook (1997 Form 10-K).

             10.8.1 *      Form of Management Recognition Plan A (1994 S-1, Exhibit 10.5).

             10.8.2 *      Form of Management Recognition Plan A, as amended (1995 Form 10-K).

             10.8.3 *      Management Recognition Plan A Restated and Continued (Plan "A" S-8, Exhibit 4.1).

             10.9.1 *      Form of Management Recognition Plan B (1994 S-1, Exhibit 10.6).

             10.9.2 *      Form of Management Recognition Plan B, as amended (1995 Form 10-K).

             10.9.3 *      Management Recognition Plan B, Restated and Continued (Plan "B" S-8, Exhibit 4.1).

             10.10.1 *     Form of Stock Option and Incentive Plan (1994 S-1, Exhibit 10.7)  (1995 Form 10-K).
</TABLE>



                                       73
<PAGE>


<TABLE>
             <S>           <C>
             10.10.2 *     Form of Stock Option and Incentive Plan, as amended (1995 Form 10-K).

             10.10.3 *     From of Stock Option and Incentive Plan, Restated and Continued (Option Plan S-8, Exhibit 4.1).

             10.10.4 *     Form of Stock Option and Incentive Plan, as Amended (Amended Option Plan S-8)

             10.10.5*      Form of Incentive Stock Option Agreement (Option Plan S-8, Exhibit 4.2).

             10.10.6*      Form of Incentive Stock Option Agreement, as Amended (Amended Option Plan S-8)

             10.11.1*      Form of SouthFirst Bancshares, Inc. Employee Stock Ownership Plan (1994 S-1, Exhibit 10.8).

             10.11.2       Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership Plan executed
                           as of September 29, 2001.

             10.12 *       Deferred Compensation Agreement between First Federal of the South and Joe K. McArthur
                           (1995 Form 10-K).

             10.13 *       Deferred Compensation Agreement between First Federal of the South and Donald C. Stroup
                           (1995 Form 10-K).

             10.14         Deferred Compensation Agreement between Benefit Financial Services, Inc. and Ruth M. Roper.

             10.12*        Employment Agreement dated as of January 1, 1998 between First Federal of the South
                           and Jimmy C. Maples (1998 Form 10-K).

             11            Statement Regarding Computation of Per Share Earnings.

             21            Subsidiaries of Registrant.

             23.1          Consent of Jones and Kirkpatrick, P.C.

             99.1          Financial Statements of SouthFirst Bancshares, Inc. and subsidiaries.
</TABLE>


                                       74
<PAGE>


                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Sylacauga, State of Alabama, on the
31st day of December, 2001.

                                            SOUTHFIRST BANCSHARES, INC.


                                            By: /s/ Joe K. McArthur
                                                -------------------------------
                                                Joe K. McArthur
                                                Chief Executive Officer


         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.


<TABLE>
<CAPTION>
                       Signature                     Title                            Date
                       ---------                     -----                            ----
       <S>                                        <C>                                <C>
       /s/ Joe K. McArthur                        Chief Executive Officer
       ---------------------------------------    (principal executive officer)      December 31, 2001
       Joe K. McArthur

       /s/ Sandra H. Stephens                     Executive Vice President,
       ---------------------------------------    Chief Operating Officer,
       Sandra H. Stephens                         Secretary                          December 31, 2001

       /s/ Janice Browning                        Controller, Treasurer
       ---------------------------------------    (Principal Accounting
       Janice Browning                            Officer)                           December 31, 2001

       /s/ Allen Gray McMillan, III               Chairman and Director              December 31, 2001
       ---------------------------------------
       Allen Gray McMillan, III

       /s/ J. Malcomb Massey                      President and Director             December 31, 2001
       ---------------------------------------
       J. Malcomb Massey

       /s/ Kenneth E. Easterling                  Director                           December 31, 2001
       ---------------------------------------
       Kenneth E. Easterling

       /s/ H. David Foote, Jr.                    Director                           December 31, 2001
       ---------------------------------------
       H. David Foote, Jr.

       /s/ L. Neal Bice                           Director                           December 31, 2001
       ---------------------------------------
       L. Neal Bice

       /s/ Donald R. Hardy                        Director                           December 31, 2001
       ---------------------------------------
       Donald R. Hardy
</TABLE>



                                       75
<PAGE>

                           SOUTHFIRST BANCSHARES, INC.

EXHIBIT INDEX

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION OF EXHIBIT
<S>               <C>
10.1              Form of Employment Agreement between SouthFirst Bancshares, Inc. and Joe K. McArthur.

10.2              Form of Employment Agreement between First Federal of the South and Joe K. McArthur.

10.3              Form of Employment Agreement between First Federal of the South and Sandra H. Stephens.

10.4.1            Form of Employment Agreement between Pension & Benefit Financial Services, Inc. and
                  J. Malcomb Massey.

10.4.2            Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., First Federal of
                  the South, Pension & Benefit Financial Services, Inc., and J. Malcomb Massey.

10.5.1            Form of Employment Agreement between Pension & Benefit Financial Services, Inc. and
                  Ruth M. Roper.

10.5.2            Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc., First Federal
                  of the South, Pension & Benefit Financial Services, Inc., and Ruth M. Roper.

10.6              Severance Agreement dated as of August 31, 2001 by and among SouthFirst Bancshares, Inc.,
                  First Federal of the South and Donald C. Stroup.

10.11.2           Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership Plan executed
                  as of September 29, 2001.

10.14             Deferred Compensation Agreement between Benefit Financial Services, Inc. and Ruth M. Roper.

11                Statement Regarding Computation of Per Share Earnings.

21                Subsidiaries of Registrant.

23.1              Consent of Jones and Kirkpatrick, P.C.

99.1              Financial Statements of SouthFirst Bancshares, Inc. and subsidiaries.
</TABLE>




                                       76