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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-KSB



|           |  |                                                                                          |  | 
|---------- |  | ---------------------------------------------------------------------------------------- |  | 
|(Mark One) |  |                                                                                          |  | 
|           |  |                                                                                          |  | 
|(ü)        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934     |  | 
|           |  |                                                                                          |  | 
|           |  | For the fiscal year ended September 30, 2002                                             |  | 
|           |  |                                                                                          |  | 
|(   )      |  | 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 [ü] No [   ]

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

Issuers Revenues for the fiscal year ended September 30, 2002:
$11,560,646

The aggregate market value of the common equity held by non-affiliates of
the Registrant (607,676 shares), computed using the closing price as reported
on the American Stock Exchange for the Registrants Common Stock
on December 19, 2002 was $8,082,091. For the purposes of this response, officers,
directors and holders of 10% 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 19, 2002: 803,294 shares of $.01 par value Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE: None

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





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TABLE OF CONTENTS



|                            |                                                                                               |  |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                     
|                            | ITEM 1. BUSINESS                                                                             
|                            | ITEM 2. PROPERTIES.                                                                          
|                            | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                            | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                    
|                            | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|                            | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                            | ITEM 7. FINANCIAL STATEMENTS                                                                 
|                            | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                   
|                            | ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                   
|                            | ITEM 10. EXECUTIVE COMPENSATION                                                              
|                            | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                            | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                            | ITEM 13. EXHIBITS                                                                            
|                            | ITEM 14. CONTROLS AND PROCEDURES                                                             
|SIGNATURES                 
|CERTIFICATION              
|Exhibit Index              
|SOUTHFIRST BANCSHARES, INC.
|SOUTHFIRST BANCSHARES, INC.
|SOUTHFIRST BANCSHARES, INC.
|SOUTHFIRST BANCSHARES, INC.
|Southfirst Bancshares, inc.
|SOUTHFIRST BANCSHARES, INC.



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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, or the Company) 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 2003 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

General

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

To date, SouthFirst has neither owned nor leased any property, but,
instead, has 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.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the Act), which sets forth broad accounting and corporate governance
reforms intended to restore confidence in the integrity of public-company
disclosure and accounting practices. The Act is expected to have a significant
impact on public

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companies, their officers, directors and stockholders, and the accounting and
legal professions. Some provisions of the Act are effective immediately, while
others will be effective as soon as the Securities and Exchange Commission
(the SEC) adopts the relevant rules, which the SEC must
do within mandated time
periods. Until all of these rules are adopted, the Company will be unable to
determine whether the Act will have a material impact on the operations of the
Company and First Federal.

CEO and CFO Certifications. The Act contains two separate provisions
requiring principal executive officers and principal financial officers of public
companies to make certifications with respect to such companies periodic
reports to the SEC. One provision imposes criminal penalties and became
immediately effective upon passage of the Act, while the other imposes civil
penalties for certifications pursuant to recently adopted SEC rules. The
Companys Chief Executive Officer and Controller (principal financial officer),
each, have submitted both certifications in connection with this Annual Report
on Form 10-KSB. See Certification(s) following the
signatures to this Annual Report on Form 10-KSB, and see
Exhibit 99.2 attached hereto.

Evaluation
of disclosure controls and procedures, and changes in internal
controls. Although the Act only addresses officer certifications,
the SECs rules implementing the Act further require that public
companies maintain disclosure controls and procedures that are
designed to ensure that principal executive officers and principal
financial officers are timely alerted to material information
required to be disclosed by such companies in reports filed under the
Securities Exchange Act of 1934. Thus, a new item has been added to
periodic reports filed by public companies with the SEC, such as this
Annual Report on Form 10-KSB, requiring that such companies
describe officers conclusions regarding the effectiveness of
disclosure controls and procedures, based on their evaluation made
within the past 90 days, and whether there were significant changes
in the companys internal controls that could significantly
affect these controls after the date of such officers
evaluation. See Item 14. CONTROLS AND PROCEDURES.

Business of First Federal

General

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

At September 30, 2002, 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.
First Federal also pursues other types of loans, such as consumer and
commercial loans, in the Birmingham market area, 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

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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 accounts, money-market accounts, passbook savings accounts 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 80,000 and Chilton County
and Bibb County had populations of approximately 40,000 and 21,000,
respectively, based on 2000 census data, as published by the U.S. Bureau of
Vital Statistics. First Federals main office in Sylacauga is situated
approximately 38 miles southeast of Birmingham, the largest city in Alabama.
First Federals branch office in the city of 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, located in the city of Hoover, is
situated within the Birmingham metropolitan area.

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 the total employment in
Talladega County. The economy is generally stable, and there has been no
substantial increase or decrease in the population in the last five years.

Sylacaugas economy is based primarily on major industrial employers such
as ECC International, Inc., Sullivan Graphics, Inc., Avondale Mills, Blue Bell
Ice Cream, Pursell Industries and Georgia Marble. Bowater, Inc., 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, operated by Teksid Automotive Components, Inc., is located
in Sylacauga, and employs approximately 400 skilled workers.

Talladegas economy is based largely on major textile manufacturing
employers such as Brecon Knitting Mills, Wehadkee Yarn Mills, and Image
Industries, Inc. Georgia-Pacific Corporation also employs a number of persons
in Talladega. On May 6, 1999, American Honda Motor Co., Inc. (Honda)
announced plans to construct a comprehensive automobile manufacturing facility
near the town of Lincoln, Talladega County, Alabama. The plant, completed in
the Fall of 2001, is located on a 1,350-acre tract, approximately forty miles
east of Birmingham and 20 miles north of the city of Talladega, and employs
approximately 2,300 persons. The plant will employ 1,500 associates when it
reaches its annual production capacity of 120,000 vehicles and 120,000 engines.
Production began in the last quarter of 2001. In addition, Talladega is the
home of the Talladega Superspeedway which hosts the EA Sports 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, as a result of the
acquisition by SouthFirst of First Federal Savings and Loan Association of
Chilton County, which acquisition was effective 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 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

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is located near Tuscaloosa and the fast-growing town of Vance, the location of
the Mercedes-Benz manufacturing plant.

Residential Lending

General

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 lending personnel. No loan brokers are
used. Conventional residential loans are priced based on rates offered by the
local competition and in the secondary market. At September 30, 2002, First
Federal had $44.3 million, or 48% 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 according to, either, 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,
2002, First Federal held approximately $32.3 million ARMs, which represented
approximately 34.7% of First Federals total loan portfolio. First Federals
ARM loans are subject to a limitation of 2.0% per year adjustment for interest
rate increases and decreases. In addition, ARM loans currently originated by
First Federal typically have a lifetime cap of 6.0% on increases in the
interest rate. These limits, based on the initial rate, may reduce the
interest rate sensitivity of such loans during periods of changing interest
rates. The repayment terms of ARM loans may increase the likelihood of
delinquencies during periods of rising interest rates. First Federal offers
teaser rates on ARM loans to remain competitive. Adjustable-rate loans which
provide for teaser rates may be subject to increased risk of delinquency or
default as the higher, fully indexed rate of interest subsequently replaces the
lower, initial rate.

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

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

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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
require authorizations by the Loan Committee of the First Federal Board prior
to closing. First Federal issues written, formal commitments as to interest
rates to prospective borrowers upon request on real estate loans at the date of
application. The interest rate commitment remains valid for 30 to 60 days (the
lock-in period) from the date of the application. Upon receipt of loan
approval, the borrower has the balance of the lock-in period to close the loan
at the interest rate committed.

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

First Federal also offers loans secured by second mortgages on real
estate, such as home improvement and home equity loans. On September 30, 2002,
such loans amounted to $9.7 million. Second mortgage loans are extended for up
to 80% of the appraised value of the property, less existing liens, at an
adjustable or fixed interest rate. Home equity loans are extended in amounts
up to 90% of the appraised value of the property. First Federal generally
holds the first mortgage loans on the properties securing the second mortgages.

Residential Lending  Birmingham Market Area

In order to increase residential lending volume in the strong housing
market in the Birmingham area, the residential mortgage lending activity of
SouthFirst Mortgage was increased and re-structured. As a result of this
re-structuring, Anna Vanderford was appointed as the Vice President of
Residential Mortgage Loan Production for SouthFirst Mortgage. Ms. Vanderford
has many years of residential mortgage lending experience in the Birmingham
housing market. Further, Cindy Stevens was appointed as Vice President of
Residential Mortgage Closing and Shipping. Ms. Stevens has extensive
experience in the closing and shipping function. During fiscal year 2002,
residential-loan originators were hired by SouthFirst Mortgage, along with the
necessary back-office personnel required to meet increased residential loan
volumes. During the quarter ended September 30, 2002, SouthFirst Mortgage had
65 residential loan originations totaling $10,589,313. For the years ended
September 30, 2002 and September 30, 2001, First Federal had total residential
loan originations (including the originations by SouthFirst Mortgage) of
$28,567,757 and $19,428,273, respectively.

Construction Lending

SouthFirst Mortgage, Inc.

The majority of the residential construction lending of First Federal is
conducted in the Birmingham metropolitan area, through its wholly-owned
subsidiary, SouthFirst Mortgage, located in Hoover, Alabama, a suburb of
Birmingham. At September 30, 2002, committed construction loans secured by
single-family residential property totaled $26.1 million; of this amount,
approximately $4.4 million was not disbursed. SouthFirst Mortgage makes
construction loans primarily to builders for the construction of single-family
residences, on both a pre-sold and speculative basis. SouthFirst Mortgage also
makes construction loans on single-family residences to individuals who will
ultimately be the owner-occupant of the house.

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

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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.

During fiscal year ended September 30, 2002, the organizational structure
of SouthFirst Mortgage was reviewed and revised by the Board of Directors of
First Federal. Prior to fiscal 2002, SouthFirst Mortgage had primarily been
focused on residential construction lending in the greater Birmingham market
area, although a limited emphasis had been placed by SouthFirst Mortgage on
permanent residential mortgage lending. However, the
organizational structure necessary to respond to the strong demand for permanent
residential mortgage loans, created by the continuing, strong housing market in
the Birmingham area, was not in place at SouthFirst Mortgage. In addition,
Margie Bryant, the President and CEO of SouthFirst Mortgage, left the
employment of the company in fiscal year 2002. Also a further change in the
organizational structure of SouthFirst Mortgage became necessary as result of a
supervisory agreement imposed by the OTS on First Federal in fiscal year 2002
regarding, among other things, certain aspects of the construction lending
function (SeeConstruction Lending  Supervisory Agreement and
Organizational Restructure below). As a result of the above mentioned factors,
SouthFirst Mortgage was re-organized into two separate lending areas,
residential construction lending and residential permanent mortgage lending,
with each group having its own management officers. Senior management of First
Federal has oversight of both lending groups as set forth by the
Board of Directors. The
organizational structure for SouthFirst Mortgage is set forth below.

Supervisory Agreement and Organizational Restructure

The construction-lending activity of SouthFirst Mortgage was placed under
certain loan-amount restrictions, and related requirements, as a result of a
supervisory agreement imposed on First Federal (the Supervisory Agreement),
in March, 2002, by the OTS. See, also, Item 6.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS  Supervisory Agreement. Subsequently, on
August 8, 2002, Margie
Bryant resigned as President and CEO of SouthFirst Mortgage.

Pursuant to the requirements of the Supervisory Agreement, and in light of
the resignation of Ms. Bryant, it was determined by the Board of Directors of
First Federal that Senior Management of First Federal should provide direct
managerial oversight of SouthFirst Mortgage. Thereafter, Joe K. McArthur,
President and Chief Executive Office of First Federal, was appointed as the
Chief Executive Officer of SouthFirst Mortgage, Sandra

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Stephens, Executive Vice President and Chief Operating Officer of First
Federal, was appointed as President of SouthFirst Mortgage, and Janice
Browning, Vice President and Controller of First Federal, was appointed as
Vice President and Controller of SouthFirst Mortgage.

Further, certain Vice Presidents of First Federal were appointed as
additional Vice Presidents of SouthFirst Mortgage, in order to perform credit
review analysis and assist in certain administrative functions within the
SouthFirst Mortgage construction lending and permanent mortgage lending
operations. Any Vice President of SouthFirst Mortgage with construction
lending authority can originate construction loans up to $350,000 with
co-approval of another Vice President. Any construction loan between $350,000
and $500,000 must be presented to the loan committee of First Federal for
approval. All construction loans greater than $500,000 require approval of the
Board of Directors of First Federal.

To further enhance the overall organizational structure of SouthFirst
Mortgage, in, both, the residential lending and construction lending functions,
SouthFirst Mortgage also named a Vice President of Billing and Collections who
has many years of experience in the collection function with another financial
institution.

First Federal, pursuant to the provisions of the Supervisory Agreement,
has instituted a system of internal procedures to help ensure that construction
loan interest, construction loan balances, as well as provisions set forth in
the Supervisory Agreement regarding construction lending are met and fairly
stated.

Commercial Lending

At September 30, 2002, commercial lending totaled $13.5 million, or 14.5%,
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,
2002, consumer loans totaled $4.8 million, or 5.2% of First Federals total
loan portfolio. This amount includes $1.2 million of loans secured by savings
accounts, $2.4 million of loans secured by vehicles, and $1.2 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 permanent residential mortgage loans, other than residential
construction loans less than $350,000, are underwritten and approved by the
loan committee of First Federal. Any Vice President of SouthFirst Mortgage

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with construction lending authority, with the co-approval of another Vice
President, has underwriting and loan approval authority for any construction
loan up to $350,000. Construction loans in amounts greater than $350,000, but
less than $500,000, must be approved by the loan committee of the First Federal
Board of Directors. All permanent residential mortgage loans and residential
construction loans in excess of $500,000 require approval of the Board of
Directors of First Federal.

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 loan products in
Talladega, Jefferson, Chilton and Bibb Counties and in the Birmingham market
area. The cities of Birmingham, 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 also faces significant competition in attracting deposits in its
relevant market areas. First Federals competition for its loan products 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 is a community and retail-oriented financial institution
serving its relevant market areas with deposit services and loan services.
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 areas.

Data Processing

First Federal has entered into a data processing agreement with Kirchman
Corp. This data processing 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 78 individuals on a full-time basis,
including 24 officers, and 4 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, or 5500-C/R, and related
schedules and attachments), the preparation of summary plan descriptions,
summary annual reports, statements of accrued benefits and various other
notices and reports required under ERISA, and the preparation of accounting
records for plan trustees, including the preparation and maintenance of
participants accounts.

Trust Services

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

Magnolia Title Service, Inc.

At September 30, 2002, SouthFirst owned a 50% interest in Magnolia Title
Services, Inc. (Magnolia), a company which provides title insurance and
related services to borrowers and lenders. Start-up losses at Magnolia have
resulted in a write-off of SouthFirsts investment, in the amount of $245,000.
As a consequence, SouthFirst has undertaken programs to re-evaluate its
ownership interest in Magnolia.

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SouthFirst Financial Services, Inc.

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

Supervision and Regulation

General

With respect to the supervision and regulation of SouthFirst and First
Federal, 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 SouthFirst and First Federal establishes a
comprehensive framework for the operations of SouthFirst and First Federal, 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

Sarbanes-Oxley Act of 2002

See
Item 1. BUSINESS  Business of SouthFirst  Sarbanes-Oxley Act of
2002.

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 SEC. As such, SouthFirst is required
to register and file reports with the OTS and the SEC and is subject to
regulation and examination by the OTS. In addition, the OTSs 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.

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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 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 below). Although the Gramm-Leach-Bliley Act, enacted in November 1999,
prohibits new unitary thrift holding companies from engaging in nonfinancial
activities or affiliating with nonfinancial entities, such prohibition does not
apply to companies, such as SouthFirst, which became unitary thrift holding
companies pursuant to applications filed with the OTS prior to May 4, 1999.
Because SouthFirst filed its application prior to this date, it is considered a
grandfathered unitary thrift holding company and, as such, retains its
authority to engage in nonfinancial activities, but does not retain its ability
to be acquired by a nonfinancial company. In the event that 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 savings association insured by the Savings Association Insurance Fund (SAIF)) 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.

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.

As discussed above, 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 new unitary
thrift holding companies (formed after May 4, 1999) by nonfinancial companies.

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Federal Securities Laws

Shares
of common stock of SouthFirst (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 of
Common Stock in any
three-month period.

Regulation of First Federal

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 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.

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).

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.

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As a result of the recapitalization of the SAIF implemented by the
Economic Growth and Regulatory Paperwork Reduction Act (the Economic Growth
Act), 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. 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 smaller savings
institutions, whose total assets never exceeded $100 million, the OTS
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 1on the CAMELS financial
institutions rating system, equal to a ratio of core capital to adjusted total
assets of 3%; (b) for all other savings associations which are assigned a value
lower than 1 on the CAMELS financial institutions rating system, equal to a
ratio of core capital to adjusted total assets of 4%; and (iii) a tangible
capital requirement, where the savings associations minimum tangible capital
requirement shall be an amount equal to at least 1.5% of adjusted total assets.

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, 2002, First Federal was well
capitalized. Failure to maintain that status could result in greater
regulatory oversight or restrictions on First Federals activities.

Core Capital and Tangible Capital. The OTS requires savings associations
receiving a composite examination rating of 1, the best possible rating under
the CAMELS examination rating system, to maintain a ratio of core capital to
adjusted total assets of 3.0%. All other savings associations are required to
maintain minimum core capital of at least 4.0% of total adjusted assets. Core
capital includes, generally, (i) common

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stockholders equity (including retained earnings), (ii) non-cumulative
perpetual preferred stock and related surplus, (iii) non-withdrawable accounts
and certain pledged deposits of mutual savings associations, (iv) minority
interests in fully-consolidated subsidiaries, and (v) the remaining goodwill
resulting from certain prior regulatory accounting practices, less a savings
associations (A) investments in certain non-includable subsidiaries (as
determined by regulation) and (B) intangible assets (with limited exceptions
for purchased mortgage servicing rights, purchased credit card relationships
and certain intangible assets arising from prior regulatory accounting
practices). At September 30, 2002, First Federals ratio of tangible and core
capital to total adjusted assets was 9.69%.

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, 2002, First Federals ratio of total capital to total
risk-weighted assets was 15.91%.

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.

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-

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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
Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS  Capital
Resources for tables setting forth First Federals compliance with its
regulatory capital requirements as of September 30, 2002.

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 CAMELS 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 CAMELS 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, 2002, 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.

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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 impose limitations upon savings associations
capital distributions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, and other distributions charged against capital.
Under the 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 application or 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 a notice
and to
receive the approval of the OTS.

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The OTS may disapprove a notice or
deny an application regarding a proposed capital distribution,
if the OTS determines that the proposed distribution by a savings
association would constitute an unsafe or unsound practice or that,
after making the distribution, the savings association would be
undercapitalized under the OTS regulations.

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, as amended (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
savings 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
limit of 20% of portfolio assets, 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, 2002, 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 has 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 fails the QTL test, it is
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 prudently can be 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.
Prior to March 2002, First Federal had permission from the OTS to increase its
loans to one borrower limit for single-family,

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residential builders, as permitted under applicable federal law and
regulations. The increased limit for these borrowers was 30.0% of unimpaired
capital and surplus of First Federal, with an aggregate limit to all such
borrowers equal to 150.0% of First Federals unimpaired capital and surplus.
As a result of the Supervisory Agreement between First Federal and the OTS,
entered into in March 2002, the 30% limit was revoked. See, also, Item 6.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS  Supervisory Agreement.

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.

Such real estate lending 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%). There is no maximum LTV limit for
one-to-four family residential (owner occupied); however, any LTV ratio in
excess of 90.0% requires appropriate credit enhancement in the form of either
mortgage insurance or readily marketable collateral.

Certain institution may make real estate loans that do not conform with
established LTV limits, up to 100.0% of the institutions 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 (the 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
this record into account in its evaluation of certain applications by the
institution. FIRREA amended the CRA to require public disclosure of an
institutions CRA rating and to 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.

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Consumer Credit Regulation

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

Transactions with Affiliates

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

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

Branching by Federal Associations

Subject to certain limitations, HOLA and the OTS regulations permit
federally chartered savings associations to establish branches in any state of
the United States. The authority to establish such a branch is available (a)
in states that expressly authorize branches of savings associations located in
another state and (b) to an association that either satisfies the QTL test or
qualifies as a domestic building and loan association under the 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

The Asset and Liability Committee of First Federals Board of Directors
monitors and manages the liquidity needs of the Company to ensure that there is
sufficient cash flow to satisfy demand for credit and deposit withdrawals, to
fund operations and to meet other Company obligations and commitments on a
timely and cost effective basis. Under current regulations, First Federal is
required to maintain sufficient liquidity to assure its safe and sound
operation. The requirement to maintain a specific minimum amount of liquid
assets, established by

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previous regulation, has been eliminated. Presently, there is no specific
standard or guideline regarding the application of the current regulatory
requirement.

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

As of September 30, 2002, First Federals average daily balance of liquid
assets was approximately 24.7% of its June 30, 2002 liquidity base, far
exceeding the 4% requirement set by the previous regulation. These liquid
assets included approximately $6,686,000 in cash and cash equivalents, and
approximately $18,601,000 in other qualifying assets. As of
September 30, 2002, the fair market value of the Companys investment
securities portfolio, which is held for sale, was $26,768,000. The Company uses
its investment securities portfolio to manage liquidity and interest rate risk,
whereby liquidity is available through those securities that are not pledged.
Further, cash flows from operations, resulting primarily from net income
adjusted for certain items such as interest expense and provision for loan
losses, are an additional source of liquidity for the Company.

With respect to current funding sources, deposits provide a significant
portion of SouthFirsts cash flow needs and continue to provide a relatively
stable, low cost source of funds. Other sources of funding used by SouthFirst
include commercial lines of credit and advances from the Federal Home Loan
Bank of Atlanta. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION  Liquidity.

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, 2002, of $2,229,800.

Federal Home Loan Bank Advances

Each FHLB serves as a reserve or central bank for its members within its
assigned region. Each FHLB is funded from proceeds derived from the sale of
consolidated obligations of the FHLB system. FHLB 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.

On April 15, 2002, First Federal was notified that the amount available
under its credit line with the Federal Home Loan Bank of Atlanta had been
changed from a variable amount, equal to 30% of total assets, or approximately
$42,000,000, to a fixed amount of $22,000,000. At September 30, 2002, First
Federal owed the Federal Home Loan Bank of Atlanta $24,340,000 in outstanding
advances. The Federal Home Loan Bank of Atlanta has notified First Federal that
it will not require First Federals existing borrowings to be reduced to the
new fixed amount prior to the existing advance maturities, but that it will
require that any additional borrowings by First Federal (in excess of
$22,000,000 in the aggregate) be approved through application by First Federal

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to the Federal Home Loan Bank of Atlantas Credit Committee. Management
believes that this reduction in the amount available under this credit line,
because of the existing liquidity and other funding sources available to
SouthFirst and First Federal, will have no adverse impact on the operations of
SouthFirst or First Federal.

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, 2002 and September 30, 2001, dividends were paid by the FHLB to
First Federal in the amounts of $125,434 and $158,762, respectively. Were
these dividends to be reduced, or were interest subsidies on future FHLB
advances were to increase, First Federals net interest income likely would 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 effect of reducing the amount of depository
institutions interest-earning assets. At September 30, 2002, 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, 2002.




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 a loan production office in Hoover, 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, 2002. The
total net book value of these properties at September 30, 2002 was
approximately $4,199,000.

|                             |                              |                                                  |  |             |  |                |  |                |     |       |  |                |        |          |  |  |  | 
|---------------------------- | ---------------------------- | ------------------------------------------------ |  | ----------- |  | -------------- |  | -------------- | --- | ----- |  | -------------- | ------ | -------- |  |  |  | 
|                             |                              |                                                  |  |             |  |                |  |                |     |       |  | Net Book Value |        | Deposits
|                             |                              |                                                  |  | Leased      |  |                |  |                |     | as of |  | as of         
|Location                     |                              | or Owned                                         |  | Date Opened |  | Sept. 30, 2002 |  | Sept. 30, 2002
|                             |                              |                                                  |  |             |  |                |  |               
|                             |                              |                                                  |  |             |  |                |  |                |     |       |  | (In thousands)
|SouthFirst and First Federal |                              |                                                  |  |             |  |                |  |                |     |       |  |                |        |          |  | 
|                             | Main Office                  |                                                  |  |             |  |                |  |                |     |       |  |                |        |          |  |  | 
|                             |                              | 126 North Norton Avenue
Sylacauga, Alabama 35150 |  | Owned       |  | April 1966     |  | $              | 876 |       |  | $              | 39,221 |         
|                             | Office/Storage Building      |                                                  |  |             |  |                |  |                |     |       |  |                |        |          |  |  | 
|                             |                              | North Norton Avenue
Sylacauga, Alabama 35150     |  | Owned       |  | November 1995  |  |                | 234 |       |  |                | N/A    |         
|                             | First Federal Branch Offices |                                                  |  |             |  |                |  |                |     |       |  |                |        |          |  |  | 
|                             |                              | 301 West North Street
Talladega, Alabama 35160   |  | Owned       |  | April 1961     |  |                | 176 |       |  |                | 14,353 |         

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|                    |                         |                                                             |  |        |  |               |  |  |       |   |       |  |        |   |        |  |  | 
|------------------- | ----------------------- | ----------------------------------------------------------- |  | ------ |  | ------------- |  |  | ----- | - | ----- |  | ------ | - | ------ |  |  | 
|                    |                         | 102 Fifth Street North
Clanton, Alabama 35045               |  | Owned  |  | November 1997 |  |  | 1,366 |   |       |  | 34,364 |  
|                    |                         | 125 Olan Heights
Shopping Center
Centreville, Alabama 35042 |  | Leased |  | November 1997 |  |  | N/A   |   |       |  | 8,545  |  
|SouthFirst Mortgage |                         |                                                             |  |        |  |               |  |  |       |   |       |  |        |   |        | 
|                    | Loan Production Offices |                                                             |  |        |  |               |  |  |       |   |       |  |        |   |        |  | 
|                    |                         | 3055 Lorna Road
Birmingham, Alabama 35216                   |  | Leased |  | March 1994    |  |  | 1,257 |   |       |  | N/A    |  
|Pension & Benefit   |                         |                                                             |  |        |  |               |  |  |       |   |       |  |        |   |        | 
|                    |                         | 260 Commerce Street
Third Floor
Montgomery, Alabama 36101   |  | Owned  |  | April 1997    |  |  | 290   |   |       |  | N/A    |  
|                    |                         |                                                             |  |        |  |               |  |  |       |   |       |  |        |   |        | 
|Total               |                         |                                                             |  |        |  |               |  |  |       | $ | 4,199 |  |        | $ | 96,483 | 
|                    |                         |                                                             |  |        |  |               |  |  |       |   |       |  |        |   |        | 




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 that there are no pending or threatened legal proceedings
which, upon resolution, are expected to have a material effect upon
SouthFirsts or First Federals financial condition. Nonetheless, descriptions
of certain, previously-disclosed legal proceedings follow:

On August 20, 2001, SouthFirst agreed to settle certain litigation claims
with Bobby R. Cook, the former President of the Western Division of First
Federal and a former member of the Boards of Directors of SouthFirst and First
Federal. The terms of the settlement agreement, which were reduced to writing
and executed by the parties as of December 11, 2001, provided for a payment of
$570,000 to Mr. Cook. In exchange for the payment, SouthFirst received 13,856
shares of its common stock, which Mr. Cook owned and which had a market value
of approximately $160,000 at the time of the settlement agreement. Based on
this settlement agreement, SouthFirst accrued the excess of the proposed
payment ($410,000) for the fiscal year ended September 30, 2001, and included
this excess in the statement of operations under other expenses, as part of
the termination agreements item, therein. SouthFirst treated the common
stock that it received under this settlement agreement as treasury stock.

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

Subsequently, on June 28, 2002, as previously announced by SouthFirst in
its Form 8-K filed with the SEC on July 2, 2002, First Federal entered into a
settlement agreement with the parties against whom the above complaint was
filed, including Mr. Vawter. Under the terms of this settlement agreement (a
form of which was filed as an exhibit to SouthFirsts Form 8-K filed on July 2,
2002), the parties to the settlement agreement, including Mr. Vawter, agreed to
pay the Company approximately $761,000 on or before August 27, 2002. The
payment of this agreed-upon settlement amount was secured by four consent
judgments, each for $761,000, in favor of First Federal, executed by four of
the five parties to the settlement agreement, including Mr. Vawter.

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Further, the payment of this agreed-upon settlement amount was secured by
a promissory note in the principal amount of $761,000, issued by Automatic Gas
& Appliance Co., Inc., one of the parties to the settlement agreement, and
personally guaranteed by each of the remaining parties to the settlement
agreement. On August 28, 2002, SouthFirst received full payment of the
settlement amount from Mr. Vawter, in the amount of $761,000 (See MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 
Provision for Loan Losses). Generally, under the terms of the settlement
agreement, the obligations of the parties to the settlement agreement would
have been fulfilled if Mr. Vawter, as the party to the settlement agreement who
paid the agreed-upon settlement amount, did not become a debtor in any
bankruptcy proceeding, within ninety-one (91) days after the full payment of
such amount. To the best of SouthFirsts knowledge, Mr. Vawter did not become
a debtor in any bankruptcy proceeding within ninety-one (91) days of August 28,
2002.




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

No matter was submitted during the fourth quarter ended September 30, 2002
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 20, 2002, SouthFirsts Common Stock was held by
approximately 320 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 sale prices, as well as cash dividends declared for
each quarter from October 1, 2000 through September 30, 2002:

|                                        |  |           |        |          |  |             |        |  |  |           |         | 
|--------------------------------------- |  | --------- | ------ | -------- |  | ----------- | ------ |  |  | --------- | ------- | 
|                                        |  |           |        |          |  |             |        |  |  | Cash     
|                                        |  |           |        |          |  |             |        |  |  | Dividends
|                                        |  | High Sale |        | Low Sale |  | Declared(1)
|                                        |  |           |        |          |  |            
|Fiscal Year Ended September 30, 2002    |  |           |        |          |  |             |        |  |  |           |         | 
|First Quarter ended December 31, 2001   |  |           | 11     |          |  |             | 9 1/3  |  |  |           | 130,948 | 
|Second Quarter ended March 31, 2002     |  |           | 11 2/3 |          |  |             | 11     |  |  |           | 122,894 | 
|Third Quarter ended June 30, 2002       |  |           | 13     |          |  |             | 12 5/9 |  |  |           | 121,752 | 
|Fourth Quarter ended September 30, 2002 |  |           | 12 1/3 |          |  |             | 11 6/7 |  |  |           | 121,751 | 
|Fiscal Year Ended September 30, 2001    |  |           |        |          |  |             |        |  |  |           |         | 
|First Quarter ended December 31, 2000   |  |           | 10 1/8 |          |  |             | 8 4/9  |  |  | $         | 139,362 | 
|Second Quarter ended March 31, 2001     |  |           | 11     |          |  |             | 9 2/3  |  |  |           | 139,312 | 
|Third Quarter ended June 30, 2001       |  |           | 11 4/5 |          |  |             | 10 1/2 |  |  |           | 137,689 | 
|Fourth Quarter ended September 30, 2001 |  |           | 11 3/4 |          |  |             | 10 5/7 |  |  |           | 137,689 | 



|(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
Item 10. EXECUTIVE COMPENSATION  Management Recognition Plans and  Employee
Stock Ownership Plan.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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,

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financial condition, capital requirements, and other relevant factors.
SouthFirst management presently intends to continue its present dividend
policies. See Item 1. 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 Item 6. MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Capital
Resources and Item 1. 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s operations during the two-year
period ended September 30, 2002. 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.

Forward Looking Statements

As
stated in the opening paragraph to this Annual Report on Form 10-KSB, entitled Safe Harbor Statement Under
the Private Securities Litigation Reform Act of 1995, this Annual Report on
Form 10-KSB contains certain forward-looking statements, including managements
discussion and analysis of financial condition and results of operation under
this Item 6. While SouthFirst believes that the statements contained in this
Item 6, and throughout this Annual Report on Form 10-KSB, are accurate,
SouthFirsts business is dependent upon general economic conditions and various
conditions specific to its industry, and future trends and such factors could
cause actual results to differ materially from the forward-looking statements
that have been made herein.

Results of Operations

Net Income

For the fiscal year ended September 30, 2002, net income increased
$1,092,898 (258.0%), from a (loss) of ($422,093) to a positive net income of
$670,805. Earnings (losses) per common share were $0.82 and ($0.47) for the
fiscal years ended September 30, 2002 and 2001, respectively. The increase in
net income for fiscal 2002 was due primarily to a decrease in loan loss
reserves, an increase in gain on sale of loans, an increase in the sale of
investment securities available for sale, and an increase in other income.
First Federals net interest income after provision for loan losses increased
$1,415,069 (46.4%) during fiscal 2002, from $3,049,977 to $4,465,046. This
increase was primarily attributable to a decrease in the provision for loan
losses of $1,525,338, from $857,688 to ($667,650), the reasons for which are
discussed below in the section entitled Provision for Loan Losses. This
increase in net interest income was partially offset by a decrease in net
interest income before provision for loan losses in the amount of $110,269
(2.8%) resulting primarily from a lag effect in the changes in interest rates
between interest-earning assets and interest-bearing liabilities. Fee income
received by Pension and Benefit Trust Company increased $43,632 (3.9%) during
fiscal 2002, from $1,128,996 to $1,172,628. Other expenses increased $381,352
(6.3%) from $6,025,379 to $6,406,731 during fiscal 2002.

For the fiscal year ended September 30, 2001, net income decreased
$1,383,585 (142.9%) to ($422,093). Earnings (losses) per common share were
($0.47) for the fiscal year ended September 30, 2001. The decrease in

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net income in fiscal 2001 was due primarily to an increase in loan loss
reserves, the settlement and termination of certain employment contracts and
the decrease in interest rates.

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

Net Interest Income

Net interest income was $3,797,000 for the twelve months ended September
30, 2002, which represents a decrease of $110,000 (2.8%) from fiscal 2001. Net
interest income is the difference between the interest earned on loans,
investment securities and other earning assets and the interest cost associated
with deposits and borrowed funds. The decrease in 2002 is primarily due to a
decrease in the net interest rate spread. The net interest rate spread
decreased as rates on interest-earning assets decreased one hundred and six
(106) basis points to 6.63%, and the cost of funds also decreased one hundred
thirty seven (137) basis points to 3.77%. The combined effect of the changes
in average balances and rates on interest-earning assets and interest-bearing
liabilities resulted in a decrease in net interest income.

Net interest income was $3,908,000 for the twelve months ended September
30, 2001. This decrease of $868,000 (18.2%) over the comparable twelve months
of fiscal 2000 was primarily the result of a decrease in the average balance of
interest-earning assets from $150.9 million to $141.6 million, where the
average balance of interest-bearing liabilities decreased from $143.2 million
to $136.0 million. The combined effect of the changes in average balances and
the decrease in the net interest rate spread resulted in the $868,000 decrease
in net interest income for fiscal 2001.

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

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.

|                       |                               |  |                          |      |                     |  |                     |        |        |  |        |        |       |  |                               |      |      |  |       |      |   |  |        |      |   |  |      |       |   |  |     |     |   |  |       |       |  
|---------------------- | ----------------------------- |  | ------------------------ | ---- | ------------------- |  | ------------------- | ------ | ------ |  | ------ | ------ | ----- |  | ----------------------------- | ---- | ---- |  | ----- | ---- | - |  | ------ | ---- | - |  | ---- | ----- | - |  | --- | --- | - |  | ----- | ----- | -
|                       |                               |  | Year Ended September 30,
|                       |                               |  |                         
|                       |                               |  | 2002 vs. 2001            |      | 2001 vs. 2000       |  | 2000 vs. 1999      
|                       |                               |  | 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) |      |      |  |       |      |   |  |        |      |   |  |     
|Interest income:       |                               |  |                          |      |                     |  |                     |        |        |  |        |        |       |  |                               |      |      |  |       |      |   |  |        |      |   |  |      |       |   |  |     |     |   |  |       |      
|                       | Investment securities         |  | $                        | (286 | )                   |  | $                   | (400   | )      |  | $      | (686   | )     |  | $                             | (167 | )    |  | $     | (20  | ) |  | $      | (187 | ) |  | $    | 346   |   |  | $   | 204 |   |  | $     | 550   |  
|                       | Loans receivable              |  |                          | (534 | )                   |  |                     | (1,145 | )      |  |        | (1,679 | )     |  |                               | (542 | )    |  |       | (294 | ) |  |        | (836 | ) |  |      | 278   |   |  |     | 603 |   |  |       | 881   |  
|                       |                               |  |                          |      |                     |  |                     |        |        |  |        |        |       |  |                               |      |      |  |       |      |   |  |        |      |   |  |      |       |   |  |     |     |   |  |       |      
|Total interest income  |                               |  | (820                     | )    |                     |  | (1,545              | )      |        |  | (2,365 | )      |       |  | (709                          | )    |      |  | (314  | )    |   |  | (1,023 | )    |   |  | 624  |       |   |  | 807 |     |   |  | 1,431 |      
|                       |                               |  |                          |      |                     |  |                     |        |        |  |        |        |       |  |                               |      |      |  |       |      |   |  |        |      |   |  |      |       |   |  |     |     |   |  |       |      
|Interest expense:      |                               |  |                          |      |                     |  |                     |        |        |  |        |        |       |  |                               |      |      |  |       |      |   |  |        |      |   |  |      |       |   |  |     |     |   |  |       |      
|                       | NOW accounts                  |  |                          | 14   |                     |  |                     | (31    | )      |  |        | (17    | )     |  |                               | (10  | )    |  |       | (5   | ) |  |        | (15  | ) |  |      | (21   | ) |  |     | (27 | ) |  |       | (48   | )
|                       | Money market demand           |  |                          | (1   | )                   |  |                     |       |        |  |        | (1     | )     |  |                               | (1   | )    |  |       |     |   |  |        | (1   | ) |  |      | (1    | ) |  |     | (1  | ) |  |       | (2    | )
|                       | Passbook savings              |  |                          | 4    |                     |  |                     | (41    | )      |  |        | (37    | )     |  |                               | (15  | )    |  |       | (8   | ) |  |        | (23  | ) |  |      | (33   | ) |  |     | (20 | ) |  |       | (53   | )
|                       | CDs other than Jumbos         |  |                          | (314 | )                   |  |                     | (899   | )      |  |        | (1,213 | )     |  |                               | (158 | )    |  |       | 151  |   |  |        | (7   | ) |  |      | (555  | ) |  |     | (52 | ) |  |       | (607  | )
|                       | Jumbos                        |  |                          | (10  | )                   |  |                     | (208   | )      |  |        | (218   | )     |  |                               | 59   |      |  |       | 107  |   |  |        | 166  |   |  |      | 167   |   |  |     | 12  |   |  |       | 179   |  
|                       | Borrowed funds                |  |                          | (185 | )                   |  |                     | (584   | )      |  |        | (769   | )     |  |                               | (213 | )    |  |       | (61  | ) |  |        | (274 | ) |  |      | 1,165 |   |  |     | 138 |   |  |       | 1,303 |  
|                       |                               |  |                          |      |                     |  |                     |        |        |  |        |        |       |  |                               |      |      |  |       |      |   |  |        |      |   |  |      |       |   |  |     |     |   |  |       |      
|Total interest expense |                               |  | (492                     | )    |                     |  | (1,763              | )      |        |  | (2,255 | )      |       |  | (338                          | )    |      |  | 184   |      |   |  | (154   | )    |   |  | (722 | )     |   |  | 50  |     |   |  | 772   |      
|                       |                               |  |                          |      |                     |  |                     |        |        |  |        |        |       |  |                               |      |      |  |       |      |   |  |        |      |   |  |      |       |   |  |     |     |   |  |       |      
|                       | Change in net interest income |  | $                        | (328 | )                   |  | $                   | 218    |        |  | $      | (110   | )     |  | $                             | (371 | )    |  | $     | (498 | ) |  | $      | (869 | ) |  | $    | (98   | ) |  | $   | 757 |   |  | $     | 659   |  
|                       |                               |  |                          |      |                     |  |                     |        |        |  |        |        |       |  |                               |      |      |  |       |      |   |  |        |      |   |  |      |       |   |  |     |     |   |  |       |      

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Interest Income

Interest income is a function of both the volume of interest earning
assets and their related yields. Interest income was $8,527,000, $10,892,000
and $11,915,000 for the twelve months ended September 30, 2002, September 30,
2001 and September 30, 2000, respectively. Average interest earning assets
decreased $12,945,000 (9.1%) during 2002, decreased $9,269,000 (6.1%) during
2001 and increased $8,682,000 (6.1%) during 2000. The 2002 and 2001 yield
decreased primarily due to decreasing rates on mortgage loans and residential
construction loans during the year, while the 2000 yield increased, primarily
due to increasing rates on residential construction loans during that period.
Interest and fees on loans were $6,828,000, $8,506,000 and $9,342,000 for the
twelve months ended September 30, 2002, September 30, 2001, and September 30,
2000, respectively. The decrease in loans receivable in 2002 was due to a
decreasing rate environment with customers refinancing higher rate mortgages.
The decrease in average loans receivable in 2002 was largely due to decreases
in residential construction loans, home equity loans, and residential mortgage
loans, some of which resulted from the closing of the loan production office in
Dothan, Alabama during fiscal 2002, due to which loans were sold to another
financial institution in Dothan in the amount of $8,392,000.

Interest income on total investment securities available for sale
decreased $509,000 (24.1%) to $1,600,000 in 2002. The average balance
outstanding of investment securities available for sale decreased $5,612,000
(15.37%) to $30,907,000 in 2002, decreased $2,373,000 (6.1%) to $36,519,000 in
2001 and increased $4,212,000 (12.2%) to $38,891,000 in 2000. The yields on
investment securities were 5.18% in 2002 and 5.78% in 2001. Interest income on
total investment securities available for sale decreased $325,000 (13.3%) in
2001.

Interest Expense

Total average interest-bearing liabilities were $125,364,000, $136,000,000
and $143,213,000 for fiscal years 2002, 2001, and 2000, respectively. Interest
bearing liabilities decreased by $10,636,000 (7.8%) in 2002, decreased by
$7,213,000 (5.0%) in 2001 and increased by $9,036,000 (6.7%) in 2000. The
rates paid on these liabilities decreased by 137 basis points to 3.77% in 2002,
increased by 16 basis points to 5.14% in 2001, and increased by 23 basis points
to 4.98% in 2000. Total interest expense was $4,730,000, $6,984,000 and
$7,139,000 for 2002, 2001 and 2000, respectively, which represents a decrease
of $2,254,000 (32.3%), a decrease of $155,000 (2.2%), and an increase of
$772,000 (12.1%) during 2002, 2001, and 2000, respectively. The decrease in
2002 was primarily due to the decrease in interest-bearing liabilities, along
with the reduction in interest rates. The decrease in 2001 was primarily the
result of a decrease in interest-bearing liabilities, which was partially
offset by an increase in interest rates. The increase in 2000 was primarily
the result of an increase in interest-bearing liabilities.

Interest on deposits, the primary component of total interest expense,
decreased to $3,491,000 in 2002, decreased to $4,977,000 in 2001 and decreased
to $4,858,000 in 2000. The average balance of interest-bearing deposits
decreased to $95,363,000 in 2002, from $101,528,000 in 2001, representing a
decrease of $6,165,000 (6.1%). In 2001, the balance of $101,528,000 in
interest-bearing deposits represented a decrease of $3,560,000 (3.4%) from the
balance of $105,088,000 in 2000.

Interest expense on borrowed funds, including both short-term and other
borrowed funds, was $1,239,000, $2,007,000 and $2,281,000 for fiscal 2002, 2001
and 2000, respectively. The decrease in 2002 was primarily due to lower
interest rates, along with principal reduction in borrowings of approximately
$6,500,000. The decrease in 2001 was due to the repayment of FHLB advances
with funds received from investments maturing and principal repayment of
mortgage loans. The increase in 2000 was due to the funding of additional
investments. The average balance of FHLB advances outstanding was $27,044,000,
$31,717,000 and $34,861,000 for 2002, 2001, and 2000, respectively. The
average balance of total borrowed funds, including both short-term and other
borrowed funds, was $30,001,000 for 2002, $34,471,000 for 2001, and $38,125,000
for 2000.

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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 (benefit) was ($667,650),
$857,688 and $5,572 for fiscal 2002, 2001 and 2000, respectively. The amount
of the provision for loan losses for fiscal 2002 is primarily the result of a
reversal of an additional provision for a loan which defaulted in the fourth
quarter of fiscal 2001, in the principal amount of $657,000. This loan was
made to Vawter Properties and Resources, LP, an Alabama limited partnership
whose general partner is Charles R. Vawter, Jr., a former director of
SouthFirst and First Federal, and who personally guaranteed the loan. The
total of the loan loss and the related expenses associated with this loan in
the fourth quarter of 2001 was $713,000, including the loss of principal and
unpaid interest, as well as related legal and accounting expenses. First
Federal brought suit against Mr. Vawter, Vawter Properties and Resources, LP,
and other related parties to recover the total amount of the loan loss and
related expenses. A settlement was reached on August 28, 2002, from which
First Federal received $761,000. See Item 3. LEGAL
PROCEEDINGS, and, below,  Financial Condition
 Allowance for Loan Losses and Risk Elements.

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 Counties, Alabama.
Management believes that the credit risks associated with one-to-four family
residential mortgage loans are significantly lower than other loan
types.

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

There were no significant charge-offs in the total loan portfolio, in
2002, 2001 and 2000. In 2001, a provision for loan losses was made in the
amount of $654,746, for the loan made to Vawter Properties (see
Item 3. LEGAL PROCEEDINGS), which was
recovered in fiscal 2002. Further, management has specifically reserved
approximately $495,000, of which approximately $316,000 is reserved on a
commercial loan to a used automobile dealership, and approximately $179,000 is
reserved on a commercial, unsecured loan presently in litigation. Management
believes that the allowances for loan losses, at September 30, 2002 ($854,013),
is an adequate level relative to the total loan portfolio and to non-performing
loans, and in light of the other factors, which are relevant to the assessment
of risks in the loan portfolio.

Future additions to the allowance for loan losses 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
for loan losses based upon information available at the time of such reviews.

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Other Income

Other income increased $722,000 (31.3%) in 2002 from $2,311,000 in 2001.
Other income increased $212,000 (10.1%) in 2001 from $2,100,000 in 2000. The
increase in 2002 was due to an increase in fee income from Pension & Benefit
Trust Company, from $1,129,000 to $1,173,000, an increase in the gain on the
sale of mortgage loans, from $394,000 to $612,000, and an increase in the gain
from the sale of certain investment securities available for sale, from $4,000
to $236,000. The increase in 2001 was due to an increase in fee income from
Pension & Benefit Trust Company in the amount of $42,000, as well as an
increase in the gain on the sale of mortgage loans and other income, in the
amount of $156,000, from fiscal 2000.

Service charges and other fees were $448,000, $443,000 and $440,000 in
fiscal 2002, 2001 and 2000, respectively. The fluctuations are primarily due
to changes in overdraft and non-sufficient charges.

The gain on sale of mortgage loans increased $218,000 (55.4%) in 2002,
increased $82,000 (26.2%) in 2001 and decreased $130,000 (29.5%) in 2000. The
restructuring process in the mortgage banking division, with the addition of
mortgage loan originators, along with the decrease in mortgage loan rates, has
resulted in more volume of originations and sales of mortgage loans in fiscal
2002. The increase in 2001 was also the result of lower mortgage loan rates,
which increased volumes and sales of mortgage loans. The decrease in 2000 was
primarily due to a decrease in mortgage loan demand as a result of higher
interest rates from prior years.

The gain on sale of investment securities available for sale increased
$232,000 in 2002, increased $8,000 in 2001 and decreased $2,400,000 in 2000.
The increase in 2002 was the result of a gain, in the amount of $236,000, on
the sale of certain investment securities. The decrease in 2000 was the result
of selling FHLMC stock, at a gain of approximately $2,265,000, in 1999.

Other Expense

Total other expense increased to $6,407,000 in 2002, from $6,025,000 in
2001. Other expense decreased in 2000 to $5,299,000. This represented an
increase of $382,000 (6.3%) in 2002, an increase of $726,000 (13.7%) in 2001,
and a decrease of $532,000 (9.1%) in 2000.

Compensation and benefits totaled $3,636,000, $3,118,000 and $2,901,000
for fiscal 2002, 2001 and 2000, respectively. These levels reflect an increase
of $518,000 (16.6%) in 2002, an increase of $217,000 (7.5%) in 2001 and a
decrease of $367,000 (11.2%) in 2000. The increases in 2002 and 2001 primarily
were attributable to new salaries associated with a restructuring process (see
Item 1. BUSINESS  Business of First Federal  Residential Lending 
Birmingham Market Area), along with merit and cost of living raises and the
costs of benefits associated with such increases. The decrease in 2000 was the
result of streamlining operations and the reduction of employees through
attrition.

Expenses related to termination agreements were $0, $560,000, and $0 for
fiscal 2002, 2001 and 2000, respectively. The expense in 2001 was related to
the settlement of certain legal actions with a former director and officer, as
well as other expenses under the employment contract of SouthFirsts President
and Chairman of the Board of Directors, who resigned. See Item 3. LEGAL
PROCEEDINGS and Item 10. EXECUTIVE COMPENSATION.

Income Tax Expense

Income tax expenses (benefit) were $421,000, ($242,000) and $609,000 for
fiscal 2002, 2001 and 2000, respectively. These levels represent an effective
tax rate on pre-tax earnings (losses) of 39% in 2002, 36% in 2001 and 39% in
2000.

Supervisory Agreement

On
March 29, 2002, SouthFirst announced that First Federal, on March 22,
2002, had entered into the Supervisory Agreement with the OTS. A copy of the
press release announcing the Supervisory Agreement and a

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copy of the Supervisory Agreement were included with SouthFirsts Form 8-K
filed with the SEC on March 29, 2002.

The Supervisory Agreement formalized certain understandings between First
Federal and the OTS with respect to actions that First Federal and its Board of
Directors had to undertake to comply with the requirements of the OTS.

Under the Supervisory Agreement, First Federals Board of Directors was
required, among other things, to develop, adopt and implement appropriate
lending policies and procedures before beginning any new types of lending
activities or increasing the amounts of existing construction-lending
activities.

Further, the Board of Directors was required to review First Federals
residential construction loan portfolio and establish limits on its residential
construction lending in compliance with federal regulations and the Supervisory
Agreement. As a result of the requirements set forth in the Supervisory
Agreement and based upon further communications with the OTS, First Federals
speculative construction lending, in the aggregate, is limited to 120% of First
Federals tangible capital, which aggregate portfolio limit, as of September
30, 2002, was $16,300,000. The total amount of First Federals speculative
construction loan portfolio, as of September 30, 2002, was equal to
$13,863,000, which was 85% of First Federals tangible capital and, thus, well
within the 120% limit. Management believes that this aggregate portfolio
limit, as required by the Supervisory Agreement, will not have a material
adverse effect on the amount of First Federals future net income to be derived
from its construction-lending activities, as contemplated in the relevant
projections included in the Business Plan and Strategic Plan of First Federal.

Further, under the Supervisory Agreement, First Federals limits on loans
to one borrower were reduced. Under federal law, the aggregate amount of loans
that First Federal and SouthFirst Mortgage are permitted to make to any one
borrower (in the aggregate) 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. Prior to the effective date of the
Supervisory Agreement, First Federal and SouthFirst Mortgage had received
permission from the OTS to increase the applicable loans to one borrower limits
for single-family residential builders, as permitted under applicable federal
law and regulations. The increased limit for these borrowers was 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.

As a result of the Supervisory Agreement, however, the 30% limit was
revoked, and First Federal and SouthFirst Mortgage now are required to comply
with the normal regulatory limit of 15% of unimpaired capital and surplus of
First Federal. At September 30, 2002, this 15% limit was equal to
$2,171,000, and there was one (1) construction loan commitments from
First Federal and/or SouthFirst Mortgage which remained in excess of this newly
imposed loan limit, with the largest commitment being $2,710,000. The OTS
has previously indicated to First Federal that the balance of the remaining
non-compliant loans will be allowed to pay out through the ordinary course of
loan payment collection, thus avoiding having to sell such loans.

Most of First Federals construction lending relationships have been well
below the 15% loan-to-one-borrower limit. As of March 22, 2002, the effective
date of the Supervisory Agreement, there were only three (3) construction loan
commitments in excess of that limit. Therefore, management believes that this
reduction in individual loan-to-one-borrower limits will not have a material
adverse effect on the amount of future net-income of First Federal to be
derived from its construction lending activities, as contemplated in the
relevant projections included in the Business Plan and Strategic Plan of First
Federal.

First Federal remains a well-capitalized institution, and the Supervisory
Agreement has not resulted in any interruption of its day-to-day operations.
The Supervisory Agreement will remain in place until modified, terminated or
suspended by the OTS. A failure to comply with the Supervisory Agreement could
result in the initiation of a formal enforcement action by the OTS, including
the imposition of civil money penalties.

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New Accounting Pronouncements

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

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

SFAS Nos. 142, 143 and 144 were adopted, and are effective as of, October
1, 2002. The Company does not anticipate that these statements will have a
material impact on its financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities. The statement requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred and
that such liability be measured initially at fair value, whereas prior guidance
required the liability be recognized at the date of an entitys commitment to
an exit plan. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. SFAS No. 147 provides guidance on the application of
the purchase method to acquisitions of financial institutions. In addition,
SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer relationship
intangible assets of financial institutions. SFAS No. 147 is effective for
acquisitions for which the date of acquisition is on or after October 1, 2002.

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, First Federal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. This 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

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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, 2002, First Federal had a negative one-year cumulative ratio
of (1.69%) and a five-year cumulative ratio of 7.40%, 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, 2001, First
Federal had a negative one-year cumulative ratio of (12.68%) and a positive
five-year cumulative ratio of 6.89%. During the declining interest rate
environment of 2002, First Federals interest rate spread decreased.
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
a loan. First Federals portfolio of one-to-four family residential mortgage
loans included $24.4 million and $30.0 million (26.3% and 29.7% of First
Federals total loan portfolio) of adjustable rate loans at September 30, 2002
and September 30, 2001, respectively. These loans have restrictions limiting
interest rate changes to 1.0% or 2.0% per year and 6.0% over the life of the
loan. In a rapidly declining or rising interest rate environment, these
restrictions could have a material effect on interest income by slowing the
overall response of the portfolio to market movements. ALCO utilizes the
Asset and Liability Management Report prepared by Farin & Associates (the
Strategic Asset Liability Management) in order to assist First Federal in
determining First Federals gap and interest rate position. Through use of the
Farin & Associates analysis, ALCO analyzed the effect of an increase or
decrease of up to 300 basis points on the market value of First Federals
portfolio equity (MVPE) at September 30, 2002 and September 30, 2001. At a
300 basis point increase, First Federals MVPE decreased approximately
$5,165,000 and decreased $5,628,000 at September 30, 2002 and September 30,
2001, respectively, and, at a 300 basis point decrease, First Federals MVPE
increased approximately $8,631,000 and increased $7,290,000 at September 30,
2002 and September 30, 2001, 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, 2002 and September 30, 2001. 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.

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Interest Rate Sensitivity Gap

|                                                                              |                                     |                |        |                       |        |                       |        |            |        |            |        |        |       |         |        |             |       |            |         |            |        |       |         |        |        |   |         |        |        |   |         |        |        |   |        |        |       |   |         |        |        | 
|----------------------------------------------------------------------------- | ----------------------------------- | -------------- | ------ | --------------------- | ------ | --------------------- | ------ | ---------- | ------ | ---------- | ------ | ------ | ----- | ------- | ------ | ----------- | ----- | ---------- | ------- | ---------- | ------ | ----- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ----- | - | ------- | ------ | ------ | 
|                                                                              |                                     |                |        | At September 30, 2002 |        | At September 30, 2001
|                                                                              |                                     |                |        |                       |        |                      
|                                                                              |                                     |                |        | One year              |        | One to                |        | Three to   |        | Over       |        |        |       |         |        | One year    |       | One to     |         | Three to   |        | Over  |         |        |        |  
|                                                                              |                                     |                |        | or less               |        | three years           |        | five years |        | five years |        | Total  |       | or less |        | three years |       | five years |         | five years |        | Total
|                                                                              |                                     |                |        |                       |        |                       |        |            |        |            |        |        |       |         |        |             |       |            |         |            |        |      
|Interest-earning assets:                                                      |                                     |                |        |                       |        |                       |        |            |        |            |        |        |       |         |        |             |       |            |         |            |        |       |         |        |        |   |         |        |        |   |         |        |        |   |        |        |       |   |         |       
|                                                                              | Mortgage loans                      |                | $      | 54,649                |        |                       | $      | 15,060     |        |            | $      | 10,616 |       |         | $      | 7,095       |       |            | $       | 87,420     |        |       | $       | 50,888 |        |   | $       | 17,074 |        |   | $       | 10,341 |        |   | $      | 17,103 |       |   | $       | 95,406 |       
|                                                                              | All other loans                     |                |        | 4,168                 |        |                       |        | 2,507      |        |            |        | 1,126  |       |         |        | 989         |       |            |         | 8,790      |        |       |         | 4,103  |        |   |         | 2,012  |        |   |         | 565    |        |   |        | 206    |       |   |         | 6,886  |       
|                                                                              | Collateralized mortgage
obligations |                |        | 5,140                 |        |                       |        |           |        |            |        |       |       |         |        |            |       |            |         | 5,140      |        |       |         | 2,075  |        |   |         | 1,932  |        |   |         | 1,727  |        |   |        | 7,752  |       |   |         | 13,486 |       
|                                                                              | Mortgage-backed
securities          |                |        | 2,193                 |        |                       |        | 2,873      |        |            |        | 2,086  |       |         |        | 4,086       |       |            |         | 11,238     |        |       |         | 2,337  |        |   |         | 2,359  |        |   |         | 1,564  |        |   |        | 2,518  |       |   |         | 8,778  |       
|                                                                              | Other Investments(1)                |                |        | 12,450                |        |                       |        |           |        |            |        |       |       |         |        | 6,121       |       |            |         | 18,571     |        |       |         | 13,742 |        |   |         |       |        |   |         |       |        |   |        | 2,574  |       |   |         | 16,316 |       
|                                                                              |                                     |                |        |                       |        |                       |        |            |        |            |        |        |       |         |        |             |       |            |         |            |        |       |         |        |        |   |         |        |        |   |         |        |        |   |        |        |       |   |         |       
|Total interest- earning assets                                                |                                     | $              | 78,600 |                       |        | $                     | 20,440 |            |        | $          | 13,828 |        |       | $       | 18,291 |             |       | $          | 131,159 |            |        | $     | 73,145  |        |        | $ | 23,377  |        |        | $ | 14,197  |        |        | $ | 30,153 |        |       | $ | 140,872 |       
|                                                                              |                                     |                |        |                       |        |                       |        |            |        |            |        |        |       |         |        |             |       |            |         |            |        |       |         |        |        |   |         |        |        |   |         |        |        |   |        |        |       |   |         |       
|Interest-bearing liabilities:                                                 |                                     |                |        |                       |        |                       |        |            |        |            |        |        |       |         |        |             |       |            |         |            |        |       |         |        |        |   |         |        |        |   |         |        |        |   |        |        |       |   |         |       
|                                                                              |                                     | Deposits       |        | $                     | 56,007 |                       |        | $          | 23,332 |            |        | $      | 8,012 |         |        | $           | 5,746 |            |         | $          | 93,097 |       |         | $      | 55,397 |   |         | $      | 25,618 |   |         | $      | 10,905 |   |        | $      | 3,645 |   |         | $      | 95,565 | 
|                                                                              |                                     | Borrowed funds |        |                       | 24,805 |                       |        |            | 1,055  |            |        |        | 2,500 |         |        |             |      |            |         |            | 28,360 |       |         |        | 35,605 |   |         |        |       |   |         |        |       |   |        |        |      |   |         |        | 35,605 | 
|                                                                              |                                     |                |        |                       |        |                       |        |            |        |            |        |        |       |         |        |             |       |            |         |            |        |       |         |        |        |   |         |        |        |   |         |        |        |   |        |        |       |   |         |       
|Total interest-bearing liabilities                                            |                                     | $              | 80,812 |                       |        | $                     | 24,387 |            |        | $          | 10,512 |        |       | $       | 5,746  |             |       | $          | 121,457 |            |        | $     | 91,002  |        |        | $ | 25,618  |        |        | $ | 10,905  |        |        | $ | 3,645  |        |       | $ | 131,170 |       
|                                                                              |                                     |                |        |                       |        |                       |        |            |        |            |        |        |       |         |        |             |       |            |         |            |        |       |         |        |        |   |         |        |        |   |         |        |        |   |        |        |       |   |         |       
|Interest sensitivity gap                                                      |                                     | $              | (2,212 | )                     |        | $                     | (3,947 | )          |        | $          | 3,316  |        |       | $       | 12,545 |             |       | $          | 9,702   |            |        | $     | (17,857 | )      |        | $ | (2,241  | )      |        | $ | 3,292   |        |        | $ | 26,508 |        |       | $ | 9,702   |       
|Cumulative interest sensitivity gap                                           |                                     | $              | (2,212 | )                     |        | $                     | (6,159 | )          |        | $          | (2,843 | )      |       | $       | 9,702  |             |       | $          |        |            |        | $     | (17,857 | )      |        | $ | (20,098 | )      |        | $ | (16,806 | )      |        | $ | 9,702  |        |       |   |         |       
|Ratio of cumulative interest sensitivity
gap to total interest earning assets |                                     |                | (1.69  | )%                    |        |                       | (4.70  | )%         |        |            | (2.17  | )%     |       |         | 7.40   | %           |       |            |        |            |        |       | (12.68  | )%     |        |   | (14.27  | )%     |        |   | (11.93  | )%     |        |   | 6.89   | %      |       |   |         |       
|Ratio of cumulative interest sensitivity
gap to total assets of $141,179      |                                     |                | (1.57  | )%                    |        |                       | (4.36  | )%         |        |            | (2.01  | )%     |       |         | 6.87   | %           |       |            |        |            |        |       | (11.81  | )%     |        |   | (13.29  | )%     |        |   | (11.12  | )%     |        |   | 6.42   | %      |       |   |         |       



---

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

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The Farin & Associates analysis for 2002 and the preceding table were
based upon the contractual terms of the asset or liability and in consideration
of the following assumptions regarding prepayment of loans, collateralized
mortgage obligations (CMOs) and mortgage-backed securities, and decay rates
of deposits. These prepayment and decay rate assumptions are managements
estimates based on expectations of future interest rates. Fixed rate mortgage
loans are assumed to prepay at approximately 8%. Adjustable rate loans, CMOs
and mortgage-backed securities are presented in the period in which they next
reprice. All other loans (principally consumer installment loans) are
presented at their contractual maturities. Fixed rate CMOs are assumed to
prepay at rates ranging from 15% to 20%. The decay rates for money market
demand accounts are assumed to be 47% for the first year and 40% for the second
year. The decay rates for passbook accounts are assumed to be 22% for the
first year and 22% thereafter, and the decay rates for NOW accounts are assumed
to be 23% for the first year and approximately 22% thereafter. Certificate
accounts and borrowed funds are presented at their contractual maturities.
Certain shortcomings are inherent in the method of analysis presented in the
table above. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in the market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as ARMs, generally have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayments and early withdrawal levels would cause significant deviations in
the table. Additionally, an increased credit risk may result if the ability of
many borrowers to service their debt decreases in the event of an interest rate
increase. A majority of the adjustable rate loans in First Federals portfolio
contain conditions which restrict the periodic change in interest rates.

Interest Rate Risk Strategy

First Federal has employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations by attempting to
balance the interest rate sensitivities 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 $23,916,000 at September 30, 2002 and
$32,652,000 at September 30, 2001. 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 that 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
likely would decrease if interest rates increased.

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Average Balance, Interest, Yields and Rates

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

The
following 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 reflect or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.

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|
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|
|

|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |   |      |  
|----------------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------- | ---------------------- | ---------- | ---------- | ---------- | --------- | --------- | ---- | --------- | ------- | ---- | -------- | ----------- | ----------- | ----------- | ------------------------ | ---------- | --------- | --------- | ------- | --------- | ---- | ----- | - | ----------- | ----------- | ----------- | --------- | ---------- | --------- | --------- | - | --------- | ---- | ---- | - | ---- | -
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             | Year Ended September 30, |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |  
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |  
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           | 2002 |           |         |      |          |             | 2001        |             |                          |            |           |           | 2000    |           |      |       |   |             |             |             |          
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |          
|                                                                                    |                                                |                                                             |                                                   |                        |            | Average    |            |           |           |      |           | Yield/  |      | Average  |             |             |             |                          |            | Yield/    |           | Average |           |      |       |   |             | Yield/     
|                                                                                    |                                                |                                                             |                                                   |                        |            | Balance    |            | Interest  |           | Cost |           | Balance |      | Interest |             | Cost        |             | Balance                  |            | Interest  |           | Cost   
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |        
|Interest Earning Assets:                                                            |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |     
|                                                                                    |                                                | Interest earnings deposited
in other financial institutions |                                                   | $                      | 1,131,360  |            |            | $         | 99,189    |      |           |         | 8.77 | %        |             | $           | 916,802     |                          |            | $         | 276,257   |         |           |      | 30.13 | % |             | $           | 1,171,156   |           |            | $         | 138,758   |   |           |      |      |  
|                                                                                    |                                                | Total investment securities                                 |                                                   |                        | 30,907,198 |            |            |           | 1,600,346 |      |           |         | 5.18 | %        |             |             | 36,518,896  |                          |            |           | 2,109,156 |         |           |      | 5.78  | % |             |             | 38,891,644  |           |            |           | 2,433,984 |   |           |      | 6.26 | %
|                                                                                    |                                                | Loans receivable                                            |                                                   |                        | 96,599,905 |            |            |           | 6,827,657 |      |           |         | 7.07 | %        |             |             | 104,148,074 |                          |            |           | 8,506,455 |         |           |      | 8.17  | % |             |             | 110,789,666 |           |            |           | 9,342,440 |   |           |      | 8.43 | %
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|Total interest earning assets                                                       |                                                |                                                             | 128,638,463                                       |                        |            |            | 8,527,192  |           |           |      | 6.63      | %       |      |          | 141,583,772 |             |             |                          | 10,891,868 |           |           |         | 7.69      | %    |       |   | 150,852,466 |             |             |           | 11,915,182 |           |           |   | 7.90      | %   
|                                                                                    |                                                |                                                             | Allowance for loan losses                         |                        |            | (1,386,892 | )          |           |           |      |           |         |      |          |             |             |             | (770,245                 | )          |           |           |         |           |      |       |   |             |             |             | (736,726  | )          |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             | Cash and amounts due from
depository institutions |                        |            | 6,341,587  |            |           |           |      |           |         |      |          |             |             |             | 7,237,695                |            |           |           |         |           |      |       |   |             |             |             | 4,404,043 |            |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             | Premises and equipment                            |                        |            | 4,881,979  |            |           |           |      |           |         |      |          |             |             |             | 4,938,849                |            |           |           |         |           |      |       |   |             |             |             | 5,054,685 |            |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             | FHLB stock, at cost                               |                        |            | 2,229,800  |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             | Foreclosed real estate                            |                        |            | 226,899    |            |           |           |      |           |         |      |          |             |             |             | 535,006                  |            |           |           |         |           |      |       |   |             |             |             | 383,862   |            |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             | Accrued interest receivable                       |                        |            | 783,703    |            |           |           |      |           |         |      |          |             |             |             | 965,109                  |            |           |           |         |           |      |       |   |             |             |             | 1,055,087 |            |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             | Other assets                                      |                        |            | 2,532,819  |            |           |           |      |           |         |      |          |             |             |             | 1,504,934                |            |           |           |         |           |      |       |   |             |             |             | 1,714,340 |            |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             | Investments in Affiliates                         |                        |            |           |            |           |           |      |           |         |      |          |             |             |             | 4,116                    |            |           |           |         |           |      |       |   |             |             |             | 14,006    |            |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|Total Assets                                                                        |                                                | $                                                           | 144,248,358                                       |                        |            |            |            |           |           |      |           |         |      | $        | 155,999,236 |             |             |                          |            |           |           |         |           |      |       | $ | 162,741,763 |             |             |           |            |           |           |   |           |     
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|Interest Bearing Liabilities:                                                       |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |     
|                                                                                    |                                                |                                                             | Deposits:                                         |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |   |     
|                                                                                    |                                                |                                                             |                                                   | NOW accounts           |            | $          | 10,968,447 |           |           | $    | 142,688   |         |      |          | 1.30        | %           |             | $                        | 9,929,758  |           |           | $       | 159,740   |      |       |   | 1.61        | %           |             | $         | 10,581,025 |           |           | $ | 175,539   |      |      |   | 1.66 | %
|                                                                                    |                                                |                                                             |                                                   | Money market demand    |            |            | 66,441     |           |           |      | 850       |         |      |          | 1.28        | %           |             |                          | 144,497    |           |           |         | 1,992     |      |       |   | 1.38        | %           |             |           | 219,418    |           |           |   | 3,371     |      |      |   | 1.54 | %
|                                                                                    |                                                |                                                             |                                                   | Statement savings      |            |            | 11,946,198 |           |           |      | 179,579   |         |      |          | 1.50        | %           |             |                          | 11,650,760 |           |           |         | 216,553   |      |       |   | 1.86        | %           |             |           | 12,476,710 |           |           |   | 240,270   |      |      |   | 1.93 | %
|                                                                                    |                                                |                                                             |                                                   | CDs, other than Jumbos |            |            | 64,985,484 |           |           |      | 2,830,798 |         |      |          | 4.36        | %           |             |                          | 72,197,589 |           |           |         | 4,044,144 |      |       |   | 5.60        | %           |             |           | 75,020,005 |           |           |   | 4,050,687 |      |      |   | 5.40 | %
|                                                                                    |                                                |                                                             |                                                   | Jumbo certificates     |            |            | 7,396,298  |           |           |      | 336,800   |         |      |          | 4.55        | %           |             |                          | 7,605,523  |           |           |         | 554,878   |      |       |   | 7.30        | %           |             |           | 6,790,810  |           |           |   | 388,441   |      |      |   | 5.72 | %
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|Total interest-bearing deposits                                                     |                                                |                                                             | 95,362,868                                        |                        |            |            | 3,490,715  |           |           |      | 3.66      | %       |      |          | 101,528,127 |             |             |                          | 4,977,307  |           |           |         | 4.90      | %    |       |   | 105,087,968 |             |             |           | 4,858,308  |           |           |   | 4.62      | %   
|                                                                                    | Borrowed funds                                 |                                                             |                                                   | 30,000,755             |            |            |            | 1,239,081 |           |      |           | 4.13    | %    |          |             | 34,471,370  |             |                          |            | 2,006,896 |           |         |           | 5.82 | %     |   |             | 38,124,848  |             |           |            | 2,280,558 |           |   |           | 5.98 | %   
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|Total interest-bearing liabilities                                                  |                                                |                                                             | 125,363,623                                       |                        |            |            | 4,729,796  |           |           |      | 3.77      | %       |      |          | 135,999,497 |             |             |                          | 6,984,203  |           |           |         | 5.14      | %    |       |   | 143,212,816 |             |             |           | 7,138,866  |           |           |   | 4.98      | %   
|Non-interest bearing demand accounts                                                |                                                |                                                             | 3,472,967                                         |                        |            |            |            |           |           |      |           |         |      |          | 2,836,095   |             |             |                          |            |           |           |         |           |      |       |   | 3,128,850   |             |             |           |            |           |           |   |           |     
|Advances by borrowers for property taxes                                            |                                                |                                                             | 258,250                                           |                        |            |            |            |           |           |      |           |         |      |          | 310,794     |             |             |                          |            |           |           |         |           |      |       |   | 323,424     |             |             |           |            |           |           |   |           |     
|Accrued interest payable                                                            |                                                |                                                             | 1,032,802                                         |                        |            |            |            |           |           |      |           |         |      |          | 1,342,510   |             |             |                          |            |           |           |         |           |      |       |   | 1,113,935   |             |             |           |            |           |           |   |           |     
|Income taxes payable                                                                |                                                |                                                             | 9,084                                             |                        |            |            |            |           |           |      |           |         |      |          | 231,595     |             |             |                          |            |           |           |         |           |      |       |   | 111,491     |             |             |           |            |           |           |   |           |     
|Accrued expenses and other liabilities                                              |                                                |                                                             | 381,893                                           |                        |            |            |            |           |           |      |           |         |      |          | 286,462     |             |             |                          |            |           |           |         |           |      |       |   | 495,292     |             |             |           |            |           |           |   |           |     
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|                                                                                    | Total liabilities                              |                                                             |                                                   | 130,518,619            |            |            |            |           |           |      |           |         |      |          |             | 141,006,953 |             |                          |            |           |           |         |           |      |       |   |             | 148,385,808 |             |           |            |           |           |   |           |      |     
|Stockholders equity                                                                |                                                |                                                             | 13,729,739                                        |                        |            |            |            |           |           |      |           |         |      |          | 14,992,283  |             |             |                          |            |           |           |         |           |      |       |   | 14,355,955  |             |             |           |            |           |           |   |           |     
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|                                                                                    | Total liabilities & stockholders
equityequity |                                                             | $                                                 | 144,248,358            |            |            |            |           |           |      |           |         |      |          | $           | 155,999,236 |             |                          |            |           |           |         |           |      |       |   | $           | 162,741,763 |             |           |            |           |           |   |           |      |     
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|Net interest income                                                                 |                                                |                                                             |                                                   |                        |            | $          | 3,797,396  |           |           |      |           |         |      |          |             |             |             | $                        | 3,907,665  |           |           |         |           |      |       |   |             |             |             | $         | 4,776,316  |           |           |   |           |     
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  
|Interest rate spread                                                                |                                                |                                                             |                                                   |                        |            |            |            |           |           |      | 2.86      | %       |      |          |             |             |             |                          |            |           |           |         | 2.56      | %    |       |   |             |             |             |           |            |           |           |   | 2.91      | %   
|Net yield on total interest earning assets                                          |                                                |                                                             |                                                   |                        |            |            |            |           |           |      | 2.95      | %       |      |          |             |             |             |                          |            |           |           |         | 2.76      | %    |       |   |             |             |             |           |            |           |           |   | 3.17      | %   
|Average interest-earning assets to
average total interest-bearing
liabilities ratio |                                                |                                                             |                                                   |                        |            |            |            |           |           |      | 102.61    | %       |      |          |             |             |             |                          |            |           |           |         | 104.11    | %    |       |   |             |             |             |           |            |           |           |   | 105.33    | %   
|                                                                                    |                                                |                                                             |                                                   |                        |            |            |            |           |           |      |           |         |      |          |             |             |             |                          |            |           |           |         |           |      |       |   |             |             |             |           |            |           |           |   |           |      |      |  

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Financial Condition

Investment Securities

First Federals portfolio of investment securities available for sale
totaled $26,768,000 and $33,053,000 at September 30, 2002, and September 30,
2001, 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 First Federal Savings and Loan of Chilton County
in October 1997, 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 CMOs that reprice to LIBOR on a monthly basis. These
CMOs 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%.

During fiscal year 2002, as interest rates declined, First Federal sold
$7,750,000 of FNMA adjustable rate CMOs and repaid FHLB advances to reduce the
risk associated in having the repricing of long-term investments and
shorter-term liabilities. A pre-tax loss occurred from the sale of these
investments in the amount of $8,485. As of September 30, 2002, First Federal
has approximately $3,000,000 in adjustable rate FNMA CMOs and FHLB advances
outstanding in the original arbitrage.

Principal repayments on both CMOs and mortgage-backed securities for the
years ended September 30, 2002, 2001 and 2000 were $674,700, $1,774,000 and
$1,938,000, respectively. As of September 30, 2002, First Federal had an
investment in U. S. Government agencies of $9,867,000, compared to $9,590,000
as of September 30, 2001. At September 30, 2002, First Federal had investments
of approximately $2,238,000 in equity securities, such as FHLB stock and other
common stock.

The following table indicates the fair value of the portfolio of
investment securities available for sale at September 30, 2002, 2001 and 2000.

|                           |                                     |                                                |   |                |        |                  |   |        |        |  |   |        |        | 
|-------------------------- | ----------------------------------- | ---------------------------------------------- | - | -------------- | ------ | ---------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                           |                                     |                                                |   |                |        | Total Fair Value |   |       
|                           |                                     |                                                |  
|                           |                                     |                                                |   | 2002           |        | 2001             |   | 2000  
|                           |                                     |                                                |   |                |        |                  |   |       
|                           |                                     |                                                |   | (in thousands)
|Investment Securities AFS: |                                     |                                                |   |                |        |                  |   |        |        |  |   |       
|                           | U.S. Treasury securities            |                                                | $ |               |        |                  | $ |       |        |  | $ | 2,761  |       
|                           | U.S. Government Agency              |                                                |   | 9,867          |        |                  |   | 9,590  |        |  |   | 8,901  |       
|                           | Corporate obligations               |                                                |   | 98             |        |                  |   |       |        |  |   |       |       
|                           | Mortgage-backed securities          |                                                |   | 11,679         |        |                  |   | 9,127  |        |  |   | 10,096 |       
|                           | Collateralized mortgage obligations |                                                |   | 5,115          |        |                  |   | 13,495 |        |  |   | 13,602 |       
|                           | Other investments                   |                                                |   | 8              |        |                  |   | 841    |        |  |   | 737    |       
|                           |                                     |                                                |   |                |        |                  |   |        |        |  |   |        |       
|                           |                                     | Total Investment Securities Available for Sale |   | $              | 26,767 |                  |   | $      | 33,053 |  |   | $      | 36,097 | 
|                           |                                     |                                                |   |                |        |                  |   |        |        |  |   |        |       

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At September 30, 2002, First Federal owned CMOs totaling $5,115,000.
These securities are all backed by federal agency guaranteed mortgages.

The mortgage backed securities portfolio, totaling $11,679,000 at
September 30, 2002, consists of fixed rate mortgages in the amount of
$11,315,000 and ARMs in the amount of $364,000. When purchasing these
securities, First Federal looks at various prepayment speeds and makes such
purchases based on the ability to accept the yield and average life, based on
both increasing and decreasing prepayment speeds.

The following tables present the contractual maturities and weighted
average yields of investment securities, other than equity securities,
available for sale at September 30, 2002:

|                                                               |                                                |   |          |    |            |   |                       |       |            |   |       |       |  |   |        |        | 
|-------------------------------------------------------------- | ---------------------------------------------- | - | -------- | -- | ---------- | - | --------------------- | ----- | ---------- | - | ----- | ----- |  | - | ------ | ------ | 
|                                                               |                                                |   |          |    |            |   | Maturities of         |       |            |   |      
|                                                               |                                                |   |          |    |            |   | Investment Securities |       |            |   |      
|                                                               |                                                |   |          |    |            |   |                       |       |            |   |      
|                                                               |                                                |   |          |    |            |   | After one             |       | After five |   |       |       | 
|                                                               |                                                |   | Within   |    | through    |   | through               |       | After     
|                                                               |                                                |   | one year |    | five years |   | ten years             |       | ten years 
|                                                               |                                                |   |          |    |            |   |                       |       |           
|                                                               |                                                |   |          |    |            |   | (In thousands)        |       |            |   |      
|U.S. Government agencies, excluding
mortgage-backed securities |                                                | $ | 88       |    |            | $ | 1,742                 |       |            | $ | 1,671 |       |  | $ | 6,366  |       
|Mortgage-backed securities                                     |                                                |   |         |    |            |   | 229                   |       |            |   | 1,378 |       |  |   | 10,072 |       
|Collateralized mortgage obligations                            |                                                |   |         |    |            |   |                      |       |            |   | 1,775 |       |  |   | 3,340  |       
|Corporate obligations                                          |                                                |   |         |    |            |   | 98                    |       |            |   |      |       |  |   |       |       
|                                                               |                                                |   |          |    |            |   |                       |       |            |   |       |       |  |   |        |       
|                                                               | Total Investment Securities
Available for Sale |   | $        | 88 |            |   | $                     | 2,069 |            |   | $     | 4,824 |  |   | $      | 19,778 | 
|                                                               |                                                |   |          |    |            |   |                       |       |            |   |       |       |  |   |        |       

|                                                               |                              |  |          |       |            |  |                               |       |            |  |       |           |       |  |  |  |  |  |       |       |  
|-------------------------------------------------------------- | ---------------------------- |  | -------- | ----- | ---------- |  | ----------------------------- | ----- | ---------- |  | ----- | --------- | ----- |  |  |  |  |  | ----- | ----- | -
|                                                               |                              |  |          |       |            |  | Weighted Average Yields       |       |            |  |       |           |       |  | 
|                                                               |                              |  |          |       |            |  | (Taxable-equivalent basis)(1) |       |            |  |       |           |       |  | 
|                                                               |                              |  |          |       |            |  |                               |       |            |  |       |           |       |  | 
|                                                               |                              |  |          |       |            |  | After one                     |       | After five |  |       |           |       |  |  |  | 
|                                                               |                              |  | Within   |       | through    |  | through                       |       |            |  |       |           | After |  |  |  | 
|                                                               |                              |  | one year |       | five years |  | ten years                     |       |            |  |       | Ten years
|                                                               |                              |  |          |       |            |  |                               |       |           
|                                                               |                              |  |          |       |            |  | (In thousands)                |       |            |  |       |           |       |  | 
|U.S. Government agencies, excluding
mortgage-backed securities |                              |  | 7.196    | %     |            |  | 5.829                         | %     |            |  | 5.916 | %         |       |  |  |  |  |  | 6.848 | %    
|Mortgage-backed securities                                     |                              |  |         |       |            |  | 6.766                         | %     |            |  | 6.173 | %         |       |  |  |  |  |  | 6.186 | %    
|Collateralized mortgage obligations                            |                              |  |         |       |            |  |                              |       |            |  | 3.939 | %         |       |  |  |  |  |  | 2.370 | %    
|Corporate obligations                                          |                              |  |         |       |            |  |                              |       |            |  | 7.125 | %         |       |  |  |  |  |  |      |      
|                                                               | Total Weighted Average Yield |  |          | 7.196 | %          |  |                               | 5.938 | %          |  |       | 5.299     | %     |  |  |  |  |  |       | 5.755 | %



---

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

The maturities for the CMOs and mortgage-backed securities presented above
represent contractual maturities of such securities. Due to the nature of
these securities, the timing and the amount of principal repayments is
generally unpredictable. However, assuming current prepayment rates are based
on 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, 2002:

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|                                                                                      |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |       |  |       |     |  |  |   |       |  |  |          |        |      |  |         |        |  |  |          |      |  
|------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  | ----- | ----- | ----- |  | ----- | --- |  |  | - | ----- |  |  | -------- | ------ | ---- |  | ------- | ------ |  |  | -------- | ---- | -
|Principal Payments Expected During the Year Ended September 30,(Dollars in thousands)
|                                                                                      |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |       |  |      
|                                                                                      |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |       |  |       |     |  |  |   |       |  |  |          |        |      |  |         |        |  |  | Weighted
|                                                                                      |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |       |  |       |     |  |  |   |       |  |  | Carrying |        | Fair |  | Average
|                                                                                      |  | 2003 |       | 2004 |  | 2005 |       | 2006 |  | 2007 |       | Thereafter |  | Value |       | Value |  | Yield
|                                                                                      |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |       |  |      
|Collateralized mortgage
Obligations                                                   |  | $    | 3,198 |      |  | $    | 652   |      |  | $    | 386   |            |  | $     | 339   |       |  | $     | 148 |  |  | $ | 371   |  |  | $        | 5,141  |      |  | $       | 5,115  |  |  |          | 2.92 | %
|Mortgage-backed securities                                                            |  |      | 2,636 |      |  |      | 2,020 |      |  |      | 1,451 |            |  |       | 1,127 |       |  |       | 889 |  |  |   | 3,140 |  |  |          | 11,239 |      |  |         | 11,679 |  |  |          | 6.20 | %
|Agencies                                                                              |  |      | 4,841 |      |  |      | 4,700 |      |  |      |      |            |  |       |      |       |  |       |    |  |  |   |      |  |  |          | 9,507  |      |  |         | 9,867  |  |  |          | 6.51 | %
|Corporate obligations                                                                 |  |      |      |      |  |      | 98    |      |  |      |      |            |  |       |      |       |  |       |    |  |  |   |      |  |  |          | 100    |      |  |         | 98     |  |  |          | 7.13 | %

Loans

Total loans of $92,985,000, at September 30, 2002, reflected a decrease of
$8,150,000 (8.1%) compared to total loans at September 30, 2001. Total loans of
$101,135,000, at September 30, 2001, reflected a decrease of 6.7% from total
loans of $108,354,000, at September 30, 2000. The decrease in the volume of
loans for fiscal 2002 was due primarily to the sale of loans in the amount of
$8,392,000 to another financial institution in Dothan, Alabama, as result of
closing the Dothan loan production office in February 2002. Other decreases are
due to seasonal changes in mortgage and construction lending demand. The
increases from fiscal 1998 through fiscal 2000 were due to loans generated in
the normal course of business. First Federal has experienced strong demand in
its one-to-four family construction loan portfolio since First Federals
purchase of the construction loan portfolio of First Federal Savings and Loan
of Chilton County, and the opening of a loan production office in Birmingham in
1994.

One-to-four family real estate mortgage loans decreased $7,512,000
(12.8%), from September 30, 2000 to September 30, 2001, and decreased
$6,736,000 from September 20, 2001 to September 30, 2002. First Federal
aggressively pursues real estate mortgage loans within its 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 that it originates. For
the most part, such sales are composed of residential mortgage loans with terms
of 30 years. Proceeds from loan sales were $27,159,000, $19,731,000, and
$15,092,000 for the years ended September 30, 2002, 2001, and 2000,
respectively. Had First Federal not sold residential mortgage loans over the
last several years, the one-to-four family real estate mortgage loan portfolio
would have increased by a larger margin (or decreased by lesser margin) than
the percentage indicated above. The declining interest rate market for much of
2002 and 2001 resulted in an increase in the volume of loans sold during the
period, compared to fiscal 2000, which had a rising interest rate environment.
The following table presents the composition of the loan portfolio for each of
the past five years:

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|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |      |         |      |       |      |        |  
|--------------------------- | --------------------------- | ------------------------- | ---------------- | ------ | ------ | ------ | -------- | ----- | ------- | ------ | -------- | ------ | ------ | ------- | -------- | ----- | -------------------------- | ------ | -------- | ------ | ---------------------- | ------- | -------- | ----- | ---- | ------ | ------- | ------ | ---- | ------- | ---- | ----- | ------- | ------ | ----- | ------ | ---- | ------- | ---- | ----- | ---- | ------ | -
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       | Loan Portfolio Composition |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |        
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |        
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        | At September 30,       |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |     
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |     
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        | (Dollars in thousands) |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |     
|                            |                             |                           |                  |        |        | 2002   |          | 2001  |         | 2000   |          |        | 1999   |         |          | 1998  |                           
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |       
|                            |                             |                           |                  |        |        |        |          |       | Percent |        |          |        |        |         | Percent  |       |                            |        |          |        | Percent                |         |          |       |      |        | Percent |        |      |         |      |       | Percent
|                            |                             |                           |                  |        | Amount |        | of Total |       | Amount  |        | of Total |        | Amount |         | of Total |       | Amount                     |        | of Total |        | Amount                 |         | of Total
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |         
|Real estate mortgage loans: |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |      |         |      |      
|                            | One-to four family          |                           | $                | 44,347 |        |        |          | 47.69 | %       |        | $        | 51,083 |        |         |          | 50.51 | %                          |        | $        | 58,595 |                        |         |          | 54.08 | %    |        | $       | 65,637 |      |         |      | 61.74 | %       |        | $     | 73,239 |      |         |      | 70.02 | %   
|                            | Multi-family and commercial |                           |                  | 13,490 |        |        |          | 14.51 | %       |        |          | 14,205 |        |         |          | 14.05 | %                          |        |          | 13,790 |                        |         |          | 12.73 | %    |        |         | 8,330  |      |         |      | 7.84  | %       |        |       | 1,837  |      |         |      | 1.76  | %   
|                            | Construction loans          |                           |                  | 16,621 |        |        |          | 17.87 | %       |        |          | 25,378 |        |         |          | 25.09 | %                          |        |          | 24,381 |                        |         |          | 22.50 | %    |        |         | 17,510 |      |         |      | 16.47 | %       |        |       | 14,731 |      |         |      | 14.09 | %   
|                            | Land                        |                           |                  | 5,077  |        |        |          | 5.46  | %       |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |      |         |      |       |     
|Savings account loans       |                             |                           | 1,190            |        |        |        | 1.28     | %     |         |        | 1,144    |        |        |         | 1.13     | %     |                            |        | 1,097    |        |                        |         | 1.01     | %     |      |        | 1,267   |        |      |         | 1.19 | %     |         |        | 1,988 |        |      |         | 1.90 | %    
|Installment loans           |                             |                           | 3,599            |        |        |        | 3.87     | %     |         |        | 3,507    |        |        |         | 3.47     | %     |                            |        | 4,089    |        |                        |         | 3.77     | %     |      |        | 5,616   |        |      |         | 5.28 | %     |         |        | 7,593 |        |      |         | 7.26 | %    
|Second mortgage loans       |                             |                           | 9,665            |        |        |        | 10.39    | %     |         |        | 7,593    |        |        |         | 7.51     | %     |                            |        | 7,334    |        |                        |         | 6.77     | %     |      |        | 9,046   |        |      |         | 8.51 | %     |         |        | 6,216 |        |      |         | 5.94 | %    
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |      |         |      |       |     
|                            |                             |                           | Total loans      |        |        | 93,989 |          |       |         |        |          |        |        | 102,910 |          |       |                            |        |          |        |                        | 109,286 |          |       |      |        |         |        |      | 107,406 |      |       |         |        |       |        |      | 105,604 |      |       |      |        |  
|Less:                       |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |      |         |      |      
|                            |                             | Loans in process          |                  |        |       |        |          |       |        |        |          |        | (8     | )       |          |       | (.01                       | )%     |          |        | (39                    | )       |          |       | (.03 | )%     |         |        |     |         |      |       |        |        |       |        |     |         |      |       |     |       
|                            |                             | Discounts and other, net  |                  |        | (149   | )      |          |       | (.16    | )%     |          |        | (189   | )       |          |       | (.19                       | )%     |          |        | (192                   | )       |          |       | (.18 | )%     |         |        | (242 | )       |      |       | (.23    | )%     |       |        | (282 | )       |      |       | (.27 | )%    
|                            |                             | Allowance for loan losses |                  |        | (855   | )      |          |       | (.92    | )%     |          |        | (1,578 | )       |          |       | (1.56                      | )%     |          |        | (701                   | )       |          |       | (.65 | )%     |         |        | (852 | )       |      |       | (.80    | )%     |       |        | (732 | )       |      |       | (.70 | )%    
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |      |         |      |       |     
|                            |                             |                           | Total loans, net |        | $      | 92,985 |          |       |         | 100.00 | %        |        | $      | 101,135 |          |       |                            | 100.00 | %        |        | $                      | 108,354 |          |       |      | 100.00 | %       |        | $    | 106,312 |      |       |         | 100.00 | %     |        | $    | 104,590 |      |       |      | 100.00 | %
|                            |                             |                           |                  |        |        |        |          |       |         |        |          |        |        |         |          |       |                            |        |          |        |                        |         |          |       |      |        |         |        |      |         |      |       |         |        |       |        |      |         |      |       |     

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The table below shows the maturity of First Federals loan portfolio at
September 30, 2002, 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, 2002. The table
below does not include an estimate of prepayments, the occurrence of which
would significantly shorten the average life of all mortgage loans and cause
First Federals actual repayment to differ from that shown below.

|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   |                        |       |           |   |           |        |           |   |        |        |  |   |        |        |  |   |        |        | 
|-------------------------- | ----- | - | ------ | -------------------- | ---- | - | ----- | ----- | --------- | - | ---------- | ----- | ----------- | - | ---------------------- | ----- | --------- | - | --------- | ------ | --------- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   | Loan Maturities        |       |           |   |           |        |           |   |        |        |  |   |       
|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   |                        |       |           |   |           |        |           |   |        |        |  |   |       
|                           |       |   |        | Due during the       |      |   |       |       |           |   |            |       |             |   |                        |       |           |   |           |        |           |   |        |        |  |   |       
|                           |       |   |        | year ending Sept 30, |      |   |       |       |           |   |            |       |             |   |                        |       |           |   |           |        |           |   |        |        |  |   |       
|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   |                        |       |           |   |           |        |           |   |       
|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   | Due after              |       | Due after |   | Due After |        | Due After |   |        |        | 
|                           |       |   | 2003   |                      | 2004 |   | 2005  |       | 3-5 years |   | 5-10 years |       | 10-15 years |   | 15 years               |       | Total    
|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   |                        |       |          
|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   | (Dollars in thousands) |       |           |   |           |        |           |   |        |        |  |   |       
|Real estate mortgage loans |       | $ | 3,646  |                      |      | $ | 2,005 |       |           | $ | 312        |       |             | $ | 1,016                  |       |           | $ | 8,519     |        |           | $ | 16,888 |        |  | $ | 16,956 |        |  | $ | 49,342 |       
|Construction loans (1)     |       |   | 16,671 |                      |      |   |      |       |           |   |           |       |             |   |                       |       |           |   |          |        |           |   |       |        |  |   |       |        |  |   | 16,671 |       
|Business loans             |       |   | 1,711  |                      |      |   | 571   |       |           |   | 932        |       |             |   | 1,072                  |       |           |   | 1,752     |        |           |   | 2,533  |        |  |   | 2,904  |        |  |   | 11,475 |       
|All other loans            |       |   | 3,731  |                      |      |   | 1,089 |       |           |   | 1,732      |       |             |   | 4,791                  |       |           |   | 2,607     |        |           |   | 975    |        |  |   | 572    |        |  |   | 15,497 |       
|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   |                        |       |           |   |           |        |           |   |        |        |  |   |        |        |  |   |        |       
|                           | Total |   | $      | 25,759               |      |   | $     | 3,665 |           |   | $          | 2,976 |             |   | $                      | 6,879 |           |   | $         | 12,878 |           |   | $      | 20,396 |  |   | $      | 20,432 |  |   | $      | 92,985 | 
|                           |       |   |        |                      |      |   |       |       |           |   |            |       |             |   |                        |       |           |   |           |        |           |   |        |        |  |   |        |        |  |   |        |       



---

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

The following tables set forth, at September 30, 2002 and September 30,
2001, the dollar amount of loans due after September 30, 2002 and September 30,
2001, respectively, based upon whether such loans have fixed interest rates or
adjustable interest rates:

|                               |       |   |                        |        |                    |   |        |        |  |   |        |        | 
|------------------------------ | ----- | - | ---------------------- | ------ | ------------------ | - | ------ | ------ |  | - | ------ | ------ | 
|                               |       |   |                        |        | September 30, 2002 |   |       
|                               |       |   |                        |        |                    |   |       
|                               |       |   | Fixed                  |        | Floating or        |   |        |        | 
|                               |       |   | Rates                  |        | Adjustable Rate    |   | Total 
|                               |       |   |                        |        |                    |   |       
|                               |       |   | (Dollars in thousands)
|Real estate mortgage loans     |       | $ | 26,587                 |        |                    | $ | 24,433 |        |  | $ | 51,020 |       
|Commercial loans               |       |   | 3,613                  |        |                    |   | 7,862  |        |  |   | 11,475 |       
|Construction loans             |       |   | 21,696                 |        |                    |   |       |        |  |   | 21,696 |       
|Savings and installments loans |       |   | 8,794                  |        |                    |   |       |        |  |   | 8,794  |       
|                               |       |   |                        |        |                    |   |        |        |  |   |        |       
|                               | Total |   | $                      | 60,690 |                    |   | $      | 32,295 |  |   | $      | 92,985 | 
|                               |       |   |                        |        |                    |   |        |        |  |   |        |       

|                               |       |   |                        |        |                    |   |        |        |  |   |        |         | 
|------------------------------ | ----- | - | ---------------------- | ------ | ------------------ | - | ------ | ------ |  | - | ------ | ------- | 
|                               |       |   |                        |        | September 30, 2001 |   |       
|                               |       |   |                        |        |                    |   |       
|                               |       |   | Fixed                  |        | Floating or        |   |        |        | 
|                               |       |   | Rates                  |        | Adjustable Rate    |   | Total 
|                               |       |   |                        |        |                    |   |       
|                               |       |   | (Dollars in thousands)
|Real estate mortgage loans     |       | $ | 28,266                 |        |                    | $ | 29,987 |        |  | $ | 58,253 |        
|Commercial loans               |       |   | 4,916                  |        |                    |   | 5,654  |        |  |   | 10,570 |        
|Construction loans             |       |   | 25,378                 |        |                    |   | 0      |        |  |   | 25,378 |        
|Savings and installments loans |       |   | 6,935                  |        |                    |   | 0      |        |  |   | 6,935  |        
|                               |       |   |                        |        |                    |   |        |        |  |   |        |        
|                               | Total |   | $                      | 65,495 |                    |   | $      | 35,641 |  |   | $      | 101,136 | 
|                               |       |   |                        |        |                    |   |        |        |  |   |        |        

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

|                               |                            |                 |       |        |                          |        |      |        |        |        |   |        |        |        | 
|------------------------------ | -------------------------- | --------------- | ----- | ------ | ------------------------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                               |                            |                 |       |        | Year ended September 30,
|                               |                            |                 |       |        |                         
|                               |                            |                 |       |        | 2002                     |        | 2001 |        | 2000  
|                               |                            |                 |       |        |                          |        |      |        |       
|                               |                            |                 |       |        | (Dollars in thousands)   |        |      |        |       
|Loan Originations:             |                            |                 |       |        |                          |        |      |        |        |        |   |       
|                               | Real estate mortgage loans |                 | $     | 87,131 |                          |        | $    | 67,995 |        |        | $ | 68,671 |       
|                               | All other loans            |                 |       | 6,790  |                          |        |      | 4,407  |        |        |   | 5,457  |       
|                               |                            |                 |       |        |                          |        |      |        |        |        |   |        |       
|                               |                            |                 | Total |        | $                        | 93,921 |      |        | $      | 72,402 |   |        | $      | 74,128 | 
|                               |                            |                 |       |        |                          |        |      |        |        |        |   |        |       
|Portfolio Loan Purchases:      |                            |                 |       |        |                          |        |      |        |        |        |   |       
|                               | Real estate mortgage loans |                 | $     |       |                          |        | $    |       |        |        | $ |       |       
|                               |                            |                 |       |        |                          |        |      |        |        |        |   |        |       
|Portfolio Loan Sales Proceeds: |                            |                 |       |        |                          |        |      |        |        |        |   |       
|                               | Real estate mortgage loans |                 | $     | 32,346 |                          |        | $    | 19,731 |        |        | $ | 15,092 |       
|                               |                            |                 |       |        |                          |        |      |        |        |        |   |        |       
|Principal Repayments:          |                            |                 |       |        |                          |        |      |        |        |        |   |       
|                               | Real estate mortgage loans |                 | $     | 46,578 |                          |        | $    | 54,071 |        |        | $ | 51,636 |       
|                               |                            | All other loans |       |        | 6,652                    |        |      |        | 4,964  |        |   |        | 6,821  |       
|                               |                            |                 |       |        |                          |        |      |        |        |        |   |        |       
|                               |                            | Total           |       | $      | 53,230                   |        |      | $      | 59,035 |        |   | $      | 58,457 |       
|                               |                            |                 |       |        |                          |        |      |        |        |        |   |        |       

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 a reasonable doubt as to the repayment of a loan, in accordance
with the agreed terms, the loan may be placed on a non-accrual basis pending the
sale of any collateral or a determination as to whether sources of repayment
exist. Generally, delinquency of 90 days or more creates reasonable doubt as to
repayment. This action may be taken even though the financial condition of the
borrower or the collateral may be sufficient to ultimately reduce or satisfy
the obligation. Generally, when a loan is placed on a non-accrual basis, all
payments are applied to reduce principal to the extent necessary to eliminate
doubt as to the repayment of the loan. Interest income on a non-accrual loan is
recognized only on a cash basis. See Non-Performing Assets below.

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. Once the loan
officer determines that there is a potential collection problem, the loan is
turned over to First Federals collections officer. It is the responsibility of
the collections officer to coordinate all collection efforts on troubled and
delinquent loans. Senior management and the First Federal Board of Directors
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 Board of Directors as to loan chargeoffs on a monthly basis.

At September 30, 2002, September 30, 2001, and September 30, 2000, loans
accounted for, on a non-accrual basis, were approximately $764,000, $742,000, and
$1,064,000, respectively, or 0.8%, 0.7%, and 1% of the total loans outstanding,
net of unearned income. The balances of accruing loans past due 90 days or
more, as to principal and interest payments, were $0 at September 30, 2002,
2001, and 2000.

The allowance for loan losses represents managements assessment of the
risk associated with extended 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 all 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 1994. As of
September 30, 2002, First Federal had not experienced any significant losses on
the construction loan portfolio. Due to the concentration of these loans, a
default by certain construction loan borrowers, or other financial difficulty,
could result in a significant addition to the allowance of loan losses.

While it is First Federals policy to charge off loans in the period in
which the loss is considered probable, there are additional risks of future
losses which cannot be quantified precisely or attributed to the particular
loans

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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 the 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 is utilized 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 for purposes of calculating the allowance for loan losses are loans
which are delinquent for more than 90 days. However, the Board of Directors may
classify loans that are less than 90 days delinquent, should such classification be
deemed necessary.

First Federals allowance for loan losses is also subject to regulatory
examinations and determinations as to its 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 a 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 provisions for
loan losses and allowances for loan losses, as the OTSs credit evaluations and
allowance for loan loss methodology have differed from those of 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 $854,000 allowance for loan losses, at
September 30, 2002, is adequate to absorb known risks in the portfolio. No
assurance can be given, however, that adverse economic circumstances will not
result in increased losses in First Federals loan portfolio. At September 30,
2002, $303,000 of the allowance for loan losses was reserved for possible
losses on real estate mortgage loans and $551,000 was reserved for possible
losses on all other loans.

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

|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |    |    | 
|------------------------------------------------------------------------------- | -------------------- | ----------------- | ------ | ---- | -- | ---- | ------- | ---- | -- | ------------------------ | ------- | ---- | --- | - | ------- | --- | --- | - | ------- | -- | -- | 
|                                                                                |                      |                   |        |      |    |      |         |      |    | Year Ended September 30, |         |      |     |   |         |    
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |    
|                                                                                |                      |                   |        | 2002 |    | 2001 |         | 2000 |    | 1999                     |         | 1998
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |     
|                                                                                |                      |                   |        |      |    |      |         |      |    | (Dollars in thousands)   |         |      |     |   |         |     |     |  
|Balance at beginning of period                                                  |                      | $                 | 1,578  |      |    | $    | 701     |      |    | $                        | 852     |      |     | $ | 732     |     |     | $ | 284     |   
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|Clanton balance at acquisition                                                  |                      |                   |       |      |    |      |        |      |    |                          |        |      |     |   |        |     |     |   | 488     |   
|Charge-offs:                                                                    |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|                                                                                | Real estate          |                   |        |     |    |      |         |     |    |                          |         | 54   |     |   |         | 216 |     |   |         | 16 |   
|                                                                                | Installment          |                   |        | 79   |    |      |         | 49   |    |                          |         | 138  |     |   |         | 290 |     |   |         | 82 |   
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|                                                                                |                      | Total charge-offs |        |      | 79 |      |         |      | 49 |                          |         |      | 192 |   |         |     | 506 |   |         |    | 98 | 
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|Recoveries:                                                                     |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|                                                                                | Real estate mortgage |                   |        |     |    |      |         |     |    |                          |         |     |     |   |         |    |     |   |         | 4  |   
|                                                                                | Installment          |                   |        | 23   |    |      |         | 68   |    |                          |         | 35   |     |   |         | 38  |     |   |         | 39 |   
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|                                                                                |                      | Total recoveries  |        |      | 23 |      |         |      | 68 |                          |         |      | 35  |   |         |     | 38  |   |         |    | 13 | 
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|Net loans (recovered) charged off                                               |                      |                   | 56     |      |    |      | (19     | )    |    |                          | 157     |      |     |   | 468     |     |     |   | 85      |   
|Provisions for loan losses (benefit)                                            |                      |                   | (668   | )    |    |      | 858     |      |    |                          | 6       |      |     |   | 588     |     |     |   | 45      |   
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|Balance at end of period                                                        |                      | $                 | 854    |      |    | $    | 1,578   |      |    | $                        | 701     |      |     | $ | 852     |     |     | $ | 732     |   
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|Ratio of net charge-offs to total loans
outstanding, net of unearned income     |                      |                   | 0.06   | %    |    |      | (.02    | )%   |    |                          | 0.14    | %    |     |   | 0.44    | %   |     |   | 0.08    | % 
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|Ratio of allowance for loan losses
to loans outstanding, net of
unearned income |                      |                   | 0.92   | %    |    |      | 1.56    |      |    |                          | 0.65    | %    |     |   | 0.80    | %   |     |   | 0.70    | % 
|                                                                                |                      |                   |        |      |    |      |         |      |    |                          |         |      |     |   |         |     |     |   |         |   
|Total Loans Outstanding                                                         |                      | $                 | 92,985 |      |    | $    | 101,135 |      |    | $                        | 108,354 |      |     | $ | 106,312 |     |     | $ | 104,590 |   

As indicated in the table above, First Federal substantially increased its
loan loss allowance in fiscal 2001 from the level of the preceding year. The
increase was due primarily to the default in the Vawter Properties loan.
See Item 3. LEGAL PROCEEDINGS and above,
 Results of Operation 
Provision for Loan Losses.

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.

|                                |  |        |     |                |  |               |        |                |  |                        |       |                |  |  |        |   |  |               |     |  |  |  |        |  
|------------------------------- |  | ------ | --- | -------------- |  | ------------- | ------ | -------------- |  | ---------------------- | ----- | -------------- |  |  | ------ | - |  | ------------- | --- |  |  |  | ------ | -
|                                |  |        |     |                |  |               |        |                |  | At September 30,       |       |                |  |  |        |   |  |              
|                                |  |        |     |                |  |               |        |                |  |                        |       |                |  |  |        |   |  |              
|                                |  | 2002   |     | 2001           |  | 2000          |       
|                                |  |        |     |                |  |               |        |                |  |                        |      
|                                |  |        |     |                |  | Percent of    |        |                |  |                        |       | Percent of     |  |  |        |   |  | Percent of   
|                                |  |        |     |                |  | loans in each |        |                |  |                        |       | loans in each  |  |  |        |   |  | loans in each
|                                |  |        |     |                |  | category      |        |                |  |                        |       | category       |  |  |        |   |  | category     
|                                |  | Amount |     | to total loans |  | Amount        |        | to total loans |  | Amount                 |       | to total loans
|                                |  |        |     |                |  |               |        |                |  |                        |       |               
|                                |  |        |     |                |  |               |        |                |  | (Dollars in thousands) |       |                |  |  |        |   |  |              
|Real estate mortgage loans      |  | $      | 303 |                |  |               | 35.48  | %              |  | $                      | 886   |                |  |  | 56.15  | % |  | $             | 584 |  |  |  | 83.31  | %
|All other loans                 |  |        | 551 |                |  |               | 64.52  | %              |  |                        | 692   |                |  |  | 43.85  | % |  |               | 117 |  |  |  | 16.69  | %
|                                |  |        |     |                |  |               |        |                |  |                        |       |                |  |  |        |   |  |               |     |  |  |  |        |  
|Total allowance for
loan losses |  | $      | 854 |                |  |               | 100.00 | %              |  | $                      | 1,578 |                |  |  | 100.00 | % |  | $             | 701 |  |  |  | 100.00 | %
|                                |  |        |     |                |  |               |        |                |  |                        |       |                |  |  |        |   |  |               |     |  |  |  |        |  

At September 30, 2002 and 2001, the total recorded investment in impaired
loans was approximately $874,000 and $648,000, respectively. The average
recorded investment in impaired loans amounted to approximately $890,000 and
$54,000, for the years ended September 30, 2002 and 2001, respectively. The
allowance for loan losses related to impaired loans was approximately $495,000
and $648,000, for fiscal 2002 and 2001, respectively. Interest income on
impaired loans of approximately $65,000 and $0 was booked in 2002 and 2001,
respectively. Loans impaired at September 30, 2000 were $4,000.

Non-Performing Assets

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

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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 for 90 days or more creates
reasonable doubt as to repayment. At the time the loan is placed on non-accrual
status, interest previously accrued but not collected is reversed and charged
against current earnings. Income is subsequently recognized
only to the extent that cash payments are received until, in managements
judgment, the borrower is able to make periodic interest and principal payments
and the loan is no longer delinquent and is returned to accrual status.

Non-performing assets were $844,000, $1,000,000, and $1,240,000 at
September 30, 2002, 2001, and 2000, respectively. As a percentage of total
loans, non-performing assets continued to be at levels which management
considers to be acceptable and commensurate with First Federals conservative
lending policies.

An analysis of the components of non-performing assets, at September 30,
2002, 2001, and 2000 is presented in the following table:

|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |    |       | 
|------------------------------------------------------------------ | --------------------------- | --------------- | ----- | ------ | ---------------------- | --- | ---- | ------- | ---------------- | --- | ----- | ------- | -- | ----- | 
|                                                                   |                             |                 |       |        |                        |     |      |         | At September 30, |     |       |         |   
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|                                                                   |                             |                 |       |        | 2002                   |     | 2001 |         | 2000            
|                                                                   |                             |                 |       |        |                        |     |      |         |                 
|                                                                   |                             |                 |       |        | (Dollars in thousands)
|Loans accounted for on a non-accrual basis:                        |                             |                 |       |        |                        |     |      |         |                  |     |       |        
|                                                                   | Real estate mortgage loans  |                 | $     | 762    |                        |     | $    | 735     |                  |     | $     | 1,039   |   
|                                                                   |                             | All other loans |       |        | 2                      |     |      |         | 7                |     |       |         | 25 |      
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|                                                                   |                             |                 | Total |        |                        | 764 |      |         |                  | 742 |       |         |    | 1,064 | 
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|Accruing loans which are past due 90 days or more:                 |                             |                 |       |        |                        |     |      |         |                  |     |       |        
|                                                                   | Real estate mortgage loans  |                 |       |       |                        |     |      |        |                  |     |       |        |   
|                                                                   | All other loans             |                 |       |       |                        |     |      |        |                  |     |       |        |   
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|                                                                   |                             |                 | Total |        |                        |    |      |         |                  |    |       |         |    |      | 
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|Total of non-accrual and 90 days past due loans                    |                             |                 | 764   |        |                        |     | 742  |         |                  |     | 1,064 |        
|Foreclosed real estate (net of related loss provisions)            |                             |                 | 80    |        |                        |     | 258  |         |                  |     | 176   |        
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|                                                                   | Total non-performing assets |                 |       | 844    |                        |     | $    | 1,000   |                  |     | $     | 1,240   |   
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|Non-accrual and 90 days past due loans as a
percent of total loans |                             |                 | 0.82  | %      |                        |     | 0.73 | %       |                  |     | 0.98  | %      
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|Non-performing assets as a percent of total loans                  |                             |                 | 0.91  | %      |                        |     | 0.99 | %       |                  |     | 1.14  | %      
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   
|                                                                   | Total loans outstanding     |                 | $     | 92,985 |                        |     | $    | 101,135 |                  |     | $     | 108,354 |   
|                                                                   |                             |                 |       |        |                        |     |      |         |                  |     |       |         |   

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

Deposits

Total deposits decreased in fiscal 2002 by $2,572,000 (2.6%), to
$96,483,000, and decreased in fiscal 2001 by $6,307,000 (6.0%), to $99,055,000.
In fiscal 2000, total deposits decreased by $9,359,000 (8.1%), to
$105,363,000. Non interest-bearing demand deposits were $2,850,000, $3,349,000
and $2,991,000, while total interest-bearing deposits were $93,632,000,
$95,706,000 and $102,371,000 at September 30, 2002, 2001 and 2000,
respectively.

First Federals deposit mix, at September 30, 2002, changed when compared
to that at September 30, 2001. NOW accounts increased $805,000 (8.5%), while
money-market demand accounts increased $61,000 (15.0%).

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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 $3,918,000 (5.8%). Non-interest bearing demand deposits
decreased by $499,000 (14.9%). During 2002, certificates of deposit, excluding
Jumbos, comprised approximately 65.7% of total deposits, while low cost funds,
including NOW accounts, money market
demand accounts, and passbook savings accounts, made up 26.7% of First
Federals total deposits. Jumbos comprised 7.6% of total deposits at
September 30, 2002.

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

|                                     |                       |                                 |        |        |        |          |        |            |       |          |        |                        |        |            |       |        |       |    |         |                |         |  |        |        |       |   
|------------------------------------ | --------------------- | ------------------------------- | ------ | ------ | ------ | -------- | ------ | ---------- | ----- | -------- | ------ | ---------------------- | ------ | ---------- | ----- | ------ | ----- | -- | ------- | -------------- | ------- |  | ------ | ------ | ----- | --
|                                     |                       |                                 |        |        |        |          |        |            |       |          |        | September 30,          |        |            |       |        |       |    |         |               
|                                     |                       |                                 |        |        |        |          |        |            |       |          |        |                        |        |            |       |        |       |    |         |               
|                                     |                       |                                 |        | 2002   |        | 2001     |        |            |       | 2000     |        |                       
|                                     |                       |                                 |        |        |        |          |        |            |       |         
|                                     |                       |                                 |        |        |        |          |        | Percent    |       |          |        |                        |        | Percent    |       |        |       |    |         |                |         | 
|                                     |                       |                                 |        |        |        |          |        | change     |       |          |        |                        |        | change     |       |        |       |    |         | Percent change
|                                     |                       |                                 |        |        |        |          |        | from prior |       |          |        |                        |        | from prior |       |        |       |    |         | from prior    
|                                     |                       |                                 |        | Amount |        | year-end |        | Amount     |       | year-end |        | Amount                 |        | year-end  
|                                     |                       |                                 |        |        |        |          |        |            |       |          |        |                        |        |           
|                                     |                       |                                 |        |        |        |          |        |            |       |          |        | (Dollars in thousands) |        |            |       |        |       |    |         |               
|Non-interest bearing
demand deposits |                       | $                               | 2,850  |        |        |          | (14.90 | )%         |       | $        | 3,349  |                        |        |            | 11.97 | %      |       | $  | 2,991   |                |         |  | (22.07 | )%    
|Interest bearing deposits:           |                       |                                 |        |        |        |          |        |            |       |          |        |                        |        |            |       |        |       |    |         |                |         |  |        |       
|                                     | NOW accounts          |                                 |        | 10,295 |        |          |        | 8.48       | %     |          |        | 9,490                  |        |            |       | (2.46  | )%    |    |         | 9,729          |         |  |        | (19.79 | )%   
|                                     | Money market demand   |                                 |        | 468    |        |          |        | 14.99      | %     |          |        | 407                    |        |            |       | (35.60 | )%    |    |         | 632            |         |  |        | 9.53   | %    
|                                     | Passbook savings      |                                 |        | 12,149 |        |          |        | 8.88       | %     |          |        | 11,158                 |        |            |       | (5.39  | )%    |    |         | 11,794         |         |  |        | (12.12 | )%   
|                                     | CDs other than Jumbos |                                 |        | 63,346 |        |          |        | (5.82      | )%    |          |        | 67,265                 |        |            |       | (6.05  | )%    |    |         | 71,592         |         |  |        | (11.01 | )%   
|                                     | Jumbos                |                                 |        | 7,374  |        |          |        | ( .18      | )%    |          |        | 7,387                  |        |            |       | (14.34 | )%    |    |         | 8,624          |         |  |        | 100.14 | %    
|                                     |                       |                                 |        |        |        |          |        |            |       |          |        |                        |        |            |       |        |       |    |         |                |         |  |        |       
|                                     |                       | Total interest bearing deposits |        |        | 93,632 |          |        |            | (2.17 | )%       |        |                        | 95,707 |            |       |        | (6.51 | )% |         |                | 102,371 |  |        |        | (7.68 | )%
|                                     |                       |                                 |        |        |        |          |        |            |       |          |        |                        |        |            |       |        |       |    |         |                |         |  |        |       
|Total deposits                       |                       | $                               | 96,483 |        |        |          | (2.60  | )%         |       | $        | 99,056 |                        |        |            | (5.99 | )%     |       | $  | 105,363 |                |         |  | (8.16  | )%    
|                                     |                       |                                 |        |        |        |          |        |            |       |          |        |                        |        |            |       |        |       |    |         |                |         |  |        |       

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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:

|                                               |  |                 |  |                                   |  |                       |         |         |  |          |        |  |  |   |        |   |  |            |        |  
|---------------------------------------------- |  | --------------- |  | --------------------------------- |  | --------------------- | ------- | ------- |  | -------- | ------ |  |  | - | ------ | - |  | ---------- | ------ | -
|                                               |  |                 |  |                                   |  | At September 30, 2002
|                                               |  |                 |  |                                   |  |                      
|                                               |  |                 |  |                                   |  |                       |         |         |  |          |        |  |  |   |        |   |  | Percentage
|Interest                                       |  |                 |  |                                   |  |                       |         |         |  |          |        |  |  |   |        |   |  | of Total  
|Rate                                           |  | Term            |  | Category                          |  | Minimum               |         | Balance |  | Balances
|                                               |  |                 |  |                                   |  |                       |         |         |  |         
|(Dollars in thousands, except minimum balance)
|0.00%                                          |  | None            |  | Non-interest bearing demand       |  | $                     | 50      |         |  | $        | 2,850  |  |  |   | 2.95   | %
|1.00%                                          |  | None            |  | NOW accounts                      |  |                       | 250     |         |  |          | 10,156 |  |  |   | 10.53  | %
|1.00%                                          |  | None            |  | Non-profit                        |  |                       | 100     |         |  |          | 141    |  |  |   | .15    | %
|1.00%                                          |  | None            |  | Money market checking             |  |                       | 50      |         |  |          | 467    |  |  |   | .48    | %
|1.00%                                          |  | None            |  | Statement savings                 |  |                       | 50      |         |  |          | 12,149 |  |  |   | 12.59  | %
|1.25%                                          |  | 3 months        |  | Fixed-term fixed rate certificate |  |                       | 250     |         |  |          | 230    |  |  |   | .24    | %
|2.75%                                          |  | 6 months        |  | Fixed-term fixed rate certificate |  |                       | 250     |         |  |          | 10,239 |  |  |   | 10.61  | %
|3.20%                                          |  | 12 months       |  | Fixed-term fixed rate certificate |  |                       | 250     |         |  |          | 17,596 |  |  |   | 18.24  | %
|2.85%                                          |  | 18 months       |  | Fixed-term fixed rate certificate |  |                       | 250     |         |  |          | 4,393  |  |  |   | 4.55   | %
|2.85%                                          |  | 18 mth Roth IRA |  | Fixed-term fixed rate certificate |  |                       | 250     |         |  |          | 92     |  |  |   | .10    | %
|2.85%                                          |  | 18 mth IRA      |  | Fixed-term fixed rate certificate |  |                       | 250     |         |  |          | 13,293 |  |  |   | 13.78  | %
|4.50%                                          |  | 60 mth IRA      |  | Fixed-term fixed rate certificate |  |                       | 250     |         |  |          | 1,135  |  |  |   | 1.18   | %
|3.00%                                          |  | 30 months       |  | Fixed-term fixed rate certificate |  |                       | 250     |         |  |          | 11,612 |  |  |   | 12.04  | %
|3.50%                                          |  | 4 year          |  | Fixed-term fixed rate certificate |  |                       | 1,500   |         |  |          | 479    |  |  |   | .50    | %
|4.50%                                          |  | 5  year         |  | Fixed-term fixed rate certificate |  |                       | 1,500   |         |  |          | 4,277  |  |  |   | 4.43   | %
|4.36%                                          |  | Jumbo           |  | Fixed-term fixed rate certificate |  |                       | 100,000 |         |  |          | 7,374  |  |  |   | 7.64   | %
|                                               |  |                 |  |                                   |  |                       |         |         |  |          |        |  |  |   |        |   |  |            |        |  
|                                               |  |                 |  |                                   |  |                       |         |         |  |          |        |  |  | $ | 96,483 |   |  |            | 100.00 | %
|                                               |  |                 |  |                                   |  |                       |         |         |  |          |        |  |  |   |        |   |  |            |        |  

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

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The following table provides information about the average balances of
interest-bearing demand deposits and time deposits, for the periods indicated,
based upon average balances:

|                |  |                          |        |          |  |                  |        |          |  |                  |        |          |  |   |        |   |  |   |        |   |  |   |        |  
|--------------- |  | ------------------------ | ------ | -------- |  | ---------------- | ------ | -------- |  | ---------------- | ------ | -------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                |  | Year ended September 30,
|                |  |                         
|                |  | 2002                     |        | 2001     |  | 2000            
|                |  |                          |        |          |  |                 
|                |  | (Dollars in thousands)  
|                |  | Interest bearing         |        | Time     |  | Interest bearing |        | Time     |  | Interest bearing |        | Time    
|                |  | demand deposits          |        | deposits |  | demand deposits  |        | deposits |  | demand deposits  |        | deposits
|                |  |                          |        |          |  |                  |        |          |  |                  |        |         
|Average balance |  | $                        | 22,981 |          |  | $                | 72,382 |          |  | $                | 21,725 |          |  | $ | 79,803 |   |  | $ | 23,277 |   |  | $ | 81,811 |  
|Average rate    |  |                          | 1.41   | %        |  |                  | 4.38   | %        |  |                  | 1.83   | %        |  |   | 5.34   | % |  |   | 1.80   | % |  |   | 5.76   | %

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

|                                                |  |                          |        |      |  |      |         |      |  |   |         |    |  |   |         |   
|----------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------- | ---- |  | - | ------- | -- |  | - | ------- | --
|                                                |  | Year ended September 30,
|                                                |  |                         
|                                                |  | 2002                     |        | 2001 |  | 2000 |         | 1999
|                                                |  |                          |        |      |  |      |         |     
|                                                |  | (Dollars in thousands)  
|Opening balance                                 |  | $                        | 99,056 |      |  | $    | 105,363 |      |  | $ | 114,722 |    |  | $ | 123,884 |   
|Deposits acquired in Chilton County Acquisition |  |                          |       |      |  |      |        |      |  |   |        |    |  |   |        |   
|Net deposits (withdrawals)                      |  |                          | (5,475 | )    |  |      | (9,864  | )    |  |   | (12,623 | )  |  |   | (13,168 | ) 
|Interest credited on deposits                   |  |                          | 2,902  |      |  |      | 3,557   |      |  |   | 3,264   |    |  |   | 4,006   |   
|                                                |  |                          |        |      |  |      |         |      |  |   |         |    |  |   |         |   
|Ending balance                                  |  | $                        | 96,483 |      |  | $    | 99,056  |      |  | $ | 105,363 |    |  | $ | 114,722 |   
|                                                |  |                          |        |      |  |      |         |      |  |   |         |    |  |   |         |   
|Total decrease (increase) in deposits           |  | $                        | (2,573 | )    |  | $    | (6,307  | )    |  | $ | (9,359  | )  |  | $ | (9,162  | ) 
|                                                |  |                          |        |      |  |      |         |      |  |   |         |    |  |   |         |   
|Percentage decrease (increase)                  |  |                          | (2.60  | )%   |  |      | (5.99   | )%   |  |   | (8.16   | )% |  |   | (7.40   | )%
|                                                |  |                          |        |      |  |      |         |      |  |   |         |    |  |   |         |   

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

|              |       |      |                          |        |  |      |        |        |  |   |        |        | 
|------------- | ----- | ---- | ------------------------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|              |       |      | Year ended September 30,
|              |       |      |                         
|Interest Rate |       | 2002 |                          | 2001   |  | 2000
|              |       |      |                          |        |  |     
|              |       |      | (Dollars in thousands)  
|0.00 - 1.99%  |       | $    | 2,775                    |        |  | $    |       |        |  | $ |       |       
|2.00 - 2.99%  |       |      | 22,060                   |        |  |      |       |        |  |   |       |       
|3.00 - 3.99%  |       |      | 18,771                   |        |  |      | 7,077  |        |  |   | 373    |       
|4.00 - 4.99%  |       |      | 11,694                   |        |  |      | 25,368 |        |  |   | 9,489  |       
|5.00 - 5.99%  |       |      | 3,922                    |        |  |      | 9,623  |        |  |   | 34,239 |       
|6.00 - 6.99%  |       |      | 5,471                    |        |  |      | 22,998 |        |  |   | 24,581 |       
|7.00 - 7.99%  |       |      | 6,028                    |        |  |      | 9,585  |        |  |   | 11,535 |       
|              |       |      |                          |        |  |      |        |        |  |   |        |       
|              | Total |      | $                        | 70,721 |  |      | $      | 74,651 |  |   | $      | 80,217 | 
|              |       |      |                          |        |  |      |        |        |  |   |        |       

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At September 30, 2002, First Federal had approximately $70.7 million
outstanding in certificate accounts that mature as follows:

|              |       |   |                        |        |           |   |             |       |            |   |            |       |            |   |       |       |  |   |       |       |  |   |   |   |  |   |        |        | 
|------------- | ----- | - | ---------------------- | ------ | --------- | - | ----------- | ----- | ---------- | - | ---------- | ----- | ---------- | - | ----- | ----- |  | - | ----- | ----- |  | - | - | - |  | - | ------ | ------ | 
|              |       |   | Amount due            
|              |       |   |                       
|              |       |   | Less than              |        | One to    |   | Two to      |       | Three to   |   | Four to    |       |            |   |       |       |  |   |      
|              |       |   | one year               |        | two years |   | three years |       | Four years |   | five years |       | Thereafter |   | Total
|              |       |   |                        |        |           |   |             |       |            |   |            |       |            |   |      
|              |       |   | (Dollars in thousands)
|Interest Rate |       |   |                        |        |           |   |             |       |            |   |            |       |            |   |       |       |  |   |       |       |  |   |   |   |  |   |        |       
|0.00 - 1.99%  |       | $ | 342                    |        |           | $ |            |       |            | $ | 2,433      |       |            | $ |      |       |  | $ |      |       |  | $ |  |   |  | $ | 2,775  |       
|2.00 - 2.99%  |       |   | 18,312                 |        |           |   | 3,661       |       |            |   |           |       |            |   |      |       |  |   | 87    |       |  |   |  |   |  |   | 22,060 |       
|3.00 - 3.99%  |       |   | 14,933                 |        |           |   | 2,829       |       |            |   | 990        |       |            |   | 19    |       |  |   |      |       |  |   |  |   |  |   | 18,771 |       
|4.00 - 4.99%  |       |   | 8,391                  |        |           |   | 2,057       |       |            |   | 429        |       |            |   | 43    |       |  |   | 774   |       |  |   |  |   |  |   | 11,694 |       
|5.00 - 5.99%  |       |   | 1,389                  |        |           |   | 245         |       |            |   | 22         |       |            |   | 449   |       |  |   | 1,816 |       |  |   |  |   |  |   | 3,921  |       
|6.00 - 6.99%  |       |   | 4,836                  |        |           |   | 108         |       |            |   | 265        |       |            |   | 263   |       |  |   |      |       |  |   |  |   |  |   | 5,472  |       
|7.00 - 7.99%  |       |   | 1,951                  |        |           |   | 41          |       |            |   | 3,453      |       |            |   | 583   |       |  |   |      |       |  |   |  |   |  |   | 6,028  |       
|              |       |   |                        |        |           |   |             |       |            |   |            |       |            |   |       |       |  |   |       |       |  |   |   |   |  |   |        |       
|              | Total |   | $                      | 50,154 |           |   | $           | 8,941 |            |   | $          | 7,592 |            |   | $     | 1,357 |  |   | $     | 2,677 |  |   | $ |  |  |   | $      | 70,721 | 
|              |       |   |                        |        |           |   |             |       |            |   |            |       |            |   |       |       |  |   |       |       |  |   |   |   |  |   |        |       

As of September 30, 2002, certificates of deposit, other than Jumbos,
mature as follows:

|              |       |   |                        |        |           |   |             |       |            |   |            |       |       |   |     |     |  |   |       |       |  |   |        |        | 
|------------- | ----- | - | ---------------------- | ------ | --------- | - | ----------- | ----- | ---------- | - | ---------- | ----- | ----- | - | --- | --- |  | - | ----- | ----- |  | - | ------ | ------ | 
|              |       |   | Amount due            
|              |       |   |                       
|              |       |   | Less than              |        | One to    |   | Two to      |       | Three to   |   | Four to    |       |       |   |    
|              |       |   | one year               |        | two years |   | three years |       | Four years |   | five years |       | Total
|              |       |   |                        |        |           |   |             |       |            |   |            |       |      
|              |       |   | (Dollars in thousands)
|Interest Rate |       |   |                        |        |           |   |             |       |            |   |            |       |       |   |     |     |  |   |       |       |  |   |        |       
|0.00 - 1.99%  |       | $ | 230                    |        |           | $ |            |       |            | $ |           |       |       | $ |    |     |  | $ |      |       |  | $ | 230    |       
|2.00 - 2.99%  |       |   | 17,888                 |        |           |   | 3,661       |       |            |   |           |       |       |   |    |     |  |   | 87    |       |  |   | 21,636 |       
|3.00 - 3.99%  |       |   | 14,081                 |        |           |   | 2,629       |       |            |   | 990        |       |       |   | 19  |     |  |   |      |       |  |   | 17,719 |       
|4.00 - 4.99%  |       |   | 8,291                  |        |           |   | 2,057       |       |            |   | 429        |       |       |   | 43  |     |  |   | 774   |       |  |   | 11,594 |       
|5.00 - 5.99%  |       |   | 1,389                  |        |           |   | 245         |       |            |   | 22         |       |       |   | 449 |     |  |   | 1,716 |       |  |   | 3,821  |       
|6.00 - 6.99%  |       |   | 4,735                  |        |           |   | 108         |       |            |   | 265        |       |       |   | 263 |     |  |   |      |       |  |   | 5,371  |       
|7.00 - 7.99%  |       |   | 1,601                  |        |           |   | 41          |       |            |   | 1,114      |       |       |   | 219 |     |  |   |      |       |  |   | 2,975  |       
|              |       |   |                        |        |           |   |             |       |            |   |            |       |       |   |     |     |  |   |       |       |  |   |        |       
|              | Total |   | $                      | 48,215 |           |   | $           | 8,741 |            |   | $          | 2,820 |       |   | $   | 993 |  |   | $     | 2,577 |  |   | $      | 63,346 | 
|              |       |   |                        |        |           |   |             |       |            |   |            |       |       |   |     |     |  |   |       |       |  |   |        |       

As of September 30, 2002, Jumbos mature as follows:

|              |       |   |                        |       |           |   |             |     |            |   |            |       |       |   |     |     |  |   |     |     |  |   |       |       | 
|------------- | ----- | - | ---------------------- | ----- | --------- | - | ----------- | --- | ---------- | - | ---------- | ----- | ----- | - | --- | --- |  | - | --- | --- |  | - | ----- | ----- | 
|              |       |   | Amount due            
|              |       |   |                       
|              |       |   | Less than              |       | One to    |   | Two to      |     | Three to   |   | Four to    |       |       |   |    
|              |       |   | one year               |       | two years |   | three years |     | Four years |   | five years |       | Total
|              |       |   |                        |       |           |   |             |     |            |   |            |       |      
|              |       |   | (Dollars in thousands)
|Interest Rate |       |   |                        |       |           |   |             |     |            |   |            |       |       |   |     |     |  |   |     |     |  |   |       |      
|0.00 - 1.99%  |       | $ | 112                    |       |           | $ |            |     |            | $ | 2,433      |       |       | $ |    |     |  | $ |    |     |  | $ | 2,545 |      
|2.00 - 2.99%  |       |   | 424                    |       |           |   |            |     |            |   |           |       |       |   |    |     |  |   |    |     |  |   | 424   |      
|3.00 - 3.99%  |       |   | 852                    |       |           |   | 200         |     |            |   |           |       |       |   |    |     |  |   |    |     |  |   | 1,052 |      
|4.00 - 4.99%  |       |   | 100                    |       |           |   |            |     |            |   |           |       |       |   |    |     |  |   |    |     |  |   | 100   |      
|5.00 - 5.99%  |       |   |                       |       |           |   |            |     |            |   |           |       |       |   |    |     |  |   | 100 |     |  |   | 100   |      
|6.00 - 6.99%  |       |   | 100                    |       |           |   |            |     |            |   |           |       |       |   |    |     |  |   |    |     |  |   | 100   |      
|7.00 - 7.99%  |       |   | 350                    |       |           |   |            |     |            |   | 2,339      |       |       |   | 364 |     |  |   |    |     |  |   | 3,053 |      
|              |       |   |                        |       |           |   |             |     |            |   |            |       |       |   |     |     |  |   |     |     |  |   |       |      
|              | Total |   | $                      | 1,938 |           |   | $           | 200 |            |   | $          | 4,772 |       |   | $   | 364 |  |   | $   | 100 |  |   | $     | 7,374 | 
|              |       |   |                        |       |           |   |             |     |            |   |            |       |       |   |     |     |  |   |     |     |  |   |       |      

The following table presents the maturities of certificates of deposit, as
of September 30, 2002, 2001 and 2000:

|                                                                   |       |   |                             |        |      |   |        |        |  |   |        |        | 
|------------------------------------------------------------------ | ----- | - | --------------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                   |       |   | Maturities of Time Deposits
|                                                                   |       |   | September 30,              
|                                                                   |       |   |                            
|                                                                   |       |   | 2002                        |        | 2001 |   | 2000  
|                                                                   |       |   |                             |        |      |   |       
|                                                                   |       |   | (Dollars in thousands)     
|Three months or less                                               |       | $ | 13,824                      |        |      | $ | 12,281 |        |  | $ | 15,541 |       
|After three within six months                                      |       |   | 16,557                      |        |      |   | 15,765 |        |  |   | 18,979 |       
|After six within twelve months                                     |       |   | 19,772                      |        |      |   | 20,984 |        |  |   | 27,015 |       
|One year to two years                                              |       |   | 8,941                       |        |      |   | 16,138 |        |  |   | 11,418 |       
|Two years to three years                                           |       |   | 7,593                       |        |      |   | 2,219  |        |  |   | 3,943  |       
|Three years to four years                                          |       |   | 1,357                       |        |      |   | 6,060  |        |  |   | 389    |       
|Four years to five years                                           |       |   | 2,677                       |        |      |   | 1,204  |        |  |   | 2,932  |       
|                                                                   |       |   |                             |        |      |   |        |        |  |   |        |       
|                                                                   | Total |   | $                           | 70,721 |      |   | $      | 74,651 |  |   | $      | 80,217 | 
|                                                                   |       |   |                             |        |      |   |        |        |  |   |        |       
|Weighted average rate on all certificates of
deposit at period-end |       |   | 3.74                        | %      |      |   | 5.34   | %      |  |   | 5.76   | %     
|                                                                   |       |   |                             |        |      |   |        |        |  |   |        |       

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Short-Term Borrowings

SouthFirst has a line of credit of up to $2,500,000 which bears interest
at the prime lending rate. Accrued interest on the unpaid balance of the
principal is due monthly and continuing until June 2003, at which time the
entire unpaid balance, along with any unpaid accrued interest, is due. At
September 30, 2002, the prime lending rate was 4.75%, and the outstanding
balance on the line of credit was $698,861.

SouthFirst paid off a previous line of credit with Regions Bank, of up to
$4,000,000, earlier in fiscal 2002.

Borrowings also include borrowings from the FHLB of Atlanta. The balances
outstanding at September 30, 2002, and September 30, 2001 were $24,340,000 and
$32,250,000, respectively. These balances included advances with both fixed and
variable interest rates, which averaged 4.09% and 4.43% at September 30, 2002
and September 30, 2001, respectively.

First Federal also has short term borrowings through reverse repurchase
agreements with Morgan Keegan. As of September 30, 2002, the balance
outstanding on these was $4,018,750, with an average rate of 1.87%.

Capital Resources

Stockholders Equity

SouthFirsts consolidated stockholders equity was $13,878,000 and
$14,282,000 at September 30, 2002 and September 30, 2001, respectively. The
2002 decrease was due primarily to the repurchase, by SouthFirst, of shares of
its Common Stock, in the amount of $759,000, pursuant to its
previously announced stock
repurchase program. The 2002 decrease was partially offset by
the change in accumulated other comprehensive income, in the amount of
$63,000, resulting from the increase in unrealized holding gains on
available-for-sale securities, and by net income from operations in the amount
of $671,000.

During 2002, cash dividends of $497,345, or $0.60 per share, were declared
on SouthFirst Common Stock. During 2001, cash dividends of $554,051, or $0.60
per share, were declared. During 2000, cash dividends of $557,446, or $0.60
per share, were declared. Management believes that a strong capital position
is vital to the continued profitability of First Federal and SouthFirst and
provides a foundation for future growth, as well as promoting depositor and
investor confidence.

The following table provides certain financial ratios for SouthFirst, as
of the end of the most recent three fiscal years:

|                                                     |  |                         |             |      |  |      |             |    |  |   |             |  
|---------------------------------------------------- |  | ----------------------- | ----------- | ---- |  | ---- | ----------- | -- |  | - | ----------- | -
|                                                     |  | Equity and Asset Ratios
|                                                     |  |                        
|                                                     |  | September 30,          
|                                                     |  |                        
|                                                     |  | 2002                    |             | 2001 |  | 2000
|                                                     |  |                         |             |      |  |     
|Return on average assets                             |  |                         | 0.47        | %    |  |      | (0.27       | )% |  |   | 0.59        | %
|Return on average stockholders equity               |  |                         | 4.89        | %    |  |      | (2.82       | )% |  |   | 6.70        | %
|Common dividend payout ratio                         |  |                         | 74.14       | %    |  |      | N/A         |    |  |   | 57.98       | %
|Average stockholders equity to average assets ratio |  |                         | 9.52        | %    |  |      | 9.61        | %  |  |   | 8.82        | %
|                                                    
|Net Income (Loss)                                    |  | $                       | 670,805     |      |  | $    | (422,093    | )  |  | $ | 961,492     |  
|Average Assets                                       |  |                         | 144,248,358 |      |  |      | 155,999,236 |    |  |   | 162,741,763 |  
|Average Equity                                       |  |                         | 13,729,739  |      |  |      | 14,992,282  |    |  |   | 14,355,955  |  
|Cash Dividends Paid                                  |  |                         | 497,345     |      |  |      | 554,051     |    |  |   | 557,446     |  

Capital

The regulations of the OTS provide the capital requirements applicable to
thrifts, including First Federal, and the consequences for failing to comply
with such standards (as amended from time to time, the OTS Capital
Regulations). The regulatory capital standards contained in the OTS Capital
Regulations include (i) a core capital requirement, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement and identity certain

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minimum regulatory capital
requirements, including a tangible capital ratio equal
to 1.50% of adjusted total assets, a core capital ratio equal to 4.0% of adjusted
total assets, and a minimum risk-based capital ratio 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, 2002 and September
30, 2001.

|                                                          |                             |   |                       |          |                       |   |             |          |          |   |            |          |            |   |             |          |   |   |             |          |   |   |            |          |  
|--------------------------------------------------------- | --------------------------- | - | --------------------- | -------- | --------------------- | - | ----------- | -------- | -------- | - | ---------- | -------- | ---------- | - | ----------- | -------- | - | - | ----------- | -------- | - | - | ---------- | -------- | -
|                                                          |                             |   | At September 30, 2002 |          | At September 30, 2001
|                                                          |                             |   |                       |          |                      
|                                                          |                             |   | Tangible              |          | Core                  |   | Risk-based  |          | Tangible |   | Core       |          | Risk-based
|                                                          |                             |   | Capital               |          | Capital               |   | Capital     |          | Capital  |   | Capital    |          | Capital   
|                                                          |                             |   |                       |          |                       |   |             |          |          |   |            |          |           
|Capital                                                   |                             | $ | 14,606,000            |          |                       | $ | 14,606,000  |          |          | $ | 14,606,000 |          |            | $ | 14,883,000  |          |   | $ | 14,883,000  |          |   | $ | 14,883,000 |         
|Adjustments:                                              |                             |   |                       |          |                       |   |             |          |          |   |            |          |            |   |             |          |   |   |             |          |   |   |            |         
|                                                          | General valuation
allowance |   |                       |         |                       |   |             |         |          |   |            | 361,000  |            |   |             |         |   |   |             |         |   |   |            | 852,000  |  
|                                                          | Goodwill                    |   |                       | (511,000 | )                     |   |             | (511,000 | )        |   |            | (511,000 | )          |   |             | (562,000 | ) |   |             | (562,000 | ) |   |            | (562,000 | )
|                                                          | Unrealized Gains            |   |                       | (479,000 | )                     |   |             | (479,000 | )        |   |            | (479,000 | )          |   |             | (418,000 | ) |   |             | (418,000 | ) |   |            | (418,000 | )
|Regulatory capital                                        |                             |   | 13,616,000            |          |                       |   | 13,616,000  |          |          |   | 13,977,000 |          |            |   | 13,903,000  |          |   |   | 13,903,000  |          |   |   | 14,755,000 |         
|Regulatory asset base                                     |                             |   | 140,500,000           |          |                       |   | 140,500,000 |          |          |   | 87,853,000 |          |            |   | 150,798,000 |          |   |   | 150,798,000 |          |   |   | 92,155,000 |         
|Capital ratio                                             |                             |   | 9.69                  | %        |                       |   | 9.69        | %        |          |   | 15.91      | %        |            |   | 9.28        | %        |   |   | 9.28        | %        |   |   | 16.01      | %       
|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      | %       

Liquidity

First Federal

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

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

Sources of liability liquidity include customer deposits and participation
in the FHLB advance program. Although deposit growth historically has been a
primary source of liquidity, such balances may be influenced by changes in the
banking industry, interest rates available on other investments, general
economic conditions, competition and other factors. FHLB advances include both
fixed and variable terms and are taken out with varying maturities. First
Federal can borrow an amount equal to 50% of its mortgage loans which are
backed by one-to-four family residential properties. At September 30, 2002,
First Federal had credit available, net of advances drawn down, of
approximately $2 million. First Federal has drawn down such advances in order
to fund dividend payments to stockholders and to pay various holding company
expenses.

On a consolidated basis, net cash provided (used) by operating activities
in fiscal 2002 was $(2,529,000), a $3,163,000 decrease from 2001. The
$15,101,000 in net cash provided by investing activities during 2002 consisted
primarily of a $8,442,000 decrease in loan funding activities. Net cash
decreased from the purchase of investment securities available for sale to
$15,573,000, from $7,054,000 in 2001. Cash provided by calls and maturities of
investment securities available for sale increased to $3,559,000, from
$1,755,000, while cash provided from the sale of investment securities
available for sale increased to $18,598,000, from $9,696,000 in 2001. The
$10,470,000 in net cash used by financing activities resulted from a decrease
of $3,930,000 in certificates of deposit, while demand accounts increased
$1,358,000. Borrowed funds decreased $6,547,000; payments for common stock
dividends totaled $463,000; and the acquisition of treasury stock totaled
$759,000.

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First Federals liquidity ratio (as defined under the previous OTS
Liquidity Regulations) at September 30, 2002 was 24.74%, and at September 30,
2001 was 25.29%. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, managements expectations
with respect 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 $1,100,000 and $771,900 to SouthFirst during 2002 and 2001, respectively.

SouthFirst

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 of the OTS Capital
Regulations for classification as a well capitalized institution and,
thereby, enable First Federal to pay dividends to SouthFirst. In addition to
dividends, SouthFirst has access to various capital markets and other sources
of borrowings including a line of credit in the amount of $2,500,000, from
First Commercial Bank in Birmingham, Alabama. The line of credit is renewable
annually and is secured by all of the issued and outstanding shares of First
Federal, pledged by SouthFirst. SouthFirst, at September 30, 2002, has
drawn $699,000 against the line of credit.

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)
to repurchase SouthFirst Common Stock, to invest in affiliates and to pay
general corporate expenses. Accordingly, SouthFirst likely will 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 and to
repurchase shares of SouthFirst pursuant to the current repurchase program
announced by SouthFirst in January 2002, under which, as of December 16, 2002,
SouthFirst has repurchased 56,700 shares of the intended repurchase of up to 85,000
shares of Common Stock.




ITEM 7. FINANCIAL STATEMENTS

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



| |                             
| | ----------------------------
| | Independent Auditors Report



| |                             
| | ----------------------------
| | 1. Jones & Kirkpatrick, P.C.



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Consolidated Statements of Financial Condition as of
September 30, 2002 and 2001                     
|
| | Consolidated Statements of Operations for the years ended
September 30, 2002, 2001 and 2000          
|
| | Consolidated Statements of Stockholders Equity for the years ended
September 30, 2002, 2001 and 2000
|
| | Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000          
|
| | Notes to Consolidated Financial Statements                                                           




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

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

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PART III




ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Management of SouthFirst

The SouthFirst Board of Directors currently consists of eight persons and
is divided into three classes, each of which contains approximately one-third
of the members. The directors of SouthFirst are elected
by the stockholders of SouthFirst for staggered, three-year terms, so that
approximately one-third of the directors are 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 are elected at each annual
meeting of stockholders. Since SouthFirst owns all of the issued and
outstanding shares of common stock of First Federal, SouthFirst elects 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 or among such persons.

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

|                         |  |        |    |               |  |                                                                                                                               |  |              |      |      |  |  |      | 
|------------------------ |  | ------ | -- | ------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---- | ---- |  |  | ---- | 
|                         |  |        |    |               |  |                                                                                                                               |  | Year First   |      |      |  | 
|                         |  |        |    |               |  |                                                                                                                               |  | Elected as a |      | Year
|                         |  |        |    |               |  |                                                                                                                               |  | Director of  |      | Term
|Name                     |  | Age(1) |    | Position Held |  | SouthFirst                                                                                                                    |  | Expires     
|                         |  |        |    |               |  |                                                                                                                               |  |             
|Joe K. McArthur          |  |        | 51 |               |  | Chief Executive Officer of
SouthFirst and First Federal;
President of First Federal;
Director of SouthFirst and
First Federal |  |              | 1996 |      |  |  | 2005 | 
|J. Malcomb Massey        |  |        | 53 |               |  | President of SouthFirst;
Director of SouthFirst and
First Federal; President and
Chief Executive Officer of
Pension & Benefit |  |              | 1997 |      |  |  | 2003 | 
|Allen Gray McMillan, III |  |        | 45 |               |  | Chairman of SouthFirst and
First Federal; Director of
SouthFirst and First Federal                                            |  |              | 1994 |      |  |  | 2005 | 
|H. David Foote, Jr.      |  |        | 53 |               |  | Director of SouthFirst and
First Federal                                                                                      |  |              | 1994 |      |  |  | 2004 | 
|Kenneth E. Easterling    |  |        | 59 |               |  | Director of SouthFirst and
First Federal                                                                                      |  |              | 2001 |      |  |  | 2004 | 
|L. Neal Bice             |  |        | 62 |               |  | Director of SouthFirst and
First Federal                                                                                      |  |              | 2001 |      |  |  | 2004 | 
|Donald R. Hardy          |  |        | 52 |               |  | Director of SouthFirst and
First Federal                                                                                      |  |              | 2001 |      |  |  | 2005 | 

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|                   |  |        |    |               |  |                                                                                                                                |  |              |      |      |  |  |      | 
|------------------ |  | ------ | -- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ---- | ---- |  |  | ---- | 
|                   |  |        |    |               |  |                                                                                                                                |  | Year First   |      |      |  | 
|                   |  |        |    |               |  |                                                                                                                                |  | Elected as a |      | Year
|                   |  |        |    |               |  |                                                                                                                                |  | Director of  |      | Term
|Name               |  | Age(1) |    | Position Held |  | SouthFirst                                                                                                                     |  | Expires     
|                   |  |        |    |               |  |                                                                                                                                |  |             
|Sandra H. Stephens |  |        | 43 |               |  | Executive Vice President and
Chief Operating Officer of
SouthFirst and First Federal;
Director of SouthFirst and
First Federal |  |              | 2002 |      |  |  | 2003 | 
|Ruth M. Roper      |  |        | 52 |               |  | Executive Vice President of
Pension & Benefit                                                                                  |  |              |      |      |  |  |      | 



---

|(1) |  | At September 30, 2002
|--- |  | ---------------------

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

Joe K. McArthurhas served as a director of First Federal and SouthFirst
since February 1996. Effective September 1, 2001, Mr. McArthur was elected
President and Chief Executive Officer of SouthFirst and First Federal.
Thereafter, as part of the Companys restructuring efforts, Mr. McArthur
resigned as President of SouthFirst to allow J. Malcomb Massey to assume that
office, as of October 1, 2001. Prior to assuming his current positions, Mr.
McArthur served as the Executive Vice President, Chief Financial Officer and
Secretary of First Federal and SouthFirst from 1992 and 1994, respectively. Mr.
McArthur has over 25 years of experience in the banking industry and received a
B.S. in Accounting from the University of Alabama-Birmingham and a Masters of
Business Administration equivalent from the National School of Finance and
Management. He has also completed all courses with the Institute of Financial
Education. Prior to joining First Federal, Mr. McArthur was Assistant
Executive Director of Finance of Humana, a hospital, from 1990 to 1992, and
Senior Vice President of First Federal of Alabama from 1983 to 1990. He has
also served as a manager of various Little League and Babe Ruth Baseball teams,
as well as Boys Club basketball teams. Mr. McArthur is a member of the First
United Methodist Church of Sylacauga.

J.     Malcomb Masseyhas served as a director of First Federal and SouthFirst
since May 1997. On September 26, 2001, Mr. Massey was elected President of
SouthFirst to be effective October 1, 2001. In addition, Mr. Massey is
President and Chief Executive Officer of Pension & Benefit, First Federals
wholly-owned, operating subsidiary. This is a position he has held since he
joined Pension & Benefit in 1997, after it acquired substantially all of the
assets of Lambert, Massey, Roper & Taylor, Inc., an employee benefits
consulting firm, based in Montgomery, for which Mr. Massey had served as
President since 1980. Mr. Massey is a member of the American Society of Pension
Actuaries, 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, IIIhas served as a director of First Federal since
1993 and of SouthFirst since 1994. On August 15, 2001, Mr. McMillan was
elected Chairman of SouthFirst and First Federal. Mr. McMillan is also
President of Brecon Knitting Mill, where he has been employed since 1979. Mr.
McMillan has been active in the Kiwanis Club, United Way, and Boy Scouts of
America. He is a member of the First United Methodist Church.

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

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

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

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

Sandra H. Stephenswas elected as director of SouthFirst and First
Federal, effective November 12, 2002, and Ms. Stephens was elected as Executive
Vice President and Chief Operating Officer of SouthFirst and First Federal,
effective November 1, 2001. Ms. Stephens previously served as the Chief
Operating Officer, from 1997 to 2001, and Chief Financial Officer, from 1992 to
1997, of First Federal Bank, in Tuscaloosa, Alabama. Prior to her employment
with First Federal Bank, Ms. Stephens held various executive positions with
Federal Home Loan Mortgage Corporation, Atlanta, Georgia from 1990 until 1992,
and with Pinnacle Bank, Jasper, Alabama from 1981 until 1990. Ms. Stephens is
a member of the American Society of Women Accountants, and she is a member of
Saint Mark United Methodist Church in Birmingham, Alabama and serves on the
Board of Trustees of the North Alabama Conference of the United Methodist
Church.

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

Compliance With Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires SouthFirsts
directors, certain of SouthFirsts officers and persons who own more than 10%
of the outstanding Common Stock of SouthFirst (Reporting Persons) to file
with the SEC reports of changes in ownership of the Common Stock of SouthFirst
held by such persons (Section 16(a) Reports). Reporting Persons are also
required to furnish SouthFirst with copies of all Section 16(a) Reports that
they file. SouthFirst has been subject to this regulation since February 13,
1995.

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To SouthFirsts knowledge, there were nine Section 16(a) Reports that were
not filed on a timely basis (including such reports that should have been filed
during fiscal 2001 but were filed during fiscal 2002, and such reports that
were not timely filed in fiscal 2002), which include the following: for L. Neal
Bice  an Initial Statement of Beneficial Ownership of Securities (Form 3),
and one Annual Statement of Changes in Beneficial Ownership of Securities
(Form 5) (reporting one transaction); for Janice R. Browning  a Form 3; for
Kenneth E. Easterling  a Form 3, one Statement of Changes in Beneficial
Ownership of Securities (Form 4) (reporting two transactions), and one Form 5
(reporting one transaction); for J. Malcomb Massey  one Form 4 (reporting two
transactions); for Joe K. McArthur  one Form 4 (where one of six transactions
reported thereon was not timely reported); and for Sandra H. Stephens  one
Form 4 (where one of three transactions reported thereon was not timely
reported). Otherwise, to SouthFirsts knowledge, based solely on a review of
copies of Section 16(a) Reports furnished to SouthFirst and representations
that no other reports were required, all Section 16(a) filing requirements
applicable to such Reporting Persons were complied with during fiscal 2002.




ITEM 10. EXECUTIVE COMPENSATION

The following table provides certain summary information for fiscal 2002,
2001, and 2000 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 2002 (the Named Executive Officers):

Summary Compensation Table

|                      |  |        |                                                                                      |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |       |       |       |     
|--------------------- |  | ------ | ------------------------------------------------------------------------------------ | ----------------------- | ---- | ---------------------- | - | ---------------- | ------- | ------- | - | ------------ | ------ | ------------------ | ---- | --------- | ----- | ------ |  | - | ---------- | ----- | ---- | ----- | ----- | ----- | ----
|                      |  |        |                                                                                      | Annual Compensation (1) |      | Long Term Compensation
|                      |  |        |                                                                                      |                         |      |                       
|                      |  |        |                                                                                      |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   | Securities |       |      |       |      
|Name and              |  | Fiscal |                                                                                      |                         |      |                        |   |                  |         |         |   | Other Annual |        | Underlying Options |      | All Other
|Principal
Position    |  | Year   |                                                                                      | Salary                  |      | Bonus                  |   | Compensation (2) |         | (No.)   |   | Compensation
|                      |  |        |                                                                                      |                         |      |                        |   |                  |         |         |   |             
|Joe K. McArthur       |  |        |                                                                                      |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |      
|                      |  |        | Chief Executive
Officer                                                              |                         |      | 2002                   |   |                  | $       | 142,917 |   |              | $      | 25,439             | (3)  |           | $     | 22,995 |  |   |            | 0     |      |       | $     | 2,451 | (4) 
|                      |  |        | of
SouthFirst and First                                                              |                         |      | 2001                   |   |                  |         | 107,916 |   |              |        | 22,314             | (5)  |           |       | 19,725 |  |   |            | 5,024 | (6)  |       |       | 1,414 | (7) 
|                      |  |        | Federal,                                                                             |                         |      | 2000                   |   |                  |         | 105,000 |   |              |        | 29,490             | (8)  |           |       | 13,155 |  |   |            | 0     |      |       |       | 1,624 | (9) 
|                      |  |        | President of                                                                         |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |       |       |       |     
|                      |  |        | First Federal                                                                        |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |       |       |       |     
|J. Malcomb Massey (1) |  |        |                                                                                      |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |      
|                      |  |        | President of
SouthFirst,                                                             |                         |      | 2002                   |   |                  | $       | 150,000 |   |              | $      | 13,270             | (10) |           | $     | 22,995 |  |   |            | 0     |      |       | $     | 2,488 | (11)
|                      |  |        | President and
Chief                                                                  |                         |      | 2001                   |   |                  |         | 130,000 |   |              |        | 9,270              | (12) |           |       | 16,725 |  |   |            | 1,724 | (13) |       |       | 1,819 | (14)
|                      |  |        | Executive                                                                            |                         |      | 2000                   |   |                  |         | 130,000 |   |              |        | 17,069             | (15) |           |       | 13,155 |  |   |            | 0     |      |       |       | 1,873 | (16)
|                      |  |        | Officer of                                                                           |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |       |       |       |     
|                      |  |        | Pension & Benefit                                                                    |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |       |       |       |     
|Sandra H. Stephens    |  |        |                                                                                      |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |      
|                      |  |        | Executive Vice
President and Chief
Operating Officer of SouthFirst and First Federal |                         | 2002 |                        |   | $                | 105,417 |         |   | $            | 39,500 | (17)               |      | $         | 4,500 |        |  |   | 7,500      | (18)  |      | $     | 1,537 | (19) 
|Ruth M. Roper         |  |        |                                                                                      |                         |      |                        |   |                  |         |         |   |              |        |                    |      |           |       |        |  |   |            |       |      |      
|                      |  |        | Executive Vice
President of
Pension & Benefit                                        | 2002                    |      |                        | $ | 98,000           |         |         | $ | 5,778        | (20)   |                    | $    | 3,000     |       |        |  | 0 |            |       | $    | 2,744 | (21) 



---

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|(1)  |  | All compensation received by the Named Executive Officers was paid by
First Federal and Pension & Benefit, except for an annual salary, in the
amount of $20,000, paid by SouthFirst to its President, J. Malcomb Massey.                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Fees received as member of the Board of Directors of SouthFirst, First
Federal, Pension & Benefit and/or SouthFirst Mortgage.                                                                                                                                                        
|    
|(3)  |  | Consists of a regular bonus of $10,000 as well as $15,439 of compensation
consisting of dividends paid under SouthFirsts Dividend Investment Plan
on unexercised stock options. See   Compensation of Directors below.                                                           
|    
|(4)  |  | Represents a $1,485 automobile allowance and income of $966 recognized on
employer provided group term life insurance in excess of $50,000.                                                                                                                                          
|    
|(5)  |  | Consists of a regular bonus of $6,875 as well as $15,439 of compensation
consisting of dividends paid under SouthFirsts Dividend Investment Plan
on unexercised stock options. See   Compensation of Directors below.                                                            
|    
|(6)  |  | On February 17, 2001, SouthFirst issued 5,024 options under the 1995 plan
to Mr. McArthur at an exercise
price of $9.75 per share. These options vest in equal annual increments
commencing on November 4,
2001 through November 4, 2003.                                            
|    
|(7)  |  | Represents a $964 automobile allowance and income of $450 recognized on
employer provided group term life insurance in excess of $50,000.                                                                                                                                            
|    
|(8)  |  | Consists of a regular bonus of $17,065 as well as $12,425 of compensation
consisting of dividends paid under SouthFirsts Dividend Investment Plan
on unexercised stock options. See   Compensation of Directors below.                                                           
|    
|(9)  |  | Represents a $964 automobile allowance and income of $660 recognized on
employer provided group term life insurance in excess of $50,000.                                                                                                                                            
|    
|(10) |  | Consists of a regular bonus of $10,000 as well as $3,270 of compensation
consisting of dividends paid under SouthFirsts Dividend Investment Plan
on unexercised stock options. See   Compensation of Directors below.                                                            
|    
|(11) |  | Represents a $1,522 automobile allowance and income of $966 recognized on
employer provided group term life insurance in excess of $50,000.                                                                                                                                          
|    
|(12) |  | Consists of a regular bonus of $6,000 as well as $3,270 of compensation
consisting of dividends paid under SouthFirsts Dividend Investment Plan
on unexercised stock options. See   Compensation of Directors below.                                                             
|    
|(13) |  | On January 17, 2001, SouthFirst issued 1,407 options under the 1995 plan
and 317 options under the 1998 plan to Mr. Massey at an exercise price of
$9.75 per share. These options vest in relatively equal annual increments
commencing on November 4, 2001 through November 4, 2003.
|    
|(14) |  | Represents a $1,405 automobile allowance and income of $414 recognized on
employer provided group term life insurance in excess of $50,000.                                                                                                                                          
|    
|(15) |  | Consists of a regular bonus of $14,833 as well as $2,236 of compensation
consisting of dividends paid under SouthFirsts Dividend Investment Plan
on unexercised stock options. See   Compensation of Directors below.                                                            

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|(16) |  | Represents a $1,405 automobile allowance and income of $468 recognized on
employer provided group term life insurance in excess of $50,000.                                                                                                                                                                                                   
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(17) |  | Consists of a signing bonus of $17,500, a regular bonus of $10,000, a tax
bonus, with respect to MRP shares,(See -Management
Recognition Plans below) of $7,500, and $4,500 of compensation
consisting of dividends paid under SouthFirsts Dividend Investment Plan
on unexercised stock options. See   Compensation of Directors below.
|    
|(18) |  | On December 1, 2001, SouthFirst issued 7,500 options under the 1995 plan
to Ms. Stephens at an exercise price of $9.92 per share. These options
vest in equal annual increments commencing on December 1, 2002 through
December 1, 2006.                                                                                                      
|    
|(19) |  | Represents a $1,117 automobile allowance and income of $420 recognized on
employer provided group term life insurance in excess of $50,000.                                                                                                                                                                                                   
|    
|(20) |  | Consists of a regular bonus of $4,000 as well as $1,778 of compensation
consisting of dividends paid under SouthFirsts Dividend Investment Plan
on unexercised stock options. See -Compensation of Directors below.                                                                                                                        
|    
|(21) |  | Represents a $1,778 automobile allowance and income of $966 recognized on
employer provided
group term life insurance in excess of $50,000.                                                                                                                                                                                                   

Employment Agreements

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

Joe K. McArthur

Chief Executive Officer of SouthFirst and First Federal, President of
First Federal

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

Pursuant to Mr. McArthurs employment agreement, SouthFirst shall be
jointly and severally liable for the payment of all amounts due under a
separate employment agreement with First Federal, which is of even date with
the employment agreement with SouthFirst. Under the terms of the employment
agreement with First Federal, SouthFirst and First Federal agree to pay Mr.
McArthur a salary at the rate of $140,000 per annum, payable in cash not less
frequently than monthly. Beginning on the effective date, Mr. McArthur shall
be eligible to receive such performance bonuses as may be determined in the
sole discretion of the Board. In addition, Mr. McArthur shall participate in
standard retirement and medical plans, and is entitled to customary fringe
benefits, vacation and sick leave.

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

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

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

Sandra H. Stephens

Executive Vice President and Chief Operating Officer

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

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

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

Ms. Stephens employment agreement further provides that, in the event of
her involuntary termination in connection with, or within two years after any
change in control of First Federal or SouthFirst, other than for cause, or
death or disability, Ms. Stephens will be paid, within 10 days of such
termination, an amount equal to the difference between (i) 2.99 times her base
amount, as defined in Section 280G(b)(3) of the Code, and (ii) the sum of any
other parachute payments, as defined under Section 280G(b)(2) of the Code,
that Ms. Stephens receives on account of the change in control. Under Ms.
Stephens employment agreement, a change in control generally refers to a
change in ownership, holding or power to vote more than 25% of First Federals
or SouthFirsts voting stock, a change in the ownership or possession of the
ability to control the election of a

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majority of First Federals or
SouthFirsts directors, or the exercise of a controlling influence over the
management or policies of First Federal or SouthFirst. In addition, under Ms.
Stephens employment agreement, a change in control occurs when, during any
consecutive two-year period, the directors of First Federal or SouthFirst, at
the beginning of such period, cease to constitute two-thirds of the Board of
Directors of First
Federal or SouthFirst, unless the election of replacement directors was
approved by a two-thirds (66 2/3%) vote of the initial directors then in
office. Ms. Stephens employment agreement also provides for a similar lump
sum payment to be made in the event of her voluntary termination of employment
within one year following a change in control of First Federal or SouthFirst.

J.     Malcomb Massey

President and Chief Executive Officer of Pension & Benefit

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

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

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

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

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Ruth M. Roper

Executive Vice President of Pension & Benefit

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

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

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

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

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

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Deferred Compensation Agreements

First Federal previously entered into deferred compensation agreements
(collectively, the Deferred Compensation Agreements) with Mr. McArthur and
Ms. Roper, pursuant to which each would receive certain retirement benefits at
age 65. Under the Deferred Compensation Agreements, benefits would be payable
for 15 years. A portion of the retirement benefits would accrue each year
until age 65 or, if sooner, until termination of employment. If Mr. McArthur
remains in the employment of First Federal until age 65, his annual benefit
will be $45,000. If Mr. McArthur dies prior to age 65, while in the employment
of First Federal, the full retirement
benefits available under the deferred compensation agreement will accrue
and will, thereupon, be payable to his beneficiaries. Similarly, if Ms. Roper
remains in the employment of First Federal until age 65, her annual benefit
will be $30,000. If Ms. Roper dies prior to age 65, while in the employment of
First Federal, the full retirement benefits available under the deferred
compensation agreement will accrue and will, thereupon, be payable to her
beneficiaries.

The retirement benefits available under the Deferred Compensation
Agreements are unfunded. However, First Federal has purchased life insurance
policies on the lives Mr. McArthur and Ms. Roper 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 $35,719 for each of
2002, 2001, and 2000.

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 MRP Plans). The objective of the MRP
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.

Except for the fact that Plan B provides for awards only to employees of
SouthFirst and First Federal, while Plan A provides for awards to employees as
well as to non-employee directors of SouthFirst and First Federal, the terms of
the MRP Plans are the same. The MRP Plans are administered by a committee (the
Committee) of the SouthFirst Board of Directors. Awards under the MRP Plans
are in the form of restricted stock grants (MRP grants). Each MRP 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
MRP 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 MRP 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 MRP Plans, the Committee
considers the position, duties and responsibilities of the employees, the value
of their services to SouthFirst and First Federal and any other factors the
Committee may deem relevant.

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

During the year ended September 30, 2001, SouthFirst repurchased 11,525
shares of its Common Stock, which shares subsequently were designated MRP
shares. During 2002, 1,750 shares were issued to employees under MRP
grants, leaving 9,775
shares in trust at September 30, 2002, which the Committee may issue in its
sole discretion.

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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 Plan), and the
second was adopted on January 28, 1998 and is denominated the 1998 Stock Option
and Incentive Plan (the 1998 Plan) (collectively, the Stock Option Plans).
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 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 Plan. As of September 30, 1996, options to
purchase a total of 83,000 shares had been issued under the 1995 Stock Option
Plan, and, as of that date, no other shares were available for future issuance.
Subsequently, options to purchase 8,300 shares were exercised, which shares
are no longer available for issuance under the 1995 Plan; options to purchase
56,649 shares expired prior to being exercised, which shares then became
available for re-issuance under the 1995 Plan; and additional options to
purchase 27,260 shares were issued. Thus, at September 30, 2002, 29,389 shares
were available for issuance under the 1995 Plan.

The 1998 Plan authorizes the grant of up to 63,361 shares of Common Stock
to select officers and employees in the form of (i) Options or
(ii) SARs, all of
which shares were granted under the 1998 Plan. Subsequently, options to purchase 35,450 shares expired
prior to being exercised, which shares then became available for re-issuance
under the 1998 Plan, and additional options to purchase 19,177 shares were
issued. Thus, at September 30, 2002, 16,273 shares were available for issuance
under the 1998 Plan.

The terms and conditions of the 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 Plans, the Option Plan Committee considers the position,
duties, and responsibilities of the employees, the value of their services to
SouthFirst and First Federal, and any other factor the Option Plan Committee
may deem relevant to achieving the stated purpose of the Stock Option Plan.

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

Under the 1995 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
to purchase 4,150 shares, which options
had an exercise price of $14.00 per
share, the fair market value of SouthFirst Common Stock on the date of grants.
Likewise, under the 1998 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 to purchase 2,700 shares, which options

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had an exercise price of $21.25
per share, the fair market value of SouthFirst Common Stock on the date of
grants.

See, also, Item 11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS. 

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
7,428 and 3,726 options to Joe K. McArthur and J. Malcomb Massey, respectively
(i.e., the Named Executive Officers at that time). Options to purchase an
aggregate of 50,597 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 at
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 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 per share, which was equal to the fair
market value of SouthFirsts Common Stock on the date of grants. 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, 2002:

Ten-Year Option/SAR Repricings

|                  |  |                  |  |                    |       |                   |  |                    |       |                   |  |  |       |                    |  |          
|----------------- |  | ---------------- |  | ------------------ | ----- | ----------------- |  | ------------------ | ----- | ----------------- |  |  | ----- | ------------------ |  | ---------
|                  |  |                  |  | Number of          |       |                   |  |                    |       |                   |  |  |       | Length of Original
|                  |  |                  |  | Securities         |       |                   |  |                    |       |                   |  |  |       | Option Term       
|                  |  |                  |  | Underlying Options |       | Original Exercise |  | New Exercise Price |       | Remaining at Date
|Name              |  | Date             |  | Repriced(1)        |       | Price ($)         |  | ($)                |       | of Repricing     
|                  |  |                  |  |                    |       |                   |  |                    |       |                  
|Joe K. McArthur   |  | November 4, 1998 |  |                    | 7,428 |                   |  |                    | 21.25 |                   |  |  | 15.75 |                    |  | 9.2 years
|(1998 Plan)       |  |                  |  |                    |       |                   |  |                    |       |                   |  |  |       |                    |  |          
|J. Malcomb Massey |  | November 4, 1998 |  |                    | 3,726 |                   |  |                    | 21.25 |                   |  |  | 15.75 |                    |  | 9.2 years
|(1998 Plan)       |  |                  |  |                    |       |                   |  |                    |       |                   |  |  |       |                    |  |          



---

|(1) |  | The 1998 Plan authorizes the grant of up to 63,361 shares of Common
Stock to select officers and employees in the form of
(i) Options or (ii) SARs, all of which shares were granted
under the 1998 Plan. Subsequently, options to purchase 35,450
shares expired prior to being exercised, which shares then became available for
re-issuance under the 1998 Plan, and additional options to purchase 19,177
shares were issued. Thus, at September 30, 2002, 16,273 shares were available
for issuance under the 1998 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, 2002, by the Named Executive Officers and the
fiscal-year-end value of unexercised options held by those individuals:

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Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values

|                   |  |                 |   |          |  |               |   |                  |  |                      |              |                      |  |   |              | 
|------------------ |  | --------------- | - | -------- |  | ------------- | - | ---------------- |  | -------------------- | ------------ | -------------------- |  | - | ------------ | 
|                   |  |                 |   |          |  |               |   |                  |  | Number of Securities |              |                      |  |  
|                   |  |                 |   |          |  |               |   |                  |  | Underlying           |              | Value of Unexercised
|                   |  |                 |   |          |  |               |   |                  |  | Unexercised Options  |              | In-the-Money        
|                   |  |                 |   |          |  |               |   |                  |  | at                   |              | Options at Fiscal   
|                   |  |                 |   |          |  |               |   |                  |  | Fiscal Year End      |              | Year End            
|                   |  | Shares Acquired |   | Value    |  | Exercisable/  |   | Exercisable/    
|Name               |  | on Exercise     |   | Realized |  | Unexercisable |   | Unexercisable(1)
|                   |  |                 |   |          |  |               |   |                 
|Joe K. McArthur    |  |                 | 0 |          |  | $             | 0 |                  |  |                      | 19,411/6,321 |                      |  | $ | 3,768/$7,536 | 
|J. Malcomb Massey  |  |                 | 0 |          |  | $             | 0 |                  |  |                      | 2,810/2,640  |                      |  | $ | 1,293/$2,586 | 
|Sandra H. Stephens |  |                 | 0 |          |  | $             | 0 |                  |  |                      | 0/7,500      |                      |  | $ | 0/$15,600    | 
|Ruth M. Roper      |  |                 | 0 |          |  | $             | 0 |                  |  |                      | 1518 / 1446  |                      |  | $ | 716/$1,454   | 



---

|(1) |  | Represents the value of unexercised, in-the-money stock options on
September 30, 2002, using the $12.00 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 14% of their gross
salary to the 401(k) Plan, or $10,500, whichever is less. Currently, all
contributions are fully vested under the 401(k) Plan at the time of
contribution. Prior to First Federals adoption of an Employee Stock Ownership
Plan (see Employee Stock Ownership Plan below), the first 1% to 3% of
employee compensation was matched by a First Federal contribution of $0.50 for
each $1.00 of employee contribution, and contributions from 4% to 6% were 100%
matched. Effective October 1, 2000, the first 1% to 3% of employee
compensation was matched by a First Federal contribution of $0.25 for each
$1.00 of employee contribution, and contributions from 4% to 6% were matched by
a contribution of $0.50 for each $1.00 of employee contribution. During these
periods, contributions were 100% vested following the completion of five years
of service and were invested in one or more investment accounts administered by
the Plan administrator.

Employee Stock Ownership Plan

First Federal has adopted an Employee Stock Ownership Plan (the ESOP)
for the exclusive benefit of participating employees. All employees of First
Federal who are at least 21 years old and who have completed a year of service
with First Federal are eligible to participate in the ESOP. SouthFirst 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 ESOP plan year and must 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 a participant has served for two years.
Participants benefits also become fully vested upon his or her death,
disability, attainment of normal retirement age, or the termination of the
ESOP. For vesting purposes, a year of service means any plan year in which an
employee completes at least 1,000 hours of service with First Federal. An
employees years of service prior to the ESOPs effective date will be
considered for purposes of determining vesting under the ESOP.

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

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

Director Fees and Dividends

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 2002, each non-employee director was paid from $830 to
$4,940 under the Dividend Incentive Plan with respect to the shares of Common
Stock underlying the stock options held by each non-employee director.
Further, certain SouthFirst directors, during fiscal 2002, received a cash
dividend in the amount of $996 with respect to the restricted shares held by
such directors, as granted under Management Recognition Plans A and B.

Director Retirement Benefits

The
Board of Directors of First Federal has adopted, effective as of
October 1, 2001, the Bank Director Supplemental Retirement Plan
(the Director Plan), under which First Federal will make
certain payments to each participating director, upon the
directors retirement, or to the directors beneficiary(ies) in the event of the directors
death. The Director Plan is an unfunded arrangement maintained
primarily to provide supplemental retirement benefits for each
participating director and constitutes a non-qualified benefit plan
for purposes of the Employee Retirement Income Security Act of 1974,
as amended (ERISA). A pre-retirement account
is established under the Director Plan, as a liability reserve
account on the books of First Federal for the benefit of each
participating director. Such liability reserve account shall be
increased or decreased each plan year, until the participating
director either retires, or has a termination of service, as a
director of First Federal.

The
annual increase or decrease in this liability reserve account is
determined by an index which, generally, measures the amount of
aggregate annual after-tax income from certain life insurance
contracts, owned by First Federal on the lives of each participating
director, against the annual cost of funds of First Federal
represented by the net premiums paid on these life insurance
policies. Each participating director of First Federal will receive,
on a monthly basis beginning at retirement or termination of service,
as a supplemental retirement benefit, the amount attributed to their
liability service account, adjusted, as applicable, under the terms
of the Director Plan. The cost of the Director Plan was $18,646 for
fiscal year 2002. However, no benefits were paid under the Director
Plan in fiscal year 2002.

Compensation Committee Interlocks and Insider Participation

SouthFirst presently does not have a compensation committee because,
except for an annual salary, in the amount of $20,000, paid by SouthFirst to
its President, J. Malcomb Massey, no officers of SouthFirst receive any
compensation for services to SouthFirst. All officers of SouthFirst are
compensated by First Federal solely for

65



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their services to First Federal. In
addition, directors are paid for attendance at First Federal committee
meetings, but employee members of committees are not paid. Joe K. McArthur,
Chief Executive Officer of First Federal and SouthFirst, and President of First
Federal, and J. Malcomb Massey, President of SouthFirst and Pension & Benefit,
serve as members of the Wage and Compensation Committee of First Federal.
First Federals Wage and Compensation Committee is responsible for reviewing
salaries and benefits of directors, officers, and employees of First Federal.
SouthFirst had no interlocking relationships existing at or before the year
ended September 30, 2002 in which (i) any executive officer was a member of the
board of directors/trustees of another entity, one of whose executive officers
was a member of the First Federal Board of Directors, or where (ii) any
executive officer was a member of the compensation committee of another entity,
one of whose executive officers was a member of the First Federal Board of
Directors.




ITEM 11. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS

The following table sets forth certain information as of December 16, 2002
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 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.

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|                                                            |  |                       |         |                       |  |  |      |  
|----------------------------------------------------------- |  | --------------------- | ------- | --------------------- |  |  | ---- | -
|                                                            |  | Shares of             |         |                       |  | 
|                                                            |  | Common Stock          |         | Percent of           
|Beneficial Owner                                            |  | Beneficially Owned(1) |         | Outstanding Shares(2)
|                                                            |  |                       |         |                      
|Joe K. McArthur(3)                                          |  |                       | 38,161  |                       |  |  | 4.6  | %
|H. David Foote, Jr.(4)                                      |  |                       | 13,392  |                       |  |  | 1.6  | %
|J. Malcomb Massey(5)                                        |  |                       | 27,826  |                       |  |  | 3.4  | %
|Allen Gray McMillan, III(6)                                 |  |                       | 18,892  |                       |  |  | 2.3  | %
|Kenneth E. Easterling(7)                                    |  |                       | 25,182  |                       |  |  | 3.1  | %
|L. Neal Bice(8)                                             |  |                       | 30,763  |                       |  |  | 3.8  | %
|Donald R. Hardy(9)                                          |  |                       | 1,122   |                       |  |  | 0.1  | %
|Jeffrey L. Gendell, et. al.(10)                             |  |                       | 81,700  |                       |  |  | 10.2 | %
|Robert J. Salmon and
Mary Anne J. Salmon(11)                |  |                       | 47,600  |                       |  |  | 5.9  | %
|Sandra H. Stephens(12)                                      |  |                       | 1,850   |                       |  |  | 0.2  | %
|Ruth M. Roper(13)                                           |  |                       | 8,724   |                       |  |  | 1.1  | %
|Pension & Benefit Financial
Services, Inc.(14)              |  |                       | 66,400  |                       |  |  | 8.3  | %
|All directors and
executive officers
as a group (9 persons) |  |                       | 165,912 | (15)                  |  |  | 19.4 | %



---

|(1) |  | Beneficial Ownership includes shares for which an individual, directly
or indirectly, has or shares voting or investment power or both and also
includes options which are exercisable within sixty days of the date
hereof. Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 of the Exchange Act.                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The percentages are based upon 803,294 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 803,294 shares plus the number of shares subject
to presently exercisable options held by them, as indicated in the
following notes.                                                                                                                                                           
|   
|(3) |  | Of the amount shown, 1,568 shares
are owned by Mr. McArthurs son (who lives in the same
household as Mr. McArthur), 1,500 shares are owned jointly by Mr. McArthur and
his wife, 5,644 shares are held in his account under SouthFirsts 401(k)
Plan, 5,734 shares are held in his account under First Federals ESOP,
22,571 shares are subject to presently exercisable options and 1,144
shares represent restricted stock granted under SouthFirsts Management
Recognition Plans A and B, all of which are fully vested.                
|   
|(4) |  | Of the amount shown, 3,000 shares are owned jointly by Mr. Foote and his
wife, 1,500 shares are held by Mr. Foote as custodian for each of his two
minor children, 7,232 shares are subject to presently exercisable options
and 1,660 shares represent restricted stock granted under SouthFirsts
Management Recognition Plan A, all of which are fully vested.                                                                                                                                                                               
|   
|(5) |  | Of the amount shown, 15,521 shares are restricted stock acquired pursuant
to that certain employment agreement between Mr. Massey and
Pension & Benefit, vesting in equal increments over a period of 15 years beginning
on April 11, 1997, 3,502 shares are held in a profit sharing account, and
2,234 shares are held in an Individual Retirement Account, and 1,349
shares are held in his account under First Federals ESOP, 4,130 shares
are subject to exercisable options, and 1,090 shares are owned jointly by
Mr. Massey and his wife.
|   
|(6) |  | Of the amount shown, 10,000 shares are held jointly by Mr. McMillan and
his wife, 7,232 shares are subject to presently exercisable options and
1,660 shares represent restricted stock granted under SouthFirsts
Management Recognition Plan A, all of which are fully vested.                                                                                                                                                                                                                                                                
|   
|(7) |  | Of the amount shown, 21,099 shares are held jointly by Mr. Easterling and
his wife, 1,001 shares are held individually by Mr. Easterling and 3,082
shares are subject to exercisable options.                                                                                                                                                                                                                                                                                                                                                     
|   
|(8) |  | Of the amount shown, 13,332 shares are held by Mr. Bice, as the Executor
of the Estate of H. D. Bice, his father, 14,349 are held individually by
Mr. Bice and 3,082 shares are subject to exercisable options.                                                                                                                                                                                                                                                                                                                                   

67



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|(9)  |  | Of the amount shown, 200 shares are held jointly by Mr. Hardy and his
wife and 922 shares are subject to exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(10) |  | Of the amount shown, Jeffrey L. Gendell has shared voting power with
respect to 81,700 shares, Tontine Management, L.L.C. (TM) has shared
voting power with respect to 81,700 shares, and Tontine Financial
Partners, L.P. (TFP) has shared voting power with respect to 81,700
shares. TM, the general partner of TFP, has the power to direct the
affairs of TFP. Mr. Gendell is the Managing Member of Tontine Management,
L.L.C. and, in that capacity, directs its operations. The business
address of Mr. Gendell and TFP is 200 Park Avenue, Suite 3900, New York,
New York 10166. The foregoing information is based on a Schedule 13G,
dated May 10, 2000 filed by Mr. Gendell, TM, and TFP. SouthFirst makes no
representation as to the accuracy or completeness of the information
reported.
|    
|(11) |  | Robert J. Salmon and Mary Anne J. Salmon beneficially own and have shared
voting and dispositive power with respect to 47,600 shares. The foregoing
information is based on a Schedule 13G, dated October 8, 1998 received by
SouthFirst from Mr. and Mrs. Salmon. Mr. and Mrs. Salmons address is
3623 Raymond Street, Chevy Chase, Maryland, 20815. SouthFirst makes no
representation as to the accuracy or completeness of the information
reported therein.                                                                                                                                                                                                                                                                                                                                           
|    
|(12) |  | Of the amount
shown, 1,500 shares are subject to presently exercisable options, and
350 shares represent restricted stock granted under SouthFirsts
Management Recognition Plan(s), all of which shares are fully vested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|(13) |  | Of the amount shown, 5,623 shares are directly
owned by Ms. Roper, 858 shares are held in her account in First
Federals ESOP, and 2,243 shares are subject to presently exercisable
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    
|(14) |  | These shares are held in trust by
Pension & Benefit as trustee of First Federals
ESOP. See Item 10. EXECUTIVE COMPENSATION  Employee Stock Ownership
Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(15) |  | Of the amount shown, 51,994 shares are subject to exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

The following table provides information with
respect to shares of SouthFirst Common Stock authorized for
issuance under equity compensation plans:

Equity Compensation Plan
Information(1)

|                                                               |  |                   |        |                      |  |                         |        |  |  |  |        | 
|-------------------------------------------------------------- |  | ----------------- | ------ | -------------------- |  | ----------------------- | ------ |  |  |  | ------ | 
|                                                               |  |                   |        |                      |  | Number of              
|                                                               |  | Number of         |        |                      |  | securities remaining   
|                                                               |  | securities to be  |        |                      |  | available for future   
|                                                               |  | issued upon       |        |                      |  | issuance under         
|                                                               |  | exercise of       |        | Weighted-average     |  | equity compensation    
|                                                               |  | outstanding       |        | exercise price of    |  | plans (excluding       
|                                                               |  | options, warrants |        | outstanding options, |  | securities reflected in
|                                                               |  | and rights        |        | warrants and rights  |  | column(a))             
|Plan category                                                  |  | (a)               |        | (b)                  |  | (c)                    
|                                                               |  |                   |        |                      |  |                        
|Equity compensation plans approved by security
    holders(2)  |  |                   | 92,399 |                      |  |                         | $13.15 |  |  |  | 45,662 | 
|Equity compensation plans not approved by
    security holders |  |                   | 0      |                      |  |                         | $0     |  |  |  | 0      | 



---

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | The terms equity compensation plan,
    as used in this table, refers to compensation plans and
    individual compensation arrangements for employees and directors
    of the Company and its affiliates, which authorize the issuance
    of equity securities of the Company, excluding all compensation
    plans and arrangements which meet the qualification requirements
    under Section 401(a) of the Code.
|(2) |  | Includes the SouthFirst Bancshares, Inc. Stock
    Option and Incentive Plan, the 1998 Stock Option and Incentive
    Plan, the SouthFirst Bancshares, Inc. Management Recognition
    Plan A, and the SouthFirst Bancshares, Inc.
    Management Recognition Plan B. See, also,
    Item 10. EXECUTIVE COMPENSATION 
    Management Recognition Plans, and  Stock Option
    Plans.                             




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, 2002, the
aggregate of all loans by First Federal to its officers, directors, and related
interests was $816,000.




ITEM 13. EXHIBITS AND REPORTS ON
FORM 8-K

(a)  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 with the SEC 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); Annual Report on Form 10-KSB for the year ended
September 30, 2001 (2001 Form 10-KSB); Other Event on Form 8-K, filed on
March 29, 2002

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(March 29, 2002 Form 8-K); Quarterly Report on Form 10-QSB for
the period ended December 31, 2001 (December 31, 2001 10-QSB); Other Event on
Form 8-K, filed on July 2, 2002 (July 2, 2002
Form 8-K). Unless otherwise indicated, the exhibit number
corresponds to the exhibit number in the referenced document.

|            |  |                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                             
|3.1*        |  | Amended and Restated Certificate of Incorporation (1994 S-1).                                                                                                                                               
|            |  |                                                                                                                                                                                                             
|3.2*        |  | Bylaws (1994 S-1, Exhibit 3.2).                                                                                                                                                                             
|            |  |                                                                                                                                                                                                             
|3.3         |  | Amendment to Article III, Section 2 of the Bylaws.                                                                                                                                                          
|            |  |                                                                                                                                                                                                             
|4*          |  | Form of Common Stock Certificate (1994 S-1).                                                                                                                                                                
|            |  |                                                                                                                                                                                                             
|10.1*       |  | Form of Employment Agreement between SouthFirst Bancshares, Inc. and
Joe K. McArthur (2001 Form 10-KSB).                                                                                                    
|            |  |                                                                                                                                                                                                             
|10.2*       |  | Form of Employment Agreement between First Federal of the South and
Joe K. McArthur (2001 Form 10-KSB).                                                                                                     
|            |  |                                                                                                                                                                                                             
|10.3*       |  | Form of Employment Agreement between First Federal of the South and
Sandra H. Stephens (2001 Form 10-KSB).                                                                                                  
|            |  |                                                                                                                                                                                                             
|10.4*       |  | Form of Employment Agreement between Pension & Benefit Financial
Services, Inc. and J. Malcomb Massey (2001 Form 10-KSB, Exhibit
10.4.1).                                                                   
|            |  |                                                                                                                                                                                                             
|10.5*       |  | Form of Guaranty of Employment Agreement among SouthFirst Bancshares,
Inc., First Federal of the South, Pension & Benefit Financial Services,
Inc. and J. Malcomb Massey (2001 Form 10-KSB, Exhibit
10.4.2).
|            |  |                                                                                                                                                                                                             
|10.6*       |  | Form of Employment Agreement between Pension & Benefit Financial Services,
Inc. and Ruth M. Roper (2001 Form 10-KSB, Exhibit
10.5.1).                                                                       
|            |  |                                                                                                                                                                                                             
|10.7*       |  | Form of Guaranty of Employment Agreement among SouthFirst Bancshares, Inc.,
First Federal of the South, Pension & Benefit Financial Services, Inc. and
Ruth M. Roper (2001 Form 10-KSB, Exhibit
10.5.2).    
|            |  |                                                                                                                                                                                                             
|10.8*       |  | Form of Management Recognition Plan A (1994 S-1, Exhibit 10.5).                                                                                                                                             
|            |  |                                                                                                                                                                                                             
|10.9 *      |  | Form of Management Recognition Plan A, as amended (1995 Form 10-K, Exhibit
10.8.2).                                                                                                                         
|            |  |                                                                                                                                                                                                             
|10.10*      |  | Management Recognition Plan A Restated and Continued (Plan A S-8,
Exhibit 4.1).                                                                                                                           
|            |  |                                                                                                                                                                                                             
|10.11*      |  | Form of Management Recognition Plan B (1994 S-1, Exhibit 10.6).                                                                                                                                             
|            |  |                                                                                                                                                                                                             
|10.12*      |  | Form of Management Recognition Plan B, as amended (1995 Form 10-K, Exhibit
10.9.2).                                                                                                                         
|            |  |                                                                                                                                                                                                             
|10.13*      |  | Management Recognition Plan B, Restated and Continued (Plan B S-8,
Exhibit 4.1).                                                                                                                          
|            |  |                                                                                                                                                                                                             
|10.14*      |  | Form of Stock Option and Incentive Plan (1994 S-1, Exhibit 10.7)
(1995 Form 10-K, Exhibit
10.10.1).                                                                                                         
|            |  |                                                                                                                                                                                                             
|10.15*      |  | Form of Stock Option and Incentive Plan, as amended (1995 Form 10-K, Exhibit
10.10.2).                                                                                                                      
|            |  |                                                                                                                                                                                                             
|10.16 *     |  | Form of Stock Option and Incentive Plan, Restated and Continued
(Option Plan S-8, Exhibit 4.1).                                                                                                             

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|            |  |                                                                                                                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                  
|10.17*      |  | Form of Stock Option and Incentive Plan, as Amended (Amended Option
Plan S-8, Exhibit 10.10.4).                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                  
|10.18*      |  | Form of Incentive Stock Option Agreement (Option Plan S-8, Exhibit 4.2).                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                  
|10.19*      |  | Form of Incentive Stock Option Agreement, as Amended (Amended Option
Plan S-8, Exhibit 10.10.6)                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                  
|10.20*      |  | Form of SouthFirst Bancshares, Inc. Employee Stock Ownership Plan (1994 S-1,
Exhibit 10.8).                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                  
|10.21*      |  | Third Amendment to the SouthFirst Bancshares, Inc. Employee Stock Ownership
Plan executed as of September 29, 2001 (2001 Form 10-KSB,
Exhibit 10.11.2).                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                  
|10.22*      |  | Deferred Compensation Agreement between First Federal of the South and
Joe K. McArthur (1995 Form 10-K, Exhibit 10.12).                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                  
|10.23*      |  | Deferred Compensation Agreement between Pension & Benefit
and Ruth M. Roper (2001 Form 10-KSB, Exhibit 10.14).                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                  
|10.24*      |  | Stock Option Agreement between SouthFirst Bancshares, Inc. and Sandra H.
Stephens (December 31, 2001 10-QSB, Exhibit 10.16).                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                  
|10.25*      |  | Supervisory Agreement dated March 22, 2002, by and between First Federal of the
South and the Office of Thrift Supervision (March 29, 2002
Form 8-K, Exhibit 99.1).                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                  
|10.26*      |  | Form of Settlement Agreement dated June 28, 2002, by and between First Federal
of the South and Charles R. Vawter, Jr., Charles R. Vawter, Sr., Vawter Properties
& Resources, LP, Angela H. Vawter and Automatic Gas & Appliance Co., Inc. (July 2,
2002 Form 8-K, Exhibit 99.1)
|            |  |                                                                                                                                                                                                                                                                                  
|11          |  | Statement Regarding Computation of Per Share Earnings.                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                  
|21          |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                  
|23.1        |  | Consent of Jones & Kirkpatrick, P.C.                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                  
|99.1        |  | Financial Statements of SouthFirst Bancshares, Inc. and subsidiaries.                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                  
|99.2        |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                          

(b) Reports on Form 8-K

There
was one report on Form 8-K, filed by SouthFirst during the last
quarter of fiscal year 2002. This report, filed on July 2, 2002,
included a press release announcing that SouthFirst had entered into
a settlement agreement, and a copy of the form of such settlement
agreement.




ITEM 14. CONTROLS AND PROCEDURES

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

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

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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 23rd day
of
December 2002.

| |  |                             |  |                                                             
| |  | --------------------------- |  | ------------------------------------------------------------
| |  | SOUTHFIRST BANCSHARES, INC.
| |  |                             |  |                                                             
| |  |                             |  |                                                             
| |  | By:                         |  | /s/ Joe K. McArthur

Joe K. McArthur
Chief Executive Officer
| |  |                            
| |  |                             |  |                                                             

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

|                                                      |  |                                                                         |  |                  
|----------------------------------------------------- |  | ----------------------------------------------------------------------- |  | -----------------
|Signature                                             |  | Title                                                                   |  | Date             
|                                                      |  |                                                                         |  |                  
|                                                      |  |                                                                         |  |                  
|/s/ Joe K. McArthur

Joe K. McArthur                  |  | Chief Executive Officer & Director (principal executive officer)        |  | December 23, 2002
|                                                      |  |                                                                         |  |                  
|/s/ Sandra H. Stephens

Sandra H. Stephens            |  | Executive Vice President, Chief Operating Officer, Secretary & Director |  | December 23, 2002
|                                                      |  |                                                                         |  |                  
|/s/ Janice Browning
Janice Browning                   |  | Controller, Treasurer (Principal Accounting Officer)                    |  | December 23, 2002
|                                                      |  |                                                                         |  |                  
|/s/ Allen Gray McMillan, III
Allen Gray McMillan, III |  | Chairman and Director                                                   |  | December 23, 2002
|                                                      |  |                                                                         |  |                  
|/s/ J. Malcomb Massey

J. Malcomb Massey              |  | President and Director                                                  |  | December 23, 2002
|                                                      |  |                                                                         |  |                  
|/s/ Kenneth E. Easterling

Kenneth E. Easterling      |  | Director                                                                |  | December 23, 2002
|                                                      |  |                                                                         |  |                  
|/s/ H. David Foote, Jr.

H. David Foote, Jr.          |  | Director                                                                |  | December 23, 2002
|                                                      |  |                                                                         |  |                  
|/s/ L. Neal Bice

L. Neal Bice                        |  | Director                                                                |  | December 23, 2002
|                                                      |  |                                                                         |  |                  
|/s/ Donald R. Hardy

Donald R. Hardy                  |  | Director                                                                |  | December 23, 2002

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CERTIFICATION

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

1.     I have reviewed this annual report on Form 10-KSB of SouthFirst
Bancshares, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

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

December 23, 2002

|                                                             |  | 
|------------------------------------------------------------ |  | 
|/s/ Joe K. McArthur

Joe K. McArthur
Chief Executive Officer |  | 

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CERTIFICATION

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

1.     I have reviewed this annual report on Form 10-KSB of SouthFirst
Bancshares, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

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

December 23, 2002

|                                                                                    |  | 
|----------------------------------------------------------------------------------- |  | 
|/s/ Janice R. Browning

Janice R. Browning
Controller (principal financial officer) |  | 

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Exhibit Index

|            |  |                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                 
|            |  |                                                                                                                        
|            |  |                                                                                                                        
|3.3         |  | Amendment to Article III, Section 2 of the Bylaws.                                                                     
|            |  |                                                                                                                        
|11          |  | Statement Regarding Computation of Per Share Earnings.                                                                 
|            |  |                                                                                                                        
|21          |  | Subsidiaries of Registrant.                                                                                            
|            |  |                                                                                                                        
|23.1        |  | Consent of Jones and Kirkpatrick, P.C.                                                                                 
|            |  |                                                                                                                        
|99.1        |  | Financial Statements of SouthFirst Bancshares, Inc. and subsidiaries.                                                  
|            |  |                                                                                                                        
|99.2        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

75