<PAGE>
 
                                  EXHIBIT 13.1


                        FIRST SOUTHERN BANCSHARES, INC.
                                AND SUBSIDIARIES
                                 ANNUAL REPORT
                                      1996


MANAGEMENT DISCUSSION AND ANALYSIS

OVERVIEW

First Southern Bancshares, Inc. (the "Company") is a bank holding company which
wholly owns First Southern Bank (the "Bank") and FSB Mortgage Services, Inc.
("Mortgage Services").  This financial overview provides insight into the
financial condition of the Company and addresses the factors that have affected
earnings.  The Company's consolidated financial statements and accompanying
notes which follow are an integral part of this overview and should be read in
conjunction with it.

The First Southern Bank is a full service commercial bank chartered in the State
of Georgia.  The Bank is a community bank which operates three retail locations
in south DeKalb County and focuses on small to medium size businesses,
individuals and professionals. On July 19, 1996, the Bank began operations of
its new Rockbridge Plaza Branch.  The branch  is located in Stone Mountain,
Georgia and has three drive through bays, a drive up ATM, as well as a state of
the art electronic message board.  This facility was constructed by the bank
after a careful demographic analysis of the entire metropolitan Atlanta area.
This analysis included not only potential undeveloped locations but also a large
list of local bank branches that were available due the to mergers and
acquisitions of several major banks.

On September 6, 1996, the Company purchased the assets of and employed the
personnel of American Financial Mortgage Corp. ("AFM").  The resulting company,
FSB Mortgage Services Inc., is a mortgage company licensed by the State of
Georgia Department of Banking and Finance and has received approval from the
Department of Housing and Urban Development, FHA, Fannie Mae and the Veterans
Administration.

The Company's principal business activities are affected by many factors,
including general economic and financial conditions, the level and volatility of
interest rates, currency and security valuations, competitive conditions,
transactional volume and market liquidity.  As a result, revenues and
profitability are subject to fluctuations reflecting the impact of these
factors.  During 1996, interest rates and macro-economic growth remained stable,
therefore, inflation did not have a material impact on the Company.


RESULTS OF OPERATIONS

The Company reported after tax earnings of $301,843 for the year ended December
31, 1996, as compared to $309,674 for the same period in 1995.  While the 1996
results of operations remained virtually unchanged when compared to 1995.  The
Company experienced higher levels of interest income and interest expense
proportionate to its increase in asset size.  Net interest income before
provision for loan losses was $2,240,957 at December 31, 1996 as compared to
$1,896,677 at year end 1995.  During 
<PAGE>
 
1996, the Company increased its provision for loan losses by $45,000 to reflect
the growth in the Company's loan portfolio. [?]During 1996, net loans increased
by 44.37 percent.

NET INTEREST INCOME

Net interest income, the primary source of the Company's earnings, is the amount
by which interest and fees generated by earning assets (principally loans and
investment securities) exceeds the total interest costs of the funds (mainly
deposits) obtained to carry them.  Net interest income rose by $344,280 or 18.15
percent for the period ending December 31, 1996 as compared with  the same
period in 1995.  Strong growth in interest-earnings assets, primarily loans,
accounted for the earnings gain.  During 1996 gross loans grew by 43.52 percent,
while total interest bearing deposits grew by 20.02 percent.

STATEMENT OF CONDITION

LIQUIDITY

The Bank primarily manages its liquidity position through federal funds sold.
At December 31, 1996, the Bank had $1,300,000 in federal fund sold.  This is a
$4,400,000 decrease from 1995 levels and  resulted from increase loan demand and
management efforts to improve the interest yields the Company earns on its
assets.  Management feels this level is sufficient to meet immediate deposit
withdrawal demands at the end of December 31, 1996.  Additional sources of
liquidity include cash and due from banks, federal funds line from correspondent
banks, maturing investment securities and payments on commercial and installment
loans.

At December 31,1996, the Bank's liquid assets (cash and due from banks,
investment securities, and federal funds sold) represented 30.57 percent  of
total assets compared to 40.91 percent at December 31, 1995.


INVESTMENT SECURITIES

The Bank invests a portion of its assets in U.S. treasury bills and notes, U.S.
government sponsored agency securities, as well as mortgage backed bonds.  At
December 31, 1996 and 1995, the Bank's investment securities portfolio
represented approximately 22.60 percent of total assets.  The investment
portfolio, based on amortized cost,  increased by $2,293,000 or 24.17 percent
during 1996.

At December 31, 1996, the Bank's securities portfolio was invested in the
following types of securities:
 
                   Available for Sale   Held for Maturity
                   -------------------  ------------------
U.S. Treasuries            -%                 19%
U.S. Agencies             93                  24
Mortgage Backed            7                  20
Municipals                 -                  37
                         ---                 ---
                         100%                100%
                         ===                 ===

The fair value of the Bank's total investment portfolio was less than its book
value by $22,492 at year-end.
<PAGE>
 
PROVISION FOR LOSSES ON LOANS

The provision for losses on loans, which decreased 5.52 percent or $21,330 in
1996 compared to 1995, is the charge to operating earnings that management feels
is necessary to maintain the reserve for possible loan losses at an adequate
level.  [?]The allowance is based on management's assessment of the Company's
risk of possible loan defaults. Management determines the adequacy of the
allowance by considering the dollar amount of loans outstanding, individual
evaluations of problem loans, current economic conditions, the underlying
collateral value of the loan and prior loan loss experience.

At December 31, 1996, the allowance for loan losses represented 1.12 percent of
gross loans compared to 1.70 percent at December 31, 1995.  Management believes
that this level of reserve is adequate to absorb possible loan losses on
existing loans, including non-accrual loans of $184,000 at December 31, 1996,
that may be uncollectible.  Non-accrual loans were approximately $240,000 at the
end of 1995.

PREMISES AND EQUIPMENT

First Southern operates three retail commercial banking operations in DeKalb
County, Georgia.  The Company's main office is located in Lithonia, Georgia, the
South DeKalb Mall Branch is located in Decatur and the Company's Rockbridge
Branch is located in Stone Mountain, Georgia.  On July 19, 1996, the Company
began operating the Rockbridge Plaza Branch after an extensive study of
metropolitan Atlanta designed to determine the best location for a new branch.
After five months of operation, the branch maintains over $2,500,000 in deposits
and now rivals the main office in new account openings.  The Company also
utilizes a building in Decatur, Georgia as its Operations Center and to house
its mortgage company.

The Company maintains a wide area network ("WAN").  The Company's WAN enables it
to communicate to locations efficiently, as well as process customer
information.  The Company believes leading edge technology will further enhance
the Company's ability to remain competitive with major banks.  The Company's
investment in premises and equipment at December 31, 1996 was $2,909,751
compared to $2,055,975 at December 31, 1995.

DEPOSITS

The Company held total deposits of $45,535,324 at December 31, 1996 compared to
$36,383,055 for the same period in 1995.  This represents an increase of 25.16
percent and is attributed to a 47.65 percent increase in non-interest bearing
demand accounts, a 40.88 percent increase in interest-bearing demand accounts,
and a 42.16 percent increase in $100,000 and over time deposits. During the
period time deposits less than $100,000 increased by 6.98 percent.

STOCKHOLDER'S EQUITY

Stockholder's equity increased by 6.09 percent as a result of  1996 earnings.
The unrealized gain or loss from securities is the difference between the fair
market value and the book value of the Company's investment securities portfolio
that was held in the available for sale category.  The net unrealized loss on
the investment portfolio was $10,937 as of December 31, 1996.  This amount had a
negligible effect on total equity.  Total stockholders equity as of December 31,
1996 was $5,627,789 compared to $5,304,787 at December 31, 1995.  The Company
maintained total retained earnings of $357,581.
<PAGE>
 
INCOME TAXES

For the year ended December 31, 1996, the Company had estimated income taxes of
$76,703 compared to $125,600 at December 31, 1995.  The decrease in income taxes
is attributed to the bank's investment in tax free municipal bonds.  This
strategy has enabled management to reduce its income tax liability.
<PAGE>
 
[LOGO OF BANKS, FINLEY, WHITE & CO. APPEARS HERE]


                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
First Southern Bancshares, Inc.
Lithonia, Georgia:


We have audited the accompanying consolidated balance sheets of First Southern
Bancshares, Inc. (the "Company") and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for the three years ended December 31, 1996.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Southern
Bancshares and subsidiaries as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for the three  years ended December 31, 1996,
in conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, under a Plan of
Reorganization First Southern Bancshares was created as a holding company
through the conversion of all outstanding shares of First Southern Bank to
shares of the Company.  The financial statements presented herein represent the
consolidated entity.


/s/ Banks, Finley, White & Co.

February 13, 1997.


     3504 EAST MAIN STREET . COLLEGE PARK, GEORGIA 30337 . (404) 763-1002
<PAGE>
 
                FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
                          Consolidated Balance Sheets
                           December 31, 1996 and 1995

                                     ASSETS
<TABLE>
<CAPTION>
 
                                                                    1996          1995
                                                                ------------  ------------
<S>                                                             <C>           <C>
 
Cash and due from banks                                         $ 2,858,625   $ 2,046,906
Federal Funds Sold                                                1,300,000     5,700,000
Securities available for sale,
 at fair value (Note 2)                                           4,301,985     3,887,888
Securities held to maturity
 (fair value of $7,456,739 in 1996
 and $5,662,808 in 1995) (Note 2)                                 7,480,583     5,644,389
 
Loans (Notes 3 and 10)                                           32,691,757    22,778,100
Less allowance for loan losses (Note 3)                            (365,231)     (386,561)
                                                                -----------   -----------
 
Loans, net                                                       32,326,526    22,391,539
                                                                -----------   -----------
 
Premises and equipment, net (Note 6)                              2,909,751     2,055,975
Foreclosed real estate (Note 4)                                     378,690             -
Other assets                                                        588,478       504,064
                                                                -----------   -----------
 
TOTAL ASSETS                                                    $52,144,638   $42,230,761
                                                                ===========   ===========
 
</TABLE>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
 
Deposits
<S>                                                             <C>           <C>        
  Noninterest-bearing demand                                    $ 9,979,254   $ 6,758,903
  Interest-bearing demand                                         5,601,021     3,975,759
  Savings                                                         3,298,627     3,037,360
  Time, $100,000 and over                                         9,972,207     7,014,753
  Other time                                                     16,684,215    15,596,280
                                                                -----------   ----------- 
 
            Total Deposits                                       45,535,324    36,383,055
                                                                                         
Note payable (Note 9)                                               400,000        80,000
Other liabilities                                                   564,970       462,919
Obligation under capital lease (Note 10)                             16,555             -
                                                                -----------   -----------
                                                                                         
            Total Liabilities                                    46,516,849    36,925,974
                                                                -----------   ----------- 
 
Stockholders' Equity:
  Common stock, par value $5, 10,000,000
   shares authorized, 528,958 shares issued,
   527,503 and 521,562 shares outstanding
   in 1996 and 1995, respectively                                 2,644,790     2,631,560
  Paid in capital                                                 2,647,268     2,631,560
  Treasury stock, 1,455 shares at cost                              (10,913)      (45,647)
  Retained earnings                                                 357,581        81,817
  Net unrealized gain (Loss) on                                                          
   securities, net of deferred taxes                                (10,937)        5,497
                                                                -----------   -----------
                                                                                         
            Total Stockholders' Equity                            5,627,789     5,304,787
                                                                -----------   -----------
                                                                                         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      $52,144,638   $42,230,761
                                                                ===========   =========== 
</TABLE>
   The accompanying notes are an integral part of the consolidated financial 
                                  statements.

                                       2
<PAGE>
 
                FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
                       Consolidated Statements of Income
              For the Years Ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
 
 
                                                            1996         1995         1994
                                                         ----------   ----------   ---------- 
<S>                                                      <C>          <C>          <C>
 
Interest income
  Interest and fees on loans                             $3,103,798   $2,585,428   $1,994,104
  Interest on investments                                   702,336      382,454      307,723
  Interest on Federal funds sold                            205,566      201,431       95,500
                                                         ----------   ----------   ----------
 
  Total Interest Income                                   4,011,700    3,169,313    2,397,327
 
Interest expense
  Interest paid on deposits                               1,749,666    1,269,480      816,080
  Interest on notes payable                                  21,077        3,156            -
                                                         ----------   ----------   ----------
 
  Total interest expense                                  1,770,743    1,272,636      816,080
                                                         ----------   ----------   ----------
 
Net interest income                                       2,240,957    1,896,677    1,581,247
 
Provision for loan losses (Note 3)                         (140,000)     (95,000)    (113,000)
                                                         ----------   ----------   ----------
 
  Net interest income after provision for loan losses     2,100,957    1,801,677    1,468,247
                                                         ----------   ----------   ----------
 
Other income
  Service charges on deposit accounts                       823,167      764,994      723,927
  Other service charges, commissions and fees               605,181      189,617      156,772
  Net realized gains on sales
   of securities available for sale                          14,124            -            -
  Other operating income                                     64,447       30,078       12,229
                                                         ----------   ----------   ----------
 
  Total Other Income                                      1,506,919      984,689      892,928
                                                         ----------   ----------   ----------
 
Other expenses
  Salaries and employee benefits                          1,577,478    1,068,805    1,019,585
  Equipment expense                                         343,021      279,430      217,977
  Occupancy expense                                         249,682      193,424      141,295
  Loss on foreclosed real estate                                  -       25,077            -
  Other operating expenses                                1,059,149      784,356      636,273
                                                         ----------   ----------   ----------
 
  Total Other Expenses                                    3,229,330    2,351,092    2,015,130
                                                         ----------   ----------   ----------
 
Income before income taxes                                  378,546      435,274      346,045
 
Income tax expense                                           76,703      125,600        6,220
                                                         ----------   ----------   ----------
 
NET INCOME                                               $  301,843   $  309,674   $  339,825
                                                         ==========   ==========   ==========
 
NET INCOME PER COMMON AND
 COMMON EQUIVALENT SHARE                                       $.57         $.59         $.65
                                                         ==========   ==========   ==========
 
WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES OUTSTANDING                               $  524,069   $  524,362   $  526,312
                                                         ==========   ==========   ==========
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       3
<PAGE>
 
                FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
                Consolidated Statements of Stockholders' Equity
              For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
 
 
                                                                                                Net
                                                                                            Unrealized
                                                                                            Gain (Loss)
                                                                       Treasury  Retained       on
                                          Common Stock                   Stock   Earnings   Investment
                                       Shares   Par Value    Surplus    Shares    Amount     (Deficit)   Securities      Total
                                       -------  ----------  ----------  -------  ---------  -----------  -----------  -----------
<S>                                    <C>      <C>         <C>         <C>      <C>        <C>          <C>          <C>
 
Balance, December 31, 1993             526,312  $2,631,560  $2,631,560       -   $      -    $(567,682)    $ 20,197   $4,715,635
 
Net Income                                   -           -           -       -          -      339,825            -      339,825
 
Net change in unrealized loss
 on investments transferred from
 available for sale to held to
 maturity, net of deferred taxes             -           -           -       -          -            -      (89,912)     (89,912)
                                       -------  ----------  ----------  ------   --------   ----------   ----------   ----------
 
Balance, December 31, 1994             526,312  $2,631,560  $2,631,560       -   $      -    $(227,857)    $(69,715)  $4,965,548
 
Purchase of treasury stock                   -           -           -  (4,750)   (45,647)           -            -      (45,647)
 
Net Income                                   -           -           -       -          -      309,674            -      309,674
 
Net change in unrealized gain on
 available for sale securities, net
 of deferred taxes                           -           -           -       -          -            -       75,212       75,212
                                       -------  ----------  ----------  ------   --------   ----------   ----------   ----------
 
Balance, December 31, 1995             526,312   2,631,560   2,631,560  (4,750)   (45,647)      81,817        5,497    5,304,787
 
Stock Sold                               2,646      13,230      13,230       -          -            -            -       26,460
 
Purchase of Treasury Stock                   -           -           -  (1,705)   (12,788)           -            -      (12,788)
 
Sale of Treasury Stock                       -           -       2,478   5,000     47,522            -            -       50,000
 
Net Income                                   -           -           -       -          -      301,843            -      301,843
 
Dividends Declared
 ($.05 per share)                            -           -           -       -          -      (26,079)           -      (26,079)
 
Net change in unrealized gain on
 available for sale securities, net
 of deferred taxes                           -           -           -       -          -            -      (16,434)     (16,434)
                                       -------  ----------  ----------  ------   --------   ----------   ----------   ----------
 
Balance, December 31, 1996             528,958  $2,644,790  $2,647,268  (1,455)  $(10,913)   $ 357,581     $(10,937)  $5,627,789
                                       =======  ==========  ==========  ======   ========   ==========   ==========   ==========
 
</TABLE>



   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       4
<PAGE>
 
                FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
                     Consolidated Statements of Cash Flows
              For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
 
 
                                                                   1996           1995          1994
                                                               -------------  ------------  ------------
<S>                                                            <C>            <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                   $    301,843   $   309,674   $   339,825
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Depreciation                                                    294,229       244,134       205,394
    Gain on sale of securities                                      (14,124)            -             -
    Premium accretion, net of discount amortization                   4,824        29,456        33,330
    Provision for loan losses                                       140,000        95,000       113,000
    Provision for losses on foreclosed real estate                        -        19,000        11,900
    Deferred income taxes                                            (2,372)       38,746       (46,318)
    Increase in interest receivable                                 (38,011)      (83,305)      (61,811)
    Increase (decrease) in interest payable                         119,328       136,038        42,760
    Other prepaids, deferrals and accruals, net                     (68,098)        8,819      (126,997)
                                                               ------------   -----------   -----------
 
  Total adjustments                                                 435,776       487,888       171,258
                                                               ------------   -----------   -----------
 
  Net cash provided by operating activities                         737,619       797,562       511,083
                                                               ------------   -----------   -----------
 
CASH FLOWS FROM INVESTING ACTIVITIES
  Net decrease (increase) in Federal funds sold                   4,400,000    (3,100,000)     (200,000)
  Purchase of securities available for sale                      (2,997,623)   (2,086,411)   (2,966,451)
  Proceeds from the sale of securities available for sale         1,012,892             -             -
  Proceeds from the sale of securities held to maturity             199,828             -             -
  Proceeds from maturities of securities available for sale       1,243,522       201,684       424,487
  Purchase of securities held to maturity                        (4,987,012)   (3,251,857)            -
  Proceeds from maturities of securities held to maturity         3,268,598     2,386,064             -
  Increase in Foreclosed Real Estate                               (425,811)            -             -
  Net increase in loans                                         (10,027,866)   (2,401,229)   (2,594,418)
  Proceeds from sales of foreclosed real estate                           -        72,232             -
  Purchases of premises and equipment                            (1,131,450)     (440,269)     (447,477)
                                                               ------------   -----------   -----------
 
  Net cash used in investing activities                          (9,444,922)   (8,619,786)   (5,783,859)
                                                               ------------   -----------   -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from line of credit                                      320,000        80,000             -
  Sale of common stock                                               13,230             -             -
  Dividends Paid                                                    (16,919)            -             -
  Sale of treasury stock                                             47,522             -             -
  Addition to paid in capital from sale of stock                     15,708             -             -
  Purchase of treasury stock                                        (12,788)      (45,647)            -
  Net increase in deposits                                        9,152,269     5,316,179     7,389,193
                                                               ------------   -----------   -----------
 
  Net cash provided by financing activities                       9,519,022     5,350,532     7,389,193
                                                               ------------   -----------   -----------
 
Net increase (decrease) in cash and due from banks                  811,719    (2,471,692)    2,116,417
Cash and due from banks, beginning of year                        2,046,906     4,518,598     2,402,181
                                                               ------------   -----------   -----------
 
CASH AND DUE FROM BANKS, END OF YEAR                           $  2,858,625   $ 2,046,906   $ 4,518,598
                                                               ============   ===========   ===========
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
  Cash Paid During the Year for Interest                       $  1,651,415   $ 1,010,141   $   773,320
                                                               ============   ===========   ===========
  Cash Paid During the Year for Income Taxes                   $     84,453   $   119,750   $         -
                                                               ============   ===========   ===========
  Capital Expenditures Financed by Capital Lease               $     16,555   $         -   $         -
                                                               ============   ===========   ===========
 
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       5
<PAGE>
 
                   FIRST SOUTHERN BANCSHARES AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                           December 31, 1996 and 1995


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business:  Effective July 3, 1995, First Southern Bancshares, Inc.
(the "Company") was created out of a reorganization of First Southern Bank (the
"Bank").  The Bank is now a wholly-owned subsidiary of the Company.  The
reorganization was effected pursuant to a Plan of Reorganization (the "Plan"),
dated as of February 16, 1995.  Pursuant to the Plan, each share of the Bank
common stock outstanding was converted into one share of the Company common
stock.

First Southern Bank is a state chartered bank operating in the State of Georgia.
The Bank provides a variety of financial services to individuals, small and
medium-sized business and professionals in communities located in and around
Dekalb County and metropolitan Atlanta, Georgia.

Use of Estimates:  The preparation of financial statement in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of foreclosed real estate.  In connection with the determination of
the estimated losses on loans and foreclosed real estate management obtains
independent appraisals for significant properties.

While management uses available information to recognize losses on loans and
foreclosed real estate, further reductions in the carrying amounts of loans and
foreclosed assets may be necessary based on changes in local economic
conditions.  In addition, regulatory agencies, as an integral part of their
examination process, periodically review the estimated losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans and foreclosed real estate may
change materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.

Principles of Consolidation:  The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries First Southern Bank
(the "Bank") and FSB Mortgage Services ("FSB Mortgage").  All significant
intercompany transactions and balances have been eliminated in the
consolidation.

                                       6
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED


FSB Mortgage Services, Inc.:  On May 22, 1996, FSB Mortgage Services, Inc. was
created as a wholly-owned subsidiary of First Southern Bancshares, Inc. (the
"Parent").  FSB Mortgage was formed to provide mortgage related services to
communities in and around Dekalb County, as well as, the entire metropolitan
Atlanta, Georgia area.

On June 17, 1996, 30,000 shares of the FSB Mortgage's common stock were issued
at a price of $10 per share for a total of $300,000.

On May 23, 1996, FSB Mortgage entered into an asset purchase agreement to
purchase the assets of an existing business which provides residential mortgage
lending and mortgage brokerage services.  The purchase price for the purchased
assets totaled $225,000.  The purchase price was paid as $175,000 in cash and
5,000 shares of the Parent's common stock valued at $50,000.  This agreement was
consummated on September 6, 1996.

Basis of Presentation:  The accounting and reporting policies of the Company and
its subsidiaries conform to generally accepted accounting principles and with
general practices within the banking industry.  Assets held by the Bank in a
fiduciary or agency capacity are not assets of the Bank and are not included in
the financial statements.

Investment Securities:  The Bank's investments in securities are classified in
the following two categories:

     Securities Held to Maturity:  Securities held to maturity are those
     securities which the Bank has the ability and intent to hold to maturity.
     These securities are stated at cost adjusted for amortization of premium
     and accretion of discount, which are recognized in interest income using
     the interest method.  Realized gains and losses on the sale of investment
     securities are computed on the basis of specific identification of the
     amortized cost of each security and included in earnings.

     Securities Available for Sale:  Securities classified as available for sale
     are those debt securities that the Bank intends to hold for an indefinite
     period of time but not necessarily to maturity. Any decision to sell a
     security classified as available for sale would be based on various
     factors, including significant movements in interest rates, changes in the
     maturity mix of the Bank's assets and liabilities, liquidity needs,
     regulatory capital considerations and other similar factors.  Realized
     gains or losses on the sale of investment securities available for sale are
     computed on the basis of specific identification of the amortized cost of
     each security and included in earnings.

                                       7
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     Securities available for sale are carried at fair value with unrealized
     holding gains and losses, net of deferred taxes, reported as a net amount
     in a separate component of stockholders' equity until realized.

Loans:  Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, reduced by unearned discount.  Interest on commercial and real
estate loans is credited to income on a daily basis based upon the principal
amount outstanding.  Most interest on installment loans is credited to income on
a daily basis based upon the principal amount outstanding.  The remaining
interest on installment loans is credited to income based on the sum-of-the-
months-digits method, the results of which are not materially different from
generally accepted accounting principles.

Accrual of interest income is discontinued on impaired loans when, in the
opinion of management, collection of such interest income becomes doubtful.
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current interest income.  Accrual of interest
on such loans is resumed when, in management's judgment, the collection of
interest and principal amounts become probable.

Allowance for Loan Losses: The allowance for loan losses is established through
a provision for loan losses charged to expenses. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible and is based on evaluations of the collectibility of loans, prior
loan loss experience, the estimated value of any underlying collateral and
current economic conditions.

Loan Fees and Costs:  Fees on loans and costs incurred in origination of loans
are recognized at the time the loan is recorded on the books.  Because loan fees
are not significant and the majority of the related loans have maturities of one
year of less, the results on operations are not materially different than the
results which would be obtained by accounting for loan fees and costs in
accordance with generally accepted accounting principles as set forth in
Statement of Financial Accounting Standards No. 91.

The Bank and FSB Mortgage have adopted SFAS 122 "Accounting for Mortgage
Servicing Rights". SFAS 122 requires that a mortgage banking enterprise
recognize as separate assets, rights to service mortgage loans for others,
however, those servicing rights are acquired.

                                       8
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Foreclosed Real Estate:  Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at the
date of foreclosure, establishing a new cost basis.  After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenues and expenses from operations and changes in the valuation allowance are
included in loss on foreclosed real estate.

Premises and Equipment:  Premises and equipment are stated at cost less
accumulated depreciation.  Depreciation is computed principally by the straight-
line method over the following estimated useful lives:

                                                      Years
                                                      -----

               Buildings and Improvements             10-40
               Equipment                               5-10

The Bank has adopted SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of".  SFAS 121 requires that
long-lived assets such as premises and equipment be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the entity
should estimate the future cash flows expected to result from the use of the
assets and its eventual disposition.  If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss is recognized. Otherwise, an impairment
loss is not recognized.  Measurement of an impairment loss for long-lived assets
and identifiable intangibles that an entity expects to hold and use should be
based on the fair value of the asset.  The adoption of SFAS 121 had no material
effect on the Company's financial statements.

Income Taxes:  The Bank adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes".  SFAS No. 109 requires a
balance sheet approach to accounting for income taxes and requires that deferred
tax assets and liabilities be adjusted in the period of enactment for the effect
of an enacted change in tax laws or rates.  The adoption of SFAS No. 109 had no
material effect on the consolidated financial statements.

Earnings Per Share:  Net income per common and common equivalent share was
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding during each year.  Common
stock equivalent shares represent outstanding stock options.

                                       9
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Statement of Cash Flows:  For purposes of reporting cash flows, cash and due
from banks includes cash on hand and amounts due from banks (including cash
items in process of clearing).  Cash flows from loans originated by the Bank,
deposits, interest-bearing deposits and Federal funds purchased and sold are
reported net.

Current Accounting Developments:  The Financial Accounting Standards Board has
issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", which becomes effective for years beginning
after December 31, 1996.

SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities.  The statement generally
requires that servicing assets and liabilities be subsequently measured by (a)
amortization in proportion to and over the period of estimated servicing income
or loss and (b) assessment for asset impairment or increased obligation based on
their fair values.

The Bank is currently assessing the potential future impact of the application
of this statement.

Reclassifications:  Certain amounts for 1995 and 1994 have been reclassified to
conform to the 1996 presentation.


NOTE 2 - INVESTMENT SECURITIES

Securities Held to Maturity:  The amortized cost and estimated fair value of
securities held to maturity are as follows:
<TABLE>
<CAPTION>
 
                                             December 31, 1996
                              -----------------------------------------------
                                            Gross        Gross     Estimated
                              Amortized   Unrealized  Unrealized      Fair
                                 Cost       Gains       Losses       Value
                              ----------  ----------  -----------  ----------
<S>                           <C>         <C>         <C>          <C>
 
U.S. Government and
 agencies securities          $3,241,082     $17,515    $(17,200)  $3,241,397
 
State and municipal
 securities                    2,743,068       5,532     (13,572)   2,735,028
 
Mortgage-backed securities     1,496,433       2,081     (18,200)   1,480,314
                              ----------     -------    --------   ----------
 
                              $7,480,583     $25,128    $(48,972)  $7,456,739
                              ==========     =======    ========   ==========
</TABLE>

                                       10
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 2 - INVESTMENT SECURITIES, CONTINUED
<TABLE>
<CAPTION>
 
 
                                             December 31, 1995
                              -----------------------------------------------
                                            Gross        Gross     Estimated
                              Amortized   Unrealized  Unrealized      Fair
                                 Cost       Gains       Losses       Value
                              ----------  ----------  -----------  ----------
<S>                           <C>         <C>         <C>          <C>
 
U.S. Government and
 agencies securities          $4,080,862     $12,631     $(1,456)  $4,092,037
 
State and municipal
 securities                    1,160,000       3,651      (4,498)   1,159,153
 
Mortgage-backed securities       403,527       8,091           -      411,618
                              ----------     -------  ----------   ----------
 
                              $5,644,389     $24,373     $(5,954)  $5,662,808
                              ==========     =======  ==========   ==========
 
</TABLE>
Securities Available for Sale:  The amortized cost and estimated fair value of
securities available for sale are as follows:
<TABLE>
<CAPTION>
 
                                             December 31, 1996
                              -----------------------------------------------
                                            Gross        Gross     Estimated
                              Amortized   Unrealized  Unrealized      Fair
                                 Cost       Gains       Losses       Value
                              ----------  ----------  -----------  ----------
<S>                           <C>         <C>         <C>          <C>
 
U.S. Government and
 agencies securities          $3,987,178     $16,029    $(19,615)  $3,983,592
 
Mortgage-backed securities       313,455       5,128        (190)     318,393
                              ----------  ----------    --------   ----------
 
                              $4,300,633     $21,157    $(19,805)  $4,301,985
                              ==========  ==========    ========   ==========
 
 
                                              December 31, 1995
                              -----------------------------------------------
                                               Gross       Gross    Estimated
                               Amortized  Unrealized  Unrealized         Fair
                                    Cost       Gains      Losses        Value
                              ----------  ----------    --------   ----------
 
U.S. Government and
 agencies securities          $3,785,982     $47,720    $ (3,407)  $3,830,295
 
Mortgage-backed securities        57,663           -         (70)      57,593
                              ----------  ----------    --------   ----------
 
                              $3,843,645     $47,720    $ (3,477)  $3,887,888
                              ==========  ==========    ========   ==========
</TABLE>

                                       11
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 2 - INVESTMENT SECURITIES, CONTINUED

The amortized cost and estimated fair value of securities available for sale and
held for maturity at December 31, 1996, by contractual maturity, are shown
below.  The amortized cost and fair value of mortgage backed securities are
presented in the available-for-sale and held-to-maturity categories by
contractual maturity in the following table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
 
 
                                   Available for Sale Securities            Held to Maturity Securities
                                   -----------------------------            ---------------------------
                                     Amortized         Fair                   Amortized        Fair    
                                        Cost           Value                    Cost          Value    
                                   --------------  -------------            -------------  ------------
<S>                                <C>             <C>                      <C>            <C>         
                                                                                                       
Due in one year                        $   34,883     $   36,853               $  504,314    $  503,856
Due from one year to five years           598,974        596,520                3,570,029     3,558,603
Due from five to ten years              3,666,776      3,668,612                3,406,240     3,394,280
                                       ----------     ----------               ----------    ----------
                                                                                                       
                                       $4,300,633     $4,301,985               $7,480,583    $7,456,739
                                       ==========     ==========               ==========    ========== 
 
</TABLE>

In December, 1995, the Bank implemented the Financial Accounting Standards Board
(FASB) Special Report "A Guide to Implementation of Statement No. 115 on
Accounting for Certain Investments in Debt and Equity Securities".  In
conjunction with the issuance of the Special Report, FASB permitted a one-time
reassessment of securities classifications and allowed reclassification of
securities in the "held to maturity" category without calling into question
management's intention to hold other securities to maturity in the future.  In
accordance with the implementation of the Special Report, the Bank transferred
securities with an amortized cost of $1,957,864 from "held to maturity" to
"available for sale".  The securities had an unrealized gain of approximately
$13,000 on the date of transfer.

During April, 1994, the Bank transferred all securities classified as "available
for sale" to the "held to maturity" category.  The unrealized loss on the date
of transfer continues to be reported as a separate component of stockholders'
equity and amortized over the securities' remaining life as an adjustment of
interest yield.  The Bank had a net change in unrealized loss of $16,434 net of
deferred taxes of $2,372 for 1996 and had a net change in unrealized gain of
$75,212, net of deferred taxes of $38,746 for 1995.

Proceeds from sales of investment securities during 1996 were $1,212,720. Gross
gains of $14,124 and no losses were realized on those sales.  There were no
sales of investment securities during 1995 and 1994.

Investment securities carried at approximately $4,736,084 and $2,949,000 at
December 31, 1996 and 1995, respectively, were pledged to secure public deposits
as required or permitted by law.

                                       12
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
                                                    1996          1995
                                                -----------   ----------- 
<S>                               <C>                         <C>
   Commercial, financial and
    agricultural                                $19,552,000   $10,468,000
    Real estate-construction                      3,117,000     2,239,000
    Real estate-mortgage                          6,345,000     7,430,000
    Consumer installment loans                    1,457,000     1,754,000
    Other                                         2,220,757       887,100
                                                -----------   -----------
 
                                                 32,691,757    22,778,100
    Allowance for loan losses                      (365,231)     (386,561)
                                                -----------   -----------
 
    LOANS, NET                                  $32,326,526   $22,391,539
                                                ===========   ===========
 
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
 
                                     1996        1995        1994
                                  ----------  ----------  ----------
<S>                               <C>         <C>         <C>
 
    Balance, beginning of year    $ 386,561   $ 400,219   $ 401,835
    Provision charged to
    operations                      140,000      95,000     113,000
    Loans charged off              (210,766)   (125,141)   (176,684)
    Recoveries                       49,436      16,483      62,068
                                  ---------   ---------   ---------
 
    BALANCE, END OF YEAR          $ 365,231   $ 386,561   $ 400,219
                                  =========   =========   =========
</TABLE>

As required by FASB No. 114 "Accounting by Creditors for Impairment of a Loan"
(as amended by FASB No. 118 "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures"), the Bank has loans amounting to
approximately $482,042 and $305,334 that were specifically classified as
impaired at December 31, 1996 and December 31, 1995, respectively.  The total
allowance for loan losses related to these loans was $142,290 at December 31,
1996 and $98,875 at December 31, 1995.  Interest income on impaired loans of
$73,408 and $19,949 was recognized in 1996 and 1995, respectively.

                                       13
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 4 - FORECLOSED REAL ESTATE

Activity in the allowance for losses for foreclosed real estate was as follows:
<TABLE>
<CAPTION>
 
                                      1996    1995     1994
                                      -----   -----    ---- 
<S>                                   <C>    <C>      <C>
  
    Balance, beginning of year        $   -  $11,900  $     -  
    Provision charged to income           -   19,000   11,900
    Charge-offs, net of recoveries        -  (30,900)       -
                                      -----  -------  -------
 
    BALANCE, END OF YEAR              $   -  $     -  $11,900
                                      =====  =======  =======
</TABLE>
The loss on foreclosed real estate included net expenses of $6,077 in 1995
resulted from the operation of foreclosed real estate.


NOTE 5 - RELATED PARTIES

In the normal course of business, the Bank has made loans at prevailing interest
rates and terms to directors and executive officers of the Company and its
subsidiary.  The aggregate dollar was $3,310,950 at December 31, 1996 and
$3,047,624 at December 31, 1995.  During 1996, $638,296 of new loans were made
and principal repayments totaled $374,970.


NOTE 6 - PREMISES AND EQUIPMENT

Major classifications of these assets are summarized as follows:
<TABLE>
<CAPTION>
 
                                     1996         1995
                                 -----------   ---------- 
<S>                              <C>           <C>
 
     Land                        $   459,622   $  258,000
     Buildings                     1,595,947    1,274,534
     Leasehold Improvements          144,600      144,600
     Equipment                     1,841,801    1,254,702
                                 -----------   ----------
 
                                   4,041,970    2,931,836
 
     Accumulated depreciation     (1,132,219)    (875,861)
                                 -----------   ----------
 
                                 $ 2,909,751   $2,055,975
                                 ===========   ==========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995, and 1994 was
$294,229, $244,134, and $205,394, respectively.

                                       14
<PAGE>
 
           Notes to the Consolidated Financial Statements, Continued


NOTE 7 - OPERATING LEASES

The Bank leases a facility and ATM space under various operating leases.  The
Bank facility lease contains an additional renewal option for seven years.
Rental expense was $52,547 in 1996, $46,351 in 1995 and $26,030 in 1994.  Future
minimum rental commitments under the leases are:


          1997                  $36,292
          1998                   39,174
          1999                   39,657
          2000                   38,532
          2001                   16,055
                                -------

                                $169,710
                                ========

Contingent lease payments are applicable to the leases and are based on the
Bank's proportionate share of the landlord's operating costs.


NOTE 8 - INCOME TAXES

The consolidated provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
 
                      1996      1995     1994
                     -------  --------  -------
<S>                  <C>      <C>       <C>
 
Currently Payable    $76,703  $125,600   $6,220
Deferred                   -         -        -
                     -------  --------  -------
 
                     $76,703  $125,600   $6,220
                     =======  ========  =======
</TABLE>

The Company's provision for income taxes differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes.
A reconciliation of the differences is as follows:

                                       15
<PAGE>
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


NOTE 8 - INCOME TAXES, CONTINUED
<TABLE>
<CAPTION>
 
 
                           December 31, 1996    December 31, 1995    December 31, 1994
                           Amount    Percent    Amount    Percent     Amount    Percent
                          ---------  --------  ---------  --------  ----------  --------
<S>                       <C>        <C>       <C>        <C>       <C>         <C>
 
Tax provision at
 statutory rate           $128,706      34.0%  $147,993      34.0%  $ 117,655      34.0%
Effect of tax exempt
 income                    (29,746)     (7.0)    (2,582)      (.6)          -         -
Nondeductible expenses       1,442        .5      1,937        .4       1,657        .5
 Benefit of net
  operating loss
  carryforward                   -         -          -         -    (119,418)    (34.5)
Other items, net           (23,699)     (6.0)   (21,748)     (5.0)      6,326       1.8
                          --------      ----   --------      ----   ---------     -----
 
PROVISION FOR INCOME
 TAXES                    $ 76,703      21.5%  $125,600      28.8%  $   6,220       1.8%
                          ========      ====   ========      ====   =========     =====
 
</TABLE>

Net deferred income tax liabilities of $460 at December 31, 1996 are included in
other liabilities.  Pursuant to SFAS No. 109, the components of deferred income
taxes at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
 
                                                        1996       1995  
                                                      ---------  ---------
<S>                                                   <C>        <C>     
Deferred tax assets:                                                     
  Loan loss reserves                                  $ 79,718   $ 84,790
  Valuation allowance                                  (18,097)   (27,392)
                                                      --------   --------
                                                        61,621     57,398 
 
Deferred tax liabilities:
  Unrealized gain on securities                           (460)    (2,832)
  Depreciation                                         (61,621)   (57,398)
                                                      --------   -------- 
 
</TABLE>

  Net deferred tax liability                         $    (460)  $ (2,832)  
                                                     =========    =======   

At December 31, 1995, the Company had no remaining operating loss carryforwards
available to offset future taxable income.

                                       16
<PAGE>
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


NOTE 9 - NOTE PAYABLE

Consolidated notes payable are summarized below:

                                                    1996       1995
                                                    ----       ----

A $450,000 line of credit arrangement, due
on demand and expiring on June 30, 1997.
The note bears interest at the bank's prime
rate and is payable at maturity.                  $400,000    $80,000


NOTE 10 - OBLIGATION UNDER CAPITAL LEASE

Under the terms of the purchase asset agreement entered into with the seller
Company, FSB Mortgage Services, Inc. assumed a Capital Lease Agreement for the
purchase of equipment.  In accordance with the agreement, lease payments of
$1,063 including interest at 16.689% are payable monthly.  The Company
expects to exercise the residual buy-out option of $3,120 in November, 1997.
The present value of the remaining lease payments is $16,555 including the buy-
out option.


NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES

Judgments and Claims:  The Bank is a defendant in certain legal proceedings in
connection with its normal business activities.  It is the best judgment of
management and its legal counsel that none of these matters, when resolved, will
have a material effect on the consolidated financial position of the Company.

Commitments to Extend Credit:  In the ordinary course of business, the Bank has
entered into off balance sheet financial instruments which are not reflected in
the consolidated financial statements.  These instruments include commitments to
extend credit, standby letters of credit, and commercial letters of credit.
Such financial instruments are recorded in the financial statements when funds
are disbursed or the instruments become payable.  The Bank uses the same credit
policies for these off balance sheet financial instruments as it does for
instruments that are recorded in the financial statements.

                                       17
<PAGE>
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES, CONTINUED

Following is an analysis of significant off balance sheet financial instruments.
<TABLE>
<CAPTION>
 
 
                                      December 31,
                                ------------------------
                                   1996         1995
                                -----------  -----------
<S>                             <C>          <C>
 
Commitments to extend credit    $14,351,489  $10,201,461
Standby letters of credit                 -       30,000
                                -----------  -----------
 
                                $14,351,489  $10,231,461
                                ===========  ===========
</TABLE>

Commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee.  Since many of the
commitment amounts expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.  The credit risk involved
in issuing these financial instruments is essentially the same as that involved
in extending loans to customers.  The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit, is based on management's credit
evaluation of the customer.  Collateral held varies but may include real estate
and improvements, marketable securities, accounts receivable, inventory,
equipment and personal property.

The Bank does not anticipate any material losses as a result of these
commitments.


NOTE 12 - CONCENTRATIONS OF CREDIT

Most of the Bank's loans, commitments and standby letters of credit have been
granted to customers in the Bank's market area.  The concentrations of credit by
type of loan are set forth in Note 3.  Standby letters of credit are granted
primarily to commercial borrowers of the Bank.

The Bank, as a matter of policy, does not generally extend credit to any single
borrower or group of related borrowers in excess of 25% of the lesser of the
Bank's combined capital stock and capital surplus accounts or the Bank's net
assets which amounted to approximately $1,406,335 and $1,351,000 at December 31,
1996 and 1995, respectively.


NOTE 13 - STOCK OPTIONS

The Company has granted to the president of the Bank, options to purchase a
total of 5,000 shares of common stock at $10.00 per share.  These options, each
of which will be exercisable for a period of five (5) years from the date of
grant, will be granted at the rate of 1,000 shares each

                                       18
<PAGE>
 
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT, CONTINUED


NOTE 13 - STOCK OPTIONS, CONTINUED

year, beginning July 6, 1994, the first anniversary of the president's
employment.  Each subsequent 1,000 share option will be granted on the four
successive anniversaries of the president's employment.  All of these options
must be exercised no later than five (5) years from the date of grant.  As of
December 31, 1996, none of the options granted had been exercised.  Based on the
limited trading information available to the Company, the per share fair market
value of Company stock at December 31 1996 ($10) equalled the per share exercise
price of the listed options.  Fair market value is based on trades in Company
stock during 1996 and 1995.  The exercise of outstanding stock options would not
have a dilative effect on earnings.

The following table contains with respect to the president of the Bank,
information concerning the number of stock options held, the number currently
exercisable and the value of the exercisable options.
<TABLE>
<CAPTION>
 
                                               1996    1995    1994
                                              ------  ------  ------
<S>                                           <C>     <C>     <C>
 
Exercisable                                    3,000   2,000   1,000
Unexercisable                                  2,000   3,000   4,000
Weighted-Average grant
 date fair value of options
 granted during the year                      $   10  $   10  $   10
Value of Unexercised in-the-money options:
  Exercisable                                 $    0  $    0  $    0
  Unexercisable                               $    0  $    0  $    0
 
</TABLE>

NOTE 14 - EMPLOYEE BENEFIT PLAN

The Bank has a defined contribution pension plan in effect for substantially all
full-time employees.  Salaries and employee benefits expense includes $3,955 in
1996, $4,745 in 1995, and $2,709 in 1994, for such plans.  Employer
contributions under the defined contribution plan are made at the discretion of
the Board of Directors.

                                       19
<PAGE>
 
                  NOTES TO THE FINANCIAL STATEMENTS, CONTINUED


NOTE 15 - REGULATORY MATTERS

Banking regulations require the Bank to maintain minimum capital levels in
relation to Bank assets.  At December 31, 1996, the Bank's capital ratios were
considered adequate based on regulatory minimum capital requirements.  The
minimum capital requirements and the actual capital ratios for the Bank at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
 
                                                            Regulatory 
                                                 Actual    Requirement  
                                                 -------   ------------ 
<S>                                              <C>       <C>          
                                                                     
Leverage capital ratio                               12%          4.00% 
Risk based capital ratios:                                           
  Core capital                                       16%          4.00% 
  Total capital                                      17%          8.00% 
</TABLE>                                                             

NOTE 16 - FIRST SOUTHERN BANCSHARES (PARENT ONLY) INFORMATION

The following are condensed statements of the parent company:

                                 BALANCE SHEETS
<TABLE>
<CAPTION>
 
                                                  1996        1995
                                               ----------  ----------
<S>                                            <C>         <C>
ASSETS
 
Cash on demand deposit with bank subsidiary    $   57,994  $    3,932
 
Investments In:
  Bank subsidiary                               5,653,647   5,364,122
  Mortgage services subsidiary                    293,723           -
 
Other Assets                                       39,458      19,889
                                               ----------  ----------
 
Total Assets                                   $6,044,822  $5,387,943
                                               ==========  ==========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Note payable                                   $  400,000  $   80,000
Other liabilities                                  17,033       3,156
Stockholders' equity                            5,627,789   5,304,787
                                               ----------  ----------
 
TOTAL LIABILITIES AND
 STOCKHOLDERS' EQUITY                          $6,044,822  $5,387,943
                                               ==========  ==========
</TABLE>

                                       20
<PAGE>
 
                  NOTES TO THE FINANCIAL STATEMENTS, CONTINUED


NOTE 16 - FIRST SOUTHERN BANCSHARES (PARENT ONLY) INFORMATION, CONTINUED


                              STATEMENTS OF INCOME
<TABLE>
<CAPTION>
 
                                    1996       1995     1994
                                  ---------  ---------  -----
<S>                               <C>        <C>        <C>
 
Interest on short-term debt       $ 21,078   $  3,156   $   -
Other expenses                      26,761     10,532       -
                                  --------   --------   -----
 
Total Expenses                      47,839     13,688       -
                                  --------   --------   -----
 
Income (Loss) before equity in
 undistributed net income of
 subsidiaries                      (47,839)   (13,688)      -
 
Equity in undistributed net
 income of subsidiaries:
  Bank                             355,959    323,362       -
  Mortgage Company                  (6,277)         -       -
                                  --------   --------   -----
 
NET INCOME                        $301,843   $309,674   $   -
                                  ========   ========   =====
 
</TABLE>
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
 
OPERATING ACTIVITIES
<S>                                      <C>         <C>          <C>
 
Net Income                               $ 301,843   $  309,674   $ -
 
Adjustment to Reconcile Net Income:
  Amortization                               5,598        1,808
  Increase in Other Assets                 (23,908)     (21,697)    -
 
  Increase in other liabilities             13,877        3,156     -
 
  Change in Deferrals                      (10,419)           -     -
 
  Equity in undistributed net income
   of subsidiaries                        (349,682)    (323,362)    -
                                         ---------   ----------   ---
 
Net Cash Provided (Used) by Operating
 Activities                                (62,691)     (30,421)    -
                                         ---------   ----------   ---
</TABLE>

                                       21
<PAGE>
 
                  NOTES TO THE FINANCIAL STATEMENTS, CONTINUED


NOTE 16 - FIRST SOUTHERN BANCSHARES (PARENT ONLY) INFORMATION
<TABLE>
<CAPTION>
 
                                            1996       1995     1994
                                         ----------  ---------  -----
<S>                                      <C>         <C>        <C>
 
INVESTING ACTIVITIES
 
Investment in Subsidiary                 $(300,000)  $      -   $   -
 
Dividends received from 100% owed
 subsidiary                                 50,000          -       -
                                         ---------   --------   -----
 
Net Cash Provided (Used) by Investing
 Activities                               (250,000)         -       -
                                         ---------   --------   -----
 
 
FINANCING ACTIVITIES
 
Proceeds from line of credit               320,000     80,000       -
 
Sale of treasury stock                      50,000          -       -
 
Purchase of treasury stock                 (12,788)   (45,647)      -
 
Sale of common stock                        26,460          -       -
 
Dividends paid                             (16,919)         -       -
                                         ---------   --------   -----
 
Net Cash Provided (Used) by
 Financing Activities                      366,753     35,353       -
                                         ---------   --------   -----
 
Net increase in cash for the year           54,062      3,932       -
 
Cash, beginning of year                      3,932          -       -
                                         ---------   --------   -----
 
CASH, END OF YEAR                        $  57,994   $  3,932   $   -
                                         =========   ========   =====
</TABLE>

                                       22