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                       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, 2000

[ ]             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. [X]

         Issuer's Revenues for the fiscal year ended September 30, 2000:
$14,014,685

         The aggregate market value of the common equity held by non-affiliates
of the Registrant (716,488 shares), computed using the closing price as reported
on the American Stock Exchange for the Registrant's Common Stock on December 18,
was $6,985,758. 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, 2000: 928,568 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 2001 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 has recently organized, as a wholly-owned subsidiary,
SouthFirst Financial Services, Inc. ("SouthFirst Financial"), located in
Montgomery, Alabama, through which SouthFirst intends to provide 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.

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.


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         At September 30, 2000, First Federal conducted business from four
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.

         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 77,000 based on 1996 census
data as published by the U.S. Bureau of Vital Statistics. Chilton County and
Bibb County had populations of approximately 35,000 and 18,000, respectively,
based on 1996 CACI, Inc. estimates. 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


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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., Sullivan Graphics, Inc., Avondale Mills,
Russell Corporation, 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. Honda stated that the proposed plant
will be 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 is proposed to begin in
2002. 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 home of a
relatively-recent Mercedes-Benz manufacturing plant.

         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,
2000, First Federal had $58.6 million, or 54% 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, 2000, First Federal held approximately $37.9 million ARMs, which
represented approximately 34.9% 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


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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.

         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
and all other loans in excess of $250,000 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 45 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, 2000,
such loans amounted to $7.3 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 100% of the appraised value of the property, with the requirement that
private mortgage insurance be obtained. 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, 2000, committed construction loans
secured by single-family residential property totaled $36.8 million; of this
amount, approximately $12.5 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.


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         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.

         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, 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, 2000, 18 borrowers had construction loan commitments
from SouthFirst Mortgage in excess of $500,000 with the largest commitment being
$3,844,569. 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


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Mortgage and First Federal's Loan Committee. At September 30, 2000, there were
19 such renewal loans totaling $2,221,340.

         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.

         COMMERCIAL LENDING

         At September 30, 2000, commercial lending totaled $13.8 million, or
12.7%, 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, 2000,
consumer loans totaled $5.2 million, or 4.8% of First Federal's total loan
portfolio. This amount includes $1.1 million of loans secured by savings
accounts, $2.3 million of loans secured by vehicles, and $1.8 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. In addition, all one-to-four family loans in excess
of $250,000 must be approved by the Loan Committee. 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.


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         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.

         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 60 individuals on a full-time basis,
including 15 officers, and 5 individuals on a part-time basis. First Federal
will hire additional persons as needed, including additional tellers and
financial service representatives.


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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, 5500-C, or
5500-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, 2000, SouthFirst owned a 50% interest in Magnolia
Title Services, Inc. ("Magnolia"), a company which provides title insurance and
related services to borrowers and lenders. Magnolia has not been profitable
since its inception. 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.

         SOUTHFIRST FINANCIAL SERVICES, INC.

         SouthFirst Financial was incorporated on June 16, 2000, as the
wholly-owned subsidiary of SouthFirst. Through SouthFirst Financial, SouthFirst
intends to provide insurance products and other financial services to the
customers of First Federal and to others. At September 30, 2000, SouthFirst
Financial was not yet actively conducting business.


                                       -8-


<PAGE>   10


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 also 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 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.


                                       -9-


<PAGE>   11


         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 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."


                                      -10-


<PAGE>   12


         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 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.


                                      -11-


<PAGE>   13


         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 were 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 CAMEL 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 CAMEL 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.

         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 under capitalized. At September 30, 2000, First
Federal was "well capitalized." Failure to maintain that status could result in
greater regulatory oversight or restrictions on First Federal's activities.


                                      -12-


<PAGE>   14


         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, and (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, 2000,
First Federal's ratio of tangible and core capital to total adjusted assets was
9.14%.

         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, 2000, First Federal's ratio of total capital to total
risk-weighted assets was 16.02%.

         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 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.


                                      -13-


<PAGE>   15


         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, 2000.

         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%. However, under certain
circumstances, 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, 2000, 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 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.


                                      -14-


<PAGE>   16


         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 the
Company, will continue to have to file an application to receive the approval of
the OTS. These new regulations are more restrictive to the Company than
regulations being replaced based upon the Company'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 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,
2000, 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


                                      -15-


<PAGE>   17

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 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, 2000, 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 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 has received 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


                                      -16-


<PAGE>   18


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%); improved property (85.0%) and
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.

         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


                                      -17-


<PAGE>   19


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 comarable 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 other things, 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
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 diving the total by the number of days in
the quarter.

         Liquid assets for purposes of this computation include specified
short-term assets (e.g., cash, certain time deposits, certain banker's
acceptances and short-term U.S. Government, state, or federal agency
obligations), and long-term assets (e.g., U. S. Government obligations of more
than one and less than five years and state agency obligations maturing in two
years or less). The regulations governing liquidity requirements include, within
the definition of liquid assets, debt securities hedged with forward


                                      -18-


<PAGE>   20


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, 2000 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, 2000, First Federal had $35.8 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,
2000 and September 30, 1999, dividends were paid by the FHLB to First Federal in
the amount of $150,603 and $113,135, 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.

         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


                                      -19-


<PAGE>   21


effect of reducing the amount of the institution's interest-earning assets. At
September 30, 2000, 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,
2000.

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, 2000. The total
net book value of these properties at September 30, 2000 was approximately
$4,359,000.

<TABLE>
<CAPTION>
                                                                                       NET BOOK VALUE     DEPOSITS
                                                          LEASED                            AS OF           AS OF
                LOCATION                                 OR OWNED      DATE OPENED     SEPT. 30, 2000  SEPT. 30, 2000
                --------                                 --------      -----------     --------------  --------------
                                                                                               (In thousands)
<S>                                                      <C>           <C>             <C>              <C>
SOUTHFIRST AND FIRST FEDERAL
    MAIN OFFICE
         126 North Norton Avenue                          Owned         April 1966        $   694        $   43,839
         Sylacauga, Alabama 35150

FIRST FEDERAL
    BRANCH OFFICES
         301 West North Street                            Owned         April 1961            196        $   15,092
         Talladega, Alabama 35160

         102 Fifth Street North                           Owned         November            1,448        $   38,697
         Clanton, Alabama 35045                                         1997

         125 Olan Heights                                 Leased        November               --        $    7,735
         Shopping Center                                                1997
         Centreville, Alabama 35042

LOAN PRODUCTION OFFICE                                    Leased        April 1998            180                --
         BrightLeaf Court
         Suite 20
         25 Honeysuckle Rd
         Dothan, Alabama 36305

OFFICE/STORAGE BUILDING
         North Norton Avenue                              Owned         November              267                --
         Sylacauga, Alabama 35150                                       1995

SOUTHFIRST MORTGAGE, INC
         3055 Lorna Road                                  Leased        March 1994          1,257                --
         Birmingham, Alabama 35216

PENSION & BENEFIT
         260 Commerce Street                              Owned         April 1997            317                --
         Third Floor
         Montgomery, Alabama 36101

TOTAL                                                                                     $ 4,359        $  105,363
                                                                                          =======        ==========
</TABLE>





                                      -20-

<PAGE>   22


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 effect upon SouthFirst's or
First Federal's financial condition.

         Further, On January 19, 2000, 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, against First
Federal, SouthFirst and Donald C. Stroup, alleging wrongful termination of his
employment as President of the Western Division and other claims. On January 24,
2000, the employment of Mr. Cook was terminated for cause by the Board of
Director 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, as the sole shareholder of First
Federal. Management believes Mr. Cook's lawsuit to be without merit is
vigorously defending the case. Furthermore, Management has reviewed, and has
asserted against Mr. Cook, appropriate counterclaims for damages to First
Federal and SouthFirst. Mr. Cook continues to serve as a member of the Board of
Directors of SouthFirst.

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

         No matter was submitted during the fourth quarter ended September 30,
2000 to a vote of security holders of SouthFirst.


                                     PART II

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

         As of December 15, 2000, SouthFirst's Common Stock was held by
approximately 392 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, 1998 through September 30, 2000:

<TABLE>
<CAPTION>
                                                                                                          Cash
                                                                                                        Dividends
                                                                        High Sale        Low Sale       Declared(1)
                                                                        ---------        --------       ----------
    <S>                                                                 <C>               <C>           <C>
    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

    FISCAL YEAR ENDED SEPTEMBER 30, 1999
    First Quarter ended December 31, 1998                                 16 1/2           15 3/4         144,080
    Second Quarter ended March 31, 1999                                   16 1/8           12 5/8         144,228
    Third Quarter ended June 30, 1999                                     13 1/4           12             144,176
    Fourth Quarter ended September 30, 1999                               12 7/8           10 1/2         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."


                                      -21-

<PAGE>   23


         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, 2000. 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, 2000, net income decreased
$338,507, from $1,299,999 to $961,492. Earnings per common share was $1.06 and
$1.44 for the fiscal years ended September 30, 2000 and September 30, 1999,
respectively. The decrease in net income for 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 which had taken place in 1999. First Federal's net interest
income after provision for loan losses increased $1,241,160 (35.2%) during
fiscal 2000, from $3,529,584 to $4,770,744. This increase was attributable to an
increase of $659,042 in net interest income, resulting primarily from an
increase in the net interest margin, and a decrease in the provision for loan
losses of $582,118, from $587,690 to $5,572, the reasons for which are discussed
below under the heading "Provision for Loan Losses." Fee income received by
Pension & Benefit increased $77,884 (7.8%) during fiscal 2000, from $1,010,000
to 1,087,884. Other expenses decreased $531,737 (9.1%) from $5,831,116 to
$5,299,379 during fiscal 2000.

         For the fiscal year ended September 30, 1999, net income increased
$665,125, or 104.8%, to $1,299,999. Earnings per common share was $1.44 for the
fiscal year ended September 30, 1999. The increase in net income in fiscal 1999
was due primarily to a one time gain of approximately $2,265,000 realized on the
sale by First Federal of FHLMC stock. This was partially offset by an increase
of approximately $543,000 in provision for loan losses.

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

         NET INTEREST INCOME

         Net interest income was $4,776,000 for the twelve months ended
September 30, 2000, which represents an increase of $659,000 (16.0%) from fiscal
1999. Net interest income is the difference between the interest earned on
loans, investment securities and other earning assets and the interest cost


                                      -22-


<PAGE>   24


associated with deposits and borrowed funds. The increase in 2000 is primarily
due to an increase in the net interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities. For fiscal 2000, the net interest rate
spread increased 30 basis points as rates on interest earning assets increased
53 basis points from 7.37% to 7.90%, while rates on interest bearing liabilities
increased 23 basis points from 4.75% to 4.98%. During fiscal 2000, the average
balance of interest-earning assets increased from $142.2 million to $150.9 while
the average balance of interest-bearing liabilities increased from $134.2
million to 143.2 million. The combined effect of the changes in average balances
and the increase in the net interest rate spread resulted in the $659,000
increase in net interest income for fiscal 2000.

         Net interest income was $4,117,000 for the twelve months ended
September 30, 1999. This decrease of $416,000, or 9.2%, over the comparable
twelve months of 1998 is primarily the result of the increase in the average
balance of interest earning assets from $137.3 million to $142.2 million, with
the average balance of interest-bearing liabilities decreasing from $134.5
million to $134.2 million. The net interest rate spread decreased as rates on
interest-earning assets decreased seventy-one basis points to 7.37%, and the
cost of funds also decreased thirteen basis points, to 4.75%. The combined
effect of the changes in average balances and the changes in rates above
resulted in a decrease in net interest income.

         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. However, there can be no assurance
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,
                                -----------------------------------------------------------------------------------------
                                      2000 vs. 1999                1999 vs. 1998                    1998 vs. 1997
                                   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       $ 346     $ 204     $ 550     $(113)    $ (689)   $(802)    $ 1,265     $ 231     $ 1,496
    Loans receivable              278       603       881       531       (343)     188       2,669      (161)      2,508
                                -----     -----     -----     -----     ------    -----     -------     -----     -------
Total interest income             624       807      1431       418      (1032)    (614)      3,934        69       4,004
                                =====     =====     =====     =====     ======    =====     =======     =====     =======

Interest expense:
    NOW accounts                  (21)      (27)      (48)       23        (80)     (57)        124       (35)         89
    Money market demand            (1)       (1)       (2)       (1)        (1)      (2)         (3)       --          (3)
    Passbook savings              (33)      (20)      (53)       --        (35)     (35)        117       (40)         78
    Certificates of deposit
           other than Jumbos     (555)      (52)     (607)     (222)       139      (83)      2,404        54       2,458
    Jumbos                        167        12       179        92         58      150          30       (49)        (19)
    Borrowed funds               1165       138      1303        44       (215)    (171)        122        45         167
                                -----     -----     -----     -----     ------    -----     -------     -----     -------
Total interest expense           (722)       50       772       (64)      (134)    (198)      2,797       (26)      2,770
                                =====     =====     =====     =====     ======    =====     =======     =====     =======
Change in net interest          $ (98)    $ 757     $ 659     $ 482     $ (898)   $(416)    $ 1,137     $  95     $ 1,234
                                =====     =====     =====     =====     ======    =====     =======     =====     =======
    income
</TABLE>


                                      -23-


<PAGE>   25


         INTEREST INCOME

         Interest income is a function of both the volume of interest earning
assets and their related yields. Interest income was $11,915,000, 10,484,000 and
$11,098,000 for the twelve months ended September 30, 2000, September 30, 1999,
and September 30, 1998, respectively. Average interest earning assets increased
8,682,000 (6.1%) during 2000, increased $4,821,000 (3.5%) during 1999, and
$49,735,000 (56.7%) during 1998. The 2000 yield increased, primarily due to
rates on residential construction loans increasing during the year, while the
1999 yield decreased from the 1998 yield reflecting the declining interest rate
environment during that period. Interest and fees on loans were $9,342,000,
$8,461,000 and $8,273,000 for the twelve months ended September 30, 2000,
September 30, 1999, and September 30, 1998, respectively. 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. The increase in average loans receivable in 1998 was largely due
to the acquisition of Chilton county plus the strong loan demand in 1998 as a
result of lower interest rates. Interest and fees on loans during 1999 increased
$188,000 (2.3%) compared to 1998.

         Interest income on total investment securities, including those held to
maturity and those available for sale, increased $550,000 (27.2%) to $2,573,000
in 2000. The average balance outstanding of investment securities, including
those held to maturity and those available for sale, 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 total investment securities were 6.26% in 2000 and 5.82% in
1999. Interest income on total investment securities, including those held to
maturity and those available for sale, decreased $802,000 (28.4%) to $2,023,000
in 1999. This decrease in interest income in 1999 was largely due to the lower
interest rates combined with lower balances.

         INTEREST EXPENSE

         Total average interest-bearing liabilities were $143,213,000,
$134,177,000 and $134,503,000 for fiscal years 2000, 1999 and 1998,
respectively. Interest bearing liabilities increased by $9,036,000 (6.7%),
decreased by $326,000 (0.24%) in 1999 and increased by $56,964,000 (73.5%) for
1998. The rates paid on these liabilities increased 23 basis points to 4.98% in
2000, decreased 13 basis points to 4.75% in 1999 and decreased 2 basis points to
4.88% in 1998. Total interest expense was $7,139,000 for 2000, $6,367,000 for
1999, $6,565,000 for 1998, which represented an increase of $772,000 (12.1%), a
decrease of $198,000 (3.02%) and an increase of $2,764,000 (72.7%) during 2000,
1999 and 1998, respectively. 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. The increase in 1998 resulted from the additional
interest-bearing liabilities associated with the acquisition of the Chilton
County and an increase in the cost funds.

         Interest on deposits, the primary component of total interest expense,
decreased to $4,858,000 in 2000, while interest on deposits decreased to
$5,399,000 in 1999 from $5,416,000 in 1998. The average balance of
interest-bearing deposits decreased to $105,088,000 in 2000 from $115,533,000 in
1999 as a result of certificates of deposit seeking higher yields. The average
balance of interest-bearing deposits decreased to $115,533,000 in 1999 from
$116,692,000 in 1998.

         Interest expense on borrowed funds, including both short-term and other
borrowed funds, was $2,281,000, $977,000 and $1,149,000 for fiscal 2000, 1999
and 1998, respectively. 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 increase in 1998 was due to the Chilton County acquisition as well as
FHLB advances to fund loan growth during the year. The average balance of FHLB
advances outstanding was $34,861,000 for 2000, $17,596,123 for 1999 and
$16,379,738 for 1998. The average balance of borrowed funds outstanding was
$38,125,000 for 2000, $18,644,000 for 1999 and $17,810,000 for 1998.


                                      -24-


<PAGE>   26



         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 $5,572, $587,690
and $44,744 for fiscal 2000, 1999, and 1998, respectively. The amount of the
provision for loan losses for fiscal 1999 is primarily the result of an
additional provisions for loan losses in an amount of $451,593. These provisions
for loan losses is 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 of the First Federal's Western Division. The
remainder of the provisions for loan losses was primarily a result of
management's determination to increase the loan loss reserves relating to First
Federal's residential construction loan portfolio to 1% of the aggregate amount
of its construction loans outstanding, which provisions management believes
correctly reflects the risks in First Federal's construction loan portfolio.

         This addition to 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 and hiring the loan officer who originated and managed
the portfolio. 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 in 1998 to approximately $468,000, due, in
significant part, to the previously mentioned loan quality problems occurring in
the Western Division of First Federal. Management believes the allowances for
loan losses at September 30, 2000 ($700,620) to be at an adequate level relative
to the total loan portfolio and to nonperforming loans, and in light of the
other factors which are relevant to the assessment of risks in the loan
portfolio.

         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 an analysis of
information available at the time of their review.

         OTHER INCOME

         Other income decreased $2,318,000 (52.5%) in 2000, from $4,418,000 in
1999. Other income increased $2,672,000 (153.2%) in 1999, from $1,745,000 in
1998. 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.
Also, fee income from Pension & Benefit increased approximately $78,000 to
$1,087,000 during 2000, and had increased in 1999 by approximately $251,000 to
$1,010,000 from $759,000 in 1998. These increases


                                      -25-


<PAGE>   27


in fee income are results of the acquisition of Pension & Benefit in the third
fiscal quarter of 1997 and in Pension & Benefit subsequently receiving limited
trust powers and successfully being able to generate additional sources of fee
income.

         Service charges and other fees were $440,000, $502,000, and $466,000 in
fiscal 2000, 1999, and 1998, respectively. The fluctuations are primarily due to
changes in overdraft fees and NSF charges.

         Gain on sale of loans decreased $130,000 (29.5%) in 2000, increased
$203,000 (85.1%) in 1999, and $94,000 (64.8%) in 1998. 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. These increases were due to the
increased volume of loans sold relative to prior years. Proceeds from sales of
loans increased by $11,680,000 (99.5%) to $23,424,000 in 1999, $7,113,000
(153.6%) to $11,743,000 in 1998.

         OTHER EXPENSE

         Total other expense decreased to $5,299,000 in 2000 from $5,831,000 in
1999. Other expense had increased in 1999 from $5,210,000 in 1998. This
represented a decrease of $532,000 (9.1%) in 2000, and increases of $621,000
(11.9%) and $1,651,000 (46.2%) in 1999 and 1998, respectively.

         Compensation and benefits totaled $2,901,000, $3,268,000, and
$3,128,000 for 2000, 1999, and 1998, respectively. These levels reflect a
decrease of $367,000 (11.2%) in 2000, an increase of $140,000 (4.5%) in 1999,
and in increase of $1,033,000 (49.3%) in 1998. The decrease in 2000 is the
result of streamlining operations and the reduction of employees through
attrition. The increase in 1999 is attributable to merit and cost-of-living
raises and the cost of benefits associated with such increases. The increase in
1998 was primarily a result of the increased number of First Federal employees
following the acquisition of Chilton County and Pension & Benefit. The increase
in 1998 can also be attributed to merit and cost-of-living raises and the cost
of benefits associated with such increases.

         "Other" non-interest expense was $555,000, $510,000, and $459,000 for
2000, 1999 and 1998, respectively. These levels correspond to an increase of
8.8% in 2000, and an increase of 11.0% in 1999. The increases in "other"
expenses in 2000 and 1999 were primarily attributable to increased costs
associated with various other operating expenses. The increase in 1998 was due
to increased costs and other operating expenses as a result of the acquisition
of Chilton County.

         INCOME TAX EXPENSE

         Income tax expense was $609,000, $816,000, $388,000 for fiscal years
2000, 1999, and 1998, respectively. These levels represent an effective tax rate
on pre-tax earnings of 38% for each of the fiscal years ended September 30,
2000, September 30, 1999 and September 30, 1998. For 2000, 1999 and 1998, 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 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 position and measure those instruments
at fair value. In June 1999, the FASB issued SAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133. This statement encourages earlier application, but
delays the effective date of Statement No. 133 from fiscal quarters of all
fiscal years beginning after June 15, 1999 to fiscal quarters of all fiscal
years beginning after June 15, 2000. In accordance with the new


                                      -26-
<PAGE>   28


standard, management will continue to evaluate the impact and defer
implementation as the standard allows.

         In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
The statement revises the standards for accounting for securitization and other
transfers of financial assets and collateral, and requires certain disclosures.
This statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The statement is to be applied prospectively with
certain exceptions. Other than those exceptions, earlier or retroactive
application of its accounting provisions is not permitted. Based on the
Company's current operating activities, management does not believe that future
adoption of this statement will have a material impact on the presentation of
the Company's financial condition or results of operations.

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, 2000, First Federal had a negative one-year cumulative ratio of
(16.46%) and a five-year cumulative ratio of 6.16%, 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, 1999, First
Federal had a negative one-year cumulative ratio of (17.02%) and a positive
five-year cumulative ratio of 1.49%. 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 $32.3 million and $32.7 million (30.3% and 30.2% of First Federal's
total loan portfolio) of adjustable rate loans at September 30, 2000 and
September 30, 1999, respectively. These loans have restrictions limiting
interest rate changes to 1.0%


                                      -27-


<PAGE>   29


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 Morgan Keegan & Company, Inc. (the "Morgan Keegan Analysis") in
order to assist First Federal in determining First Federal's gap and interest
rate position. Through use of the Morgan Keegan 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, 2000 and September
30, 1999. At a 300 basis point increase, First Federal's MVPE decreased
approximately $4,383,000 and decreased $2,939,800 at September 30, 2000 and
September 30, 1999, respectively, and, at a 300 basis point decrease, First
Federal's MVPE increased approximately $5,772,900 and increased $3,557,600 at
September 30, 2000 and September 30, 1999, respectively. Management determined
that these changes in MVPE were acceptable.

         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, 2000 and September 30, 1999. 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]


                                      -28-


<PAGE>   30

                         INTEREST RATE SENSITIVITY GAP


<TABLE>
<CAPTION>

                                                                         At September 30, 2000
                                     --------------------------------------------------------------------------------------------

                                      One year       One to        Two to       Three to      Four to        Over
                                      or less       two years    three years   four years    five years   five years      Total
                                     ---------      ---------    -----------   ----------    ----------   ----------    ---------
                                                                             (In Thousands)
<S>                                  <C>            <C>           <C>           <C>           <C>           <C>         <C>
Interest-earning assets:
 Mortgage loans                      $  59,551      $  7,758      $  7,230      $  6,650      $  4,554      $ 9,165     $  94,908
 All other loans                         2,488         2,430         2,377         2,330         2,287           --        11,912
 Collateralized mortgage
   obligations                          13,602            --            --            --            --           --        13,602
 Mortgage-backed securities              1,823         1,016           957           902           850        4,548        10,096
 Investments(1)                          4,138                       3,000         1,593         4,555        6,732        20,018
                                     ---------      --------      --------      --------      --------      -------     ---------
   Total interest earning assets     $  81,602      $ 11,204      $ 13,564      $ 11,475      $ 12,246      $20,445     $ 150,536
                                     =========      ========      ========      ========      ========      =======     =========

Interest-bearing liabilities:
 Deposits                               67,486        11,412         3,924           388         2,932       16,230       102,372
 Borrowed funds                         38,889                                                                             38,889
                                     ---------      --------      --------      --------      --------      -------     ---------
    Total interest bearing
      liabilities                    $ 106,375      $ 11,412      $  3,924      $    388      $  2,932      $16,230     $ 141,261
                                     =========      ========      ========      ========      ========      =======     =========

Interest sensitivity gap             $ (24,773)     $   (208)     $  9,640      $ 11,087      $  9,314      $(4,215)    $   9,275

Cumulative interest
 sensitivity gap                     $ (24,773)     $(24,981)     $(15,341)     $ (4,254)     $  5,060      $ 9,275             0

Ratio of cumulative interest
 sensitivity gap to total interest
 earning assets                         (16.46)%      (16.59)%      (10.19)%       (2.82)%        3.36%        6.16%            0
Ratio of cumulative interest
 sensitivity gap to total assets
 of $160,506                            (15.43)%      (15.56)%       (9.56)%       (2.65)%        3.15%        5.78%            0

<CAPTION>
                                                                         At September 30, 1999
                                     --------------------------------------------------------------------------------------------
                                      One year       One to        Two to       Three to      Four to        Over
                                      or less       two years    three years   four years    five years   five years      Total
                                     ---------      ---------    -----------   ----------    ----------   ----------    ---------
                                                                             (In Thousands)
<S>                                  <C>            <C>           <C>           <C>           <C>         <C>         <C>

Interest-earning assets:
 Mortgage loans                      $  54,978      $  8,882      $  8,261      $  7,714      $ 6,381     $11,530     $ 97,746
 All other loans                         2,620         1,749         1,672         1,648          545          --        8,234
 Collateralized mortgage
   obligations                          13,252            --            --            --           --          --       13,252
 Mortgage-backed securities              2,994         1,273         1,142         1,095        1,050       4,731       12,285
 Investments(1)                          2,034            --           500         2,593        6,055       3,000       14,182
                                     ---------      --------      --------      --------      -------     -------     --------
   Total interest earning assets     $  75,878      $ 11,904      $ 11,575      $ 13,050      $14,031     $19,261     $145,699
                                     =========      ========      ========      ========      =======     =======     ========

Interest-bearing liabilities:
 Deposits                               76,168        15,855         3,022           595          265      18,818      114,723
 Borrowed funds                         24,507           297                                    4,000                   28,804
                                     ---------      --------      --------      --------      -------     -------     --------
    Total interest bearing
      liabilities                    $ 100,675      $ 16,152      $  3,022      $    595      $ 4,265     $18,818     $143,527
                                     =========      ========      ========      ========      =======     =======     ========

Interest sensitivity gap             $ (24,797)     $ (4,248)     $  8,553      $ 12,455      $ 9,766      $  443     $ 2,172

Cumulative interest
 sensitivity gap                     $ (24,797)     $(29,045)     $(20,492)     $ (8,037)     $ 1,729      $2,172     $      0

Ratio of cumulative interest
 sensitivity gap to total interest
 earning assets                         (17.02)%      (19.93)%      (14.06)%       (5.52)%       1.19%       1.49%           0
Ratio of cumulative interest
 sensitivity gap to total assets
 of $160,506                            (15.95)%      (18.07)%      (12.74)%       (4.98)%       1.10%       1.38%           0
</TABLE>

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


                                      -29-


<PAGE>   31

         The Morgan Keegan Analysis for 2000 and 1999 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 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 12% to 18%. The decay rates for money market demand accounts are assumed to
be 33% for the first year and 18% thereafter. The decay rates for passbook
accounts are assumed to be 56% for the first year and 10% thereafter and the
decay rates for NOW accounts are assumed to be 18% for the first year and 33%
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 $28,989,000 at September 30, 2000 and $28,691,000 at
September 30, 1999. 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.

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.


                                      -30-
<PAGE>   32

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.

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                                      -31-
<PAGE>   33

                   AVERAGE BALANCE, INTEREST, YIELDS AND RATES

<TABLE>
<CAPTION>
                                                                      Year ended September 30,
                                       ----------------------------------------------------------------------------------------
                                                         2000                                            1999
                                       -----------------------------------------    -------------------------------------------

                                          Average                                      Average
                                       -------------                     Yield/     -------------                       Yield/
                                          Balance          Interest       Cost         Balance          Interest         Cost
                                       -------------     ------------    ------     -------------     ------------     --------
<S>                                    <C>               <C>             <C>        <C>               <C>              <C>
INTEREST EARNING ASSETS:
   Interest earnings deposited
       In other Financial Institutions $   1,171,156     $    138,758
   Total investment securities            38,891,644        2,433,984      6.26%    $  34,679,305     $  2,023,243      5.83%
   Loans receivable                      110,789,666        9,342,440      8.43%      107,491,039        8,460,854      7.87%
                                       -------------     ------------    ------     -------------     ------------    ------
TOTAL INTEREST EARNING ASSETS          $ 150,852,466     $ 11,915,182      7.90%    $ 142,170,344     $ 10,484,097      7.37%

   Allowance for loan losses                (736,726)                                    (648,011)
   Cash and amounts due from
       depository institutions         $   4,404,043                                $   5,831,483
   Premises and equipment                  5,054,685                                    5,091,035
   Foreclosed real estate                    383,862                                      497,565
   Accrued interest receivable             1,055,087                                      957,191
   Other assets                            1,714,340                                    1,781,940
   Investments in Affiliates                  14,006                                      138,089
                                       -------------                                -------------
 TOTAL ASSETS                          $ 162,741,763                                $ 155,819,636
                                       =============                                =============

INTEREST BEARING LIABILITIES:
   Deposits:
      NOW accounts                     $  10,581,025     $    175,539      1.66%    $  11,879,338     $    224,338      1.89%
      Money market demand                    219,418            3,371      1.54%          297,113            5,471      1.84%
       Statement savings                  12,476,710          240,270      1.93%       14,185,017          292,846      2.06%
      Certificates of deposit,
        other than Jumbos                 75,020,005        4,050,687      5.40%       85,308,830        4,657,951      5.46%
      Jumbos                               6,790,810          388,441      5.72%        3,862,585          208,938      5.41%
                                       -------------     ------------    ------     -------------     ------------    ------
TOTAL INTEREST-BEARING DEPOSITS        $ 105,087,968     $  4,858,308      4.62%    $ 115,532,883     $  5,389,544      4.66%
   Borrowed funds                         38,124,848        2,280,558      5.98%       18,644,068          977,279      5.24%
                                       -------------     -------------   ------     -------------     ------------    ------
TOTAL INTEREST-BEARING LIABILITIES     $ 143,212,816     $  7,138,866      4.98%    $ 134,176,951     $  6,366,823      4.75%
Non-interest bearing demand
accounts                                   3,128,850                                    3,266,569
Advances by borrowers for
   property taxes                            323,424                                      322,996
Accrued interest payable                   1,113,935                                    1,042,165
Income taxes payable                         111,491                                    1,274,069
Accrued expenses and other
   liabilities                               495,292                                      404,940
                                       -------------                                -------------
   TOTAL LIABILITIES                   $ 148,385,808                                $ 140,487,690
Stockholders' equity                      14,355,955                                   15,331,946
                                       -------------                                -------------
TOTAL LIABILITIES & STOCKHOLDERS'
   EQUITY                              $ 162,741,763                                $ 155,819,636
                                       =============                                =============

Net interest income                                      $  4,776,316                                 $  4,117,275
                                                         ============                                 ============
Interest rate spread                                                       2.91%                                        2.63%
                                                                         ======                                       ======
Net yield on total interest earning
    assets                                                                 3.17%                                        2.90%
                                                                         ======                                       ======
Average interest-earning assets to
   average total interest-bearing
   liabilities ratio                                                     105.33%                                      105.96%
                                                                         ======                                       ======

<CAPTION>

                                                           Year ended September 30,
                                             ----------------------------------------------------
                                                                     1998
                                             ----------------------------------------------------

                                                 Average
                                             --------------                             Yield/
                                                 Balance          Interest               Cost
                                             --------------     -------------         -----------
<S>                                          <C>                <C>                   <C>
INTEREST EARNING ASSETS:
   Interest earnings deposited
       In other Financial Institutions        $  36,608,820     $ 2,825,283             7.72%
   Total investment securities                  100,740,509       8,272,834             8.21%
   Loans receivable                           -------------     -----------          -------
                                              $ 137,349,329     $11,098,117             8.08%
TOTAL INTEREST EARNING ASSETS
                                                   (761,418)
   Allowance for loan losses
   Cash and amounts due from                  $  13,521,914
       depository institutions                    3,243,193
   Premises and equipment                            79,991
   Foreclosed real estate                           992,932
   Accrued interest receivable                    2,870,586
   Other assets                                     143,373
   Investments in Affiliates                  -------------
                                              $ 157,439,900
 TOTAL ASSETS                                 =============


INTEREST BEARING LIABILITIES:
   Deposits:
      NOW accounts                            $  10,661,585     $   281,676             2.64%
      Money market demand                           331,268           6,676             2.02%
       Statement savings                         14,163,764         327,840             2.31%
      Certificates of deposit,
        other than Jumbos                        89,379,909       4,741,697             5.31%
      Jumbos                                      2,155,655          58,240             2.70%
                                              -------------     -----------          -------
TOTAL INTEREST-BEARING DEPOSITS               $ 116,692,181     $ 5,416,129             4.64%
   Borrowed funds                                17,810,529       1,148,782             6.45%

TOTAL INTEREST-BEARING LIABILITIES              134,502,710     $ 6,564,911             4.88%
Non-interest bearing demand
accounts                                          3,183,937
Advances by borrowers for
   property taxes                                   341,284
Accrued interest payable                            813,599
Income taxes payable                              1,366,979
Accrued expenses and other
   liabilities                                    1,214,852
                                              -------------
   TOTAL LIABILITIES                          $ 141,423,361
Stockholders' equity                             16,016,540
                                              -------------
TOTAL LIABILITIES & STOCKHOLDERS'
   EQUITY                                     $ 157,439,900
                                              =============


Net interest income                                             $ 4,533,206
                                                                ===========
Interest rate spread                                                                    3.20%
                                                                                     =======
Net yield on total interest earning
    assets                                                                              3.30%
                                                                                     =======
Average interest-earning assets to
   average total interest-bearing
   liabilities ratio                                                                  102.12%
                                                                                     =======

</TABLE>


<PAGE>   34

FINANCIAL CONDITION

         INVESTMENT SECURITIES

         Investment securities held to maturity were $0, $29,000 and $590,000 at
September 30, 2000, September 30, 1999 and September 30, 1998, respectively. The
decrease of $561,000 in 1999 was the result of principal repayments and
scheduled maturities. First Federal's portfolio of investment securities
available for sale totaled $38,327,000 and $39,313,000 at September 30, 2000 and
September 30, 1999, 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, 2000, 1999 and 1998 were $1,938,438, $17,884,113
and $15,292,000, respectively. As of September 30, 2000, First Federal had an
investment in U.S. Government agencies of $8,901,000 compared to $8,915,000 as
of September 30, 1999. At September 30, 2000, First Federal had investments of
approximately $5,728,000 in equity securities such as FHLB stock, other Common
Stock, mutual funds and U.S. Treasuries. 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 will result in higher investment
yields.

              [The remainder of this page intentionally left blank]



                                      -33-
<PAGE>   35

         The following table indicates the amortized cost of the portfolio of
investment securities held to maturity at September 30, 2000, September 30, 1999
and September 30, 1998:

<TABLE>
<CAPTION>
                                                       AMORTIZED COST
                                                        SEPTEMBER 30
                                             2000           1999           1998
                                          ----------     ----------     -----------
                                                       (IN THOUSANDS)
<S>                                       <C>            <C>            <C>
Investments Securities HTM:
   U.S. Government Agency                         --             --            499
   Mortgage Backed Securities                     --             29             90
   Collateralized Mortgage Obligations            --             --             --
   Other                                          --             --
                                          ----------     ----------     ----------
TOTAL INVESTMENT SECURITIES                        0             29            589
HELD TO MATURITY                          ==========     ==========     ==========
</TABLE>

         The following table indicates the fair value of the portfolio of
investment securities available for sale at September 30, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                 TOTAL FAIR VALUE
                                  (IN THOUSANDS)
<S>                                         <C>            <C>            <C>
Investment Securities AFS:

U.S. Government Agency                         8,901          8,915          1,101
Mortgage-backed securities                    10,096         11,979         26,538
Collateralized mortgage obligations           13,602         13,232          4,331
Other                                          5,728          5,187          4,854
                                            --------       --------       --------

   TOTAL INVESTMENT SECURITIES AFS            38,327         39,313         36,824
                                            ========       ========       ========
</TABLE>


         At September 30, 2000, First Federal owned CMOs totaling $13,602,000.
These securities were all backed by federal agency guaranteed mortgages except
for two issues, in the aggregate amount of $75,880, which are privately issued
mortgage pass-through certificates. All CMO's presently owned are variable rate
instruments.

         The mortgage-backed securities portfolio, totaling $10,096,000 at
September 30, 2000, consists of fixed rate mortgages in the amount of $9,085,000
and ARMs in the amount of $1,011,000. 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.

              [The remainder of this page intentionally left blank]


                                      -34-
<PAGE>   36

         The following tables present the contractual maturities and weighted
average yields of investment securities, other than equity securities, available
for sale at September 30, 2000:

<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                       --               8,901               --              --
Mortgage-backed securities                       --               1,141            5,416           3,539
Collateralized mortgage obligations              --                  --            2,329          11,273
U.S. Treasuries                                  --                  --            2,760              --
Other securities                                 --                  --               --              --

       TOTAL INVESTMENT SECURITIES               --              10,042           10,505          14,812
           AVAILABLE FOR SALE
</TABLE>

<TABLE>
<CAPTION>
                                                                WEIGHTED AVERAGE YIELDS
                                                               (TAXABLE-EQUIVALENT BASIS)
                                                                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                       --               5.93%            5.30%            --
Mortgage-backed securities                       --               6.51%            6.05%          7.47%
Collateralized mortgage obligations              --                 --             6.56%          7.83%
Other securities                                 --                 --               --             --
      TOTAL WEIGHTED AVERAGE YIELD               --               6.00%            5.80%          7.75%
</TABLE>

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


              [The remainder of this page intentionally left blank]


                                      -35-
<PAGE>   37

         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 prepayments 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, 2000.

         PRINCIPAL PAYMENTS EXPECTED DURING THE YEAR ENDED SEPTEMBER 30
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                                   Weighted
                                                                                       Carrying       Fair         Average
                            2001     2002     2003     2004     2005    Thereafter       Value        Value         Yield
                           -----    -----    -----    -----    -----    ----------    ----------    ---------     ---------
<S>                        <C>      <C>      <C>      <C>      <C>      <C>           <C>           <C>           <C>
Collateralized Mortgage
Obligations                   51       65      537      631      511      11,696        13,668        13,602         7.61%

Mortgage-backed
Securities                 1,165    1,012      866    1,299      574       5,418        10,402        10,096         6.60%

Agencies                      --      500    2,593    6,055       --          --         9,120         8,901         5.93%

U.S. Treasuries               --       --       --       --       --       3,000         2,896         2,760         5.30%
</TABLE>

LOANS

         Total loans of $108,354,000 at September 30, 2000 reflected an increase
of $2,042,000 (1.9%) compared to September 30, 1999. Total loans of $106,312,000
at September 30, 1999 reflected an increase of 1.6% from total loans of
$104,590,000 at September 30, 1998. 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 increased $20,384,000
(38.6%) from September 30, 1997 to September 30, 1998 due to the acquisition of
First Federal of Chilton County. There was a decrease from September 30, 1998 to
September 30, 1999 of $7,602,000 (10.4%), and a decrease of $7,042,000 (10.7%)
from September 30, 1999 to September 30, 2000. 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
$15,092,000, $23,424,000 and $11,743,000 for the years ended September 30, 2000,
1999 and 1998, 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 rising interest rate market for
much of 2000 and 1999 resulted in a decrease in volume of loans sold during this
period. The following table presents the composition of the loan portfolio for
each of the past five years:


                                      -36-
<PAGE>   38

<TABLE>
<CAPTION>
                                                                 Loan Portfolio Composition
                                                                     At September 30,
                              ------------------------------------------------------------------------------------------------------
                                                                      (In thousands)
                                 2000                  1999                 1998                 1997              1996
                              ---------             ---------            ---------             --------           -------
                                           Percent               Percent             Percent             Percent            Percent
                               Amount      of Total  Amount     of Total  Amount     of Total   Amount  of Total   Amount   of Total
                              ---------   --------- ---------   -------- ---------   --------  -------- --------  -------   --------
<S>                           <C>         <C>       <C>         <C>      <C>         <C>       <C>      <C>       <C>       <C>
Real estate mortgage loan:
   One-to four family         $  58,595    54.08%   $  65,637   61.74%   $  73,239    70.02%   $ 52,855   73.74%  $ 47,981   76.89%
   Multi-family and
commercial                       13,790    12.73%       8,330    7.84%       1,837     1.76%        390    0.54%       485    0.78%
   Construction loans            36,800    33,96%      26,222   24.67%      20,833    19.92%     22,880   31.92%    17.717   28.39%
Savings account loans             1,097     1.01%       1,267    1.19%       1,988     1.90%        826    1.15%       753    1.21%
Installment loans                 4,089     3.77%       5,616    5.28%       7,593     7.26%      2,044    2.85%     2,129    3.41%
Second mortgage loans             7,334     6.77%       9,046    8.51%       6,216     5.94%
                              ---------             ---------            ---------             --------           --------
   Total loans                $ 121,705             $ 116,118            $ 111,706             $ 78,995           $ 69,065
                              =========             =========            =========             ========           ========

Less:
   Loans in process             (12,458)  -11.50%       (8712)  -8.19%      (6,102)    5.83%     (6,778)  -9.46%    (6,195)  -9.93%
   Discounts and other, net        (192)   -0.18%        (242)  -0.23%        (282)   -0.27%       (251)  -0.35%      (217)  -0.35%
   Allowance for loan losses       (701)   -0.65%        (852)  -0.81%        (732)   -0.70%       (284)  -0.40%      (251)  -0.40%
                              ---------   ------    ---------  ------                ------    --------  ------   --------  ------
   Total loans, net           $ 108,354   100.00%   $ 106,312  100.00%   $ 104,590   100.00%   $ 71,682  100.00%  $ 62,402  100.00%
                              =========             =========            =========             ========           ========
</TABLE>



         The following table shows the maturity of First Federal's loan
portfolio at September 30, 2000, 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,
2000. The table below does not include an estimate of prepayments, the
occurrence of which would significantly shortens the average life of all
mortgage loans and causes 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
                                2001      2002      2003     3-5 years    5-10 years   10-15 years    15 years    Total
                              -------    ------    ------    ---------    ----------   -----------    ---------  --------
                                                                 (In thousands)
<S>                           <C>        <C>       <C>       <C>          <C>          <C>            <C>        <C>
Real estate mortgage loans    $   956    $  911    $  669      $2,091      $12,718       $19,387      $20,725    $ 57,457
Construction loans             22,806        --        --          --           --            --          142      22,948
Business loans                  2,253       712     1,030       1,794          871         1,746        3,494      11,900
All other loans                 3,789     3,480     2,514       3,761        1,947           558           --      16,049
                              -------    ------    ------      ------      -------       -------      -------    --------
     Total                    $29,804    $5,103    $4,213      $7,646      $15,536       $21,691      $24,361    $108,354
                              =======    ======    ======      ======      =======       =======      =======    ========
</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.


                                      -37-
<PAGE>   39

         The following tables set forth, at September 30, 2000 and September 30,
1999, the dollar amount of loans due after September 30, 2000 and September 30,
1999, respectively, based upon whether such loans have fixed interest rates or
adjustable interest rates:

<TABLE>
<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
                                            ========         ========     ========

<CAPTION>

                                                              1999
                                            --------------------------------------
                                              Fixed       Floating or
                                              Rates     Adjustable Rate    Total
                                            --------    ---------------   --------
Real estate mortgage loans                  $ 32,633       $ 32,255       $ 64,888
Commercial loans                               6,440          1,880          8,320
Construction loans                            17,509              0         17,509
Savings and installments loans                15,595              0         15,595
                                            --------       --------       --------
   Total                                    $ 72,177       $ 34,135       $106,312
                                            ========       ========       ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                              Year ended September 30,
                                                         ---------------------------------
                                                          2000         1999          1998
                                                         -------      -------      -------
                                                                  (In thousands)
<S>                                                      <C>          <C>          <C>
Loan Originations:
     Real estate mortgage loans .....................    $68,671      $76,383      $61,629
     All other loans ................................      5,457        7,012        7,820
                                                         -------      -------      -------
        Total .......................................    $74,128      $83,395      $69,449
                                                         =======      =======      =======
Portfolio Loan Purchases:
     Real estate mortgage loans .....................    $     0      $     0      $     0
                                                         =======      =======      =======
Portfolio Loan Sales Proceeds:
     Real estate mortgage loans .....................    $15,092      $23,424      $11,743
                                                         =======      =======      =======
Principal Repayments:
     Real estate mortgage and construction loans ....     51,636       49,190       43,040
     All other loans ................................      6,821       10,429        6,825
                                                         -------      -------      -------
     Total ..........................................    $58,457      $59,619      $49,865
                                                         =======      =======      =======
</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 "--Nonperforming 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


                                      -38-
<PAGE>   40

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, 2000, September 30, 1999 and September 30, 1998, loans
accounted for on a non-accrual basis were approximately $1,064,000, $1,214,000
and $1,734,000, respectively, or 1.0%, 1.1% and 1.6% 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 $.00, $.00 and $394,000,
at September 30, 2000, September 30, 1999 and September 30, 1998, respectively.

         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.

         First Federal began construction lending activities in March of 1994.
As of September 30, 2000, First Federal has not experienced any significant
losses on the construction loan portfolio. Since these lending activities are
fairly new to First Federal, First Federal does not have the same historical
data available for construction loans as for other loans. 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 $701,000 allowance for loan losses at
September 30, 2000, 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


                                      -39-
<PAGE>   41

30, 2000, $223,000 of the allowance for loan losses was reserved for possible
losses on construction loans, $296,000 was reserved for possible losses on real
estate mortgage loans, and the remaining $182,000 was reserved for all other
loan classifications.

         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,
                                             ------------------------------------------------------------------
                                               2000           1999           1998          1997          1996
                                             --------       --------       --------      --------      --------
                                                               (Dollar amounts in thousands)
<S>                                          <C>            <C>            <C>           <C>           <C>
Balance at beginning of period               $    852       $    732       $    284      $    251      $    266
Clanton Balance at Acquisition                     --             --            488            --            --
Charge-offs:
     Real estate                                   54            216             16            --             3
     Installment                                  138            290             82             4            14
                                             --------       --------       --------      --------      --------
        Total charge-offs                         192            506             98             4            17
                                             --------       --------       --------      --------      --------
Recoveries:
     Real estate mortgage                          --             --              4            --            --
     Installment                                   35             38             39             1             2
                                             --------       --------       --------      --------      --------
        Total recoveries                           35             38             13             1             2
                                             --------       --------       --------      --------      --------
Net loans (recovered) charged off                 157            468             85             3           -15
Provisions for loan losses                          6            588             45            36            --
                                             --------       --------       --------      --------      --------
Balance at end of period                     $    701       $    852       $    732      $    284      $    251
                                             ========       ========       ========      ========      ========
Ratio of net charge-offs to total loans
   outstanding net of unearned income            0.14%          0.44%          0.08%         0.00%        -0.02%
                                             ========       ========       ========      ========      ========
Ratio of allowance for loan losses
      to loans outstanding, net of
      unearned income                            0.65%          0.80%          0.70%         0.39%         0.40%
                                             ========       ========       ========      ========      ========

Total Loans Outstanding                      $108,354       $106,312       $104,590      $ 71,967      $ 62,653
</TABLE>

         As indicated in the above table, First Federal substantially increased
its loan loss allowance in fiscal 1998 from the levels of the preceding years.
This increase was primarily due to the acquisition of Chilton County.

              [The remainder of this page intentionally left blank]


                                      -40-

<PAGE>   42

         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,
                          ----------------------------------------------------------------------------------------
                                     2000                           1999                            1998
                          --------------------------     ---------------------------      ------------------------
                                        Percent of                      Percent of                    Percent of
                                          loans                           loans                          loans
                                         in each                        in each                        in each
                                         category                        category                      category
                           Amount     to total loans     Amount       to total loans      Amount      to total ALL
                          -------     --------------     ------       --------------      ------      ------------
                                                       (Dollar amounts in thousands)
<S>                       <C>         <C>                <C>          <C>                 <C>         <C>
Real estate
mortgage
and
construction
loans                      $584           83.31%          $513           60.21%            $510            69.67%

All other loans             117           16.69%           339           39.79%             222            30.33%
                           ----          ------           ----          ------             ----          -------

Total allowance
for loan losses            $701          100.00%          $852          100.00%            $732           100.00%
                           ====          ======           ====          ======             ====          =======
</TABLE>

         At September 30, 2000 and 1999, the total recorded investment in
impaired loans was approximately $4,000 and $75,000, respectively. The average
recorded investment in impaired loans amounted to approximately $5,000 and
$79,000 for the years ended September 30, 2000 and 1999, respectively. The
allowance for loan losses related to impaired loans was approximately $4,000 and
$75,000 for fiscal years 2000 and 1999, respectively. Interest income on
impaired loans of approximately $400 and $1,200 was booked in 2000 and 1999,
respectively. Loans impaired at September 30, 1998 were $227,000.

         NONPERFORMING 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.
Nonperforming 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.

         Nonperforming assets were $1,240,000, $1,782,000 and $2,128,000, at
September 30, 2000, September 30, 1999 and September 30, 1998, respectively. As
a percentage of total loans, nonperforming assets continue to be at levels which
management considers to be acceptable and commensurate with First Federal's
conservative lending policies.


                                      -41-
<PAGE>   43

         An analysis of the components of nonperforming assets at September 30,
2000, September 30, 1999 and September 30, 1998 is presented in the following
table:

<TABLE>
<CAPTION>
                                                            At September 30,
                                                 --------------------------------------
                                                   2000           1999           1998
                                                 --------       --------       --------
                                                     (Dollar amounts in thousands)
<S>                                              <C>            <C>            <C>
Loans accounted for on a non-accrual basis:
   Real estate mortgage loans ...........        $  1,039       $  1,089       $    756
   All other loans ......................              25            125            978
                                                 --------       --------       --------
      Total .............................        $  1,064       $  1,214       $  1,734
                                                 --------       --------       --------
Accruing loans which are past due 90
days or more:
   Real estate mortgage loans ...........              --       $     --       $    394
   All other loans ......................              --             --             --
                                                                --------       --------
      Total .............................              --       $     --       $    394
                                                                --------       --------
Total of non-accrual and 90 days past
   due loans ............................        $  1,064       $  1,214       $  2,128
Foreclosed real estate (net of related
   loss provisions) .....................             176            568             --
                                                 --------       --------       --------
Total non-performing assets .............        $  1,240       $  1,782       $  2,128
                                                 ========       ========       ========
Non-accrual and 90 days past due
loans as a percent of total loans .......            0.98%          1.14%          2.03%
Nonperforming assets as a percent of
total loans .............................            1.14%          1.68%          2.03%
                                                 ========       ========       ========
Total Loans Outstanding .................        $108,354       $106,312       $104,590
                                                 ========       ========       ========
</TABLE>

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

         DEPOSITS

         Total deposits decreased in fiscal 2000 by $9,359,000 (8.1%) to
$105,363,000 and decreased in fiscal 1999 by $9,162,000 (7.4%) to $114,722,000.
In fiscal 1998, total deposits increased 104.6% from $60,552,000 to $123,883,000
as a result of the Chilton County acquisition. Non-interest-bearing demand
deposits were $2,991,000, $3,838,000 and $3,436,000, while total
interest-bearing deposits were $102,371,000, $110,884,000 and $120,447,000, at
September 30, 2000, September 30, 1999, and September 30, 1998, respectively.

         First Federal's deposit mix at September 30, 2000 changed compared to
year-end 1999. NOW accounts decreased $2,400,000 (19.8%), while money market
demand accounts increased $55,000 (9.5%). 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
$8,855,000 (11.1%). Non-interest-bearing demand deposits decreased $847,000
(22.1%). During 2000, 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
21.0% of First Federal's total deposits. Jumbos comprised 3.6% of total deposits
at September 30, 1999.


                                      -42-
<PAGE>   44

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


<TABLE>
<CAPTION>
                                                                 September 30,
                                    ------------------------------------------------------------------------------
                                              2000                      1999                      1998
                                    ------------------------- -------------------------  -------------------------
                                                   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 ............     $  2,991      (22.07)%     $  3,838        11.70%      $  3,436      173.57%
Interest bearing deposits:
   NOW accounts ...............        9,729      (19.79)%       12,129         6.83%        11,354      100.00%
   Money market demand ........          632        9.53%           577        78.09%           324      (19.40)%
   Passbook savings ...........       11,794      (12.12)%       13,420        (9.13)%       14,769       57.45%
   Certificates of deposit
   other than Jumbos ..........       71,592      (11.01)%       80,448       (11.30)%       90,698      115.60%
   Jumbos .....................        8,624      100.14%         4,309        30.50%         3,302       86.55%
                                    --------                   --------                    --------
   Total interest bearing
   deposits ...................      102,371       (7.68)%      110,883        (7.94)%      120,447      103.13%
                                    --------                   --------                    --------      ------
        Total deposits ........     $105,363       (8.16)%     $114,722        (7.39)%     $123,883      104.59%
                                    ========                   ========                    ========      ======
</TABLE>

              [The remainder of this page intentionally left blank]


                                      -43-
<PAGE>   45

         The following tables set forth the distribution of First Federal's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented based on average balances:

<TABLE>
<CAPTION>
                                                       At September 30, 2000
                                                                                                                  Percentage of
Interest                                                                                                              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%
                                                                                                ========              ======

<CAPTION>

                                                       At September 30, 1999
                                                                                                                  Percentage of
Interest                                                                                                              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         $  3,838                3.35%
1.50%           None              NOW accounts                                      250           12,344               10.76%
1.50%           None              Non-profit                                        100              103                0.09%
1.50%           None              Money market checking                              50              260                0.23%
1.93%           None              Statement savings                                  50           13,420               11.70%
4.25%           3 months          Fixed-term fixed rate certificate                 250              529                0.46%
4.75%           6 months          Fixed-term fixed rate certificate                 250           13,227               11.53%
4.75%           12 months         Fixed-term fixed rate certificate                 250           18,779               16.37%
5.00%           18 months         Fixed-term fixed rate certificate                 250            4,941                4.31%
5.10%           IRA               Fixed-term fixed rate certificate                 250           18,826               16.41%
5.00%           30 months         Fixed-term fixed rate certificate                 250           20,821               18.15%
5.00%           1 month           Fixed-term fixed rate certificate               1,000                5                0.00%
5.00%           4 year            Fixed-term fixed rate certificate               1,500            1,321                1.15%
5.25%           5 year            Fixed-term fixed rate certificate               1,500            1,999                1.74%
5.27%           Jumbo             Fixed-term fixed rate certificate             100,000            4,309                3.76%
                                                                                                --------             -------

                                                                                                $114,722              100.00%
                                                                                                ========             =======
</TABLE>

              [The remainder of this page intentionally left blank]



                                      -44-
<PAGE>   46

         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,
                              ---------------------------------------------------------------------------------
                                        2000                          1999                         1998
                              -----------------------        ---------------------       ----------------------
                                                        (Dollar amounts in thousands)
                              Interest                       Interest                    Interest
                               bearing                        bearing                     bearing
                               demand          Time          demand         Time          demand         Time
                              deposits       deposits        deposits     deposits        deposits     deposits
                              --------       --------        --------     --------       ---------     --------
<S>                           <C>            <C>             <C>          <C>            <C>           <C>
Average balance.........       $23,277        $81,811         $23,361      $89,172         $25,157      $81,536
Average rate............          1.80%          5.76%           1.81%        5.23%           2.46%        5.24%
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   For the year ended September 30,
                                                     ------------------------------------------------------------
                                                        2000             1999             1998             1997
                                                     ---------        ---------        ---------        ---------
                                                                      (Dollar amounts in thousands)
<S>                                                  <C>              <C>              <C>              <C>
Opening balance ...................................  $ 114,722        $ 123,884        $  60,552        $ 64,095
Deposits acquired in Chilton County Acquisition ...         --               --           64,608              --
Net deposits (withdrawals) ........................    (12,623)         (13,168)          (4,331)         (5,364)
Interest credited on deposits .....................      3,264            4,006            3,055           1,821
                                                     ---------        ---------        ---------        --------
Ending balance ....................................  $ 105,363        $ 114,722        $ 123,884        $ 60,552
                                                     =========        =========        =========        ========
Total decrease (increase) in deposits .............  $  (9,359)       $  (9,162)       $  63,332        $ (3,543)
                                                     =========        =========        =========        ========
Percentage decrease (increase) ....................      (8.16)%          (7.40)%         104.59%          (5.53)%
                                                     =========        =========        =========        ========
</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,
                    ---------------------------------
                      2000         1999         1998
                    -------      -------      -------
                              (In thousands)
<S>                 <C>          <C>          <C>
Interest Rate
2.00-2.99%          $    --      $    --      $    --
3.00.-3.99%             373          399           --
4.00-4.99%            9,489       35,608          591
5.00.-5.99%          34,239       33,660       64,168
6.00-6.99%           24,581       13,964       26,693
7.00.-7.99%          11,535        1,126        2,548
                    -------      -------      -------
      Total         $80,217      $84,757      $94,000
                    =======      =======      =======
</TABLE>


                                      -45-
<PAGE>   47

         There were no certificates of deposit bearing an interest rate less
than 3% at September 30, 2000. At September 30, 2000, First Federal had
outstanding approximately $80.2 million in certificate accounts that mature as
follows:

<TABLE>
<CAPTION>
                                                        Amount due
                         ------------------------------------------------------------------------
                                        One        Two     Three      Four
                         Less than one to two   to three  to four    to five
                              year      years     years    years      years   Thereafter   Total
                         ------------- -------  --------  -------    -------  ----------  -------
                                                      (In thousands)
<S>                      <C>           <C>      <C>       <C>        <C>      <C>         <C>
Interest Rate
2.00-2.99% .....            $     0    $     0    $    0    $  0     $    0       $  0    $     0
3.00-3.99% .....                373          0         0       0          0          0        373
4.00-4.99% .....              8,279      1,185        25       0          0          0     9, 489
5.00.-5.99% ....             31,321      2,229       400     277         11          0     34,238
6.00-6.99% .....             14,926      7,174     2,147      76        258          0     24,581
7.00.-7.99% ....              6,634        831     1,371      36      2,664          0     11,536
                            -------    -------    ------    ----     ------       ----    -------
     Total .....            $61,533    $11,419    $3,943    $389     $2,933       $  0    $80,217
                            =======    =======    ======    ====     ======       ====    =======
</TABLE>

         Certificates of deposit, other than Jumbos, mature as follows as of
September 30, 2000:

<TABLE>
<CAPTION>
                                                                     Amount due
                         -----------------------------------------------------------------------------------------------
                                              One             Two             Three          Four
                         Less than one       to two         to three         to four        to five
                             year            years            years           years          years              Total
                         -------------    ------------     -----------     ------------   ------------      ------------
                                                             (Dollars in thousands)
<S>                      <C>              <C>              <C>             <C>            <C>               <C>
Interest Rate
2.00 -2.99%                $     0          $     0          $    0            $  0           $    0          $     0
3.00 -3.99%                      0                0               0               0                0                0
4.00 -4.99%                  7,637            1,185              25               0                0            8,847
5.00.-5.99%                 28,983            2,129             400             277               11           31,800
6.00 -6.99%                 13,546            7,074           2,147              76              258           23,101
7.00.-7.99%                  4,570              831           1,248              36            1,160            7,845
                           -------          -------          ------            ----           ------          -------
     Total                 $54,736          $11,219          $3,820            $389           $1,429          $71,593
                           =======          =======          ======            ====           ======          =======
</TABLE>

              [The remainder of this page intentionally left blank]


                                      -46-
<PAGE>   48

         Jumbos mature as follows as of September 30, 2000:

<TABLE>
<CAPTION>
                                                                     Amount due
                         -----------------------------------------------------------------------------------------------
                                              One             Two              Three          Four
                         Less than one       to two         to three          to four        to five
                              year           years            years            years          years             Total
                         -------------    -----------      ----------      ------------   ------------      ------------
                                                               (Dollars in thousands)
<S>                      <C>              <C>              <C>             <C>            <C>               <C>
Interest Rate
2.00 - 2.99%               $    0             $  0            $  0              $0          $    0             $    0
3.00 - 3.99%                  373                0               0               0               0                373
4.00 - 4.99%                  642                0               0               0               0                642
5.00.- 5.99%                2,338              100               0               0               0              2,438
6.00 - 6.99%                1,380              100               0               0               0              1,480
7.00.- 7.99%                2,064                0             123               0           1,504              3,691
                           ------             ----            ----              --          ------             ------
     Total                 $6,797             $200            $123              $0          $1,504             $8,624
                           ======             ====            ====              ==          ======             ======
</TABLE>

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                                      -47-
<PAGE>   49

         The following table presents the maturities of certificates of deposit
as of September 30, 2000, September 30, 1999 and September 30, 1998:


<TABLE>
<CAPTION>
                                                              Maturities of Time Deposits
                                                                     September 30,
                                                          ----------------------------------
                                                          2000            1999        1998
                                                                     (In thousands)
<S>                                                       <C>           <C>           <C>
Three months or less .............................        $15,541       $17,476       $ 2,433
After three within six months ....................         18,979        23,768        12,417
After six within twelve months ...................         27,015        24,517        51,730
One year to two years ............................         11,418        15,262        22,731
Two years to three years .........................          3,943         2,875         4,070
Three years to four years ........................            389           594           352
Four years to five years .........................          2,932           265           267
                                                          -------       -------       -------
    Total ........................................        $80,217       $84,757       $94,000
                                                          =======       =======       =======
Weighted average rate on all certificates of
deposit at period-end ............................           5.76%         5.23%         5.73%
                                                          =======       =======       =======


</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 9.5% at September 30,
2000 and the outstanding balance on the line of credit was $3,005,000.

         Borrowings also include borrowings from the FHLB of Atlanta (See "--
Liquidity"). The balances outstanding at September 30, 2000, and September 30,
1999 were $35,844,000 and $27,944,000, respectively. These balances included
advances with both fixed and variable interest rates, which averaged 6.34% and
5.27% at September 30, 2000 and September 30, 1999, respectively.

CAPITAL RESOURCES

         STOCKHOLDERS' EQUITY

         SouthFirst's consolidated stockholders' equity was $14,925,000 and
$14,352,000 at September 30, 2000 and September 30, 1999, respectively. The 2000
increase was primarily due to net income from operations.

         During 2000, cash dividends of $557,446, or $0.60 per share, were
declared on SouthFirst Common Stock. During 1999, cash dividends of $571,846, or
$0.60 per share were declared. During 1998, cash dividends of $543,746, or
$0.575 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.


                                      -48-
<PAGE>   50

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

<TABLE>
<CAPTION>
                                                               Equity and Asset Ratios
                                                                     September 30,
                                                  --------------------------------------------------
                                                       2000              1999               1998
                                                  ------------       ------------        -----------
<S>                                               <C>                <C>                 <C>
Return on average assets ..................               0.59%              0.83%              0.40%
Return on average stockholder's equity ....               6.70%              8.48%              3.96%
Common dividend payout ratio ..............              57.98%             43.99%             85.65%
Average stockholders' equity to average
assets ratio ..............................               8.82%              9.84%             10.17%


Net Income ................................       $    961,492       $  1,299,999       $    634,874
Average Assets ............................       $162,741,763       $155,819,636       $157,439,900
Average Equity ............................       $ 14,355,955       $ 15,331,948       $ 16,016,540
Cash Dividends Paid .......................       $    557,446       $    571,846       $    543,745
</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, 1998 and September 30, 1999.

<TABLE>
<CAPTION>
                                               At September 30, 2000                           At September 30, 1999
                                    -------------------------------------------    ---------------------------------------------
                                       Tangible         Core        Risk-based       Tangible        Core          Risk-based
                                       Capital         Capital        Capital        Capital        Capital          Capital
                                    ------------    ------------   ------------    ------------   ------------    --------------
<S>                                 <C>             <C>            <C>             <C>            <C>             <C>
Capital .........................   $ 14,889,000    $ 14,889,000   $ 14,889,000    $ 13,707,000   $ 13,707,000    $ 13,707,000
Adjustments
   General valuation
       allowance ................             --              --        625,000              --             --         886,000
   Goodwill .....................       (613,000)       (613,000)      (613,000)       (586,000)      (586,000)       (586,000)
   Unrealized Gains .............        450,000         450,000        450,000         419,000        419,000         419,000

Regulatory capital ..............     14,726,000      14,726,000     15,351,000      13,540,000     13,540,000      14,426,000

Regulatory asset base ...........    161,319,000     161,319,000     95,827,000     161,901,000    161,901,000      79,046,000
Capital ratio ...................           9.14%           9.14%         16.02%           8.37%          8.37%          17.34%
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>

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.


                                      -49-
<PAGE>   51

         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, 2000,
First Federal had credit available, net of advances drawn down, of approximately
$12 million. First Federal has drawn down such advances in the amount of
approximately $835.8 million at September 30, 2000, 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 2000 was $1,185,000, a $441,000 increase from 1999. The $1,531,000 in net
cash used by investing activities during 2000 consisted primarily of a
$2,454,000 increase in loan funding activities. Net cash used for investment
securities available for sale decreased to $1,568,000 from $31,453,000 in 1999.
The $43,000 in net cash provided by financing activities resulted from a
decrease of $4,541,000 in certificates of deposits, and a decrease of $4,818,000
in demand accounts, coupled with a net increase of $10,085,000 in borrowed
funds, and payment of $515,300 in Common Stock dividends.

         First Federal's liquidity ratio at September 30, 2000 was 25.17% and at
September 30, 1999 was 10.12%. 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 no
dividends to SouthFirst during 2000 or 1999. In 1998, First Federal paid
$2,893,000 to SouthFirst in order to purchase Treasury Stock and partially repay
a revolving line of credit with Regions Bank.

         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.

ITEM 7.  FINANCIAL STATEMENTS

         The following financial statements are filed with this report:

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

         Consolidated Statements of Financial Condition as of
                  September 30, 2000 and 1999
         Consolidated Statements of Operations for the years ended September 30,
                  2000, 1999 and 1998.
         Consolidated Statements of Stockholders' Equity for the years ended
                  September 30, 2000, 1999 and 1998.
         Consolidated Statements of Cash Flows for the years ended September 30,
                  2000, 1999 and 1998.
         Notes to Consolidated Financial Statements


                                      -50-
<PAGE>   52

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 eight 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 certain of
the executive officers and directors of SouthFirst and First Federal.

<TABLE>
<CAPTION>
                                                                                      YEAR FIRST
                                                                                      ELECTED AS A      YEAR
                                                                                      DIRECTOR OF       TERM
             NAME                     AGE(1)             POSITION HELD                SOUTHFIRST       EXPIRES
     -------------------------        ------       ----------------------------       ------------     -------
     <S>                              <C>          <C>                                <C>              <C>
     Donald C. Stroup                   51         President, Chief Executive             1994          2003
                                                   Officer and Chairman of
                                                   SouthFirst and First Federal
     Joe K. McArthur                    49         Executive Vice President,
                                                   Chief Operating Officer,               1995          2002
                                                   Chief Financial Officer,
                                                   Secretary and Director of
                                                   SouthFirst and First Federal
     Bobby R. Cook                      60         Director of SouthFirst                 1997          2001
     H. David Foote, Jr.                51         Director of SouthFirst and
                                                   First Federal                          1994          2001
     J. Malcomb Massey(2)               51         Director of SouthFirst and
                                                   First Federal                          1997          2003
     Allen Gray McMillan, III           43         Director of SouthFirst and
                                                   First Federal                          1995          2002
     Charles R. Vawter, Jr.             39         Director of SouthFirst and
                                                   First Federal                          1994          2003
</TABLE>

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

     (1)  At September 30, 2000.

     (2)  Mr. Massey is also President of Pension & Benefit.


                                      -51-
<PAGE>   53

         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
principal occupation for the past five years.

         DONALD C. STROUP has served as the President and Chief Executive
Officer of First Federal since 1988 and of SouthFirst since 1994. Mr. Stroup has
also been a member of the First Federal Board of Directors since 1988 and of the
SouthFirst Board of Directors since 1994. Mr. Stroup has over 25 years of
experience in the banking industry and received a B.S. in Business
Administration from Samford University, and a Certificate of Achievement and
Diploma of Merit from the Institute of Financial Education, Chicago, Illinois.
He is a director of the Boys' Club, a member of the Red Cross, Hospice Care,
Talladega County Economic Development Authority and Boy Scouts Advisory, a
former Chairman of the Southern Community Bankers and a former member of the
Sylacauga School Board and the Sylacauga Industrial Development Board. Mr.
Stroup is also a current member and former President of the Sylacauga Rotary
Club and a former director of the Sylacauga Chamber of Commerce and Coosa Valley
Country Club. Mr. Stroup is a member of the First Baptist Church of Sylacauga.

         JOE K. MCARTHUR has served as the Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary of First Federal and
SouthFirst since 1992 and 1994, respectively. Mr. McArthur has served as a
director of First Federal and SouthFirst since February 1996. Mr. McArthur has
over 24 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 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.

         BOBBY R. COOK was named President of the Western Division of First
Federal and as a director of SouthFirst and First Federal on October 31, 1997,
in connection with the purchase by SouthFirst of First Federal Chilton County.
Prior to joining SouthFirst and First Federal, Mr. Cook had served as President
and Chief Executive Officer of First Federal of Chilton County since 1973.
Thereafter, on January 24, 2000, the employment of 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, as the sole
shareholder of First Federal.

         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.

         J. MALCOMB MASSEY has served as a director of First Federal and
SouthFirst since May, 1997. 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, 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. Mr. McMillan is 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.

         CHARLES R. VAWTER, JR. has served as a director of First Federal since
1992 and of SouthFirst since 1994. Mr. Vawter is Chief Financial Officer of
Automatic Gas and Appliance Co., Inc., where he has been employed since 1987.
Mr. Vawter is a member of the First Baptist Church. He is a director of B.B.
Comer


                                      -52-
<PAGE>   54

Library Foundation and the Coosa Valley Country Club. He is a past director of
the Sylacauga Chamber of Commerce. He is currently a member of the Planning
Commission of the City of Sylacauga Chamber of Commerce and has served on the
Planning Committee of Alabama LP Gas Association.

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

         Section 16(a) of the Exchange Act requires SouthFirst's directors,
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. 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 2000.

         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
2000, 1999, and 1998 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 2000 (the "Named Executive Officers"):

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                Annual Compensation(1)                     Long Term Compensation
                                                                                        Securities
  Name and Principal        Fiscal                                     Other Annual     Underlying          All Other
       Position              Year          Salary        Bonus       Compensation(2)     Options          Compensation
-------------------------  -------        --------     ----------    ---------------   -----------       -------------
<S>                        <C>            <C>          <C>           <C>               <C>               <C>
Donald C. Stroup             2000         $140,000       $43,605(3)      $13,155         14,180(4)          $2,901(5)
        President, Chief     1999          140,000        32,625          12,250         14,180(6)           2,901
        Executive Officer    1998          140,000        35,812          12,250         14,180(7)           2,886
        and Chairman

Joe K. McArthur              2000         $105,000       $29,490(8)      $13,155          7,428(9)          $1,624(10)
        Executive Vice       1999          105,000        21,175          12,250          7,428(11)          1,624
        President, Chief     1998          105,000        24,104          12,250          7,428(12)          1,309
        Financial Officer
        and Director
J. Malcomb Massey            2000         $130,000       $17,069(13)     $13,155          3,726(14)         $1,873(15)
        Director and         1999          130,000         2,236          13,250          3,726(16)          1,873
        President of         1998          130,000         1,677          12,250          3,726(17)          1,795
        Pension & Benefit
</TABLE>

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

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

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

(3)      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."


                                      -53-
<PAGE>   55

(4)      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 (see footnote (6) and footnote (7)
         below). These options vest in equal annual increments commencing on
         11/4/99. See "---Repricing of Stock Options under the Stock Option
         Plans."

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

(6)      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."

(7)      On January 28, 1998, SouthFirst granted these options, which vested in
         equal annual increments commencing on January 29, 1999. These options
         were canceled on November 4, 1998 (see footnote (4) and footnote (6)
         above).

(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)      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 (see footnote (11) and footnote
         (12) below). These options vest in equal annual increments commencing
         on 11/4/99. See "---Repricing of Stock Options under the Stock Option
         Plans."

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

(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)     On January 28, 1998, SouthFirst granted these options, which vested in
         equal annual increments commencing on January 29, 1999. These options
         were canceled on November 4, 1998 (see footnote (9) and footnote (11)
         above).

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

(14)     On November 4, 1998, SouthFirst canceled all options granted to Mr.
         Massey in 1998, and issued these options to purchase the same number of
         shares at a lower exercise price (see footnote (16) and footnote (17)
         below). These options vest in equal annual increments commencing on
         11/4/99. See "---Repricing of Stock Options under the Stock Option
         Plans."

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

(16)     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."

(17)     On January 28, 1998, SouthFirst granted these options, which vested in
         equal annual increments commencing on January 29, 1999. These options
         were canceled on November 4, 1998 (see footnote (14) and footnote (16)
         above).

EMPLOYMENT AGREEMENTS

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

Donald C. Stroup, Chairman, President and Chief Executive Officer.

         The employment agreement with Mr. Stroup was effective as of October 1,
1997 and is for a term of three years. On each anniversary date from the
expiration of the initial three year term of the employment agreement, the term
of Mr. Stroup's employment will be extended for an additional one-year period
beyond the then effective expiration date, upon a determination by the Boards of
Directors of SouthFirst and First Federal that the performance of Mr. Stroup has
met the required performance standards and that such employment agreement should
be extended.


                                      -54-
<PAGE>   56

         Pursuant to Mr. Stroup's employment agreement, First Federal pays Mr.
Stroup an annual base salary of $140,000, for which SouthFirst is jointly and
severally liable. Mr. Stroup's employment agreement entitles him to participate
with all other senior management employees of SouthFirst or First Federal in any
discretionary bonuses that the SouthFirst or First Federal Boards of Directors
may award. In addition, Mr. Stroup participates in standard retirement and
medical plans, and is entitled to customary fringe benefits, vacation and sick
leave.

         Mr. Stroup'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. Stroup. If SouthFirst or First Federal terminates Mr. Stroup
without cause, he will be entitled to a continuation of his salary and benefits
from the date of termination through the remaining term of the employment
agreement plus an additional twelve-month period. Mr. Stroup 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. Stroup's employment agreement further provides that, in the event
of Mr. Stroup'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. Stroup 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. Stroup receives on account of the change in control. Such payment
would be reduced to the extent it would cause First Federal to fail to meet any
of its regulatory capital requirements. Under Mr. Stroup'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. Stroup'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. Stroup's employment
agreement also provides for a similar lump sum payment to be made in the event
of the Mr. Stroup's voluntary termination of employment within one year
following a change in control of First Federal or SouthFirst.

Joe K. McArthur, Executive Vice President and Chief Financial Officer.

         The employment agreement with Mr. McArthur was effective as of October
1, 1997 and is for a term of three years. On each anniversary date from the
expiration of the initial three year term of the employment agreement, the term
of Mr. McArthur's employment will be extended for an additional one-year period
beyond the then effective expiration date, upon a determination by the Boards of
Directors of SouthFirst and First Federal that the performance of Mr. McArthur
has met the required performance standards and that such employment agreement
should be extended.

         Pursuant to Mr. McArthur's employment agreement, First Federal pays Mr.
McArthur an annual base salary of $105,000, for which SouthFirst will be jointly
and severally liable. Mr. McArthur's employment agreement entitles him to
participate with all other senior management employees of SouthFirst or First
Federal in any discretionary bonuses that the SouthFirst or First Federal Boards
of Directors may award. In addition, Mr. McArthur participates 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 and benefits
from the date of termination through the remaining term of the employment
agreement plus an additional twelve-month period. 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.


                                      -55-
<PAGE>   57

         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;
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. Such payment would be reduced to the extent it would
cause First Federal to fail to meet any of its regulatory capital requirements.
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, 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 the Mr. McArthur's
voluntary termination of employment within one year following a change in
control of First Federal or SouthFirst.

J. Malcomb Massey, President of Pension & Benefit.

         The employment agreement with Mr. Massey was effective as of April 11,
1997 and provides for a term of three years. On each anniversary date from the
expiration of the initial three year term of the employment agreement, the term
of Mr. Massey's employment will be extended for an additional one-year period
beyond the then effective expiration date, upon a determination by the Board of
Directors of First Federal that the performance of Mr. Massey has met the
required performance standards and that such employment agreement should be
extended.

         The employment agreement with Mr. Massey provides for an annual base
salary of $130,000. In addition, Mr. Massey received 15,512 shares of restricted
SouthFirst Common Stock which, one-fifteenth of which vest on each of the first
fifteen anniversaries of the date of the employment agreement. Should Mr.
Massey's employment be terminated due to his death or disability, all unvested
shares will vest on the last day of Mr. Massey's service with Pension & Benefit.
All unvested shares will also vest upon a "change in control" of Pension &
Benefit. 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 voting stock, a change in the ownership or possession of the
ability to control the election of a majority of Pension & Benefit's directors
or the exercise of a controlling influence over the management or policies of
Pension & Benefit. In addition, under Mr. Massey's employment agreement, a
change in control occurs when, during any consecutive two-year period, directors
of SouthFirst or Pension & Benefit, 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. Massey's employment agreement entitles him to participate with all
other senior management employees of First Federal in any discretionary bonuses
that the Board of Directors of First Federal may award. 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 First Federal terminates Mr. Massey 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
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 is limited to
three times 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
voluntarily terminate his employment agreement by providing sixty days


                                      -56-
<PAGE>   58

written notice to the Board of Directors of First Federal, in which case he is
entitled to receive only his compensation, vested rights and benefits up to the
date of termination.

         Mr. Massey's employment agreement previously contained a
non-competition provision, pursuant to which Mr. Massey agreed that if his
employment by Pension & Benefit terminated during the initial three-year period
of employment, he would not, for two years following such termination, directly
or indirectly engage in activities related to the planning, designing,
implementation or administration of employee benefit plans in the same county as
Pension & Benefit is located or in any contiguous county. This non-competition
provision expired on April 11, 2000. The employment contract also provides that
during the term of Mr. Massey's employment, and for three years thereafter, he
shall refrain from recruiting or hiring, or attempting to recruit or hire,
directly or by assisting others, any other employee of Pension & Benefit or any
successor or affiliate of Pension & Benefit.

DEFERRED COMPENSATION AGREEMENTS

         First Federal has entered into deferred compensation agreements
(collectively, the "Deferred Compensation Agreements") with Mr. Stroup and Mr.
McArthur, pursuant to which each will receive certain retirement benefits at age
65. Under the Deferred Compensation Agreements, benefits are payable for 15
years. A portion of the retirement benefits accrue each year until age 65 or, if
sooner, until termination of employment. If Mr. Stroup remains in the employment
of First Federal until age 65, his annual benefit will be $65,000. If Mr.
McArthur remains in the employment of First Federal until age 65, his annual
benefit will be $45,000. If either of these officers dies prior to age 65, while
in the employment of First Federal, the full retirement benefits available under
the deferred compensation agreements will accrue and will, thereupon, be payable
to their respective 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, both, for retirement
benefits and for key man insurance. The costs of these arrangements was $57,075
for each of 2000, 1999, and 1998.

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.

         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. As of September 30, 1996, a total of 33,200 shares had been
awarded under the Plans and, as of that date, no further shares were available
for future issuance.

         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


                                      -57-
<PAGE>   59

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.

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, 1998, a total of 83,000 shares had been issued under the 1995
Stock Option Plan and, as of that date, no further shares were available for
future issuance. 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 Appreciation
Rights ("SARs"). As of September 30, 1999, a total of 63,361 shares had been
issued under the 1998 Stock Option Plan and, as of that date, no further shares
were available for future issuance

         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 a
rate of 20% 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.


                                      -58-
<PAGE>   60

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 to Donald C. Stroup, Joe K. McArthur and J. Malcomb
Massey, respectively (i.e., the Named Executive Officers). 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, 2000:

                      OPTION REGRANTS FOR FISCAL YEAR 2000

<TABLE>
<CAPTION>
Name                      Date             Number of           Original Exercise    New Exercise         Length of
                                           Securities          Price ($)            Price ($)            Original Option
                                           Underlying                                                    Term Remaining
                                           Options Repriced                                              at Date of
                                                                                                         Repricing
<S>                  <C>                   <C>                 <C>                  <C>                  <C>
Donald Stroup        November 4, 1998          4150                 21.25             15.75               9.2  years
(1995 Plan) (1)
Donald Stroup        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 the Bank 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, 2000, 14,110 options have expired and remain unissued under the 1995 Stock
Option Plan and 16,477 options have expired and remain unissued under the 1998
Stock Option Plan.

     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, 2000, by the Named Executive Officers and the fiscal-year-end
value of unexercised options held by those individuals:


                                      -59-
<PAGE>   61

                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.                       0                $0             12,450 / 20,750                $0 / $0
Stroup
Joe K.                          0                $0              7,968 / 13,280                $0 / $0
McArthur
J. Malcomb                      0                $0                 0  /  3,726                $0 / $0
Massey
</TABLE>

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

(1)  Represents the value of unexercised, in-the-money stock options on
     September 30, 2000, using the $10.00 closing price of SouthFirst Common
     Stock on that date.

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 10% of their gross
salary to the 401(k) Plan or $9,500, 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.
During this period, 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. At September 30, 2000, neither First
Federal nor any of its affiliates match employee contributions to the 401(k)
Plan.

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


                                      -60-
<PAGE>   62

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 will
be eligible to begin receiving benefits once he or she has completed his or her
fifth one year break in service. Distributions will generally be made in whole
shares of SouthFirst Common Stock, with the value of fractional shares being
paid in cash. Although accounts will generally be distributed in a lump sum,
accounts valued in excess of $500,000 may be distributed in installments over a
five-year period.

         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 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 2000, each non-employee director (except John Robbs, who
resigned as a director of First Federal and SouthFirst on April 5, 2000) was
paid $2,316 under the Dividend Incentive Plan with respect to the shares of
Common Stock underlying the stock options held by him. Further, each SouthFirst
director (except John Robbs, who resigned as a director of First Federal and
SouthFirst on April 5, 2000), during fiscal 2000, 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. Donald C. Stroup, President and Chief Executive Officer of SouthFirst and
First Federal, and Joe K. McArthur, Executive Vice President, Chief Operating
Officer, and Chief Financial Officer of First Federal, 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,
2000 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.


                                      -61-
<PAGE>   63

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information as of December 1,
2000 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.

<TABLE>
<CAPTION>
                                                          Shares of
                                                        Common Stock                        Percent of
                 Beneficial Owner                   Beneficially Owned(1)               Outstanding Shares
         -------------------------------            ---------------------               ------------------
         <S>                                        <C>                                 <C>
         Donald C. Stroup(2)                                71,139                               7.8%
         Joe K. McArthur(3)                                 32,726                               3.6%
         Bobby R. Cook(4)                                   14,815                               1.6%
         H. David Foote, Jr.(5)                             11,390                               1.3%
         J. Malcomb Massey(6)                               24,328                               2.7%
         Allen Gray McMillan, III(7)                        16,890                               1.8%
         Charles R. Vawter, Jr.(8)                          40,792                               4.4%
         Jeffrey L. Gendell, et. al.(9)                     83,700                               9.2%
         Robert J. Salmon and
            Mary Anne J. Salmon(10)                         47,600                               5.2%
         Pension & Benefit Financial
            Services, Inc.,(11)                             66,400                               7.3%
         All directors and
            executive officers
            as a group (7 persons)                         212,080                              23.2%
</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.
         The percentages are based upon 910,102 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 902,232 shares plus the number of
         shares subject to presently exercisable options held by them, as
         indicated in the following notes.

(2)      Of the amount shown, 17,100 shares are owned jointly by Mr. Stroup and
         his wife, 300 shares are held by one of Mr. Stroup's sons, 13,196
         shares are held in his account under SouthFirst's 401(k) Plan, 5,471
         shares are held in his account under First Federal's ESOP, 26,422
         shares are subject to presently exercisable options and 8,300 shares
         represent restricted stock granted under SouthFirst's Management
         Recognition Plans "A" and "B," all of which are fully vested.

(3)      Of the amount shown, 1,500 shares are owned jointly by Mr. McArthur and
         his wife, 5,030 shares are held in his account under SouthFirst's
         401(k) Plan, 4,633 shares are held in his account under First Federal's
         ESOP, 16,251 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, 1,624 shares are held in an Individual Retirement
         Account for the benefit of Mr. Cook's wife.

(5)      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, 5,230 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.

(6)      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, 3,265 shares are held in a profit
         sharing account, and 2,234 shares are held in an Individual Retirement
         Account, and 737 shares are held in his account under First Federal's
         ESOP, 1,490 shares are subject to exercisable options, and 1,090 shares
         are owned jointly by Mr. Massey and his wife..

(7)      Of the amount shown, 10,000 shares are held jointly by Mr. McMillan and
         his wife, 5,230 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.

(8)      Of the amount shown, 31,989 shares are held jointly by Mr. Vawter and
         his wife, 5,230 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 shares are fully vested.

(9)      Of the amount shown, Jeffrey L. Gendell has shared voting power with
         respect to 83,700 shares, Tontine Management, L.L.C. ("TM") has shared
         voting power with respect to 83,700 shares, Tontine Partners, L.P.
         ("TP") has shared voting power with respect to 10,500 shares and
         Tontine Financial Partners, L.P. ("TFP") has shared voting power with
         respect to 73,200 shares. TM, the general partner of TP and TFP, has
         the power to direct the affairs of TP and 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, TP and TFP
         is 200 Park Avenue, Suite 3900, New York, New York 10166. The foregoing
         information is based on a Schedule 13D/A, Amendment No. 2, dated
         October 6, 1997 filed by Mr. Gendell, TP and TFP. SouthFirst makes no
         representation as to the accuracy or completeness of the information
         reported.


                                      -62-
<PAGE>   64

(10)     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
         filed by Mr. and Mrs. Salmon.

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

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

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, 2000, the aggregate of
all loans by First Federal to its officers, directors, and related interests was
$2,944,000.

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*       Employment Agreement dated as of October 1, 1997 between SouthFirst
                           Bancshares, Inc. and Donald C. Stroup (1997 Form 10-K).


               10.2*       Employment Agreement dated as of October 1, 1997 between SouthFirst
                           Bancshares, Inc. and Joe K. McArthur (1997 Form 10-K).


               10.3*       Employment Agreement dated as of October 1, 1997
                           between First Federal of the South and Donald C.
                           Stroup (1997 Form 10-K).


               10.4*       Employment Agreement dated as of October 1, 1997
                           between First Federal of the South and Joe K.
                           McArthur (1997 Form 10-K).

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

             10.5.1*       Form of Management Recognition Plan A (1994 S-1, Exhibit 10.5).
</TABLE>


                                      -63-
<PAGE>   65

<TABLE>
<S>          <C>           <C>
             10.5.2*       Form of Management Recognition Plan A, as amended (1995 Form 10-K).

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

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

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

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

             10.7.1*       Form of Stock Option and Incentive Plan (1994 S-1, Exhibit 10.7)
                           (1995 Form 10-K).

             10.7.2*       Form of Stock Option and Incentive Plan, as amended (1995 Form 10-K).

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

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

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

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

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

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

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

              10.11*       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.

                 27        Financial Data Schedule (for SEC use only)
</TABLE>


                                      -64-
<PAGE>   66
                           SOUTHFIRST BANCSHARES, INC.

                               SYLACAUGA, ALABAMA

                           SEPTEMBER 30, 2000 AND 1999


                                TABLE OF CONTENTS

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

FINANCIAL STATEMENTS:

     Consolidated Statements of Financial Condition...................................F-2

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

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

     Consolidated Statements of Cash Flows........................................F-7-F-9

     Notes to Consolidated Financial Statements.................................F-10-F-43
</TABLE>


<PAGE>   67




                          INDEPENDENT AUDITORS' REPORT


November 1, 2000


Board of Directors
SouthFirst Bancshares, Inc.
Sylacauga, Alabama


We have audited the accompanying consolidated statements of financial condition
of SouthFirst Bancshares, Inc. and subsidiaries (the Company) as of September
30, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SouthFirst
Bancshares, Inc. and subsidiaries as of September 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2000, in conformity with generally accepted
accounting principles.


Certified Public Accountants


                                       F-1


<PAGE>   68



                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                 Consolidated Statements of Financial Condition
                           September 30, 2000 and 1999


<TABLE>
<CAPTION>
                                                                                     2000                1999
                                                                                 -------------       -------------
                                     ASSETS
<S>                                                                              <C>                 <C>
Cash and cash equivalents                                                        $   4,667,295       $   4,969,578
Interest-bearing deposits in banks                                                   1,737,099             993,708
Investment securities held to maturity, at cost                                             --              28,783
Investment securities available for sale, at fair value                             38,326,808          39,312,785
Loans receivable, net of allowance for loan losses of
     $700,620 in 2000 and $851,915 in 1999                                         108,353,773         106,312,481
Loans held for sale at cost (which approximates fair value)                            181,662             710,134
Foreclosed assets, net                                                                 175,500             568,358
Premises and equipment, net                                                          4,992,261           5,178,234
Accrued interest receivable                                                          1,183,485           1,018,029
Investments in affiliates                                                                   --              16,464
Other assets                                                                         1,407,751           1,397,811
                                                                                 -------------       -------------

          Total Assets                                                           $ 161,025,634       $ 160,506,365
                                                                                 =============       =============

                          LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
     Deposits:
        Non-interest bearing                                                     $   2,990,806       $   3,838,290
        Interest bearing                                                           102,372,295         110,883,586
                                                                                 -------------       -------------
          Total deposits                                                           105,363,101         114,721,876
     Advances by borrowers for property taxes and insurance                            297,004             441,180
     Accrued interest payable                                                        1,403,005           1,134,016
     Borrowed funds                                                                 38,889,068          28,804,068
     Accrued expenses and other liabilities                                            147,972           1,053,036
                                                                                 -------------       -------------
          Total liabilities                                                        146,100,150         146,154,176
                                                                                 -------------       -------------

Stockholders' equity:
     Common stock, $.01 par value, 2,000,000 shares authorized;
         999,643 shares issued and 910,102 shares outstanding in 2000;
         999,643 shares issued and 904,822 shares outstanding in 1999;                   9,996               9,996
     Additional paid-in capital                                                      9,835,352           9,851,981
     Treasury stock, at cost (72,196 shares in 2000; 71,076 shares in 1999)         (1,140,781)         (1,129,738)
     Deferred compensation on common stock employee benefit plans                     (482,325)           (623,224)
     Retained earnings, substantially restricted                                     7,186,244           6,740,051
     Accumulated other comprehensive income (loss)                                    (483,002)           (496,877)
                                                                                 -------------       -------------
           Total stockholders' equity                                               14,925,484          14,352,189
                                                                                 -------------       -------------

     Commitments and contingencies (Note 14)                                                --                  --
                                                                                 -------------       -------------

     Total Liabilities and Stockholders' equity                                  $ 161,025,634       $ 160,506,365
                                                                                 =============       =============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-2
<PAGE>   69

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations
                  Years Ended September 30, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                  2000             1999             1998
                                                              ------------     ------------     ------------
<S>                                                           <C>              <C>              <C>
Interest and dividend income:
     Interest and fees on loans                               $  9,342,440     $  8,460,854     $  8,272,834
     Interest and dividend income on investment securities       2,572,742        2,023,243        2,825,283
                                                              ------------     ------------     ------------

           Total interest and dividend income                   11,915,182       10,484,097       11,098,117
                                                              ------------     ------------     ------------

Interest expense:
     Interest on deposits                                        4,858,308        5,389,544        5,416,128
     Interest on borrowed funds                                  2,280,558          977,279        1,148,782
                                                              ------------     ------------     ------------
          Total interest expense                                 7,138,866        6,366,823        6,564,910
                                                              ------------     ------------     ------------

          Net interest income                                    4,776,316        4,117,274        4,533,207

Provision for loan losses                                            5,572          587,690           44,744
                                                              ------------     ------------     ------------

     Net interest income after provision for loan losses         4,770,744        3,529,584        4,488,463
                                                              ------------     ------------     ------------

Other income:
     Service charges and other fees                                440,355          502,016          466,469
     Employee benefit trust and consulting fees                  1,087,884        1,010,000          758,835
     Gain on sale of loans                                         312,024          442,287          238,907
     Gain (loss) on sales and calls of investment
        securities available-for-sale                               (4,199)       2,402,639          123,736
     Gain (loss) on sale of premises and equipment                      --            5,622            2,565
     Equity in net loss of affiliates                              (16,464)        (128,153)         (26,279)
     Other                                                         279,903          183,326          180,581
                                                              ------------     ------------     ------------

         Total other income                                      2,099,503        4,417,737        1,744,814
                                                              ------------     ------------     ------------
</TABLE>


                             (Continued)


See accompanying notes to consolidated financial statements.


                                       F-3
<PAGE>   70
                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                Consolidated Statements of Operations (Continued)
                  Years Ended September 30, 2000, 1999 and 1998


<TABLE>
<CAPTION>
                                           2000          1999          1998
                                        ----------    ----------    ----------
<S>                                     <C>           <C>           <C>
Other expenses:
     Compensation and benefits          $2,901,364    $3,268,188    $3,128,023
     Net occupancy expense                 348,875       330,871       282,015
     Furniture and fixtures                441,026       441,788       331,505
     Data processing                       309,196       336,284       293,820
     Office supplies and expenses          350,205       392,529       359,713
     Deposit insurance premiums             77,649       116,240       119,330
     Legal expenses                        253,000       380,822       212,852
     Goodwill amortization                  63,128        54,772        23,178
     Other                                 554,936       509,622       459,338
                                        ----------    ----------    ----------

        Total other expenses             5,299,379     5,831,116     5,209,774
                                        ----------    ----------    ----------

Income before income taxes               1,570,868     2,116,205     1,023,503

Income tax expense                         609,376       816,206       388,629
                                        ----------    ----------    ----------

     Net income                         $  961,492    $1,299,999    $  634,874
                                        ==========    ==========    ==========

Earnings pre share:
     Basic                              $     1.06    $     1.44    $     0.68
     Diluted                            $     1.06    $     1.44    $     0.67

Weighted average shares outstanding:
     Basic                                 908,020       903,460       931,195
     Diluted                               908,020       903,460       950,833
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   71


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity
                  Years Ended September 30, 2000, 1999 and 1998
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                                  Deferred
                                                                                                Compensation
                                                                                 Retained         on Common
                                                                Additional       Earnings-         Stock
                                                 Common          Paid-in       Substantially      Employee          Treasury
                                                  Stock          Capital        Restricted      Benefit Plans        Stock
                                               -------------   -------------   -------------    -------------    ------------
<S>                                            <C>             <C>             <C>              <C>              <C>
Balance - September 30, 1997                   $       8,632   $   7,792,748   $   5,815,352    $    (914,604)   $    (198,392)

Comprehensive Income:
    Net income                                            --              --         634,874               --               --
    Change in net unrealized gain (loss) on
       available-for-sale securities, net of
       reclassification adjustment and tax
       effects                                            --              --              --               --               --

         Total comprehensive income

Release of unallocated ESOP shares                        --          37,600              --           40,000               --
Vesting of shares on Management
    Recognition Plans                                     --          39,740              --           76,194               --
Vesting of deferred compensation shares                   --              --              --           19,902               --
Acquisition of Treasury stock                             --              --              --               --         (668,695)
Issuance of common stock                               1,364       1,940,875              --               --               --
Cash dividends declared ($ .575/share)                    --              --        (496,880)              --               --
                                               -------------   -------------   -------------    -------------    -------------

Balance - September 30, 1998                           9,996       9,810,963       5,953,346         (778,508)        (867,087)

Comprehensive Income:
    Net income                                            --              --       1,299,999               --               --
    Change in net unrealized gain (loss) on
       available-for-sale securities, net of
       reclassification adjustments and tax
       effect                                             --              --              --               --               --

         Total comprehensive income (loss)

Release of unallocated ESOP shares                        --          35,336              --           70,560               --
Acquisition of ESOP shares                                --              --              --          (13,068)              --
Vesting of shares on Management
    Recognition Plans                                     --           5,682              --           77,890               --
Vesting of deferred compensation shares                   --              --              --           19,902               --
Acquisition of Treasury stock                             --              --              --               --         (262,651)
Cash dividends declared ($ .60/share)                     --              --        (513,294)              --               --
                                               -------------   -------------   -------------    -------------    -------------

Balance - September 30, 1999                           9,996       9,851,981       6,740,051         (623,224)      (1,129,738)
                                               -------------   -------------   -------------    -------------    -------------

<CAPTION>

                                                Accumulated
                                                   Other
                                                  Compre-
                                                  hensive
                                                  Income
                                                  (Loss)            Total
                                               -------------    -------------
<S>                                            <C>              <C>
Balance - September 30, 1997                   $   1,119,598    $  13,623,334
                                                                -------------

Comprehensive Income:
    Net income                                            --          634,874
    Change in net unrealized gain (loss) on
       available-for-sale securities, net of
       reclassification adjustment and tax
       effects                                       422,307          422,307
                                                                -------------

         Total comprehensive income                                 1,057,181
                                                                -------------

Release of unallocated ESOP shares                        --           77,600
Vesting of shares on Management
    Recognition Plans                                     --          115,934
Vesting of deferred compensation shares                   --           19,902
Acquisition of Treasury stock                             --         (668,695)
Issuance of common stock                                  --        1,942,239
Cash dividends declared ($ .575/share)                    --         (496,880)
                                               -------------    -------------

Balance - September 30, 1998                       1,541,905       15,670,615
                                                                -------------

Comprehensive Income:
    Net income                                            --        1,299,999
    Change in net unrealized gain (loss) on
       available-for-sale securities, net of
       reclassification adjustments and tax
       effect                                     (2,038,782)      (2,038,782)
                                                                -------------

         Total comprehensive income (loss)                           (738,783)
                                                                -------------

Release of unallocated ESOP shares                        --          105,896
Acquisition of ESOP shares                                --          (13,068)
Vesting of shares on Management
    Recognition Plans                                     --           83,572
Vesting of deferred compensation shares                   --           19,902
Acquisition of Treasury stock                             --         (262,651)
Cash dividends declared ($ .60/share)                     --         (513,294)
                                               -------------    -------------

Balance - September 30, 1999                        (496,877)      14,352,189
                                               -------------    -------------
</TABLE>


                                  (Continued)

See accompanying notes to consolidated financial statements.


                                      F-5


<PAGE>   72


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

           Consolidated Statements of Stockholders' Equity (Continued)
                  Years Ended September 30, 2000, 1999 and 1998


<TABLE>
<CAPTION>
                                                                                                   Deferred
                                                                                                 Compensation
                                                                                  Retained        on Common
                                                                Additional        Earnings-         Stock
                                                  Common         Paid-in        Substantially      Employee          Treasury
                                                  Stock           Capital        Restricted      Benefit Plans        Stock
                                               -------------   -------------    -------------    -------------    -------------
<S>                                            <C>             <C>              <C>              <C>              <C>
Balance - September 30, 1999                   $       9,996   $   9,851,981    $   6,740,051    $    (623,224)   $  (1,129,738)

Comprehensive Income:
    Net income                                            --              --          961,492               --               --
    Change in net unrealized gain (loss) on
       available-for-sale securities, net of
       reclassification adjustments and tax
       effect                                             --              --               --               --               --


         Total comprehensive income


Release of unallocated ESOP shares                        --            (896)              --           63,990               --
Acquisition of ESOP shares                                --              --               --          (12,404)              --
Vesting of shares on Management
    Recognition Plans                                     --         (15,733)              --           69,411               --
Vesting of deferred compensation shares                   --              --               --           19,902               --
Acquisition of Treasury stock                             --              --               --               --          (11,043)
Cash dividends declared ($ .60/share)                     --              --         (515,299)              --               --
                                               -------------   -------------    -------------    -------------    -------------

Balance - September 30, 2000                   $       9,996   $   9,835,352    $   7,186,244    $    (482,325)   $  (1,140,781)
                                               =============   =============    =============    =============    =============

<CAPTION>

                                                Accumulated
                                                  Other
                                                  Compre-
                                                  hensive
                                                  Income
                                                  (Loss)            Total
                                               -------------    -------------
<S>                                            <C>              <C>
Balance - September 30, 1999                   $    (496,877)   $  14,352,189
                                                                -------------

Comprehensive Income:
    Net income                                            --          961,492
    Change in net unrealized gain (loss) on
       available-for-sale securities, net of
       reclassification adjustments and tax
       effect                                         13,875           13,875
                                                                -------------

         Total comprehensive income                                   975,367
                                                                -------------

Release of unallocated ESOP shares                        --           63,094
Acquisition of ESOP shares                                --          (12,404)
Vesting of shares on Management
    Recognition Plans                                     --           53,678
Vesting of deferred compensation shares                   --           19,902
Acquisition of Treasury stock                             --          (11,043)
Cash dividends declared ($ .60/share)                     --         (515,299)
                                               -------------    -------------
Balance - September 30, 2000                   $    (483,002)   $  14,925,484
                                               =============    =============
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>   73

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
                  Years Ended September 30, 2000, 1999 and 1998


<TABLE>
<CAPTION>
                                                                             2000               1999               1998
                                                                         ------------       ------------       ------------
<S>                                                                      <C>                <C>                <C>
OPERATING ACTIVITIES

Net income                                                               $    961,492       $  1,299,999       $    634,874

Adjustments to reconcile net income to net cash
provided by operating activities:
    Provision for loan losses                                                   5,572            587,690             44,744
    Depreciation and amortization                                             422,789            398,407            345,844
    Equity in loss of unconsolidated affiliates                                16,464            128,153             26,279
    Proceeds from sales of loans                                           15,092,258         23,423,676         11,743,414
    Loans originated for sale                                             (14,251,762)       (23,598,773)       (11,263,507)
    Gain on sale of loans                                                    (312,024)          (442,287)          (238,907)
    (Gain) loss on sale of premises and equipment                                  --             (5,622)            (2,565)
    (Gain) loss on sale of foreclosed assets                                  (20,947)             4,041                 --
    Compensation expense on ESOP and MRPs                                     136,674            209,370            213,436
    (Gain) loss on sale of investment securities available-for-sale             4,199         (2,402,639)          (123,736)
    Net amortization of premium on investment securities                       13,746           (134,240)           (73,995)
    (Increase) decrease in accrued interest receivable                       (165,456)            26,949             26,377
    (Increase) decrease in other assets                                       (73,068)           280,880            794,629
    Increase (decrease) in accrued interest payable                           268,989             62,833            (41,500)
    Increase (decrease) in accrued expenses and other liabilities            (913,573)           906,189           (977,764)
                                                                         ------------       ------------       ------------

       Net cash provided by operating activities                            1,185,353            744,626          1,107,623
                                                                         ------------       ------------       ------------

INVESTING ACTIVITIES

Net cash paid for acquisition                                                      --                 --           (536,430)
Investment in affiliated companies                                                 --                 --            (75,000)
Net change in interest-bearing deposits in banks                             (743,391)          (612,192)           381,516
Proceeds from calls and maturities of investment
    securities held-to-maturity                                                28,783            561,889         13,473,975
Proceeds from calls and maturities of investment
    securities available-for-sale                                           1,550,119          7,243,091            100,281
Proceeds from sales of investment securities
    available-for-sale                                                      1,007,841         20,968,808         20,206,296
Purchase of investment securities available-for-sale                       (1,567,544)       (31,453,474)       (18,813,395)
Net increase in loans                                                      (2,453,697)        (2,918,378)          (936,336)
Proceeds from sale of premises and equipment                                       --             18,000             11,106
Purchase of premises and equipment                                           (173,688)        (1,630,939)          (864,793)
Proceeds from sale of foreclosed real estate                                  820,638             36,000                 --
                                                                         ------------       ------------       ------------

    Net cash provided (used) by investing activities                       (1,530,939)        (7,787,195)        12,947,220
                                                                         ------------       ------------       ------------
</TABLE>

                               (Continued)

See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>   74


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                Consolidated Statements of Cash Flows (Continued)
                  Years Ended September 30, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                2000               1999               1998
                                                            ------------       ------------       ------------
<S>                                                         <C>                <C>                <C>
FINANCING ACTIVITIES

Net increase (decrease) in demand accounts
    and savings accounts                                    $ (4,818,176)      $     81,185       $  1,790,205
Net increase (decrease) in certificates of deposit            (4,540,599)        (9,242,985)        (3,433,339)
Proceeds from borrowed funds                                  56,107,709         55,476,593         10,629,505
Repayment of borrowed funds                                  (46,022,709)       (42,841,593)       (15,113,823)
Net proceeds from issuance of common stock                            --                 --            116,200
Cash dividends paid                                             (515,299)          (513,294)          (496,880)
Acquisition of employee stock ownership plan shares              (12,404)           (13,068)                --
Acquisition of treasury stock                                    (11,043)          (262,651)          (668,695)
(Increase) decrease in advances by borrowers
    for property taxes and insurance                            (144,176)           114,054           (112,233)
                                                            ------------       ------------       ------------

      Net cash provided (used) by financing activities            43,303          2,798,241         (7,289,060)
                                                            ------------       ------------       ------------

Increase (decrease) in cash and cash equivalents                (302,283)        (4,244,328)         6,765,783

Cash and cash equivalents - beginning of year                  4,969,578          9,213,906          2,448,123
                                                            ------------       ------------       ------------

Cash and cash equivalents - end of year                     $  4,667,295       $  4,969,578       $  9,213,906
                                                            ============       ============       ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-8
<PAGE>   75


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                Consolidated Statements of Cash Flows (Continued)
                  Years Ended September 30, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                               2000            1999            1998
                                                                            -----------    -------------    -----------
<S>                                                                         <C>            <C>              <C>
Supplemental information on cash payments:
    Interest paid                                                           $ 6,869,877    $   6,303,990    $ 6,352,838
                                                                            ===========    =============    ===========

    Income taxes paid                                                       $ 1,418,194    $      64,390    $   426,888
                                                                            ===========    =============    ===========

Supplemental information on non-cash transactions:
    Change in net unrealized gain on investment
        securities available-for-sale, net of deferred taxes                $    13,875    $  (2,038,782)   $   422,307
                                                                            ===========    =============    ===========

    Disposition of investment in affiliate by issuance of loan              $        --    $          --    $    96,664
                                                                            ===========    =============    ===========

    Real estate owned, obtained through foreclosure                         $   406,833    $     608,399    $        --
                                                                            ===========    =============    ===========

    Acquisition of company through business combination accounted for as
        purchase:
        Assets acquired:
           Cash and cash equivalents                                                                        $ 2,787,484
           Investment securities                                                                             35,436,448
           Loans receivable, net                                                                             31,919,681
           Premises and equipment                                                                             1,558,213
           Accrued interest receivable                                                                          541,855
           Other assets                                                                                         215,684
                                                                                                            -----------
               Total assets                                                                                  72,459,365
                                                                                                            -----------

        Liabilities assumed:
           Deposits                                                                                          64,974,274
           Advances by borrowers for property taxes and insurance                                                50,441
           Accrued interest payable                                                                             253,572
           Borrowed funds                                                                                     2,000,000
           Accrued expenses and other liabilities                                                               403,924
                                                                                                            -----------
               Total liabilities                                                                             67,682,211
                                                                                                            -----------

        Net assets acquired                                                                                   4,777,154
                                                                                                            -----------

        Consideration paid:
           Cash                                                                                               3,323,914
           Common stock                                                                                       1,826,039
                                                                                                            -----------
               Total paid                                                                                     5,149,953
                                                                                                            -----------

        Goodwill recorded                                                                                   $   372,799
                                                                                                            ===========
</TABLE>


See accompanying notes to consolidated financial statements



                                      F-9


<PAGE>   76


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes To Consolidated Financial Statements

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

     On February 13, 1995, the Bank was converted from a mutual to stock form of
     ownership (the Conversion) whereupon the Corporation, approved by the OTS
     as a thrift holding company, acquired all of the issued and outstanding
     shares of the Bank. The Corporation, simultaneously with the Conversion,
     issued 830,000 shares in the initial public offering of its common stock,
     par value $.01 per share, at $10.00 per share, for a gross offering
     proceeds of $8,300,000. The net offering proceeds to the Corporation, after
     deduction of all expenses and fees associated with the offering, was
     $7,248,366. Fifty percent (50%) of the net proceeds, or $3,624,183, was
     distributed to the Bank, as additional capital, in exchange for all of the
     issued and outstanding shares of capital stock of the Bank. The Corporation
     also loaned $664,000 of the net offering proceeds to the trustee of the
     SouthFirst Bancshares, Inc., Employee Stock Ownership Plan (the ESOP), who
     purchased, on behalf of the trust for the ESOP, 66,400 shares (or 8%) of
     the shares sold by the Corporation in the public offering. The loan will be
     repaid from contributions made by the Bank pursuant to the ESOP; and, as
     the loan is repaid, shares will be released to the accounts of the
     employees eligible to participate therein.

     The Bank, pursuant to applicable OTS regulations, established a special
     "liquidation account" for the benefit of the eligible account holders and
     supplemental eligible account holders in the Conversion. The liquidation
     account was established in an amount equal to the regulatory capital of the
     Bank as of the date of the statement of financial condition contained in
     the final Prospectus. Each eligible account holder and supplemental
     eligible account holder is entitled, on a complete liquidation of the Bank
     after the Conversion (and only in such event), to an interest in the
     liquidation account. The initial interest in such liquidation account is
     determined by multiplying the opening balance in the


                                   (Continued)

                                      F-10


<PAGE>   77


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     liquidation account by a fraction of which the numerator is the amount of
     the qualifying deposit in the related deposit account and the denominator
     is the total amount of the qualifying deposits of all eligible account
     holders and supplemental eligible account holders in the Bank. If, on any
     annual closing date subsequent to the Conversion, the amount in any
     qualifying deposit account is less than the amount in such account on the
     initial applicable date, then the interest in the liquidation account is
     reduced by an amount proportionate to any such reduction. If, subsequent to
     the Conversion, a qualified deposit account is closed, then the interest of
     the account holder in the liquidation account will be reduced to zero. A
     merger, consolidation, sale of bulk assets or similar combination or
     transaction with an FDIC insured institution, in which the Bank is not the
     surviving insured institution, would not be considered to be a
     "liquidation" under which any distribution of the liquidation account would
     be made. In such a transaction, the liquidation account would be assumed by
     the surviving institution. The creation and maintenance of the liquidation
     account would not restrict the use or application of any of the capital
     accounts of the Bank, except that the Bank may not declare or pay a cash
     dividend to, or repurchase any of its capital stock from, the Corporation,
     if the effect of such dividend or repurchase would be to cause its equity
     to be reduced below the aggregate amount then required for the liquidation
     account.

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

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

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

     A substantial portion of the Company's loans are secured by real estate in
     the Company's primary market area. Accordingly, the ultimate collectibility
     of a substantial portion of the Company's loan portfolio is susceptible to
     changes in market conditions in the Company's primary market area.


                                   (Continued)

                                      F-11


<PAGE>   78


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Management believes that the allowances for losses on loans and foreclosed
     real estate are adequate. While management uses available information to
     recognize losses on loans and foreclosed real estate, future additions to
     the allowances may be necessary based on changes in economic conditions,
     particularly in the Company's primary market area. In addition, various
     regulatory agencies, as an integral part of their examination process,
     periodically review the Company's allowances for loan losses and foreclosed
     real estate. Such agencies may require the Company to recognize additions
     to the allowances based on their judgments about information available to
     them at the time of their examination.

     The principles which significantly affect the determination of financial
     position, results of operations and cash flows are summarized below.

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

     Declines in fair value of investment securities (available for sale or held
     to maturity) that are considered other than temporary are charged to
     securities losses, reducing the carrying value of such securities. Gains or
     losses on the sale of investment securities are computed using the specific
     identification method and are shown separately in non-interest income in
     the consolidated statements of operations. No securities were classified as
     trading account securities as of September 30, 2000 or 1999.

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

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

                                   (Continued)

                                      F-12


<PAGE>   79


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Premises and Equipment - Land is stated at cost. Premises and equipment are
     carried at cost less accumulated depreciation. Depreciation is provided by
     the straight-line method at rates intended to distribute the cost of
     buildings and improvements and furniture, fixtures, and equipment over
     their estimated service lives of 40 years and 3 to 12 years, respectively.

     Foreclosed Real Estate - For real estate acquired through foreclosure, a
     new cost basis is established at fair value at the time of foreclosure
     through a charge to the allowance for loan losses with a valuation
     allowance established for estimated costs to sell. The charge to establish
     the valuation allowance is charged to the allowance for loan losses at the
     time of foreclosure. Fair value for significant properties is determined
     through outside appraisal of the collateral. Subsequent to foreclosure,
     foreclosed assets are carried at the lower of fair value less estimated
     costs to sell or cost, with the difference recorded as a valuation
     allowance on an individual asset basis. Subsequent decreases in fair value
     and increases in fair value, up to the value established at foreclosure,
     are recognized as charges or credits to expense.

     Loans Receivable, Loans Held for Sale and Interest Income - Loans
     receivable are stated at principal amounts outstanding less the undisbursed
     portion of loans, unearned interest income, deferred loan fees, and the
     allowance for loan losses. Interest income on loans is credited to income
     based on the principal amount outstanding at the respective rate of
     interest except for add on installment loans for which interest is
     recognized on a method approximating the interest method. It is the general
     policy of the Company to discontinue the accrual of interest when principal
     or interest payments are delinquent and the ultimate collection of either
     is in doubt.

     Loans held for sale are carried at the lower of cost or market, determined
     on an aggregate basis.

     Allowance for Loan Losses - Additions to the allowance for loan losses are
     based on management's evaluation of the loan portfolio under current
     economic conditions, including such factors as the volume and character of
     loans outstanding, past loss experience, general economic conditions, and
     such other factors which, in management's judgment, deserve recognition in
     estimating loan losses. Loans are charged to the allowance when, in the
     opinion of management, such loans are deemed to be uncollectible.
     Provisions for loan losses and recoveries of loans previously charged to
     the allowance are added to the allowance.

     Loan Origination Fees, Premiums and Discounts on Loans, Mortgage-Backed
     Securities and Collateralized Mortgage Obligations - Loan origination fees
     and certain direct loan origination costs are deferred and recognized over
     the lives of the related loans as an adjustment of the loan yields using
     the interest method.

                                   (Continued)

                                      F-13


<PAGE>   80


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Premiums or discounts on loans, mortgage-backed securities, and
     collateralized mortgage obligations are amortized over the estimated lives
     of the related mortgage loans, adjusted for prepayments, using a method
     approximating the interest method. Premiums and discounts on loans,
     mortgage-backed securities, and collateralized mortgage obligations were
     insignificant at September 30, 2000.

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

     Loan Sales - Gains or losses on loan sales are recognized at the time of
     sale and are determined by the difference between net sales proceeds and
     the carrying value of the loans sold.

     Advertising - Advertising costs are charged to operations when incurred.
     Advertising expense was $35,508, $25,323 and $51,150 for the years ended
     September 30, 2000, 1999 and 1998, respectively.

     Earnings per Share - Basic earnings per share of common stock has been
     computed on the basis of the weighted-average number of shares of common
     stock outstanding. Fully diluted earnings per share reflects the potential
     dilution that could occur if the Company's outstanding options to acquire
     common stock were exercised. The exercise of these options accounts for the
     differences between basic and diluted weighted average shares outstanding.
     Options on 104,774 shares in 2000 and 133,901 shares in 1999 of common
     stock were not included in computed diluted earnings per share because
     their effects were antidilutive.

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

                                   (Continued)

                                      F-14


<PAGE>   81


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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


<TABLE>
<CAPTION>
                                                2000            1999            1998
                                             -----------     -----------     -----------
<S>                                          <C>             <C>             <C>
Unrealized holding gains (losses) on
   available-for-sale securities arising
   during the period                         $    18,185     $  (885,720)    $   804,890

Reclassification adjustment for losses
   (gains) realized in income                      4,199      (2,402,639)       (123,736)
                                             -----------     -----------     -----------

Net unrealized gains (losses)                     22,384      (3,288,359)        681,154

  Tax effect                                      (8,509)      1,249,577        (258,847)
                                             -----------     -----------     -----------

Net-of-tax amount                            $    13,875     $(2,038,782)    $   422,307
                                             ===========     ===========     ===========
</TABLE>

                              (Continued)



                                      F-15


<PAGE>   82


                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     New Accounting Pronouncements - In June 1998, the Financial Accounting
     Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
     Instruments and Hedging Activities. This Statement establishes accounting
     and reporting standards for derivative instruments embedded in other
     contracts (collectively referred to as derivatives) and for hedging
     activities. It requires that an entity recognize all derivatives as either
     assets or liabilities in the statement of financial position and measure
     those instruments at fair value. In June 1999, the FASB issued SFAS No.
     137, Accounting for Derivative Instruments and Hedging Activities -
     Deferral of the Effective Date of FASB Statement No. 133. This statement
     encourages earlier application, but delays the effective date of Statement
     No. 133 from fiscal quarters of all fiscal years beginning after June 15,
     1999 to fiscal quarters of all fiscal years beginning after June 15, 2000.
     In accordance with the new standard, management will continue to evaluate
     the impact and defer implementations as the standard allows.

     In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
     and Servicing of Financial Assets and Extinguishment of Liabilities. The
     statement revises the standards for accounting for securitization and other
     transfers of financial assets and collateral, and requires certain
     disclosures. This statement is effective for transfers and servicing of
     financial assets and extinguishments of liabilities occuring after March
     31, 2001. This statement is effective for recognition and reclassification
     of collateral and for disclosures relating to securitization transactions
     and collateral for fiscal years ending after December 15, 2000. The
     statement is to be applied prospectively with certain exceptions. Other
     than those exceptions, earlier or retroactive application of its accounting
     provisions is not permitted. Based on the Company's current operating
     activities, management does not believe that future adoption of this
     statement will have a material impact on the presentation of the Company's
     financial condition or results of operations.


                                      F-16

<PAGE>   83
                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

2.       INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                            Gross          Gross
                                                          Amortized      Unrealized     Unrealized
                                                             Cost           Gains          Losses        Fair Value
                                                         -----------     ----------     -----------      -----------
         <S>                                             <C>             <C>            <C>              <C>
         Held-to-Maturity Securities

         September 30, 1999:
            Mortgage-backed securities                   $    28,783      $     --      $        14      $    28,769
                                                         ===========      ========      ===========      ===========


         Available-for-Sale Securities

         September 30, 2000:
            U.S Treasury securities                      $ 2,896,067      $     --      $   135,643      $ 2,760,424
            U.S. Government agency                         9,120,162            --          218,913        8,901,249
            Investment in FHLB stock                       2,229,800            --               --        2,229,800
            Other common stock                               790,385            --           53,072          737,313
            Collateral mortgage obligations (CMO's)       13,667,965        16,927           82,565       13,602,327
            Mortgage-backed securities                    10,401,465        17,967          323,737       10,095,695
                                                         -----------      --------      -----------      -----------
                                                         $39,105,844      $ 34,894      $   813,930      $38,326,808
                                                         ===========      ========      ===========      ===========

         September 30, 1999:
            U.S Treasury securities                      $ 2,883,245      $     --      $   155,889      $ 2,727,356
            U.S. Government agency                         9,113,745         1,875          200,596        8,915,024
            Investment in FHLB stock                       1,397,300            --               --        1,397,300
            Other common stock                               570,385            --          125,260          445,125
            Collateral mortgage
               obligations (CMO's)                        13,267,804        68,071          104,119       13,231,756
            AMF mutual fund                                  617,418            --               --          617,418
            Mortgage-backed securities                    12,264,310         1,676          287,180       11,978,806
                                                         -----------      --------      -----------      -----------
                                                         $40,114,207      $ 71,622      $   873,044      $39,312,785
                                                         ===========      ========      ===========      ===========
</TABLE>


                                   (Continued)


                                      F-17
<PAGE>   84

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


2.       INVESTMENT SECURITIES (Continued)

         The Company sold securities available-for-sale for total proceeds of
         $1,007,841, $20,968,808 and $20,206,296 resulting in gross realized
         gains (losses) of $(4,199), $2,402,639 and $123,736 in 2000, 1999 and
         1998, respectively.

         The scheduled maturities at September 30, 2000 of securities (other
         than equity securities) available-for-sale by contractual maturity are
         shown below. Expected maturities will differ from contractual
         maturities because borrower may have the right to call or prepay
         obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                  Available-for-Sale
                                             ----------------------------
                                              Amortized
                                                 Cost         Fair Value
                                             -----------      -----------
             <S>                             <C>              <C>
             Due in one year or less         $         0      $         0
             Due from one to five years       10,271,179       10,042,447
             Due from five to ten years       10,957,300       10,504,844
             Due after ten years              14,857,180       14,812,404
                                             -----------      -----------
                                             $36,085,659      $35,359,695
                                             ===========      ===========
</TABLE>

         Investment securities available-for-sale with a carrying amount of
         approximately $5,299,000 and $2,424,000 at September 30, 2000 and 1999,
         respectively, were pledged to secure public deposits as required by law
         and for other purposes required or permitted by law.


                                      F-18
<PAGE>   85

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

3.       LOANS

         Loans consisted of the following at September 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                 2 0 0 0           1 9 9 9
                                                              ------------      ------------
         <S>                                                  <C>               <C>
         Real estate mortgage loans:
              First mortgage loans:
                 Single-family residential                    $ 58,595,477      $ 65,636,899
                 Multi-family and commercial real estate        13,789,799         8,329,795
              Second mortgage loans                              7,333,692         9,046,297
              1-4 family construction loans                     36,800,035        26,221,923
         Savings account loans                                   1,097,108         1,267,321
         Installment loans                                       4,089,397         5,616,001
                                                              ------------      ------------
                 Total                                         121,705,508       116,118,236
                                                              ------------      ------------

         Deduct:
              Deferred loan fees                                   192,333           241,696
              Undisbursed portion of loans in process           12,458,782         8,712,144
              Allowance for loan losses                            700,620           851,915
                                                              ------------      ------------
                                                                13,351,735         9,805,755
                                                              ------------      ------------

         Total loans receivable - net                         $108,353,773      $106,312,481
                                                              ============      ============
</TABLE>

         Activity in the allowance for loan losses was as follows for the years
         ended September 30, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                  2 0 0 0         1 9 9 9         1 9 9 8
                                                 ---------       ---------       ---------
         <S>                                     <C>             <C>             <C>
         Beginning balance                       $ 851,915       $ 732,021       $ 284,324
         Addition from business combination             --              --         487,611
         Provision charged to income                 5,572         587,690          44,744
         Recovery of amounts charged off
            in prior years                          35,221          38,447          13,200
         Loans charged off                        (192,088)       (506,243)        (97,858)
                                                 ---------       ---------       ---------

         Ending balance                          $ 700,620       $ 851,915       $ 732,021
                                                 =========       =========       =========
</TABLE>


                                   (Continued)


                                      F-19
<PAGE>   86

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

3.       LOANS (Continued)

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

<TABLE>
<CAPTION>
                                                               September 30,
                                                           --------------------
                                                           2 0 0 0      1 9 9 9
                                                           -------      -------
         <S>                                                <C>         <C>
         Impaired loans without a valuation allowance       $   --      $    --
         Impaired loans with a valuation allowance           3,742       75,210
                                                            ------      -------

            Total impaired loans                            $3,742      $75,210
                                                            ======      =======

         Valuation allowance related to impaired loans      $3,742      $75,210
                                                            ======      =======
</TABLE>

<TABLE>
<CAPTION>
                                                              Years Ended September 30,
                                                          ----------------------------------
                                                          2 0 0 0      1 9 9 9      1 9 9 8
                                                          -------      -------      --------
         <S>                                              <C>          <C>          <C>
         Average investment in impaired loans              $4,771      $78,998      $226,690
         Interest income recognized on impaired loans         373        1,188         1,037
         Interest income recognized on a cash basis
            on impaired loans                                 373        1,188         1,037
</TABLE>

     No additional funds are committed to be advanced in connection with
     impaired loans.

4.       PREMISES AND EQUIPMENT

         Premises and equipment are summarized as follows at September 30, 2000
         and 1999:

<TABLE>
<CAPTION>
                                                  2 0 0 0           1 9 9 9
                                                -----------       -----------
         <S>                                    <C>               <C>
         Land                                   $ 1,848,059       $ 1,848,059
         Buildings and improvements               3,374,990         3,342,483
         Furniture, fixtures and equipment        1,187,236         1,124,030
         Automobiles                                193,282           214,869
                                                -----------       -----------
                                                  6,603,567         6,529,441
         Less: Accumulated depreciation          (1,611,306)       (1,351,207)
                                                -----------       -----------

         Premises and equipment, net            $ 4,992,261       $ 5,178,234
                                                ===========       ===========
</TABLE>

         Depreciation expense charged to operations was $359,661, $343,635 and
         $291,443 in 2000, 1999 and 1998, respectively.


                                      F-20
<PAGE>   87

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

5.       ACCRUED INTEREST RECEIVABLE

         Accrued interest receivable consists of the following at September 30,
         2000 and 1999:

<TABLE>
<CAPTION>
                                                2 0 0 0         1 9 9 9
                                              ----------      ----------
<S>                                           <C>             <C>
Loans                                         $  811,252      $  683,821
Investment securities held-to-maturity                --          14,895
Investment securities available-for-sale         372,233         319,313
                                              ----------      ----------

   Total accrued interest receivable          $1,183,485      $1,018,029
                                              ==========      ==========
</TABLE>

6.       INVESTMENTS IN AFFILIATES

         In March 1995, the Company obtained a 50% ownership interest in
         Magnolia Title Services, Inc. (Magnolia) for an investment of $100,000.
         Magnolia provides title insurance and related services to various
         borrowers and lenders in the state of Alabama. In October 1995, the
         Company obtained a 50% ownership interest in Meta Company (Meta) for an
         investment of $175,000. Meta is engaged in the financial planning
         business. In December 1997, the Company sold its investment in Meta at
         no gain or loss. The Company financed the sale through a loan of
         approximately $96,000. The Company accounts for these investments under
         the equity method.

7.       LEASES

         The Company leases certain real estate and office equipment under
         operating leases expiring in various years through 2004. Minimum future
         rental payments under non-cancellable operating leases having remaining
         terms in excess of one year as of September 30, 2000 are as follows:

<TABLE>
<CAPTION>
                 Year Ending
                 September 30,               Amount
                 -------------              --------

                 <S>                        <C>
                     2001                   $ 45,243
                     2002                     44,883
                     2003                     28,569
                     2004                      4,500
                                            --------

                                            $123,195
                                            ========
</TABLE>

         Lease expense charged to operations was $66,229, $65,359 and $63,631
         for the years ended September 30, 2000, 1999 and 1998, respectively.


                                      F-21
<PAGE>   88

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

8.       BUSINESS ACQUISITION

         On October 31, 1997, the Company acquired First Federal Savings & Loan
         Association of Chilton County ("Chilton County") in a business
         combination accounted for as a purchase. Chilton County was primarily
         engaged in banking services in Chilton County, Alabama. The results of
         operations of Chilton County are included in the accompanying financial
         statements since the date of acquisition. The total cost of the
         acquisition was approximately $5.2 million, which consisted of 128,143
         shares of common stock issued at $14.25 per share and approximately
         $3.3 million in cash. The cost exceeded the fair value of the net
         assets of Chilton County by approximately $373,000, which is being
         amortized on the straight-line method over 15 years.

         In connection with the acquisition, approximately $665,000 of the
         purchase price was allocated to premiums on loans purchased. These
         amounts are being amortized on the straight-line method over various
         periods ranging from one to fifteen years, of which approximately
         $126,000, $163,000 and $235,000 has been amortized during 2000, 1999
         and 1998, respectively. Additionally, approximately $61,000 was
         allocated as a premium on deposits which was amortized over
         approximately 12 months. The combined effects of the goodwill and
         premium amortization was to reduce income before taxes by approximately
         $160,000, $184,000 and $202,000 in 2000, 1999 and 1998, respectively.

9.       DEPOSITS

         An analysis of deposit accounts at the end of the period is as follows
         at September 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                           2 0 0 0           1 9 9 9
                                                        ------------      ------------
         <S>                                            <C>               <C>
         Demand accounts:
            Non interest bearing checking accounts      $  2,990,806      $  3,838,290
            Interest bearing:
               NOW accounts                                9,728,880        12,129,229
               Money market demand                           632,274           577,440
                                                        ------------      ------------
                    Total demand accounts                 13,351,960        16,544,959

         Statement savings accounts                       11,794,425        13,419,602

         Certificate accounts                             80,216,716        84,757,315
                                                        ------------      ------------

              Total                                     $105,363,101      $114,721,876
                                                        ============      ============
</TABLE>


                                   (Continued)


                                      F-22
<PAGE>   89

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

9.       DEPOSITS (Continued)

         Certificate accounts greater than or equal to $100,000 were $19,434,998
         and $16,227,615 at September 30, 2000 and 1999, respectively.

         Scheduled maturities of certificate accounts were as follows at
         September 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                          2 0 0 0          1 9 9 9
                                        -----------      -----------
         <S>                            <C>              <C>
         Less than one year             $61,535,297      $65,748,139
         One year to two years           11,418,188       15,274,808
         Two years to three years         3,942,230        2,874,855
         Three years to four years          388,595          594,196
         Four years to five years         2,932,406          265,317
                                        -----------      -----------

            Total                       $80,216,716      $84,757,315
                                        ===========      ===========
</TABLE>

         Interest expense on deposits for the years ended September 30, 2000,
         1999 and 1998 were as follows:

<TABLE>
<CAPTION>
                                           2 0 0 0         1 9 9 9         1 9 9 8
                                         ----------      ----------      ----------
         <S>                             <C>             <C>             <C>
         Demand accounts                 $  178,910      $  229,810      $  288,352
         Statement savings accounts         240,270         292,847         327,840
         Certificate accounts             4,439,128       4,866,887       4,799,936
                                         ----------      ----------      ----------

              Total                      $4,858,308      $5,389,544      $5,416,128
                                         ==========      ==========      ==========
</TABLE>


                                      F-23
<PAGE>   90

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

10.      BORROWED FUNDS

         The Company was liable to the Federal Home Loan Bank of Atlanta on the
         following advances at September 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                   Interest                             Balance
                                                      ---------------------------------     -----------------------------
         Maturity Date         Callable Date             Type          Rate at Sept. 30       2 0 0 0           1 9 9 9
         -------------         -------------          ----------       ----------------     -----------       -----------
         <S>                   <C>                    <C>              <C>                  <C>               <C>
         March 2000                                   Adjustable              5.39%         $        --       $ 4,315,549
         March 2000                                   Fixed Rate              8.62%                  --           271,080
         May 2000                                     Adjustable              5.43%                  --         5,250,000
         March 2001                                   Fixed Rate              8.68%             257,439           257,439
         March 2001                                   Adjustable              6.55%          12,336,629                --
         August 2001                                  Adjustable              6.68%           5,250,000         5,250,000
         May 2002                                     Adjustable              6.70%           1,660,000                --
         May 2003                                     Adjustable              6.77%           1,670,000                --
         April 2004            April 2001             Fixed Rate              5.01%           4,000,000         4,000,000
         April 2004            April 2001             Adjustable              6.46%           4,000,000         4,000,000
         May 2005                                     Adjustable              6.89%           1,670,000                --
         March 2010            December 2000          Fixed Rate              5.88%           5,000,000                --
         September 2009                               Adjustable              5.07%                  --         4,600,000
                                                                                            -----------       -----------

                                                                                            $35,844,068       $27,944,068
                                                                                            ===========       ===========
         Weighted average rate                                                                     6.34%             5.27%
                                                                                            ===========       ===========
</TABLE>

         At September 30, 2000 and 1999, the advances were collateralized by
         first-mortgage residential loans with carrying values of approximately
         $58,652,000 and $63,461,000, respectively. The Bank has an approved
         credit availability of approximately $48,000,000 at the Federal Home
         Loan Bank of Atlanta.

         During fiscal year 2000, the Bank established a discount window
         borrowing agreement with the Federal Reserve Bank of Kansas City with a
         maximum credit availability of $3,000,000. During fiscal year 2000,
         there were no borrowings on this discount window borrowing agreement.
         Securities carried at $2,760,000 at September 30, 2000 were pledged to
         secure this agreement.


                                   (Continued)


                                      F-24
<PAGE>   91

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

10.      BORROWED FUNDS (Continued)

         The Company also has a line-of-credit with a commercial bank of up to
         $4,000,000 which bears interest at the prime lending rate. The
         line-of-credit requires monthly interest payments. At September 30,
         2000, the prime lending rate was 9.50%. The outstanding balance on the
         line-of-credit was $3,005,000 and $780,000 at September 30, 2000 and
         1999, respectively. The note is secured by the Company's stock in its
         subsidiary, First Federal of the South. The line-of-credit is due on
         demand, but no later than March 1, 2001.

         The Company has a note payable to an individual in the amount of
         $40,000 and $80,000 at September 30, 2000 and 1999, respectively,
         payable in annual equal installments of $40,000 over five years.

         Total borrowed funds at September 30, 2000 have maturities (or call
         dates) in future years as follows:

<TABLE>
<CAPTION>
                    Year Ending
                   September 30,                     Amount
                   -------------                  ------------
                   <S>                            <C>
                       2001                       $ 33,889,068
                       2002                          1,660,000
                       2003                          1,670,000
                       2004                                 --
                       2005                          1,670,000
                                                  ------------

                                                  $ 38,889,068
                                                  ============
</TABLE>


                                      F-25
<PAGE>   92

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

11.      INCOME TAX EXPENSE

         Income tax expense (benefit) for the years ended September 30, 2000,
         1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
                               2 0 0 0           1 9 9 9            1 9 9 8
                              --------          ---------           --------
         <S>                  <C>               <C>                 <C>
         Federal:
            Current           $419,552          $ 794,668           $329,558
            Deferred            66,547            (76,991)            30,099
                              --------          ---------           --------
                               486,099            717,677            359,657
                              --------          ---------           --------
         State:
            Current            118,384            105,259             26,759
            Deferred             4,893             (6,730)             2,213
                              --------          ---------           --------
                               123,277             98,529             28,972
                              --------          ---------           --------

               Total          $609,376          $ 816,206           $388,629
                              ========          =========           ========
</TABLE>

      Income tax expense includes taxes related to investment security gains
      (losses) in the approximate amount of $(1,600), $913,000 and $47,000 in
      2000, 1999 and 1998, respectively.

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

<TABLE>
<CAPTION>
                                                                      2 0 0 0              1 9 9 9            1 9 9 8
                                                                     ---------            --------           --------
         <S>                                                         <C>                  <C>                <C>
         Computed "expected" income tax expense                      $ 534,095            $719,510           $347,991
         Increase (reduction) in income tax resulting from:
            Compensation expense for ESOP                              (22,176)             20,987                 --
            Management Recognition Plan                                    785               1,878                 --
            State tax, net of federal income tax benefit                99,915              71,086             24,663
            Other                                                       (3,243)              2,745             15,975
                                                                     ---------            --------           --------

                 Total                                               $ 609,376            $816,206           $388,629
                                                                     =========            ========           ========

         Effective tax rate                                                 39%                 39%                38%
                                                                     =========            ========           ========
</TABLE>


                                   (Continued)


                                      F-26
<PAGE>   93

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

11.      INCOME TAX EXPENSE (Continued)

         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         September 30, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                                    2 0 0 0             1 9 9 9
                                                                                   ---------           --------
         <S>                                                                       <C>                 <C>
         Deferred tax assets:
              Unrealized loss on investment securities available-for-sale          $ 296,033           $304,539
              Bad debts                                                              146,666            201,907
              Deferred compensation                                                   43,147             41,665
              Investment in equity of affiliate                                       89,425             74,770
              Other                                                                       --             19,691
                                                                                   ---------           --------
                   Total deferred tax assets                                         575,271            642,572
                                                                                   ---------           --------

         Deferred tax liabilities:
              Management Recognition Plan                                             11,368             68,870
              FHLB stock                                                             237,138            237,138
              Depreciation                                                           217,421            216,074
              Prepaid expenses                                                        92,424             37,781
              Foreclosed real estate gain                                             13,585             11,233
              Federal/state tax deduction on a cash basis                              6,896                 --
              Other                                                                    4,909                 --
                                                                                   ---------           --------
                   Total deferred tax liabilities                                    583,741            571,096
                                                                                   ---------           --------

                   Net deferred tax asset (liability)                              $  (8,470)          $ 71,476
                                                                                   =========           ========
</TABLE>

         There was no valuation allowance at September 30, 2000 or 1999.


                                      F-27
<PAGE>   94

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

12.      EMPLOYEE BENEFIT PLANS

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

         The common stock of the Corporation acquired for the ESOP is held as
         collateral for the loan and is released for allocation to the ESOP
         participants as principal payments are made on the loan. The Bank makes
         contributions to the ESOP in amounts sufficient to make loan interest
         and principal payments and may make additional discretionary
         contributions. Contributions, which include dividends on ESOP shares,
         of $88,478, $43,518 and $52,258 were made to the ESOP in 2000, 1999 and
         1998, respectively. During 2000 and 1999, the Trustee distributed cash
         of $12,404 and $13,068, respectively, in lieu of shares to retiring
         participants.

         The ESOP's loan is repayable in ten annual installments of principal
         and interest. The interest rate is adjusted annually and is equal to
         the prime rate on each October 1st, beginning with October 1, 1995,
         until the note is paid in full. Principal and interest for the years
         ended September 30, 2000, 1999 and 1998 were $88,478, $73,845 and
         $75,882, respectively. The interest rate and principal outstanding at
         September 30, 2000 were 8.25% and $201,208, respectively. These
         payments resulted in the commitment to release 6,399 shares in 2000,
         7,056 shares in 1999 and 4,000 shares in 1998. The Company has
         recognized compensation expense, equal to the fair value of the
         committed-to-be released shares of $63,094, $105,896 and $77,600 in
         2000, 1999 and 1998, respectively. Excluding committed-to-be released
         shares, suspense shares at September 30, 2000 and 1999 equaled 17,345
         and 23,744, respectively. The fair value of the suspense shares at
         September 30, 2000 and 1999, was $173,450 and $293,844, respectively.
         These suspense shares are excluded from weighted average shares in
         determining earnings per share.

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


                                   (Continued)


                                      F-28
<PAGE>   95

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

12.      EMPLOYEE BENEFIT PLANS (Continued)

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

<TABLE>
<CAPTION>
                                                1995 Plan                         1998 Plan
                                       --------------------------        --------------------------
                                       Number of         Exercise        Number of         Exercise
                                         Shares            Price          Shares            Price
                                       ---------         --------        ---------         --------
         <S>                           <C>               <C>             <C>               <C>
         Outstanding at
            September 30, 1997           78,850           $14.00                0           $  .00
         Granted                              0              .00           67,511            21.00
         Exercised                       (8,300)           14.00                0              .00
                                        -------           ------          -------           ------

         Outstanding at
           September 30, 1998            70,550            14.00           67,511            21.00
         Forfeited                       (1,660)           14.00           (2,500)           15.75
                                        -------           ------          -------           ------

         Outstanding at
            September 30, 1999           68,890            14.00           65,011            15.75
         Forfeited                      (12,450)           14.00          (16,667)           15.75
                                        -------           ------          -------           ------

         Outstanding at
            September 30, 2000           56,440           $14.00           48,334           $15.75
                                        =======           ======          =======           ======
</TABLE>

         The Company applies APB Opinion 25 in accounting for its stock option
         plans. Accordingly, no compensation cost has been recognized for the
         plan in 2000, 1999 or 1998. Had compensation cost been determined on
         the basis of fair value pursuant to SFAS No. 123, net income and
         earnings per share would have been reduced as follows:

<TABLE>
<CAPTION>
                                                     2 0 0 0           1 9 9 9             1 9 9 8
                                                   ----------        -----------          ----------
        <S>                                        <C>               <C>                  <C>
        Net income:
           As reported                             $  961,492        $ 1,299,999          $  634,874
           Pro forma                                  948,247          1,272,640             602,059

        Basic earnings per share:
           As reported                                   1.06               1.44                 .68
           Pro forma                                     1.06               1.43                 .64

        Fully diluted earnings per share:
           As reported                                   1.06               1.44                 .67
           Pro forma                                     1.06               1.43                 .64
</TABLE>


                                   (Continued)


                                      F-29
<PAGE>   96

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

12.      EMPLOYEE BENEFIT PLANS (Continued)

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

<TABLE>
                  <S>                                       <C>
                  Dividend yield                            3.81%
                  Expected life                             9 years
                  Expected volatility                       9.00%
                  Risk-free interest rate                   5.77%
</TABLE>

         On November 15, 1995, the Company issued 33,200 shares of common stock
         (Initial Shares) to key employees under the terms of the Company's
         Management Recognition Plans (MRP's). These shareholders receive
         dividends on the shares and have voting rights. However, the sale or
         transferability of the shares is subject to the vesting requirements of
         the plan. These vesting requirements provide for the removal of the
         transferability restrictions upon the performance of employment
         services. The restrictions will be removed on 20 percent of the Initial
         Shares on each November 15 through the year 2000. Participants who
         terminate employment prior to satisfying the vesting requirements must
         forfeit the unvested shares and the accumulated dividends on the
         forfeited shares. The Company has recorded compensation expense equal
         to the fair value of the portion of vested shares attributable to 2000,
         1999 and 1998. In addition, the dividends paid on unvested shares are
         also reflected as compensation expense. Total compensation expense
         attributable to the MRP's in 2000, 1999 and 1998 was $42,635, $83,572
         and $115,934, respectively.

         The Company also has a 401(k) plan that covers all employees who meet
         minimum age and service requirements. The plan provides for elective
         employee salary deferrals and discretionary company matching
         contributions. Company matching contributions were $0, $44,454 and $0
         in 2000, 1999 and 1998, respectively.

         The Company has entered into deferred compensation agreements with
         three of its senior officers, pursuant to which each officer will
         receive from the Company certain retirement benefits at age 65. Such
         benefits will be payable for 15 years to each officer or, in the event
         of death, to such officer's respective beneficiary. A portion of the
         retirement benefits will accrue each year until age 65 or, if sooner,
         until termination of employment. The annual benefits under these
         arrangements range from $30,000 to $65,000.


                                   (Continued)


                                      F-30
<PAGE>   97

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

12.      EMPLOYEE BENEFIT PLANS (Continued)

         The retirement benefits available under the deferred compensation
         agreements are unfunded. However, the Bank has purchased life insurance
         policies on the lives of these officers that will be available to the
         Company and the Bank to provide, both, for retirement benefits and for
         key man insurance. The costs of these arrangements was $73,758, $73,481
         and $70,689 in 2000, 1999 and 1998, respectively.

         In addition to the deferred compensation arrangements discussed above,
         the Company entered into arrangements with two officers in April 1997,
         under which the Company issued a total of 21,135 shares of common stock
         to these officers. The shares vest ratably over the 15 year term of
         their employment contracts. The Company has recognized compensation
         expense equal to the fair value of the vested shares of $19,902,
         $19,902 and $19,902 in 2000, 1999 and 1998, respectively.

13.      RELATED PARTY TRANSACTIONS

         Certain directors and officers of the Company are loan customers of the
         Bank. Total loans outstanding to these persons at September 30, 2000
         and 1999 amounted to $2,943,529 and $2,710,176, respectively. The
         change from 1999 to 2000 reflects payments of $293,618 and advances of
         $526,971. Management believes that such loans are made in the ordinary
         course of business at normal credit terms, including interest rate and
         collateral requirements, and do not represent more than a normal credit
         risk.

         Deposits from related parties held by the Bank at September 30, 2000
         and 1999 amounted to $511,182 and $423,700, respectively.

14.      COMMITMENTS AND CONTINGENCIES

         At September 30, 2000, the Bank had outstanding loan commitments of
         $16,282,051 including $10,137,849 in undisbursed construction loans in
         process, $5,493,102 in unused lines and letters of credit, and $651,100
         in commitments to originate mortgage loans consisting primarily of
         30-day commitments. Commitments to originate conventional mortgage
         loans consisted of fixed rate mortgages for which interest rates had
         not been established, all having terms ranging from 15 to 30 years.

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


                                   (Continued)


                                      F-31
<PAGE>   98

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

14.      COMMITMENTS AND CONTINGENCIES (Continued)

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

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

15.      RETAINED EARNINGS AND REGULATORY CAPITAL

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

         Quantitative measures established by regulations to ensure capital
         adequacy require the Bank to maintain minimum amounts and ratios (set
         forth in the table below) of total and Tier I capital to risk-weighted
         assets, and of Tier I capital to average assets. Management believes,
         as of September 30, 2000, that the Bank meets all capital adequacy
         requirements and meets the requirements to be classified as "well
         capitalized."


                                   (Continued)


                                      F-32
<PAGE>   99
                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

15.      RETAINED EARNINGS AND REGULATORY CAPITAL (Continued)

<TABLE>
<CAPTION>
                                                                               For Capital
                                                     Actual                 Adequacy Purposes             Well Capitalized
                                              --------------------         -------------------          --------------------
                                              Amount         Ratio         Amount        Ratio          Amount         Ratio
                                              ------         -----         ------        -----          ------         -----
         <S>                                <C>              <C>         <C>             <C>          <C>             <C>
         As of September 30, 2000:
           Total capital
              (to risk weighted assets)     $ 14,924,000     15.57%      >$ 7,666,000     >8.00%      >$ 9,583,000    >10.00%
                                                                         -                -           -               -
           Tier I capital
              (to risk weighted assets)       14,761,000     15.40%      >  3,833,000     >4.00%      >  5,750,000    > 6.00%
                                                                         -                -           -               -
           Tier I capital
              (to average assets)             14,761,000      9.44%      >  6,253,000     >4.00%      >  7,816,000    > 5.00%
                                                                         -                -           -               -

         As of September 30, 1999:
           Total capital
              (to risk weighted assets)     $ 13,707,000     17.34%      >$ 6,324,000     >8.00%      >$ 7,905,000    >10.00%
                                                                         -                -           -               -
           Tier I capital
              (to risk weighted assets)       13,540,000     17.13%      >  3,162,000     >4.00%      >  4,743,000    > 6.00%
                                                                         -                -           -               -
           Tier I capital
              (to average assets)             13,540,000      8.74%      >  6,200,000     >4.00%      >  7,750,000    > 5.00%
                                                                         -                -           -               -
</TABLE>


         Savings institutions with more than a "normal" level of interest rate
         risk are required to maintain additional total capital. A savings
         institution with a greater than normal interest rate risk is required
         to deduct specified amounts from total capital, for purposes of
         determining its compliance with risk-based capital requirements.
         Management believes that the Bank was in compliance with capital
         standards at September 30, 2000 and 1999.

         Retained earnings at September 30, 2000 and 1999, include approximately
         $2,400,000 for which no provision for income tax has been made. This
         amount represents allocations of income to bad debt deductions for tax
         computation purposes. If, in the future, this portion of retained
         earnings is used for any purpose other than to absorb tax bad debt
         losses, income taxes may be imposed at the then applicable rates.
         Retained earnings is also restricted at September 30, 2000, as a result
         of the liquidation account established upon conversion to a stock
         company. No dividends may be paid to stockholders if such dividends
         would reduce the net worth of the Bank below the amount required by the
         liquidation account.



                                      F-33
<PAGE>   100

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

16.      SHAREHOLDERS' RIGHTS PLAN

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

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following table provides fair values of the Company's financial
         instruments at September 30, 2000 and 1999. Fair value estimates are
         made at a specific point in time, based on relevant market information
         and information about the financial instrument. These estimates do not
         reflect any premium or discount that could result from offering for
         sale at one time the Company's entire holdings of a particular
         financial instrument. Because no market exists for a portion of the
         Company's financial instruments, fair value estimates are based on
         judgments regarding future expected loss experience, current economic
         conditions, risk characteristics of various financial instruments, and
         other factors. These estimates are subjective in nature and involve
         uncertainties and matters of significant judgment and, therefore,
         cannot be determined with precision. Changes in assumptions could
         significantly affect the estimates. Fair value estimates are based on
         existing on and off-balance sheet financial instruments without
         attempting to estimate the value of anticipated future business and the
         value of assets and liabilities that are not considered financial
         instruments. In addition, the tax ramifications related to the
         realization of the unrealized gains and losses can have a significant
         effect on fair value estimates and have not been considered in any of
         the estimates. The assumptions used in the estimation of the fair value
         of the Company's financial instruments are explained below. Where
         quoted market prices are not available, fair values are based on
         estimates using discounted cash flow and other valuation techniques.
         Discounted cash flows can be significantly affected by the assumptions
         used, including the discount rate and estimates of future cash flows.
         The following fair value estimates cannot be substantiated by
         comparison to independent markets and should not be considered
         representative of the liquidation value of the Company's financial
         instruments, but rather a good-faith estimate of the fair value of
         financial instruments held by the Company.

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

                                   (Continued)


                                      F-34

<PAGE>   101

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

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

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

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

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

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


                                   (Continued)


                                      F-35

<PAGE>   102

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

<TABLE>
<CAPTION>
                                                        2000                                    1999
                                            ------------------------------         -----------------------------
                                              Carrying          Estimated            Carrying         Estimated
                                               Amount          Fair Value             Amount          Fair Value
                                            ------------      ------------         ------------     ------------
    <S>                                     <C>               <C>                  <C>              <C>
    Financial assets:
     Cash and cash equivalents              $  4,667,295      $  4,667,295         $  4,969,578     $  4,969,578
     Interest-bearing deposits                 1,737,099         1,737,099              993,708          993,708
     Investments securities                   38,326,808        38,326,808           39,341,568       39,341,554
     Loans receivable, net                   108,353,773       111,480,637          106,312,481      108,123,122
     Accrued interest receivable               1,183,485         1,183,485            1,018,029        1,018,029
    Financial liabilities:
     Deposits                                105,363,101       105,610,887          114,721,876      114,595,134
     Borrowed funds                           38,889,068        38,850,183           28,804,068       28,808,635
     Accrued interest payable                  1,403,005         1,403,005            1,134,016        1,134,016
</TABLE>


                                      F-36

<PAGE>   103

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

18.      PARENT COMPANY

         The condensed financial information for SouthFirst Bancshares, Inc.
         (Parent Company) is presented below:


                                 Parent Company
                            Condensed Balance Sheets
                           September 30, 2000 and 1999

<TABLE>
<CAPTION>
                                                                                         2000                 1999
                                                                                     ------------         ------------
         <S>                                                                         <C>                  <C>

         ASSETS

         Cash and cash equivalents                                                   $    570,819         $     38,799
         Investment securities available for sale                                         737,313              445,125
         Investment in financial institution subsidiary                                14,269,626           13,201,531
         Investment in other subsidiaries                                                 645,977              506,212
         Investment in affiliates                                                              --               16,464
         Other assets                                                                   1,783,091            2,454,724
                                                                                     ------------         ------------

             Total Assets                                                            $ 18,006,826         $ 16,662,855
                                                                                     ============         ============

         LIABILITIES AND STOCKHOLDERS' EQUITY

         Liabilities:
            Borrowed funds (including $1,000,000 from financial
                 institution in 1999)                                                $  3,005,000         $  1,780,000
            Other liabilities                                                              76,342              530,666
                                                                                     ------------         ------------
               Total liabilities                                                        3,081,342            2,310,666
                                                                                     ------------         ------------
         Stockholders' equity:
            Common stock, $ .01 par value, 2,000,000 shares authorized;
               999,643 shares issued and 910,102 shares outstanding in 2000;
               999,643 shares issued and 904,822 shares outstanding in 1999;                9,996                9,996
            Additional paid-in capital                                                  9,835,352            9,851,981
            Treasury stock                                                             (1,140,781)          (1,129,738)
            Deferred compensation on common stock employee benefit plans                 (482,325)            (623,224)
            Retained earnings                                                           7,186,244            6,740,051
            Accumulated other comprehensive income (loss)                                (483,002)            (496,877)
                                                                                     ------------         ------------
                  Total stockholders' equity                                           14,925,484           14,352,189
                                                                                     ------------         ------------

               Total Liabilities and Stockholders' Equity                            $ 18,006,826         $ 16,662,855
                                                                                     ============         ============
</TABLE>


                                   (Continued)


                                      F-37
<PAGE>   104

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


18.      PARENT COMPANY (Continued)


                                 Parent Company
                       Condensed Statements of Operations
                  Years Ended September 30, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                         2000                1999                1998
                                                                     -----------         -----------         -----------
         <S>                                                         <C>                 <C>                 <C>
         Cash dividends from financial institution subsidiary        $        --         $   344,740         $ 2,892,976
         Interest and dividend income                                     59,266              49,307              53,688
                                                                     -----------         -----------         -----------

             Total income                                                 59,266             394,047           2,946,664
                                                                     -----------         -----------         -----------

         Expenses:
            Interest on borrowed funds                                   199,603             110,355             225,485
            Equity in loss of affiliates                                  16,464             128,153              26,279
            Compensation and benefits                                      7,500              21,500              28,500
            Management fee                                                90,000              90,000              90,000
            Other                                                        176,530             239,633             153,249
                                                                     -----------         -----------         -----------

                                                                         490,097             589,641             523,513
                                                                     -----------         -----------         -----------

         Income (loss) before income taxes                              (430,831)           (195,594)          2,423,151

         Income tax benefit                                              153,685             195,309             166,269
                                                                     -----------         -----------         -----------

         Income (loss) before equity in undistributed
            earnings of subsidiaries                                    (277,146)               (285)          2,589,420
                                                                     -----------         -----------         -----------

         Equity in undistributed earnings of subsidiaries
            (dividends in excess of earnings):
                 Financial institution                                 1,098,874           1,194,617          (1,978,410)
                 Other                                                   139,764             105,667              23,864
                                                                     -----------         -----------         -----------

                                                                       1,238,638           1,300,284          (1,954,546)
                                                                     -----------         -----------         -----------

         Net income                                                  $   961,492         $ 1,299,999         $   634,874
                                                                     ===========         ===========         ===========
</TABLE>


                                   (Continued)


                                      F-38
<PAGE>   105

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)


18.      PARENT COMPANY (Continued)


                                 Parent Company
                       Condensed Statements of Cash Flows
                  Years Ended September 30, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                               2000                1999                1998
                                                                            -----------         -----------         -----------
         <S>                                                                <C>                 <C>                 <C>
         Operating Activities:
             Net income                                                     $   961,492         $ 1,299,999         $   634,874
             Adjustments to reconcile net income to
             cash from operating activities:
                 Equity in undistributed earnings of subsidiaries            (1,238,638)         (1,645,024)           (938,430)
                 Compensation expense on ESOP and MRP                           136,674             209,370             213,436
                 Equity in losses of unconsolidated affiliates                   16,464             128,153              26,279
                 (Increase) decrease in other assets                            671,633            (587,975)            159,496
                 Increase (decrease) in other liabilities                      (454,324)            176,531            (564,096)
                                                                            -----------         -----------         -----------
                    Net cash provided (used) by operating activities             93,301            (418,946)           (468,441)
                                                                            -----------         -----------         -----------

         Investing Activities:
             Proceeds from sale of investment securities                             --                  --             102,187
             Investment in subsidiaries, net of dividends received              (27,535)            446,697           1,928,626
             Investment in affiliates, net of sale proceeds                          --                  --              21,664
             Purchase of investment securities available-for-sale              (220,000)                 --                  --
                                                                            -----------         -----------         -----------
                 Net cash provided (used) by investing activities              (247,535)            446,697           2,052,477
                                                                            -----------         -----------         -----------

         Financing Activities:
             Issuance of common stock                                                --                  --             116,200
             Acquisition of ESOP shares                                         (12,404)            (13,068)                 --
             Proceeds from borrowed funds                                     3,000,000             775,000                  --
             Repayment on borrowed funds                                     (1,775,000)                 --            (590,301)
             Cash dividends paid                                               (515,299)           (513,294)           (496,880)
             Acquisition of treasury stock                                      (11,043)           (262,651)           (668,695)
                                                                            -----------         -----------         -----------
                 Net cash provided (used) by financing activities               686,254             (14,013)         (1,639,676)
                                                                            -----------         -----------         -----------

         Net increase (decrease) in cash and cash equivalents                   532,020              13,738             (55,640)

         Cash and cash equivalents - beginning of year                           38,799              25,061              80,701
                                                                            -----------         -----------         -----------

         Cash and cash equivalents - end of year                            $   570,819         $    38,799         $    25,061
                                                                            ===========         ===========         ===========
</TABLE>


                                      F-39
<PAGE>   106

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

19.      SELECTED QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Year Ended September 30, 2000
                                            -------------------------------------------------------------------------
                                                                          Three Months Ended
                                            -------------------------------------------------------------------------
                                            September 30,          June 30,           March 31,          December 31,
                                            -------------        -----------         -----------         ------------
         <S>                                <C>                  <C>                 <C>                 <C>
         Interest and dividend income        $ 3,053,728         $ 3,049,455         $ 2,969,200         $ 2,842,799
         Interest expense                      1,902,608           1,829,970           1,738,651           1,667,637
                                             -----------         -----------         -----------         -----------

         Net interest income                   1,151,120           1,219,485           1,230,549           1,175,162
         Provision for loan losses                    --               5,572                  --                  --
                                             -----------         -----------         -----------         -----------

         Net interest income after
            provision for loan losses          1,151,120           1,213,913           1,230,549           1,175,162
         Non-interest income                     482,181             585,644             569,830             461,848
         Non-interest expenses                (1,237,025)         (1,333,671)         (1,361,030)         (1,367,653)
                                             -----------         -----------         -----------         -----------

         Income before taxes                     396,276             465,886             439,349             269,357
         Provision for income taxes              153,382             180,995             171,404             103,595
                                             -----------         -----------         -----------         -----------

         Net income                          $   242,894         $   284,891         $   267,945         $   165,762
                                             ===========         ===========         ===========         ===========

         Earnings per share:
            Basic                            $      0.28         $      0.31         $      0.29         $      0.18
            Diluted                          $      0.28         $      0.31         $      0.29         $      0.18

         Dividends per share                 $      0.15         $      0.15         $      0.15         $      0.15
</TABLE>


<TABLE>
<CAPTION>
                                                                     Year Ended September 30, 1999
                                            -------------------------------------------------------------------------
                                                                          Three Months Ended
                                            -------------------------------------------------------------------------
                                            September 30,          June 30,           March 31,          December 31,
                                            -------------        -----------         -----------         ------------
         <S>                                <C>                  <C>                 <C>                 <C>
         Interest and dividend income        $ 2,666,983         $ 2,588,350         $ 2,575,930         $ 2,652,834
         Interest expense                      1,548,338           1,528,084           1,594,359           1,696,042
                                             -----------         -----------         -----------         -----------

         Net interest income                   1,118,645           1,060,266             981,571             956,792
         Provision for loan losses               451,593              70,123              28,668              37,306
                                             -----------         -----------         -----------         -----------

         Net interest income after
            provision for loan losses            667,052             990,143             952,903             919,486
         Non-interest income                   2,721,864             735,037             718,162             572,432
         Non-interest expenses                (1,874,640)         (1,465,400)         (1,440,737)         (1,380,097)
                                             -----------         -----------         -----------         -----------

         Income before taxes                   1,514,276             259,780             230,328             111,821
         Provision for income taxes              579,829             101,231              90,520              44,626
                                             -----------         -----------         -----------         -----------

         Net income                          $   934,447         $   158,549         $   139,808         $    67,195
                                             ===========         ===========         ===========         ===========

         Earnings per share:
            Basic                            $      1.03         $      0.18         $      0.16         $      0.07
            Diluted                          $      1.03         $      0.18         $      0.16         $      0.07

         Dividends per share                 $      0.15         $      0.15         $      0.15         $      0.15
</TABLE>


                                      F-40



<PAGE>   107

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

20.      BUSINESS SEGMENT INFORMATION

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

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

         The following table presents financial information for each reportable
         segment.

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

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

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

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

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

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

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


                                   (Continued)


                                      F-41


<PAGE>   108

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

20.      BUSINESS SEGMENT INFORMATION (Continued)


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

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

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

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

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

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

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


                                   (Continued)


                                      F-42


<PAGE>   109

                           SOUTHFIRST BANCSHARES, INC.
                                AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

20.      BUSINESS SEGMENT INFORMATION (Continued)

<TABLE>
<CAPTION>
                                                                          September 30, 1998
                                                        -------------------------------------------------------
                                                                               Employee
                                                           Banking             Benefits
                                                          Activities          Consulting             Total
                                                        -------------         -----------         -------------
         <S>                                            <C>                   <C>                 <C>
         Interest and dividend income                   $  11,096,727         $     1,390         $  11,098,117
         Interest expenses                                  6,564,910                  --             6,564,910
                                                        -------------         -----------         -------------

         Net interest income                                4,531,817               1,390             4,533,207
         Provision for loan losses                             44,744                  --                44,744
                                                        -------------         -----------         -------------

         Net interest income after provision for
            loan losses                                     4,487,073               1,390             4,488,463
         Other income                                         985,979             758,835             1,744,814
         Other expenses                                    (4,491,446)           (718,328)           (5,209,774)
                                                        -------------         -----------         -------------

         Income before income taxes                           981,606              41,897             1,023,503
         Income taxes                                         370,596              18,033               388,629
                                                        -------------         -----------         -------------

         Net income                                     $     611,010         $    23,864         $     634,874
                                                        =============         ===========         =============

         Depreciation and amortization included
            in other expenses                           $     251,626         $    62,995         $     314,621
                                                        =============         ===========         =============

         Total assets at year-end                       $ 157,975,789         $ 1,043,739         $ 159,019,528
                                                        =============         ===========         =============
</TABLE>

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

<TABLE>
<CAPTION>
                                                            2000                 1999                  1998
                                                        -------------         -------------       -------------
         <S>                                            <C>                   <C>                 <C>
         ASSETS
         Total assets for reportable segments           $ 161,918,126         $ 161,380,029       $ 159,019,528
         Elimination of intercompany receivables             (892,492)             (873,664)           (501,436)
                                                        -------------         -------------       -------------

         Consolidated assets                            $ 161,025,634         $ 160,506,365       $ 158,518,092
                                                        =============         =============       =============
</TABLE>


                                      F-43

<PAGE>   110

                                   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
20th day of December, 2000.

                                      SOUTHFIRST BANCSHARES, INC.


                                      By: /s/ Donald C. Stroup
                                          -----------------------------------
                                          Donald C. Stroup
                                          President and 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/ Donald C. Stroup
       -----------------------------------------     Chairman, President and
       Donald C. Stroup                              Chief Executive Officer
                                                     (principal executive officer)                 December 20, 2000


       /s/ Joe K. McArthur
       -----------------------------------------     Executive Vice President,
       Joe K. McArthur                               Chief Operating Officer,
                                                     Chief Financial Officer,
                                                     Secretary/Treasurer and director
                                                     (principal financial and
                                                     accounting officer)                           December 20, 2000


                                                     Director
       -----------------------------------------
       Bobby R. Cook


       /s/ H. David Foote, Jr.                       Director                                      December 20, 2000
       -----------------------------------------
       H. David Foote, Jr.


       /s/ J. Malcomb Massey                         Director                                      December 20, 2000
       -----------------------------------------
       J. Malcomb Massey


                                                     Director
       -----------------------------------------
       Allen Gray McMillan, III

       /s/ Charles R. Vawter, Jr.                    Director                                      December 20, 2000
       -----------------------------------------
       Charles R. Vawter, Jr.
</TABLE>


<PAGE>   111

                           SOUTHFIRST BANCSHARES, INC.

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                        DESCRIPTION OF EXHIBIT
<S>                   <C>
    11                Statement Regarding Computation of Per Share Earnings.
    21                Subsidiaries of Registrant.
  23.1                Consent of Jones and Kirkpatrick, P.C.
    27                Financial Data Schedule. (for SEC use only)
</TABLE>