<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                     Page
<S>                                                                                               <C>
       Business of the Company                                                                          1
       President's message                                                                              2
       Tables:
          I     Selected consolidated financial condition, operating and other data                     3
          II    Key operating ratios                                                                    4
          III   Weighted average yields earned and rates paid                                           5
          IV    Effects of changing rates and volume on net interest income                             6
          V     Interest rate sensitivity                                                               7
       Management's discussion and analysis of financial condition and
         results of operations                                                                     8 - 18
       Independent auditors' report on consolidated financial statements                               19
       Consolidated financial statements                                                          20 - 24
       Notes to consolidated financial statements                                                 25 - 47
       Common stock information                                                                        48
       Directors and officers                                                                          49
       Company information                                                                             50
       Notice of annual meeting of stockholders                                                        50
       10-KSB information                                                                              50

</TABLE>

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


                            BUSINESS OF THE COMPANY
First Southern Bancshares, Inc. ("Bancshares"), a Delaware corporation, is the
holding company for First Southern Bank (the "Bank"). Bancshares is a registered
bank holding company regulated by the Federal Reserve Board and is not engaged
in any other business activity other than holding all of the issued and
outstanding common stock of the Bank. Accordingly, the information set forth in
this report, including financial statements and related data, relates primarily
to the Bank. All references to the "Company" include Bancshares and the Bank.

The Bank is regulated by the Superintendent of Banks of the State of Alabama.
Its deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").

The Bank is a community-oriented financial institution that serves individuals
and businesses located in Lauderdale and Colbert Counties, and the surrounding
counties located in Northwest Alabama, its primary market area. The Bank's
primary business consists of attracting deposits from the general public to
originate residential mortgage loans, commercial real estate loans, multi-family
mortgage loans, and consumer loans.

<PAGE>

                              PRESIDENT'S MESSAGE



To Our Stockholders:

On behalf of the Board of Directors, Officers and Employees of First Southern
Bancshares, Inc. and its wholly-owned subsidiary, First Southern Bank, I am
pleased to present our Annual Report for Fiscal Year ended December 31, 1999.

Our ongoing commitment to maintain a strong capital base, minimize risk, and
enhance shareholder value continues to be critical in the strategic planning of
First Southern Bancshares, Inc. Total stockholders' equity to total assets as of
December 31, 1999 was 7.8% compared to 10.1% as of December 31, 1998. The
reduced equity is a result of our continuing effort to repurchase outstanding
stock in an effort to enhance shareholder value. Total assets as of December 31,
1999 were $178,798,000, an increase of $423,000 from December 31, 1998.
Consolidated net income for 1999 was $1,246,000.

Many factors contributed to our 1999 results and are discussed in more detail in
other sections of this Annual Report.

Our focus continues to be directed at providing the best possible financial
services for the residents of Northwest Alabama and surrounding areas. With the
combined efforts of our Board of Directors and dedicated staff, we will remain
successful.



Sincerely,


/s/ Charles L. Frederick, Jr.
-----------------------------
Charles L. Frederick, Jr.
President/CEO

<PAGE>

TABLE I - SELECTED CONSOLIDATED FINANCIAL CONDITION, OPERATING AND OTHER DATA

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,
                                                        --------------------------------------------------------
                                                                           (In Thousands)
Financial condition data                                  1995       1996       1997        1998       1999
<S>                                                     <C>        <C>        <C>         <C>        <C>
Total assets                                            $ 180,855  $ 184,484  $ 183,673   $ 178,375  $ 178,798
Loans receivable, net                                     152,105    159,718    159,758     153,253    155,818
Cash and cash equivalents                                   8,971      4,220      6,420      13,188      5,906
Investment securities                                       8,792     10,948      7,993       2,016      4,408
Mortgage-backed securities                                  3,135      1,887      1,432         945      3,527
Deposits                                                  131,867    132,800    143,731     127,550    126,870
Advances from Federal Home Loan Bank                       16,770     25,619     18,468      31,316     33,665
Other notes payable                                             -      4,000          -           -      2,000
Agreement to repurchase securities                              -          -          -           -      1,487
Total stockholders' equity                                 31,495     21,042     20,949      18,008     13,969
Non performing assets                                       2,584      1,639      1,206       4,069      3,168
Allowance for loan losses                                   1,509      1,659      1,584       1,441      1,400
</TABLE>

<TABLE>
<CAPTION>
                                                                          Ended December 31,
                                                       --------------------------------------------------------
                                                               (In thousands, except per share amounts)
Operating data                                            1995        1996       1997        1998       1999
<S>                                                    <C>          <C>        <C>         <C>        <C>
Interest income                                        $   13,768   $ 15,089  $  15,446  $   15,177  $  13,951
Interest expense                                            6,690      7,537      8,452       7,956      7,105
                                                       -----------  --------- ---------- ----------- ----------
Net interest income                                         7,078      7,552      6,994       7,221      6,846
Provision for loan losses                                     565        270        242         605        528
                                                       -----------  --------- ---------- ----------- ----------
Net interest income after provision
  for loan losses                                           6,513      7,282      6,752       6,616      6,318
Noninterest income                                            432        426        766         956        782
Noninterest expense                                         3,921      7,194      5,176       5,060      5,046
                                                       -----------  --------- ---------- ----------- ----------
Income before income taxes                                  3,024        514      2,342       2,512      2,054
Income tax expense (benefit)                                1,069        (24)       945       1,010        808
                                                       -----------  --------- ---------- ----------- ----------

Net income                                             $    1,955   $    538  $   1,397  $    1,502  $   1,246
                                                       ===========  ========= ========== =========== ==========

 Basic Earnings per share                                     N/A   $   0.28  $    0.74  $     0.83  $    0.80
                                                       ===========  ========= ========== =========== ==========

 Diluted Earnings per share                                   N/A   $   0.28  $    0.73  $     0.82  $    0.79
                                                       ===========  ========= ========== =========== ==========

Cash dividends per share:
   Regular dividends                                   $     0.23   $   0.50  $    0.50  $     0.50  $    0.50

   Special cash dividends                              $        -   $   5.40  $       -  $     0.30  $       -
                                                       -----------  --------- ---------- ----------- ----------

Total cash dividends                                   $     0.23   $   5.90  $    0.50  $     0.80  $    0.50
                                                       ===========  ========= ========== =========== ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                               At December 31,
                                                        --------------------------------------------------------
                                                                               (In Thousands)
Other data                                                  1995       1996       1997        1998       1999
<S>                                                     <C>            <C>        <C>         <C>        <C>
 Real estate loans                                           2,137      1,975      2,032       1,828      1,709
 Deposit accounts                                           12,741     12,584     12,508      12,092     11,697
 Number of branch offices                                        5          5          5           6          6
</TABLE>

                                       3

<PAGE>

TABLE II - OPERATING RATIOS

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


<TABLE>
<CAPTION>
                                                                      Year ended December 31,

                                                      1995         1996       1997      1998      1999
<S>                                                   <C>          <C>         <C>      <C>        <C>
Performance ratios

Return on average assets (net income
  divided by average assets)                          1.17%       0.29%      0.75%     0.81%     0.70%

Return on average stockholders' equity (net
  income divided by average equity)                   7.42%       2.04%      6.74%     7.45%     7.30%

Dividend payout ratio (dividends declared per
 share divided by basic earnings
  per share):
  Regular dividends (1)                                N/A      178.57%     67.57%    60.24%    62.50%
  Special dividends                                    N/A     1928.57%       N/A     36.14%      N/A

Interest rate spread (difference between
  average yield on interest-earning assets and
  average cost of interest-bearing liabilities)       3.83%       3.75%      3.52%     3.72%     3.82%

Net interest margin (net interest income as a
  percentage of average interest-earning assets)      4.45%       4.37%      3.98%     4.15%     4.16%

Non-interest expense to average assets                2.34%       3.94%      2.78%     2.73%     2.85%

Average interest-earning assets to interest
  bearing liabilities                               114.95%     114.26%    109.69%   109.61%   107.81%

Asset quality ratios

Allowance for loan losses to net loans
  at end of period                                    0.99%       1.04%      0.99%     0.94%     0.90%

Net charge offs to average outstanding
  loans during period                                 0.11%       0.08%      0.19%     0.49%     0.38%

Ratio of nonperforming assets to total assets
  at end of period                                    1.43%       0.89%      0.66%     2.28%     1.77%

Capital ratios

Average stockholders' equity to average assets
  during period                                      15.71%      14.47%     11.12%    10.89%     9.63%
</TABLE>

-------------------------------------
(1) The Company had no stockholders until completion of its initial public stock
offering on April 13, 1995.

                                       4
<PAGE>

TABLE III - WEIGHTED AVERAGE YIELDS EARNED AND RATES PAID

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 period.


<TABLE>
<CAPTION>
                                                          Year ended December 31,                                            At
                                                      1997                      1998                     1999           December 31,
                                                    Interest                  Interest                 Interest            1999
                                           Average    and     Yield/  Average    and    Yield/ Average    and     Yield/   Yield/
                                           balance  dividends  cost  balance  dividends  cost  balance dividends   cost     cost
<S>                                       <C>       <C>       <C>    <C>      <C>       <C>    <C>     <C>        <C>   <C>
Interest-earning/dividend paying assets
Interest-earning assets
Mortgage loans and contracts              $  75,207  $ 6,232  8.29%  $  63,187 $  5,179  8.20% $ 47,814 $  3,788   7.92%    8.05%
Other loans                                  87,556    8,411  9.61%     97,506    9,166  9.40%  103,146    9,306   9.02%    8.95%
                                          ---------  -------         --------- --------        -------- --------
   Total net loans (1)                      162,763   14,643  9.00%    160,693   14,345  8.93%  150,960   13,094   8.67%    8.71%
Mortgage-backed securities                    1,689      137  8.11%      1,199       96  8.01%    2,472      171   6.92%    6.83%
Investment securities                         7,069      362  5.12%      4,362      252  5.78%    3,951      260   6.58%    6.23%
FHLB overnight account and other              1,846      144  7.80%      5,956      360  6.04%    5,553      296   5.33%    4.39%
                                          ---------  -------         --------- --------        -------- --------
   Total interest-earning assets            173,367   15,286  8.82%    172,210   15,053  8.74%  162,936   13,821   8.48%    8.60%
Federal Home Loan Bank stock                  2,215      160  7.22%      1,662      123  7.40%    1,709      130   7.61%    7.75%
                                          ---------  -------         --------- --------        -------- --------
  Total interest earning and dividend
    paying assets                           175,582   15,446  8.80%    173,872   15,176  8.73%  164,645   13,951   8.47%    8.59%
                                          ---------  -------         --------- --------        -------- --------
Non interest earning/dividend paying
assets
Office properties and equipment, net          3,537                      3,752                    3,767
Real estate owned                               232                        336                    1,010
Cash on hand and in banks                     4,740                      4,827                    5,654
Accrued interest receivable                   1,725                      1,832                    1,638
Other                                           617                        559                      534
                                          ---------                  ---------                 --------
   Total non interest-earning/dividend
    paying assets                            10,851                     11,306                   12,603
                                          ---------                  ---------                 --------
Total assets                              $ 186,433                  $ 185,178                 $177,248
                                          =========                  =========                 ========

Interest-bearing liabilities
Deposit accounts:
Passbook accounts                         $  18,301  $   505  2.76%  $  17,402 $    481  2.76% $ 17,720 $    491   2.77%    2.77%
NOW accounts                                 10,541      248  2.35%     11,486      255  2.22%   11,720      223   1.90%    2.00%
Money market accounts                         3,337      100  3.00%      3,527      106  3.01%    3,797      115   3.03%    3.00%
Certificates of deposit                     101,473    6,039  5.95%     95,686    5,361  5.60%   86,913    4,425   5.09%    5.24%
                                          ---------  -------         --------- ---------       -------- --------
  Total interest-bearing deposits           133,652    6,892  5.16%    128,101    6,203  4.84%  120,150    5,254   4.37%    4.52%
Other interest-bearing liabilities:
Advances from Federal Home Loan Bank
    of Atlanta                               26,221    1,543  5.88%     30,231    1,727  5.71%   31,939    1,804   5.65%    5.42%
Agreement to repurchase securities                -        -  0.00%          -        -  0.00%      225       12   5.33%    5.68%
Other borrowings                                195       17  8.71%        297       25  8.42%      397       35   8.82%    8.62%
                                          ---------  -------         --------- --------        -------- --------
  Total borrowings                           26,416    1,560  5.89%     30,528    1,752  5.74%   32,561    1,851   5.68%    5.61%
                                          ---------  -------         --------- --------        -------- --------
  Total interest-bearing liabilities        160,068    8,452  5.28%    158,629    7,955  5.01%  152,711    7,105   4.65%    4.78%
                                          ---------  -------         --------- --------        -------- --------
Non interest-bearing liabilities
Non interest bearing deposit accounts         4,433                      5,235                    6,204
Other liabilities                             1,210                      1,155                    1,269
                                          ---------                  ---------                 --------


Total liabilities                           165,711                    165,019                  160,184
Stockholders' equity                         20,722                     20,159                   17,064
                                          ---------                  ---------                 --------
Total liabilities and stockholders'
 equity                                   $ 186,433                  $ 185,178                 $177,248
                                          =========                  =========                 ========

Net interest income                                  $ 6,994                   $  7,221                 $  6,846
                                                     =======                   ========                 ========
Interest rate spread (2)                                      3.52%                      3.72%                     3.82%    3.81%
                                                             =====                      =====                     =====    =====

Net interest margin (2)                                       3.98%                      4.15%                     4.16%
                                                             =====                     =====                     =====

Ratio of average interest-earning assets
  to average interest-bearing liabilities    109.64%                    109.61%                  107.81%
                                          =========                  =========                 ========
</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.
                                       5
<PAGE>

TABLE IV - EFFECTS OF CHANGING RATES AND VOLUME ON NET INTEREST INCOME

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>
                                           1996 Compared to 1997              1997 Compared to 1998
                                            Increase (Decrease)                Increase (Decrease)
                                                   Due to                            Due to
                                                      Rate/                              Rate/
                                      Rate    Volume  Volume    Net      Rate   Volume   Volume    Net
<S>                                  <C>      <C>     <C>    <C>        <C>     <C>     <C>     <C>
Interest-earning/dividend
  paying assets
  Mortgage loans                     $ (339)  $(766)  $ 36   $ (1,069)  $ (68)  $ (996) $  11   $(1,053)
  Other loans                           256   1,263     48      1,567    (180)     956    (19)      757
                                     ------   -----   ----   --------   -----   ------  -----   -------

    Total net loans                     (83)    497     84        498    (248)     (40)    (8)     (296)

Mortgage-backed securities                3     (58)    (1)       (56)     (2)     (40)     1       (41)
Investment securities                   (48)     (6)     1        (53)     46     (139)   (18)     (111)
Overnight deposits                       58    (122)   (29)       (93)    (31)     318    (69)      218
                                     ------   -----   ----   --------   -----   ------  -----   -------

Total net change in income on
  interest earning assets               (70)    311     55        296    (235)      99    (94)     (230)

Federal Home Loan Bank stock              -      61      -         61       4      (40)    (1)      (37)
                                     ------   -----   ----   --------   -----   ------  -----   -------

Total net change in income on
  interest earning/dividend
  paying assets                         (70)    372     55        357    (231)      59    (95)     (267)
                                     ------   -----   ----   --------   -----   ------  -----   -------

Interest-bearing liabilities:
Deposits                                221     443     16        680    (425)    (286)    18      (693)
Other interest-bearing liabilities      (13)    251     (3)       235     (40)     242     (6)      196
                                     ------   -----   ----   --------   -----   ------  -----   -------

Total net change in expense on
  interest bearing liabilities          208     694     13        915    (465)     (44)    12      (497)
                                     ------   -----   ----   --------   -----   ------  -----   -------
Net change in net interest income    $ (278)  $(322)  $ 42   $   (558)  $ 234   $  103  $(107)  $   230
                                     ======   =====   ====   ========   =====   ======  =====   =======
<CAPTION>
                                         1998 Compared to 1999
                                          Increase (Decrease)
                                                Due to
                                                      Rate/
                                     Rate     Volume  Volume     Net
<S>                                 <C>    <C>        <C>     <C>
Interest-earning/dividend
  paying assets
  Mortgage loans                    $(173) $ (1,260)  $  42   $ (1,391)
  Other loans                        (369)      530     (20)       141
                                    -----  --------   -----   --------

    Total net loans                  (542)     (730)     22     (1,250)

Mortgage-backed securities            (13)      102     (14)        75
Investment securities                  35       (24)     (3)         8
Overnight deposits                    (43)      (24)      4        (63)
                                    -----  --------   -----   --------

Total net change in income on
  interest earning assets            (563)     (676)      9   $ (1,230)

Federal Home Loan Bank stock            3         3       1          7
                                    -----  --------   -----   --------

Total net change in income on
  interest earning/dividend
  paying assets                      (559)     (674)     10     (1,223)
                                    -----  --------   -----   --------

Interest-bearing liabilities:
Deposits                             (601)     (352)     34       (919)
Other interest-bearing liabilities    (17)      117      (1)        99
                                    -----  --------   -----   --------

Total net change in expense on
  interest bearing liabilities       (618)     (235)     33       (820)
                                    -----  --------   -----   --------
Net change in net interest income   $  59  $   (439)  $ (23)  $   (403)
                                    =====  ========   =====   ========
</TABLE>

                                       6
<PAGE>

TABLE V - INTEREST RATE SENSITIVITY

The table below measures interest rate risk by estimating the change in market
value of the Bank's assets, liabilities, and off balance sheet contracts in
response to an instantaneous change in market interest rates. The data was
compiled by an independent third-party service bureau. Using the composition of
the Bank's portfolio of interest-earning assets and interest-bearing liabilities
at December 31, 1999, an estimate of the level of the Bank's stockholders'
equity (market value of assets, less market value of liabilities, plus or minus
the market value of any off-balance sheet items) was computed under the rate
environment prevailing on or about December 31, 1999. The Bank's stockholders'
equity was then computed under different interest rate scenarios. The change in
stockholders' equity under the different interest rate scenarios provides a
measure of the Bank's exposure to interest rate risk. The data presented below
is as of December 31, 1999 and is for the Bank only. Since, with minor
exceptions, all of Bancshares' assets and liabilities, exclusive of its
investment in the Bank, are adjustable rate financial instruments, the fair
value of such instruments would remain substantially unchanged in the changed
interest rate scenarios.

<TABLE>
<CAPTION>
                                                                         Percent
                                                                        change in
                                                            Stock-      Stock-
                                                            holders'    holders'
                                    Assets     Liabilities  equity      equity
                                       (Dollars in Thousands)
<S>                                 <C>        <C>          <C>         <C>
Change in level of interest rates:

Minus 400 basis points    (4.00)%  $ 185,762    $172,958   $12,804      (8.60)%

Minus 300 basis points    (3.00)%    183,642     171,325    12,317     (12.08)%

Minus 200 basis points    (2.00)%    181,591     169,045    12,546     (10.44)%

Minus 100 basis points    (1.00)%    179,606     166,311    13,295      (5.10)%

No change                            177,683     163,674    14,009       0.00%

Plus 100 basis points      1.00%     175,821     161,136    14,685       4.83%

Plus 200 basis points      2.00%     174,017     158,691    15,326       9.40%

Plus 300 basis points      3.00%     172,268     156,335    15,933      13.73%

Plus 400 basis points      4.00%     170,573     154,064    16,509      17.85%
</TABLE>

Certain assumptions, relating to interest rates, loan prepayment rates, deposit
decay rates, and the market values of certain assets under differing interest
rate scenarios, among others, were used in preparing the preceding table. As
with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. The interest on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets, such
as adjustable rate mortgage loans, have features that restrict changes in
interest rates on a short-term basis and over the life of the asset.
Furthermore, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in the table.

                                       7
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                    GENERAL

First Southern Bancshares, Inc. ("Bancshares") is primarily engaged in the
business of directing and planning the activities of its wholly-owned
subsidiary, First Southern Bank (the "Bank"). Bancshares' primary assets are
comprised of its investment in the Bank and a note receivable from the Bank's
Employee Stock Ownership Plan ("ESOP"). 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 Federal Home Loan Bank ("FHLB") and other financial institutions.
Net earnings are also effected 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, 1998, as well as certain material changes in results of operations
during the years ended December 31, 1997, 1998 and 1999.

Forward-looking Statements Safe-harbor Statement

This report may contain forward-looking statements that are subject to numerous
assumptions, risks and uncertainties. Statements pertaining to future periods
are subject to uncertainty 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: 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 and the ability to
generate loans; significant delay in or inability to execute strategic
initiatives designed to grow revenues and/or control expenses; 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.


             FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General

Management changed its strategy from an aggressive growth in deposits and assets
to a more conservative position of maximizing profits through an increase in its
average interest spread in 1998. This change in strategy was prompted by the
lack of growth in the Company's primary lending area and the increased
competition with other banks. Due to the lack of economic growth, many
competitor banks have offered low rates to the Company's loan customers that the
Company was unwilling to match due to the low interest yield commitment over the
long term. The same holds true for deposits as competitor banks are offering
aggressive rates that are higher than the interest cost to the Company of
borrowing from the FHLB. Therefore management decided to retain loans or
originate and retain new loans that have a satisfactory long term yield, and to
offer competitive rates for deposits while maintaining an acceptable interest
spread. As a result of this change in strategy, average interest bearing assets
have decreased from $175.6 million in 1997 to $173.9 million in 1998, and in
1999 to $164.6 million reflecting the continuing effect of this strategy.
Average interest bearing liabilities have correspondingly decreased from $160.1
million in 1997 to $158.6 million in 1998, and in 1999 to $152.7 million. As
planned, the interest spread between the average yield on the average interest
bearing assets and the average cost on average interest bearing liabilities has
increased from 3.52% in 1997 to 3.72% in 1998, and in 1999 to 3.82%.

                                       8
<PAGE>

This section of the annual report provides a narrative discussion and analysis
of the Company's financial condition and results of operations for the previous
three years. All tables and financial statements included in this report should
be considered an integral part of this analysis.


Cash and cash equivalents

Cash and cash equivalents at December 31, 1999 of $5.9 million had decreased
from $13.2 million in 1998. 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". Net cash provided by operating
activities decreased from $3.3 million in 1998 to $1.8 million in 1999 partially
due to the decrease in net income, but largely due to the accelerated payment of
income taxes and other liabilities. Net cash from investing activities decreased
significantly from a cash source of $11.7 million in 1998 to a cash use of $8.7
million in 1999, as a result of the increase in total loans and additions to the
securities portfolio. Net cash used in financing activities decreased from $8.2
million in 1998 to $300,000 in 1999. The primary uses in 1999 were the decrease
in deposits of $680,000, $730,000 payment of dividends and $4.8 million of funds
used to continue the Company's Stock Repurchase Plan. These uses were offset by
$5.8 million of new borrowings from the FHLB and other banks.


Investments and mortgage-backed securities

At December 31, 1999, the Company had $104,000 of net unrealized losses on
investment securities classified as available for sale of the amortized cost
basis ($4.6 million) of the related securities, and $247,000 of net unrealized
losses on mortgage-backed securities held to maturity. If future market interest
rates were to decrease, the unrealized gains on these securities would, for a
period of time, become greater. In a decreasing interest rate environment, the
fair value of the investments increases in relation to the cost of the
investment, thereby reducing the net unrealized loss and/or increasing any
unrealized gain on the related securities. However, assuming that the securities
are held to their individual dates of maturity, even in periods of changing
market interest rates, as the securities approach their dates of maturity, the
unrealized gain/loss will begin to decrease and eventually be eliminated.

The Company increased its investment in investment securities and mortgage-
backed securities in 1999 over 1998 utilizing the cash held in short-term
investments at December 31, 1998. Investment securities available for sale
increased from $2.0 million at December 31, 1998 to $4.4 million at December
31,1999. The additional securities were in corporate bonds that are fixed rate
guaranteed or senior notes with an S&P A rating. The average balance for
investment securities for 1999 was $3.9 million as compared to $4.4 million in
1998. The average yield increased from 5.78% in 1998 to 6.58% in 1999 due to the
higher interest rate earned on corporate bonds verses the U.S. Government
obligations held in 1998.

Mortgage-backed securities increased from $1.0 million at December 31, 1998 to
$3.5 million at December 31, 1999. The additional investments were in GNMA
participations. The average balance for mortgage-backed investment securities
for 1999 was $2.5 million as compared to $1.1 million in 1998. The average yield
decreased from 8.01% in 1998 to 6.92% in 1999 due to the effect of lower
interest rates for residential mortgages offered by GNMA in recent periods.

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 1999 the
average balance and year end balance of loans declined as a result of the change
in management strategy as previously discussed. The average balance declined
$9.7 million from $160.7 million in 1998 to $151.0 million in 1999.

                                       9
<PAGE>

The loan portfolio composition is changing as the result of management's
continued efforts to expand and diversify the Company's loan portfolio into
higher yielding commercial mortgage loans, commercial business loans, and
consumer loans. These types of loans are inherently riskier than residential
mortgage loans. A comparison of the Bank's loan portfolio analysis at December
31, 1998 and December 31, 1999 follows:

<TABLE>
<CAPTION>
                                                               December 31, 1998                              December 31, 1999
                                                               -----------------                              -----------------
                                                 Amount                    Percent               Amount                   Percent
                                                 ------                    -------               ------                   -------
<S>                                              <C>                     <C>                     <C>                      <C>
      Mortgage loans:
       Residential                                 $ 69,524                  45.4%                $ 64,057                 41.1%
       Commercial                                    35,566                  23.2%                  34,259                 22.0%
                                                   --------                ------                 --------                -----
        Total mortgage loans                        105,090                  68.6%                  98,316                 63.1%

      Commercial business loans                      29,010                  18.9%                  36,332                 23.3%

      Consumer Loans                                 21,766                  14.2%                  23,317                 15.0%

                                                   --------                 -----                  -------                -----
        Total loans                                 155,866                 101.7%                 157,965                101.4%

      Less:
       Undisbursed loans                              1,103                   0.7%                     675                  0.4%
       Unamortized loan fees                             69                   0.1%                      72                  0.1%
       Allowance for possible losses                  1,441                   0.9%                   1,400                  0.9%

                                                   --------                ------                 --------                -----
        Net loans receivable                       $153,253                 100.0%                $155,818                100.0%
                                                   ========                ======                 ========                =====
</TABLE>

The Company's loan portfolio continues to reflect the market served by the
Bank's primary lending area. Mortgage loans decreased in volume and percentage
of the portfolio as the Company has not been inclined to invest in low yielding
loans for the long term.

At December 31, 1999, the allowance for loan losses was $1.4 million and
represented 0.9% of total net loans and 44.2% of non performing assets. The
provision for loan losses was $528,000 in 1999 as compared to $605,000 in 1998.
The decrease in the provision was due to the decrease in net loan charge-offs
from $748,000 in 1998 to $569,000 in 1999. In the opinion of management at
December 31, 1999, the allowance for loan losses was adequate at that date.
There can be no assurance that the Company will not be required to increase the
allowance in the future.

At December 31, 1999, the Company had no significant commitments to originate
fixed-rate loans. At December 31, 1999, the Company had commitments to originate
variable rate loans, including unused commercial business lines of credit as
follows:

               Commitments to extend credit    $    724,000
               Unused lines of credit          $ 11,548,000
               Standby letters of credit       $     10,000

                                       10
<PAGE>

Non performing Assets

Non performing assets include loans classified as nonaccrual and repossessed
assets. The Company's policy is to classify loans as nonaccrual 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. As shown in the following table, non performing assets of $4.1 million
as of December 31, 1998, decreased $900,000 from $3.2 million at December 31,
1999. The increase in non performing 1 - 4 unit family residential loans in 1998
was partly reflective of the slow down in the local economy and partly due to
the inclusion of two mortgage loans aggregating $550,000 that were subsequently
brought current as reflected by the decrease in accruing loans contractually
past due 90 days in 1999.

Other increases in 1998 were primarily in commercial real estate and business
due to the impaired loans to one borrower of $484,000. The impaired loans are
commercial business loans secured by real estate, equipment, accounts receivable
and other tangible assets. In order to value impaired loans at estimated net
realizable value, the Company has recorded charge-offs in 1998 of $611,000. In
1999 these impaired loans were classified as in-substance foreclosures and
additional charge offs of approximately $170,000 were incurred. As of December
31, 1999 impaired loans aggregated $683,000 and had specific allowances of
$100,000.

The following table sets forth nonperforming assets as of December 31, 1997,1998
and 1999 (dollars in thousands):

<TABLE>
<CAPTION>
                                                               ---------  --------  ---------
                                                                 1997      1998       1999
                                                               ---------  --------  ---------
<S>                                                            <C>        <C>       <C>
Loans accounted for on a nonaccrual basis:
    Real estate:
       1 - 4 unit residential                                   $    -    $  132    $     -
       Commercial                                                  401         -          -
    Commercial business                                            135       782        683
    Consumer                                                        25         -          -
                                                                ------    ------    -------

      Total                                                        561       914        683
                                                                ------    ------    -------

Accruing loans which are contractually past
  due 90 days or more:
  Real estate:
      1 - 4 unit residential                                       216     1,553       952
      Commercial                                                     -       243        59
      Construction                                                   -       112         -
  Commercial business                                              148       432       398
  Consumer                                                         181       105       158
                                                                ------    ------    ------

        Total                                                      545     2,445     1,567
                                                                ------    ------    ------

    Total of nonaccrual and
    90 days past due loans                                       1,106     3,359     2,250

Foreclosed real estate and other assets                            100       710       918
                                                                ------    ------    ------


Total non-performing assets                                     $1,206    $4,069    $3,168
                                                                ======    ======    ======

Total loans delinquent
  90 days or more to net loans                                    0.69%     2.19%     1.44%

Total loans delinquent 90 days or more
  to total assets                                                 0.60%     1.88%     1.26%

Total non-performing assets
  to total assets                                                 0.66%     2.28%     1.77%
</TABLE>

                                       11
<PAGE>

Accruing loans contractually past due 90 days or more is primarily comprised of
mortgage loans or collateralized commercial business or consumer 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 nonaccrual and evaluated for impairment.

Premises and Equipment

Premises and equipment decreased from $3.9 million in 1998 to $3.7 million in
1999 as of the result of depreciation and retirements. The Company now has six
locations of which the newest is in Colbert County, Alabama, in the City of
Tuscumbia, and was opened in August 1998. Management opened this branch in order
to attract new deposits and loans, as well as provide a more convenient location
to existing customers. The Company has one other branch in Colbert County
located in Muscle Shoals, Alabama. The main office and three other branches are
located in Lauderdale County, Alabama.

Deposits, FHLB advances and other notes payable

Deposit balances decreased $700,000 from $127.6 million at December 31, 1998 to
$126.9 at December 31, 1999. The Company changed its strategy from paying
aggressive market rates to retain these certificates of deposits to borrowing
from the FHLB at a lower interest rate than the market rate for the certificates
of deposits. As a result of this strategy, interest paid on deposits decreased
15.3% or $949,000 from $6.2 million in 1998 to $5.3 million in 1999, and the
interest rate paid on the average balance of deposits decreased from 4.84% in
1998 to 4.37% in 1999. The decrease in interest paid on deposits in 1999 was
partially offset by the increase in interest paid on FHLB advances of $98,000
from $1.7 million in 1998 to $1.8 million in 1999; however the effective rate
paid on the average outstanding balance of FHLB advances decreased from 5.71% in
1998 to 5.65% in 1999.

At December 31, 1999, savings certificates amounted to $89.5 million, or 70.6%,
of the Company's total deposits, including $56.4 million that were scheduled to
mature by December 31, 2000. Management of the Company believes it has adequate
resources to fund all loan commitments with savings deposits, FHLB of Atlanta
advances and proceeds from the sale of mortgage loans, and that it can adjust
the offering rates of savings certificates to retain deposits in changing
interest rate environments.

Borrowings from the Federal Home Loan Bank increased $2.4 million from $31.3
million at December 31, 1998, to $33.7 million at December 31, 1999. The
increase in advances was used to offset the increase in loans as previously
explained. At December 31, 1999, the Company had unused credit availability with
the FHLB of $6.3 million.

Other borrowings and securities sold under repurchase agreements increased to
$3.5 million. Such new borrowings were utilized for the acquisition of treasury
stock as explained below. The terms of this debt is set forth in the notes to
the financial statements and is secured by the Company's stock in the Bank or
other securities.

Stockholders' equity

Total stockholders' equity at December 31, 1999 is $14.0 million as compared to
$18.0 million at December 31, 1998. The payment of $730,000 in dividends and the
acquisition of treasury stock of $4.8 million, were offset by net income of $1.2
million, and $227,000 of other increases in stockholders' equity related
primarily to the unearned employee stock benefit compensation plans.

The Company is continuing with its Stock Repurchase Program that originated in
1995. During years ended December 31, 1998 and 1999, the Company acquired
224,182 and 356,272, respectively, of treasury shares at a cost of $3.6 million
and $4.8 million, respectively, at an average price per share of $16.23 and
$13.42, respectively. Treasury shares acquired in 1999 include the 307,871
shares purchased at $13.50 per share through a tender offer that closed in
October 1999. See Note 19 to the Consolidated Financial Statements.

A strong capital position promotes depositor and investor confidence for a solid
foundation for future growth. Average shareholders' equity as a percentage of
total average assets is one measure used to determine capital strength. Overall,
the Company's capital position remains strong as the ratio of average
shareholders' equity to average assets for was 9.63% for 1999 as compared to
10.89% in 1998. The decrease is primarily related to the acquisition of treasury
shares in 1999.

                                       12
<PAGE>

The Bank is required to maintain specific amounts of capital pursuant to FDIC
requirements and the Company is required to maintain specific amounts of capital
pursuant to the regulations of the Federal Reserve Board. As summarized below,
the Company and Bank are in compliance with all such requirements at December
31, 1999:

<TABLE>
<CAPTION>
                                                                                 Percentage of
                                                                                adjusted total
                                                                   Amount           assets
First Southern Bancshares, Inc:                                       (Dollars in thousands)
<S>                                                               <C>           <C>
Primary capital ratios:
GAAP capital                                                      $ 13,969
Adjustments:
Mortgage servicing rights                                               (5)
Net unrealized loss on securities available for sale                   104
                                                                  --------

Tier 1 capital                                                      14,068         7.92%
Minimum Tier 1 (leverage) requirement                                7,108         4.00%
                                                                  --------       ------

Excess                                                            $  6,960         3.92%
                                                                  ========       ======

Risk-based capital ratios:
Core (Tier 1) Capital                                               14,068         9.73%
Minimum core capital                                                 5,781         4.00%
                                                                  --------       ------

Excess                                                            $  8,287         5.73%
                                                                  ========       ======

Risk-based capital                                                $ 15,468        10.70%
Minimum risk-based capital requirement                              11,562         8.00%
                                                                  --------       ------

Excess                                                            $  3,906         2.70%
                                                                  ========       ======
</TABLE>

Under the FDICIA prompt corrective action provisions applicable to banks, the
most recent notification from the FDIC categorized the Bank as well capitalized.
To be categorized as well capitalized, the Bank must maintain a total risk-based
capital ratio as set forth in the following table and not be subject to a
capital order. There are no conditions or events since that notification that
management believes have changed the Bank's risk-based capital category.


<TABLE>
<CAPTION>
                                                            Percentage of
                                                           adjusted total
                                           Amount              assets
First Southern Bank:                           (Dollars in thousands)
<S>                                        <C>             <C>
Total capital (to risk-weighted assets)    $ 16,099              11.15%
To be well capitalized under the FDICIA
  prompt corrective action provisions        14,441              10.00%
                                           --------            -------

Excess                                     $  1,658               1.15%
                                           ========            =======

Tier 1 capital (to risk-weighted assets)   $ 14,699              10.18%
To be well capitalized under the FDICIA
  prompt corrective action provisions         8,664               6.00%
                                           --------            -------

Excess                                     $  6,035               4.18%
                                           ========            =======

Tier 1 capital (to average assets)         $ 14,699               8.28%
To be well capitalized under the FDICIA
  prompt corrective action provisions         8,880               5.00%
                                           --------            -------

Excess                                     $  5,819               3.28%
                                           ========            =======
</TABLE>

                                       13
<PAGE>

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
and borrowings from the FHLB and local financial institutions. 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. As an
Alabama state-chartered bank that is not a member of the Federal Reserve System,
the Bank is required by the Alabama State Banking Board to maintain at all times
a reserve (comprised of cash on hand) based upon average daily deposits of the
Bank. At December 31, 1999, the Bank's qualifying reserves of $3.2 million
significantly exceeded the required reserve of $292,000.

Additionally, Bancshares requires cash for various operating needs including
dividends to shareholders and the general corporate expenses. The primary source
of liquidity for Bancshares is dividends from the subsidiary Bank. At December
31, 1999, the Bank could have paid additional dividends to Bancshares of $1.7
million while continuing to meet the capital requirements for "well-capitalized"
banks. Bancshares does not anticipate any liquidity requirements in the near
future that it will not be able to meet.

Pending Legislation

Legislation recently enacted by Congress eliminates many Federal and State law
barriers to affiliations among banks and other financial services providers. The
legislation establishes a statutory framework pursuant to which full
affiliations can occur between banks and securities firms. Insurance companies,
and other financial companies. The legislation provides some degree of
flexibility in structuring these new affiliations, although certain activities
may only be conducted through a holding company structure. The legislation,
preserves the role of the Board of Governors of the Federal Reserve System as
the umbrella supervisor for holding companies, but incorporates a system of
functional regulation pursuant to which the various Federal and state financial
supervisors will continue to regulate the activities traditionally within their
jurisdictions. The legislation specifies that banks may not participate in the
new affiliations unless the banks are well-capitalized and well-managed or if
any bank affiliate had received a less than "satisfactory" Community
Reinvestment Act of 1977 rating as of its most recent examination.

                    COMPARISON OF OPERATING RESULTS FOR THE
                 YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

Summary of Consolidated Financial Performance

Consolidated net income for the year ended December 31, 1999, decreased 17.0% to
$1.2 million from $1.5 million in 1998. Consolidated net income for 1997 was
$1.4 million or 7.0% less than 1998. Basic earnings per share for the year ended
December 31, 1999, was $0.80 as compared to $0.83 in 1998, and diluted earnings
per share for the year ended December 31, 1999 was $0.79 as compared to $0.82 in
1998. 1997 basic and diluted earning per share were $0.74 and $0.73,
respectively.

The decrease in net income for 1999 was primarily related to the reduction of
average interest earning assets, loans in particular, as previously discussed.
Although basic and diluted earnings per share were less than 1998, the reduction
was not proportionate to the decrease in earnings due to the reduction in
weighted average shares outstanding as of the result of the Stock Repurchase
Program and tender offer. The weighted average of shares outstanding will
continue to decline in 2000.

Increased net income in 1998 over 1997 was primarily due to a higher interest
spread in 1998 and lower noninterest expenses due to a pension termination
charge of $600,000 incurred in 1997.

Two key measures of profitability in the banking industry are return on average
equity (ROE) and return on average assets (ROA). ROE was 7.30% in 1999 versus
7.45% in 1998 and 6.74% in 1997. ROA was .70% in 1999 compared to .81% in 1998
and .75% in 1997.

                                       14
<PAGE>

Net Interest Income

1999 net interest income after provision for loan losses was $6.3 million or
4.5% less than the $6.6 million reported in 1998. The Company had less average
interest earning assets in 1999 as compared to 1998, but had a net interest
spread on such assets of 3.82% in 1999 as compared to 3.72% in 1998. The
increase in the net interest spread was related to the decrease in interest cost
on certificates of deposit and FHLB advances due to the change in management's
strategy as previously discussed.

For 1998, net interest income after provision for loan losses decreased 2.0% to
$6.6 million from $6.8 million reported in 1997. Increases in the net interest
spread to 3.72% for 1998 from 3.52% for 1997, was offset by a higher provision
for loan losses in 1998 related to impaired loans.

Interest Income

Interest income for 1999 was $14.0 million as compared to $15.2 million in 1998
and $15.5 million for 1997. The decrease in interest income of $1.2 million or
7.9% in 1999 and $269,000 or 1.7% in 1998 is primarily attributable to the
decrease in average interest earning assets from $175.6 million in 1997 to
$173.9 million in 1998 to $164.6 million in 1999. The continual reduction is
primarily in loans reflecting management's strategy as previously discussed.
Also contributing to the decrease in interest income was a decrease in the
average yield on interest-earning assets from 8.80% for 1997 to 8.73% for 1998
to 8.47% in 1999, as a result of lower market interest rates. The yield on the
average balance of loans decreased from 9.0% in 1997 to 8.93% in 1998 to 8.67%
in 1999 reflecting the competitive market rates in the Company's lending area.
The annual yield is expected to continue to decrease as the effect of such
decreases impacts commercial loans related to the prime interest rate and
adjustable mortgages in 2000.

Interest on loans receivable decreased $1.3 million in 1999 to $13.1 million
from $14.3 million in 1998, and $298,000 in 1998 as compared to $14.6 million in
1997. The continual decrease is primarily attributable to a decrease in average
net loans of $9.7 million in 1999 ($151.0 million), $2.1 million in 1998 ($160.7
million) from 1997 ($162.8 million). Additionally, the average yield on total
loans decreased as previously mentioned.

Interest on mortgage-backed securities increased in 1999 by $75,000 to $171,000
from $96,000 in 1998, primarily from the increase in the average balance in 1999
of $2.5 million from $1.2 million in 1998. 1998 interest on mortgage-backed
securities decreased by $41,000 from $137,000 during 1997 as a result of the
average balance of mortgage-related securities decreasing by $500,000 during
1998 ($1.2 million) as compared to 1997 ($1.7 million). In addition, the average
yields from such securities decreased from 8.11% in 1997 to 8.01% in 1998 as a
result of lower yielding mortgage-related securities remaining in the portfolio.

Income from the investment securities portfolio increased by $8,000 from
$252,000 during 1998 to $260,000 in 1999 as the result of the yield on the
average balance increasing from 5.78% in 1998 to 6.58%. The increase in the
yield is related to the investment in corporate bonds as previously discussed.
The effect of the increase in the yield was partially offset by the decrease in
the average balance of investment securities from $4.4 million in 1998 to $4.0
million in 1999. In 1998, income from investment securities decreased by
$110,000 from $362,000 in 1997, due to a $2.7 million decrease in the average
balance from $7.1 million in 1997 to $4.4 million in 1998. The effect of the
decrease in securities in 1998 was partially offset by the increase in yield on
the average balances from 5.12% in 1997 to 5.78% in 1998.

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. The $58,000 decrease in other interest income in 1999 to $426,000
when compared to 1998 other interest income of $484,000 is due primarily to the
decreased in the average yield on overnight account and time deposits at the
FHLB from 6.04% in 1998 to 5.33% in 1999. In addition to the decrease in yield,
the average invested balance of FHLB overnight funds decreased from $6.0 million
in 1998 to $5.6 million in 1999. FHLB dividends were $123,000 during 1998 as
compared to $130,000 in 1999 due to increase in the yield on the average balance
from 7.40% in 1998 to 7.61% in 1999. The $180,000 increase in other interest
income in 1998 to $484,000 when compared to 1997 other interest income of
$304,000 is due primarily to the increased interest earnings on the FHLB
overnight and on money market funds due to a increase in average invested
balances from $1.8 million in 1997 to $5.9 million in 1998. FHLB dividends were
$160,000 during 1997 as compared to $123,000 in 1998 due to decrease in average
FHLB stock from $2.2 million in 1997 to $1.7 million in 1998. 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.

                                       15
<PAGE>

Interest Expense

Interest expense for 1999 was $7.1 million compared with $8.0 million for 1998,
representing a decrease of $900,000 or 11.3%. Interest expense for 1998 was $8.0
million compared to $8.5 million for 1997, representing a decrease of $500,000
or 5.9%.

Interest on deposits for 1999 was $5.3 million compared with $6.2 million for
1998, representing a decrease of $900,000 or 14.5%, and $6.9 million for 1997,
representing a decrease of $700,000 or 10.2% for 1998. The decreases are due to
a $8.0 million decrease in average deposits in 1999 ($120.1 million) as compared
to 1998 ($128.1 million), and a $5.5 million decrease for 1998 from 1997 ($133.7
million). The 1999 average interest cost decreased to 4.37% as compared to 4.84%
in 1998, and 5.16% in 1997, as lower interest rates were offered on certificates
of deposits due primarily to the Company changing its strategy from paying
aggressive market rates to retain certificates of deposits to borrowing from the
FHLB at a lower interest rate than the market rate for the certificates of
deposits.

Other interest expense primarily relates to FHLB of Atlanta borrowings and
increased by $98,000 over 1998 to $1.8 million in 1999, and $193,000 over 1997
to $1.8 million in 1998. The increases in interest expense were due to the
increase in average FHLB borrowings each year from $26.2 million in 1997 to
$30.2 million in 1998 to $31.9 million in 1999. The increases in interest
expense caused by the higher average balances were partially offset by decreased
interest rates of 5.88% in 1997 to 5.71% in 1998 to 5.65% in 1999 as a
consequence of the adjustable rate nature of the majority of the FHLB of Atlanta
borrowings and lower market interest rates.

Provision for Loan Losses

The provision for loan losses is the cost of providing an allowance for
anticipated future losses on loans. The amount depends upon many factors
including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of loan portfolio quality, the
value of collateral and general economic factors. The loan portfolio is changing
as of the result of management's continued effort to expand and diversify into
commercial mortgage loans, commercial business loans, and consumer loans. These
types of loans are inherently riskier than residential mortgage loans.

The economic outlook for the Bank's primary lending area is guardedly optimistic
as the local economy is assisted by the strong national economy overall.
However, there is very little growth in the Bank's primary lending area and
there is aggressive competition for existing loan and deposit customers. A
slowdown in the economy could further impact asset growth and have a negative
impact on real estate lending as well as the level of net charge-offs and
delinquencies. Since such a slowdown in the economy could have an adverse effect
on property values and for commercial development projects, cause an increase in
vacancy rates, the possibilities exist for write-downs, charge-offs and transfer
of currently performing loans to a nonaccrual status in the real estate and
commercial loan categories.

The Company utilizes loan reviews procedures, including techniques such as loan
grading and monitoring of financial information, in order to identify early
potential problem loans in order for management to take steps to lessen any
potential losses. Reports are prepared and used in conjunction with
identification and monitoring of such loans on a monthly basis. Management's
involvement continues throughout the process and includes participation in the
work-out process and recovery activity. These procedures are monitored by the
loan and audit committees whose work is supplemented periodically by regulatory
agencies. A determination of a potential loss will result in a charge to the
provision for loan losses, thereby increasing the allowance for loan losses.
Management monitors the entire loan portfolio in an attempt to identify problem
loans so that risks in the portfolio can be timely identified and an appropriate
allowance or charge-off recognized. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may effect
the borrower's ability to repay the estimated value of any underlying
collateral, and current economic conditions.

For 1999, the provision for loan losses was $528,000 as compared to $605,000 in
1998 and $242,000 in 1997. These provisions were made based on management's
analysis of the various factors that effect the loan portfolio and management's
desire to maintain the allowance at a level considered adequate to provide for
losses. As shown in the following table, charge-offs in 1999 were $704,000 or
0.47% of average loans as compared to $780,000, or 0.49% of average loans in
1998 and $347,000, or 0.21% of average loans, in 1997. The increase in the level
of charge-offs in 1998 was related primarily to loans to one customer whose
loans were impaired. Management recorded charge-offs of $611,000 for such
impaired in 1998 to reflect management's estimate of collection at December 31,
1998. In 1999, impaired loans aggregated $683,000 and have a specific loan loss
allowance of $100,000.

                                       16
<PAGE>

The following table sets forth information with respect to the Company's
allowance for loan losses for the last three years:


<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                            --------------------------------
                                                               1997       1998       1999
                                                            ---------  ---------  ----------
                                                                  (Dollars in thousands)
<S>                                                         <C>       <C>         <C>
Allowance at beginning of period                            $ 1,659   $ 1,584      $ 1,441
                                                            -------   -------      -------

Provision for loan losses                                       242       605          528
                                                            -------   -------      -------
Recoveries:
  Residential real estate                                         9         -            2
  Commercial business                                            17         1          114
  Consumer and other                                              4        31           19
                                                            -------   -------      -------

    Total recoveries                                             30        32          135
                                                            -------   -------      -------

Charge offs:
  Residential real estate                                       (52)      (36)         (56)
  Commercial real estate                                       (185)        -           (2)
  Commercial business                                           (54)     (496)        (421)
  Consumer and other                                            (56)     (248)        (225)
                                                            -------   -------      -------

    Total charge offs                                          (347)     (780)        (704)
                                                            -------   -------      -------

    Net charge offs                                            (317)     (748)        (569)
                                                            -------   -------      -------

Balance at end of period                                    $ 1,584   $ 1,441      $ 1,400
                                                            =======   =======      =======

Ratio of allowance to net loans
  outstanding at the end of the period                         0.99%     0.94%        0.90%

Ratio of net charge offs to average loans
  outstanding during the period                                0.19%     0.46%        0.38%
</TABLE>

When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
nonperforming and past due loans, historical loan loss experience, the existing
risk of individual loans, concentrations of loans to specific borrowers or
industries and existing and prospective economic conditions. The allowance for
loan losses at December 31, 1999, was $1.4 million or 0.90% of net loans as
compared with $1.4 million, or 0.94% of net loans in 1998, and $1.6 million, or
0.99% of loans in 1997. As shown in the following table, the percentages of the
allowance allocated as a percentage of the total allowance was consistent for
1997 and 1998. In 1999, the Bank established a loan rating system to assist in
the loan loss allowance determination. The fluctuations in 1999 are a result of
this systematic change in estimating the allowance. The following table sets
forth the allocation of the allowance for loan losses at December 31, 1997, 1998
and 1999:


<TABLE>
<CAPTION>
                                        -------------------------   ----------------------     ---------------------
                                                     1997                   1998                        1999
                                        -------------------------   ----------------------     ---------------------

                                                       As a %                    As a %                     As a %
                                                      of Total                   of Total                  of Total
                                                      Allowance                  Allowance                 Allowance
                                                      for Loan                   for Loan                  for Loan
                                          Amount       Losses       Amount       Losses         Amount      Losses
                                        -------------------------   ----------------------     ---------------------
                                                                      (Dollars in thousands)
<S>                                     <C>           <C>           <C>          <C>            <C>        <C>
Real estate mortgage loans:
  Residential                           $   234         14.77%       $  217         15.06%        $   270       19.26%
  Other                                     210         13.26%          188         13.04%            222       15.85%
Consumer and commercial business            614         38.76%          651         45.18%            298       21.30%
 Impaired loans                               -          0.00%            -          0.00%            200       14.29%
Unallocated                                 526         33.21%          385         26.72%            410       29.30%
                                        ---------------------        --------------------         -------------------

    Total allowance for loan losses     $ 1,584        100.00%       $1,441        100.00%        $ 1,400      100.00%
                                        =====================        ====================         ===================
</TABLE>

                                       17
<PAGE>

Non-interest Income.

Non-interest income decreased by $174,000 in 1999 to $782,000 as compared to
$956,000 in 1998, and $766,000 in 1997. The decrease was primarily due to losses
on sales of real estate owned in 1999. The 1998 increase over 1997 was primarily
the result of an increase in loan and service fees of $189,000 from $468,000 in
1997 to $657,000 in 1998. This increase was due largely to the increased
activity in refinanced loans resulting from lower mortgage rates.

Non-interest Expense.

Non-interest expenses were consistent in 1999 and 1998 at approximately $5.0
million as the Company had no major changes in operations. In 1998 non-interest
expense decreased $116,000 or 2.2% to $5.1 million compared to $5.2 million in
1997. The decrease was primarily in compensation and employee benefit expense as
in 1997 the Company incurred a $600,000 pension plan expense to terminate its
defined benefit pension plan. This plan was replaced with a contributory 401K
retirement plan for which there was less expense in 1998, as well as future
periods in comparison to the defined benefit retirement plan.

Income Taxes

Income tax expense in 1999, 1998 and 1997 was $800,000, $1.0 million and
$945,000, respectively, or approximately 40.0% of income before income taxes
representing expected combined federal and state income tax rates.

                                      18
<PAGE>

              [LETTERHEAD OF MARMANN, MCCRARY & ASSOCIATES, P.C.]



INDEPENDENT AUDITORS' REPORT

To the Board of Directors
First Southern Bancshares, Inc. and Subsidiary
Florence, Alabama

We have audited the accompanying consolidated statements of financial condition
of First Southern Bancshares, Inc. and subsidiary (the "Company") as of December
31, 1998 and 1999 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each year in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Southern
Bancshares, Inc. and subsidiary at December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each year in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.


/s/ Marmann, McCrary & Associates, P.C.

Marmann, McCrary & Associates, P.C.
Sheffield, Alabama
March 3, 2000
<PAGE>

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1999 (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                 December 31,       December 31,
                                                                     1998               1999
<S>                                                              <C>                <C>
ASSETS

Cash and cash equivalents                                        $     13,188       $      5,906
Investment securities available for sale, at market                     2,016              4,408
Mortgage-backed securities, available for sale, at market                   -                  -
Mortgage-backed securities, held to maturity, at cost                     945              3,527
Loans held for sale, at cost, which approximates market                   659                 80
Loans receivable, net                                                 152,594            155,738
Foreclosed real estate and other assets                                   710                918
Premises and equipment, net                                             3,852              3,663
Federal Home Loan Bank stock, at cost                                   1,918              1,685
Accrued interest receivable                                             1,758              1,855
Deferred income taxes                                                     397                592
Other assets                                                              338                426
                                                                 ------------       ------------

TOTAL ASSETS                                                     $    178,375       $    178,798
                                                                 ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits                                                         $    127,550       $    126,870
Advances from Federal Home Loan Bank                                   31,316             33,665
Other notes payable                                                         -              2,000
Securities sold under repurchase agreement                                  -              1,487
Income taxes currently payable                                            356                183
Other liabilities                                                       1,145                624
                                                                 ------------       ------------

Total liabilities                                                     160,367            164,829
                                                                 ------------       ------------

COMMITMENTS AND CONTINGENCIES                                               -                  -

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares authorized; none
  issued and outstanding                                                    -                  -
Common stock, $.01 par value; 4,000,000 shares authorized;
  2,076,969 and  shares issued                                             21                 21
Additional paid-in capital                                             11,414             11,425
Retained earnings - Substantially restricted                           13,340             13,856
Unearned employee compensation - ESOP                                    (172)              (112)
Unearned employee compensation - MRDP                                    (550)              (290)
Net unrealized loss on securities available for sale                       11               (104)
Net provision for additional minimum pension liability
Treasury stock, at cost                                                (6,056)           (10,827)
                                                                 ------------       ------------

Total stockholders' equity                                             18,008             13,969
                                                                 ------------       ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $    178,375       $    178,798
                                                                 ============       ============
</TABLE>

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

                                      20
<PAGE>

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 and 1999 (Dollars in thousands,
---------------------------------------------------------------------------
except per share data)
----------------------

<TABLE>
<CAPTION>
                                                                    Year ended
                                                                    December 31,
                                                          1997           1998            1999
<S>                                                    <C>            <C>            <C>
INTEREST INCOME:
Loans                                                  $   14,643     $   14,345     $   13,094
Mortgage-backed securities                                    137             96            171
Investment securities                                         362            252            260
Other                                                         304            484            426
                                                       ----------     ----------     ----------

Total interest income                                      15,446         15,177         13,951
                                                       ----------     ----------     ----------

INTEREST EXPENSE:
Deposits                                                    6,892          6,203          5,254
Advances from Federal Home Loan Bank and other              1,560          1,753          1,851
                                                       ----------     ----------     ----------

Total interest expense                                      8,452          7,956          7,105
                                                       ----------     ----------     ----------

NET INTEREST INCOME                                         6,994          7,221          6,846

PROVISION FOR LOAN LOSSES                                     242            605            528
                                                       ----------     ----------     ----------

NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                                          6,752          6,616          6,318
                                                       ----------     ----------     ----------

NON INTEREST INCOME:
Loan fees and service charges                                 468            657            651
Net gains on sale of loans                                    258            263            193
Gains (losses) on sales of investments                          -              -             (1)
Gains (losses) on real estate owned                             2              2            (89)
Other                                                          38             34             28
                                                       ----------     ----------     ----------

Total non interest income                                     766            956            782
                                                       ----------     ----------     ----------

NON INTEREST EXPENSES:
Compensation and employee benefits                          3,218          3,001          2,849
Building and occupancy expense                                559            630            669
Data processing expense                                       296            395            446
Advertising                                                   185            164            191
Insurance expense                                             242            202            177
Other                                                         676            668            714
                                                       ----------     ----------     ----------

Total non interest expenses                                 5,176          5,060          5,046
                                                       ----------     ----------     ----------

INCOME BEFORE INCOME TAXES                                  2,342          2,512          2,054

INCOME TAX EXPENSE                                            945          1,010            808
                                                       ----------     ----------     ----------

NET INCOME                                             $    1,397     $    1,502     $    1,246
                                                       ==========     ==========     ==========

BASIC EARNINGS PER SHARE                               $     0.74     $     0.83     $     0.80
                                                       ==========     ==========     ==========

DILUTED EARNINGS PER SHARE                             $     0.73     $     0.82     $     0.79
                                                       ==========     ==========     ==========

DIVIDENDS PER SHARE
  Regular cash dividends                               $     0.50     $     0.50     $     0.50

  Special cash dividends                               $        -     $     0.30     $        -
                                                       ----------     ----------     ----------

Total dividends per share                              $     0.50     $     0.80     $     0.50
                                                       ==========     ==========     ==========
</TABLE>

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

                                      21
<PAGE>

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 and 1999 (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                                Accumulated
                                                                                        Retained     Unearned     other     Total
                                                Common stock              Additional    earnings     employee    compre-    stock-
                                           Issued          In treasury      paid-in  Substantially compensation  hensive   holders'
                                       Shares   Amount   Shares    Amount   capital    restricted  ESOP    MRDP   income    equity
                                      ---------------------------------------------------------------------------------------------
<S>                                   <C>       <C>    <C>       <C>      <C>        <C>          <C>    <C>    <C>        <C>
Balances at December 31, 1996         2,076,969 $   21 (109,400) $ (1,425)  $11,334    $ 12,672   $(401) $(1,119)  $ (40)  $ 21,042

 Comprehensive income:
Net income for the year
  ended December 31, 1997                     -      -        -         -         -       1,397       -        -       -      1,397
Change in net unrealized gain
  (loss) on securities available
  for sale, net of reclassification
  adjustments and tax effects                 -      -        -         -         -           -       -        -      38         38
                                                                                                                           --------
Total comprehensive income                    -      -        -         -         -           -       -        -              1,435
                                                                                                                           --------

Cash dividends                                -      -        -         -         -        (870)      -        -       -       (870)

Acquisition of treasury stock                 -      -  (79,930)   (1,078)        -           -       -        -       -     (1,078)

ESOP shares committed
  for release                                 -      -        -         -        41           -     121        -       -        162

Amortization of MRDP
  unearned compensation                       -      -        -         -         -           -       -      258       -        258
                                      --------- ------ --------  --------   -------    --------   -----  -------   -----   --------
Net for the period                    2,076,969     21  (79,930)   (1,078)       41         527     121      258      38        (93)
                                      --------- ------ --------  --------   -------    --------   -----  -------   -----   --------

Balances at December 31, 1997         2,076,969 $   21 (189,330) $ (2,503)  $11,375    $ 13,199   $(280) $  (861)  $  (2)  $ 20,949

Net income for the year
  ended December 31, 1998                     -      -        -         -         -       1,502       -        -       -      1,502
Change in net unrealized gain
  (loss) on securities available
  for sale, net of reclassification
  adjustments and tax effects                 -      -        -         -         -           -       -        -      13         13
                                                                                                                           --------
Total comprehensive income                    -      -        -         -         -           -       -        -              1,515
                                                                                                                           --------

Cash dividends                                -      -        -         -         -      (1,361)      -        -       -     (1,361)

Options exercised                             -      -    5,250        87       (25)          -       -        -       -         62

Acquisition of treasury stock                 -      - (224,182)   (3,640)        -           -       -        -       -     (3,640)

ESOP shares committed
  for release                                 -      -        -         -        64           -     108        -       -        172

Common stock grants
  to MRDP                                     -      -        -         -         -           -       -        -       -          -

Amortization of MRDP
  unearned compensation                       -      -        -         -         -           -       -      311       -        311
                                      --------- ------ --------  --------   -------    --------   -----  -------   -----   --------
Net for the period                            -      - (218,932)   (3,553)       39         141     108      311      13     (2,941)
                                      --------- ------ --------  --------   -------    --------   -----  -------   -----   --------

Balances at December 31, 1998         2,076,969 $   21 (408,262) $ (6,056)  $11,414    $ 13,340   $(172) $  (550)  $  11   $ 18,008
Net income for the year
  ended December 31, 1998                     -      -        -         -         -       1,246       -        -       -      1,246
Change in net unrealized gain
  (loss) on securities available
  for sale, net of reclassification
  adjustments and tax effects                 -      -        -         -         -           -       -        -    (115)      (115)
                                                                                                                           --------
Total comprehensive income                    -      -        -         -         -           -       -        -              1,131
                                                                                                                           --------

Cash dividends                                -      -        -         -         -        (730)      -        -       -       (730)

Options exercised                             -      -      936        11        (1)          -       -        -       -         10

Acquisition of treasury stock                 -      - (356,272)   (4,782)        -           -       -        -       -     (4,782)

ESOP shares committed
  for release                                 -      -        -         -        12           -      60        -       -         72

Common stock grants
  to MRDP                                     -      -        -         -         -           -       -        -       -          -

Amortization of MRDP
  unearned compensation                       -      -        -         -         -           -       -      260       -        260
                                      --------- ------ --------  --------   -------    --------   -----  -------   -----   --------
Net for the period                            -      - (355,336)   (4,771)       11         516      60      260    (115)    (4,039)
                                      --------- ------ --------  --------   -------    --------   -----  -------   -----   --------

Balances at December 31, 1999         2,076,969 $   21 (763,598) $(10,827)  $11,425    $ 13,856   $(112) $  (290)  $(104)  $ 13,969
                                      ========= ====== ========  ========   =======    ========   =====  =======   =====   ========
</TABLE>

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

                                      22
<PAGE>

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (Dollars in thousands)
--------------------------------------------------------------------------------

                                  (Continued)

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                       1997          1998          1999
<S>                                                                   <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                            $ 1,397       $ 1,502       $ 1,246
Adjustments to reconcile net income to net  cash provided
  by operating activities:
  Depreciation                                                            272           313           334
  Provision for loan losses                                               242           605           528
  Provision for deferred income taxes (benefit)                           (72)         (232)         (195)
  Amortization/accretion of  premiums/discounts on investment
    and mortgage-backed securities                                        (33)           (5)           (1)
  Amortization of deferred loan fees                                      (95)         (121)          (77)
  Fair market value of ESOP shares
    committed for release and charged to
    employee compensation                                                 162           147            71
  Amortization of unearned compensation - MRDP                            258           311           260
  (Gains) losses on real estate owned                                       2             2           (89)
  (Gain) on sale of premises and equipment                                 (2)            -             -
  Loss on disposal of premises and equipment                                -             -             -
  (Increase) decrease in:
    Loans held for sale                                                     9          (436)          579
    Accrued interest receivable                                           (94)           64           (97)
    Other assets                                                          376           166           (88)
  Increase (decrease) in:
    Income taxes currently payable                                        112           241          (173)
    Other liabilities                                                    (610)          735          (521)
                                                                      -------       -------       -------

Net cash provided by operating activities                               1,924         3,292         1,777
                                                                      -------       -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease:
  Total loans                                                            (196)        6,457        (3,595)
  Real estate owned                                                        96          (612)         (119)
  Federal Home Loan Bank stock                                           (613)           52           233
Proceeds from maturities of:
  Investments                                                           3,405         6,482            41
  Mortgage-backed securities                                                -             -         1,001
Acquisition of:
  Investments                                                               -             -        (2,622)
  Mortgage-backed securities                                                -             -        (3,508)
  Premises and equipment                                                 (326)         (656)         (145)
  Capitalized improvements to real estate owned                            78             -             -
                                                                      -------       -------       -------

Net cash provided by (used in) investing activities                     2,444        11,723        (8,714)
                                                                      -------       -------       -------
</TABLE>


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

                                      23
<PAGE>

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, and 1999 (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                   1997            1998           1999
<S>                                                              <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts                      $  10,931      $ (16,181)     $    (680)
Cash dividends paid                                                   (870)        (1,361)          (730)
Proceeds from FHLB advances                                              -         12,848          2,349
Proceeds from other borrowings                                           -              -          2,000
Proceeds from securities sold under agreement to repurchase              -              -          1,487
Reductions in FHLB advances                                         (7,151)             -              -
Reductions in other borrowings                                      (4,000)             -              -
Acquisition of treasury stock                                       (1,078)        (3,553)        (4,771)
                                                                 ---------      ---------      ---------

Net cash provided by (used in) financing activities                 (2,168)        (8,247)          (345)
                                                                 ---------      ---------      ---------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     2,200          6,768         (7,282)

CASH AND CASH EQUIVALENTS -
  BEGINNING OF PERIOD                                                4,220          6,420         13,188
                                                                 ---------      ---------      ---------

CASH AND CASH EQUIVALENTS -
  END OF PERIOD                                                  $   6,420      $  13,188      $   5,906
                                                                 =========      =========      =========

SUPPLEMENTAL INFORMATION FOR CASH FLOW:

Noncash transactions:
  Loans foreclosed and transferred to real estate owned          $     477      $   1,218      $   1,148
                                                                 =========      =========      =========

  Increase (decrease) in net unrealized loss on securities
    available for sale                                           $     (38)     $     (13)     $     115
                                                                 =========      =========      =========

Cash paid during the period for:
  Income taxes                                                   $     815      $     850      $   1,091
                                                                 =========      =========      =========

  Interest                                                       $   8,531      $   7,919      $   7,116
                                                                 =========      =========      =========
</TABLE>

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

                                       24
<PAGE>

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


First Southern Bancshares, Inc. ("Bancshares") was incorporated in the State of
Delaware on November 22, 1994, and is the holding company for First Southern
Bank, Inc. (the "Bank").  The Bank is an Alabama-chartered commercial bank that
is the successor to First Federal Savings and Loan Association of Florence,
which converted from a mutual savings and loan to a stock savings and loan on
April 13, 1995.  Bancshares and the Bank are collectively referred to as the
"Company."

Principles of consolidation

The accompanying consolidated financial statements include the accounts of First
Southern Bancshares, Inc. and its wholly-owned subsidiary, First Southern Bank.
All significant intercompany transactions and balances have been eliminated in
consolidation.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash due from banks, interest-
bearing overnight deposits and time deposits in the Federal Home Loan Bank
(FHLB) of Atlanta, and highly liquid investments with a maturity of three months
or less at purchase date.

Investments in debt and equity securities

In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS NO.
115"), management classifies its investment portfolio into three categories: (i)
held to maturity, (ii) available for sale, and (iii) trading securities, and
sets forth specific criteria for determining these classifications. SFAS No. 115
requires unrealized holding gains and losses for trading securities to be
included in earnings while unrealized holding gains and losses for available for
sale securities are to be reported as a separate component of equity, net of
related income taxes, until realized. Held to maturity securities are to be
recorded at their amortized cost. Portfolio additions subsequent to the adoption
of the statement are classified into the appropriate category when purchased.

Investments securities and certain mortgage-backed securities available for sale

As required by SFAS No. 115, available for sale securities have been recorded in
the accompanying consolidated statement of financial condition at estimated fair
value. The related net unrealized holding loss has been reported as a separate
component of equity, net of related income taxes. Gain or loss on any sale of
investment securities classified as available for sale continues to be recorded
based on the specific identification method.

Mortgage-backed securities held to maturity

The Company has both the intent and ability to hold its mortgage-backed
securities to maturity, and therefore, are classified in the accompanying
consolidated statements of financial condition as held to maturity. The
securities are stated at cost, as adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using the interest
method over the estimated life of the security. An allowance for loss on
mortgage-backed securities held to maturity is recorded only when the security
is deemed to be permanently impaired. Mortgage-backed securities are accounted
for on a specific identification basis.

Loans receivable

Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan origination fees. Interest income is accrued
daily based upon the outstanding principal amounts except for those classified
as nonaccrual loans. Interest accrual is discontinued when it appears that
future collection of principal or interest according to the contractual terms
may be doubtful. Interest collections on nonaccrual loans for which the ultimate
collectibility of principal is uncertain are applied as principal reductions.
Otherwise, such collections are credited to income when received.

                                       25
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------


Impaired loans are specifically reviewed loans for which it is probable that the
creditor will be unable to collect all amounts due according to the terms of the
loan agreement. Impairment of a loan is measured by comparing the recorded
investment in the loan with the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
A valuation allowance is provided to the extent that the measure of the impaired
loan is less than the recorded investment. A loan is not considered impaired
during a period of delay in payment if the ultimate collectiblity of all amounts
due is expected. Larger groups of homogeneous loans such as consumer
installment, bankcard and residential real estate mortgage loans are
collectively evaluated for impairment. Impaired loans are therefore primarily
commercial loans and commercial real estate loans. Payments received on impaired
loans for which the ultimate collectibility of principal is uncertain are
generally applied first as principal reductions.

The allowance for loan losses is maintained at a level that is considered to be
adequate to reflect estimated credit losses for specifically identified loans,
as well as estimated probable credit losses inherent in the remainder of the
loan portfolio at the balance sheet date. A formal review of the allowance for
loan losses is prepared quarterly to assess the risk in the portfolio and to
determine the adequacy of the allowance for loan losses. Commercial and
commercial real estate loans  are assigned a risk rating on a numerical
scale of one to nine by loan officers using established credit policy
guidelines. These risk ratings are periodically reviewed, and all risk ratings
are subject to review by an independent reviewer. The risk ratings are assigned
an allocation percentage which, when multiplied times the dollar value of loans
in that risk category, results in the amount of the allowance for loan losses
allocated to these loans. The allocation of allowance for loans with a grade of
one through six is based upon historical loss rates adjusted for current
conditions that include estimated current economic developments. The allocations
for loans with a grade of seven through nine are generally nonaccrual, impaired
or charge-offs. Management reviews its allocation of the loan losses versus
actual performance of each of its portfolios and adjusts allocation rates to
reflect the recent performance of the portfolio as well as other factors that
might impact the estimated losses in the portfolio.

In determining the appropriate level for the allowance, management ensures that
the overall allowance appropriately reflects a margin for the imprecision
inherent in most estimates of expected credit losses. This additional allowance
is reflected in the unallocated portion of the allowance. Based on management's
periodic evaluation of the allowance for loan losses, a provision for loan
losses is charged to operations if additions to the allowance are required.

Loan origination fees

Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is amortized to income using a method that approximates the interest
method over the contractual lives of the loans.

Loans held for sale

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate.  Net
unrealized losses are recognized in a valuation allowance by charges to income.

Foreclosed real estate owned and other assets

For real estate and other assets acquired through foreclosure and in-substance
foreclosed assets, a new cost basis is established at fair value at the time of
foreclosure through a charge to the allowance for loan losses with a valuation
allowance established for estimated costs to sell. The charge to establish the
valuation allowance is reflected in other expenses. Subsequent to foreclosure,
foreclosed assets are carried at the lower of fair value, less estimated costs
to sell, or cost, with the difference recorded as a valuation allowance on an
individual asset's basis. Subsequent decreases in fair value and increases in
fair value, up to the value established at foreclosure, are recognized as
charges or credits to expense.

Premises and equipment

Office properties and equipment are carried at cost less accumulated
depreciation. Renewals and betterments are capitalized, whereas repairs and
maintenance are charged to expense as incurred. Depreciation is provided by the
straight-line method at rates intended to distribute the cost of buildings and
equipment over their estimated service lives of ten to fifty years and three to
ten years, respectively.

                                       26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------


Income taxes

The consolidated financial statements have been prepared on an accrual basis.
When income and expenses are recognized in different periods for financial
reporting purposes and for purposes of computing income taxes currently payable,
deferred taxes are provided on such temporary differences. Deferred tax assets
and liabilities are recorded for the expected future tax consequences of events
that have been recognized in the financial statements or tax returns. Deferred
tax assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be realized or settled.

Transfer of assets and liabilities

Transfers and servicing of financial assets and extinguishment of liabilities
are based on a consistent application of a "financial components approach" that
focuses on control. Under that approach, after a transfer of financial assets,
and entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets that are sales from
transfers that are secured borrowings.

Earnings per share

SFAS No. 128 Earnings Per Share was adopted by the Company in the fourth quarter
of 1997. Under SFAS No. 128, Basic Earnings Per Share ("Basic EPS") and Diluted
Earning Per Share ("Diluted EPS") are reported in the accompanying financial
statements. Basic EPS is based on the weighted average number of common shares
outstanding to income available to common stockholders. Outstanding common
shares include shares issuable for little or no cash consideration upon the
satisfaction of certain conditions as of the date that all necessary conditions
have been satisfied. Diluted EPS is based on the weighted average number of
common shares outstanding plus any potential dilutive shares committed to be
issued upon the satisfaction of certain conditions to income available to common
stockholders. A reconciliation of the weighted average of common shares
outstanding used in the earnings per share computation follows:

<TABLE>
<CAPTION>
                                                                  December 31,
                                               1997                  1998                   1999
                                          ---------------        ---------------       ---------------
         <S>                              <C>                    <C>                   <C>
         Common shares outstanding              2,076,969              2,076,969             2,076,969
         Treasury shares                         (153,146)              (264,027)             (509,185)
         Unreleased ESOP shares                   (31,546)               (20,102)              (14,195)
         Options - uncontingent                     2,525                  9,112                 2,529
                                          ---------------        ---------------       ---------------
            Basic EPS                           1,894,802              1,801,952             1,556,118

         Options - contingent                      19,682                 16,271                 3,708
         Unreleased ESOP shares                    31,546                 20,102                14,195
                                          ---------------        ---------------       ---------------
            Diluted EPS                         1,946,030              1,838,325             1,574,021
                                          ===============        ===============       ===============
</TABLE>


Mortgage Servicing Rights

Mortgage servicing rights retained on loans sold are capitalized as an asset at
estimated fair value and amortized over the estimated servicing period in
accordance with SFAS No. 125 Accounting for Transfers Servicing of Financial
Assets and Extinguishments of Liabilities that was adopted in 1997. The adoption
of SFAS No. 125 had no significant effect on the method utilized in 1996.

                                       27
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------


Comprehensive income

Comprehensive income includes net income as well as certain items that are
reported directly within a separate component of stockholders' equity and bypass
net income. The components of other comprehensive income and related tax effects
are as follows:

<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                                         1997        1998        1999
                                                                      ----------  -----------  ----------
                                                                                (in thousands)
<S>                                                                   <C>         <C>          <C>
Unrealized holdings gains (losses) on available for sale securities   $       59  $        23  $     (190)


Reclassification adjustment for gains (losses) realized in income              -            -          (1)
                                                                      ----------  -----------  ----------
Net unrealized gains (losses)                                                 59           23        (191)

Tax effect                                                                   (21)         (10)         76
                                                                      ----------  -----------  ----------

Net of tax amount                                                     $       38  $        13  $      115
                                                                      ==========  ===========  ==========
</TABLE>


Segment reporting and disclosures

An operating segment is defined as a component of an enterprise that engages in
business activities that generate revenue and incur expense, whose operating
results are reviewed by the chief operating decision maker in the determination
of resource allocation and performance, and for which discrete financial
information is available. The Company has determined it has no segment reporting
requirements.

Recent accounting pronouncements

SFAS No. 133 - Accounting for Derivative Instruments and for Hedging Activities
requires all derivatives to be recorded on the balance sheet at fair value. SFAS
No. 137 has deferred the effective date of the adoption of this statement until
after June 15, 2000. The impact of adopting SFAS No. 133 on the financial
condition of the Company has not been determined at this time.

SFAS No. 134 - Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
amended SFAS No. 65 and SFAS No. 115 to require the classification as trading
any retained mortgage-backed securities that it commits to sell before or during
the securitization process. SFAS No. 134 has been adopted by the Company and has
had no significant impact on its financial condition in 1999.

SFAS No. 135 - Rescission of FASB Statement No. 75 and Technical Corrections.
This statement made various minor corrections to other pronouncements and
rescinded FASB No. 75 which had no significant effect on the financial condition
of the Company.

SFAS No. 136 - Transfers of Assets to a Not-for Profit Organization or
Charitable Trust that Raises or Holds Contributions for Others. This statement
establishes standards for transactions in which an entity makes a contribution
by transferring assets to a not-for profit organization or charitable trust that
accepts the assets and agrees to use those assets on behalf of another specified
entity. SFAS No. 136 has been adopted by the Company and has had no significant
impact on its financial condition in 1999.

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

Reclassifications

Certain reclassifications were made in the 1997 and 1998 financial statements in
order for them to conform with the reporting format utilized in 1999.

                                       28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------


NOTE 2 - CASH AND CASH EQUIVALENTS

Cash and cash equivalents were comprised of the following:


                                                        December 31,
                                                       1998       1999
                                                      (In thousands)
Cash on hand                                        $  1,861   $  3,119
Cash due from banks                                    2,737      2,553
Interest bearing deposits at FHLB of Atlanta           8,579        198
Other interest bearing accounts                           11         36
                                                    --------   --------

                                                    $ 13,188   $  5,906
                                                    ========   ========

Cash due from banks at December 31, 1999 includes aggregate bank balances of
approximately $2.4 million that are not covered by FDIC insurance.


NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

The Company's investment and mortgage-backed securities classified as available
for sale consisted of the following:

<TABLE>
<CAPTION>
                                                           December 31, 1998
                                            Amortized      Unrealized holding     Estimated
                                            cost basis      Gains      Losses    market value
                                                               (In thousands)
<S>                                         <C>            <C>        <C>        <C>
Investment securities
Maturity in less than one year:
U.S. Government and agency obligations        $  1,001     $       3  $      -    $   1,004
Maturity between one and five years:
U.S. Government and agency obligations             997            15         -        1,012
                                              --------     ---------   --------   ---------

                                              $  1,998     $      18  $      -    $   2,016
                                              ========     =========   ========   =========
</TABLE>

<TABLE>
<CAPTION>
                                                           December 31, 1999
                                            Amortized      Unrealized holding     Estimated
                                            cost basis      Gains      Losses    market value
                                                               (In thousands)
<S>                                         <C>            <C>         <C>       <C>
Investment securities
Maturity between one and five years:
Corporate Bonds                               $  3,081     $       -   $   (158)  $   2,923
U.S. Government and agency obligations           1,500             -        (15)      1,485
                                              --------     ---------   --------   ---------

                                              $  4,581     $       -   $   (173)  $   4,408
                                              ========     =========   ========   =========
</TABLE>

                                       29
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

At December 31, 1998 and 1999, the portfolio of securities classified as
available for sale have been recorded in the accompanying statement of financial
condition at their estimated market value.  The difference between amortized
cost and estimated market value has been reflected as a separate component of
equity, net of related income taxes:

                                                                December 31,
                                                               1998      1999
                                                               (In thousands)
Unrealized gain (loss) on securities available for sale        $  18    $ (173)
Deferred income taxes                                             (7)       69
                                                               -----    ------

Net unrealized gain (loss) on securities available for sale    $  11    $ (104)
                                                               =====    ======

NOTE 4 - MORTGAGE-BACKED SECURITIES HELD TO MATURITY

The following summarizes the amortized cost basis, estimated market value and
unrealized holding gains and losses related to investments in mortgage-backed
securities classified as held to maturity:

<TABLE>
<CAPTION>
                                                            December 31, 1998
                                             Amortized      Unrealized holding    Estimated
                                             cost basis     Gains       Losses   market value
                                                              (In thousands)

<S>                                          <C>            <C>         <C>      <C>
Maturing in one to five years:
FNMA certificates                               $   -       $  -         $  -       $    -
FHLMC certificates                                 89          1            -           90
GNMA certificates                                  26          1            -           27
Maturing in five to ten years:
FHLMC certificates                                217          7            -          224
GNMA certificates                                 292         13            -          305
Maturing in over ten years:
GNMA certificates                                  84         10            -           94
FNMA certificates                                  69          9            -           78
FHLMC certificates                                168          8            -          176
                                                -----       ----         ----       ------
                                                $ 945       $ 49         $  -       $  994
                                                =====       ====         ====       ======
</TABLE>

<TABLE>
<CAPTION>
                                                        December 31, 1999
                                            Amortized   Unrealized holding   Estimated
                                            cost basis   Gains     Losses   market value
                                                         (In thousands)
<S>                                         <C>         <C>        <C>      <C>
Maturing in one to five years:
GNMA certificates                              $   41       $  2    $    -     $   43
Maturing in five to ten years:
FHLMC certificates                                148          3         -        151
GNMA certificates                                 172          3         -        175
Maturing in over ten years:
GNMA certificates                               3,039                 (247)     2,792
FHLMC certificates                                127          2         -        129
                                               ------       ----    ------     ------

                                               $3,527       $ 10    $ (247)    $3,290
                                               ======       ====    ======     ======
</TABLE>

Mortgage-back securities of $3.4 million have been pledged as collateral for
public funds on deposit.


                                      30

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

The Company has the intent and ability to hold these mortgage-backed securities
to maturity and in accordance with the provisions of SFAS No. 115 are recorded
in the accompanying statement of financial condition at amortized cost.  At
December 31, 1998 and 1999, neither a disposal, nor conditions that could lead
to a decision not to hold mortgage-backed securities classified as held to
maturity, were reasonably foreseen.

NOTE 5 - LOANS RECEIVABLE

Loans receivable consisted of the following:

<TABLE>
<CAPTION>
                                                         December 31,
                                                       1998        1999
                                                        (In thousands)
<S>                                                <C>         <C>
Type of loan
One-four family residential mortgage loans,
  including loans held for sale                     $  53,019   $  49,808
Multi-family residential mortgage loans                 6,473       4,132
Commercial mortgage and business loans                 62,526      66,124
Construction  loans                                    12,082      14,584
Consumer loans                                         21,766      23,317
                                                    ---------   ---------

Total loans                                           155,866     157,965
                                                    ---------   ---------

Less:
  Loans held for sale                                    (659)        (80)
  Undisbursed loans in process                         (1,103)       (675)
  Unamortized loan origination fees                       (69)        (72)
  Allowance for loan losses                            (1,441)     (1,400)
                                                    ---------   ---------

                                                       (3,272)     (2,227)
                                                    ---------   ---------

Total loans receivable, net                         $ 152,594   $ 155,738
                                                    =========   =========

</TABLE>

Loans and participations serviced on behalf of the Company by others were
approximately $3.6 million and $3.3 million at December 31, 1998 and 1999,
respectively.  Loans and participations serviced by the Company on behalf of
others were approximately  $16.2 million and $16.6 million at December 31, 1998
and 1999, respectively.

The weighted average yield for all loans was 8.70% and 8.71% at December 31,
1998 and 1999, respectively.


                                      31


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

The Company originates both adjustable and fixed interest rate loans. At
December 31, 1998 and 1999, the composition of these loans was as follows:

<TABLE>
<CAPTION>
                     Fixed rate loans                                    Adjustable rate loans
   Term        December 31,      December 31,        Term to rate    December 31,      December 31,
to maturity        1998              1999              adjustment        1998              1999
                        (In thousands)                                      (In thousands)
<S>            <C>               <C>                 <C>             <C>               <C>
1 mo - 1 yr        $ 12,171          $ 14,621        1 mo - 1 yr         $ 81,208          $ 83,936
1 yr - 5 yrs         38,587            42,010        1 yr - 5 yrs             625               131
Over 5 yrs           23,275            17,267        Over 5 yrs                 -                 -
                   --------          --------                            --------          --------

                   $ 74,033          $ 73,898                            $ 81,833          $ 84,067
                   ========          ========                            ========          ========
</TABLE>

The adjustable rate loans have interest rate adjustment limitations.  The
majority of the adjustable rate loans are indexed to the one-year U.S. Treasury
bill rate.  Future market factors may affect the correlation of the interest
rate adjustment with the rates the Company pays on the short-term deposits that
have been primarily utilized to fund these loans.

Activity in the allowance for  loan losses account is summarized as follows:

                                                     Year ended December 31,
                                                     1997      1998      1999
                                                            (In thousands)
Balance - Beginning of period                       $1,659    $1,584    $1,441
Provision for loan losses                              242       605       528
Charge-offs                                           (347)     (780)     (704)
Recoveries                                              30        32       135
                                                    ------    ------    ------

Balance - End of period                             $1,584    $1,441    $1,400
                                                    ======    ======    ======

At December 31, 1999 and 1998, the Company had non-accrual loans aggregating
$2.3 million and $3.4 million, respectively, of which $484,000 in 1998 and
$683,000 in 1999 were determined to be impaired. The specific allowance for
impaired loans was $100,000 as of December 31, 1999.

Loans to executive officers and directors are made in the ordinary course of
business on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated parties. The Company gives employees who
are not directors or executive officers a preferred interest rate on adjustable-
rate mortgages of up to 3/4% less than published interest rates.

Loan activity relating to loans made to executive officers and directors and
companies in which executive officers and directors own a significant interest
is summarized as follows:

                     Balance                               Balance
   Year ended       Beginning                                End
  December 31,       of year     Advances    Repayments    of year
                                     (In thousands)
      1997            $ 2,221     $   642       $   594     $2,269

      1998            $ 2,269     $   465       $ 2,329     $  405

      1999            $   405     $ 5,772       $ 2,721     $3,456

Unused credit lines or commitments to extend credit to executive officers and
directors, and companies to which executive officers and directors own a
significant interest aggregated $1.8 million and $391,000 for the years ended
December 31, 1998, and 1999, respectively.


                                      32


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment are summarized by major classifications as follows:

                                                               December 31,
                                                            1998         1999
                                                             (In thousands)
Land                                                       $  636       $  636
Building and improvements                                   4,175        4,192
Furniture, fixtures and equipment                           1,277        1,325
                                                           ------       ------

                                                            6,088        6,153

Less - Accumulated depreciation                            (2,236)      (2,490)
                                                           ------       ------

                                                           $3,852       $3,663
                                                           ======       ======

Depreciation expense aggregated approximately $285,000, $320,000 and $343,000
during the years ended December 31, 1997, 1998, and 1999 respectively.

NOTE 7 - INVESTMENT IN FHLB STOCK

The Bank, as a member of the FHLB System, is required to maintain an investment
in the FHLB of Atlanta.  Although the stock represents a form of equity interest
in the FHLB of Atlanta, it does not meet the marketability criteria of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, because
its ownership is restricted and it lacks a market.  As a result, the FHLB stock
is classified as a restricted investment security and is stated at cost.

NOTE 8 - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE

Accrued interest receivable consisted of the following:

                                                               December 31,
                                                            1998          1999
                                                              (In thousands)
Interest on loans                                           $1,654        $1,725
Interest on investment and mortgage-backed securities           68            97
Dividends on Federal Home Loan Bank Stock                       36            33
                                                            ------        ------

                                                            $1,758        $1,855
                                                            ======        ======

                                       33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

NOTE 9 - DEPOSITS

Deposits by major classification and interest rate are summarized as follows:

<TABLE>
<CAPTION>
                                                                   December 31,
                                     Rates                   1998                1999
                                1998       1999         Amount       %       Amount       %
<S>                            <C>        <C>         <C>       <C>          <C>       <C>
Demand accounts:                                                (Dollars in thousands)
Non interest-bearing accounts      -          -       $   5,939      4.7   $   5,349     4.2
NOW accounts                    2.00%      2.00%         11,757      9.2      11,316     8.9
Money market demand accounts    3.00%      3.00%          3,421      2.7       3,824     3.0
Passbook accounts               2.75%      2.75%         15,415     12.1      14,218    11.2
Statement savings              2.875%     2.875%          2,300      1.7       2,664     2.1
                                                      ---------    -----   ---------   -----

                                                         38,832     30.4      37,371    29.4
                                                      ---------    -----   ---------   -----
Certificate accounts:
2.00% to 5.00%                                           18,360     14.4      43,006    33.9
5.01% to 6.00%                                           62,697     49.2      32,731    25.8
6.01% to 7.00%                                            6,835      5.4      13,249    10.5
Over 7.00%                                                  826      0.6         513     0.4
                                                      ---------    -----   ---------   -----

                                                         88,718     69.6      89,499    70.6
                                                      ---------    -----   ---------   -----

                                                      $ 127,550    100.0   $ 126,870   100.0
                                                      =========    =====   =========   =====

Weighted-average cost of interest-bearing deposits         4.57%                4.52%
                                                      =========            =========
</TABLE>

Scheduled maturities of certificate accounts were as follows:

                                                             December 31,
                                                          1998          1999
                                                            (In thousands)
Less than one year                                      $ 70,086      $ 56,405
One year to two years                                     13,347        28,281
Two years to three years                                   2,331         2,762
Three years to four years                                  1,310         1,790
Over four year                                             1,644           261
                                                        --------      --------

                                                        $ 88,718      $ 89,499
                                                        ========      ========

As of December 31, 1998 and 1999, the Company had aggregate deposit accounts
with balances greater than $100,000 of approximately $11.7 million and $15.6
million, respectively.  Balances in excess of $100,000 are not covered by FDIC
insurance.  Deposits from directors, executive officers, and related parties
held by the Bank at December 31, 1999 amounted to $628,000.

                                       34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

Interest expense by deposit type is summarized as follows:

                                                      Year ended December 31,
                                                    1997       1998       1999
                                                          (In thousands)
NOW accounts                                       $  248     $  255     $  223
Money market demand accounts                          100        105        115
Passbook and statement savings accounts               505        481        491
Certificate accounts                                6,039      5,362      4,425
                                                   ------     ------     ------

                                                   $6,892     $6,203     $5,254
                                                   ======     ======     ======

NOTE 10 - BORROWED FUNDS

Federal Home Loan Bank:

Advances from the Federal Home Loan Bank are as follows:

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                             1998         1999
                                                                                               (In thousands)
         <S>                                                                                <C>          <C>
         Advances under a $40,000,000 Credit Availability Program(a) expiring
           May 14, 2000, interest rate determined daily at FHLB determined
           "spread" over the rate paid on FHLB overnight deposit accounts,
           interest due monthly                                                             $     -      $ 9,000
         Advances from Community Investment Fund:
           7.36% principal reducing credit advance dated May 1, 1992, interest
             due monthly, principal due in equal quarterly installments of $13,514
             commencing May 1993 and continuing through May 2002                                189          135
           6.53% principal reducing credit advance dated November 2, 1992,
             interest due monthly, principal due in equal quarterly installments of
             $18,919 commencing in November 1993 and continuing through
             November 2002                                                                      303          227
           6.91% principal reducing credit advance dated March 4, 1994,
             interest due monthly, principal due in equal quarterly installments of
             $33,333 commencing in March 2004 and continuing through
             March 2009                                                                         700          700
           7.49% principal reducing credit advance dated July 8, 1994,
             interest due monthly, principal due in equal quarterly installments of
             $5,405 commencing in July 1995 and continuing through
             July 2004                                                                          124          103
          6.08% advance under fixed rate credit plan dated August 25, 1993,
           interest due monthly, principal due August 25, 2003                                2,000        2,000
          5.66% five year convertible advance renewed September 24, 1997,
           interest due quarterly, principal due September 24, 2002                           5,000            -
          6.28% advance under fixed rate credit plan dated October 24, 1995,
           interest due monthly, principal due October 24, 2000                               5,000        5,000
          5.49% ten year convertible advance dated February 4, 1998,
           interest due quarterly, principal due February 4, 2008                            10,000       10,000
          4.97% ten year convertible advance dated June 19, 1998,
           interest due quarterly, principal due June 19, 2008                                8,000            -
          5.36% five year convertible advance dated September 29, 1999,
           interest due quarterly, principal due September 29, 2004                               -        6,500
                                                                                            -------      -------

          Total advances from Federal Home Loan Bank                                        $31,316      $33,665
                                                                                            =======      =======
</TABLE>

                                       35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------


  (a)  The Company has a "Credit Availability" agreement with the Federal Home
  Loan Bank of Atlanta expiring in May 2000,  which generally, limits the
  Company's aggregate borrowings to the amount of credit availability ($40
  million).  At December 31, 1999, the Company has unused credit availability of
  approximately $6.3 million.

The Company's advances from the FHLB of Atlanta are secured by a blanket
floating lien on qualifying first mortgage loans (approximately $46.4 million at
December 31, 1999).  The Company incurred interest expense on FHLB advances of
approximately $1.6 million, $1.7 million and $1.8  million in 1997, 1998 and
1999, respectively.

Other Notes Payable:
Other notes payable are as follows at December 31, 1999 (in thousands):


<TABLE>
<CAPTION>
                                                                                                        1999
          <S>                                                                                          <C>
          Advances under a $3 million line of credit with a bank,
           interest of LIBOR plus 2.25% or bank's prime rate payable
           monthly, principal due December 1, 2000.  Secured with
           the Bank's stock.                                                                           $1,000

          Advances under a $1.2 million unsecured line of credit with
           A bank, interest at the bank's prime, interest and principal due
           October 25, 2000                                                                             1,000

                                                                                                     --------
          Total other notes payable                                                                    $2,000
                                                                                                     ========
</TABLE>


Securities Sold Under Agreements to Repurchase:

Securities sold under agreements to repurchase were as follows as of December
31, 1999 (in thousands):

   6.14% Federal Home Loan Bank Bond of $1,500,000,
    estimated fair value of $1,485,000                            $1,487

Weighted average interest rate of the agreement                     5.68%

This agreement matures February 29, 2000.  The security underlying the agreement
was delivered to the institution that arranged the transaction.

Total borrowed funds at December 31, 1999 have maturities and/or are scheduled
to be liquidated in future years as follows:


                       Year ending           Principal
                       December 31,          reductions
                                           (In thousands)

                         2000                 $17,638
                         2001                     151
                         2002                     124
                         2003                   2,022
                         2004                   6,650
                     2005 - 2009               10,567

                                           ----------

                                              $37,152
                                           ==========

                                       36
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------



NOTE 11 - INCOME TAXES


Income tax expense is comprised of the following elements of current and
deferred Federal and state income taxes:


                                                       Year ended December 31,
                                                      1997      1998      1999
                                                          (In thousands)
Current income tax expense:
Federal                                              $ 935    $1,142     $ 902
State                                                  108       112        26
                                                   -------  --------  --------

                                                     1,043     1,254       928
                                                   -------  --------  --------
Deferred income tax expense (benefit):
Federal                                               (104)     (251)     (152)
State                                                    6         7        32
                                                   -------  --------  --------

                                                       (98)     (244)     (120)
                                                   -------  --------  --------

                                                     $ 945    $1,010     $ 808
                                                   =======  ========  ========

The Company files consolidated federal and state income tax returns.  At
December 31, 1999, the Company had prepaid federal income taxes of approximately
$168,000 and a liability for unpaid state income taxes of approximately $95,000.
As of December 31, 1998, the Company had a liability for  federal income taxes
of approximately $104,000 and a liability for unpaid state income taxes of
approximately $152,000.

The provisions for income taxes are different than the amounts determined by
applying the federal statutory rate to income before income taxes due to the
following:


<TABLE>
<CAPTION>
                                                                                      Year ended December 31,
                                                                                     1997      1998      1999
                                                                                      (Dollars in thousands)
<S>                                                                                 <C>      <C>        <C>
Expected income tax, at statutory rate                                              $ 754    $  854     $ 698
Charitable contribution of appreciated property                                        90         -         -
Excess of fair value over cost of ESOP shares committed for release                    14        13         4
Federal Home Loan Bank stock dividends
Dividend received deduction                                                           (35)      (29)      (31)
State excise taxes based on income, net of Federal
  income tax expense                                                                  117       119        79
Other, net                                                                              5        53        58
                                                                                   ------    ------     -----

Total income tax expense                                                            $ 945    $1,010     $ 808
                                                                                   ======    ======     =====

Effective income tax rate                                                              40%       40%       40%
                                                                                   ======    ======     =====
</TABLE>

                                       37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

Deferred income tax expense (benefit) results from temporary differences in the
recognition of revenues and expenses for tax and financial statement purposes.
Deferred income taxes are also provided on certain components of equity. The
sources and tax effects of these temporary differences and the separately stated
components of equity resulting in deferred income taxes as follows:

<TABLE>
<CAPTION>
                                             Deferred tax (benefit) liability related to:
                                                                                                       Accrued
          Temporary            Bad debt deduction   Loan     Accumulated   Prepaid                    compensated
    reporting differences      (Asset)  Liability   Fees     Depreciation  Expenses    MRDP    Other   absences       Total
                                                                 (In thousands)
<S>                            <C>      <C>       <C>        <C>           <C>       <C>      <C>     <C>            <C>
Balance - December 31, 1996     $(509)    $ 685   $ (39)      $ 30         $ 132     $ (45)   $(299)   $ (48)        $ (93)
1997 changes                      (38)      (84)    (20)        31          (281)       (8)     341      (13)          (72)
                                -----     -----  ------      -----         -----     -----   ------    -----         -----

Balance - December 31, 1997      (547)      601     (59)        61          (149)      (53)      42      (61)         (165)
1998 changes                      (84)     (198)     22          9             -       (10)       -       29          (232)
                                -----     -----  ------      -----         -----     -----   ------    -----         -----

Balance - December 31, 1998      (631)      403     (37)        70          (149)      (63)      42      (32)         (397)
1999 changes                        7      (232)      8        (12)          149        11      (93)     (33)         (195)
                                -----     -----  ------      -----         -----     -----   ------    -----         -----

Balance - December 31, 1999     $(624)   $  171   $ (29)      $ 58             -     $ (52)   $ (51)   $ (65)       $ (592)
                                =====   =======   =====      =====         =====     =====    =====    =====        ======
</TABLE>

NOTE 12 - PENSION PLAN

The Company froze the benefits of its defined benefit noncontributory retirement
plan ("Plan") in May 1997 and subsequently terminated the plan and recognized an
expense in 1997 of $588,000 for the unfunded projected liability in accordance
with SFAS No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits.  The Plan covered
substantially all of its employees.  Benefits were generally based upon the
fractional rule based on service.  It was the Company's policy to make
contributions to the Plan sufficient to meet minimum funding requirements of
applicable laws and regulations.  Plan assets consist principally of passbook
savings, certificates of deposit and life insurance.  During 1998 the Plan was
terminated and  the Plan's assets were distributed to the participants.


NOTE 13 - STOCK OWNERSHIP AND OPTION  PLANS

Employee Stock Ownership Plan
The Bank has established an internally-leveraged Employee Stock Ownership Plan
("ESOP") for the exclusive benefit of the Bank's participating employees meeting
certain eligibility requirements.  In general, participating employees must be
full-time employees (defined as an employee working 1,000 hours or more during
an employment year) with one or more years of service and must have attained the
age of 21 years.

The ESOP borrowed funds from the Company in an amount sufficient to purchase
163,990 shares.  The loan is secured by the shares purchased and will be repaid
by the contributions to the ESOP by the Bank and any other earnings on ESOP
assets.  The loan has an outstanding balance of $172,000 and $112,000  as of
December 31, 1998 and 1999, respectively.

Accounting for the ESOP is in accordance with Statement of Position 93-6,
Employers Accounting for Employee Stock Ownership Plans issued by the American
Institute of Certified Public Accountants.  Accordingly, the Company's loan to
the ESOP is reflected as a reduction of stockholders' equity as "unearned
employee compensation".  The ESOP is expected to cover its debt service
requirements through discretionary contributions to the ESOP by the Bank and
through dividends paid on shares of Company common stock held by the ESOP.  The
shares held by the ESOP are committed for release from collateral as principal
repayment of the loan is made.  At such time, unearned employee compensation is
reduced by the cost basis of shares released and compensation is charged for the
fair value of such  shares at the date of release.  Any difference between the
cost basis and fair value of shares committed for release is charged or credited
to additional paid-in capital, net of related income taxes.  As shares are
committed for release, they become outstanding for earnings per share
computations.

                                       38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

Shares committed for release are held in a suspense account for allocation among
participants.  Contributions to the ESOP and shares released from the suspense
account are allocated among participants at the end of each Plan year (December
31) in proportion to their compensation relative to total compensation of all
active participants.  Benefits generally become 100% vested after five years of
credited service.  Vesting is accelerated upon retirement, death or disability.
Since the Company's annual contributions are discretionary, benefits payable
under the ESOP cannot be estimated.

Dividends paid on unallocated ESOP shares are recorded as reductions of debt and
accrued interest, whereas dividends on allocated ESOP shares are recorded as a
reduction in retained earnings.  The following summarizes activity related to
the ESOP for the three years ended December 31, 1999:

<TABLE>
<CAPTION>
                                      Unearned employee        Additional
                                        compensation            paid-in        Compensation
                                    Shares        Amount        capital           expense
                                                   (Dollars in thousands)
<S>                              <C>            <C>            <C>             <C>
1997
Shares committed for release:          12,070          121     $         41    $       162
                                 ------------   ----------     ============    ===========

Balances - December 31, 1997          (28,041)  $     (280)


1998
Shares committed for release:          10,878          108     $         64    $       172
                                 ------------   ----------     ============    ===========

Balances - December 31, 1998          (17,163)  $     (172)

1999
Shares committed for release:           5,987           60     $         12    $        72
                                 ------------   ----------     ============    ===========

Balances - December 31, 1999          (11,176)  $     (112)
                                 ============   ==========
</TABLE>

Management Recognition and Development Plan
On April 17, 1996, the Company established the 1996 Management Recognition and
Development Plan (the "MRDP").  The MRDP was established in order to increase
the proprietary and vested interest of certain key Company employees and
Directors in the growth, development and financial success of the Company by
granting them awards of a maximum of 82,000 restricted shares of the Company's
common stock.  Among other provisions of the MRDP, the MRDP shares are
restricted as to transferability prior to vesting, which vesting is to occur
generally over a five-year period at a rate of 20% per year, commencing one year
after the original date of grant.

As of December 31, 1999, the Company has awarded the 82,000 restricted shares of
the Company's common stock in accordance with the terms and conditions of the
MRDP.  The restricted shares were obtained from stock held in treasury (54,906
shares) and from authorized and unissued common stock (27,094 shares) and were
recorded to unearned employee compensation at the then prevailing market price
of the company's common stock ($15.75 per share).  Unearned compensation related
to the MRDP is reflected as a reduction of stockholders' equity and is being
amortized to expense on a ratable basis over the five-year vesting period.  MRDP
amortization expense was $243,000 in 1999.  As of December 31, 1999, 50,837
shares are vested, 3,541 shares have been forfeited, and 27,622 remain
unreleased.

Stock Option Plan
On April 17, 1996, the Company established the 1996 Stock Option Plan (the
"Plan").  The Plan was established in order to promote the interests of the
Company by attracting, retaining and motivating exceptional executive personnel
and other key employees and Directors of the Company.  The Plan sets an exercise
price not less than 100% of the per share fair market value at the date of grant
(110% under certain circumstances), contains various anti-dilution/enlargement
provisions, and generally provides for vesting of awards at a rate of 20% per
year, commencing one year after the original date of grant.  Options are
generally exercisable until the tenth anniversary date of the grant.

                                       39
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

The Plan provides that a maximum of 204,988 options to acquire the Company's
common stock may be granted under the Plan.  Commensurate with its April 17,
1996 adoption of the Plan, the Board of Directors granted awards aggregating
102,492 share options to the Company's Directors and certain key Company
employees, at an exercise price equal to the fair market value per share at the
date of grant ($15.75 per share, which amount was subsequently adjusted in
accordance with Plan provisions to $11.75 per share so as to give appropriate
recognition to the effects of 1996 Special dividends).  In 1998,  14,000 options
were granted to certain officers and directors under the Plan.  No options were
granted in 1999.

The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, on
January 1, 1996.  SFAS No. 123 encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted.  The resulting compensation cost would be shown as an expense on the
income statement.  Companies may choose to continue to measure compensation for
stock-based plans using the intrinsic method of accounting prescribed by APB
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees.  Entities
electing to continue the accounting prescribed in APB 25 will be required to
disclose in the notes to the financial statements what net income and earnings
per share would have been if the fair value-based method of accounting defined
in SFAS No. 123 had been applied.  Such pro forma information is as follows (in
thousands):

<TABLE>
<CAPTION>
                                  1997        1998       1999
                                 ------      ------     ------
          <S>                    <C>         <C>        <C>
          Net income             $1,339      $1,444     $1,179
          Basic EPS              $ 0.71      $ 0.80     $ 0.76
          Diluted EPS            $ 0.70      $ 0.79     $ 0.75
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model using weighted-average assumptions of
expected life-10 years, volatility-30%, risk-free interest rate-7.5%, and
dividend yield -3.3%.

A summary of the status (shares in thousands) of the Company's stock option plan
is as follows:

<TABLE>
<CAPTION>
                                     -------------------- ------------------- --------------------
                                            1997                  1998                1999
                                     -------------------- ------------------- --------------------
                                                Weighted            Weighted             Weighted
                                                average             average              average
                                                exercise            exercise             exercise
                                       Shares     price     Shares    price     Shares     price
                                     ---------- --------- --------- --------- ---------- ---------
<S>                                  <C>        <C>       <C>       <C>       <C>        <C>
Outstanding, beginning of year         102,492   $ 11.75   102,492   $ 11.75    111,242   $ 11.69
Granted                                      -         -    14,000     11.25          -         -
Exercised                                    -         -    (5,250)    11.75       (936)    11.75
Forfeited                                    -         -         -         -          -         -

                                     ---------- --------- --------- --------- ---------- ---------
Outstanding, ending of year            102,492   $ 11.75   111,242   $ 11.69    110,306   $ 11.69
                                     ========== ========= ========= ========= ========== =========

Options exercisable at year-end         20,498   $ 11.75    35,746   $ 11.75     55,308   $ 11.75
                                     ---------- --------- --------- --------- ---------- ---------
Weighted-average fair value of
options granted during the year                  $     -             $  3.34              $     -
                                                ---------           ---------            ---------
</TABLE>

                                       40
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

NOTE 14 - REGULATORY COMPLIANCE

The Bank is required to maintain specific amounts of capital pursuant to FDIC
requirements and the Company is required to maintain specific amounts of capital
pursuant to the regulations of the Federal Reserve Board.  As summarized below,
the Company and Bank are in compliance with all such requirements at December
31, 1999:

<TABLE>
<CAPTION>
                                                                        Percentage of
                                                                        adjusted total
                                                         Amount             assets
First Southern Bancshares, Inc:                              (Dollars in thousands)
<S>                                                      <C>                <C>
Primary capital ratios:
GAAP capital                                             $  13,969
Adjustments:
Mortgage servicing rights                                       (5)
Net unrealized loss on securities available for sale           104
                                                         ---------

Tier 1 capital                                              14,068             7.92%
Minimum Tier 1 (leverage) requirement                        7,108             4.00%
                                                         ---------          --------

Excess                                                   $   6,960             3.92%
                                                         =========          ========

Risk-based capital ratios:
Core (Tier 1) Capital                                       14,068             9.73%
Minimum core capital                                         5,781             4.00%
                                                         ---------          --------

Excess                                                   $   8,287             5.73%
                                                         =========          ========

Risk-based capital                                       $  15,468            10.70%
Minimum risk-based capital requirement                      11,562             8.00%
                                                         ---------          --------

Excess                                                   $   3,906             2.70%
                                                         =========          ========
</TABLE>

Under the FDICIA prompt corrective action provisions applicable to banks, the
most recent notification from the FDIC categorized the Bank as well capitalized.
To be categorized as well capitalized, the Bank must maintain a total risk-based
capital ratio as set forth in the following table and not be subject to a
capital order. There are no conditions or events since that notification that
management believes have changed the Bank's risk-based capital category.

<TABLE>
<CAPTION>
                                                                        Percentage of
                                                                        adjusted total
                                                         Amount             assets
First Southern Bancshares, Inc:                              (Dollars in thousands)
<S>                                                    <C>                  <C>
Total capital (to risk-weighted assets)                $    16,099              11.15%
To be well capitalized under the FDICIA
  prompt corrective action provisions                       14,441              10.00%
                                                       -----------          ----------

Excess                                                 $     1,658               1.15%
                                                       ===========          ==========

Tier 1 capital (to risk-weighted assets)               $    14,699              10.18%
To be well capitalized under the FDICIA
  prompt corrective action provisions                        8,664               6.00%
                                                       -----------          ----------

Excess                                                 $     6,035               4.18%
                                                       ===========          ==========

Tier 1 capital (to average assets)                     $    14,699               8.28%
To be well capitalized under the FDICIA
  prompt corrective action provisions                        8,880               5.00%
                                                       -----------          ----------

Excess                                                 $     5,819               3.28%
                                                       ===========          ==========
</TABLE>

                                       41
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

As an Alabama state-chartered bank which is not a member of the Federal Reserve
System, the Bank is required by Alabama law to maintain at all times a reserve
(comprised of cash on hand) based upon average daily deposits of the Bank. At
December 31, 1999, the Bank's qualifying reserves of approximately $3.2 million
significantly exceeded the required reserve of $292,000.

NOTE 15 - INTEREST RATE RISK

The Company is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At December 31, 1999, the Company's
interest earning assets consisted of approximately 48% fixed interest rates and
approximately 52% adjustable interest rates (49% and 51%, respectively, at
December 31, 1998). Approximately 93% of the Company's assets at December 31,
1999 earned interest. Those assets were funded primarily with short-term
liabilities that have interest rates that vary with market rates over time. The
shorter duration of the interest-sensitive liabilities indicates that the
Company is exposed to interest rate risk because, in a rising rate environment,
liabilities will be repricing faster at higher interest rates, thereby reducing
the market value of long-term assets and net interest income. Conversely, in a
stable or decreasing rate environment, the Company's asset value and net
interest income will show improvement.

NOTE 16 - COMMITMENTS AND CONTINGENCIES

Loan commitments and other matters
The Company makes loan commitments and incurs contingent liabilities in the
normal course of business. The Company is, from time to time, a defendant in
legal actions arising from normal business activities. Management does not
anticipate that the ultimate liability, if any, arising from litigation
outstanding at December 31, 1999 will have a materially adverse effect on the
financial statements.

Outstanding loan commitments issued by the Company (excluding loans in process
and standby letters of credit) in the normal course of business were comprised
of unused advances under line-of-credit agreements totaling $11.5 million as of
December 31, 1999.

NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, letters of credit, interest
rate caps and floors written on variable rate loans. Those instruments involve,
to varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.

The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, and
letters of credit are represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making commitments as
it does for on-balance-sheet instruments. For interest rate caps and floors, the
contract or notional amounts do not represent exposure to credit loss.


                                               Contract or notional amount
                                                       December 31,
                                                   1998          1999
                                                     (In thousands)
Financial instruments and contract amounts
  which represent credit risk:
Commitments to extend credit                     $  1,254      $    724
Unused lines of credit                           $ 12,279      $ 11,548
Standby letters of credit                        $     10      $     10

                                       42
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if it is
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.

NOTE 18 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK

Substantially, all of the Company's business activity is with customers located
in Lauderdale and Colbert Counties, and surrounding counties in Northwest
Alabama. As such, a significant portion of its loan portfolio is collateralized
by real estate located in the same geographic location.

NOTE 19 - STOCK REPURCHASE PROGRAM

In October 1995, the Company's Board of Directors approved a Stock Repurchase
Program whereby the Company may repurchase up to 102,493 shares of its common
stock, which number of shares represents 5% of the Company's issued common
stock. In June 1996 the Company's Board of Directors approved an extension of
the Stock Repurchase Program whereby the Company, upon completion of the
repurchase original 102,493 shares of its common stock, could then repurchase up
to an additional 102,493 shares of its common stock. The ongoing program has
resulted in the 1997, 1998 and 1999 acquisition of 79,930, 224,182 and 356,272
shares, respectively, of Company common stock (aggregating 36.8% of issued
shares) at an aggregate cost of $1.1 million, $3.6 million and $4.8 million in
1997, 1998 and 1999, respectively. 54,906 of such shares were utilized in the
funding of the MRDP, 6,186 were used to satisfy options exercised and 763,598
(aggregating 36.8% of issued shares) are held in treasury at December 31, 1999.

NOTE 20 - BANK DIVIDEND RESTRICTIONS

As required by OTS regulations, the Association established a liquidation
account at the time of the conversion. The liquidation account (which account
was assumed by the Bank) is maintained for the benefit of eligible account
holders who continue to maintain their accounts at the Bank after the
conversion. The initial balance of this liquidation account was equal to the
Association's net worth as defined by OTS regulations as of the date of the
latest statement of financial condition contained in the final offering
circular. The liquidation account will be reduced annually to the extent the
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank (and
only in such event) each eligible holder shall be entitled to receive a
liquidation distribution from this account in the amount of the then current
adjusted balance for deposits then held, before any liquidation distribution may
be made to the Bank's stockholder, Bancshares. The liquidation account restricts
the Bank's use of its net worth related to the repurchase of its stock from or
payment of dividends to Bancshares.

                                       43
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

The Bank may not declare or pay a cash dividend on any of its capital stock if
the effect thereof would cause the Bank's regulatory capital to be reduced below
the amount required for the liquidation account, which account, was assumed by
the Bank. In addition, the Bank is subject to restrictions on dividends under
the Alabama Banking Code, which provides that an Alabama state bank must
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 regulatory
approval 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.

NOTE 21 - FIRST SOUTHERN BANCSHARES, INC. PARENT COMPANY ONLY FINANCIAL
STATEMENTS

Condensed parent company only financial statements for First Southern
Bancshares, Inc. are set forth below:


CONDENSED BALANCE SHEET (In thousands)

<TABLE>
<CAPTION>

                                                          December 31,
                                                       1998         1999
<S>                                                 <C>          <C>
ASSETS

Cash and cash equivalents                            $     284    $   1,220
Notes receivable                                           172          112
Investment in wholly-owned subsidiary                   17,512       14,600
Other assets                                               102           94
                                                     ---------    ---------

TOTAL ASSETS                                         $  18,070    $  16,026
                                                     =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Notes payable                                        $       -    $   2,000
Income taxes currently payable                               -
Other accrued liabilities                                   62           57
                                                     ---------    ---------

Total liabilities                                           62        2,057

STOCKHOLDERS' EQUITY                                    18,008       13,969
                                                     ---------    ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY           $  18,070    $  16,026
                                                     =========    =========
</TABLE>


CONDENSED STATEMENT OF INCOME (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                       1997        1998       1999
<S>                                                    <C>        <C>        <C>
INCOME
Equity in earnings of wholly-owned subsidiary          $ 1,477    $ 1,583    $ 1,375
Other                                                       18         18         36
                                                       -------    -------    -------

Total income                                             1,495      1,601      1,411
EXPENSES                                                   139        157        227
                                                       -------    -------    -------

Net income before income taxes                           1,356      1,444      1,184
Provision for income taxes                                 (41)       (58)       (62)
                                                       -------    -------    -------

NET INCOME                                             $ 1,397    $ 1,502    $ 1,246
                                                       =======    =======    =======

BASIC EARNINGS PER SHARE                               $  0.74    $  0.83    $  0.80

DILUTED EARNINGS PER SHARE                             $  0.73    $  0.82    $  0.79

DIVIDENDS PER SHARE, REGULAR AND SPECIAL               $  0.50    $  0.80    $  0.50

DIVIDEND PAYOUT RATIO DURING THE PERIOD                  67.57%     96.39%     62.50%
</TABLE>

                                       44
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------


CONDENSED STATEMENT OF CASH FLOWS (In thousands)

<TABLE>
<CAPTION>
                                                                                Year ended December 31,
                                                                              1997        1998       1999
<S>                                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                    $  1,397   $  1,502   $  1,246
Adjustments to reconcile net income to net cash provided by operations:
  Equity in earnings of wholly-owned subsidiary                                  3,512      3,095      2,912
  (Increase) decrease in other assets                                              (52)       (28)         8
  (Decrease) in income taxes payable                                                (3)         -          -
  Increase (decrease) in other accrued liabilities                                 (30)        16         (5)
                                                                              --------   --------   --------

Cash flows from operating activities                                             4,824      4,585      4,161
                                                                              --------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity and sales of investment and mortgage-backed securities                      -          -          -
Principal reductions in notes receivable                                           121        108         60
                                                                              --------   --------   --------

Cash flows from (used in) investing activities                                     121        108         60
                                                                              --------   --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings                                                             -      2,750      2,800
Repayments of borrowings                                                        (4,000)    (2,750)      (800)
Cash dividends, including dividends on unallocated ESOP shares                    (870)    (1,361)      (730)
Acquisition of treasury stock                                                   (1,078)    (3,640)    (4,771)
  ESOP shares committed for release                                                162        147         71
  Amortization of MRDP shares                                                      258        311        260
  Equity in reserves of wholly-owned subsidiary                                     38         13       (115)
                                                                              --------   --------   --------

Cash flows from (used in) financing activities                                  (5,490)    (4,530)    (3,285)
                                                                              --------   --------   --------

INCREASE IN CASH AND CASH EQUIVALENTS                                             (545)       163        936

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                    666        121        284
                                                                              --------   --------   --------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                     $    121   $    284   $  1,220
                                                                              ========   ========   ========
</TABLE>

                                       45
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------


NOTE 22 - CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair value of financial instruments as of December 31,
1999 are summarized as follows:

<TABLE>
<CAPTION>
                                                      Carrying         Fair
                                                       amount         value
                                                          (In thousands)
<S>                                                    <C>         <C>
FINANCIAL ASSETS
Cash and cash equivalents                              $  5,906    $   5,906
Investment securities                                     4,408        4,408
Mortgage-backed securities                                3,527        3,290
Loans receivable, net                                   155,738      155,813
Loans held for sale                                          80           80
Federal Home Loan Bank stock                              1,685        1,685
Accrued dividends and interest receivable                 1,855        1,855
                                                      ----------  -----------

                                                       $173,199    $ 173,037
                                                      ==========  ===========

FINANCIAL LIABILITIES
Deposits:
  Demand accounts                                      $ 37,371    $  37,371
  Certificates of deposit                                89,499       89,424
Advances from Federal Home Loan Bank                     33,665       33,665
Other notes payable                                       2,000        2,000
Securities sold under repurchase agreement                1,487        1,485
Off-balance sheet commitments                                 -            -
                                                      ----------  -----------

                                                       $164,022    $ 163,945
                                                      ==========  ===========
</TABLE>

Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument.  Certain
financial instruments and all nonfinancial instruments are excluded.  The
disclosures also do not include certain intangible assets, such as customer
relationships, deposit base intangibles, and goodwill.  Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.  The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it was practicable
to estimate the value:Cash and cash equivalents

  Based upon the nature of the instrument, carrying value approximates fair
  value.

  Investment and mortgage-backed securities
  Fair value was determined based upon quoted market prices and/or dealer
  quotes.

  Loans receivable and loans held for sale
  The fair value of loans receivable was estimated (1) by market value for those
  loans which have a readily available market, and (2) discounting future cash
  flows using the current rates at which similar loans would be made to
  borrowers with similar credit ratings and with the same remaining term to
  maturity, as adjusted for an estimate of borrower prepayments and estimated
  loan losses.  The fair value of loans held for sale, which instruments were of
  recent creation and reflect currently existing market rates and attributes,
  approximates their carrying value.

  Federal Home Loan Bank stock
  The carrying value of the Federal Home Loan Bank stock reasonably reflects its
  fair value.

  Accrued dividends and interest receivable
  Based upon the nature of the instrument, the carrying value approximates fair
  value.



                                       46

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------

  Deposits

  The carrying value of demand deposits and other non fixed maturity deposit
  accounts reflects the amount payable on demand and therefore, is a reasonable
  approximation of fair value.  The estimated fair values of certificates of
  deposit were estimated by discounting future cash flows using the rates
  currently being offered for deposits of similar remaining maturities.

  Advances from Federal Home Loan Bank and other notes payable
  The estimated fair value of Federal Home Loan Bank loan advances and other
  notes payable was determined by discounting future cash flows using the rates
  currently being offered on Federal Home Loan Bank advances and bank borrowings
  having similar characteristics.

  Off-balance sheet financial commitments
  The Company had $12.3 million of off-balance sheet financial commitments as of
  December 31,1999, which are commitments to originate loans and unused lines of
  credit.  Since these obligations are based on current market, the carrying
  amount is considered to be a reasonable estimate of fair value.

By their nature, estimates are subjective in nature and involve uncertainties
and matters of significant judgment, and therefore, cannot be determined with
precision.  Changes in any of the assumptions used in calculating fair value
could significantly affect the estimates.  Further, the fair value estimates
were calculated as of December 31, 1999.  Subsequent changes in market interest
rates and other conditions could significantly change the fair value.

Fair value estimates are based on existing on and off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.  For example, the Company has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, premises and equipment, and goodwill.  In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of these estimates.

NOTE 23 - QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                           1998                               1999
                                         ------------------------------------  ----------------------------------
                                          First      Second   Third    Fourth    First   Second    Third   Fourth
                                         Quarter    Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter
                                         --------   -------  -------  -------  -------  -------  -------  -------
                                                            (In thousands, except per share data)

<S>                                      <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>
Interest income                          $  3,780  $ 3,823   $ 3,913   $3,661  $ 3,444   $3,468  $ 3,471  $ 3,568
Interest expense                            2,050    1,970     2,040    1,896    1,779    1,759    1,734    1,833
                                         --------  -------   -------  -------  -------  -------- -------- -------
Net interest income                         1,730    1,853     1,873    1,765    1,665    1,709    1,737    1,735
Provision for loan losses                      60       61       103      381      195      148       49      136
                                         --------  -------   -------  -------  -------  -------- -------- -------
Net interest income after provisions
  for loan losses                           1,670    1,792     1,770    1,384    1,470    1,561    1,688    1,599
Noninterest income                            210      253       230      263      247      218      156      161
Noninterest expense                         1,228    1,322     1,276    1,234    1,180    1,249    1,308    1,309
                                         --------  -------   -------  -------  -------  -------- -------- -------
Income before income taxes                    652      723       724      413      537      530      536      451
Income tax expense                            246      280       270      214      213      207      211      177
                                         --------  -------   -------  -------  -------  -------- -------- -------

Net income                               $    406  $   443   $   454   $  199  $   324   $  323  $   325  $   274
                                         ========  =======   =======  =======  =======  ======== ======== =======

 Basic Earnings per share                $   0.22  $  0.24   $  0.25   $ 0.13  $  0.20   $  0.20 $  0.20  $ 0.21
                                         ========  =======  ======== ========  =======  ======== ======== =======

 Diluted Earnings per share              $   0.21  $  0.24   $  0.25   $ 0.13  $  0.19   $  0.20 $  0.20  $ 0.20
                                         ========  =======  ======== ========  =======  ======== ======== =======
</TABLE>

Note:  Quarterly amounts may not add to year-to-date due to rounding.

                                       47
<PAGE>

                           COMMON STOCK INFORMATION

The common stock of First Southern Bancshares, Inc. is quoted on The NASDAQ
National Stock Market under the symbol "FSTH."  As of March 10, 2000, First
Southern Bancshares, Inc. had 629 shareholders and 1,268,626 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.  As discussed in Note 20 to the consolidated financial
statements, 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 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.

<TABLE>
<CAPTION>
                 1998                      High         Low     Dividend
<S>                                      <C>         <C>        <C>
            First quarter                $ 16.500    $ 14.750   $ 0.425

            Second quarter               $ 18.375    $ 15.500   $ 0.125

            Third quarter                $ 17.375    $ 14.750   $ 0.125

            Fourth quarter               $ 16.875    $ 13.375   $ 0.125


                 1999                      High         Low     Dividend

            First quarter                $ 14.438    $ 12.750   $ 0.125

            Second quarter               $ 13.500    $ 11.125   $ 0.125

            Third quarter                $ 13.375    $ 10.000   $ 0.125

            Fourth quarter               $ 13.250    $ 10.000   $ 0.125
</TABLE>

                                       48
<PAGE>

                           DIRECTORS AND OFFICERS OF
                      FIRST SOUTHERN BANCSHARES, INC. AND
                              FIRST SOUTHERN BANK

<TABLE>
<CAPTION>
Members of the Board of Directors          Officers
----------------------------------         ---------------------------------
<S>                                        <C>
Charles L. Frederick, Jr.                  Charles L. Frederick, Jr.
Chairman of the Board                      President and Chief Executive Officer
President and Chief Executive Officer
First Southern Bancshares, Inc. and        Thomas N. Ward
   First Southern Bank                     Executive Vice President and
                                             Chief Operating Officer
Thomas N. Ward
Executive Vice President and               Glenda Young
  Chief Operating Officer                  Senior Vice President and
First Southern Bank                          Chief Accounting Officer

Milka S. Duke                              Marva Kaye Townsend
Retired                                    Assistant to the President and
Former officer of First Federal Savings      Corporate Secretary
   and Loan of Florence
                                           Brent Turpen
Kenneth Williams                           Treasurer/Controller
Partner of Williams & Son Oil Co.
(An oil distribution company)              Sharon Robbins
                                           Assistant Corporate Secretary

J. Acker Rogers                            Vice President:
Partner                                    ---------------
Rogers, Carlton & Associates, Inc.         Linda Allen
(Insurance Agency)                         Tyler Calhoun III
                                           Kenneth McLain
Gary Gamble                                Farrell Southern
President                                  Irene Woods
Plantation Springs, Inc.                   Marc Tays
(Land development company)

James E. Bishop                            Assistant Vice President:
President and Owner                        -------------------------
Jim Bishop Chevrolet, Inc. and             Donna Ezekiel
   Buick Oldsmobile, Inc.                  Marsha Rochester
(Automobile and truck dealership)          Natalie Tackett
                                           Brenda Crittenden

S. Gregory Beadle
President
SBS Electric Supply
(Electrical supply company)

Steve McKinney
President
Southern Fastening Systems, Inc.
(Fastener manufacturer)
</TABLE>

                                       49
<PAGE>

                              COMPANY INFORMATION


      Corporate Headquarters                  Transfer Agent

      102 South Court Street                  Registrar and Transfer Agent
      Florence, Alabama 35630                 10 Commerce Drive
                                              Cranford, New Jersey  07016

      Independent Auditors                    Common Stock

      Marmann, McCrary & Associates, P.C.     The NASDAQ National Market System
      900 E. Second St.                       NASDAQ Symbol:  FSTH
      Sheffield, Alabama 35660


      Special Securities Counsel

      Muldoon, Murphy & Faucette LLP
      5101 Wisconsin Avenue, N.W.
      Washington, D.C. 20016


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

                                ANNUAL MEETING

The Annual Meeting of Stockholders will be held Wednesday, April 19, 2000, at
10:00 a.m., Central Time, at the main office of First Southern Bank, 102 South
Court Street, Florence, Alabama.  Stockholders of record as of the close of
business on March 10, 2000 are those stockholders entitled to notice of and to
vote at the Annual Meeting.

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

A COPY OF THE ANNUAL REPORT ON FORM 10-KSB, INCLUDING FINANCIAL STATEMENTS, AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT
CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR VOTING AT THE  ANNUAL MEETING
OF STOCKHOLDERS UPON WRITTEN REQUEST TO THE SECRETARY OF FIRST SOUTHERN
BANCSHARES, INC., 102 SOUTH COURT STREET, FLORENCE, ALABAMA 35630.

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

                                       50