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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, 2001

[_] 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             (I.R.S. Employer Identification No.)
Incorporation or Organization)

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, 2001
were $10,238,000.

         The aggregate market value of the outstanding voting stock (Common
Stock) held by nonaffiliates of the Registrant, based on the closing price of
the registrant's Common Stock as quoted on The Nasdaq National Stock Market
under the symbol "FSTH" on April 1, 2002, was $3,757,486 (1,138,632 shares at
$3.30 per share). It is assumed for purposes of this calculation that the
issuer's executive officers and directors are affiliates.

         As of April 1, 2002, the issuer has 1,256,715 shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         No documents are incorporated by reference in this Form 10-KSB.

Transitional Small Business Disclosure Format (check one):  YES_____  NO    X
                                                                          -----

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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.

                                  RISK FACTORS

As a Result of Recent Deterioration in the Company's Financial Condition and
Results of Operations, the Auditors Are Unable to Render an Opinion on the
December 31, 2001 Financial Statements.

         The Company's financial condition and results of operations
deteriorated during fiscal 2001 primarily as a result of significant loan
charge-offs and significant increases to the provision for loan losses primarily
associated with the Bank's commercial and consumer loan portfolios and a
reduction in interest income from loans. Interest income decreased as a result
of a significant reduction in the balance of the loan portfolio in fiscal 2001.
The Company reported a consolidated net loss for fiscal 2001 of $7.6 million. At
December 31, 2001, total non-performing assets amounted to $14.8 million or
11.3% of total assets. Adversely classified assets have increased from 11.3% of
total assets at December 31, 2000 to 21.2% of total assets at December 31, 2001.
The Company charged-off $5.8 million for known and estimated losses on
nonperforming loans, primarily in commercial and consumer loans in 2001. The
provision for loan losses for the year ended December 31, 2001 totaled $5.9
million.

         The report of the independent auditors on the Company's financial
statements for the year ending December 31, 2001 contains a disclaimer of
opinion ("Disclaimer") because of the existence of substantial doubt about the
Company's ability to continue as a going concern as a result of the Company's
financial condition, the regulatory restrictions imposed on the Bank's business
operations and the need to meet certain regulatory capital requirements.

         For additional information, see "Risk Factors," "Item 1. Description of
Business -- Lending Activities -- Schedule of Non-performing Assets," " --
Allowance for Loan Losses," "-- Regulation and Supervision of the Company and
the Bank -- Prompt Corrective Action" and "-- Regulation and Supervision of the
Company and the Bank -- Capital Requirements," and "Item 6. Management's
Discussion and Analysis or Plan of Operation -- Financial Condition, Liquidity
and Capital Resources -- Nonperforming Assets" and "--Comparison of Operating
Results for the Years Ended December 31, 2001 and 2000 -- Provision for Loan
Losses."

As a Result of the Disclaimer, the Company's Common Stock May Be Delisted From
The Nasdaq National Stock Market.

         The Nasdaq may, according to its rules, apply additional or more
stringent criteria for the continued listing or suspend or terminate the
inclusion of the Company's common stock in its automated quotation system as a
result of the Disclaimer. If the Nasdaq listing of the common stock is
suspended, the Company will be required, prior to reinclusion, to comply with
all Nasdaq requirements for continued listing such as: to have stockholders'
equity of $2.5 million, market capitalization of $35 million, or net income
(excluding extraordinary or nonrecurring items) of $500,000 for the most recent
fiscal year or in two of the last three fiscal years; and a minimum bid price of
$1.00 per share for the most recent fiscal year or in two of the last three
fiscal years.

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         If the Nasdaq listing of the common stock is terminated, the Company
will be required, prior to relisting, to comply with the more strict
requirements for initial listing such as: to have stockholders' equity of $5
million, market capitalization of $50 million, or net income (excluding
extraordinary or nonrecurring items) of $750,000 for the most recent fiscal year
or in two of the last three fiscal years; and a minimum bid price of $4.00 per
share.

         If the common stock is delisted, whether by suspension or termination,
there will be no public market for the common stock and no assurance that one
will ever be reestablished. As a result, the stock will be illiquid and
stockholders may not be able to sell their shares when they want to and without
an active trading market there will be no market factors establishing a fair
market value for the common stock.

         As of December 31, 2001, the Company had stockholders' equity of $1.5
million and a net loss for the year ended December 31, 2001 of $7.6 million. On
April 1, 2002, the closing price of the common stock was $3.30 per share and its
market capitalization was $4.1 million.

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, 2001, the Company believes it was in material compliance with the
MOU.

         Given the Company's financial condition and the potential that further
deterioration in the Bank's loan portfolio may lead to additional material
losses or the need to substantially increase the allowance for loan losses in
future periods, regulators may require the Company and/or the Bank to take
additional remedial action that may further restrict the Company's and the
Bank's operations in future periods.

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, allowances for loan and lease losses, and internal policies,
procedures and controls. 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 must equal or exceed 5% 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% of total assets. At December 31,
2001, the Bank's Tier 1 capital was 5.00% of total assets. Subsequent to
December 31, 2001, the Company contributed $1 million of equity capital to the
Bank with the proceeds of a loan from certain directors of the Company. With
this capital infusion, the Bank's Tier 1 capital increased to 5.96% of total
assets at January 31, 2002. The Order also requires the Bank, by March 31, 2002,
to develop and adopt a plan to meet the FDIC's minimum risk-based capital
requirements.

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         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 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.

         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 some of the requirements and
continues to seek compliance with the remaining 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 the 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 is re-evaluating its lending strategy. The
Board of Directors and Management are actively taking 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
is not Management's intent to curtail the origination of new loans, primary
emphasis is now being given to problem loan administration and as a result
originations have decreased. Management cannot predict when the emphasis on
working out problem loans will no longer be required and shifted back to loan
production.

         As a result of the requirement to increase regulatory capital, as of
January 31, 2002, the Bank has received approximately $5.3 million in
contributed capital from the Company. This infusion of capital is not
sufficient, however, to meet the imposed capital requirements and the Bank may
have to further shrink income earning assets which may have a negative effect on
future net income.

         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. Effective January 31, 2001, Charles L.
Frederick, Jr. resigned as Chairman, President, Chief Executive Officer and a
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 Boards 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. On April 2, 2002, B. Jack Johnson became President and Chief Executive
Officer of the Company and the Bank, subject to regulatory approval.

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 substantially
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. See "Item 1. Description of Business -- Market Area."

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                                     PART I

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.

         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 money
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
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 first mortgage loans and certain investment and mortgage-backed
securities.

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Market Area

         The Bank conducts its business through five 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 substantially 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 savings deposits
(its primary source of lendable funds) and in the origination of real estate and
consumer loans. Its most direct competition for savings 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 savings 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 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 15, 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
Regulators which 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, 2001, the Bank's qualifying
reserves of $1.3 million exceeded the required reserve of $277,000. In addition,
the Bank is subject to

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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 focus a 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. 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 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, 2001, equaled $172,000.

         SAIF-insured institutions are also required to add to their assessments
to the FDIC points 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 2001, the FICO
assessment amounted to approximately 1.90 basis points. 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 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. Substantial 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 shall be 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

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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
may 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 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 a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency 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, 2001, the Bank's capital ratios met the requirements
to be categorized as "adequately capitalized." Given the Bank's financial
condition and the potential for future losses, this categorization could be
reduced to a lower category in the future.

         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.

         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
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
5.00% as of December 31, 2001.

         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

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currently include cumulative perpetual preferred stock, adjustable-rate
perpetual preferred stock, mandatory convertible securities, term subordinated
debt, intermediate-term preferred stock 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.

         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. 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.

         In addition, an insured state bank (i) that is located in a state which
authorized as of September 30, 1991 investment in common or preferred stock
listed on a national securities exchange ("listed stock") or shares of a
registered investment company ("registered shares"), and (ii) which during the
period beginning September 30, 1990 through November 26, 1991 ("measurement
period") made or maintained investments in listed stocks and registered shares,
may retain whatever shares that were lawfully acquired or held prior to December
19, 1991 and continue to acquire listed stock and registered shares, provided
that the bank does not convert its charter to another form or undergo a change
in control. In order to acquire or retain any listed stock or registered shares,
however, the bank must file a one-time notice with the FDIC which meets
specified requirements and which sets forth the bank's intention to acquire and
retain stocks or shares, and the FDIC must determine that acquiring or retaining
the listed stocks or registered shares will not pose a significant risk to the
deposit insurance fund of which the bank is a member.

         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
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

                                       8

<PAGE>

account are fully secured or 10% of capital accounts if such loans are not fully
secured. At December 31, 2001, the Bank's legal lending limit was either $1.0
million unsecured or $2.0 million secured.

         At December 31, 2001, the Bank had identified one lending relationship
in the amount of $720,000 that may have exceeded the legal lending limit during
2001. If management determines that this relationship did exceed the legal
lending limit at that time, management intends to take the necessary action to
promptly cure the violation.

         Federal Reserve System. Regulation D of the FRB requires all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
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, as
are any nonpersonal time deposits at a bank. Under Regulation D, a bank must
establish reserves equal to 3% of the first $41.3 million of transaction
accounts, of which the first $5.7 million is exempt, and 10% on the remainder.
The reserve requirement on nonpersonal time deposits with original maturities of
less than 1-1/2 years is 0%. As of December 31, 2001, 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. Recent
legislation created 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 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. 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."

                                       9

<PAGE>

         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, 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

                                       10

<PAGE>

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 the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized" under the prompt corrective action regulations. 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 forseeable 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,
2001, 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.

         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.

         Under applicable provisions of the Code, on a ratable basis over a
six-year period commencing in 1995, the Bank must include in income the excess
of the PTI Method bad debt reserve as of December 31, 1994 over its newly

                                       11

<PAGE>

adopted Experience Method tax basis reserve determined as of December 31, 1994.
See Note 8 of the "Notes to Consolidated Financial Statements."

         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.

State Taxation

         Alabama Taxation. The State of Alabama imposes a 6% excise tax on the
Bank's earnings. The Bank's state tax returns have not been audited during the
last five years.

                                       12

<PAGE>

         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, 2001, the Bank had 46 full-time and 13 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.

                                       13

<PAGE>

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.

<TABLE>
<CAPTION>
                                                                                         At December 31,
                                                          --------------------------------------------------------------------------
                                                                2001           2000           1999            1998           1997
                                                          ---------------  -------------  --------------  --------------  ----------
Financial Condition Data                                                                  (In thousands)
<S>                                                         <C>             <C>             <C>             <C>             <C>
Total assets .......................................        $131,483        $167,384        $178,798        $178,375        $183,673
Loans receivable, net ..............................          90,420         139,707         155,818         153,253         159,758
Cash and cash equivalents ..........................          14,230           7,479           5,906          13,188           6,420
Investment securities ..............................          12,858           4,497           4,408           2,016           7,993
Mortgage-backed securities .........................           3,230           3,367           3,527             945           1,432
Deposits ...........................................         118,664         131,218         126,870         127,550         143,731
Advances from Federal Home Loan
   Bank ............................................           5,862          25,514          33,665          31,316          18,468
Other notes payable ................................             750             825           2,000               -               -
Agreement to repurchase securities .................               -               -           1,487               -               -
Preferred stock ....................................           4,488               -               -               -               -
Total stockholders' equity .........................           1,501           9,230          13,969          18,008          20,949
Non performing assets ..............................          14,847           4,857           3,168           4,069           1,206
Allowance for loan losses ..........................           5,650           5,152           1,400           1,441           1,584


                                                                                     Year Ended December 31,
                                                          --------------------------------------------------------------------------
                                                                2001           2000           1999            1998            1997
                                                          ---------------  -------------  --------------  --------------  ----------
Operating Data                                                                (In thousands, except per share amounts)

Interest income ....................................        $ 10,238        $ 14,208        $ 13,951        $ 15,177        $ 15,446
Interest expense ...................................           6,453           7,951           7,105           7,956           8,452
                                                            --------        --------        --------        --------        --------
Net interest income ................................           3,785           6,257           6,846           7,221           6,994
Provision for loan losses ..........................           5,904           8,226             528             605             242
                                                            --------        --------        --------        --------        --------
Net interest income (loss) after provision
   for loan losses .................................          (2,119)         (1,969)          6,318           6,616           6,752
Noninterest income .................................            (170)            597             782             956             766
Noninterest expense ................................           5,566           5,038           5,046           5,060           5,176
                                                            --------        --------        --------        --------        --------
Income (loss) before income taxes ..................          (7,855)         (6,410)          2,054           2,512           2,342
Income tax (benefit) expense .......................            (239)         (2,519)            808           1,010             945
                                                            --------        --------        --------        --------        --------
   Net income (loss) ...............................        $ (7,616)       $ (3,891)       $  1,246        $  1,502        $  1,397

  Basic Earnings (loss) per share ..................        $  (6.06)       $  (3.09)       $   0.80        $   0.83        $   0.74
  Diluted Earnings (loss) per share ................        $  (6.06)       $  (3.09)       $   0.79        $   0.82        $   0.73

Cash dividends per share:
  Regular dividends ................................        $      -        $   0.50        $   0.50        $   0.50        $   0.50
  Special cash dividends ...........................               -               -               -            0.30               -
                                                            --------        --------        --------        --------        --------

Total cash dividends ...............................        $      -        $   0.50        $   0.50        $   0.80        $   0.50
                                                            ========        ========        ========        ========        ========

                                                                                          At December 31,
                                                          --------------------------------------------------------------------------
                                                               2001            2000            1999            1998          1997
                                                          ---------------  -------------  --------------  --------------  ----------
Other Data

Real estate loans ..................................           1,456           1,646           1,709           1,828           2,032
Deposit accounts ...................................          10,947          11,426          11,697          12,092          12,508
</TABLE>

                                       14

<PAGE>

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

<TABLE>
<CAPTION>
                                                                        At or For Year Ended December 31,
                                                               ------------------------------------------------------
                                                                 2001         2000       1999        1998      1997
                                                               ---------  ----------  ---------   --------- ---------
<S>                                                             <C>           <C>       <C>        <C>        <C>
Performance ratios:
   Return on average assets [net income (loss)
      divided by average assets] .........................       (5.17)%     (2.21)%     0.70%      0.81%      0.75%
   Return on average stockholders' equity [net
      income (loss) divided by average equity]............     (100.70)     (29.66)      7.30       7.45       6.74
   Dividend payout ratio [dividends declared per
      share divided by basic earnings (loss) per share:
   Regular dividends .....................................         N/A      (16.18)     62.50      60.24      67.57
   Special cash dividends ................................         N/A         N/A        N/A      36.14        N/A
   Interest rate spread (difference between average
      yield on interest-earning assets and average cost
      of interest-bearing liabilities ....................        2.80        3.59       3.82       3.72       3.52
   Net interest margin (net interest income as a
      percentage of average interest-earning assets) .....        2.84        3.84       4.16       4.15       3.98
   Non-interest expense to average assets ................        3.78        2.86       2.85       2.73       2.78
   Average interest-earning assets to interest
      bearing liabilities ................................      100.76      105.01     107.81     109.61     109.69

Asset quality ratios:
   Allowance for loan losses to net loans
      at end of period ...................................        6.25        3.69       0.90       0.94       0.99
   Net chargeoffs to average outstanding
      loans during period ................................        4.76        2.94       0.38       0.47       0.19
   Ratio of nonperforming assets to total assets
      at end of period ...................................       11.29        2.90       1.77       2.28       0.66

Capital ratios:
   Average stockholders' equity to average assets
      during period ......................................        5.13        7.46       9.63      10.89      11.12
</TABLE>

                                       15

<PAGE>

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.

<TABLE>
<CAPTION>
                                                At December 31,                         Year Ended December 31,
                                                                   -----------------------------------------------------------------
                                                      2001                     2001                          2000
                                               -----------------   ----------------------------- ----------------------------
                                                                               Interest                    Interest
                                                          Yield/     Average     and     Yield/  Average     and     Yield/
                                               Balance     Cost      Balance   Dividends  Cost   Balance  Dividends   Cost
                                               -------   -------   ---------- ---------- ------- --------- ---------  -------
                                                                                (Dollars in thousands)
<S>                                           <C>         <C>      <C>       <C>        <C>     <C>       <C>       <C>
Interest-earning/dividend paying assets
Mortgage loans and contracts ...............   $ 24,852    8.05%  $ 33,284   $ 2,725    8.19%  $ 45,198   $ 3,734     8.26%
Other loans ................................     65,568    8.01     80,200     6,608    8.24    107,095     9,741     9.10
                                               --------           --------   -------           --------   -------
      Total net loans (1) ..................     90,420    8.02    113,484     9,333    8.22    152,293    13,475     8.85
Mortgage-backed securities .................      3,230    6.69      3,301       222    6.73      3,443       233     6.77
Investment securities ......................     12,858    4.65      4,105       220    5.36      4,404       284     6.45
FHLB overnight account and other ...........      9,786    1.53     10,301       337    3.27      1,163        74     6.36
                                               --------           --------   -------           --------   -------
      Total interest-earning assets ........    116,294    7.11    131,191    10,112    7.71    161,303    14,066     8.72
Federal Home Loan Bank stock ...............      1,866    6.25      1,866       126    6.75      1,815       141     7.77
                                               --------           --------   -------           --------   -------
      Total interest earning and dividend
         paying assets .....................    118,160    7.10%   133,057   $10,238    7.69%   163,118   $14,207     8.71%
                                                                  --------   -------           --------   -------
Non interest earning/dividend paying assets
Office properties and equipment, net .......      2,807              3,289                        3,564
Real estate owned ..........................      1,226              1,168                          947
Cash on hand and in banks ..................      4,444              4,862                        5,453
Accrued interest receivable ................        976              1,300                        1,798
Other ......................................      3,870              3,695                        1,018
                                               --------           --------                     --------
      Total non interest-earning/dividend
         paying assets .....................     13,323             14,314                       12,780
                                               --------           --------                     --------
Total assets ...............................   $131,483           $147,371                     $175,898
                                               ========           ========                     ========

<CAPTION>
                                                              Year Ended December 31,
                                                          --------------------------------
                                                                        1999
                                                          --------------------------------
                                                                      Interest
                                                            Average     and      Yield/
                                                            Balance   Dividends   Cost
                                                          --------------------------------
                                                                (Dollars in thousands)
<S>                                                            <C>        <C>         <C>
Interest-earning/dividend paying assets
Mortgage loans and contracts ...............                $ 47,814   $ 3,788    7.92%
Other loans ................................                 103,146     9,306    9.02
                                                            --------   -------
      Total net loans (1) ..................                 150,960    13,094    8.67
Mortgage-backed securities .................                   2,472       171    6.92
Investment securities ......................                   3,951       260    6.58
FHLB overnight account and other ...........                   5,553       296    5.33
                                                            --------   -------
      Total interest-earning assets ........                 162,936    13,821    8.48
Federal Home Loan Bank stock ...............                   1,709       130    7.61
                                                            --------   -------
      Total interest earning and dividend
         paying assets .....................                 164,645   $13,951    8.47%
                                                            --------   -------
Non interest earning/dividend paying assets
Office properties and equipment, net .......                   3,767
Real estate owned ..........................                   1,010
Cash on hand and in banks ..................                   5,654
Accrued interest receivable ................                   1,638
Other ......................................                     534
   Total non interest-earning/dividend                      --------
    paying assets ..........................                  12,603
                                                            --------
      Total assets .........................                $177,248
                                                            ========
</TABLE>

____________________________________
(1) Loans on nonaccrual status have been included in the computation of average
balances.
(2) Includes Federal Home Loan Bank stock and related dividends, as applicable.

                                       16

<PAGE>

<TABLE>
<CAPTION>
                                            At December 31,                     Year Ended December 31,
                                                                -------------------------------------------------------
                                                 2001                     2001                          2000
                                           -----------------    -------------------------   ---------------------------
                                                                         Interest                     Interest
                                                     Yield/     Average    and     Yield/   Average     and      Yield/
                                           Balance    Cost      Balance  Dividends  Cost    Balance   Dividends   Cost
                                           -------    ----      -------  --------- ------   -------   ---------  ------
                                                                                 (Dollars in thousands)
<S>                                        <C>          <C>      <C>        <C>    <C>       <C>         <C>      <C>
Interest-bearing liabilities:
Deposit accounts:
Passbook accounts ........................ $ 14,963    1.00%   $ 15,004   $  358   2.39%   $ 16,379   $  454     2.77%
NOW accounts .............................   10,697    0.75      11,376      189   1.66      11,177      214     1.91
Money market accounts ....................    4,419    1.50       3,406       91   2.69       3,573      113     3.16
Certificates of deposit ..................   82,362    4.96      88,394    4,997   5.65      91,300    5,160     5.65
                                           --------            --------    -----           --------   ------
    Total interest-bearing deposits ......  112,441    3.90     118,180    5,635   4.77     122,429    5,941     4.85
Other interest-bearing liabilities:
Advances from Federal Home Loan Bank
   of Atlanta ............................    5,862    5.77      13,053      752   5.76      30,872    1,856     6.01
Agreement to repurchase securities .......        -       -           -        -      -       1,111       72     6.48
Other borrowings .........................      750    6.75         819       66   8.02         924       80     8.66
                                           --------            --------   ------           --------   ------
    Total borrowings .....................    6,612    5.88      13,872      818   5.90      32,907    2,008     6.10
                                           --------            --------   ------           --------   ------     ----
    Total interest-bearing liabilities ...  119,053    4.01     132,052    6,453   4.89     155,336    7,949     5.12
                                                               --------   ------           --------   ------
Non interest-bearing liabilities:
Non interest-bearing deposit accounts ....    6,223               5,661                       6,401
Other liabilities ........................      218                 973                       1,044
                                           --------            --------                    --------
Total liabilities ........................  125,494             138,686                     162,781

Preferred stock ..........................    4,488               1,122                           -
Stockholders' equity .....................    1,501               7,563                      13,117
                                           --------            --------                    --------
Total liabilities and stockholders'
equity ................................... $131,483            $147,371                    $175,898
                                           ========            ========                    ========

Net interest income ......................                                $3,785                      $6,258
Interest rate spread (2) .................             3.09%                       2.80                          3.59
Net interest margin (2) ..................                                         2.84%                         3.84%
Ratio of average interest-earning assets
   to average interest-bearing
   liabilities (2)........................                       100.76%                     105.01%

<CAPTION>
                                                                   Year Ended December 31,
                                                                -----------------------------
                                                                             1999
                                                                -----------------------------
                                                                            Interest
                                                                 Average      and      Yield/
                                                                 Balance    Dividends  Cost
                                                                ---------  ---------- -------
                                                                   (Dollars in thousands)
<S>                                                              <C>        <C>        <C>
Interest-bearing liabilities:
Deposit accounts:
Passbook accounts ........................................       $ 17,720    $  491    2.77%
NOW accounts .............................................         11,720       223    1.90
Money market accounts ....................................          3,797       115    3.03
Certificates of deposit ..................................         86,913     4,425    5.09
                                                                 --------    ------
      Total interest-bearing deposits ....................        120,150     5,254    4.37
Other interest-bearing liabilities:
Advances from Federal Home Loan Bank
   of Atlanta ............................................         31,939     1,804    5.65
Agreement to repurchase securities .......................            225        12    5.33
Other borrowings .........................................            397        35    8.82
                                                                 --------    ------
      Total borrowings ...................................         32,561     1,851    5.68
                                                                 --------    ------
      Total interest-bearing liabilities .................        152,711     7,105    4.65
                                                                 --------    ------
Non interest-bearing liabilities:
Non interest-bearing deposit accounts ....................          6,204
Other liabilities ........................................          1,269
                                                                 --------
Total liabilities ........................................        160,184

Preferred stock ..........................................              -
Stockholders' equity .....................................         17,064
                                                                 --------
Total liabilities and stockholders' equity ...............       $177,248
                                                                 ========


Net interest income ......................................                   $6,846
Interest rate spread (2) .................................                             3.82
Net interest margin (2) ..................................                             4.16%
Ratio of average interest-earning assets
   to average interest-bearing liabilities (2) ...........         107.81%

</TABLE>

                                       17

<PAGE>

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 volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
(iii) changes in rate/volume (change in rate multiplied by change in volume);
and (iv) the net change (the sum of the prior columns).

<TABLE>
<CAPTION>
                                                                  2001 Compared to 2000                    2000 Compared to 1999
                                                                   Increase (Decrease)                      Increase (Decrease)
                                                                          Due to                                   Due to
                                                             ----------------------------------        -----------------------------
                                                                                 Rate/                               Rate/
                                                              Rate     Volume   Volume   Net      Rate     Volume   Volume     Net
                                                             -------  --------  ------ --------  ------    ------   ------   -------
                                                                                            (In thousands)
<S>                                                          <C>      <C>       <C>    <C>        <C>     <C>       <C>      <C>
Interest-earning/dividend paying assets:
Mortgage loans ...........................................   $  (32)  $  (984)  $   7  $(1,009)  $  162    $ (207)   $ (10)  $  (55)
Other loans ..............................................     (921)   (2,447)    235   (3,133)      76       356        3      435
                                                             -------  --------  -----  --------  ------    ------    -----   -------
         Total net loans .................................     (953)   (3,431)    242   (4,142)     238       149       (7)     380

Mortgage-backed securities ...............................       (1)      (10)      -      (11)      (4)       67       (1)      62
Investment securities ....................................      (48)      (19)      3      (64)      (5)       30       (1)      24
Overnight deposits .......................................      (36)      581    (282)     263       57      (234)     (44)    (221)
                                                             -------  --------  -----  --------  ------    ------    -----   -------
         Total net change in income on interest-earning
            assets .......................................   (1,038)   (2,879)    (37)  (3,954)     286        12      (53)     245

Federal Home Loan Bank stock .............................      (19)        4       -      (15)       3         8       --       11
                                                             -------  --------  -----  --------  ------    ------    -----   -------
         Total net change in income on interest-earning/
            dividend paying assets .......................   (1,057)   (2,875)    (37)  (3,969)     289        20      (53)     256
                                                             -------  --------  -----  --------  ------    ------    -----   -------
Interest-bearing liabilities:
Deposits .................................................      (98)     (206)     (2)    (306)     576       100       12      688
Other interest-bearing liabilities .......................      (66)   (1,161)     37   (1,190)     136        20        1      157
                                                             -------  --------  -----  --------  ------    ------    -----   -------
         Total net change in expense on interest-bearing
            liabilities ..................................     (164)   (1,367)     35   (1,496)     712       120       13      845
                                                             -------  --------  -----  --------  ------    ------    -----   -------
          Net change in net interest income ..............   $ (893)  $(1,508)  $ (72) $(2,473)  $ (423)   $ (100)   $ (66)  $ (589)
                                                             =======  ========  =====  ========  ======    ======    =====   =======
</TABLE>

                                       18

<PAGE>

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, 2001, the ratio of rate-sensitive assets to
rate-sensitive liabilities maturing or repricing within one year or less is
(36)%, a negative one year gap position. In a period of generally falling
interest rates, this gap position will normally result in a decrease in net
interest income. Whereas, in a period of generally rising interest rates, this
gap position will normally result in an increase in net interest income.

                                       19

<PAGE>

<TABLE>
<CAPTION>
                                                                       Repricing or Maturing Within

                                            0 - 3         3 - 12          Total           1 - 5           Over
                                           Months         Months          1 Year          Years          5 Years           Total
                                         ----------------------------------------------------------------------------------------

                                                                              (In thousands)
<S>                                      <C>             <C>             <C>             <C>             <C>            <C>
ASSETS

FHLB overnight account .............     $   9,786       $      --       $   9,786       $      --       $      --      $   9,786

Investment securities ..............            --              --              --           7,055           9,033         16,088

FHLB stock .........................         1,866              --           1,866              --              --          1,866

Loans receivable ...................        26,886          18,880          45,766          40,799          10,388         96,953
                                         ---------       ---------       ---------       ---------       ---------      ---------

Total interest-earnings
assets .............................     $  38,538       $  18,880       $  57,418       $  47,854       $  19,421      $ 124,693
                                         =========       =========       =========       =========       =========      =========

LIABILITIES

NOW accounts .......................     $  10,697       $      --       $  10,697       $      --       $      --      $  10,697

Money market demand accounts .......         4,419              --           4,419              --              --          4,419

Passbook accounts ..................        11,470              --          11,470              --              --         11,470

Statement savings ..................         3,493              --           3,493              --              --          3,493

Certificates accounts ..............        16,806          54,934          71,740          10,622              --         82,362

FHLB advances ......................            31              93             124             438           5,300          5,862

Other Notes Payable ................            --             750             750              --              --            750
                                         ---------       ---------       ---------       ---------       ---------      ---------

Total interest-bearing
liabilities ........................     $  46,916       $  55,777       $ 102,693       $  11,060       $   5,300      $ 119,053
                                         =========       =========       =========       =========       =========      =========

Period GAP .........................     $  (8,378)      $ (36,897)      $ (45,275)      $  36,794       $  14,121      $   5,640

Cumulative GAP .....................        (8,378)        (45,275)        (45,275)         (8,481)          5,640          5,640

Cumulative as a percentage
of interest-earning assets .........            (7)%           (36)%           (36)%            (7)%             5%             5%
</TABLE>

                                       20

<PAGE>

Lending Activities


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


<TABLE>
<CAPTION>
                                                                           At December 31,
                                                  -------------------------------------------------------------------
                                                          2001                    2000                    1999
                                                  ---------------------- ----------------------- --------------------
                                                    Amount    Percent      Amount      Percent    Amount     Percent
                                                  ---------- ----------- ---------- ------------ ---------- ---------
                                                                    (Dollars in thousands)
<S>                                               <C>          <C>       <C>           <C>       <C>            <C>
Mortgage loans:
   One- to four-family residential(1) .........   $ 30,538      33.47%   $ 48,615       34.80%   $ 49,808       31.97%
   Multi-family residential ...................      2,168       2.38       4,359        3.12       4,132        2.65
   Commercial .................................     25,191      27.61      30,487       21.82      29,792       19.12
                                                  --------    -------    --------     -------    --------     -------
      Total non-construction
         mortgage loans .......................     57,897      63.46      83,461       59.74      83,732       53.74
                                                  --------    -------    --------     -------    --------     -------

Construction loans:
   One- to four-family residential ............      6,808       7.46      10,081        7.22       9,862        6.33
   Multi-family residential ...................         --         --         684        0.49         255        0.16
   Commercial .................................      1,267       1.39       1,813        1.30       4,467        2.87
                                                  --------    -------    --------     -------    --------     -------
      Total construction loans ................      8,075       8.85      12,578        9.00      14,584        9.36
                                                  --------    -------    --------     -------    --------     -------

Total mortgage loans ..........................     65,972      72.31      96,039       68.74      98,316       63.10
                                                  --------    -------    --------     -------    --------     -------

Commercial loans ..............................     18,059      19.79      28,755       20.58      36,332       23.32
                                                  --------    -------    --------     -------    --------     -------

Consumer loans:
   Home equity and second
      mortgage loans ..........................      8,342       9.14      10,781        7.72      11,757        7.55
   Automobile loans ...........................      1,718       1.88       3,342        2.39       4,019        2.58
   Savings loans ..............................        793       0.87       1,416        1.01       1,005        0.64
   Other ......................................      2,890       3.17       5,879        4.21       6,536        4.19
                                                  --------    -------    --------     -------    --------     -------
      Total consumer loans ....................     13,743      15.06      21,418       15.33      23,317       14.96
                                                  --------    -------    --------     -------    --------     -------

Total loans ...................................     97,774     107.16     146,212      104.66     157,965      101.38
                                                  --------    -------    --------     -------    --------     -------


Less:
   Undisbursed loans in process ...............        852       0.93       1,304        0.93         675        0.43
   Unamortized loan origination fees,
      net of direct costs .....................         31       0.03          49        0.04          72        0.05
   Allowance for loan losses ..................      5,650       6.19       5,152        3.69       1,400        0.90
                                                  --------    -------    --------     -------    --------     -------
      Loans receivable, net ...................   $ 91,241     100.00%   $139,707      100.00%   $155,818      100.00%
                                                  ========    =======    ========     =======    ========     =======
</TABLE>

______________________________
(1)  Includes loans held for sale.

                                       21

<PAGE>

         Loan Maturity. The following table sets forth scheduled contractual
amortization of loans at December 31, 2001 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.

<TABLE>
<CAPTION>
                                                                      At December 31, 2001
                                                   ---------------------------------------------------------
                                                        Real Estate
                                                   ------------------------            Commercial
                                                    Mortgage  Construction  Consumer    Business     Total
                                                     Loans       Loans       Loans       Loans       Loans
                                                   ---------- ------------- ---------- ----------- ---------
                                                                         (In thousands)
<S>                                                  <C>        <C>        <C>          <C>         <C>
Amounts due:
   Within one year(1) ............................   $ 8,604    $ 8,075    $ 5,809      $10,359     $32,847
   After one year through three years ............    15,010         --      5,173        4,443      24,626
   After three years through five years ..........    14,987         --      2,450        2,835      20,272
   After five years ..............................    19,296         --        311          422      20,029
                                                     -------    -------    -------      -------     -------
      Total ......................................   $57,897    $ 8,075    $13,743      $18,059     $97,774
                                                     =======    =======    =======      =======     =======

Interest rate terms on amounts
   due after one year:
   Fixed .........................................   $30,080    $    --    $ 7,833      $ 5,237     $43,150
   Adjustable ....................................    19,213         --        101        2,463      21,777
</TABLE>

______________________________
(1)  Includes loans held for sale.

                                       22

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                            ----------------------------------------
                                                                              2001           2000            1999
                                                                            ---------      ---------       ---------
                                                                                         (In thousands)
<S>                                                                         <C>            <C>             <C>
Total mortgage loans at beginning of period .......................         $  96,039      $  98,316       $ 105,090
                                                                            ---------      ---------       ---------
Loans originated:
   Single-family residential ......................................            26,794         24,576          30,575
   Multi-family residential and commercial real estate ............             6,110         12,900          13,811
   Construction loans .............................................             5,688         11,960          16,522
                                                                            ---------      ---------       ---------
      Total loans originated ......................................            38,592         49,436          60,908
                                                                            ---------      ---------       ---------
Loans purchased:
   Single-family residential ......................................                --             --              --
   Other ..........................................................                --            752              --
                                                                            ---------      ---------       ---------
      Total loans purchased .......................................                --            752              --
                                                                            ---------      ---------       ---------
         Total loans originated and purchased .....................            38,592         50,188          60,908
                                                                            ---------      ---------       ---------

Loans sold:
   Total whole loans sold .........................................            27,333          8,927          14,855
   Other ..........................................................               658            694           3,727
                                                                            ---------      ---------       ---------
      Total loans sold ............................................            27,991          9,621          18,582

Mortgage loan principal repayments ................................            35,600         41,474          48,407
Other (increase) decrease .........................................             5,068          1,370             693
                                                                            ---------      ---------       ---------
   Total net loan decreases .......................................            68,659         52,465          67,682
                                                                            ---------      ---------       ---------
Net loan activity .................................................           (30,067)        (2,277)         (6,774)
                                                                            ---------      ---------       ---------

Total mortgage loans at end of period .............................         $  65,972      $  96,039       $  98,316
                                                                            =========      =========       =========
</TABLE>

For a discussion regarding loans sold during 2001, see "Item 6. Management's
Discussion and Analysis or Plan of Operation."

                                       23

<PAGE>

         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.

<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                       -----------------------------------------------------------------------
                                                        2001            2000            1999            1998            1997
                                                       -------         -------         -------         -------         -------
                                                                               (Dollars in thousands)
<S>                                                    <C>             <C>             <C>             <C>             <C>
Allowance at beginning of period ...............       $ 5,152         $ 1,400         $ 1,441         $ 1,584         $ 1,659
                                                       -------         -------         -------         -------         -------
Provision for loan losses ......................         5,904           8,226             528             605             242
                                                       -------         -------         -------         -------         -------
Recoveries:
   Construction and land development ...........            78              --              --              --              --
   Residential real estate .....................            42              --               2              --               9
   Commercial real estate ......................             4              --              --              --              --
   Commercial business .........................           128              30             114               1              17
   Consumer and other ..........................           128              68              19              31               4
                                                       -------         -------         -------         -------         -------
      Total recoveries .........................           380              98             135              32              30
                                                       -------         -------         -------         -------         -------

Chargeoffs:
   Construction and land development ...........          (442)             (6)             --              --              --
   Farmland ....................................            --             (75)             --              --              --
   Residential real estate .....................        (1,564)           (193)            (56)            (36)            (52)
   Commercial real estate ......................          (903)           (163)             (2)             --            (185)
   Commercial business .........................        (2,272)         (3,398)           (421)           (496)            (54)
   Consumer and other ..........................          (605)           (737)           (225)           (248)            (56)
                                                       -------         -------         -------         -------         -------
      Total chargeoffs .........................        (5,786)         (4,572)           (704)           (780)           (347)
                                                       -------         -------         -------         -------         -------

      Net chargeoffs ...........................        (5,406)         (4,474)           (569)           (748)           (317)
                                                       -------         -------         -------         -------         -------

Balance at end of period .......................       $ 5,650         $ 5,152         $ 1,400         $ 1,441         $ 1,584
                                                       =======         =======         =======         =======         =======

Ratio of allowance to net loans
   outstanding at the end of the period ........          6.25%           3.69%           0.90%           0.94%           0.99%
Ratio of net chargeoffs to average loans
   outstanding during the period ...............          4.76%           2.94%           0.38%           0.47%           0.19%
</TABLE>

                                       24

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                At December 31,
                                           -----------------------------------------------------------------------------------------
                                                   2001                    2000                1999                    1998
                                           ---------------------  -------------------   ---------------------   --------------------
                                                     As a % of            As a % of               As a % of              As a % of
                                                    Outstanding           Outstanding             Outstanding           Outstanding
                                                     Loans in              Loans in               Loans in               Loans in
                                            Amount   Category     Amount   Category       Amount  Category      Amount   Category
                                           -------- ------------  ------- -----------   -------- ------------   ------- ------------
                                                                               (Dollars in thousands)

<S>                                        <C>      <C>           <C>     <C>           <C>       <C>           <C>     <C>
Real estate mortgage loans:
   Residential .......................     $  860      2.19%      $  917      1.73%      $  270       0.50%     $  217       0.36%
   Other .............................        899      3.40          908      2.10          222       0.50         188       0.41
Consumer and commercial business .....        813      4.02        1,132      2.20          298       0.50         651       1.28
Impaired loans .......................      2,747                  1,310                    200                     --
Unallocated ..........................        331                    885                    410                    385
                                           ------                 ------                 ------                 ------
   Total allowance for loan losses ...     $5,650                 $5,152                 $1,400                 $1,441
                                           ======                 ======                 ======                 ======

<CAPTION>
                                                            At December 31,
                                                       -------------------------
                                                                 1997
                                                       -------------------------
                                                                   As a % of
                                                                  Outstanding
                                                                   Loans in
                                                        Amount     Category
                                                       --------- ---------------
                                                         (Dollars in thousands)
<S>                                                    <C>        <C>
Real estate mortgage loans:
   Residential .......................                 $  234      0.33%
   Other .............................                    210      0.43
Consumer and commercial business .....                    614      1.29
Impaired loans .......................                     --
Unallocated ..........................                    526
                                                       ======
   Total allowance for loan losses ...                 $1,584
                                                       ======
</TABLE>

                                       25





<PAGE>

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

<TABLE>
<CAPTION>
                                                                            At December 31,
                                     ------------------------------------------------------------------------------------------
                                                     2001                        2000                          1999
                                     ------------------------------  ----------------------------- ----------------------------
                                     Amortized   Market  Percent of  Amortized  Market  Percent of Amortized  Market Percent of
                                      Cost(1)    Value   Portfolio    Cost(1)   Value   Portfolio   Cost(1)    Value  Portfolio
                                     --------- -------- -----------  --------- -------  ---------- ---------  ------- ---------
                                                                       (Dollars in thousands)
<S>                                  <C>        <C>      <C>         <C>        <C>     <C>        <C>       <C>      <C>
Corporate bonds ...................    $ 1,012  $ 1,021      7.94%     $3,062   $2,997     66.64%    $3,081   $2,923     66.31%
U.S. government and agency
   obligations ....................     12,030   11,837     92.06       1,500    1,500     33.36      1,500    1,485     33.69
                                       -------  -------    ------      ------   ------    ------     ------   ------    -------
   Total ..........................    $13,042  $12,858    100.00%     $4,562   $4,497    100.00%    $4,581   $4,408    100.00%
                                       =======  =======    ======      ======   ======    ======     ======   ======    =======
</TABLE>

_______________________________
(1)  Percentage of portfolio value computed based upon carrying value of
     securities. Prior to January 1, 1994, securities were recorded at amortized
     cost. In 1994 the Company adopted the provisions of SFAS No. 115 under
     which the Company has classified 100% of its investment securities as
     "available for sale," which securities were therefore recorded at market
     value.

         The following table sets forth the maturities and weighted average
yields of the investment securities portfolio at December 31, 2001.

                                                                        Weighted
                                                           Carrying      Average
                                                             Value        Yield
                                                          ----------  ----------
                                                          (Dollars in thousands)

            Corporate Bonds:

               Due after one year through five years ....   $ 1,021        6.27%
            U.S. government and agency obligations:
               Due after one year through five years ....     5,937        3.57
               Due after ten years ......................     5,900        5.45
                                                            -------
               Total ....................................   $12,858        4.65
                                                            =======

                                                   26

<PAGE>

         The following table sets forth the cost and market values of the
mortgage-backed securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                     At December 31,
                             -----------------------------------------------------------------------------------------------------
                                         2001                              2000                               1999
                             ------------------------------   ---------------------------------  ---------------------------------
                             Amortized  Market   Percent of   Amortized   Market    Percent of    Amortized  Market   Percent of
                               Cost      Value  Portfolio(1)    Cost       Value   Portfolio(1)     Cost      Value  Portfolio(1)
                             ---------  ------  -----------   ---------   ------   ------------  ---------   ------  -------------
                                                            (Dollars in thousands)
<S>                          <C>        <C>     <C>           <C>         <C>      <C>           <C>         <C>     <C>
GNMA certificates(2)......   $3,055     $3,094     94.58%      $3,152     $3,132      93.61%       $3,252    $3,010       92.20%
FHLMC certificates(2).....      175        185      5.42          215        220       6.39           275       280        7.80
                             ------     ------    ------       ------     ------     ------        ------    ------      ------
      Total...............   $3,230     $3,279    100.00%      $3,367     $3,352     100.00%       $3,527    $3,290      100.00%
                             ======     ======    ======       ======     ======     ======        ======    ======      ======
</TABLE>
________________________
(1)      Percentage of portfolio value computed based upon amortized cost of
         mortgage-backed securities.
(2)      Classified as "held to maturity" at December 31, 2001, 2000 and 1999.


         The following table sets forth the maturities and weighted average
yields of the mortgage-backed securities portfolio at December 31, 2001.

<TABLE>
<CAPTION>
                                                                             Weighted
                                                        Carrying             Average
                                                          Value               Yield
                                                        ---------            --------
                                                          (Dollars in Thousands)
<S>                                                     <C>                  <C>
Due in one year or less..........................       $    -                    -%
Due after one year through five years............           97                 8.42
Due after five years through ten years...........          121                 8.37
Due after ten years..............................        3,012                 6.57
                                                        ------
      Total......................................       $3,230                 6.69%
                                                        ======
</TABLE>

                                       27

<PAGE>

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, 2001. Other deposits with balances
of $100,000 or greater aggregated $3.5 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..............        $  6,620

                    Three through twelve months ......          11,591

                    Over twelve months ...............           1,737
                                                              --------
                   Total .............................        $ 19,948
                                                              ========

                                       28

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                At December 31,
                                              ----------------------------------------------------------------------------------
                                                       2001                          2000                         1999
                                              ---------------------------  -----------------------------  ---------------------
                                                      Percent   Increase            Percent   Increase           Percent   Increase
                                              Amount  of Total (Decrease)  Amount  of Total  (Decrease)  Amount  of Total (Decrease)
                                              ------  -------- ----------  ------  --------  ----------  ------  --------  ---------
                                                                                 (Dollars in thousands)
<S>                                        <C>       <C>      <C>        <C>       <C>        <C>       <C>      <C>      <C>
Noncertificate of deposit accounts(1):
  Noninterest-bearing ..................   $  6,223    5.25%  $   (835)  $  7,059    5.38%    $ 1,710   $  5,349    4.22%  $   (590)
  NOW checking .........................     10,697    9.01     (1,187)    11,884    9.06         568     11,316    8.92       (441)
  Regular savings accounts .............     11,470    9.67     (1,083)    12,552    9.57      (1,666)    14,218   11.21     (1,197)
  Money market deposit .................      4,419    3.72        963      3,456    2.63        (368)     3,824    3.01        403
  Statement savings ....................      3,493    2.94        600      2,893    2.20         229      2,664    2.10        364
Certificates of deposit(2)(3):
  Fixed-rate certificates which mature:
    Within one year ....................     71,740   60.46     (2,318)    74,058   56.44      17,653     56,405   44.46    (13,681)
    Within three years .................      9,859    8.31     (8,828)    18,687   14.24     (12,356)    31,043   24.47     15,365
    After three years ..................        763    0.64        134        629    0.48      (1,422)     2,051    1.62       (903)
                                           --------  ------   --------   --------  ------     -------   --------  ------   --------
      Total ............................   $118,664  100.00%  $(12,554)  $131,218  100.00%    $ 4,348   $126,870  100.00%  $   (680)
                                           ========  ======   ========   ========  ======     =======   ========  ======   ========
</TABLE>
________________________
(1)  Includes accounts with balances of $100,000 and greater of $3.5
     million,$6.0 million and $4.1 million at December 31, 2001, 2000 and 1999,
     respectively.
(2)  Includes certificates of deposit with balances of $100,000 and greater of
     $16.5 million, $19.7 million and $21.6 million at December 31, 2001, 2000
     and 1999, respectively.
(3)  Includes IRA accounts of $7.0 million, $7.7 million and $8.3 million at
     December 31, 2001, 2000 and 1999, respectively.

                                       29

<PAGE>

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

<TABLE>
<CAPTION>
                                                                At December 31,
                                          ----------------------------------------------------------
                                                2001               2000                1999
                                          ----------------------------------------------------------
                                                                 (In thousands)
<S>                                       <C>                    <C>                 <C>
1.00 - 2.00%........................          $ 5,392            $     -             $     -
2.01 - 4.00%........................           15,309                 63                 177
4.01 - 5.00%........................           15,709              5,944              42,829
5.01 - 6.00%........................           24,765             39,394              32,731
6.01 - 7.00%........................           20,639             41,342              13,249
7.01 or greater.....................              548              6,631                 513
                                              -------            -------             -------
   Total............................          $82,362            $93,374             $89,499
                                              =======            =======             =======
</TABLE>


         The following table sets forth the amount and maturities of time
deposits at December 31, 2001.

<TABLE>
<CAPTION>
                                                        Amount Due
                            -------------------------------------------------------------------------
Certificate                Less Than    1 - 2      2 - 3       3 - 4      After              Percent
Accounts                   One Year     Years      Years       Years     4 Years    Total    of Total
-----------------------    ---------   -------     ------      -----     -------   -------   --------
                                                    (Dollars in thousands)
<S>                        <C>         <C>        <C>         <C>        <C>       <C>       <C>
1.00 - 2.00%...........    $ 5,378     $    14    $    -      $   -      $   -     $ 5,392     6.54%
2.01 - 4.00% ..........     11,420       3,316       442         30        101      15,309    18.59
4.01 - 5.00% ..........     13,582       1,721       242         83         81      15,709    19.07
5.01 - 6.00% ..........     22,218       2,173       254         99         21      24,765    30.07
6.01 - 7.00% ..........     18,663       1,562        66        209        139      20,639    25.06
7.01 - or greater .....        479          69         -          -          -         548     0.67
                           -------     -------    ------      -----      -----     -------   ------
   Total ..............    $71,740     $ 8,855    $1,004      $ 421      $ 342     $82,362   100.00%
                           =======     =======    ======      =====      =====     =======   ======
</TABLE>

                                       30

<PAGE>

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

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                    -------------------------------------------
                                                                       2001            2000            1999
                                                                    --------     --------------     -----------
                                                                                 (In thousands)
<S>                                                                 <C>             <C>             <C>
Beginning balance..........................................         $131,218        $126,870        $127,550
                                                                    --------        --------        --------

Net increase (decrease) before interest credited...........          (17,047)           (384)         (5,065)

Interest credited..........................................            4,493           4,732           4,385
                                                                    --------        --------        --------
Net increase (decrease) in savings deposits................          (12,554)          4,348            (680)
                                                                    --------        --------        --------

Ending balance.............................................         $118,664        $131,218        $126,870
                                                                    ========        ========        ========
</TABLE>


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


<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                           --------------------------------------
                                                                              2001          2000         1999
                                                                           --------      --------      ----------
                                                                                     (In thousands)
<S>                                                                        <C>           <C>           <C>
Maximum amount of borrowings outstanding at any month end:

FHLB advances........................................................      $24,008       $37,322       $35,697

Securities sold under agreements to repurchase.......................            -         1,508         1,530

Other borrowings(1)..................................................          825         2,000         2,000
</TABLE>
_________
(1)      Credit facilities from third party financial institutions.

                                       31

<PAGE>

Item 2.  Description of Property
--------------------------------

         The following table sets forth certain information regarding the Bank's
offices as of December 31, 2001. The net book value of the Bank's investment in
office, properties and equipment totaled $2.8 million at December 31, 2001. The
properties are adequately insured and all in good condition.

<TABLE>
<CAPTION>
                                                  Year        Building          Land          Building
      Location                      County       Opened     Owned/Leased    Owned/Leased   Square Footage
      --------                      ------       ------     ------------    ------------   --------------
<S>                               <C>            <C>        <C>             <C>            <C>
Main Office
-----------


102 South Court Street            Lauderdale      1935         Owned           Owned           45,000
Florence, Alabama 35630


Branch Offices
--------------


5287 Highway 72                   Lauderdale      1977         Owned           Owned            1,890
Killen, Alabama  35645


U.S. Highway 72 E.                Lauderdale      1977         Owned           Owned            1,890
Rogersville, Alabama 35652


2727 Mall Drive                   Lauderdale      1979         Owned           Owned            1,216
Florence, Alabama 35630


1027 Avalon Avenue                Colbert         1990         Owned           Owned            3,500
Muscle Shoals, Alabama 35661
</TABLE>


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, 2001.

                                       32

<PAGE>

Additional Item. Executive Officers
-----------------------------------

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

        Additional executive officers of the Company are:

        Brent A. Turpen, Senior Vice President-Finance, is the principal
financial officer. Prior to becoming Senior Vice President in 2001, Mr. Turpen
was Controller from 1996 to 2001. Mr. Turpen joined the Bank in 1988. Age 31.

        Glenda Young, Senior Vice President and Chief Accounting Officer. Prior
to becoming Senior Vice President in 1998, Ms. Young was Vice
President/Treasurer from 1992 to 1998. Ms. Young has been employed by the Bank
in various capacities since 1967. Age 53.

        Billy Jack Johnson was elected President and Chief Executive Officer and
director of the Company and the Bank on April 2, 2002. Prior to April 2, 2002,
Mr. Johnson was Executive Vice President and Senior Lending Officer and director
of the Company and the Bank since 2001. Prior to joining First Southern, Mr.
Johnson had been Vice President of Sun Trust Bank. Mr. Johnson served in various
management and commercial lending positions at Sun Trust Bank from 1977 to 2001.
Age 50.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters
----------------------------------------------------------------

        (a)    (1)  As of April 1, 2002, the common stock of First Southern
        Bancshares, Inc. was quoted on The Nasdaq National Stock Market under
        the symbol "FSTH." As of April 1, 2002, First Southern Bancshares, Inc.
        had 593 shareholders and 1,256,715 shares of common stock outstanding.
        This 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."

                                       33

<PAGE>

                    The following table sets forth per share market prices and
        dividend information for Bancshares common stock. Dividends are listed
        by quarter in which declared by the Board of Directors.

                                          Year Ended December 31, 2001
                                        --------------------------------
                                            High      Low     Dividend
                                        -----------  ------ ------------

               First quarter               $ 8.50    $6.25     $   --

               Second quarter                7.33     5.95         --

               Third quarter                 6.88     3.90         --

               Fourth quarter                5.00     2.55         --

                                          Year Ended December 31, 2000
                                        --------------------------------
                                            High      Low     Dividend
                                        -----------  ------ ------------

               First quarter               $12.56    $8.00     $0.125

               Second quarter               11.95     8.50      0.125

               Third quarter                 9.50     6.00      0.125

               Fourth quarter                7.50     5.00      0.125

               (2)  Recent Sales of Unregistered Securities

                    (a) On October 9, 2001, the Company completed a private
               placement of 160,350 shares of Series A Preferred Stock and
               47,775 shares of Series B Preferred Stock.

                    (b) Sales of Series A Preferred Stock and Series B Preferred
               Stock were made only to "accredited investors" as the term is
               defined in Rule 501(a) of Regulation D of the Securities Act of
               1933. No underwriters were involved in the distribution.

                                       34

<PAGE>

<TABLE>
<CAPTION>
                                                                                    Underwriting
                    (c)  Class:                              Proceeds            Fees or Commissions
                         ------                              ---------           -------------------
                         <S>                                <C>                  <C>
                           Series A Preferred Stock ......  $3,528,000               $      N/A
                           Series B Preferred Stock ......   1,051,000                      N/A
                                                            ----------
                             Total proceeds ..............   4,579,000
                           Expenses ......................     (91,000)
                                                            ----------
                             Net proceeds ................  $4,488,000
                                                            ==========
</TABLE>

                    (d)  The sales of the Series A Preferred Stock and Series B
               Preferred Stock were made pursuant to an exemption from
               registration under Rule 506 of Regulation D of the Securities Act
               of 1933. In relying on the exemption afforded by Rule 506, the
               Company satisfied all the terms and conditions of Rules 501 and
               502 of Regulation D of the Securities Act of 1933 and limited the
               number of purchasers (excluding accredited investors) of the
               Series A Preferred Stock and Series B Preferred Stock to no more
               than 35 purchasers as that term is defined in Rule 501(a).

                    (e)  Holders of Series B Preferred Stock may at any time
               convert their shares of Series B Preferred Stock into shares of
               Company common stock. The number of shares of common stock a
               holder of Series B Preferred Stock will receive upon conversion
               equals the price paid for the shares of Series B Preferred Stock
               plus any accrued dividends, divided by the conversion price on
               the conversion date. The initial conversion price is $5.50 and is
               subject to adjustment.

                    (f)  The Company did not file a registration statement under
               the Securities Act of 1933 in connection with the offering
               because the offering qualifies as an exempt offering under the
               SEC Regulation D.

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 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, 2000, as well as certain material changes in results
of operations during the years ended December 31, 2001 and 2000.

        In attempting to comply with the Written Assurances, the Company has
made certain commitments to its regulators and has had certain changes in its
business operations and management. See "Risk Factors -- 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

                                       35

<PAGE>

Income." Management of the Company cannot currently estimate the effects of
these commitments and changes on the financial condition, liquidity and results
of operation of the Bank or Company. As of December 31, 2001, the Bank's
leverage capital ratio at 5.00% was below the 7.00% required by the Department.
Subsequent to December 31, 2001, the Company contributed $1 million to the
capital of the Bank with proceeds of a loan from certain of the directors of the
Company. The Bank's capital remained at a level meeting the regulatory capital
requirements for adequately capitalized, although the Bank's Tier 1 capital to
average assets remained below 7.00%.

        As a result of significant operating losses and other operational
deficiencies, Bancshares has entered into an MOU with the Federal Reserve Bank.
Subsequent to December 31, 2001, the Bank consented to the entry of the Order by
the Federal Deposit Insurance Corporation and the Alabama State Banking
Department which incorporates the Written Assurances. (See further discussion
under the captions "Risk Factors" and "Item 6. Management's Discussion and
Analysis or Plan of Operations -- Financial Condition, Liquidity and Capital
Resources -- General").

              FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

General

        The Company incurred a net loss of $7.6 million for the year ended
December 31, 2001. The net loss is primarily attributable to the following
factors.

        The quality of the Bank's loan portfolio deteriorated during 2000 and
2001. As a result, the Bank experienced a significant amount of charge-offs and
has been required to provide for additional anticipated loan losses in its
allowance for loan losses. The Bank's provision for loan losses for the year
ended December 31, 2001 totaled $5.9 million. (See further discussion under the
captions "-- Loans," "-- Non-performing Assets," and "-- Allowance for Loan
Losses").

        Net interest income decreased $2.5 million from $6.3 million for the
year ended December 31, 2000 to $3.8 million for the year ended December 31,
2001. The decrease in net interest income is the result of a decrease in the net
interest spread from 3.59% during 2000 to 2.80%. (See further discussion under
the captions "Comparison of Operating Results for the Years Ended December 31,
2001 and 2000 -- Net Interest Income," "-- Interest Income," and "-- Interest
Expense."

        Losses on real estate owned of $1.0 million and FHLB advance prepayment
penalties of $276,000 also contributed to the net loss of $7.6 million for the
year ended December 31, 2001.

        Total stockholders' equity decreased $7.7 million from $9.2 million at
December 31, 2000 to $1.5 million at December 31, 2001. The decrease in
stockholders' equity was the result of the $7.6 million net loss. During 2001,
the Company received net proceeds of $4.5 million from the sale of preferred
stock which is counted as regulatory capital for the Bank to the extent the
Company contributes the proceeds to the Bank, but is not classified as a part of
the Company's stockholders' equity.

        In the second quarter of 2000, the Company charged off $925,000 related
to apparent fraudulent loans involving a former loan officer and commercial loan
customers. Management is working with the Bank's regulators in an ongoing
investigation regarding the potential fraudulent activity. The Bank has fidelity
bond insurance which may cover a part or all of the related losses. The amount
of recovery, if any, cannot be estimated, and therefore, no such recovery is
reflected in the accompanying financial information.

        Subsequent to December 31, 2001, the Company contributed $1 million to
the capital of the Bank with proceeds of a loan from certain of the directors of
the Company. The Bank's capital remained at a level meeting the regulatory
capital requirements for adequately capitalized, although the Bank's Tier 1
capital to average assets remained below 7.00%.

                                       36

<PAGE>

        For further discussion regarding the Company's recent business and
regulatory developments, see "Risk Factors."

Cash and Cash Equivalents

        Cash and cash equivalents at December 31, 2001 of $14.2 million
increased $6.7 million from $7.5 million at December 31, 2000. The primary
source of this increase was from the sale of loans, payoffs on loans and the
issuance of preferred stock. Funds generated were also utilized to reduce FHLB
advances, purchase investment securities and fund decreases in deposits.

        The Bank's interest bearing balances of cash and cash equivalents have
increased by $9.2 million during 2001 from $542,000 at December 31, 2000 to $9.8
million at December 31, 2001. Interest bearing balances primarily 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.

Investments and Mortgage-Backed Securities

        The Company increased its amount of investment securities during 2001,
from $4.5 million at December 31, 2000 to $12.9 million at December 31, 2001.
The net increase in investment securities of $8.4 million from December 31, 2000
to December 31, 2001 was primarily due to the purchase of $10.0 million of
agency bonds and collateralized mortgage obligations during the fourth quarter
of 2001. The Bank also purchased a $2.0 million FHLMC discount note during the
second quarter of 2001. The FHLMC discount note matured during the fourth
quarter of 2001 and a $2.0 million U.S. Treasury Note was purchased. These
increases in investment securities were partially offset by the sale of $2.0
million in corporate bonds during the first quarter of 2001 and the call of a
$1.5 million agency bond during the second quarter of 2001. The $2.0 million
U.S. Treasury Note secures a $2.0 million repurchase agreement line of credit
with National Bank of Commerce, Birmingham, Alabama. At December 31, 2001 the
Bank had not made any draws on the line of credit.

        Mortgage-backed securities held to maturity decreased $200,000 from $3.4
million at December 31, 2000 to $3.2 million at December 31, 2001.

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.

        During 1995 the Bank converted its charter from a savings and loan
association to a commercial bank. From 1996 to 2000, the Bank focused its
efforts in growing its commercial loan portfolio. However, as a result of the
decline in quality of the Bank's loan portfolio, related reductions in Bank
capital, and other operational factors, the Board of Directors and Management is
re-evaluating its lending strategy. The Board of Directors and Management are
actively taking steps to improve the underwriting and credit administration
practices of the Bank in order to improve its overall asset quality. During the
second quarter of 2001, the Board hired an 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. New
policies with respect to loan originations have been formulated which should
enhance the quality of future production. While it is not Management's intent to
curtail the origination of new loans, primary emphasis is now being given to
problem loan administration, and the total loans originated during 2001 were
$38.6 million, a reduction of 21.9% from 2000 amounts.

        In addition to the overall philosophical changes implemented by new
management, the Bank is bound by regulatory restrictions with respect to its
capital ratios. (See further discussion in "-- Stockholder's Equity.") As a

                                       37

<PAGE>

result of declining capital ratios in light of recent loan losses, it has been
Management's intent to reduce the overall asset size of the Bank, raise
additional capital and bring required capital ratios into compliance with
regulatory guidelines. Therefore, the size of the loan portfolio has declined
significantly.

        The Bank's loan portfolio has declined from $139.7 million at December
31, 2000 to $90.4 million at December 31, 2001. This decline is attributable to
several factors.

        Residential mortgage loans have declined as a result of payoffs, regular
payments and Management's decision to sell approximately $5.5 million in
adjustable rate residential mortgage loans during the first quarter of 2001.
Proceeds from the sale of these loans were utilized to reduce the Bank's
outstanding FHLB advances. A gain of $90,000 was recorded during the first
quarter of 2001 on the sale of these loans. (See further discussion under the
captions "--Deposits, FHLB Advances and Other Notes Payable" and "--Liquidity").
An additional factor in the decline of the residential mortgage portfolio during
2001 was the continuation of the declining interest rate environment. The Bank's
residential mortgage portfolio has been impacted by the high level of refinances
as a result of the low market rates. Although the Bank has directly originated
an increased number of 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 Bank does consider
adjustable rate residential mortgage loans desirable, however, current market
conditions have not generated a demand in the origination of this type of loan.
These factors have contributed to a $24.2 million decline in the Bank's
residential mortgage portfolio during the year ended December 31, 2001.

        The Bank's combined commercial and consumer loan portfolio has declined
from $82.5 million at December 31, 2000 to $58.3 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. As noted previously, it is not Management's intention to
curtail lending to the commercial business and consumer market sectors, however,
the focus during 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 production during
2001 has been minimal and has not offset the level of repayments. Management
anticipates this focus will continue at least through the first quarter of 2002.

        At December 31, 2001, the Company had no significant commitments to
originate fixed-rate loans. At December 31, 2001, 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 ....................    $  852
                    Unused lines of credit ..........................     5,376
                    Standby letters of credit .......................        10

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, 2001 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. Such loans are
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.

                                       38

<PAGE>

Schedule of Nonperforming Assets.

         The following table sets forth nonperforming assets at the dates
indicated:

<TABLE>
<CAPTION>
                                                                                At December 31,
                                                         ------------------------------------------------------------
                                                           2001         2000         1999         1998         1997
                                                         -------       -------     --------      -------     --------
                                                                          (Dollars in thousands)
<S>                                                      <C>          <C>          <C>           <C>          <C>
Loans accounted for on a nonaccrual basis/1/:
  Real estate:
    1-4 unit residential...........................      $ 1,689      $  471       $    -        $  132       $    -
    Farmland ......................................            -         207            -             -            -
    Commercial ....................................        3,542         747            -             -          401
  Construction and land development ...............        3,089           -            -           782          135
  Commercial business .............................        3,796         866          683             -            -
  Consumer ........................................          102          96            -             -           25
                                                         -------      ------       ------        ------       ------
    Total .........................................       12,218       2,387          683           914          561
                                                         -------      ------       ------        ------       ------

Accruing loans which were contractually past
90 days or more:
  Real estate:
    1-4 unit residential ..........................          772       1,377          952         1,553          216
    Commercial ....................................          315           -           59           243            -
    Construction ..................................            -           -            -           112            -
  Commercial business .............................          306           -          398           432          148
  Consumer ........................................            2          23          158           105          181
                                                         -------      ------       ------        ------       ------
    Total .........................................        1,395       1,400        1,567         2,445          545
                                                         -------      ------       ------        ------       ------
    Total of nonaccrual and 90 days
    past due loans ................................       13,613       3,787        2,250         3,359        1,106

Foreclosed real estate and other assets ...........        1,234       1,070          918           710          100
                                                         -------      ------       ------        ------       ------
    Total non-performing assets ...................      $14,847      $4,857       $3,168        $4,069       $1,206
                                                         =======      ======       ======        ======       ======

Total loans delinquent 90 days or more to net
loans .............................................        15.06%       2.71%        1.44%         2.19%        0.69%
Total loans delinquent 90 days or more to total
assets ............................................        10.35%       2.26%        1.26%         1.88%        0.60%
Total non-performing assets to total assets .......        11.29%       2.90%        1.77%         2.28%        0.66%
</TABLE>


_________________________
(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, 2001, the Bank had impaired loans within the meaning of
         SFAS No. 114 amounting to $12.8 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, 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 $684,000. The amount of interest income on those
         loans that was included in net income for the period is $449,000.

         Total non-performing assets increased substantially during 2001 from
$4.9 million at December 31, 2000 to $14.8 million at December 31, 2001.
Non-accrual loans accounted for $9.8 million of this increase. This increase in
non-accruals is related to problems with ten commercial relationships each
ranging from $400,000 to $2.7 million. Management continues to evaluate workout
solutions and alternatives to these problem credits. Employee turnover in the
first half of 2001 led to slower collection and renewal efforts. However,
management has placed increased emphasis on the collection process and added a
new collection officer during the second quarter 2001. Despite these efforts,
the volume of non-performing assets has risen considerably. Management is
concerned about the further impact the decline in the local economy may have
upon the Bank's ability to improve the quality of its loan portfolio. No
assurance can be given that the level of non-performing assets will not increase
in future periods.

                                       39

<PAGE>

         Foreclosed real estate and other assets increased $538,000 during 2001
from $688,000 at December 31, 2000 to $1.2 million at December 31, 2001. The
increase is primarily related to foreclosures of residential real estate. The
Bank's real estate owned consisted of five lots of vacant land and fifteen
single-family properties. The balance at December 31, 2001 also includes the
Bank's Tuscumbia branch which was closed during third quarter of 2001.
Repossessed assets decreased $375,000 from $383,000 at December 31, 2000 to
$8,000 at December 31, 2001. The decrease in repossessed assets is primarily
attributable to dispositions and charge-offs of inventory, equipment and
vehicles during the year ended December 31, 2001.

         Included in non-performing assets are $12.8 million of impaired loans
at December 31, 2001 compared to $3.4 million at December 31, 2000. There was
approximately $2.7 million at December 31, 2001, in the allowance for loan
losses specifically allocated to impaired loans versus $1.2 million at December
31, 2000.

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 remained relatively unchanged at December 31, 2001 in comparison to
December 31, 2000, despite the increased activity during the year ended December
31, 2001. The allowance for loan losses represented 3.7% and 6.3% of net loans
receivable at December 31, 2000 and December 31, 2001, respectively. (See
further discussion in "Comparison of Operating Results For the Years Ended
December 31, 2001 and 2000 -- Provision for Loan Losses" below.)

         In the opinion of management, the allowance for loan losses was
adequate at December 31, 2001, to provide for potential loan losses in the loan
portfolio at that date. 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 the allowance in the future. Such 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 forth 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 $12.6 million from $131.2 million at
December 31, 2000 to $118.7 million at December 31, 2001. Savings certificate
withdrawals account for 87.7% of the decrease in deposits. During the last six
months of 2001, the Bank has set rates on savings certificates lower than much
of the competition in an effort to improve the Bank's cost of funds for deposits
and maximize the use of excess cash held on the FHLB overnight account. As a
result, the Bank's savings certificates have decreased $11.0 million.

         At December 31, 2001, savings certificates amounted to $82.3 million,
or 69.5%, of the Company's total deposits, including $71.7 million that were
scheduled to mature by December 31, 2002. Management of the Company believes it
has adequate resources to fund all loan commitments with savings deposits,
available FHLB overnight account funds, a $2.0 million secured line of credit
agreement (as discussed in "-- Investments and Mortgage-Backed Securities") and
that it can adjust the offering rates of savings certificates to retain deposits
in changing interest rate environments.

         The interest rate paid on the average balance of deposits decreased
from 4.85% for the year ended December 31, 2000 to 4.77% for the year ended
December 31, 2001. Although the prime rate decreased from 9.50% to 4.75% during
the year ended December 31, 2001, the Bank's cost of funds for deposits
decreased only slightly due to the cost on savings certificates which comprise
the majority of the Bank's deposits. Higher interest

                                       40

<PAGE>

rates were offered on 13 month and 18 month savings certificates during the last
nine months of 2000 in an effort to retain and acquire new deposits. These
specials were offered at higher rates and continue to impact the Bank's costs of
funds as many of the accounts have not matured or repriced.

         The Company decreased its borrowings from the FHLB by $19.6 million to
$5.9 million at December 31, 2001, from $25.5 million on December 31, 2000.
These funds were generated by the sale of loans and proceeds from payoffs and
regular payments on loans during the year ended December 31, 2001. The Bank
recorded prepayment penalties during 2001 aggregating $276,000 on the payoff of
a $2 million, 6.08% fixed rate advance and a $5 million reduction of a $10
million, 5.49% fixed rate advance. The FHLB advance was prepaid to reduce the
impact of the negative interest rate spread between the higher cost borrowing
liability and lower yielding investments and to reduce the Bank asset size in
order to achieve adequate regulatory capital ratios.

         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

         Total stockholders' equity decreased by $7.7 million to $1.5 million at
December 31, 2001, from $9.2 million as of December 31, 2000. The decrease in
stockholder's equity was the result of the $7.6 million net loss. During 2001,
the Company received net proceeds of $4.5 million from the sale of preferred
stock which is counted as regulatory capital for the Bank to the extent the
Company contributes the proceeds to the Bank, but is not classified as a part of
the Company's stockholders' equity. The Bank and the Company are subject to
certain regulatory capital requirements. 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 May Have a Material Adverse
Affect on the Company." "Item 1. Description of Business -- Regulation and
Supervision of the Company and the Bank" and Note 10 to "Notes to Consolidated
Financial Statements" for a discussion of the Bank's regulatory capital.

         As a result of the MOU, the Company has adopted a capital restoration
plan and capital and dividend policy to comply with one of 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.

         In October 2001, the Company completed a private placement of Series A
Preferred Stock raising $3.5 million in equity capital and a private placement
of Series B Preferred Stock raising $1.1 million in equity capital. Bancshares
used approximately $4.3 million of the net proceeds of these offerings to
contribute capital to the Bank. The remaining proceeds were used for general
corporate purposes. The Series A and Series B Preferred Stock are redeemable,
have a 4% and 6%, respectively, cumulative dividend payable in cash or stock,
subject to compliance with minimum capital requirements. For a description of
the terms of the Preferred Stock, see Note 11 to the "Notes to Consolidated
Financial Statements."

         The Bank also agreed with the Department to raise Tier 1 capital to
average assets to 7.00%. To be categorized as well capitalized, the Bank must
maintain the required capital ratios and not be subject to a capital order. At
December 31, 2001, the Bank's Tier 1 capital to average assets ratio was 5.00%
which was below the 7.00% required by the Department. At December 31, 2001, the
Bank's capital met the FDIC regulatory requirements for "adequately
capitalized."

         Subsequent to December 31, 2001, the Company contributed $1 million to
the capital of the Bank with the proceeds of a loan from certain of the
directors of the Company. The Bank's capital remained at a level meeting the
regulatory capital requirements for "adequately capitalized," although the
Bank's Tier 1 capital to average assets remains below 7.00%.

                                       41

<PAGE>

         The Order also 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 must equal or exceed 5% 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% of total assets. The
Order also requires the Bank, by March 31, 2002, to develop and adopt a plan to
meet and maintain the FDIC's minimum risk-based capital requirements for each
year in which the plan is in effect.

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 dividends to shareholders and general corporate expenses. The primary
source of liquidity for Bancshares is dividends from the subsidiary Bank. As
noted in the "Risk Factors" section, the Bank is restricted from paying any
dividends to Bancshares and Bancshares is restricted from borrowing without
special regulatory approval under the terms of the Order. As a result, liquidity
at the holding company level could become insufficient to support Bancshares'
need for funds.

         During the year ended December 31, 2001, the Company's FHLB credit
availability program, which has a credit limit equal to 10% of the Bank's
assets, was modified by the FHLB to increase the percentage of mortgage loans,
which must be held in relation to the amount outstanding under the line of
credit. All existing debt and any future borrowings from the FHLB require
physical transfer of the requisite percentage of qualifying mortgage loans to
the FHLB. Credit availability is limited to 85% of the fair value of qualifying
mortgage loans held as collateral. At December 31, 2001, the Company has
transferred and pledged mortgage loans aggregating $10.5 million to the FHLB to
collateralize outstanding advances of $5.9 million at that date. The
modification of the credit availability program and the requirement to pledge
qualifying mortgages for any additional borrowings from the FHLB limits the
Company's short-term liquidity.

         Subsequent to December 31, 2001, the Bank pledged investment securities
with a market value of $6.8 million to the FHLB to collateralize outstanding
advances of $5.9 million. Previously pledged mortgage loans were released and
returned to the Bank.

         Liquid assets of the Bank increased from $11.9 million at December 31,
2000 to $27.1 million at December 31, 2001. It is Management's policy to
maintain sufficient liquid assets to cover all foreseeable demands on cash. In
conjunction with the written assurances given by the Bank and its Directors to
the Department, Management has revised its liquidity and funds management
policies in an effort to improve its liquidity position.

         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,
2001, the Bank's qualifying reserves of $1.3 million exceeded the required
reserve of $277,000.

                                       42

<PAGE>

                     COMPARISON OF OPERATING RESULTS FOR THE
                     YEARS ENDED DECEMBER 31, 2001 AND 2000

General

         Consolidated net income (loss) for the year ended December 31, 2001 was
($7.6 million) as compared to ($3.9 million) for the year ended December 31,
2000. Basic earnings (loss) per share for the year ended December 31, 2001, was
($6.06) as compared to ($3.09) for the year ended December 31, 2000. Diluted
earnings (loss) per share for year ended December 31, 2001 was ($6.06) as
compared to ($3.09) for the year ended December 31, 2000.

Net Interest Income

         Net interest loss after provision for loan losses for the year ended
December 31, 2001 was $2.1 million, which was $100,000 greater than the net
interest loss after provision for loan losses of $2.0 million reported for the
year ended December 31, 2000. The increase in net interest loss after provision
for loan losses is due primarily to the $4.0 million decrease in interest income
from $14.2 million for the year ended December 31, 2000 to $10.2 million for the
year ended December 31, 2001. The decrease in interest income was partially
offset by a decrease in interest expense of $1.5 million from $8.0 million for
the year ended December 31, 2000 to $6.5 million for the year ended December 31,
2001. A $2.3 million decrease in the provision for loan losses from $8.2 million
for the year ended December 31, 2000 to $5.9 million for the year ended December
31, 2001 also offset the decrease in interest income.

         The average balance of interest-earning assets decreased from $163.1
million for the year ended December 31, 2000 to $133.1 million for the year
ended December 31, 2001. The average yield on interest-earning assets decreased
from 8.71% for 2000 to 7.69% for 2001. See "--Interest Income" below for further
discussion.

Interest Income

         Interest income for the year ended December 31, 2000 was $14.2 million
compared to $10.2 million for the year ended December 31, 2001, representing a
decrease of $4.0 million or 27.9%. The decrease was primarily attributable to
the $30.0 million decrease in average interest earning assets from $163.1
million for the year ended December 31, 2000 to $133.1 million for the year
ended December 31, 2001. Also contributing to the decrease in interest income
was a decrease in the average yield on interest-earning assets from 8.71% for
the year ended December 31, 2000 to 7.69% for the year ended December 31, 2001.
The lower yield is the result of lower interest rates related to the rate
reductions by the Federal Reserve Bank and the increased amount of non-accruing
loans. The decrease in interest-earning assets is summarized in the average
balance table shown below:

                                             Year ended           Year ended
                                          December 31, 2001    December 31, 2000
                                          -----------------    -----------------
                                                  (Dollars in thousands)

Net loans                                     $ 113,484            $ 152,293
Mortgage-backed securities                        3,301                3,443
Investment securities                             4,105                4,404
FHLB overnight account                           10,301                1,163
FHLB stock                                        1,866                1,815
                                              ---------            ---------
         Total                                $ 133,057            $ 163,118
                                              =========            =========

         Interest on loans receivable decreased $4.2 million from $13.5 million
for the year ended December 31, 2000 to $9.3 million for the year ended December
31, 2001. The decrease is primarily due to the $38.8 million decrease in the
average balance of net loans from $152.3 million for 2000 to $113.5 million for
2001. In addition to payoffs and regular payments, $5.8 million in loans were
charged off and $5.5 million in loans were sold during the year ended December
31, 2001. The average yield on loans also decreased from 8.85% for the year
ended December 31, 2000 to 8.22% for the year ended December 31, 2001.

                                       43

<PAGE>

         Interest on mortgage-related securities decreased by $11,000 from
$233,000 for the year ended December 31, 2000 to $222,000 for the year ended
December 31, 2001 as a result of the average balance of such securities
decreasing by $100,000 from $3.4 million for the year ended December 31, 2000 to
$3.3 million for the year ended December 31, 2001. The average yield on these
securities decreased from 6.77% for the year ended December 31, 2000 to 6.73%
for the year ended December 31, 2001.

         Interest from the investment securities portfolio decreased by $64,000
from $284,000 for the year ended December 31, 2000 to $220,000 for the year
ended December 31, 2001 as the result of the average balance of investment
securities decreasing by $300,000 from $4.4 million for 2000 to $4.1 million for
2001. The average yield on investment securities decreased from 6.45% for the
year ended December 31, 2000 to 5.36% for the year ended December 31, 2001.

         Other interest income is comprised of earnings on the overnight account
and time deposits at the FHLB of Atlanta, FHLB stock dividends, and earnings on
money market funds. Other interest income increased by $247,000 from $216,000
for the year ended December 31, 2000 compared to $463,000 for the year ended
December 31, 2001. This increase is due primarily to the increased average
invested balance on the FHLB overnight account from $1.2 million for the year
ended December 31, 2000 to $10.3 million for the year ended December 31, 2001.
FHLB dividends were $141,000 during 2000 as compared to $126,000 during 2001 due
to a decrease in the average yield on FHLB stock from 7.77% for the year ended
December 31, 2000 to 6.75% for the year ended December 31, 2001.

Provision for Loan Losses

         The identification of problem loans within the Bank's portfolio began
with an external investigation starting in the third quarter of 2000. Adversely
classified assets have increased from $18.9 million, or 11.3% of total assets at
December 31, 2000 to $27.9 million, or 21.2% of total assets at December 31,
2001. Consequently, the provision for loan losses has continued to be
significant. The provision for loan losses totaled $8.2 million for the year
ended December 31, 2000 and $5.9 million for the year ended December 31, 2001.
Additionally, known losses on non-performing unsecured loans, bankruptcies and
other inadequately secured commercial/consumer loans have been charged-off.
Charge-offs increased from $4.6 million for the year ended December 31, 2000
compared to $5.8 million for year ended December 31, 2001.

         New management, who joined the Bank during the first and second quarter
of 2001, continues to address the increasing level of problem loans. Although
the Board and Management believe that the most significant problem loans in the
portfolio 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.

Interest Expense

         Interest expense for the year ended December 31, 2001 was $6.5 million
compared with $8.0 million for the year ended December 31, 2000, representing a
decrease of $1.5 million or 18.8%. Interest on deposits decreased $300,000 from
$5.9 million for the year ended December 31, 2000 to $5.6 million for the year
ended December 31, 2001. The average balance of deposits decreased from $122.4
million for the year ended December 31, 2000 to $118.2 million for the year
ended December 31, 2001. The average cost on deposits decreased from 4.85%
during 2000 to 4.77% during 2001. Although the prime rate decreased from 9.50%
to 4.75% during the year ended December 31, 2001, the Bank's cost of funds for
deposits decreased only slightly as a result of the cost on savings certificates
which comprise the majority of the Bank's deposits. Higher interest rates were
offered on 13 month and 18 month savings certificates during the last nine
months of 2000 in an effort to retain and acquire new deposits. These specials
were offered at higher rates and continue to impact the Bank's costs of funds as
many of the accounts have not matured or repriced.

                                       44

<PAGE>

         Other interest expense consists primarily of FHLB advances. Other
interest expense decreased by $1.2 million from $2.0 million for the year ended
December 31, 2000 to $818,000 for the year ended December 31, 2001. The average
balance of other borrowings decreased $19.0 million from $32.9 million for the
year ended December 31, 2000 to $13.9 million for the year ended December 31,
2001. The decrease in other borrowings was primarily funded by the sale of
single-family mortgage loans and proceeds from payoffs and regular payments on
loans as discussed in "--Interest Income" above. The average cost of borrowings
decreased from 6.10% for 2000 to 5.90% for 2001.

Non-interest Income

         Non-interest loss for the year ended December 31, 2001 was $170,000, a
$767,000 decrease from the $597,000 net interest income recorded for the year
ended December 31, 2000. The decrease in non-interest income is primarily due to
net losses on sale of real estate owned and other assets of $1.0 million during
2001 as compared to net losses of $159,000 during 2000. A decrease in loan fees
and service charges of $113,000 from $626,000 during 2000 to $513,000 during
2001 also contributed to the decrease in non-interest income. The decrease in
loan fees and service charges is due to a decrease in new loan originations in
the commercial and installment lending areas as discussed in "--Loans."
Additionally, service charges on checking accounts have decreased as many
existing fee-earning accounts have transferred to a free checking product. These
decreases in non-interest income were partially offset by an increase in net
gains on sale of loans of $179,000 from $103,000 for the year ended December 31,
2000 to $282,000 for the year ended December 31, 2001. The net gains on sale of
loans for the year ended December 31, 2001 includes $90,000 from the sale of
$5.5 million in adjustable rate loans from the Bank's in-house portfolio during
the first quarter 2001. (See "Financial Condition, Liquidity And Capital
Resources --Loans" for further discussion.)

Non-interest Expense

         Non-interest expense increased from $5.0 million for the year ended
December 31, 2000 to $5.6 million for the year ended December 31, 2001. The
increase in non-interest expense results from an increase in other non-interest
expenses of $765,000. Other non-interest expense totaled $875,000 for the year
ended December 31, 2000 versus $1.6 million for the year ended December 31,
2001. The increase in other non-interest expense is primarily due to increases
in FHLB advance prepayment penalties, professional and consulting fees and other
loan expenses. FHLB advance prepayment penalties totaled $276,000 during 2001 as
compared to no prepayment penalties during 2000. (See further discussion in
"--Financial Condition, Liquidity And Capital Resources Deposits, FHLB Advances
and Other Notes Payable".) Professional fees increased $378,000 from $300,000
for the year ended December 31, 2000 to $678,000 for the year ended December 31,
2001. The increase in professional fees is attributable to increased legal,
accounting and consulting fees associated with the administration of the MOU and
"Agreement" (see "--Stockholder's Equity") and the administration, collection
and work-out efforts associated with the Bank's problem loan portfolio. Other
loan expenses increased $109,000 from $82,000 for the year ended December 31,
2000 to $191,000 for the year ended December 31, 2001. This increase is also
associated with the administration, collection and work-out efforts associated
with the Bank's loan portfolio. Offsetting the increase in other non-interest
expenses were decreases in compensation and employee benefits and advertising
expenses.

Income Taxes

         Income tax benefit for the year ended December 31, 2001 was $239,000 as
compared to an income tax benefit of $2.5 million for the year ended December
31, 2000. The net loss before income taxes for 2001 was $7.9 million as compared
to a net loss before income taxes for 2000 of $6.4 million. Although the net
loss before income taxes increased by $1.5 million during 2001, the income tax
benefit decreased by $2.3 million. The decrease in the income tax benefit is the
result of the creation of a valuation allowance for the Bank's deferred tax
asset during the year ended December 31, 2001. Upon the recommendation of its
independent accountants, the Bank has determined that the recognition of a
valuation allowance is necessary because generally accepted accounting standards
require that deferred tax assets be recognized only when it is more likely than
not that the assets can be utilized. The necessity for a valuation allowance
against the deferred tax asset will be reevaluated in future periods based on
objective evidence and circumstances existing at that time.

                                       45

<PAGE>

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
        Independent Auditors' Report of Marmann, McCrary & Associates, P.C.
        Consolidated Statements of Financial Condition, December 31, 2001 and
          2000
        Consolidated Statements of Operations For the Years Ended December 31,
          2001 and 2000
        Consolidated Statements of Shareholders' Equity For the Years Ended
          December 31, 2001 and 2000
        Consolidated Statements of Cash Flows For the Years Ended December 31,
          2001 and 2000
        Notes to Consolidated Financial Statements


Item 8. Changes In and Disagreements With Accountants on Accounting and
------------------------------------------------------------------------
        Financial Disclosure
        --------------------

        There have been no changes in or disagreements with accountants on
accounting and financial disclosure that have not been previously reported by
the Company. For information regarding the Company's change in accountants
during 2001, see the Company's Form 8-K filed with the SEC on August 29, 2001.

                                    PART III

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

        The Company's Board of Directors consists of six members. Five
directors are independent and one is a member of management. The Board is
divided into three classes with three-year staggered terms, with approximately
one-third of the directors elected each year. Information regarding the
directors is provided below. Unless otherwise stated, the directors have held
their current occupations for the last five years. The age indicated in each
director's biography is as of December 31, 2001. The indicated period for
service as a director includes service as a director of the Bank.

The following directors have terms expiring at the annual meeting in 2002:

        S. Greg Beadle is the president of an electric supply company. Age 51.
Director since 1998.

        Robert Walker is a shareholder in the firm of Baker, Donelson, Bearman
& Caldwell, P.C. Age 58. Director since 2001.

        The following directors have terms expiring at the annual meeting in
2003:

        James E. Bishop is owner and president of an automobile and truck
dealership. Age 53. Director since 1991.

        Billy Jack Johnson was elected Executive Vice President and Senior
Lending Officer of the Company and the Bank in 2001. Prior to joining First
Southern, Mr. Johnson had been Vice President of Sun Trust Bank. Mr. Johnson
served in various management and commercial lending positions at Sun Trust Bank
from 1977 to 2001. Mr. Johnson became President and Chief Executive Officer and
a director of the Company and the Bank in April, 2002. Age 50.

                                       46

<PAGE>

         The following directors have terms expiring at the annual meeting in
2004:

         J. Acker Rogers, Chairman of the Board, served as Acting President and
Acting Chief Executive Officer of the Company and the Bank following the
retirement of Charles L. Frederick, Jr. and prior to the election of Robert C.
Redd to these positions in 2001. Mr. Rogers is the owner and president of a
general insurance agency. Age 55. Director since 1991.

         Steve McKinney is the president of a fastener distribution company. Age
46. Director since 1998.

         For information concerning the executive officers of the Company who
are not also directors, see "Part I, Additional Item. Executive Officers."

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than 10% of
any registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Executive officers, directors and greater than 10% stockholders are required by
regulation to furnish the Company with copies of all Section 16(a) reports they
file.

         Based solely on its review of the copies of the reports it has received
and written representations provided to the Company from the individuals
required to file the reports, the Company believes that during the fiscal year
ended December 31, 2001, all individuals other than Messrs. B. Jack Johnson,
Brent A. Turpen and Ms. Glenda S. Young, each of whom filed a Form 3 more than
ten days after being designated executive officers of the Company, complied with
their reporting obligations in a timely manner.

         No reportable transactions occurred between the date Messrs. Johnson
and Turpen and Ms. Young were required to file a Form 3 and the date they filed
their Forms 3.

Item 10.  Executive Compensation
--------------------------------

Directors' Compensation

         Directors of the Company receive a quarterly retainer of $550.
Directors of the Bank, who also serve as directors of the Company, receive a fee
of $750 per month with the exception of the Chairman of the Board who receives a
fee of $850 per month. Non-officer directors receive an additional $100 for
committee meetings.

                                       47

<PAGE>

Executive Compensation

         Summary Compensation Table. The following information is furnished for
Messrs. Redd, Rogers and Frederick. No other executive officer of the Company or
its subsidiary received salary and bonus of $100,000 or more during the year
ended December 31, 2001.

<TABLE>
<CAPTION>
                                                                                     Long Term
                                                     Annual Compensation            Compensation
                                                  -------------------------   ------------------------
                                                                               Restricted                     All
                                                                                 Stock         Stock         Other
Name and Principal Position                Year      Salary         Bonus       Awards        Options     Compensation
---------------------------               ------  --------------- ---------   -------------  ---------   ---------------
<S>                                        <C>    <C>               <C>        <C>              <C>
Robert C. Redd .........................   2001   $  143,613/(1)/   $   --      20,000/(2)/     25,000     $  3,252/(3)/
  President and Chief Executive
  Officer

J. Acker Rogers/(4)/ ...................   2001   $   13,156            --     $    --              --     $     --
  Chairman of the Board of Directors
  Former acting Chief Executive
  Officer

Charles L. Frederick, Jr. ..............   2001   $   69,001/(5)/       --     $16,551/(6)/         --     $ 58,395/(7)/
  Former President and Chief               2000      143,497        20,917          --                       14,647
  Executive Officer                        1999      141,606            --          --                       15,337
</TABLE>

_____________________________________________
(1)  Salary for Mr. Redd in 2001 includes $5,374 for unused sick leave and
     $11,875 in deferred compensation.
(2)  These shares were a performance-based stock award that were forfeited upon
     his resignation effective April 2, 2002.
(3)  Represents the Bank's matching contribution under the Bank's 401(k) Plan.
(4)  Mr. Rogers served as acting Chief Executive Officer from February 1, 2001
     through February 28, 2001.
(5)  Mr. Frederick resigned as the Company's President and Chief Executive
     Officer effective January 31, 2001. As part of Mr. Frederick's termination
     agreement, Mr. Frederick received $57,521 in compensation.
(6)  As part of Mr. Frederick's termination agreement, he received 2,623 shares
     of Company common stock under the Company's Management Recognition and
     Development Plan.
(7)  As part of Mr. Frederick's termination agreement, he received unencumbered
     title to his former company automobile (estimated value of $27,150), safety
     deposit box services at the Bank, at no cost, for five years beginning
     February 1, 2001 (estimated value of $175), $28,320 for the value of his
     vacation and sick leave accumulated and unused through January 31, 2001 and
     $2,750 representing reimbursement of Mr. Frederick's cafeteria plan
     account.

         Option Exercise/Value Table. The following information is provided for
Mr. Redd for the fiscal year ended December 31, 2001.

<TABLE>
<CAPTION>
                                                                                                 Value of Unexercised
                                                                 Number of Securities          In-the -Money Options at
                                                                Underlying Unexercised                   Fiscal
                                                              Options at Fiscal Year-End             Year-End /(1)/
                                                             ----------------------------------------------------------
           Name                      Acquired
                                        on         Value
                                     Exercise     Realized   Exercisable    Unexercisable    Exercisable  Unexercisable
------------------------------       --------     --------   -----------    --------------   -----------  -------------
        <S>                          <C>          <C>        <C>            <C>              <C>          <C>
        Robert C. Redd ..........     $   --      $     --       0             25,000           $   0         $   0
</TABLE>

___________________________
(1)  The exercise price for Mr. Redd's options is $6.50. The closing trading
     price of the Company's common stock on December 31, 2001 was $3.40 per
     share.

                                       48

<PAGE>

         Employment Agreement and Stock Option Agreement. The Company and the
Bank entered into an employment agreement with Mr. Redd effective March 1, 2001.
The agreement provided for a three-year term of employment with an annual salary
of $170,000 and provided for a cash bonus of up to 25% of his base salary based
upon the board's review of Mr. Redd's performance.

          The employment agreement also provided for, among other things, Mr.
Redd's participation in stock benefit plans and provided for Mr. Redd to receive
an incentive stock bonus award of 20,000 shares of the Company's common stock if
the reported closing price of the Company's stock is at least $14.00 per share
for ten consecutive trading days between March 1, 2001 and March 31, 2004. The
Company and Mr. Redd mutually agreed to terminate the employment agreement
effective March 31, 2002 and Mr. Redd resigned effective April 2, 2002.

          The Company also entered into a stock option agreement with Mr. Redd
pursuant to which Mr. Redd was granted options to purchase 25,000 shares of the
Company's common stock at an exercise price of $6.50 per share. The options will
vest in equal annual installments over the five year period commencing on March
1, 2002 and will expire on March 1, 2008.

          Termination Agreement. Effective January 31, 2001, Charles L.
Frederick, Jr. resigned as President and Chief Executive Officer of both the
Company and the Bank, in addition to resigning as a director of both entities.
In accordance with a written agreement the Company and the Bank have agreed to
provide Mr. Frederick with the following severance payments: (1) $62,750 in
cash, payable over a 12-month period in equal monthly installments beginning
February 1, 2001; (2) $30,894 in cash, payable monthly over twelve months
beginning February 1, 2001, for the value of his vacation and sick leave
accumulated through January 31, 2001; (3) unencumbered title to his former
company automobile (estimated value of $27,150); (4) safety deposit box services
at the Bank, at no cost, for five years beginning February 1, 2001 (estimated
value of $175); (5) the 2,623 shares of Company common stock under the Company's
Management Recognition and Development Plan that vested in April 2001, to be
paid in April 2001 (estimated value of $16,551); (6) his full deferred
compensation benefit in accordance with the Company's Deferred Compensation
Plan, payable in February 2002 (estimated value of $44,765); and (7) $3,000 in
cash, payable over a 12-month period in equal monthly installments beginning
February 1, 2001, representing reimbursement of his cafeteria plan account. In
exchange for the foregoing, Mr. Frederick waived any and all rights to which he
was otherwise entitled under his employment agreement with the Company and the
Bank, which was terminated upon his resignation.

                                       49

<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

          The following table provides information, as of March 20, 2002, about
the persons known to the Company to be the beneficial owners of more than 5% of
the Company's outstanding voting stock, which includes common stock, Series A
preferred stock or Series B preferred stock, and each director and executive
officer of the Company. A person may be considered to beneficially own any
shares of stock over which he or she has, directly or indirectly, sole or shared
voting or investing power.

<TABLE>
<CAPTION>
                                                                                                                        Percent of
                                                                                                                          Series
                                                                        Percent of                                        A and B
                                                                       Common Stock     Shares of         Shares of      Preferred
                             Shares of                                     and          Series A          Series B         Stock
                            Common Stock         Common Stock          Common Stock     Preferred         Preferred     Outstanding
Name and Address               Owned            Equivalents(1)        Equivalents (1)  Stock Owned       Stock Owned        (2)
----------------            ------------        --------------        ---------------  -----------       -----------    -----------
<S>                         <C>                 <C>                   <C>              <C>               <C>            <C>
First Southern Bank(3)           144,950                    --                   11.5%          --                --             --%
Employee Stock Ownership
Plan
102 South Court Street
Florence, Alabama 35630

H. M. Bobo                        75,000/(4)/               --                    5.8       11,363                --            5.5
P.O. Box 1003
Florence, Alabama 35631

James E. Bishop                   50,913                10,249/(5)/               4.7       15,910/(3)/           --            7.6
102 South Court Street
Florence, Alabama 35630

B. Jack Johnson                       --                 2,000/(7)/               0.2        8,300                --            4.0

Steve McKinney                     2,000                83,820/(8)/               6.4           --            20,455/(9)/       9.8

Robert C. Redd                     5,317                 5,000/(10)/              0.8        9,091                --            4.4

Robert Walker                      4,500                18,180/(11)/              1.8        4,546             4,545            4.4

S. Greg Beadle                     6,875/(12)/           2,000/(7)/               0.7       11,183/(13)/          --            5.4

James M. Hughes                       --                    --                     --       18,182                --            8.7

Lockwood Holmes                       --                    --                     --       13,636                --            6.6

Earl T. Holloway                      --                36,368/(11)/              2.8        4,545             9,092            6.6

J. Acker Rogers                   28,960/(14)/          10,249                    3.0        4,546                --            2.2

All directors and                118,083               141,611                   12.3       53,576            25,000           52.3
   executive officers as a
   group (9 persons)
</TABLE>

-----------------------------
(1)  Percentages with respect to each person or group of persons have been
     calculated based on 1,256,715 shares of Company common stock outstanding
     and entitled to vote as of April 1, 2002, plus the number of the Company's
     common stock which each person or group of persons has the right to acquire
     within 60 days of April 1, 2002 by the exercise of stock options or the
     conversion of Series B Preferred Stock assuming a conversion factor of 4
     common shares for one share of Series B Preferred Stock.
(2)  Series A and Series B stock each has 3 votes per share and vote together as
     a class.
(3)  The ESOP was terminated effective February 2002. Distributions to the
     Company's stock held by the ESOP to the Company's employees are pending.
(4)  Based on the Company's stock transfer records.
(5)  Includes 10,249 shares of the Company's common stock that may be acquired
     pursuant to options that are exercisable within 60 days of the record date.

                                       50

<PAGE>

(6)  Shares are owned by Kilpatrick, Bishop Inc. Mr. Bishop is the president and
     a stockholder of Kilpatrick, Bishop Inc.
(7)  Includes 2,000 shares of the Company's common stock that may be acquired
     pursuant to stock options that are exercisable within 60 days of the record
     date.
(8)  Includes 2,000 and 81,820 shares of Company common stock, respectively,
     that may be acquired pursuant to stock options or Series B Preferred stock
     exercisable or convertable, respectively, within 60 days.
(9)  Includes 11,364 shares owned by Southern Fastening Systems, Inc. Mr.
     McKinney is president of Southern Fastening Systems, Inc.
(10) Includes 5,000 shares of the Company's common stock that may be acquired
     pursuant to stock options that are exercisable within 60 days of the record
     date.
(11) Represents shares of the Company's common stock acquired upon conversion of
     Series B Preferred Stock.
(12) Includes 1,150 shares of the Company's common stock owned by Mr. Beadle's
     spouse and 585 shares held in trust for Mr. Beadle's son.
(13) Includes 4,364 shares of the Company's Series A preferred stock owned by
     SBS Electric Supply Company.
(14) Includes 4,364 shares of common stock owned by Mr. Rogers' spouse and 500
     shares of common stock owned by Mr. Rogers' daughter.

     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.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

     Federal regulations require that all loans or extensions of credit to
executive officers and directors of insured financial institutions must be made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons,
except for loans made pursuant to programs generally available to all employees,
and must not involve more than the normal risk of repayment or present other
unfavorable features. The Bank, therefore, is prohibited from making any new
loans or extensions of credit to executive officers and directors at different
rates or terms than those offered to the general public, except for loans made
under programs generally available to all employees, and the Bank has adopted a
policy to this effect. In addition, loans made to a director or executive
officer in an amount that, when aggregated with the amount of all other loans to
such person and his or her related interests, are in excess of the greater of
$25,000 or 5% of the institution's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested members
of the Board of Directors. The aggregate amount of loans extended by the Bank to
its executive officers and directors was approximately $2.3 million at December
31, 2001.

     J. Acker Rogers, Chairman of the Board of both the Company and the Bank, is
part owner of the insurance firm of Rogers, Carlton & Associates, Inc., from
which the Bank has purchased insurance for the past several years. Rogers,
Carlton & Associates, Inc. received approximately $35,000 from the Bank during
the fiscal year ended December 31, 2001.

     Robert Walker, director of both the Company and the Bank, is a shareholder
in the law firm Baker, Donelson, Bearman & Caldwell, P.C. Mr. Walker and the
firm provided legal services to both the Company and the Bank and received
approximately $175,000 from the Company and the Bank during fiscal year ended
December 31, 2001.

                                       51

<PAGE>

                                     PART IV

Item 13.  Exhibits and Reports on Form 8-K
------------------------------------------

        (a)    Exhibits

               3(i)(a)   Certificate of Incorporation of the Company/(1)/
               3(i)(b)   Certificate of Amendment of Certificate of
                         Incorporation/(2)/
               3(ii)(a)  Bylaws of the Company/(1)/
               3(ii)(b)  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)     Employment Agreement with Billy Jack Johnson, Jr./(7)/
               11        Statement Re: Computation of Per Share Earnings/(8)/
               21        Subsidiaries of the Registrant
               23(a)     Consent of Kraft Bros., Esstman, Patton & Harrell, PLLC
               23(b)     Consent of Marmann, McCrary & Associates, P.C.
               99        Consolidated Financial Statements and Reports of
                         Independent Accountants

               _____________
               (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 the Company's Quarterly
                         Report on Form 10-QSB for the period ended June 30,
                         2001.
               (8)       N/A, Can be clearly determined from the financial
                         statements.

        (b)    Report on Form 8-K

               No Forms 8-K were filed during the quarter ended December 31,
               2001.

                                       52

<PAGE>

                                   SIGNATURES

        In accordance with section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                    FIRST SOUTHERN BANCSHARES, INC.


Date: April 11, 2002                By:/s/ B. Jack Johnson
                                       ----------------------------------
                                           B. Jack Johnson
                                           Chief Executive Officer and President

         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:  /s/ B. Jack Johnson                                 April 11, 2002
     -----------------------------
     B. Jack Johnson
     Chief Executive Officer, President and Director

By:  /s/ J. Acker Rogers                                 April 11, 2002
     -----------------------------
     J. Acker Rogers
     Chairman of the Board

By:  /s/ Brent Turpen                                    April 11, 2002
     -----------------------------
     Brent Turpen, Senior Vice President-Finance
     (principal accounting officer and
     principal financial officer)


By:  /s/ James E. Bishop                                 April 11, 2002
     -----------------------------
     James E. Bishop
     Director

By:  /s/ Robert Walker                                   April 11, 2002
     -----------------------------
     Robert Walker
     Director

By:  /s/ Steve McKinney                                  April 11, 2002
     -----------------------------
     Steve McKinney
     Director

By:  /s/ S. Greg Beadle                                  April 11, 2002
     -----------------------------
     S. Greg Beadle
     Director