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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



Washington, D.C. 20549



FORM 10-KSB



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2002



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



Commission File Number: 0-25478



FIRST SOUTHERN BANCSHARES, INC.

(Name of Small Business Issuer in Its Charter)



|Delaware                                                       |  | 63-1133624                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|102 South Court Street, Florence, Alabama                      |  | 35630                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          



Issuers telephone number, including area code:(256) 764-7131

Securities registered under
Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:



Common Stock, par value $0.01 per share

(Title of Class)



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES x     NO ̈



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in
this form, and no disclosure will 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 amendments to this Form
10-KSB. ̈



The issuers gross revenues for the fiscal year ended December 31, 2002 were $6,506,000.



There is no established market in which shares of the
Issuers common stock are regularly traded, nor are there any uniformly quoted prices for such shares. As of March 28, 2003, there were issued and outstanding 1,256,715 shares of the Issuers common stock. The aggregate value of the common
stock outstanding by non-affiliates of the Issuer on March 28, 2003 was $1,885,000 (1,256,715 shares at $1.50 per share, the most recent trade price known to the Issuer between unaffiliated parties). For purposes of this calculation, officers and
directors of the Issuer are considered non-affiliates.



As of March 28, 2003, the issuer has 1,256,715 shares of Common Stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE:



1.  Portions of Proxy Statement for the Annual Meeting of Stockholders (Proxy Statement). (Part III).



Transitional Small Business Disclosure Format (check
one):    YES ̈NO x



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INDEX



|                                                                                                                         |  | Page
|------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                                        
|PART I                                                                                                                  
|                                                                                                                        
|RISK FACTORS                                                                                                             |  | 2   
|                                                                                                                        
|Item 1.  Description of Business                                                                                         |  | 4   
|                                                                                                                        
|Item 2.  Description of Property                                                                                         |  | 31  
|                                                                                                                        
|Item 3.  Legal Proceedings                                                                                               |  | 31  
|                                                                                                                        
|Item 4.  Submission of Matters to a Vote of Security Holders                                                             |  | 31  
|                                                                                                                        
|PART II                                                                                                                 
|                                                                                                                        
|Item 5.  Market for Common Equity and Related Stockholder Matters                                                        |  | 32  
|                                                                                                                        
|Item 6.  Managements Discussion and Analysis or Plan of Operation                                                       |  | 33  
|                                                                                                                        
|Item 7.  Financial Statements                                                                                            |  | 43  
|                                                                                                                        
|Item 8.  Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 43  
|                                                                                                                        
|PART III                                                                                                                
|                                                                                                                        
|Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 43  
|                                                                                                                        
|Item 10  Executive Compensation                                                                                          |  | 43  
|                                                                                                                        
|Item 11.  Security Ownership of Certain Beneficial Owners and Management                                                 |  | 43  
|                                                                                                                        
|Item 12  Certain Relationships and Related Transactions                                                                  |  | 44  
|                                                                                                                        
|PART IV                                                                                                                 
|                                                                                                                        
|Item 13.  Exhibits and Reports on Form 8-K                                                                               |  | 44  
|                                                                                                                        
|Item 14.  Controls and Procedures                                                                                        |  | 45  
|                                                                                                                        
|SIGNATURES                                                                                                               |  |     
|                                                                                                                        
|CERTIFICATION                                                                                                            |  |     





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This report
may contain forward-looking statements as defined under the federal securities laws. These forward-looking statements are subject to numerous assumptions, risks and uncertainties because of the possibility of changes in underlying
factors and assumptions. Actual results could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including: the ability of First Southern Bancshares, Inc. (the Company) and
First Southern Bank (the Bank) to comply with the regulatory requirements and agreements applicable to each of them; sharp and rapid changes in interest rates; significant changes in the economic scenario from the current anticipated
scenario which could materially change anticipated credit quality trends, the value of investment securities and the ability to generate loans; significant delay in or inability to execute strategic initiatives designed to increase capital, reduce
non-performing loans and classified assets, grow revenues and control expenses; ability to maintain sufficient liquidity and cash flow and significant changes in accounting, tax or regulatory practices or requirements. Because of the risks and
uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. The Company assumes no obligation
to update any forward-looking statements.



PART I



RISK FACTORS



The Companys
Common Stock Has Been Delisted From the Nasdaq National Stock Market.



Under Marketplace Rule 4310(c)(14), annual reports filed with Nasdaq must contain certified financial statements. The Companys original form 10-KSB for the year ended December 31, 2001 contained a disclaimer opinion,
attributable to doubts about the Companys ability to continue as a going concern, which does not fulfill Nasdaqs filing requirements. Accordingly, the Companys securities were delisted from the Nasdaq Stock Market at the opening of
business on April 24, 2002. The Companys common stock is ineligible for quotation on the Nasdaq SmallCap Market and the OTC Bulletin Board because the Company was not deemed to be current with its periodic securities filing requirements as a
result of the issuance of the disclaimer. However, the common stock is eligible for quotation on the Pink Sheets, a quotation service for over-the-counter securities, by participating brokers. On April 15, 2003, the Company filed an
amended Form 10-KSB at and for the year ended December 31, 2001, which included a restated independent auditors report dated February 28, 2003, which expressed an unqualified opinion on the Companys Consolidated Financial Statements for
the year ended December 31, 2001. Based on events occurring subsequent to the originally issued report, management requested that the independent auditors reconsider their previous report in accordance with provisions of professional auditing
standards. The auditors were able to comply. Although the auditors reports on the Companys financial statements at and for the years ending December 31, 2001 and 2002 were unqualified, the auditors reports include an additional
paragraph alerting the user of the financial statements that they were prepared assuming the Company will continue as a going concern.



The Company Is Restricted from Certain Activities Including Paying Dividends to Stockholders.



Effective July 6, 2001, the Company entered into a Memorandum
of Understanding (MOU) with the Federal Reserve Bank of Atlanta. The MOU prohibits the Company from incurring any additional debt without the prior written approval of the Federal Reserve Bank. The MOU also prohibits the Company from
declaring or paying any dividends to its shareholders or redeeming any of its outstanding stock without the prior written approval of the Federal Reserve Bank. The Company has adopted a capital plan and capital and dividend policy in compliance with
the provisions of the MOU. The Company is required to submit quarterly progress reports to the Federal Reserve Bank of Atlanta. The MOU will remain in effect until modified or terminated by the Federal Reserve Bank. At December 31, 2002, the Company
believes it was in material compliance with the MOU.



The Bank
Has Entered Into a Consent Order with Regulators which Restricts Its Operations and the Expense of Compliance or Failure to Comply Could Have a Material Adverse Affect on the Company.



First Southern Bank has entered into a Consent Order (the Order) with the Federal Deposit
Insurance Corporation (FDIC) and the Alabama State Banking Department (collectively, the Regulators). The Order became effective March 25, 2002 and will remain in effect until modified, terminated, suspended or set aside by
the Regulators. The Order requires the Bank to address various operational deficiencies, including certain violations of law and regulations identified by the Regulators, within various time periods prescribed in the Order. Among other things, the
Bank must address identified deficiencies with respect to management staffing and effectiveness, earnings, asset quality, capital adequacy, allowance for loan losses, and internal policies, procedures and controls.



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The Order also prohibits the Bank from paying cash dividends to the Company without prior written consent from the Regulators.



The Order outlines specific capital adequacy benchmarks that
the Bank must satisfy. Within 60 days from the effective date of the Order, the Banks Tier 1 capital was required to equal or exceed 5.00% of total assets. Within 120 days of the effective date of the Order and for as long as the Order remains
in effect, the Banks Tier 1 capital must equal or exceed 7.00% of total assets. Since December 31, 2001, the Company has contributed $1.0 million of equity capital to the Bank with the proceeds of a loan from certain directors of the Company.
At December 31, 2002, the Banks Tier 1 capital was 8.37% of total assets and in compliance with the Order. The Bank has developed and adopted a plan designed to meet and maintain the FDICs minimum risk based capital requirements.



The Order also imposes specific asset quality
measures on the Bank. Among these is the requirement to reduce (by charge-off, collection or removal from adverse classification with the consent of the Regulators) the level of assets classified substandard and doubtful by
the Regulators in connection with their 2001 examination to not more than $20 million by August 31, 2002, to not more than $15 million by February 28, 2003, and to not more than $6 million by August 31, 2003. At December 31, 2002, the balance of
assets classified substandard and doubtful by the Regulators in 2001 was $10.5 million and in compliance with the Order.



The issuance of the Order follows previously disclosed written assurances by the Bank to the Alabama State Banking Department in August
2001, which written assurances were superseded by the Order, and addressed many of the same matters contained in the Order. Although the Bank cannot assure its compliance with all of the requirements of the Order within the prescribed time frames,
the Bank believes it has satisfied the requirements. The Order requires the Bank to submit periodic written reports to the Regulators detailing compliance with the terms of the Order. Violation of the Order may give rise to enforcement proceedings,
including imposition of civil money penalties against the Bank and/or its institution-affiliated parties or removal and prohibition orders against institution-affiliated parties.



The Company Has Had a Significant Change in Operating Strategy and Management since January 1, 2001, and There Can Be No
Assurance that the New Strategy or Management Will Result in Improved Financial Condition or Net Income.



From 1995 to 2000, the Bank focused its efforts in growing its commercial loan portfolio. However, as a result of a decline in the quality
of the Banks loan portfolio, related reductions in Bank capital, the previously reported fraud involving certain commercial loans and other operational factors, the Board of Directors and management have reevaluated its lending strategy. The
Board of Directors and management have actively taken steps to improve the underwriting and credit administration practices of the Bank in order to improve its overall asset quality. New policies with respect to loan originations have been
formulated which should enhance the quality of future production. While it was not Managements intent to curtail the origination of new loans, primary emphasis during 2001 was given to problem loan administration and as a result originations
decreased. During 2002, total loans originated increased $1.8 million from $38.6 million in 2001 to $40.4 million in 2002.



Effective, January 31, 2001 Charles L. Frederick, Jr. resigned as Chairman, President, Chief Executive Officer and Director of both the
Company and the Bank. J. Acker Rogers, Chairman of the Board, served as Acting President and Acting Chief Executive Officer of the Company and the Bank until Robert C. Redd was elected President and Chief Executive Officer of the Company and the
Bank effective March 5, 2001. He was also appointed to the Board of Directors of the Company and the Bank. The Company and Mr. Redd mutually agreed to terminate the employment agreement effective March 31, 2002, and Mr. Redd resigned as the
President, Chief Executive Officer and Director of the Company and the Bank effective April 2, 2002. During the second quarter of 2001, the Board hired B. Jack Johnson as Executive Vice President and Senior Lending Officer to oversee the
administration of the Banks loan portfolio with primary emphasis on improving overall credit quality of the portfolio.



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On April 2,
2002, B. Jack Johnson became President and Chief Executive Officer of the Company and the Bank. He was also appointed to the Board of Directors of the Company and the Bank. Also in April 2002, the Board hired Rod Schlosser as Chief Financial Officer
of the Company and the Bank in a consulting capacity, and Dennis Morgan as Executive Vice President and Senior Lending Officer of the Company and the Bank. Effective July 1, 2002, Mr. Schlosser became Executive Vice President and Chief Financial
Officer of the Company and the Bank.



On June 24,
2002, the Company entered into an agreement with Bank Independent, Sheffield, Alabama to sell the assets and certain related liabilities of its branch offices located at 2727 Mall Drive, Florence, Alabama and 102 Bank Street, Rogersville, Alabama.
The closing of this transaction on September 20, 2002, resulted in a pre-tax gain of approximately $1.6 million. The reduction of income earning assets resulting from the transaction may have a negative affect on future net income.



Decline in the Economy in the Companys Market Area Could Further
Adversely Affect the Quality of the Banks Loan Portfolio.



The Banks primary lending area is Lauderdale and Colbert counties, and surrounding counties located in Northwest Alabama. This area has weaker demographics than Alabama as a whole. Management is concerned about the
further impact a decline in the local economy could have on the quality of the Banks loan portfolio.



Item 1.  Description of Business



(a)    Business Development



The Company, a Delaware corporation, was organized on November 22, 1994 for the purpose of becoming the holding company for First Federal Savings and Loan Association of Florence
(Association) upon the Associations conversion from a federally chartered mutual savings and loan association to a federally chartered capital stock savings and loan association (Stock Conversion) and then to an Alabama
chartered commercial bank (Bank Conversion). The Stock Conversion was consummated on April 13, 1995 through the issuance and sale by the Company of 2,049,875 shares of common stock, $0.01 par value, at $10.00 per share to depositors of
the Association and the Associations employee stock ownership plan. The Bank Conversion was consummated on June 10, 1995, with the Association changing its name to First Southern Bank. In October 2001, the Company completed private
placements of Series A and B Preferred Stocks raising $3.5 million and $1.1 million, respectively, in equity capital. The Company used approximately $4.3 million of the $4.5 million net proceeds of these offering to contribute capital to the Bank.



The Company is a registered bank holding company
regulated by the Federal Reserve Board (FRB). The Banks primary regulator is the Superintendent of Banks of the State of Alabama (Superintendent). The Banks deposits are insured up to applicable limits under the
Savings Association Insurance Fund (SAIF) of the FDIC. The Bank is a member of the Federal Home Loan Bank (FHLB) System.



(b)    Business of the Company



The Companys principal business is conducted through its wholly-owned subsidiary, the Bank. The Bank
attracts retail deposits from the general public in its market area and invests those deposits, together with funds generated from operations, loan and investments sales and borrowings primarily in loans and, to a lesser extent, in investment
securities.



The Banks primary lending
activity is the origination of mortgage loans for the purchase and re-finance of one- to four-family owner-occupied residences. The Bank also originates commercial real estate and business loans, construction loans, consumer loans, and multi-family
residential real estate loans, principally in the Banks primary market area. These other types of lending are generally considered to involve greater credit risks than one- to four-family mortgage lending.



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Deposits and
loan repayments are the major sources of the Banks funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be used as a source of funds on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term
basis for general business purposes.



Deposits
are attracted from within the Banks primary market area through the offering of a broad selection of deposit instruments, including demand deposit accounts, negotiable order of withdrawal (NOW) accounts, money market deposit
accounts, statement savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other
factors.



The Bank may rely upon advances from
the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta has, from time to time, served as one of the Banks primary borrowing sources. Advances from the FHLB of Atlanta are
typically secured by the Banks investments.



Market Area



The Bank conducts its business through
three office facilities located in Lauderdale and Colbert Counties in northwestern Alabama, which the Bank considers as its primary market area. The two largest industries in this area are Wise Alloys and the Tennessee Valley Authority. The
University of North Alabama and the Eliza Coffee Memorial Hospital are located in Florence, Alabama, and both have a significant economic impact on the Banks primary market area. The market area has weaker demographics than Alabama as a whole.
The recent decline in the textile industry has contributed substantially to these weaker economic conditions. See Risk Factors  Decline in the Economy in the Companys Market Area Could Further Adversely Affect the Quality of the
Banks Loan Portfolio.



Competition



The Bank faces strong competition in the
attraction of deposits (its primary source of lendable funds) and in the origination of real estate and consumer loans. Its most direct competition for deposits and loans has historically come from thrift institutions and from other commercial banks
located in its primary market area in Lauderdale and Colbert counties of the State of Alabama. The Bank competes for loans primarily through the interest rates and loan fees it charges, and the prompt, efficient, and quality service it provides to
its borrowers, real estate brokers, and home builders. Primary competition for loans are from thrift institutions, other commercial banks, mortgage banking companies, insurance companies, and credit unions.



Regulation and Supervision of the Company and the Bank



The Bank



General. As an Alabama-chartered, federally insured commercial bank, the Bank is subject to extensive
regulation. Lending activities and other investments must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Bank is regularly examined by the FDIC and the Superintendent and files periodic
reports concerning the Banks activities and financial condition with its regulators. The Banks relationship with depositors and borrowers also is regulated to a great extent by both federal law and the laws of the State of Alabama,
especially in such matters as the ownership of deposit accounts and the form and content of mortgage documents.



Federal and state banking laws and regulations govern all areas of the operation of the Bank, including reserves, loans, mortgages,
capital, issuance of securities, payment of dividends and establishment of branches. Federal and state bank regulatory agencies also have the general authority to limit the dividends paid by insured



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banks and bank holding companies if such payments should be deemed to constitute an unsafe and unsound
practice. The respective primary federal regulators of the Company and the Bank have authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound
practices.



On March 25, 2002, the Bank entered
into a consent order with the FDIC and the Alabama State Banking Department. The Order is discussed under the heading Risk FactorsThe Bank Has Entered Into a Consent Order with Regulatorswhich Restricts Its Operations and the
Expense of Compliance or Failure to Comply May Have a Material Adverse Affect on the Company in the forepart of this Form 10-KSB.



State Regulation and Supervision. As an Alabama-chartered commercial bank, the Bank is subject to applicable provisions of Alabama
law and the regulations of the Superintendent adopted thereunder. Alabama law and regulations govern the Banks ability to take deposits and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer
loans, to invest in securities, to offer various banking services to its customers, and to establish branch offices. The Bank is required under Alabama law to maintain at all times a reserve (composed of cash) based upon average daily deposits of
the Bank. At December 31, 2002, the Banks qualifying reserves of $805,000 exceeded the required reserve of $95,000. In addition, the Bank is subject to periodic examination and reporting requirements by and of the Superintendent. The
Superintendent may order the board of directors of any bank to correct any matters in the conduct of the affairs of the bank which in his opinion are unsafe and unsound. Under certain circumstances, the Superintendent may vacate the charter of a
bank, liquidate a bank or appoint a receiver. During 2001, the Bank and its directors made certain written assurances to the Superintendent. Such written assurances focused the Bank and its board of directors on specific problems the Department
considers to be of supervisory concern. The Bank committed to take certain actions with respect to the Banks management, asset quality and loan administration, capital and asset/liability management. The Order requires the Bank to follow
through on these commitments. Management believes that the Bank is in material compliance with the Order at this time. See Risk Factors  The Bank has Entered Into a Consent Order with Regulators which Restricts the Operations and the
Expense of Compliance or Failure to Comply May Have a Material Adverse Effect on the Company.



Deposit Insurance. The FDIC insures deposits at the Bank to the maximum extent permitted by law. The Bank currently pays deposit
insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all SAIF-member institutions. Under applicable regulations, institutions are assigned to one of three capital groups which are based solely on the
level of an institutions capital  well capitalized, adequately capitalized and undercapitalized  which are defined in the same manner as the regulations establishing the prompt corrective action
system under Section 38 of the Federal Deposit Insurance Act, as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. This matrix results in nine assessment risk classifications, with rates currently ranging from 0 basis points of assessable deposits for well capitalized, financially sound institutions
with only a few minor weaknesses to 27 basis points for undercapitalized institutions that pose a substantial risk of loss to the SAIF unless effective corrective action is taken. The FDIC is authorized to raise assessment rates in certain
circumstances. The Banks assessments expensed for the year ended December 31, 2002, equaled $250,000.



SAIF-insured institutions are also required to make payments to the FDIC to help fund interest payments on certain bonds issued by the
Financing Corporation (FICO), an agency of the federal government established to finance takeovers of insolvent thrifts. During fiscal 2002, the FICO assessment amounted to approximately 1.75 basis points of assessable deposits.
Effective January 1, 2000, SAIF members and members of the Bank Insurance Fund (BIF) were assessed at the same rate for FICO payments whereas previously SAIF members were assessed at a rate five times that of BIF members.



The FDIC may terminate the deposit insurance of any insured
depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation,
order or any condition imposed by



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an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process
for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, continue to be insured for a
period of six months to two years, as determined by the FDIC. Noncompliance with the terms of the Order could result in the FDIC terminating the Banks insurance. However, the Company believes that the Bank is in material compliance with the
Order at this time.



Prompt Corrective
Action. Each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution is deemed to be: (i) well capitalized if it has a total risk-based capital ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1
leverage capital ratio of 5.0% or more and is not subject to specified requirements 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
more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) 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%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv) significantly
undercapitalized if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%; and (v) critically
undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.



A federal banking agency may, after notice and an opportunity for a hearing, reclassify a well capitalized institution as adequately
capitalized and require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is determined to be in an unsafe or unsound condition or
engaging in an unsafe or unsound practice. (The FDIC may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.)



An institution generally must file with the appropriate federal banking agency a written capital restoration plan which meets specified
requirements, as well as a performance guaranty by each company that controls the institution, within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an institution becomes subject to various mandatory and discretionary restrictions on its operations. Upon falling to a significantly undercapitalized status, or
upon failing to submit an acceptable capital restoration plan, the extent and severity of the mandatory and discretionary operational restrictions increase. Regulators are required to appoint a receiver for an institution that becomes
significantly undercapitalized if the institution is on average critically undercapitalized during the calendar quarter beginning 270 days after becoming critically undercapitalized subject to a narrow exception.



As of December 31, 2002, the Banks capital ratios met
the requirements to be categorized as well capitalized, but is subject to the capital requirements of the Order. The Bank was in compliance with these requirements as of December 31, 2002.



Standards for Safety and Soundness. The federal banking
regulatory agencies are required, by regulation, to prescribe standards for all insured depository institutions relating various matters such as: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The federal banking agencies have adopted final regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness
(Guidelines) to implement safety and soundness standards. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before
capital becomes impaired. Under the final regulations, if the FDIC determines that the Bank fails to meet any standard prescribed by the Guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance
with the standard. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.



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Capital
Requirements. The FDICs minimum capital standards applicable to FDIC-regulated banks and savings banks require the most highly-rated institutions to meet a Tier 1 leverage capital ratio of at least 3% of total adjusted assets.
Tier 1 (or core capital) consists of common stockholders equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries minus all intangible assets other than limited amounts of servicing rights
and certain other accounting adjustments. All other banks must have a Tier 1 leverage ratio of at least 4%. The FDICs capital regulations require higher capital levels for banks which exhibit more than a moderate degree of risk or exhibit
other characteristics which necessitate that higher than minimum levels of capital be maintained. Based on the definitions contained in the FDICs capital regulations, the Bank had a Tier 1 leverage capital ratio of 8.37% as of December 31,
2002.



FDIC regulations also require that banks
meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital) to risk weighted assets of 8% and Tier 1 capital to risk-weighted
assets of 4%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the 3% leverage requirement. The components of supplementary capital currently include cumulative perpetual preferred stock, adjustable-rate perpetual preferred stock,
mandatory convertible securities, term subordinated debt, intermediate-term preferred stock up to 45% of net unrealized holding gains on equity securities and allowance for possible loan and lease losses. Allowance for possible loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of Tier 1 capital. Since September 1995, the FDIC includes in its
evaluation of a banks capital adequacy an assessment of the exposure to declines in the economic value of the banks capital due to changes in interest rates. Banks whose trading activity exceeds specified levels are subject to
adjustments of its risk-based capital calculations to supplement required capital based on market risk.



FDIC capital requirements are designated as the minimum acceptable standards for banks whose overall financial condition is fundamentally
sound, which are well-managed and have no material or significant financial weaknesses. The FDIC capital regulations state that, where the FDIC determines that the financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or a bank has a significant volume of assets classified substandard, doubtful or loss or otherwise criticized, the FDIC may determine that the minimum adequate amount of
capital for that bank is greater than the minimum standards established in the regulation. Pursuant to the Order, the Banks Tier 1 capital must equal or exceed 5% of the total assets by May 24, 2002 and the Bank must maintain a minimum Tier 1
capital of 7% of total assets from July 23, 2002 for so long as the Order remains in effect. As of December 31, 2002, the Banks Tier 1 capital was 8.37% and in compliance with the Order. See Risk Factors  The Bank Has Entered
Into a Consent Order With Regulators which Restricts Its Operations and the Expense of Compliance or Failure to Comply Could Have a Material Adverse Affect on the Company.



Activities and Investments of Insured State-Chartered Banks. Federal law generally limits the
activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or
retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as
a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2%
of the banks total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors, trustees and officers liability insurance coverage or bankers blanket bond group
insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.



FDIC regulations provide that an insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as principal in any activity that is not permissible for a national bank unless the FDIC has



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determined that such activities would pose no risk to the insurance fund of which it is a member and the
bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.



Loans-to-One-Borrower. Under Alabama law the aggregate
amount of loans that the Bank is permitted to make to any one borrower, including related entities, is generally 20% of the Banks capital account (i.e., capital, surplus, undivided profits and the allowance for loan losses) provided
that loans in excess of 10% of the capital account are fully secured or 10% of capital accounts if such loans are not fully secured. At December 31, 2002, the Banks legal lending limit was either $1.2 million unsecured or $2.4 million secured.



At December 31, 2002, the Bank had identified
one lending relationship in the amount of $2.5 million that may have exceeded the legal lending limit during 2000. Management and the regulators have agreed on the necessary action to address this issue.



Federal Reserve System. Regulation D of the FRB
requires all depository institutions that maintain transaction accounts or nonpersonal time deposits to maintain specified reserves. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank.
NOW accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements. Under Regulation D, a bank must establish reserves
equal to 3% of the first $42.1 million of transaction accounts, of which the first $6.0 million is exempt, and 10% on the remainder. As of December 31, 2002, the Bank met its reserve requirements.



Affiliate Transactions. The Company and the Bank are
separate and distinct legal entities. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company (an affiliate), generally limiting such transactions with each affiliate to 10% of the banks
capital and surplus and limiting all transactions with all affiliates to 20% of the banks capital and surplus and imposing collateral requirements on specified transactions. Such transactions, including extensions of credit, sales of
securities or assets and provision of services, also must be on terms and conditions consistent with safe and sound banking practices, including credit standards, that are substantially the same or at least as favorable to the bank as those
prevailing at the time for transactions with unaffiliated companies.



Transactions with Related Parties. The Companys authority to extend credit to executive officers, directors and 10% shareholders (insiders), as well as entities such persons control, is governed by
Sections 22(g) and 22(h) of the Federal Reserve Act. Among other things, such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and to not involve more than the normal risk of repayment. There
is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law limits both the individual and aggregate
amount of loans the Company may make to insiders based, in part, on the Companys capital position and requires certain board approval procedures to be followed.



Community Reinvestment Act. Banks are also subject to the provisions of the Community Reinvestment Act
of 1977, which requires the appropriate federal bank regulatory agency, in connection with its regular examination of a bank, to assess the banks record in meeting the credit needs of the community serviced by the bank, including low and
moderate income neighborhoods. The regulatory agencys assessment of the banks record is made available to the public. Further, such assessment is required of any bank which has applied, among other things, to establish a new branch
office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. The Bank received a satisfactory CRA rating as a
result of its most recent evaluation.



Dividends. Dividends from the Bank constitute the major source of funds for dividends which may be paid by the Company. The amount of dividends payable by the Bank to the Company depend upon the Banks earnings and
capital position, and is limited by federal and state laws, regulations and policies. According to Alabama law, the Bank is required to transfer to surplus each year at least 10% of its net earnings (and thus cannot declare or pay a



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dividend in excess of 90% of net earnings) until its surplus equals at least 20% of its capital.
Furthermore, the Bank must obtain the approval of the Superintendent to declare dividends in any calendar year in excess of the total of its net earnings of that year combined with its retained net earnings of the preceding two years, less any
required transfers to surplus. The Bank cannot pay a dividend that would cause it to fail any applicable regulatory capital requirement. In light of the Banks supervisory difficulties, the Bank is prohibited from paying any dividends to the
Company without the written approval of the Superintendent and the FDIC. During the year ended December 31, 2002, the Bank paid dividends to the Company totaling $200,000 with such approval. SeeThe Bank Has Entered Into a Consent Order
with Regulators which Restricts Its Operations and the Expense of Compliance or Failure to Comply Could Have a Material Adverse Affect on the Company.



At the time of the consummation of the Stock Conversion of the Association (predecessor to the Bank), OTS
regulations required it to establish a liquidation account for the benefit of eligible account holders of the Association. This liquidation account was assumed by the Bank at the time of the consummation of the Conversion. The Bank may not declare
or pay a cash dividend on any of its capital stock that would reduce the Banks regulatory capital below the amount required for the liquidation account.



Federal law further provides that no insured depository institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would be undercapitalized, as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice.



The Holding Company



General. The Company, as the sole shareholder of the Bank, is a bank holding company registered as such with the FRB. Bank holding companies are subject to comprehensive regulation by the FRB
under the Bank Holding Company Act of 1956, as amended (BHCA) and the regulations of the FRB. As a bank holding company, the Company is required to file with the FRB annual reports and such additional information as the FRB may require
and is subject to regular examinations by the FRB. The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders
and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. In light of the Banks
supervisory difficulties, the Company has entered into an MOU. See Risk Factors  The Company is Restricted From Certain Activities Including Paying Dividends to Stockholders.



Under the BHCA, a bank holding company must obtain FRB
approval before: (1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or
controls the majority of such shares); (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company.



The BHCA prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the FRB is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the FRB has determined to be so
closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. The list of activities determined by regulation to be closely related to banking within the meaning of the BHCA includes, among other
things: operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax
planning and preparation services; and, subject to certain limitations,



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providing securities brokerage services for customers. The Gramm-Leach-Bliley Act of 1999 authorizes a
bank holding company that meets specified conditions, including being well capitalized and well managed, to become a financial holding company and thereby engage in a broader array of financial activities than
previously permitted. Such activities can include insurance underwriting and investment banking. The Gramm-Leach-Bliley Act also authorizes banks to engage, through financial subsidiaries in certain of the activities permitted for
financial holding companies.



Dividends.
The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRBs view that a bank holding company should pay cash dividends only to the extent that the companys net income for the
past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the companys capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate
for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under prompt corrective action, the FRB may prohibit a bank holding company from paying any dividends if the holding companys bank subsidiary
is classified as undercapitalized or worse. In light of the Banks supervisory difficulties, the Company is prohibited from paying any dividends, and management does not anticipate paying dividends on its common stock for the
foreseeable future. Dividends are accruing, however, on the Companys preferred stock. See Note 11 to the Notes to Consolidated Financial Statements.See also Risk Factors  The Company is Restricted From
Certain Activities Including Paying Dividends to Stockholders.



Bank holding companies, except for certain well-capitalized bank holding companies, are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove
such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB.



The FRBs general policy is that a bank holding company
should serve as a source of financial strength for its subsidiary banks by standing ready to use available resources to provide capital funds to the banks during periods of financial stress and by maintaining the financial flexibility to obtain
additional resources for assisting its subsidiary banks where necessary.



Capital Requirements. The FRB has established capital adequacy guidelines for bank holding companies that generally parallel the capital requirements of the FDIC for the Bank. The FRB regulations provide that capital
standards will be applied on a consolidated basis in the case of a bank holding company with $150 million or more in total consolidated assets. At December 31, 2002, the Company had less than $150 million in consolidated assets and therefore the
consolidated capital standards were not applicable. See Note 10 to Notes to Consolidated Financial Statements.



Federal Taxation



General. The Company and the Bank report their income on a calendar year basis using the accrual method of accounting. The Company
and the Bank are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Banks reserve for bad debts discussed below. The following discussion of tax matters is intended only
as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company and the Bank.



Bad Debt Reserve. In years prior to the consummation of the Bank Conversion, the Association, as a qualified thrift meeting certain
eligibility criteria prescribed in the Code, was able to determine its tax basis bad debt reserve using the percentage of taxable income method (PTI Method) set forth in the Code. The Associations use of the PTI Method resulted in
a significantly greater tax basis reserve for bad debts than that recognized for financial reporting purposes.



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Upon
consummation of the Bank Conversion, the Bank became a former thrift institution and, as such, under provisions of the Code, is no longer eligible to maintain its tax basis bad debt reserve on the PTI Method. As a financial institution
with total assets less than $500 million, the Bank is permitted to maintain its tax basis bad debt reserves on the experience method (Experience Method), which computes a tax basis bad debt reserve based upon a six-year weighted-average
calculation of actual bad debts experienced by the Bank.



If the Banks assets ever exceed the $500 million threshold, the Bank would be required to recapture its newly adopted Experience Method tax basis bad debt reserve in increasing increments over a four-year period. Thereafter,
the Bank would be required to use the direct or specific charge-off method applicable to large banks in calculating the Banks tax bad debt deduction. Under the direct or specific charge-off method, the Bank would be entitled to a bad debt
deduction only in the taxable year in which a specific debt become worthless or is shown to be recoverable only in part.



The Bank Conversion occurred prior to the enactment of the Small Business Job Protection Act of 1996 which repealed the PTI method but did
not require recapture of pre-1988 bad debt reserves.



Distributions. To the extent that the Bank makes nondividend distributions to shareholders, such distributions will be considered to result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Banks loan portfolio decreased since December 31, 1987) and then from the supplemental reserve for losses on loans (Excess Distributions), and an amount based on the Excess Distributions will be
included in the Banks taxable income. Nondividend distributions include distributions in excess of the Banks current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Banks current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Banks bad debt reserves.



The amount of additional taxable income created
from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the Excess Distribution would be includable in gross income for
federal income tax purposes, assuming a 34% federal corporate income tax rate. See Regulation and Supervision of the Company and the Bank for limits on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt reserve.



Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income (AMTI) at a rate of 20%. AMTI is increased by an amount equal to 75% of the amount by
which the Banks adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax (AMT) is paid.



Dividends-Received Deduction and Other Matters.The
Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from
unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.



Audits. The Companys and the Banks federal income tax returns have been audited through 1996.



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State Taxation



Alabama Taxation. The State of
Alabama imposes a 6.5% excise tax on the Banks earnings. The Banks state tax returns have not been audited during the last five years.



Delaware. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax,
but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.



Personnel



As of December 31, 2002, the Bank had 37 full-time and 11 part-time employees.



Statistical Information



The following tables contain directly, or through incorporation by reference, additional information concerning the business and operations of the Company and its subsidiary and should be read in
conjunction with the Consolidated Financial Statements of the Company and Managements Discussion and Analysis of Financial Condition and Results of Operations.





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Selected Financial
Condition, Operating and Other Data and Key Operating Ratios



The following tables set forth certain information concerning the consolidated financial condition, operating results and certain other related data of the Company at the dates and for the periods indicated.



|                                                                        |  | At December 31,                         
|----------------------------------------------------------------------- |  | ----------------------------------------
|                                                                        |  | 2002                                    
|Financial Condition Data                                                |  | (In thousands)                          
|Total assets                                                            |  | $                                       
|Loans receivable, net                                                   |  |                                         
|Cash and cash equivalents                                               |  |                                         
|Investment securities, available-for-sale                               |  |                                         
|Investment securities, held-to-maturity                                 |  |                                         
|Deposits                                                                |  |                                         
|Advances from Federal Home Loan Bank                                    |  |                                         
|Notes payable to banks                                                  |  |                                         
|Notes payable to directors                                              |  |                                         
|Agreement to repurchase securities                                      |  |                                         
|Preferred stock                                                         |  |                                         
|Total stockholders equity                                              |  |                                         
|Non performing assets                                                   |  |                                         
|Allowance for loan losses                                               |  |                                         
|                                                                       
|                                                                        |  | Year Ended December 31,                 
|                                                                        |  | 2002                                    
|Operating Data                                                          |  | (In thousands, except per share amounts)
|Interest income                                                         |  | $                                       
|Interest expense                                                        |  |                                         
|                                                                        |  |                                         
|Net interest income                                                     |  |                                         
|Provision for loan losses                                               |  |                                         
|                                                                        |  |                                         
|Net interest income (expense) after provision for loan losses           |  |                                         
|Noninterest income (expense)                                            |  |                                         
|Noninterest expense                                                     |  |                                         
|                                                                        |  |                                         
|Income (loss) before income taxes                                       |  |                                         
|Income tax (benefit) expense                                            |  |                                         
|                                                                        |  |                                         
|Net income (loss)                                                       |  |                                         
|Cumulative dividend arrearages and premium accretion on preferred stock |  |                                         
|                                                                        |  |                                         
|Basic income (loss) applicable to common shareholders                   |  | $                                       
|                                                                        |  |                                         
|Basic earnings (loss) per common share                                  |  | $                                       
|Diluted earnings (loss) per common share                                |  | $                                       
|Cash dividends per share:                                               |  |                                         
|Regular dividends                                                       |  | $                                       
|Special cash dividends                                                  |  |                                         
|                                                                        |  |                                         
|Total cash dividends                                                    |  | $                                       
|                                                                        |  |                                         
|                                                                       
|                                                                        |  | At December 31,                         
|                                                                        |  | 2002                                    
|Other Data                                                              |  | (In thousands)                          
|Real estate loans                                                       |  | $                                       
|Deposit accounts                                                        |  |                                         



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The table
below sets forth certain performance, asset quality and capital ratios of the Company at or for the periods indicated.



|                                                                                                                                    |  | At or For Year Ended December 31, |   
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | --
|                                                                                                                                    |  | 2002                              |   
|Performance ratios:                                                                                                                 |  |                                   |   
|Return on average assets [net income (loss) divided by average assets]                                                              |  | (0.35                             | )%
|Return on average stockholders equity [net income (loss) divided by average
equity]                                                |  | (40.65                            | ) 
|Dividend payout ratio [dividends declared per share divided by basic earnings (loss)]
per share:                                    |  |                                   |   
|Regular dividends                                                                                                                   |  | N/A                               |   
|Special cash dividends                                                                                                              |  | N/A                               |   
|Interest rate spread (difference between average yield on interest-earning assets and
average cost of interest-bearing liabilities) |  | 3.19                              |   
|Net interest margin (net interest income as a percentage of average interest-earning
assets)                                        |  | 3.09                              |   
|Non-interest expense to average assets                                                                                              |  | 4.25                              |   
|Average interest-earning assets to interest bearing liabilities                                                                     |  | 96.97                             |   
|                                                                                                                                   
|Asset quality ratios:                                                                                                               |  |                                   |   
|Allowance for loan losses to net loans at end of period                                                                             |  | 6.19                              |   
|Net chargeoffs to average outstanding loans during period                                                                           |  | 2.84                              |   
|Ratio of nonperforming assets to total assets at end of period                                                                      |  | 8.47                              |   
|                                                                                                                                   
|Capital ratios:                                                                                                                     |  |                                   |   
|Average stockholders equity to average assets during period                                                                        |  | 0.87                              |   



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Average Balance Sheets



The following table sets forth, for the
years and at the date indicated, information regarding the average balances of assets, liabilities and stockholders equity as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities. Average interest-earning assets and interest income include
Federal Home Loan Bank stock and related dividends for the indicated periods. Average balances for each period have been computed using average daily balances during such periods.



|                                                  |  | At December 31, 2002   |        |   | Year Ended December 31, |     
|------------------------------------------------- |  | ---------------------- | ------ | - | ----------------------- | ----
|                                                  |  |                        | 2002   |   |                         | 2001
|                                                  |  | Balance                |        |   | Yield/ Cost             |     
|                                                  |  | (Dollars in thousands) |       
|Interest-earning/dividend paying assets           |  |                        |        |   |                         |     
|Mortgage loans and contracts                      |  | $                      | 18,419 |   |                         | 6.77
|Other loans                                       |  |                        | 46,871 |   |                         | 6.92
|                                                  |  |                        |        |   |                         |     
|Total loans                                       |  |                        | 65,290 |   |                         | 6.88
|Investment securities                             |  |                        | 15,482 |   |                         | 4.34
|Federal funds sold                                |  |                        |       |   |                         |    
|FHLB overnight account and other                  |  |                        | 2,574  |   |                         | 1.00
|                                                  |  |                        |        |   |                         |     
|Total interest-earning assets                     |  |                        | 83,346 |   |                         | 6.22
|Federal Home Loan Bank stock                      |  |                        | 684    |   |                         | 5.00
|                                                  |  |                        |        |   |                         |     
|Total interest-earning and dividend paying assets |  |                        | 84,030 |   |                         | 6.21
|                                                  |  |                        |        |   |                         |     
|Non interest-earning/dividend paying assets       |  |                        |        |   |                         |     
|Cash and cash equivalents                         |  |                        | 4,437  |   |                         |     
|Non-accruing loans                                |  |                        | 6,841  |   |                         |     
|Other loan deductions                             |  |                        | (35    | ) |                         |     
|Loan loss reserve                                 |  |                        | (4,185 | ) |                         |     
|Premises and equipment                            |  |                        | 2,352  |   |                         |     
|Accrued interest receivable                       |  |                        | 593    |   |                         |     
|Income tax receivable                             |  |                        | 347    |   |                         |     
|Foreclosed real estate and other assets           |  |                        | 697    |   |                         |     
|Other assets                                      |  |                        | 275    |   |                         |     
|                                                  |  |                        |        |   |                         |     
|Total non interest-earning/dividend paying assets |  |                        | 11,322 |   |                         |     
|                                                  |  |                        |        |   |                         |     
|Total assets                                      |  | $                      | 95,352 |   |                         |     
|                                                  |  |                        |        |   |                         |     



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|                                                                                 |  | At December 31, 2002   |        |             | Year Ended December 31, |     
|-------------------------------------------------------------------------------- |  | ---------------------- | ------ | ----------- | ----------------------- | ----
|                                                                                 |  |                        | 2002   |             |                         | 2001
|                                                                                 |  | Balance                |        | Yield/ Cost |                         |     
|                                                                                 |  | (Dollars in thousands) |       
|Interest-bearing liabilities:                                                    |  |                        |        |             |                         |     
|Deposit accounts:                                                                |  |                        |        |             |                         |     
|Passbook/Statement savings accounts                                              |  | $                      | 10,556 |             | 0.45                    | %   
|NOW accounts                                                                     |  |                        | 6,765  |             | 0.30                    |     
|Money market deposit accounts                                                    |  |                        | 4,619  |             | 1.38                    |     
|Certificates of deposit                                                          |  |                        | 54,855 |             | 3.08                    |     
|                                                                                 |  |                        |        |             |                         |     
|Total interest-bearing deposits                                                  |  |                        | 76,795 |             | 2.37                    |     
|Other interest-bearing liabilities:                                              |  |                        |        |             |                         |     
|Advances from Federal Home Loan Bank of Atlanta                                  |  |                        | 5,738  |             | 5.68                    |     
|Agreement to repurchase securities                                               |  |                        |       |             |                        |     
|Other notes payable                                                              |  |                        | 2,000  |             | 5.75                    |     
|                                                                                 |  |                        |        |             |                         |     
|Total other interest-bearing liabilities                                         |  |                        | 7,738  |             | 5.70                    |     
|                                                                                 |  |                        |        |             |                         |     
|Total interest-bearing liabilities                                               |  |                        | 84,533 |             | 2.68                    |     
|                                                                                 |  |                        |        |             |                         |     
|Non interest-bearing liabilities:                                                |  |                        |        |             |                         |     
|Non interest-bearing deposit accounts                                            |  |                        | 4,253  |             |                         |     
|Other liabilities                                                                |  |                        | 232    |             |                         |     
|                                                                                 |  |                        |        |             |                         |     
|Total liabilities                                                                |  |                        | 89,018 |             |                         |     
|Preferred stock                                                                  |  |                        | 5,190  |             |                         |     
|Stockholders equity                                                             |  |                        | 1,144  |             |                         |     
|                                                                                 |  |                        |        |             |                         |     
|Total liabilities and stockholders equity                                       |  | $                      | 95,352 |             |                         |     
|                                                                                 |  |                        |        |             |                         |     
|Net interest income                                                              |  |                        |        |             |                         |     
|Interest rate spread                                                             |  |                        |        |             | 3.53                    | %   
|Net interest margin                                                              |  |                        |        |             | N/A                     |     
|Ratio of average interest-earning assets to average interest-bearing
liabilities |  |                        |        |             |                         |     



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Rate/Volume Analysis



The following table sets forth the effects
of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (ii) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate); (iii) changes in rate/volume (change in rate multiplied by change in volume); and (iv) the net change (the sum of the prior columns).



|                                                                       |  | 2002 Compared to 2001 Increase (Decrease) Due to |        |   | 2001 Compared to 2000 Increase (Decrease) Due to |  
|---------------------------------------------------------------------- |  | ------------------------------------------------ | ------ | - | ------------------------------------------------ | -
|                                                                       |  | Rate                                             |        |   | Volume                                           |  
|                                                                       |  | (In thousands)                                   |       
|Interest-earning/dividend paying assets:                               |  |                                                  |        |   |                                                  |  
|Mortgage loans                                                         |  | $                                                | (313   | ) |                                                  | $
|Other loans                                                            |  |                                                  | (534   | ) |                                                  |  
|                                                                       |  |                                                  |        |   |                                                  |  
|Total gross loans                                                      |  |                                                  | (847   | ) |                                                  |  
|Investment securities                                                  |  |                                                  | (81    | ) |                                                  |  
|Federal funds sold                                                     |  |                                                  |       |   |                                                  |  
|FHLB overnight account and other                                       |  |                                                  | (155   | ) |                                                  |  
|                                                                       |  |                                                  |        |   |                                                  |  
|Total net change in income on interest-earning assets                  |  |                                                  | (1,083 | ) |                                                  |  
|Federal Home Loan Bank stock                                           |  |                                                  | (27    | ) |                                                  |  
|                                                                       |  |                                                  |        |   |                                                  |  
|Total net change in income on interest-earning/ dividend paying assets |  |                                                  | (1,110 | ) |                                                  |  
|                                                                       |  |                                                  |        |   |                                                  |  
|Interest-bearing liabilities:                                          |  |                                                  |        |   |                                                  |  
|Deposits                                                               |  |                                                  | (2,035 | ) |                                                  |  
|Other interest-bearing liabilities                                     |  |                                                  | 4      |   |                                                  |  
|                                                                       |  |                                                  |        |   |                                                  |  
|Total net change in expense on interest-bearing liabilities            |  |                                                  | (2,031 | ) |                                                  |  
|                                                                       |  |                                                  |        |   |                                                  |  
|Net change in net interest income                                      |  | $                                                | 921    |   |                                                  | $
|                                                                       |  |                                                  |        |   |                                                  |  





18



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Interest Rate Sensitivity
Analysis



Interest rate risk
is the risk that future changes in interest rates will reduce the Companys net interest income and the market value of its portfolio equity. A movement in interest rates and the corresponding effect on net interest income may significantly
affect profitability. The degree of any potential consequences of such interest rate changes can be mitigated by maintaining a balance between interest rate sensitive assets and liabilities within given time frames.



The difference between assets and liabilities within a given
repricing period is expressed as a ratio and as a dollar amount known as the gap, both of which are used as a measure of interest rate risk. A ratio of 100% suggests a balanced position between rate sensitive assets and liabilities
within a given repricing period. The table below reflects the Companys interest rate sensitivity position both individually and within specified time periods and cumulatively, over various time horizons. In the table, assets and liabilities
are placed in categories based on their actual or expected repricing date. As indicated, at December 31, 2002, the ratio of rate-sensitive assets to rate-sensitive liabilities maturing or repricing within one year or less is (21)%, a negative one
year gap position. In a period of generally falling interest rates, this gap position will normally result in an increase in net interest income. Whereas, in a period of generally rising interest rates, this gap position will normally result in a
decrease in net interest income.



|                                                      |  | Repricing or Maturing Within |       
|----------------------------------------------------- |  | ---------------------------- | ------
|                                                      |  | 0-3 Months                   |       
|                                                      |  | (In thousands)               |       
|ASSETS                                                |  |                              |       
|FHLB overnight account                                |  | $                            | 2,574 
|Investment securities                                 |  |                              | 3,338 
|Loans held for sale                                   |  |                              | 271   
|Loans receivable                                      |  |                              | 21,928
|FHLB stock                                            |  |                              | 684   
|                                                      |  |                              |       
|Total interest-earnings assets                        |  | $                            | 28,795
|                                                      |  |                              |       
|                                                     
|LIABILITIES                                           |  |                              |       
|NOW accounts                                          |  | $                            | 6,765 
|Money market demand accounts                          |  |                              | 4,619 
|Passbook accounts                                     |  |                              | 8,313 
|Statement savings                                     |  |                              | 2,243 
|Certificates accounts                                 |  |                              | 8,102 
|FHLB advances                                         |  |                              | 5     
|Notes payable to banks                                |  |                              | 750   
|Notes payable to directors                            |  |                              |      
|                                                      |  |                              |       
|Total interest-bearing liabilities                    |  | $                            | 30,797
|                                                      |  |                              |       
|Period GAP                                            |  | $                            | (2,002
|Cumulative GAP                                        |  |                              | (2,002
|Cumulative as a percentage of interest-earning assets |  |                              | (2    
|                                                      |  |                              |       



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##### Table of Contents



Lending Activities



Loan Portfolio Analysis. The
following table sets forth the composition of the Banks loan portfolio as of the dates indicated.



|                                                       |  | At December 31,        |       
|------------------------------------------------------ |  | ---------------------- | ------
|                                                       |  | 2002                   |       
|                                                       |  | Amount                 |       
|                                                       |  | (Dollars in thousands) |       
|Mortgage loans:                                        |  |                        |       
|One-  to four-family residential(1)                    |  | $                      | 23,464
|Multi-family residential                               |  |                        | 3,445 
|Commercial                                             |  |                        | 18,234
|                                                       |  |                        |       
|Total non-construction mortgage loans                  |  |                        | 45,143
|                                                       |  |                        |       
|Construction loans:                                    |  |                        |       
|One-  to four-family residential                       |  |                        | 3,578 
|Multi-family residential                               |  |                        |      
|Commercial                                             |  |                        | 1,379 
|                                                       |  |                        |       
|Total construction loans                               |  |                        | 4,957 
|                                                       |  |                        |       
|Total mortgage loans                                   |  |                        | 50,100
|                                                       |  |                        |       
|Commercial loans                                       |  |                        | 11,941
|                                                       |  |                        |       
|Consumer loans:                                        |  |                        |       
|Home equity and second mortgage loans                  |  |                        | 6,275 
|Automobile loans                                       |  |                        | 1,230 
|Savings loans                                          |  |                        | 508   
|Other                                                  |  |                        | 2,381 
|                                                       |  |                        |       
|Total consumer loans                                   |  |                        | 10,394
|                                                       |  |                        |       
|Total loans                                            |  |                        | 72,435
|                                                       |  |                        |       
|Less:                                                  |  |                        |       
|Undisbursed loans in process                           |  |                        | 304   
|Unamortized loan origination fees, net of direct costs |  |                        | 35    
|Allowance for loan losses                              |  |                        | 4,185 
|                                                       |  |                        |       
|Loans receivable, net                                  |  | $                      | 67,911
|                                                       |  |                        |       

---

|(1) |  | Includes loans held for sale.
|--- |  | -----------------------------



20



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##### Table of Contents



Loan
Maturity. The following table sets forth scheduled contractual amortization of loans at December 31, 2002 and the dollar amount of such loans scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans, loans
having no stated schedule of repayments and no stated maturity and overdraft loans are reported as due in one year. All loans held for sale are also reported as due within one year.



|                                                   |  | At December 31, 2002
|-------------------------------------------------- |  | --------------------
|                                                   |  | Real Estate         
|                                                   |  | Mortgage Loans      
|                                                   |  | (In thousands)      
|Amounts due:                                       |  |                     
|Within one year(1)                                 |  | $                   
|After one year through three years                 |  |                     
|After three years through five years               |  |                     
|After five years                                   |  |                     
|                                                   |  |                     
|Total                                              |  | $                   
|                                                   |  |                     
|Interest rate terms on amounts due after one year: |  |                     
|Fixed                                              |  | $                   
|Adjustable                                         |  |                     

---

|(1) |  | Includes loans held for sale.
|--- |  | -----------------------------



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##### Table of Contents



Loan
Originations, Sales and Purchases. The following table sets forth total mortgage loans originated, purchased, sold and repaid during the years indicated.



|                                                    |  | Year Ended December 31, |        
|--------------------------------------------------- |  | ----------------------- | -------
|                                                    |  | 2002                    |        
|                                                    |  | (In thousands)          |        
|Total mortgage loans at beginning of period         |  | $                       | 65,972 
|                                                    |  |                         |        
|Loans originated:                                   |  |                         |        
|Single-family residential                           |  |                         | 28,811 
|Multi-family residential and commercial real estate |  |                         | 9,296  
|Construction loans                                  |  |                         | 2,283  
|                                                    |  |                         |        
|Total loans originated                              |  |                         | 40,390 
|                                                    |  |                         |        
|Loans purchased:                                    |  |                         |        
|Single-family residential                           |  |                         |       
|Other                                               |  |                         |       
|                                                    |  |                         |        
|Total loans purchased                               |  |                         |       
|                                                    |  |                         |        
|Total loans originated and purchased                |  |                         | 40,390 
|                                                    |  |                         |        
|Loans sold:                                         |  |                         |        
|Total whole loans sold                              |  |                         | 23,895 
|Total loans transferred in disposition of branches  |  |                         | 7,599  
|Other                                               |  |                         |       
|                                                    |  |                         |        
|Total loans sold                                    |  |                         | 31,494 
|Mortgage loan principal repayments                  |  |                         | 22,952 
|Other decrease                                      |  |                         | 1,816  
|                                                    |  |                         |        
|Total net loan decreases                            |  |                         | 56,262 
|                                                    |  |                         |        
|Net loan activity                                   |  |                         | (15,872
|                                                    |  |                         |        
|Total mortgage loans at end of period               |  | $                       | 50,100 
|                                                    |  |                         |        



For a discussion
regarding loans sold during 2002, see Item 6. Managements Discussion and Analysis or Plan of Operation.



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##### Table of Contents



Schedule of
Non-performing Assets. For the discussion and a table setting forth information with respect to the Banks nonperforming assets at the dates indicated, see Item 6. Managements Discussion and Analysis or Plan of Operation
 Schedule of Nonperforming Assets.



Allowance for Loan Losses. The following table sets forth an analysis of the Banks gross allowance for loan losses for the periods indicated. Where specific loan loss reserves have been established, any difference
between the loss reserve and the amount of loss actually realized has been charged or credited to current income.



|                                                                       |  | Year Ended December 31, |       
|---------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                       |  | 2002                    |       
|                                                                       |  | (Dollars in thousands)  |       
|Allowance at beginning of period                                       |  | $                       | 5,650 
|                                                                       |  |                         |       
|Provision for loan losses                                              |  |                         | 633   
|                                                                       |  |                         |       
|Recoveries:                                                            |  |                         |       
|Construction and land development                                      |  |                         |      
|Residential real estate                                                |  |                         | 148   
|Commercial real estate                                                 |  |                         | 50    
|Commercial business                                                    |  |                         | 573   
|Consumer and other                                                     |  |                         | 117   
|                                                                       |  |                         |       
|Total recoveries                                                       |  |                         | 888   
|                                                                       |  |                         |       
|Chargeoffs:                                                            |  |                         |       
|Construction and land development                                      |  |                         | (442  
|Farmland                                                               |  |                         |      
|Residential real estate                                                |  |                         | (412  
|Commercial real estate                                                 |  |                         | (37   
|Commercial business                                                    |  |                         | (1,931
|Consumer and other                                                     |  |                         | (164  
|                                                                       |  |                         |       
|Total chargeoffs                                                       |  |                         | (2,986
|                                                                       |  |                         |       
|Net chargeoffs                                                         |  |                         | (2,098
|                                                                       |  |                         |       
|Balance at end of period                                               |  | $                       | 4,185 
|                                                                       |  |                         |       
|Ratio of allowance to net loans outstanding at the end of the period   |  |                         | 6.19  
|Ratio of net chargeoffs to average loans outstanding during the period |  |                         | 2.84  





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##### Table of Contents



The following
table sets forth the Banks allowance for loan losses by loan category at the dates indicated.



|                                 |  | At December 31,        |      
|-------------------------------- |  | ---------------------- | -----
|                                 |  | 2002                   |      
|                                 |  | Amount                 |      
|                                 |  | (Dollars in thousands) |      
|Real estate mortgage loans:      |  |                        |      
|Residential                      |  | $                      | 615  
|Other                            |  |                        | 234  
|Consumer and commercial business |  |                        | 445  
|Impaired loans                   |  |                        | 1,287
|Unallocated                      |  |                        | 1,604
|                                 |  |                        |      
|Total allowance for loan losses  |  | $                      | 4,185
|                                 |  |                        |      



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##### Table of Contents



Investment
Activities.The following table sets forth the cost and market values of the investment securities portfolio available for sale at the dates indicated.



|                                       |  | At December 31,        |       
|-------------------------------------- |  | ---------------------- | ------
|                                       |  | 2002                   |       
|                                       |  | Amortized Cost         |       
|                                       |  | (Dollars in thousands) |       
|Corporate bonds                        |  | $                      |      
|U.S. government and agency obligations |  |                        | 5,600 
|Mortgage-backed securities             |  |                        | 9,769 
|                                       |  |                        |       
|Total                                  |  | $                      | 15,369
|                                       |  |                        |       

---

|(1) |  | Percentage of portfolio value computed based upon market value of securities.
|--- |  | -----------------------------------------------------------------------------



The following table sets forth the contractual maturities and weighted average yields of the investment
securities portfolio at December 31, 2002.



|                                                 |  | Carrying Value         |        | Weighted Average Yield |     
|------------------------------------------------ |  | ---------------------- | ------ | ---------------------- | ----
|                                                 |  | (Dollars in thousands) |       
|U.S. government and agency obligations:          |  |                        |        |                        |     
|Due after one year through five years            |  | $                      | 5,666  |                        | 3.36
|Mortgage-backed securities:                      |  |                        |        |                        |     
|Due after one year through five years            |  |                        | 101    |                        | 8.28
|Due in greater than five years through ten years |  |                        | 1,077  |                        | 4.72
|Due in greater than ten years                    |  |                        | 8,638  |                        | 5.29
|                                                 |  |                        |        |                        |     
|Total                                            |  | $                      | 15,482 |                        | 4.56
|                                                 |  |                        |        |                        |     



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##### Table of Contents



The following
table sets forth the cost and market values of the investment portfolio held to maturity at the dates indicated.



|                   |  | At December 31,        |  
|------------------ |  | ---------------------- | -
|                   |  | 2002                   |  
|                   |  | Amortized Cost         |  
|                   |  | (Dollars in thousands) |  
|GNMA certificates  |  | $                      | 
|FHLMC certificates |  |                        | 
|                   |  |                        |  
|Total              |  | $                      | 
|                   |  |                        |  

---

|(1) |  | Percentage of portfolio value computed based upon amortized cost of mortgage-backed securities.
|--- |  | -----------------------------------------------------------------------------------------------

|
|





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##### Table of Contents



Deposit Activities and
Other Sources of Funds



Jumbo Deposits.The following table indicates the amount of certificates of deposit and other deposits with balances of $100,000 or greater by time remaining until maturity as of December 31, 2002. Other deposits with balances of $100,000 or greater aggregated
$4.3 million, and have been shown in the following table as having maturities of three months or less.



|                            |  | Amount        
|--------------------------- |  | --------------
|                            |  | (In thousands)
|Maturity period:            |  |               
|Three months or less        |  | $             
|Three through twelve months |  |               
|Over twelve months          |  |               
|                            |  |               
|Total                       |  | $             
|                            |  |               





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##### Table of Contents



Deposit
Flow. The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated.



|                                       |  | At December 31,        |       
|-------------------------------------- |  | ---------------------- | ------
|                                       |  | 2002                   |       
|                                       |  | Amount                 |       
|                                       |  | (Dollars in thousands) |       
|Noncertificate of deposit accounts(1): |  |                        |       
|Noninterest-bearing                    |  | $                      | 4,253 
|NOW checking                           |  |                        | 6,765 
|Regular savings accounts               |  |                        | 8,313 
|Money market deposit                   |  |                        | 4,619 
|Statement savings                      |  |                        | 2,243 
|Certificates of deposit(2)(3):         |  |                        |       
|Fixed-rate certificates which mature:  |  |                        |       
|Within one year                        |  |                        | 40,744
|Within three years                     |  |                        | 8,825 
|After three years                      |  |                        | 5,286 
|                                       |  |                        |       
|Total                                  |  | $                      | 81,048
|                                       |  |                        |       

---

|(1) |  | Includes accounts with balances of $100,000 and greater of $4.3 million, $3.5 million and $6.0 million at December 31, 2002, 2001 and 2000, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes certificates of deposit with balances of $100,000 and greater of $10.1 million, $16.5 million and $19.7 million at December 31, 2002, 2001 and 2000,
respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes IRA accounts of $5.3 million, $7.0 million and $7.7 million at December 31, 2002, 2001 and 2000, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------



28



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##### Table of Contents



Time
Deposits by Rates. The following table sets forth time deposits classified by rates as of the dates indicated.



|                |  | At December 31,
|--------------- |  | ---------------
|                |  | 2002           
|                |  | (In thousands) 
|0.45  2.00%    |  | $              
|2.01  4.00%    |  |                
|4.01  5.00%    |  |                
|5.01  6.00%    |  |                
|6.01  7.00%    |  |                
|7.01 or greater |  |                
|                |  |                
|Total           |  | $              
|                |  |                



The
following table sets forth the amount and maturities of time deposits at December 31, 2002.



|                     |  | Amount Due             |       
|-------------------- |  | ---------------------- | ------
|Certificate Accounts |  | Less Than One Year     |       
|                     |  | (Dollars in thousands) |       
|0.45 2.00%          |  | $                      | 11,105
|2.01  4.00%         |  |                        | 25,302
|4.01  5.00%         |  |                        | 1,150 
|5.01  6.00%         |  |                        | 1,867 
|6.01  7.00%         |  |                        | 1,249 
|7.01  or greater    |  |                        | 71    
|                     |  |                        |       
|Total                |  | $                      | 40,744
|                     |  |                        |       



29



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##### Table of Contents

The following table sets forth the deposit activities of the Bank for the periods
indicated.



|                                      |  | Year Ended December 31, |        
|------------------------------------- |  | ----------------------- | -------
|                                      |  | 2002                    |        
|                                      |  | (In thousands)          |        
|Beginning balance                     |  | $                       | 118,664
|                                      |  |                         |        
|Net decrease before interest credited |  |                         | (40,212
|Interest credited                     |  |                         | 2,596  
|                                      |  |                         |        
|Net increase (decrease) in deposits   |  |                         | (37,616
|                                      |  |                         |        
|Ending balance                        |  | $                       | 81,048 
|                                      |  |                         |        



Borrowings.  The following table sets forth certain information regarding borrowings by the Company at the dates and for the periods indicated:



|                                                           |  | Year Ended December 31,
|---------------------------------------------------------- |  | -----------------------
|                                                           |  | 2002                   
|                                                           |  | (In thousands)         
|Maximum amount of borrowings outstanding at any month end: |  |                        
|FHLB advances                                              |  | $                      
|Securities sold under agreements to repurchase             |  |                        
|Other borrowings(1)                                        |  |                        

---

|(1) |  | Credit facilities from third party financial institutions and directors of the Company.
|--- |  | ---------------------------------------------------------------------------------------



30



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##### Table of Contents



Item 2.  Description of Property



The following table sets forth certain information regarding the Banks offices as of December 31, 2002. The net book value of the Banks investment in office, properties and equipment
totaled $2.4 million at December 31, 2002. The properties are adequately insured and all in good condition.



|Location                                        |  | County     |  | Year Opened |  | Building Owned/Leased |  | Land Owned/Leased |  | Building Square Footage
|----------------------------------------------- |  | ---------- |  | ----------- |  | --------------------- |  | ----------------- |  | -----------------------
|Main Office                                     |  |            |  |             |  |                       |  |                   |  |                        
|                                               
|102 South Court Street Florence, Alabama 35630  |  | Lauderdale |  | 1935        |  | Owned                 |  | Owned             |  | 45,000                 
|                                               
|Branch Offices                                  |  |            |  |             |  |                       |  |                   |  |                        
|                                               
|5287 Highway 72 Killen, Alabama 35645           |  | Lauderdale |  | 1977        |  | Owned                 |  | Owned             |  | 1,890                  
|                                               
|1027 Avalon Avenue Muscle Shoals, Alabama 35661 |  | Colbert    |  | 1990        |  | Owned                 |  | Owned             |  | 3,500                  



Item 3.  Legal Proceedings



Periodically, there have been various claims and lawsuits involving the Bank, mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues incident to the Banks business. The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings in the aggregate, are believed by management to be immaterial to the Companys financial condition or results of operations. See also, the discussion regarding the MOU and the Order under Risk
Factors  The Company is Restricted From Certain Activities Including Paying Dividends to Stockholdersand  The Bank Has Entered Into a Consent Order With Regulators which Restricts Its Operations and The Expense of
Compliance or Failure to Comply Could Have a Material Adverse Effect on the Company.



Item 4.  Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2002.



Additional Item.  Executive Officers



Executive officers who are also directors
are discussed in Part III, Item 9 hereof.



Additional executive officers of the Company are:



31



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##### Table of Contents



Roderick
V. Schlosser was appointed Executive Vice President and Chief Financial Officer of the Company effective July 1, 2002. From April 15, 2002 through June 30, 2002, Mr. Schlosser served as Chief Financial Officer of the Company and the Bank in
a consulting capacity, subject to regulatory non-objection which was received effective May 30, 2002. Mr. Schlosser is a certified public accountant who was with Secor Bank in Birmingham, Alabama from 1984 to 1991 during which time he served in
various positions including Executive Vice President and Chief Financial Officer. Mr. Schlosser worked for Martin Industries in Florence, Alabama from 1992 until 2001 and was promoted to Chief Financial Officer during his tenure there. Mr. Schlosser
served in a consulting capacity as Chief Financial Officer of Heritage Bank in Decatur, Alabama from 2001 until 2002.



Dennis Morgan was appointed Executive Vice President and Senior Lending Officer of the Company and the Bank on April 23,
2002. Mr. Morgan previously served in various commercial banking positions over the past 21 years with the local division of SunTrust Bank, the successor to the First National Bank of Florence. Most recently, Mr. Morgan served as the Senior Vice
President of SunTrust since 1996.



PART II



Item 5.  Market for Common Equity and Related Stockholder Matters





Effective April 24, 2002, the common stock of First Southern Bancshares, Inc. is listed over-the-counter
through the National Daily Quotation System Pink Sheets, published by the National Quotation Bureau, Inc. As of March 20, 2003, First Southern Bancshares, Inc. had 1,256,715 shares of common stock outstanding and 578 shareholders. The
number of shareholders does not include the number of persons or entities who hold the stock in nominee or street name.



Bancshares ability to pay dividend depends primarily upon the Banks ability to pay dividends. The Banks ability to pay
dividends is restricted by regulatory capital requirements, the required maintenance of a liquidation account established by First Federal Savings and Loan Association of Florence (which account was assumed by the Bank), and provisions of the
Alabama Banking Code. The Company has discontinued all dividend payments on common stock for the foreseeable future. See Note 14 to the Consolidated Financial Statements and Item 1. Description of Business 
Regulation and Supervision of the Company and the Bank  The Bank  Dividends.



32



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##### Table of Contents



The following
table sets forth per share market prices for each quarter during the period January 1, 2001 through and including April 23, 2002 (during which time the Companys common stock was listed on the Nasdaq National Market) and bid information
(obtained from third party market makers and reflects inter-dealer prices without retail mark-up, mark-down or commissions and may not represent actual transactions) for each quarter during the period April 24, 2002 through December 31, 2002 for the
Companys common stock and corresponding quarterly dividends period per share.



|               |  | Year Ended December 31, 2002
|-------------- |  | ----------------------------
|               |  | High                        
|First quarter  |  | $                           
|Second quarter |  |                             
|Third quarter  |  |                             
|Fourth quarter |  |                             
|              
|               |  | Year Ended December 31, 2001
|               |  | High                        
|First quarter  |  | $                           
|Second quarter |  |                             
|Third quarter  |  |                             
|Fourth quarter |  |                             



Item 6.  Managements Discussion and Analysis or Plan of Operation



General



First Southern Bancshares, Inc. (Bancshares, when referring to the holding company only) is primarily engaged in the business of directing and planning the activities of its wholly owned subsidiary, First Southern Bank.
Bancshares primary asset is comprised of its investment in the Bank. Bancshares and the Bank are collectively referred to herein as the Company.



The consolidated operating results of the Company include those of the Bank and Bancshares. All significant
intercompany transactions and balances have been eliminated in consolidation. The operating results of the Company depend primarily on net interest income, which is the difference between interest income on interest-earning assets, primarily loans
and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and advances from the FHLB and other financial institutions. Net earnings are also affected by non-interest income and non-interest expenses, such as
compensation and benefits, building and occupancy expense, and provisions for federal and state taxes.



The discussion and analysis included herein covers those material changes in financial condition, liquidity and capital resources that
have occurred since December 31, 2001, as well as certain material changes in results of operations during the year ended December 31, 2002 as compared to 2001.



33



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##### Table of Contents



FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES



General



As discussed in Risk Factors,
the Company has had a significant change in operating strategy and management since January 1, 2001. Primary emphasis was given to problem loan administration during 2001, which has continued into 2002. As a result of declining capital ratios, it
has been managements intent to reduce the overall size of the bank, raise additional capital and bring required capital ratios into compliance with the Order and regulatory guidelines.



Total assets decreased $35.8 million from $131.2 million at
December 31, 2001 to $95.4 million at December 31, 2002. The decrease in total assets is primarily the result of the sale of the assets and the transfer of certain liabilities of branch offices located at 2727 Mall Drive, Florence, Alabama and 102
Bank Street, Rogersville, Alabama. The transaction included the sale of $9.1 million in loans and the transfer of $9.7 million in cash and cash equivalents. During the year ended December 31, 2002, net loans decreased $22.8 million, investment
securities decreased $606,000, FHLB stock decreased $1.2 million, income tax receivable decreased $2.0 million, and cash and cash equivalents decreased $7.2 million.



Average earning assets decreased $32.1 million from $133.0 million for the year ended December 31, 2001 to
$100.9 million for the year ended December 31, 2002. As a financial institution, the Banks primary earning asset is loans. Average accruing loans were $73.7 million for the year ended December 31, 2002 as compared to $113.3 million for the
year ended December 31, 2001. Average accruing loans represented 73% of average earning assets for the year ended December 31, 2002.



Total liabilities decreased $36.5 million from $125.5 million at December 31, 2001 to $89.0 million at December 31, 2002. The sale of the
branch offices included the transfer of $20.7 million in deposits. During the year ended December 31, 2002, deposits decreased $37.6 million. The decrease in deposits was partially offset by borrowings of approximately $1.3 million from certain of
the Companys directors.



The following
sections provide a detailed analysis of the major components of the Consolidated Statements of Financial Condition.



Critical Accounting Policies



The accounting principles followed by the Company and the methods of applying these principles conforms with accounting principles
generally accepted in the United States and with general practices followed by the banking industry. Critical accounting policies relate to investments, loans, allowance for loan losses, income taxes and stock-based compensation. These policies,
which significantly affect the determination of financial position, results of operations and cash flows, are summarized in Note 1, Organization and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial
Statements in Exhibit 99(c) of this Annual Report on Form 10-KSB.



Cash and Cash Equivalents



Cash and cash equivalents at December 31, 2002 of $7.0 million, or 7.4% of total assets, decreased from $14.2 million, or 10.8% of total assets, at December 31, 2001. The Banks interest bearing balances of cash and cash
equivalents decreased by $7.2 million during the year ended December 31, 2002, from $9.8 million at December 31, 2001 to $2.6 million at December 31, 2002. Interest bearing balances consist of FHLB overnight account balances.



The changes in the sources and uses of cash related to
operating, investing and financing activities are disclosed in the Companys Consolidated Statements of Cash Flows in Item 7 hereof.



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Investment Securities



Investment securities available for sale
increased $2.6 million from $12.9 million at December 31, 2001 to $15.5 million at December 31, 2002. The $2.6 million increase was the result of purchases of $10.4 million, a $297,000 increase in estimated fair values, and $211,000 in transfers
from the held to maturity portfolio. These increases in investment securities available for sale were partially offset by proceeds from sales and maturities of $6.5 million and paydowns on mortgage-backed securities of $1.8 million. The Company
recorded gains of $57,000 on the sale of investment securities available for sale.



Investment securities held to maturity decreased $3.2 million from $3.2 million at December 31, 2001 to $0 at December 31, 2002. The $3.2 million decrease in investment securities held to maturity was
the result of proceeds from paydowns and a call on mortgage-backed securities of $3.1 million. Transfers to the available to sale portfolio of $211,000 also contributed to the decrease. The Company recorded gains of $59,000 resulting from a premium
on the call of a mortgage-backed security.



Loans



The primary investing activity of the
Company is the origination of residential mortgage loans, commercial business and real estate loans, multi-family mortgage loans and consumer loans in its primary lending area of Lauderdale and Colbert Counties, and surrounding counties located in
Northwest Alabama.



As discussed in Risk
Factors, the Company has had a significant change in operating strategy and management since January 1, 2001. Primary emphasis was given to problem loan administration during 2001, which has continued into 2002. As a result of declining
capital ratios, it has been managements intent to reduce the overall size of the bank, raise additional capital and bring required capital ratios into compliance with the Order and regulatory guidelines. Therefore, the loan portfolio decreased
significantly during 2001 from $91.2 million at December 31, 2001 to $67.9 million at December 31, 2002.



For a table setting forth the information with respect to the composition of the Companys loan portfolio for the last three years
seeItem 1. Description of BusinessLending Activities.



Total mortgage loans have declined $15.9 million to $50.1 million at December 31, 2002, from $66.0 million at December 31, 2001 as a result of payoffs, regular payments, charge-offs, transfers to real
estate owned, and loan sales in connection with the sale of two branch offices. The decline in residential mortgage loans continues to be impacted by refinances due to low market rates. Although the Company directly originates residential mortgage
loans, the majority of these loans have been sold in the secondary mortgage market as they are low, fixed rate, long-term loans. In managing the interest rate risk of the Bank, these loans are generally not desirable for the Banks portfolio.
The Company does consider adjustable rate residential mortgage loans desirable; however, current market conditions have not generated a significant demand in the origination of this type of loan.



The Companys combined commercial and consumer loan
portfolio declined $9.5 million to $22.3 million at December 31, 2002 from $31.8 million at December 31, 2001. This decline is primarily the result of increased emphasis on collection efforts and credit quality on commercial business loans and
consumer loans resulting in repayments, payoffs as a result of refinancing at other institutions and problem loan charge-offs. Loan sales in connection with the sale of two branch offices also contributed to the decrease. As noted previously, it is
not managements intention to curtail lending to the commercial business and consumer market sectors. However, the focus since January 1, 2001 has been on improving credit quality, granting primary attention to the existing portfolio and
reevaluating policies and procedures rather than soliciting new business. As a result, new loan business has not offset the level of repayments.



As discussed in Risk Factors, the Board has hired an Executive Vice President and Senior Lending Officer and the Bank expects
to increase loan originations and business development in future periods.





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At December
31, 2002, the Company has no significant commitments to originate fixed-rate, portfolio loans. At December 31, 2002, the Company had commitments to originate variable rate loans, including unused commercial business and consumer lines of credit, and
standby letters of credit as follows (dollars in thousands):



|Commitments to extend credit |  | $ | 304  
|---------------------------- |  | - | -----
|Unused lines of credit       |  | $ | 4,062
|Standby letters of credit    |  | $ |     



Non-performing Assets



Non-performing assets include loans
classified as non-accrual, loans contractually past due 90 days or more and foreclosed real estate and other repossessed assets. The Companys policy is to classify loans as non-accrual and stop accruing interest when a loan is 90 days
delinquent as to principal or interest unless collection of both is assured by collateral, guarantees or other security. Non-accruing loans are reviewed for impairment, and the Company has identified impaired loans based on estimated net realizable
value and provided for possible loan loss allowances as discussed in Allowance for Loan LossesandComparison of Operating Results For the Years Ended December 31, 2002 and 2000Provision for Loan
Losses below.



Accruing loans
contractually past due 90 days or more are primarily comprised of residential and non-residential mortgage loans. The collateral on such loans is generally based on 75% to 90% of appraised or estimated fair value, and collection efforts are ongoing.
Management participates in the monitoring of these loans and at such time as full collection of principal and interest is in doubt, the loans are classified as non-accrual and evaluated for impairment.



The following table sets forth non-performing assets at the
dates indicated:



|                                                                  |  | At December 31,        |      
|----------------------------------------------------------------- |  | ---------------------- | -----
|                                                                  |  | 2002                   |      
|                                                                  |  | (Dollars in thousands) |      
|Loans accounted for on a nonaccrual basis(1):                     |  |                        |      
|Real estate:                                                      |  |                        |      
|1-4 unit residential                                              |  | $                      | 1,076
|Farmland                                                          |  |                        | 17   
|Commercial                                                        |  |                        | 1,978
|Construction and land development                                 |  |                        | 1,825
|Commercial business                                               |  |                        | 1,896
|Consumer                                                          |  |                        | 49   
|                                                                  |  |                        |      
|Total                                                             |  |                        | 6,841
|                                                                  |  |                        |      
|Accruing loans which were contractually past due 90 days or more: |  |                        |      
|Real estate:                                                      |  |                        |      
|1-4 unit residential                                              |  |                        | 418  
|Commercial                                                        |  |                        | 17   
|Construction and land development                                 |  |                        |     
|Commercial business                                               |  |                        |     
|Consumer                                                          |  |                        | 100  
|                                                                  |  |                        |      
|Total                                                             |  |                        | 535  
|                                                                  |  |                        |      
|Total of nonaccrual and 90 days past due loans                    |  |                        | 7,376
|Foreclosed real estate and other assets                           |  |                        | 697  
|                                                                  |  |                        |      
|Total non-performing assets                                       |  | $                      | 8,073
|                                                                  |  |                        |      
|Total loans delinquent 90 days or more to net loans               |  |                        | 10.90
|Total loans delinquent 90 days or more to total assets            |  |                        | 7.74 
|Total non-performing assets to total assets                       |  |                        | 8.47 







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|(1) |  | At the dates indicated, the Bank had no restructured loans within the meaning of Statement of Financial Accounting Standards (SFAS) No. 15. At December
31, 2002, the Bank had impaired loans within the meaning of SFAS No. 114 amounting to $6.8 million. With regard to non accrual, restructured and impaired loans, the gross interest income that would have been recorded in the year ended December 31,
2002, if the loans had been current in accordance with their terms and had both outstanding during the year or since origination, if held for part of period, is estimated by management to be $612,000. The amount of interest income on those loans
that was included in net income for the period is $26,000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total non-performing assets decreased by $6.8 million during the year ended December 31, 2002 from $14.8 million at December 31, 2001 to $8.1 million at December 31, 2002. Non-accrual loans accounted for $5.4 million of this
decrease while accruing loans which are contractually past due 90 days or more accounted for $860,000 of the decrease. Foreclosed real estate and other assets decreased $537,000 during the year ended December 31, 2002 from $1.2 million at December
31, 2001 to $697,000 at December 31, 2002. This decrease is primarily attributable to a net decrease in foreclosed real estate of $689,000 and a decrease in repossessed assets of $8,000 during the year ended December 31, 2002. At December 31, 2002,
foreclosed real estate of $697,000 consists of 15 parcels of residential property and two parcels of commercial real estate. At December 31, 2002, the Company did not have any repossessed assets.



Included in non-performing assets are $6.8 million of impaired
loans at December 31, 2002 compared to $12.8 million at December 31, 2001. The reduction is primarily the result of significant payments on eight different relationships that totaled $3.2 million. The reduction is also attributable to several loans
being foreclosed and transferred to real estate owned. Impaired loans that were foreclosed totaled $755,000. In addition, three loans totaling $568,000 that were considered impaired at December 31, 2001 were returned to accruing status. Also, three
commercial relationships totaling $1.6 million that were considered impaired at December 31, 2001 were charged off during the second and third quarters of 2002. There was approximately $1.3 million at December 31, 2002 in the allowance for loan
losses specifically allocated to impaired loans versus $2.7 million at December 31, 2001.



Allowance for Loan Losses



When determining the adequacy of the allowance for loan losses, management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, regulatory classification of assets,
historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific borrowers or industries, existing and prospective economic conditions, and other factors. The allowance for loan losses decreased $1.5
million during the year ended December 31, 2002 to $4.2 million at December 31, 2002 from $5.7 million at December 31, 2001. The allowance for loan losses represented 6.2% and 6.2% of net loans receivable at December 31, 2002 and December 31, 2001,
respectively. (See further discussion in Provision for Loan Losses below.)



In the opinion of management, the allowance for loan losses was adequate at December 31, 2002, to provide for potential loan losses in the loan portfolio at that date. Management is concerned about the
further impact a decline in the local economy could have upon the Banks ability to improve the quality of its loan portfolio. While management believes it has established its existing allowance for loan losses in accordance with generally
accepted accounting principles, there can be no assurance that the Bank will not be required to increase or decrease the allowance in the future. Increases could have a material adverse affect on the Banks financial condition and results of
operations. Losses ultimately confirmed will vary from original estimates and adjustments, as necessary, are made in the period in which these factors and other considerations become known.



For a table setting for the information with respect to the
Companys allowance for loan losses for the last five years see Item 1. Description of Business  Lending Activities.



Deposits, FHLB Advances and Other Notes Payable



Deposit balances decreased $37.7 million from $118.7 million at December 31, 2001 to $81.0 million at December 31, 2002. The $37.7 million
decrease during year ended December 31, 2002 includes $20.7 million in



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deposits transferred as the result of the sale of the assets and the transfer of certain related liabilities of two branch offices during the
third quarter of 2002. Prior to May 2002, management set rates on savings certificates lower than much of the competition in an effort to reduce the size of the Company, improve the Companys cost of funds for deposits and maximize the use of
excess cash held in the FHLB overnight account. As a result, the Companys savings certificates decreased $11.1 million during the six months ended June 30, 2002 from $82.4 million at December 31, 2001 to $71.3 million at June 30, 2002.
Beginning in May of 2002, management set more competitive rates and offered special term certificates to stabilize the deposit base. As a result, the Companys savings certificates decreased only $2.1 million, net of the $14.3 million
transferred as a result of the sale of two branches, from $71.3 million at June 30, 2002 to $54.9 million at December 31, 2002. Demand accounts decreased $10.1 million from $36.3 million at December 31, 2001 to $26.2 million at December 31, 2002.
The $10.1 million decrease includes $6.4 million transferred as a result of the sale of two branches. The interest rate paid on the average balance of interest-bearing deposits decreased from 4.77% for the year ended December 31, 2001 to 3.05% for
the year ended December 31, 2002.



At December
31, 2002, savings certificates amounted to $54.9 million, or 67.7% of the Companys total deposits, including $40.7 million that were scheduled to mature in 2003. Management of the Company believes it has adequate resources to fund all loan
commitments with savings deposits, available FHLB overnight account funds and that it can adjust the offering rates of savings certificates to retain deposits in changing interest rate environments.



The Companys borrowings from the FHLB decreased $124,000
from $5.9 million at December 31, 2001 to $5.7 million at December 31, 2002. Notes payable to banks remained constant at $750,000 for the year ended December 31, 2002. During 2002, the Company recorded $1.3 million in notes payable as a result of
loans to the Company from certain directors of the Company. The Company contributed $1.0 million of the loan proceeds to the capital of the Bank and the remainder was used for debt service and general corporate purposes.



The borrowing ability of the Company (but not the Bank) is
restricted under the MOU. See Risk FactorsThe Company Is Restricted From Certain Activities Including Paying Dividends to Stockholders.



Stockholders Equity



Stockholders equity decreased $106,000 from $1.2 million at December 31, 2001 to $1.1 million at December 31, 2002. The decrease in
stockholders equity was primarily the result of the $701,000 non-cash charge to retained earnings to record the accretion of redeemable preferred stock, including cumulative but unpaid dividends and incentive payments. This decrease in
stockholders equity was offset by a net operating profit of $290,000, a $297,000 net unrealized gain on securities available for sale and $8,000 related to the issuance of stock warrants.



Capital is the primary tool used by regulators to monitor the
financial health of insured banks and savings institutions. The Federal Reserve Board and the Federal Deposit Insurance Corporation have historically had similar capital adequacy guidelines involving minimum leverage capital and risk-based capital
requirements. Federal Reserve Board regulations evaluate Bancshares capital compliance on a bank-only basis because Bancshares has total consolidated assets of less than $150 million. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Based on the risk-based capital rules and definitions prescribed by the banking regulators, should
an institutions capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions.



The Company and the Bank are subject to certain regulatory capital requirements. As a result of the MOU with the Federal Reserve Bank, the
Company has adopted a capital restoration plan and capital and dividend policy. The Company is required to submit quarterly progress reports to the Federal Reserve. The MOU will remain in effect until modified or terminated by the Federal Reserve.
As a result of the Consent Order with the FDIC and the Alabama State Banking Department, which became effective March 25, 2002, the Banks Tier 1 capital was required to equal or exceed 5.00% of total assets within 60 days from the effective
date of the Order. Within 120 days of the effective date of the



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Order and for as long as the Order remains in effect, the Banks Tier 1 capital must equal or exceed 7.00% of total assets. The Bank
must develop and adopt a plan designed to meet and maintain the FDICs minimum risk-based capital requirements for each year in which the plan is in effect.



At December 31, 2002, the Banks regulatory capital ratios were as follows:



|                                                                            |  | Amount                 |       | Percentage of adjusted total assets |      
|--------------------------------------------------------------------------- |  | ---------------------- | ----- | ----------------------------------- | -----
|                                                                            |  | (Dollars in thousands) |       |                                     |      
|First Southern Bank:                                                        |  |                        |       |                                     |      
|                                                                           
|Total capital (to risk-weighted assets)                                     |  | $                      | 9,002 |                                     | 13.37
|To be well capitalized under the FDICIA prompt corrective action
provisions |  |                        | 6,732 |                                     | 10.00
|                                                                            |  |                        |       |                                     |      
|                                                                           
|Excess                                                                      |  | $                      | 2,270 |                                     | 3.37 
|                                                                            |  |                        |       |                                     |      
|Tier 1 Capital (to risk-weighted assets)                                    |  | $                      | 8,120 |                                     | 12.06
|To be well capitalized under the FDICIA prompt corrective active
provisions |  |                        | 4,039 |                                     | 6.00 
|                                                                            |  |                        |       |                                     |      
|Excess                                                                      |  | $                      | 4,081 |                                     | 6.06 
|                                                                            |  |                        |       |                                     |      
|                                                                           
|Tier 1 Capital (to average assets)                                          |  | $                      | 8,120 |                                     | 8.37 
|To be well capitalized under the FDICIA prompt corrective action
provisions |  |                        | 4,853 |                                     | 5.00 
|                                                                            |  |                        |       |                                     |      
|Excess                                                                      |  | $                      | 3,267 |                                     | 3.37 
|                                                                            |  |                        |       |                                     |      



To be
well capitalized, the Bank must maintain the capital ratios as set forth in the preceding table and not be subject to a capital order. As of December 31, 2002, the Bank would have been categorized as well capitalized under applicable
regulatory guidelines but for the Order as previously discussed. However, as of December 31, 2002, the Bank is in compliance with the Orders requirement of Tier 1 capital equal to or in excess of 7.00% and meets the minimum risk-based
standards.



Liquidity



The Bank must maintain an adequate level of liquidity to
ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. The Banks primary sources of funds are deposits and proceeds from
principal and interest payments on loans, mortgage backed securities and investment securities. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic conditions and competition.



Additionally, Bancshares requires cash for various operating needs including debt service and general corporate expenses. The primary
source of liquidity for Bancshares is borrowings from various sources. As discussed in Risk Factors section, the Bank is restricted from paying any dividends to Bancshares without prior written consent from the Regulators under terms of
the Order. Additionally, Bancshares is restricted from borrowing without special regulatory approval under terms of the MOU. As a result, liquidity at the holding company level could become insufficient to support Bancshares need for funds.



During the fourth quarter of 2002, the Bank
received written consent from the Regulators and paid a $200,000 dividend to Bancshares. Bancshares expects to use the proceeds for interest payments on debt and other corporate expenses through the first half of 2003.



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The
Banks FHLB credit availability program, which has a credit limit of 10% of the Banks assets, requires all existing debt and any future borrowings from the FHLB be collateralized by the physical transfer of the requisite percentage of
qualifying mortgage loans or eligible investment securities to the FHLB. Credit availability is limited to 85% of the fair value of qualifying mortgage loans and 97% of the fair value of investment securities held as collateral. FHLB deposits may
also secure FHLB borrowings. The requirement to pledge qualifying mortgages or investment securities for any additional borrowings from the FHLB limits the Companys short-term liquidity. The Companys liquidity requirements primarily rely
on the management of cash, deposits, sale of investments or other borrowings. At December 31, 2002, the Bank has pledged investment securities with a market value of $6.3 million to the FHLB to collateralize outstanding advances of $5.7 million.



The Companys liquid assets, excluding
pledged securities, decreased from $24.1 million, or 18.3% of total assets, at December 31, 2001 to $15.6 million, or 16.4% of total assets, at December 31, 2002. It is Managements policy to maintain sufficient liquid assets to cover all
foreseeable demands on cash.



In addition to the
liquidity issues discussed above, as an insured institution as described in the Federal Deposit Insurance Act, the Bank is required to maintain cash reserves under guidelines established by the Federal Reserve. Depository institutions,
as defined by the Federal Reserve, are required to maintain cash reserves for the purpose of facilitating the implementation of monetary policy of the Federal Reserve System. At December 31, 2002, the Banks qualifying funds of $805,000
exceeded the required reserve of $95,000.



COMPARISON OF OPERATING RESULTS FOR THE

YEARS ENDED DECEMBER 31, 2002 AND 2001



General



Consolidated net income before effect of cumulative dividends and premium accretion on preferred stock for
the year ended December 31, 2002 was $290,000 as compared to a net loss of $7.9 million for the year ended December 31, 2001. Consolidated net loss applicable to common shareholders for the year ended December 31, 2002 was $411,000 as compared to a
net loss of $7.9 million for the comparable period in 2001. Basic and diluted loss per common share for the year ended December 31, 2002 was $0.33 as compared to a basic and diluted loss per common share of $6.26 for the year ended December 31,
2001.



The following sections provide a detailed
analysis of the major components of the Consolidated Statements of Operations.



Net Interest Income



Net
interest income for the year ended December 31, 2002 was $3.1 million, a $670,000 decrease as compared to $3.8 million for the year ended December 31, 2001. The decrease in interest income on earning assets of $3.7 million exceeded the benefit of
the $3.1 million decrease in interest expense on deposits and borrowings for the period.



The net interest margin increased from 2.85% for year ended December 31, 2001 to 3.09% for 2002.



Interest Income



Interest income for the year ended December 31, 2002 was $6.5 million compared to $10.2 million for the year ended December 31, 2001,
representing a decrease of $3.7 million or 36.5%. The decrease was primarily attributable to the $32.1 million decrease in average interest-earning assets from $133.0 million for the year ended December 31, 2001 to $100.9 million for the comparable
period in 2002. Also contributing to the decrease in interest income was a decrease in the average yield on interest-earning assets from 7.70% for the year ended December 31, 2001 to 6.45% for the year ended December 31, 2002. The lower yield is the
result of lower market interest rates attributable to the late 2001 and 2002 rate reductions by the Federal Reserve Bank and a reduction in earning loans as a percentage of total earning assets.



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Interest on
loans receivable decreased $3.8 million from $9.3 million for the year ended December 31, 2001 to $5.5 million for the year ended December 31, 2002. The decrease is primarily due to the $39.6 million decrease in the average balance of total accruing
loans from $113.3 million for the year ended December 31, 2001 to $73.7 million for the comparable period in 2002. The average yield on total accruing loans decreased from 8.24% for year ended December 31, 2001 to 7.49% for the comparable period in
2002.



Interest on investment securities
increased $264,000 from $442,000 for the year ended December 31, 2001 to $706,000 for the comparable period in 2002. The increase is the result of the average balance of investment securities increasing $7.1 million from $7.4 million for the year
ended December 31, 2001 to $14.5 million for the year ended December 31, 2002. The average yield on investment securities decreased from 5.96% for the year ended December 31, 2001 to 4.87% for the comparable period in 2002.



Other interest income includes earnings on the overnight
account at the FHLB of Atlanta, FHLB stock dividends and earnings on fed funds sold. The $187,000 decrease in other interest income from $463,000 for the year ended December 31, 2001 to $276,000 for the year ended December 31, 2002 is due primarily
to decreases in the average yields on FHLB stock and FHLB overnight account balances. The average yield on FHLB overnight account balances and fed funds sold decreased from 3.21% for the year ended December 31, 2001 to 1.73% for the comparable
period in 2002.



Interest Expense



Interest expense for the year ended December 31, 2002 was $3.4
million compared to $6.5 million for the year ended December 31, 2001, representing a decrease of $3.1 million, or 47.4%.



Interest on deposits decreased $2.7 million from $5.6 million for the year ended December 31, 2001 to $2.9 million for year ended December
31, 2002. The average balance of interest-bearing deposits decreased $21.8 million from $118.2 million for the year ended December 31, 2001 to $96.4 million for the comparable period in 2002. The average cost of interest-bearing deposits decreased
from 4.77% for the year ended December 31, 2001 to 3.05% for the comparable period in 2002.



Interest expense on FHLB advances and other borrowings decreased $365,000 to $453,000 for the year ended December 31, 2002 as compared to $818,000 for the year ended December 31, 2001. The average
balance of FHLB advances and other borrowings decreased $6.2 million from $13.8 million for the year ended December 31, 2001 to $7.6 million for the year ended December 31, 2002. The average cost of FHLB advances and other borrowings increased from
5.92% for the year ended December 31, 2001 to 5.95% for the comparable period in 2002.



Provision for Loan Losses



The provision for loan losses is the cost of providing for anticipated future losses on loans. The amount depends upon many factors including loan growth, net charge-offs, changes in composition of the loan portfolio, delinquencies,
managements assessment of loan portfolio quality, the value of collateral and general economic factors.



The identification of problem loans within the Banks portfolio began with an internal investigation starting in the third quarter of
2000. Adversely classified assets have decreased from $27.9 million, or 21.2% of total assets at December 31, 2001 to $15.5, or 16.3% of total assets at December 31, 2002. Management continues to address the significant amount of problem loans.
Although the Board and Management believe that the most significant problems have been identified and inherent risks have been adequately assessed, the possibilities exist for substantial write-downs, charge-offs and transfer of currently performing
real estate and commercial loans to a non-accrual status. Management is concerned about the further impact that a decline in the local economy may have upon the Banks ability to improve the quality of its loan portfolio.



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Management
recorded a provision for loan losses of $633,000 for the year ended December 31, 2002 as compared to $5.9 million for the year ended December 31, 2001. The $5.3 million decrease in the provision for the 2002 period is directly attributable to the
significant decrease in adversely classified assets in 2002 and the decrease in net charge-offs. Net charge-offs decreased from $5.4 million for the year ended December 31, 2001 to $2.1 million for the comparable period in 2002.



Non-interest Income



Non-interest income increased $2.6 million from an expense of
$170,000 for the year ended December 31, 2001 to $2.5 million for the year ended December 31, 2002. The increase in non-interest income was primarily attributable to the sale of the assets and the transfer of certain liabilities of two branch
offices. The sale resulted in a premium on transfer of deposits of $1.4 million, a net gain on the sale of fixed assets of $255,000, and a net gain on the sale of loans of $10,000. Loan fees and service charges increased $96,000 from $704,000 for
the year ended December 31, 2001 to $800,000 for the comparable period in 2002. Net gains on sale of investments increased $122,000 from a loss on sale of $6,000 for the year ended December 31, 2001 to a gain on sale of $116,000 for the comparable
period in 2002. A $873,000 decrease in net losses on the sale of real estate owned from a net loss of $1.0 million for the year ended December 31, 2001 to a net loss of $141,000 for the year ended December 31, 2002 also contributed to the increase
in non-interest income.



Non-interest Expense



Non-interest expense decreased $645,000 from
$5.6 million for year ended December 31, 2001 to $4.9 million for year ended December 31, 2002. Insurance expense increased $75,000 from $237,000 for the year ended December 31, 2001 to $312,000 for the comparable period in 2002 due to increased
FDIC insurance premiums. The FDIC assesses insurance premiums to each institution based both on the balance of insured deposits held during the previous two quarters as well as on the degree of risk the institution poses to the insurance fund. FDIC
insurance premiums totaled $250,000 for the year ended December 31, 2002 as compared to $172,000 for the same period in 2001. This increase in non-interest expense was more than offset by decreases in compensation and employee benefits, building and
occupancy expense, data processing expense, advertising expense, and other non-interest expense. Other non-interest expenses decreased $509,000 from $1.7 million for the year ended December 31, 2001 to $1.1 million for the comparable period in 2002.
Other non-interest expense decreased as a result of decreases in FHLB advance prepayment penalties, professional fees and other loan expenses. Other non-interest expense for the year ended December 31, 2001 included $276,000 in FHLB advance
prepayment penalties as compared to no prepayment penalties for the comparable period in 2002.



Income Taxes



The Company recorded an income tax benefit for the year ended December 31, 2002 of $272,000 as compared to an income tax provision of $12,000 for the year ended December 31, 2001. The income tax provision of $12,000 on a
pre-tax loss of $7.9 million for the year ended December 31, 2001 resulted primarily from the creation of a valuation allowance for the Banks net deferred tax assets that more than offsets the carryback benefits available for 2001. The 2002
benefit of $272,000 on a pre-tax income of $18,000 reflects the effect of permanent book/tax differences and the exclusion of the effect of deferred items on the income tax provision for the period. As discussed earlier, a valuation allowance for
all of the Companys net deferred tax assets remains in place as of December 31, 2002. As a result, the income tax benefit for the year ended December 31, 2002, reflects the Federal loss carryback benefit available from 1999 for the 2002 loss
for tax purposes.



Cumulative Dividends and Premium Accretion



The Company recorded $701,000 in cumulative
dividends and premium accretion related to the redeemable preferred stock outstanding during the year ended December 31, 2002. The $701,000 charge to retained earnings for the year ended December 31, 2002 included cumulative but unpaid dividends of
$255,000, premium accretion of $125,000, and accrued incentive payments of $321,000.



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Item 7.  Financial Statements



The consolidated financial statements are incorporated by reference into this Form 10-KSB from the following pages of Exhibit 99 of this Form 10-KSB. All schedules have been omitted as the required information is either
inapplicable or contained in the Consolidated Financial Statements or related Notes.



Independent Auditors Report of Kraft Bros., Esstman, Patton & Harrell, PLLC

Consolidated Statements of Financial Condition, December 31, 2002 and 2001

Consolidated Statements of
Operations For the Years Ended December 31, 2002 and 2001

Consolidated Statements of Shareholders Equity For the Years
Ended December 31, 2002 and 2001

Consolidated Statements of Cash Flows For the Years Ended December 31, 2002 and 2001

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 accountants on accounting and financial disclosure that have not been previously
reported by the Company.



PART III



Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act



The information contained under the section captioned Proposal 1  Election of
Directors in the Proxy Statement is incorporated herein by reference. For information concerning the executive officers of the Bank, see Item I  Description of Business  Executive Officers. The information
contained under the section captioned Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement is incorporated herein by reference.



Item 10.  Executive Compensation



The information contained under the section captioned Proposal 1  Election of Directors in the Proxy Statement is incorporated herein by reference.



Item 11.  Security Ownership of Certain Beneficial Owners and Management



| | (a) |  | Security Ownership of Certain Beneficial Owners
| | --- |  | -----------------------------------------------



Information required by this item is incorporated herein by reference to the section captioned Stock Ownership of the
Proxy Statement.



| | (b) |  | Security Ownership of Management
| | --- |  | --------------------------------



Information required by this item is incorporated herein by reference to the sections captioned Stock Ownership of the
Proxy Statement.



| | (c) |  | Changes in Control
| | --- |  | ------------------



The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may
at a subsequent date result in a change in control of the Company.



| | (d) |  | Securities Authorized for Issuance Under Equity Compensation Plans
| | --- |  | ------------------------------------------------------------------



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|                                                           |  | Number of securities to be issued upon exercise of
outstanding options, warrants and rights (a) |  | Weighted-average exercise price of outstanding
options, warrants and rights (b) |      | Number of securities remaining available for future
issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|                                                          
|Equity compensation plans approved by security holders     |  | 127,498                                                                                         |  | $                                                                               | 4.78 |                                                                                                                                                
|                                                          
|Equity compensation plans not approved by security holders |  | 50,000                                                                                          |  | $                                                                               | 1.00 |                                                                                                                                                
|                                                          
|Total                                                      |  | 177,498                                                                                         |  | $                                                                               | 3.71 |                                                                                                                                                



Item 12.  Certain Relationships and Related Transactions



The information required by this item is incorporated herein by reference to the section captioned Proposal I  Election of
Directors and Transactions With Management of the Proxy Statement.



PART IV



Item 13.  Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| | 3(a) |  | Certificate of Incorporation of the Company(1)
| | ---- |  | ----------------------------------------------

| | 3(b) |  | Certificate of Amendment of Certificate of Incorporation(2)
| | ---- |  | -----------------------------------------------------------

| | 3(c) |  | Bylaws of the Company(1)
| | ---- |  | ------------------------

| | 3(d) |  | Amendment to Bylaws, dated September 10, 1998(3)
| | ---- |  | ------------------------------------------------

| | 4(a) |  | Certificate of Designation of the Preference and Rights of the Series A Preferred Stock(4)
| | ---- |  | ------------------------------------------------------------------------------------------

| | 4(b) |  | Certificate of Designation of the Preference and Rights of the Series B Preferred Stock(4)
| | ---- |  | ------------------------------------------------------------------------------------------

| | 10(a) |  | 1996 Stock Option Plan of the Company(5)
| | ----- |  | ----------------------------------------

| | 10(b) |  | 1996 Management Recognition and Development Plan of the Company(5)
| | ----- |  | ------------------------------------------------------------------

| | 10(c) |  | Employment Agreement with Robert C. Redd(6)
| | ----- |  | -------------------------------------------

| | 10(d) |  | Amended and Restated Employment Agreement with Billy Jack Johnson, Jr., as amended
| | ----- |  | ----------------------------------------------------------------------------------

| | 10(e) |  | Stock Option Agreement with Billy Jack Johnson, Jr.
| | ----- |  | ---------------------------------------------------

| | 10(f) |  | Employment Agreement with Roderick Vance Schlosser, as amended
| | ----- |  | --------------------------------------------------------------

| | 10(g) |  | Stock Option Agreement with Roderick Vance Schlosser
| | ----- |  | ----------------------------------------------------

| | 10(h) |  | Employment Agreement with Dennis Morgan
| | ----- |  | ---------------------------------------

| | 10(i) |  | Stock Option Agreement with Dennis Morgan
| | ----- |  | -----------------------------------------

| | 11 |  | Statement Re: Computation of Per Share Earnings(7)
| | -- |  | --------------------------------------------------

| | 21 |  | Subsidiaries of the Registrant
| | -- |  | ------------------------------

| | 23 |  | Consent of Kraft Bros., Esstman, Patton & Harrell, PLLC
| | -- |  | -------------------------------------------------------

| | 99(a) |  | Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ----- |  | -----------------------------------------------------------------------------------------------

| | 99(b) |  | Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ----- |  | -----------------------------------------------------------------------------------------------

| | 99(c) |  | Consolidated Financial Statements and Notes to Consolidated Financial Statements
| | ----- |  | --------------------------------------------------------------------------------





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---

| | (1) |  | Incorporated by reference to the Companys Registration Statement on Form S-1 (SEC File No. 33-87384), as subsequently amended.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the period ended March 31, 1997.
| | --- |  | ---------------------------------------------------------------------------------------------------------------

| | (3) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the period ended September 30, 1998.
| | --- |  | -------------------------------------------------------------------------------------------------------------------

| | (4) |  | Incorporated by reference to the Companys Form 8-K dated August 31, 2001.
| | --- |  | --------------------------------------------------------------------------

| | (5) |  | Incorporated by reference to the Companys Proxy Statement for the 1996 Annual Meeting of Stockholders.
| | --- |  | -------------------------------------------------------------------------------------------------------

| | (6) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the period ended March 31, 2001.
| | --- |  | ---------------------------------------------------------------------------------------------------------------

| | (7) |  | Incorporated by reference to Note 1 of the Notes to Consolidated Financial Statements.
| | --- |  | --------------------------------------------------------------------------------------



|(b) |  | Report on Form 8-K
|--- |  | ------------------



The Registrant filed a Form 8-K on December 18, 2002 announcing the restatement of previously reported results of operations for the first
and second quarters ended March 31, 2002 and June 30, 2002 and for the six months ended June 30, 2002.



Item 14.  Controls and Procedures



(a)    Evaluation of disclosure controls and procedures.  The Company maintains controls and procedures designed to ensure that information required to be disclosed
in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon
their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Companys disclosure controls and
procedures were adequate.



(b)    Changes in internal controls.  The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of
the evaluation of those controls by the chief executive officer and chief financial officer.



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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.



|                     |  |  |  | FIRST SOUTHERN BANCSHARES,
INC.
|-------------------- |  |  |  | -------------------------------
|                    
|Date: April 15, 2003 |  |  |  | By:                            
|                     |  |  |  |                                



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.



|   
|---
|By:
|   



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|---
|By:
|   



|   
|---
|By:
|   



|   
|---
|By:
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|By:
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##### Table of Contents



CERTIFICATION



I, B. Jack Johnson,
certify, that:



| | 1. |  | I have reviewed this annual report on Form 10-KSB of First Southern 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 we 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 the 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 the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







|                     
|---------------------
|Date:  April 15, 2003
|                     



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##### Table of Contents



CERTIFICATION



I, Roderick V. Schlosser,
certify, that:



| | 1. |  | I have reviewed this annual report on Form 10-KSB of First Southern 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 we 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 the 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 the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







|                     
|---------------------
|Date:  April 15, 2003
|