Exhibit 99(a)



Kraft CPAs

Kraft
Bros., Esstman, Patton & Harrell, PLLC

CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors

First Southern Bancshares, Inc.

Florence, Alabama



We have audited the
accompanying consolidated statements of financial condition of First Southern Bancshares, Inc. and its wholly-owned subsidiary, First Southern Bank (collectively, the Company), as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders equity and cash flows for the years then ended. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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 as of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.



The Company has suffered recurring losses from operations and, as more fully
discussed in Note 10, First Southern Bank continues to operate under a Consent Order with the Federal Deposit Insurance Corporation and the Alabama State Banking Department. As further disclosed in Note 10, First Southern Bancshares, Inc. is subject
to certain additional restrictions pursuant to a Memorandum of Understanding with the Federal Reserve Bank of Atlanta.



/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC



Nashville, Tennessee

February 27, 2004



F-1



---

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                                                                                                    |  | December 31, 2003 |         |   | December 31, 2002 |  
|                                                                                                                                                                                                                                                                                                    |  |                  
|ASSETS                                                                                                                                                                                                                                                                                              |  |                   |         |   |                   |   |         |  
|                                                                                                                                                                                                                                                                                                    |  |                  
|Cash and cash equivalents                                                                                                                                                                                                                                                                           |  | $                 | 10,468  |   |                   | $ | 7,011   |  
|Investment securities available for sale, at fair value                                                                                                                                                                                                                                             |  |                   | 12,711  |   |                   |   | 15,482  |  
|Loans held for sale                                                                                                                                                                                                                                                                                 |  |                   | 77      |   |                   |   | 271     |  
|Loans receivable, net of allowance for loan losses of $2,866 and $4,185                                                                                                                                                                                                                             |  |                   | 69,622  |   |                   |   | 67,640  |  
|Premises and equipment, net                                                                                                                                                                                                                                                                         |  |                   | 2,346   |   |                   |   | 2,352   |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                                                                                                                               |  |                   | 383     |   |                   |   | 684     |  
|Accrued interest receivable                                                                                                                                                                                                                                                                         |  |                   | 489     |   |                   |   | 593     |  
|Income taxes receivable                                                                                                                                                                                                                                                                             |  |                   |        |   |                   |   | 347     |  
|Foreclosed real estate                                                                                                                                                                                                                                                                              |  |                   | 613     |   |                   |   | 697     |  
|Other assets                                                                                                                                                                                                                                                                                        |  |                   | 336     |   |                   |   | 275     |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Total assets                                                                                                                                                                                                                                                                                        |  | $                 | 97,045  |   |                   | $ | 95,352  |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                                |  |                   |         |   |                   |   |         |  
|                                                                                                                                                                                                                                                                                                    |  |                  
|Liabilities                                                                                                                                                                                                                                                                                         |  |                   |         |   |                   |   |         |  
|                                                                                                                                                                                                                                                                                                    |  |                  
|Deposits:                                                                                                                                                                                                                                                                                           |  |                   |         |   |                   |   |         |  
|Noninterest-bearing                                                                                                                                                                                                                                                                                 |  | $                 | 8,633   |   |                   | $ | 4,253   |  
|Interest-bearing                                                                                                                                                                                                                                                                                    |  |                   | 72,989  |   |                   |   | 76,795  |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Total deposits                                                                                                                                                                                                                                                                                      |  |                   | 81,622  |   |                   |   | 81,048  |  
|Advances from Federal Home Loan Bank                                                                                                                                                                                                                                                                |  |                   | 5,716   |   |                   |   | 5,738   |  
|Notes payable to banks                                                                                                                                                                                                                                                                              |  |                   |        |   |                   |   | 750     |  
|Notes payable to directors                                                                                                                                                                                                                                                                          |  |                   | 1,000   |   |                   |   | 1,250   |  
|Subordinated capital notes, net of discount                                                                                                                                                                                                                                                         |  |                   | 6,411   |   |                   |   |        |  
|Other liabilities                                                                                                                                                                                                                                                                                   |  |                   | 391     |   |                   |   | 232     |  
|Derivative debt instrument                                                                                                                                                                                                                                                                          |  |                   | 196     |   |                   |   | 990     |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                                                                                                                                   |  |                   | 95,336  |   |                   |   | 90,008  |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                                                                                                                                                       |  |                   |        |   |                   |   |        |  
|                                                                                                                                                                                                                                                                                                    |  |                  
|Redeemable Preferred Stock, $.01 par value                                                                                                                                                                                                                                                          |  |                   |         |   |                   |   |         |  
|Series A - 250,000 shares authorized; 29,546 and 160,350 shares issued and outstanding at December 31, 2003 and December 31, 2002,
respectively; 4% cumulative dividends initially, increasing after five years (aggregate future redemption value $650 plus cumulative dividend arrearages of $61) |  |                   | 586     |   |                   |   | 2,911   |  
|Series B - 56,000 shares authorized; 47,775 shares issued and outstanding at December 31, 2002; 6% cumulative dividends initially, increasing
after three years                                                                                                                                     |  |                   |        |   |                   |   | 1,223   |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Total redeemable preferred stock                                                                                                                                                                                                                                                                    |  |                   | 586     |   |                   |   | 4,134   |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Stockholders equity                                                                                                                                                                                                                                                                                |  |                   |         |   |                   |   |         |  
|                                                                                                                                                                                                                                                                                                    |  |                  
|Common stock, $.01 par value; 4,000,000 shares authorized; 2,076,969 shares issued and 1,256,715 outstanding                                                                                                                                                                                        |  |                   | 21      |   |                   |   | 21      |  
|Paid-in capital                                                                                                                                                                                                                                                                                     |  |                   |         |   |                   |   |         |  
|Common stock warrants                                                                                                                                                                                                                                                                               |  |                   | 211     |   |                   |   | 8       |  
|Additional paid-in capital                                                                                                                                                                                                                                                                          |  |                   | 11,785  |   |                   |   | 11,407  |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Total paid-in capital                                                                                                                                                                                                                                                                               |  |                   | 11,996  |   |                   |   | 11,415  |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Retained earnings - substantially restricted                                                                                                                                                                                                                                                        |  |                   | 659     |   |                   |   | 1,142   |  
|Net unrealized gain (loss) on securities available for sale                                                                                                                                                                                                                                         |  |                   | (72     | ) |                   |   | 113     |  
|Treasury stock, at cost                                                                                                                                                                                                                                                                             |  |                   | (11,481 | ) |                   |   | (11,481 | )
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                                                                                                                          |  |                   | 1,123   |   |                   |   | 1,210   |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                                          |  | $                 | 97,045  |   |                   | $ | 95,352  |  
|                                                                                                                                                                                                                                                                                                    |  |                   |         |   |                   |   |         |  



See
accompanying notes to consolidated financial statements.



F - 2



---

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)



|                                                                       |  |                         |       |   |      |   |       |  
|---------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | -
|                                                                       |  | Year Ended December 31, |      
|                                                                       |  | 2003                    |       |   | 2002 |  
|INTEREST INCOME:                                                       |  |                         |       |   |      |   |       |  
|Loans                                                                  |  | $                       | 4,501 |   |      | $ | 5,524 |  
|Investment securities                                                  |  |                         | 421   |   |      |   | 706   |  
|Other                                                                  |  |                         | 69    |   |      |   | 276   |  
|                                                                       |  |                         |       |   |      |   |       |  
|Total interest income                                                  |  |                         | 4,991 |   |      |   | 6,506 |  
|                                                                       |  |                         |       |   |      |   |       |  
|INTEREST EXPENSE:                                                      |  |                         |       |   |      |   |       |  
|Deposits                                                               |  |                         | 1,550 |   |      |   | 2,938 |  
|Advances from Federal Home Loan Bank                                   |  |                         | 329   |   |      |   | 333   |  
|Notes payable to banks                                                 |  |                         | 34    |   |      |   | 50    |  
|Notes payable to directors                                             |  |                         | 63    |   |      |   | 70    |  
|Subordinated capital notes                                             |  |                         | 82    |   |      |   |      |  
|                                                                       |  |                         |       |   |      |   |       |  
|Total interest expense                                                 |  |                         | 2,058 |   |      |   | 3,391 |  
|                                                                       |  |                         |       |   |      |   |       |  
|NET INTEREST INCOME                                                    |  |                         | 2,933 |   |      |   | 3,115 |  
|PROVISION (REDUCTION OF PROVISION) FOR LOAN LOSSES                     |  |                         | (288  | ) |      |   | 633   |  
|                                                                       |  |                         |       |   |      |   |       |  
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                    |  |                         | 3,221 |   |      |   | 2,482 |  
|                                                                       |  |                         |       |   |      |   |       |  
|NONINTEREST INCOME:                                                    |  |                         |       |   |      |   |       |  
|Loan fees and service charges                                          |  |                         | 775   |   |      |   | 800   |  
|Net gains on sale of loans                                             |  |                         |      |   |      |   | 10    |  
|Net losses on sale of foreclosed real estate and other assets          |  |                         | (120  | ) |      |   | (141  | )
|Net gains on sale of investments                                       |  |                         | 56    |   |      |   | 116   |  
|Net premium on transfer of deposits                                    |  |                         |      |   |      |   | 1,378 |  
|Net gains (losses) on sale or disposal of premises and equipment       |  |                         | (3    | ) |      |   | 255   |  
|Net gain on extinguishment of derivative debt instrument               |  |                         | 73    |   |      |   |      |  
|Other                                                                  |  |                         | 31    |   |      |   | 39    |  
|                                                                       |  |                         |       |   |      |   |       |  
|Total noninterest income                                               |  |                         | 812   |   |      |   | 2,457 |  
|                                                                       |  |                         |       |   |      |   |       |  
|NONINTEREST EXPENSES:                                                  |  |                         |       |   |      |   |       |  
|Compensation and employee benefits                                     |  |                         | 2,094 |   |      |   | 2,411 |  
|Building and occupancy expense                                         |  |                         | 452   |   |      |   | 542   |  
|Data processing expense                                                |  |                         | 458   |   |      |   | 482   |  
|Advertising                                                            |  |                         | 34    |   |      |   | 32    |  
|FDIC insurance expense                                                 |  |                         | 150   |   |      |   | 250   |  
|Professional fees                                                      |  |                         | 417   |   |      |   | 670   |  
|Change in fair value of derivative debt instrument                     |  |                         | 61    |   |      |   | 68    |  
|Other                                                                  |  |                         | 506   |   |      |   | 534   |  
|                                                                       |  |                         |       |   |      |   |       |  
|Total noninterest expense                                              |  |                         | 4,172 |   |      |   | 4,989 |  
|                                                                       |  |                         |       |   |      |   |       |  
|LOSS BEFORE INCOME TAXES                                               |  |                         | (139  | ) |      |   | (50   | )
|INCOME TAX EXPENSE (BENEFIT)                                           |  |                         | 5     |   |      |   | (272  | )
|                                                                       |  |                         |       |   |      |   |       |  
|NET INCOME (LOSS)                                                      |  |                         | (144  | ) |      |   | 222   |  
|CUMULATIVE DIVIDEND ARREARAGE AND PREMIUM ACCRETION ON PREFERRED STOCK |  |                         | (339  | ) |      |   | (411  | )
|GAIN ON EXCHANGE OF SUBORDINATED CAPITAL NOTES FOR PREFERRED STOCK     |  |                         | 312   |   |      |   |      |  
|GAIN ON REPURCHASE OF PREFERRED STOCK                                  |  |                         | 66    |   |      |   |      |  
|                                                                       |  |                         |       |   |      |   |       |  
|BASIC LOSS APPLICABLE TO COMMON SHAREHOLDERS                           |  | $                       | (105  | ) |      | $ | (189  | )
|                                                                       |  |                         |       |   |      |   |       |  
|BASIC LOSS PER COMMON SHARE                                            |  | $                       | (0.08 | ) |      | $ | (0.15 | )
|                                                                       |  |                         |       |   |      |   |       |  
|DILUTED LOSS PER COMMON SHARE                                          |  | $                       | (0.10 | ) |      | $ | (0.15 | )
|                                                                       |  |                         |       |   |      |   |       |  
|DIVIDENDS PER COMMON SHARE                                             |  | $                       |      |   |      | $ |      |  
|                                                                       |  |                         |       |   |      |   |       |  



See
accompanying notes to consolidated financial statements.



F - 3



---

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands, except share data)



|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ----------- | --------------- | ------ | --------------------------------------- | - | ------------------------ | ------------------------------------------ | ------- | ------ | ------------------------ | ------ | ------- |  | - | --- |  | - | ------ |  | - | ----- | - |  | - | ---- | - |  | - | ----- | -
|                                                                                                                           |  | Common Stock |  |             | Paid-In Capital |        | RetainedEarningsSubstantiallyRestricted |   |                          | AccumulatedOtherComprehensiveIncome (Loss) |         |        | TotalStockholdersEquity |       
|                                                                                                                           |  | Issued       |  | In Treasury |                 |        | Warrants                                |   | AdditionalPaid-InCapital |                                            |         |       
|                                                                                                                           |  | Shares       |  | Amount      |                 | Shares |                                         |   | Amount                   |                                            |         | Shares |                          | Amount |         |  |   |    
|Balances at January 1, 2002                                                                                                |  | 2,076,969    |  | $           | 21              |        | (820,254                                | ) |                          | $                                          | (11,481 | )      |                          | $      |        |  | $ |    |  | $ | 11,407 |  | $ | 1,331 |   |  | $ | (184 | ) |  | $ | 1,094 |  
|Net income for the year ended December 31, 2002                                                                            |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   | 222   |   |  |   |     |   |  |   | 222   |  
|Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustments and tax effects |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   |      |   |  |   | 297  |   |  |   | 297   |  
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|Total comprehensive income                                                                                                 |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   |      |   |  |   |     |   |  |   | 519   |  
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|Issuance of common stock warrants                                                                                          |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        | 50,000  |  |   | 8   |  |   |       |  |   |      |   |  |   |     |   |  |   | 8     |  
|Dividends accrued and premium accretion on redeemable preferred stock - Series A                                           |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   | (265  | ) |  |   |     |   |  |   | (265  | )
|Dividends accrued and premium accretion on redeemable preferred stock - Series B                                           |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   | (146  | ) |  |   |     |   |  |   | (146  | )
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|Net change for the year                                                                                                    |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        | 50,000  |  |   | 8   |  |   |       |  |   | (189  | ) |  |   | 297  |   |  |   | 116   |  
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|Balances at December 31, 2002                                                                                              |  | 2,076,969    |  |             | 21              |        | (820,254                                | ) |                          |                                            | (11,481 | )      |                          |        | 50,000  |  |   | 8   |  |   | 11,407 |  |   | 1,142 |   |  |   | 113  |   |  |   | 1,210 |  
|Net loss for the year ended December 31, 2003                                                                              |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   | (144  | ) |  |   |     |   |  |   | (144  | )
|Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustments and tax effects |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   |      |   |  |   | (185 | ) |  |   | (185  | )
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|Total comprehensive loss                                                                                                   |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   |      |   |  |   |     |   |  |   | (329  | )
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|Issuance of common stock warrants                                                                                          |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        | 184,912 |  |   | 203 |  |   |       |  |   |      |   |  |   |     |   |  |   | 203   |  
|Dividends accrued and premium accretion on redeemable preferred stock - Series A                                           |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   | (223  | ) |  |   |     |   |  |   | (223  | )
|Dividends accrued and premium accretion on redeemable preferred stock - Series B                                           |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   |       |  |   | (116  | ) |  |   |     |   |  |   | (116  | )
|Gain on exchange of subordinated capital notes for redeemable preferred stock - Series A                                   |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   | 182    |  |   |      |   |  |   |     |   |  |   | 182   |  
|Gain on exchange of subordinated capital notes for redeemable preferred stock - Series B                                   |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   | 130    |  |   |      |   |  |   |     |   |  |   | 130   |  
|Gain on repurchase of preferred stock - Series A                                                                           |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   | 36     |  |   |      |   |  |   |     |   |  |   | 36    |  
|Gain on repurchase of preferred stock - Series B                                                                           |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        |        |  |   |    |  |   | 30     |  |   |      |   |  |   |     |   |  |   | 30    |  
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|Net change for the year                                                                                                    |  |             |  |             |                |        |                                        |   |                          |                                            |        |        |                          |        | 184,912 |  |   | 203 |  |   | 378    |  |   | (483  | ) |  |   | (185 | ) |  |   | (87   | )
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  
|Balances at December 31, 2003                                                                                              |  | 2,076,969    |  | $           | 21              |        | (820,254                                | ) |                          | $                                          | (11,481 | )      |                          |        | 234,912 |  | $ | 211 |  | $ | 11,785 |  | $ | 659   |   |  | $ | (72  | ) |  | $ | 1,123 |  
|                                                                                                                           |  |              |  |             |                 |        |                                         |   |                          |                                            |         |        |                          |        |         |  |   |     |  |   |        |  |   |       |   |  |   |      |   |  |   |       |  



See
accompanying notes to consolidated financial statements.



F - 4



---

FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                                        |  |                         |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                        |  | Year Ended December 31, |        
|                                                                                                                        |  | 2003                    |         |   | 2002 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                   |  |                         |         |   |      |   |         |  
|Net income (loss)                                                                                                       |  | $                       | (144    | ) |      | $ | 222     |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:                                |  |                         |         |   |      |   |         |  
|Depreciation                                                                                                            |  |                         | 157     |   |      |   | 207     |  
|Provision (reduction of provision) for loan losses                                                                      |  |                         | (288    | ) |      |   | 633     |  
|Amortization of premiums/discounts on investments, net                                                                  |  |                         | 154     |   |      |   | 20      |  
|Amortization of deferred loan fees                                                                                      |  |                         | (22     | ) |      |   | (20     | )
|Gains on sale of investment securities, net                                                                             |  |                         | (56     | ) |      |   | (116    | )
|Losses on sale of foreclosed real estate and other assets, net                                                          |  |                         | 120     |   |      |   | 139     |  
|Premium on transfer of deposits                                                                                         |  |                         |        |   |      |   | (1,378  | )
|Gain on sale of loans                                                                                                   |  |                         |        |   |      |   | (10     | )
|(Gains) losses on sale or disposal of premises and equipment                                                            |  |                         | 3       |   |      |   | (255    | )
|Noncash compensation                                                                                                    |  |                         |        |   |      |   | 24      |  
|Change in fair value of derivative debt instrument                                                                      |  |                         | 61      |   |      |   | 68      |  
|Amortization of discount on subordinated capital notes                                                                  |  |                         | 10      |   |      |   |        |  
|Amortization of issuance costs on subordinated capital notes                                                            |  |                         | 4       |   |      |   |        |  
|Gain on extinguishment of derivative debt instruments                                                                   |  |                         | (73     | ) |      |   |        |  
|Fair value of common stock warrants issued                                                                              |  |                         |        |   |      |   | 8       |  
|Decrease in:                                                                                                            |  |                         |         |   |      |   |         |  
|Loans held for sale                                                                                                     |  |                         | 194     |   |      |   | 550     |  
|Accrued interest receivable                                                                                             |  |                         | 104     |   |      |   | 383     |  
|Income tax receivable                                                                                                   |  |                         | 347     |   |      |   | 2,016   |  
|Other assets                                                                                                            |  |                         | 7       |   |      |   | 160     |  
|Increase in other liabilities                                                                                           |  |                         | 105     |   |      |   | 14      |  
|                                                                                                                        |  |                         |         |   |      |   |         |  
|Net cash provided by operating activities                                                                               |  |                         | 683     |   |      |   | 2,665   |  
|                                                                                                                        |  |                         |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                   |  |                         |         |   |      |   |         |  
|Net (increase) decrease in total loans, excluding effect of loans sold in disposition of branches                       |  |                         | (3,392  | ) |      |   | 12,073  |  
|Net decrease in cash related to disposition of branches                                                                 |  |                         |        |   |      |   | (9,674  | )
|Proceeds from repayments on mortgage-backed securities                                                                  |  |                         | 6,974   |   |      |   | 4,851   |  
|Proceeds from sale or call of investments                                                                               |  |                         | 6,244   |   |      |   | 6,511   |  
|Purchases of investment securities                                                                                      |  |                         | (10,730 | ) |      |   | (10,363 | )
|Proceeds from sale of foreclosed real estate                                                                            |  |                         | 1,688   |   |      |   | 1,374   |  
|Proceeds from redemption of FHLB stock                                                                                  |  |                         | 301     |   |      |   | 1,182   |  
|Acquisition of premises and equipment                                                                                   |  |                         | (154    | ) |      |   | (38     | )
|                                                                                                                        |  |                         |         |   |      |   |         |  
|Net cash provided by investing activities                                                                               |  |                         | 931     |   |      |   | 5,916   |  
|                                                                                                                        |  |                         |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                   |  |                         |         |   |      |   |         |  
|Net increase (decrease) in deposit accounts, excluding effects of deposits transferred in disposition of branches       |  |                         | 574     |   |      |   | (16,926 | )
|Repayment of advances from Federal Home Loan Bank                                                                       |  |                         | (22     | ) |      |   | (124    | )
|Repayment of notes payable to banks                                                                                     |  |                         | (750    | ) |      |   |        |  
|Net proceeds from (repayment of) notes payable to directors                                                             |  |                         | (250    | ) |      |   | 1,250   |  
|Proceeds from issuance of subordinated capital notes and common stock warrants, net of $76,000 in issuance costs        |  |                         | 3,059   |   |      |   |        |  
|Repurchase of preferred stock                                                                                           |  |                         | (650    | ) |      |   |        |  
|Payment of premiums on exchange of subordinated capital notes for preferred stock                                       |  |                         | (118    | ) |      |   |        |  
|                                                                                                                        |  |                         |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                                                     |  |                         | 1,843   |   |      |   | (15,800 | )
|                                                                                                                        |  |                         |         |   |      |   |         |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                        |  |                         | 3,457   |   |      |   | (7,219  | )
|Cash and cash equivalents at beginning of period                                                                        |  |                         | 7,011   |   |      |   | 14,230  |  
|                                                                                                                        |  |                         |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                              |  | $                       | 10,468  |   |      | $ | 7,011   |  
|                                                                                                                        |  |                         |         |   |      |   |         |  
|SUPPLEMENTAL INFORMATION FOR CASH FLOW:                                                                                 |  |                         |         |   |      |   |         |  
|Noncash transactions:                                                                                                   |  |                         |         |   |      |   |         |  
|Decrease in net unrealized gain (loss) on securities available-for-sale                                                 |  | $                       | 185     |   |      | $ | (297    | )
|Investment securities held-to-maturity transferred to available-for-sale                                                |  | $                       |        |   |      | $ | 211     |  
|Loans foreclosed and transferred to real estate owned                                                                   |  | $                       | 1,720   |   |      | $ | 984     |  
|Issuance of subordinated capital notes in exchange for preferred stock                                                  |  | $                       | 3,469   |   |      | $ |        |  
|Book value of derivative debt instrument extinguished through exchanges for and repurchases of Series A preferred stock |  | $                       | 782     |   |      | $ |        |  
|Cash payable on repurchase of preferred stock                                                                           |  | $                       | 54      |   |      | $ |        |  
|Fair value of common stock warrants issued                                                                              |  | $                       | 203     |   |      | $ |        |  
|Net book value of assets (liabilities) transferred in disposition of branches:                                          |  |                         |         |   |      |   |         |  
|Loans                                                                                                                   |  | $                       |        |   |      | $ | 9,108   |  
|Premises and equipment                                                                                                  |  | $                       |        |   |      | $ | 265     |  
|Deposits                                                                                                                |  | $                       |        |   |      | $ | (20,690 | )
|Cash paid (received) during the period for:                                                                             |  |                         |         |   |      |   |         |  
|Interest                                                                                                                |  | $                       | 2,073   |   |      | $ | 3,387   |  
|Income taxes                                                                                                            |  | $                       | (342    | ) |      | $ | (2,338  | )



See
accompanying notes to consolidated financial statements.



F - 5



---

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 (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 association to a stock savings and loan association 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.



Use of estimates in the preparation of financial statements



The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of
the allowance for loan losses and the fair value of foreclosed real estate.



Significant group concentrations of credit risk



At times during the year, the Banks balances with financial institutions exceeded FDIC insurance limits. Management considers bank balances in excess of FDIC limits to be a normal business risk, mitigated by the underlying quality of
the financial institutions used by the Bank.



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. Information about the composition of the Banks investments and loan portfolio is provided in Notes 3 and 4, respectively. The Bank does not have a significant concentration in any one industry or customer.



Cash and cash equivalents



Cash and cash equivalents include cash on hand, cash due from banks and interest-bearing
overnight deposits in the Federal Home Loan Bank (FHLB) of Atlanta.



Investments in debt and equity securities



Securities held primarily for resale in the near term are classified as trading securities and reported at fair value, with changes in fair value recognized in earnings. The Bank currently holds no investments classified as trading
securities.



F - 6



---

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Debt securities that management has the positive intent and ability to hold to maturity are classified as
held-to-maturity and recorded at amortized cost. The Bank currently holds no investments classified as held-to-maturity. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair
values, are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.



Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in
the fair value of held-to-maturity securities and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the
trade date and are determined using the specific identification method.



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, if any, are recognized in a valuation allowance by charges to income.



Loans receivable



The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion
of the loan portfolio is represented by mortgage loans throughout Lauderdale and Colbert Counties, and surrounding counties in Northwest Alabama. The ability of the Banks debtors to honor their contracts is dependent upon the real estate and
general economic conditions in this area.



Loans that management has the intent
and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal amounts adjusted for any charge-offs, the allowance for possible loan losses, and any deferred fees or costs on originated loans.



Interest is accrued on the principal amount outstanding. 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.



The accrual of interest on all loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in the
process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.



All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The
interest on these loans is accounted for on the cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current.



Allowance for loan losses



The allowance for loan losses is established as losses are estimated to have occurred
through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the collection of the loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance.



F - 7



---

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



The allowance for loan losses is evaluated on a monthly basis by management and is based upon managements
periodic review of the collectibility of the loans in light of historical experience, known and inherent risks in the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value
of any underlying collateral, prevailing economic conditions, and other factors deemed relevant by the Companys board of directors.



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 monthly to assess the risk in the portfolio and to determine the adequacy of the
allowance for loan losses. All loans are assigned a risk rating on a numerical scale of one to eight 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 seven is based upon historical and regulatory loss rates adjusted for current conditions that include estimated current economic developments. The allocations for loans with a grade
of eight are generally 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 affect the estimated losses in the portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions or
reductions to the allowance may be necessary.



A loan is considered impaired
when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured separately for each impaired loan by either the present value of
expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Substantially all of the Banks loans which have
been identified as impaired have been measured by the fair value of existing collateral.



Larger groups of smaller balance homogeneous loans such as consumer installment, bankcard and residential real estate mortgage loans are collectively evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment disclosures. Payments received on impaired loans for which the ultimate collectibility of principal is uncertain are generally applied first as principal reductions.



F - 8



---

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Mortgage servicing rights



Servicing assets are recognized as separate assets when rights are acquired through purchase
or through sale of financial assets. Capitalized servicing rights are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment
based upon the fair value of the rights as compared to amortized costs. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized
amount for the stratum.



Credit related
financial instruments



In the ordinary course of business, the Bank has
entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.



In November 2002, the Financial Accounting Standards Board (the FASB) issued FASB
Interpretation No. 45 (FIN 45) Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. The Bank is guarantor on certain irrevocable standby letters of credit issued on behalf of certain customers in the ordinary course of business. The adoption of FIN 45 was not material to the financial
condition or results of operations of the Bank for 2003.



Foreclosed real estate and other assets



Real estate and other assets acquired through foreclosure are initially recorded 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.
Subsequent to foreclosure, foreclosed assets are carried at the lower of fair value, less estimated costs to sell, or cost, with the reduction charged to current earnings. Revenue collected on the properties is credited on the cost recovery method
and expenses are included in noninterest expenses.



Premises and equipment



Office properties and equipment are
carried at cost less accumulated depreciation. Improvements 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.



F - 9



---

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Transfers of financial assets



Transfers of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.



Derivative financial instruments



Financial instruments issued by the Company with complex terms are analyzed to determine the existence of any embedded
derivative instruments. Upon issuance, the Company assesses whether the economic characteristics of any embedded derivatives are clearly and closely related to the economic characteristics of the remaining component of the financial instrument
(i.e., the host contract), and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative. When it is determined that (1) the embedded derivative possesses economic characteristics that are
not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried
at fair value,and designated as a fair-value, cash-flow or foreign-currency hedge, or as a trading derivative instrument. However, in cases where (1) the host contract is measured at fair value, with changes in fair value reported in current
operations or (2) the Company is unable to reliably identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the statement of financial condition at fair value and is not designated as a
hedging instrument.



Income taxes



Bancshares and the Bank file a consolidated federal income tax return.



Deferred income taxes and liabilities are determined using the liability (or
balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or
minus the change during the period in deferred tax assets and liabilities.



F - 10



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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Earnings per share



Basic earnings per share (EPS) represents income available to common
stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects any additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options, stock warrants and to the potential conversion of Series B preferred stock. A
reconciliation of the weighted average number of common shares outstanding used in the earnings per share computation follows:



|                                                               |  |                              |          |   |                              |           |     |   |       |           |  |   |             |   |     |           |  |   |       |  
|-------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---------------------------- | --------- | --- | - | ----- | --------- |  | - | ----------- | - | --- | --------- |  | - | ----- | -
|                                                               |  | Year Ended December 31, 2003 |          |   | Year Ended December 31, 2002 |          
|                                                               |  | Numerator                    |          |   | Denominator                  |           | EPS |   |       | Numerator |  |   | Denominator |   | EPS |          
|Basic loss per share, loss applicable to common shareholders   |  | $                            | (105,000 | ) |                              | 1,256,715 |     | $ | (0.08 | )         |  | $ | (189,000    | ) |     | 1,256,715 |  | $ | (0.15 | )
|                                                               |  |                              |          |   |                              |           |     |   |       |           |  |   |             |   |     |           |  |   |       |  
|Effective of dilutive securities:                              |  |                              |          |   |                              |           |     |   |       |           |  |   |             |   |     |           |  |   |       |  
|Warrants(1)                                                    |  |                              |         |   |                              |          |     |   |       |           |  |   |            |   |     |          |  |   |       |  
|Options(1)                                                     |  |                              |         |   |                              |          |     |   |       |           |  |   |            |   |     |          |  |   |       |  
|Convertible preferred stock(2)                                 |  |                              | (44,000  | ) |                              | 206,388   |     |   |       |           |  |   |            |   |     |          |  |   |       |  
|                                                               |  |                              |          |   |                              |           |     |   |       |           |  |   |             |   |     |           |  |   |       |  
|Diluted loss per share, loss applicable to common shareholders |  | $                            | (149,000 | ) |                              | 1,463,103 |     | $ | (0.10 | )         |  | $ | (189,000    | ) |     | 1,256,715 |  | $ | (0.15 | )
|                                                               |  |                              |          |   |                              |           |     |   |       |           |  |   |             |   |     |           |  |   |       |  

---

|(1) | Warrants and options have an anti-dilutive effect for both periods.
|--- | -------------------------------------------------------------------

|(2) | The impact of convertible preferred stock has an anti-dilutive effect for the 2002 period.
|--- | ------------------------------------------------------------------------------------------



Comprehensive income



Accounting principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along
with net income, are components of comprehensive income. These components of comprehensive income and related tax effects are as follows:



|                                                                     |  |                         |      |   |      |   |    
|-------------------------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ---
|                                                                     |  | Year Ended December 31,
|                                                                     |  | 2003                    |      |   | 2002
|                                                                     |  | (Dollars inthousands)  
|Change in unrealized gains (losses) on available for sale securities |  | $                       | (129 | ) |      | $ | 413
|Reclassification adjustment for gains (losses) realized              |  |                         | 56   |   |      |   | 116
|                                                                     |  |                         |      |   |      |   |    
|Net change in unrealized gains (losses)                              |  |                         | (185 | ) |      |   | 297
|Tax effect                                                           |  |                         |     |   |      |   |   
|                                                                     |  |                         |      |   |      |   |    
|Net of tax amount                                                    |  | $                       | (185 | ) |      | $ | 297
|                                                                     |  |                         |      |   |      |   |    



F - 11



---

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



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.



Reclassification



Certain amounts have
been reclassified in the 2002 consolidated financial statements to conform to the 2003 presentation.



Recent accounting pronouncements



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46), which establishes guidance for determining when an
entity should consolidate another entity that meets the definition of a variable interest entity. FIN 46 requires a variable interest entity to be consolidated by a company if that company will absorb a majority of the expected losses, will receive
a majority of the expected residual returns, or both. Transferors to qualified special-purpose entities (QSPEs) and certain other interests in a QSPE are not subject to the requirements of FIN 46. On December 17, 2003, the FASB revised
FIN 46 (FIN 46R) and deferred the effective date of FIN 46 to no later than the end of the first reporting period that ends after March 15, 2004; however, for special-purpose entities the Corporation would be required to apply FIN 46 as of December
31, 2003. The Interpretation had no effect on the Companys consolidated financial statements.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. This Statement did not have a material effect on the Companys consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. This Statement provides new rules on the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. Such financial instruments include
mandatorily redeemable shares, instruments that require the issuer to buy back some of its shares in exchange for cash or other assets, or obligations that can be settled with shares, the monetary value of which is fixed. Most of the guidance in
SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 30, 2003. This Statement did not have a material effect on
the Companys consolidated financial statements



F - 12



---

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and
Postretirement Benefits. This Statement requires additional disclosures about the assets, obligations and cash flows of defined benefit pension and postretirement plans, as well as the expense recorded for such plans.This Statement had
no effect on the Companys consolidated financial statements.



In December
2003, the Accounting Standards Executive Committee issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer(SOP 03-3). SOP 03-3 addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3
includes loans acquired in purchase business combinations, but does not apply to loans originated by the entity. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004 although earlier adoption is encouraged. The
adoption of this new statement of position is not expected to have a material impact on the consolidated financial condition or results of operations of the Company.



NOTE 2 - CASH AND CASH EQUIVALENTS



Cash and cash equivalents were comprised of the following:



|                           |  |                        |        |                   |   |      
|-------------------------- |  | ---------------------- | ------ | ----------------- | - | -----
|                           |  | December 31, 2003      |        | December 31, 2002
|                           |  |                       
|                           |  | (Dollars in thousands)
|Cash and cash equivalents: |  |                        |        |                   |   |      
|Cash on hand               |  | $                      | 941    |                   | $ | 805  
|Cash due from banks        |  |                        | 3,339  |                   |   | 3,632
|Interest-bearing deposits  |  |                        | 6,188  |                   |   | 2,574
|                           |  |                        |        |                   |   |      
|Total                      |  | $                      | 10,468 |                   | $ | 7,011
|                           |  |                        |        |                   |   |      



From time to time throughout the year,
the Banks balances due from other financial institutions exceeded FDIC insurance limits. Management considers this to be a normal business risk.



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, 2003, the required reserve was $108,000, and the Banks qualifying reserves totaled approximately $706,000.



F - 13



---

NOTE 3 - SECURITIES



The amortized cost and fair value of securities, with gross unrealized gains and losses, follows:



|                                       |  |                        |        |            |        |     |                      |   |      |   |  |   |       
|-------------------------------------- |  | ---------------------- | ------ | ---------- | ------ | --- | -------------------- | - | ---- | - |  | - | ------
|                                       |  | December 31, 2003     
|                                       |  | Amortized Cost Basis   |        | Unrealized |        |     | EstimatedFair Values
|                                       |  |                        | Gains  |            | Losses |     |                     
|                                       |  | (Dollars in thousands)
|Available-for-sale:                    |  |                        |        |            |        |     |                      |   |      |   |  |   |       
|                                       |  |                        |        |           
|U.S. Government and agency obligations |  | $                      | 5,541  |            | $      | 19  |                      | $ | (62  | ) |  | $ | 5,498 
|Mortgaged-backed securities            |  |                        | 7,242  |            |        | 19  |                      |   | (48  | ) |  |   | 7,213 
|                                       |  |                        |        |            |        |     |                      |   |      |   |  |   |       
|Total securities available-for-sale    |  | $                      | 12,783 |            | $      | 38  |                      | $ | (110 | ) |  | $ | 12,711
|                                       |  |                        |        |            |        |     |                      |   |      |   |  |   |       
|                                       | 
|                                       |  | December 31, 2002     
|                                       |  | Amortized Cost Basis   |        | Unrealized |        |     | EstimatedFair Values
|                                       |  |                        | Gains  |            | Losses |     |                     
|                                       |  | (Dollars in thousands)
|Available-for-sale:                    |  |                        |        |            |        |     |                      |   |      |   |  |   |       
|                                       |  |                        |        |           
|U.S. Government and agency obligations |  | $                      | 5,600  |            | $      | 66  |                      | $ |     |   |  | $ | 5,666 
|Mortgage-backed securities             |  |                        | 9,769  |            |        | 55  |                      |   | (8   | ) |  |   | 9,816 
|                                       |  |                        |        |            |        |     |                      |   |      |   |  |   |       
|Total securities available-for-sale    |  | $                      | 15,369 |            | $      | 121 |                      | $ | (8   | ) |  | $ | 15,482
|                                       |  |                        |        |            |        |     |                      |   |      |   |  |   |       



At December 31, 2003 and 2002,
securities with a carrying value of $327,000 and $500,000, respectively, were pledged to secure public deposits. At December 31, 2003, securities with a carrying value of $5.9 million were pledged to secure FHLB advances of $5.7 million. At December
31, 2002, securities with a carrying value of $6.3 million were pledged to secure FHLB advances of $5.8 million.



F - 14



---

NOTE 3 - SECURITIES (CONTINUED)



The amortized cost and estimated fair value of debt securities at December 31, 2003, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                                 |  |                        |        |                     |   |       
|------------------------------------------------ |  | ---------------------- | ------ | ------------------- | - | ------
|                                                 |  | Amortized Cost         |        | EstimatedFair Value
|                                                 |  | (Dollars in thousands)
|Available-for-sale:                              |  |                        |        |                     |   |       
|                                                 |  |                       
|U.S. Government and agency obligations           |  |                        |        |                     |   |       
|                                                 |  |                       
|Due in less than one year                        |  | $                      | 1,000  |                     | $ | 1,008 
|Due after one year through five years            |  |                        | 4,541  |                     |   | 4,490 
|                                                 |  |                       
|Mortgage-backed securities                       |  |                        |        |                     |   |       
|                                                 |  |                       
|Due in less than one year                        |  |                        | 3      |                     |   | 3     
|Due after one year through five years            |  |                        | 43     |                     |   | 45    
|Due in greater than five years through ten years |  |                        | 1,739  |                     |   | 1,729 
|Due in greater than ten years                    |  |                        | 5,457  |                     |   | 5,436 
|                                                 |  |                        |        |                     |   |       
|                                                 |  | $                      | 12,783 |                     | $ | 12,711
|                                                 |  |                        |        |                     |   |       



For the years ended December 31, 2003
and 2002, gross realized gains amounted to $58,000 and $118,000, respectively. Gross realized losses amounted to $2,000 for each of the years ended December 31, 2003 and 2002. At December 31, 2003, the Bank did not hold investment securities of any
single issuer, other than obligations of the U.S. Treasury and other U.S. Government agencies and sponsored agencies (including FNMA and FHLMC), whose aggregate book value exceeded ten percent of stockholders equity.



Information pertaining to securities with gross unrealized losses at December 31, 2003,
aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:



|                                       |  |                        |       |                   |   |           |  |                |   |           |   |                |  |   |       |  |   |    
|-------------------------------------- |  | ---------------------- | ----- | ----------------- | - | --------- |  | -------------- | - | --------- | - | -------------- |  | - | ----- |  | - | ---
|                                       |  | Less Than 12 Months    |       | 12 Months or More |   | Total    
|                                       |  | FairValue              |       | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |   | FairValue |   | UnrealizedLoss
|                                       |  | (Dollars In thousands)
|U.S. Government and agency obligations |  | $                      | 2,233 |                   | $ | 62        |  | $              |  |           | $ |               |  | $ | 2,233 |  | $ | 62 
|Mortgaged-backed securities            |  |                        | 4,866 |                   |   | 48        |  |                |  |           |   |               |  |   | 4,866 |  |   | 48 
|                                       |  |                        |       |                   |   |           |  |                |   |           |   |                |  |   |       |  |   |    
|Total temporarily impaired securities  |  | $                      | 7,099 |                   | $ | 110       |  | $              |  |           | $ |               |  | $ | 7,099 |  | $ | 110
|                                       |  |                        |       |                   |   |           |  |                |   |           |   |                |  |   |       |  |   |    



F - 15



---

NOTE 3 - SECURITIES (CONTINUED)



Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer,
and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.



The unrealized loss approximates 1.5% of the fair value of the temporarily-impaired securities at December 31, 2003 and includes fourteen
issuances as follows:



| |  | The unrealized loss in investments in U.S. government and agency securities consists of four securities. The unrealized loss was the result of market interest rate increases since
the time these investments were acquired. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par or stated value of the investment.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The unrealized loss in mortgage-backed securities consists of ten securities. The unrealized loss was also the result of market interest rate increases since the time these
investments were acquired. The contractual cash flows of these securities are guaranteed by the issuing agency and, with respect to Government National Mortgage Association issuances, by the U.S. Government. It is expected that the securities would
not be settled at a price less than the par or stated value of the investment.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because the declines in fair value were attributable to increases in interest rates and not attributable to credit quality, and because the Bank has the ability and intent to hold all of these investments until a
market price recovery or maturity, these investments were not considered other-than-temporarily impaired.



F - 16



---

NOTE 4 - LOANS RECEIVABLE



Loans receivable consisted of the following:



|                                                        |  |                        |        |   |                  |   |        |  
|------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ------ | -
|                                                        |  | December 31,2003       |        |   | December 31,2002 |  
|                                                        |  | (Dollars in thousands) |       
|One-to-four family residential mortgage loans           |  | $                      | 27,391 |   |                  | $ | 23,193 |  
|Multi-family residential mortgage loans                 |  |                        | 2,965  |   |                  |   | 3,445  |  
|Commercial mortgage loans                               |  |                        | 18,805 |   |                  |   | 18,234 |  
|Construction and land development loans                 |  |                        | 5,331  |   |                  |   | 4,957  |  
|Commercial business loans                               |  |                        | 10,278 |   |                  |   | 11,941 |  
|Consumer loans                                          |  |                        | 9,120  |   |                  |   | 10,394 |  
|                                                        |  |                        |        |   |                  |   |        |  
|Total loans                                             |  |                        | 73,890 |   |                  |   | 72,164 |  
|                                                        |  |                        |        |   |                  |   |        |  
|Less:                                                   |  |                        |        |   |                  |   |        |  
|Undisbursed loans in process                            |  |                        | (1,286 | ) |                  |   | (304   | )
|Unamortized loan origination fees and deferred interest |  |                        | (116   | ) |                  |   | (35    | )
|Allowance for loan losses                               |  |                        | (2,866 | ) |                  |   | (4,185 | )
|                                                        |  |                        |        |   |                  |   |        |  
|                                                        |  |                        | (4,268 | ) |                  |   | (4,524 | )
|                                                        |  |                        |        |   |                  |   |        |  
|Total loans receivable, net                             |  | $                      | 69,622 |   |                  | $ | 67,640 |  
|                                                        |  |                        |        |   |                  |   |        |  



F - 17



---

NOTE 4 - LOANS RECEIVABLE (CONTINUED)



The Company originates both adjustable and fixed interest rate loans. At December 31, 2003 and 2002, the composition
of these loans was as follows:



|                       |  |                        |        |                  |   |       
|---------------------- |  | ---------------------- | ------ | ---------------- | - | ------
|                       |  | Fixed Rate Loans      
|                       |  | December 31,2003       |        | December 31,2002
|                       |  | (Dollars in thousands)
|Term to maturity       |  |                        |        |                  |   |       
|                       |  |                       
|Less than one year     |  | $                      | 9,289  |                  | $ | 8,181 
|One year to five years |  |                        | 22,315 |                  |   | 29,009
|Over five years        |  |                        | 5,381  |                  |   | 5,060 
|                       |  |                        |        |                  |   |       
|                       |  | $                      | 36,985 |                  | $ | 42,250
|                       |  |                        |        |                  |   |       
|                       | 
|                       |  | Adjustable Rate Loans 
|                       |  | December 31,2003       |        | December 31,2002
|                       |  | (Dollars in thousands)
|Term to reprice        |  |                        |        |                  |   |       
|                       |  |                       
|Less than one year     |  | $                      | 29,987 |                  | $ | 29,204
|One year to five years |  |                        | 1,708  |                  |   | 710   
|Over five years        |  |                        | 5,210  |                  |   |      
|                       |  |                        |        |                  |   |       
|                       |  | $                      | 36,905 |                  | $ | 29,914
|                       |  |                        |        |                  |   |       



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 or to the prime lending rate published in the Wall Street Journal. 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.



F - 18



---

NOTE 4 - LOANS RECEIVABLE (CONTINUED)



An analysis of the allowance for loan losses follows:



|                                                   |  |                         |        |   |      |   |        |  
|-------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                                   |  | Year Ended December 31, |       
|                                                   |  | 2003                    |        |   | 2002 |  
|                                                   |  | (Dollars in thousands)  |       
|Balance - beginning of year                        |  | $                       | 4,185  |   |      | $ | 5,650  |  
|Provision (reduction of provision) for loan losses |  |                         | (288   | ) |      |   | 633    |  
|Recoveries                                         |  |                         | 478    |   |      |   | 888    |  
|Charge-offs                                        |  |                         | (1,509 | ) |      |   | (2,986 | )
|                                                   |  |                         |        |   |      |   |        |  
|Balance - end of year                              |  | $                       | 2,866  |   |      | $ | 4,185  |  
|                                                   |  |                         |        |   |      |   |        |  



While the Bank believes it has
established its existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that regulators, in future reviews of the Banks loan portfolio, will not request the Bank to increase
significantly its allowances for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that
substantial increases would not be necessary should the quality of any loans deteriorate. Any material increase in the allowance for loan losses may adversely affect the Banks financial condition and results of operations.



Reserves for loan losses for tax purposes are maintained at the maximum allowable by the
Internal Revenue Code.



At December 31, 2003 and 2002, non-accrual loans
totaled $3.8 million and $6.8 million, respectively. Interest income totaling $160,000 and $26,000 was recognized on nonaccrual loans for the years ended December 31, 2003 and 2002.



At December 31, 2003 and 2002, the recorded investment in loans that were considered to be impaired was $3.8 million and $6.8 million,
respectively. Collateral dependent loans, which were measured at the fair value of the collateral, constituted approximately all of the impaired loans at December 31, 2003 and 2002. There was approximately $945,000 and $1.3 million at December 31,
2003 and 2002, respectively, in the allowance for loan losses specifically allocated to impaired loans. The average recorded investment in impaired loans for the years ended December 31, 2003 and 2002 was approximately $5.1 million and $9.0 million,
respectively. Interest income recognized on impaired loans was $160,000 in 2003 and $26,000 in 2002.



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 Bank gives
employees who are not directors or executive officers a preferred discount of the interest rate on adjustable-rate mortgages of up to 3⁄4%.



F - 19



---

NOTE 4 - LOANS RECEIVABLE (CONTINUED)



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:



|                       |  |                          |       |          |   |            |  |                    |       |  |   |      
|---------------------- |  | ------------------------ | ----- | -------- | - | ---------- |  | ------------------ | ----- |  | - | -----
|Year endedDecember 31, |  | BalanceBeginning of Year |       | Advances |   | Repayments |  | BalanceEnd of Year
|(Dollars in thousands)
|2003                   |  | $                        | 1,474 |          | $ | 154        |  | $                  | 909   |  | $ | 719  
|2002                   |  |                          | 1,433 |          |   | 1,679      |  |                    | 1,638 |  |   | 1,474



Unused credit lines or commitments to
extend credit to executive officers and directors, and companies in which executive officers and directors own a significant interest, aggregated $390,000 and $169,000 for the years ended December 31, 2003 and 2002, respectively.



Loans and participations serviced by the Bank on behalf of others were approximately $6.7
million and $8.2 million at December 31, 2003 and 2002, respectively. Servicing assets were insignificant at December 31, 2003 and 2002.



At December 31, 2003, first mortgage loans with an aggregate unpaid principal balance of $5.2 million were pledged to secure the Banks obligations under its
correspondent banking services with the FHLB of Atlanta.



NOTE 5 - PREMISES
AND EQUIPMENT



Premises and equipment are summarized by major
classifications as follows:



|                                  |  |                        |        |   |      |   |        |  
|--------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                  |  | December 31,           |       
|                                  |  | 2003                   |        |   | 2002 |  
|                                  |  | (Dollars in thousands) |       
|Land                              |  | $                      | 508    |   |      | $ | 508    |  
|Building and improvements         |  |                        | 3,673  |   |      |   | 3,524  |  
|Furniture, fixtures and equipment |  |                        | 1,261  |   |      |   | 1,316  |  
|                                  |  |                        |        |   |      |   |        |  
|                                  |  |                        | 5,442  |   |      |   | 5,348  |  
|Less: accumulated depreciation    |  |                        | (3,096 | ) |      |   | (2,996 | )
|                                  |  |                        |        |   |      |   |        |  
|                                  |  | $                      | 2,346  |   |      | $ | 2,352  |  
|                                  |  |                        |        |   |      |   |        |  



Depreciation expense aggregated
approximately $157,000 and $207,000 for the years ended December 31, 2003 and 2002, respectively.



F - 20



---

NOTE 6 - DEPOSITS



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



|                              |  |                        |   |                   |        |        |            |       |       |      |   |        |   |            |  |      
|----------------------------- |  | ---------------------- | - | ----------------- | ------ | ------ | ---------- | ----- | ----- | ---- | - | ------ | - | ---------- |  | -----
|                              |  | December 31, 2003      |   | December 31, 2002
|                              |  | Rates                  |   |                   | Amount |        | % of total |       | Rates |      |   | Amount |   | % of total
|                              |  | (Dollars in thousands)
|Noninterest-bearing accounts: |  |                        |   |                   |        |        |            |       |       |      |   |        |   |            |  |      
|Noninterest-bearing accounts  |  |                       |   |                   | $      | 8,633  |            | 10.6  |       |     |   |        | $ | 4,253      |  | 5.2  
|                              |  |                        |   |                   |        |        |            |       |       |      |   |        |   |            |  |      
|                              |  |                        |   |                   |        | 8,633  |            | 10.6  |       |      |   |        |   | 4,253      |  | 5.2  
|                              |  |                        |   |                   |        |       
|Interest-bearing accounts:    |  |                        |   |                   |        |        |            |       |       |      |   |        |   |            |  |      
|NOW accounts                  |  | 0.25                   | % |                   |        | 6,682  |            | 8.2   |       | 0.30 | % |        |   | 6,765      |  | 8.3  
|Money market demand accounts  |  | 1.19                   | % |                   |        | 5,832  |            | 7.1   |       | 1.38 | % |        |   | 4,619      |  | 5.7  
|Passbook accounts             |  | 0.30                   | % |                   |        | 7,927  |            | 9.7   |       | 0.45 | % |        |   | 8,313      |  | 10.3 
|Statement savings             |  | 0.30                   | % |                   |        | 3,043  |            | 3.7   |       | 0.45 | % |        |   | 2,243      |  | 2.8  
|Certificate accounts:         |  |                        |   |                   |        |        |            |       |       |      |   |        |   |            |  |      
|0.30% to 2.00%                |  |                        |   |                   |        | 25,341 |            | 31.1  |       |      |   |        |   | 12,198     |  | 15.0 
|2.01% to 3.00%                |  |                        |   |                   |        | 13,094 |            | 16.0  |       |      |   |        |   | 11,489     |  | 14.2 
|3.01% to 4.00%                |  |                        |   |                   |        | 5,603  |            | 6.9   |       |      |   |        |   | 21,312     |  | 26.3 
|4.01% to 5.00%                |  |                        |   |                   |        | 4,032  |            | 4.9   |       |      |   |        |   | 5,252      |  | 6.5  
|Over 5.00%                    |  |                        |   |                   |        | 1,435  |            | 1.8   |       |      |   |        |   | 4,604      |  | 5.7  
|                              |  |                        |   |                   |        |        |            |       |       |      |   |        |   |            |  |      
|                              |  |                        |   |                   |        | 72,989 |            | 89.4  |       |      |   |        |   | 76,795     |  | 94.8 
|                              |  |                        |   |                   |        |        |            |       |       |      |   |        |   |            |  |      
|                              |  |                        |   |                   | $      | 81,622 |            | 100.0 |       |      |   |        | $ | 81,048     |  | 100.0
|                              |  |                        |   |                   |        |        |            |       |       |      |   |        |   |            |  |      



Scheduled maturities of time deposits
were as follows:



|     |  |                       |       
|---- |  | --------------------- | ------
|     |  | December 31,2003     
|     |  | (Dollars inthousands)
|2004 |  | $                     | 28,425
|2005 |  |                       | 12,552
|2006 |  |                       | 907   
|2007 |  |                       | 5,061 
|2008 |  |                       | 2,560 
|     |  |                       |       
|     |  | $                     | 49,505
|     |  |                       |       



As of December 31, 2003 and 2002, the
Bank had aggregate deposit accounts with balances greater than $100,000 of approximately $11.8 million and $8.5 million, respectively. Balances in excess of $100,000 are not covered by FDIC insurance.



F - 21



---

NOTE 7 - BORROWED FUNDS



Advances from Federal Home Loan Bank



Advances from the Federal Home Loan Bank are as follows:



|                                                                                                                                                                                                       |  |                        |       |      |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ----- | ---- | - | -----
|                                                                                                                                                                                                       |  | December 31,          
|                                                                                                                                                                                                       |  | 2003                   |       | 2002
|                                                                                                                                                                                                       |  | (Dollars in thousands)
|Advances from Community Advance Fund:                                                                                                                                                                  |  |                        |       |      |   |      
|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     |  |                        | 16    |      |   | 38   
|                                                                                                                                                                                                       |  |                       
|5.49% ten-year convertible advance dated February 4, 1998, interest due quarterly, principal due February 4, 2008                                                                                      |  |                        | 5,000 |      |   | 5,000
|                                                                                                                                                                                                       |  |                        |       |      |   |      
|Total advances from Federal Home Loan Bank                                                                                                                                                             |  | $                      | 5,716 |      | $ | 5,738
|                                                                                                                                                                                                       |  |                        |       |      |   |      



As of December 31, 2003, the $5.0
million advance is no longer convertible to a variable rate. The FHLB did not exercise the one-time conversion option in February 2003.



The contractual maturities of Federal Home Loan Bank debt are as follows:



|                         |  |                        |      
|------------------------ |  | ---------------------- | -----
|Year ending December 31, |  | Principal Payments    
|                         |  | (Dollars in thousands)
|2004                     |  | $                      | 150  
|2005                     |  |                        | 133  
|2006                     |  |                        | 133  
|2007                     |  |                        | 133  
|2008                     |  |                        | 5,133
|Thereafter               |  |                        | 34   
|                         |  |                        |      
|                         |  | $                      | 5,716
|                         |  |                        |      



At December 31, 2003 and 2002 the
Banks advances from the FHLB of Atlanta are secured by investment securities with a carrying value of $5.9 million and $6.3 million, respectively. The Bank incurred interest expense on FHLB advances of approximately $329,000 and $333,000 in
2003 and 2002, respectively.



F - 22



---

NOTE 7 - BORROWED FUNDS (CONTINUED)



Notes payable to banks



Notes payable to banks are as follows:



|                                                                                                                                                                                                                    |  |                        |   |      |   |    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | ---- | - | ---
|                                                                                                                                                                                                                    |  | December 31,          
|                                                                                                                                                                                                                    |  | 2003                   |   | 2002
|                                                                                                                                                                                                                    |  | (Dollars in thousands)
|Note payable to a third party bank, interest rate equals banks prime rate plus 2.00% payable monthly (6.25% at December 31, 2002);
principal due December 31, 2002, secured by a pledge of the Banks common stock |  | $                      |  |      | $ | 750
|                                                                                                                                                                                                                    |  |                        |   |      |   |    
|Total notes payable to banks                                                                                                                                                                                        |  | $                      |  |      | $ | 750
|                                                                                                                                                                                                                    |  |                        |   |      |   |    



Notes payable to directors



Notes payable to directors are as follows:



|                                                                                                                                                                                                                                                                                                                       |  |                        |       |      |   |      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ---- | - | -----
|                                                                                                                                                                                                                                                                                                                       |  | December 31,          
|                                                                                                                                                                                                                                                                                                                       |  | 2003                   |       | 2002
|                                                                                                                                                                                                                                                                                                                       |  | (Dollars in thousands)
|Note payable to certain of the Companys directors, interest rate equals prime rate plus 1.00% payable quarterly (5.00% at December 31,
2003; 5.25% at December 31, 2002); principal due the earlier of (i) the change of control of the Company or (ii) November 2004, secured by a pledge of the Banks common stock |  | $                      | 1,000 |      | $ | 1,000
|                                                                                                                                                                                                                                                                                                                       |  |                       
|Notes payable to certain of the Companys directors, interest rate equals prime rate plus 2.00% payable at maturity (6.25% at December
31, 2002); principal due May 1, 2003, secured by a second pledge of the Banks common stock                                                                                     |  |                        |      |      |   | 250  
|                                                                                                                                                                                                                                                                                                                       |  |                        |       |      |   |      
|Total notes payable to directors                                                                                                                                                                                                                                                                                       |  | $                      | 1,000 |      | $ | 1,250
|                                                                                                                                                                                                                                                                                                                       |  |                        |       |      |   |      



F - 23



---

NOTE 7 - BORROWED FUNDS (CONTINUED)



On April 11, 2002, and June 25, 2002, certain of the Companys directors loaned funds to the Company of $125,000
and $125,000, respectively, for the purpose of funding both the interest on the Companys debt and other general corporate expenses. A provision in the notes stipulated that if the debt was not paid by October 31, 2002, the directors would
receive warrants to purchase a total of 50,000 shares of common stock of the Company for $1.00 per share, which warrants would not expire until November 1, 2005. The debt was not paid prior to October 31, 2002, and the warrants were issued on
November 1, 2002. The fair value of the warrants of $8,000 was charged to interest expense and credited to common stock warrants in the stockholders equity section of the Consolidated Statement of Financial Condition. As of December 31, 2003,
no warrants have been exercised.



Subordinated capital notes, net of
discount



Subordinated capital notes, net of discount are as follows:



|                                                                                                                                                                                                                                                                                          |  |                        |       |      |   |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ---- | - | -
|                                                                                                                                                                                                                                                                                          |  | December 31,          
|                                                                                                                                                                                                                                                                                          |  | 2003                   |       | 2002
|                                                                                                                                                                                                                                                                                          |  | (Dollars in thousands)
|Subordinated capital notes, net of discount; interest rate of 4.50% through September 30, 2005, and thereafter at a floating rate equal to the
prime rate; principal due in eight equal quarterly installments beginning on December 31, 2006 with a final maturity of September 30, 2008 |  | $                      | 6,411 |      | $ | 
|                                                                                                                                                                                                                                                                                          |  |                        |       |      |   |  
|Total subordinated capital notes, net of discount                                                                                                                                                                                                                                         |  | $                      | 6,411 |      | $ | 
|                                                                                                                                                                                                                                                                                          |  |                        |       |      |   |  



During 2003, the Company issued $6.6
million in Notes for cash and/or in exchange for redeemable preferred stock. The total cash proceeds of $3.1 million were used to establish an Interest Payment Fund, replenish any cash used to pay the cash consideration in a preferred stock exchange
discussed in Note 11, pay the balance of a $750,000 note payable to an independent bank, pay the balance of $250,000 in notes payable to five directors, and for other general corporate purposes, including the repurchase for cash of shares of Series
A and Series B preferred stock discussed in Note 11.



The Notes bear interest,
payable quarterly, at a fixed rate of 4.5% per annum through September 30, 2005, and thereafter at a floating rate equal to the prime rate. The Notes mature in eight equal quarterly principal installments beginning December 31, 2006, with a final
maturity of September 30, 2008. The Company may repay the Notes at any time without a penalty. The Company initially issued warrants to purchase 184,912 shares of common stock at $.01 per share related to the Notes. The warrants are exercisable one
year after the date of issuance and expire in three years. The fair value of the warrants of $203,000 was recorded as a reduction to the subordinated capital notes in the liabilities section and credited to common stock warrants in the
stockholders equity section of the Consolidated Statement of Financial Condition. The discount will be amortized over the life of the Notes through a monthly charge to interest expense. As of December 31, 2003, no warrants have been exercised.
Subject to the approval of the Companys stockholders, additional warrants to purchase up to a maximum of 184,912 shares of the Companys common stock are issuable on the first anniversary date of issue, assuming the Notes remain
outstanding. Annually thereafter, subject to the approval of the Companys stockholders, warrants to purchase a maximum total of 462,280 additional shares of Company stock may be issued.



F - 24



---

NOTE 7 - BORROWED FUNDS (CONTINUED)



The contractual maturities of the Notes are as follows:



|                         |  |                        |      
|------------------------ |  | ---------------------- | -----
|Year ending December 31, |  | Principal Payments    
|                         |  | (Dollars in thousands)
|2004                     |  | $                      |     
|2005                     |  |                        |     
|2006                     |  |                        | 801  
|2007                     |  |                        | 3,206
|2008                     |  |                        | 2,404
|                         |  |                        |      
|                         |  | $                      | 6,411
|                         |  |                        |      



NOTE 8 - INCOME TAXES



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



|                                      |  |                        |   |      |   |      |  
|------------------------------------- |  | ---------------------- | - | ---- | - | ---- | -
|                                      |  | 2003                   |   | 2002 |  
|                                      |  | (Dollars in thousands) |  
|Current income tax expense (benefit): |  |                        |   |      |   |      |  
|Federal                               |  | $                      | 5 |      | $ | (272 | )
|State                                 |  |                        |  |      |   |     |  
|                                      |  |                        |   |      |   |      |  
|                                      |  |                        | 5 |      |   | (272 | )
|                                      |  |                        |   |      |   |      |  
|Deferred income tax expense:          |  |                        |   |      |   |      |  
|Federal                               |  |                        |  |      |   |     |  
|State                                 |  |                        |  |      |   |     |  
|                                      |  |                        |   |      |   |      |  
|                                      |  |                        |  |      |   |     |  
|                                      |  |                        |   |      |   |      |  
|Total income tax expense (benefit)    |  | $                      | 5 |      | $ | (272 | )
|                                      |  |                        |   |      |   |      |  



The Company files consolidated federal
and state income tax returns. At December 31, 2003, the Company had no prepaid federal income taxes and $3,000 in prepaid state income taxes. At December 31, 2002, the Company had prepaid federal and state income taxes of approximately $75,000 and
$10,000, respectively.



F - 25



---

NOTE 8 - INCOME TAXES (CONTINUED)



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



|                                                             |  |                        |     |   |      |   |      |  
|------------------------------------------------------------ |  | ---------------------- | --- | - | ---- | - | ---- | -
|                                                             |  | 2003                   |     |   | 2002 |  
|                                                             |  | (Dollars in thousands) |    
|Expected income tax (benefit), at statutory rate             |  | $                      | (47 | ) |      | $ | (17  | )
|Dividend received deduction                                  |  |                        | (5  | ) |      |   | (20  | )
|Valuation allowance                                          |  |                        | 29  |   |      |   | (779 | )
|Effect of change in fair value of derivative debt instrument |  |                        | (4  | ) |      |   | 23   |  
|Other, net                                                   |  |                        | 32  |   |      |   | 521  |  
|                                                             |  |                        |     |   |      |   |      |  
|Total income tax expense (benefit)                           |  | $                      | 5   |   |      | $ | (272 | )
|                                                             |  |                        |     |   |      |   |      |  



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 are as follows:



|                                                      |  |                        |        |   |      |   |        |  
|----------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | 2003                   |        |   | 2002 |  
|                                                      |  | (Dollars in thousands) |       
|Deferred tax asset:                                   |  |                        |        |   |      |   |        |  
|Bad debt deduction                                    |  | $                      | 501    |   |      | $ | 1,081  |  
|Deferred compensation                                 |  |                        | 9      |   |      |   | 17     |  
|Loan fees                                             |  |                        | 72     |   |      |   | 44     |  
|Premises and equipment                                |  |                        | 23     |   |      |   | 14     |  
|Net operating loss carryforward (Federal and Alabama) |  |                        | 911    |   |      |   | 389    |  
|Tax credit carryforward (Federal)                     |  |                        | 307    |   |      |   | 313    |  
|Contribution carryforward                             |  |                        | 29     |   |      |   | 22     |  
|Other                                                 |  |                        | 76     |   |      |   | 24     |  
|                                                      |  |                        |        |   |      |   |        |  
|                                                      |  |                        | 1,928  |   |      |   | 1,904  |  
|                                                      |  |                        |        |   |      |   |        |  
|Deferred tax liability:                               |  |                        |        |   |      |   |        |  
|Other                                                 |  |                        | 9      |   |      |   | 14     |  
|                                                      |  |                        |        |   |      |   |        |  
|                                                      |  |                        | 9      |   |      |   | 14     |  
|                                                      |  |                        |        |   |      |   |        |  
|Net deferred tax asset                                |  |                        | 1,919  |   |      |   | 1,890  |  
|Valuation allowance                                   |  |                        | (1,919 | ) |      |   | (1,890 | )
|                                                      |  |                        |        |   |      |   |        |  
|Deferred tax asset, net of valuation allowance        |  | $                      |       |   |      | $ |       |  
|                                                      |  |                        |        |   |      |   |        |  



F - 26



---

NOTE 8 - INCOME TAXES (CONTINUED)



Realization of tax benefits represented by deferred tax assets is dependent on future earnings. Because of the
uncertainties involved in projecting future events and circumstances, a valuation allowance was established to fully reserve the net deferred tax asset as of and for the periods ended December 31, 2003 and 2002.



The Company realized a Federal tax loss of $1.4 million in 2002 and received, during 2003, a
refund for federal income taxes paid in 1999 totaling $272,000.



NOTE 9 -
EMPLOYEE BENEFIT PLANS



401(k) Profit
Sharing Plan and Trust



The Bank contributes to a defined contribution
profit-sharing plan (the plan), which includes a 401(k) feature, and covers substantially all employees who have completed one year with 1,000 hours of service with the Bank or another financial institution and are over 21 years of age.
Eligible employees may contribute the maximum dollar amount allowed under the Internal Revenue Code. The Bank may make discretionary matching contributions to the plan, as determined by the Board of Directors. Matching contributions are allocated
among participants in proportion to their compensation relative to the total compensation of all active participants. Vesting in the Banks matching and discretionary contributions results in 100% vesting after five years of credited service.
Contributions to the plan by the Bank, in the amounts of $67,000 in 2003 and $58,000 in 2002, are included in compensation and employee benefits.



Stock Option Plan



Under the Companys Stock Option Plan, the Company may grant options to its directors, officers and employees for up to 204,988 shares of common stock. Both
incentive stock options and non-qualified stock options may be granted under the Plan. The exercise price of each option equals or exceeds the market price of the Companys stock on the date of the grant. The options generally vest at a rate of
20% per year and expire at various times not longer than ten years from the date of the grant. As of December 31, 2003 and 2002, there were 81,304 and 71,304 shares, respectively, available for future grants.



A summary of the status of the Companys stock option plan is as follows:



|                                                               |  |         |   |      |                              |      |        |         |   |                              |   |      
|-------------------------------------------------------------- |  | ------- | - | ---- | ---------------------------- | ---- | ------ | ------- | - | ---------------------------- | - | -----
|                                                               |  | 2003    |   | 2002
|                                                               |  | Shares  |   |      | Weightedaverageexerciseprice |      | Shares |         |   | Weightedaverageexerciseprice
|Outstanding, beginning of year                                 |  | 127,498 |   |      | $                            | 4.78 |        | 77,311  |   |                              | $ | 9.27 
|Granted                                                        |  |        |   |      |                              |     |        | 85,000  |   |                              |   | 2.00 
|Exercised                                                      |  |        |   |      |                              |     |        |        |   |                              |   |     
|Forfeited                                                      |  | (10,000 | ) |      |                              | 6.31 |        | (34,813 | ) |                              |   | 7.97 
|                                                               |  |         |   |      |                              |      |        |         |   |                              |   |      
|Outstanding, end of year                                       |  | 117,498 |   |      | $                            | 4.65 |        | 127,498 |   |                              | $ | 4.78 
|                                                               |  |         |   |      |                              |      |        |         |   |                              |   |      
|Options exercisable at year-end                                |  | 48,348  |   |      | $                            | 7.97 |        | 29,698  |   |                              | $ | 11.26
|                                                               |  |         |   |      |                              |      |        |         |   |                              |   |      
|Weighted-average fair value of options granted during the year |  |         |   |      | $                            |     |        |         |   |                              | $ | 0.48 
|                                                               |  |         |   |      |                              |      |        |         |   |                              |   |      



F - 27



---

NOTE 9 - EMPLOYEE BENEFIT PLANS (CONTINUED)



During 2003, the Company adopted the prospective method of SFAS No. 148 Accounting for Stock-Based
Compensation-Transition and Disclosure in accounting for is stock option plans. In accordance with the provisions of the prospective method of SFAS No. 148, the Company is required to recognize compensation cost for options granted, modified, or
settled after January 1, 2003. No options were granted, modified, or settled during 2003. Therefore, no compensation cost related to stock option plans was recognized for the year ended December 31, 2003. Through December 31, 2002, the Company
followed the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which was amended by SFAS No. 148, and had elected to apply APB Opinion 25 and related interpretations in accounting for its stock option plans. Accordingly,
the Company did not recognize compensation cost for the options granted at least equal to market value. If the Company had elected to recognize the compensation cost for all options granted in fiscal years beginning after December 31, 1994, based on
the fair value of the options granted at the grant date, net loss and loss per share for the years ended December 31, 2003 and December 31, 2002 would have been increased to the pro forma amounts indicated below (in thousands, except per share
amounts):



|                                                         |  |      |       |   |      |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                         |  | 2003 |       |   | 2002 |  
|Net loss applicable to common shareholders - as reported |  | $    | (105  | ) |      | $ | (189  | )
|Net loss applicable to common shareholders - pro forma   |  |      | (109  | ) |      |   | (186  | )
|Basic loss per share - as reported                       |  |      | (0.08 | ) |      |   | (0.15 | )
|Basic loss per share - pro forma                         |  |      | (0.09 | ) |      |   | (0.15 | )
|Diluted loss per share - as reported                     |  |      | (0.10 | ) |      |   | (0.15 | )
|Diluted loss per share - pro forma                       |  |      | (0.10 | ) |      |   | (0.15 | )



The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions. No options were granted during 2003.



|                                |  |         |  
|------------------------------- |  | ------- | -
|                                |  | 2002    |  
|Expected dividend yield         |  | 0.00    | %
|Expected stock price volatility |  | 30      | %
|Risk-free interest rate         |  | 3.76    | %
|Expected life of options        |  | 5 years |  



F - 28



---

NOTE 10  REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS



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



As of December 31, 2003, the Banks regulatory capital ratios were as follows:



|                                                                            |  |                        |       |                                  |       |  
|--------------------------------------------------------------------------- |  | ---------------------- | ----- | -------------------------------- | ----- | -
|                                                                            |  | Amount                 |       | Percentageofadjustedtotal assets |      
|                                                                            |  | (Dollars in thousands) |      
|First Southern Bank:                                                        |  |                        |       |                                  |       |  
|                                                                            |  |                       
|Total capital (to risk-weighted assets)                                     |  | $                      | 8,953 |                                  | 13.66 | %
|To be well capitalized under the FDICIA prompt corrective action provisions |  |                        | 6,554 |                                  | 10.00 | %
|                                                                            |  |                        |       |                                  |       |  
|Excess                                                                      |  | $                      | 2,399 |                                  | 3.66  | %
|                                                                            |  |                        |       |                                  |       |  
|Tier 1 Capital (to risk-weighted assets)                                    |  | $                      | 8,108 |                                  | 12.37 | %
|To be well capitalized under the FDICIA prompt corrective action provisions |  |                        | 3,933 |                                  | 6.00  | %
|                                                                            |  |                        |       |                                  |       |  
|Excess                                                                      |  | $                      | 4,175 |                                  | 6.37  | %
|                                                                            |  |                        |       |                                  |       |  
|Tier 1 Capital (to average assets)                                          |  | $                      | 8,108 |                                  | 8.33  | %
|To be well capitalized under the FDICIA prompt corrective action provisions |  |                        | 4,869 |                                  | 5.00  | %
|                                                                            |  |                        |       |                                  |       |  
|Excess                                                                      |  | $                      | 3,239 |                                  | 3.33  | %
|                                                                            |  |                        |       |                                  |       |  
|Total capital (to risk-weighted assets)                                     |  | $                      | 8,953 |                                  | 13.66 | %
|Minimum risk-based capital requirements                                     |  |                        | 5,243 |                                  | 8.00  | %
|                                                                            |  |                        |       |                                  |       |  
|Excess                                                                      |  | $                      | 3,710 |                                  | 5.66  | %
|                                                                            |  |                        |       |                                  |       |  
|Tier 1 Capital (to risk-weighted assets)                                    |  | $                      | 8,108 |                                  | 12.37 | %
|Minimum core capital                                                        |  |                        | 2,622 |                                  | 4.00  | %
|                                                                            |  |                        |       |                                  |       |  
|Excess                                                                      |  | $                      | 5,486 |                                  | 8.37  | %
|                                                                            |  |                        |       |                                  |       |  
|Tier 1 Capital (to average assets)                                          |  | $                      | 8,108 |                                  | 8.33  | %
|Minimum Tier 1 capital requirement                                          |  |                        | 3,895 |                                  | 4.00  | %
|                                                                            |  |                        |       |                                  |       |  
|Excess                                                                      |  | $                      | 4,213 |                                  | 4.33  | %
|                                                                            |  |                        |       |                                  |       |  



F - 29



---

NOTE 10  REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS (CONTINUED)



To be categorized as well capitalized, the Bank must maintain a total risk-based capital ratio as set forth in the
preceding table and not be subject to a capital order. Under the FDICIA prompt corrective action provisions applicable to banks, as of December 31, 2003, the Bank is categorized as well capitalized, but is subject to a Consent Order (the
Order) with the Federal Deposit Insurance Corporation (FDIC) and the Alabama State Banking Department.



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



|                                                                            |  |                        |       |                                   |       |  
|--------------------------------------------------------------------------- |  | ---------------------- | ----- | --------------------------------- | ----- | -
|                                                                            |  | Amount                 |       | Percentage ofadjusted totalassets |      
|                                                                            |  | (Dollars in thousands) |      
|First Southern Bank:                                                        |  |                        |       |                                   |       |  
|                                                                            |  |                       
|Total capital (to risk-weighted assets)                                     |  | $                      | 9,002 |                                   | 13.37 | %
|To be well capitalized under the FDICIA prompt corrective action provisions |  |                        | 6,732 |                                   | 10.00 | %
|                                                                            |  |                        |       |                                   |       |  
|Excess                                                                      |  | $                      | 2,270 |                                   | 3.37  | %
|                                                                            |  |                        |       |                                   |       |  
|Tier 1 Capital (to risk-weighted assets)                                    |  | $                      | 8,120 |                                   | 12.06 | %
|To be well capitalized under the FDICIA prompt corrective action provisions |  |                        | 4,039 |                                   | 6.00  | %
|                                                                            |  |                        |       |                                   |       |  
|Excess                                                                      |  | $                      | 4,081 |                                   | 6.06  | %
|                                                                            |  |                        |       |                                   |       |  
|Tier 1 Capital (to average assets)                                          |  | $                      | 8,120 |                                   | 8.37  | %
|To be well capitalized under the FDICIA prompt corrective action provisions |  |                        | 4,853 |                                   | 5.00  | %
|                                                                            |  |                        |       |                                   |       |  
|Excess                                                                      |  | $                      | 3,267 |                                   | 3.37  | %
|                                                                            |  |                        |       |                                   |       |  
|Total capital (to risk-weighted assets)                                     |  | $                      | 9,002 |                                   | 13.37 | %
|Minimum risk-based capital requirements                                     |  |                        | 5,385 |                                   | 8.00  | %
|                                                                            |  |                        |       |                                   |       |  
|Excess                                                                      |  | $                      | 3,617 |                                   | 5.37  | %
|                                                                            |  |                        |       |                                   |       |  
|Tier 1 Capital (to risk-weighted assets)                                    |  | $                      | 8,120 |                                   | 12.06 | %
|Minimum core capital                                                        |  |                        | 2,693 |                                   | 4.00  | %
|                                                                            |  |                        |       |                                   |       |  
|Excess                                                                      |  | $                      | 5,427 |                                   | 8.06  | %
|                                                                            |  |                        |       |                                   |       |  
|Tier 1 Capital (to average assets)                                          |  | $                      | 8,120 |                                   | 8.37  | %
|Minimum Tier 1 capital requirement                                          |  |                        | 3,883 |                                   | 4.00  | %
|                                                                            |  |                        |       |                                   |       |  
|Excess                                                                      |  | $                      | 4,237 |                                   | 4.37  | %
|                                                                            |  |                        |       |                                   |       |  



Bancshares and the Bank are subject to
certain regulatory capital requirements. As a result of the Memorandum of Understanding (the MOU) with the Federal Reserve Bank of Atlanta, Bancshares is restricted from incurring any additional debt without the prior written approval of
the Federal Reserve. The MOU also prohibits Bancshares from declaring or paying dividends to its shareholders or redeeming any of its outstanding stock without the prior written approval of the Federal Reserve Bank. Bancshares has adopted a capital
restoration plan and a capital and dividend policy to comply with the provisions of the MOU and is required to submit quarterly progress reports to the Federal Reserve. The MOU will remain in effect until modified or terminated by the Federal
Reserve. At December 31, 2003, Bancshares believes it is in material compliance with the MOU.



F - 30



---

NOTE 10  REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS (CONTINUED)



As a result of the Order with the FDIC and the Alabama State Banking Department, which became effective March 25,
2002, the Bank is required to address various operational deficiencies, including certain violations of law and regulations identified by the Regulators, within various time periods prescribed by the Order. Among other things, the Bank must address
identified deficiencies with respect to management staffing and effectiveness, earnings, asset quality, capital adequacy, allowance for loan losses, and internal policies, procedures and controls. The Order also prohibits the Bank from paying cash
dividends to Bancshares without prior written consent from the Regulators.



The
Order outlines specific capital adequacy benchmarks that the Bank must satisfy. Within 120 days of the effective date of the Order and for as long as the Order remains in effect, the Banks Tier 1 capital must equal or exceed 7.00% of total
assets. At December 31, 2003, the Banks Tier 1 capital was 8.33% of total assets and in compliance with the Order. The Bank has developed and adopted a plan designed to meet and maintain the FDICs minimum risk-based capital requirements.



The Order also imposes specific asset quality measures on the Bank. Among
these is the requirement to reduce (by charge-off, collection or removal from adverse classification with the consent of the Regulators) the level of assets classified substandard and doubtful by the Regulators in connection
with their 2001 examination to not more than $20.0 million by August 31, 2002, to not more than $15.0 million by February 28, 2003, and to not more than $6.0 million by August 31, 2003. During the month of August 2003, the Company requested a
120-day extension on the $6.0 million requirement of the Order as of August 31, 2003. The extension was granted through December 31, 2003. At December 31, 2003, the balance of assets classified substandard and doubtful by the
Regulators in 2001 was $5.6 million and in compliance with the Order.



The
issuance of the Order follows previously disclosed written assurances by the Bank to the Alabama State Banking Department in August 2001, which written assurances were superseded by the Order. The Order requires the Bank to submit periodic written
reports to the Regulators detailing compliance with the terms of the Order.



At
December 31, 2003, Management believes it is in material compliance with the Order except for a violation as a result of the payment of an overdraft on a commercial relationship during the third quarter of 2003. The relationship included a loan that
was classified loss and was charged off in 2001. The Order prohibits the extension of credit, directly or indirectly, to any borrower who has a loan or other extension of credit from the Bank that has been classified, in whole or part,
loss or doubtful and is uncollected. The overdraft was cleared prior to September 30, 2003 with a secured loan advanced by the Bank. Management informed the Regulators of the violation and the Regulators included it as a
violation in their most recent examination report. In addition to this violation, the Regulators examination report also identified what they considered additional violations of the Order related to the same commercial relationship. No civil
money penalties have been or are expected to be assessed against the Bank as a result of the claimed violations; however, the violations could delay the termination of the Order.



While Bancshares and the Bank have taken actions to achieve compliance with the MOU and the Order in a timely manner, there are no
assurances that it will be successful in continuing to be in compliance with the MOU and the Order. Management of the Company cannot currently estimate the effects of these commitments on the financial condition, liquidity, and results of operations
of the Bank or Bancshares. Noncompliance with the terms of the Order may subject the Bank or its directors to civil money penalties or the termination of deposit insurance.



F - 31



---

NOTE 11 - REDEEMABLE PREFERRED STOCK AND DERIVATIVE DEBT INSTRUMENT



During 2001, the Company issued 160,350 shares of its 250,000 authorized shares of Series A redeemable, cumulative
preferred stock (the Series A preferred) for net proceeds of $3.5 million. Prior to August 1, 2006, the Series A preferred carries a cumulative 4% annual dividend ($.88 per share), payable semi-annually (in March and September), if
declared, in cash or, at the option of the holder, in shares of common stock valued at 85% of the defined book value as of the prior quarter end, subject to certain limitations. After July 31, 2006, the annual dividend increases to $5.928 per share,
payable in cash. In the event the Companys defined book value is not equal to or greater than $9.88 per adjusted share on July 31, 2006, then each holder of the Series A preferred shall be entitled to an incentive payment equal to four times
the difference between the defined book value and $9.88 per adjusted share up to a maximum total incentive payment of $8 per share. After five years, the issuer may call the shares at any time and, after seven years, the holders may annually put to
the Company up to 25% of the shares purchased in this offering, at a price equal to all accrued unpaid dividends plus the higher of $22.00 per share or four times the defined book value per adjusted share (based on equivalent common shares).



The incentive payment on the Series A preferred is indexed to the
Companys common stock but is not clearly and closely related to the economic characteristics and risks of the Series A preferred (the host contract) and requires settlement in cash or common stock at the option of the holder. Thus,
the incentive payment qualifies as an embedded derivative within the host contract. In accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, and EITF
Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, the incentive payment on the Series A preferred has been accounted for as a separate derivative liability on
the statement of financial condition and measured at fair value. The change in fair value is recognized currently in the statement of operations as Change in Fair Value of Derivative Debt Instrument. For the years ended December 31, 2003 and 2002,
the Company recognized charges of $61,000 and $68,000, respectively, on this instrument.



During 2001, the Company also issued 47,775 shares of its 56,000 authorized shares of Series B redeemable, cumulative preferred stock (the Series B preferred), for net proceeds of $1.0 million. The Series
B preferred carried a cumulative 6% annual dividend ($1.32 per share, increasing to $3.36 per share, after three years), payable semi-annually (in March and September), if declared, in cash or, at the option of the holder, in shares of common stock
valued at 85% of the defined book value as of the prior quarter end, subject to certain limitations. Each share of preferred stock was convertible at any time, at the option of the holder, into four shares of common stock. After three years, the
issuer could have called the shares at any time, and the holders could have annually put to the Company for redemption up to 50% of the shares purchased in the offering, at a price of $26.85 per share plus all accrued unpaid dividends.



Because of the mandatory redemption premium and cumulative dividend features of the Series
A and Series B preferred stocks, the Company is accreting the applicable redemption premiums utilizing the interest method over the minimum holding period, and is also accruing the cumulative dividends for each Series as earned. No dividends have
been declared or paid since the issuance of the Series A and Series B preferred stocks due to the capital and dividend restrictions of the MOU. For the years ended December 31, 2003 and 2002, the Company provided $339,000 and $411,000, respectively,
for the applicable accretion and dividends earned by a charge to retained earnings and corresponding increases to the respective carrying values of the Series A and Series B preferred stocks.



F - 32



---

NOTE 11 - REDEEMABLE PREFERRED STOCK AND DERIVATIVE DEBT INSTRUMENT (CONTINUED)



During 2003, the Company redeemed 110,395 shares of the Series A preferred stock for $2.6 million in Notes and
$57,000 in cash, and 39,092 shares of the Series B preferred stock for $902,000 in Notes and $61,000 in cash. These exchanges resulted in a net gain on the extinguishment of derivative debt instrument of $61,000 and a net gain of the exchange of
subordinated capital notes for preferred stock of $312,000.



The Company also
repurchased 20,409 shares of the Series A preferred stock for $488,000 in cash and 8,683 shares of the Series B preferred stock for $216,000 in cash, $54,000 payable in January 2004. These repurchases resulted in a net gain on the extinguishment of
derivative debt instrument of $12,000 and a net gain on the repurchase of preferred stock of $66,000.



At December 31, 2003, 29,546 shares of the Series A preferred stock remain outstanding. All shares of the Series B preferred stock were exchanged for Notes or repurchased during 2003.



NOTE 12 - 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, and 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 or notional amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.



|                                                                        |  |                             |       |                  |   |      
|----------------------------------------------------------------------- |  | --------------------------- | ----- | ---------------- | - | -----
|                                                                        |  | Contract or notional amount
|                                                                        |  | December 31,2003            |       | December 31,2002
|                                                                        |  | (Dollars in thousands)     
|Financial instruments and contract amounts which represent credit risk: |  |                             |       |                  |   |      
|                                                                        |  |                            
|Commitments to extend credit                                            |  | $                           | 1,265 |                  | $ | 304  
|Unused lines of credit                                                  |  |                             | 5,098 |                  |   | 4,062
|Standby letters of credit                                               |  |                             | 240   |                  |   |     



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.



F - 33



---

NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)



Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protection agreements are
commitments for possible future extensions of credit to existing customers.



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. The maximum potential amount of future payments the Bank could be required to make
under the standby letters of credit as of December 31, 2003 was $240,000. The current fair value of the liability for the Banks obligations under these standby letters of credit was less than $2,000 as of December 31, 2003, which approximates
the unearned premium or fee received. The Banks recourse is limited to its rights as an unsecured lender to the applicant.



NOTE 13 - STOCK REPURCHASE PROGRAM



The Company had a Stock Repurchase Program from October 16, 1995 until 2000. Since inception of the program, 54,906 of these repurchased shares were utilized in the
funding of a Management Recognition and Development Plan, 6,186 shares were used to satisfy options exercised, and 820,254 shares (aggregating 39.5% of issued shares) are held in treasury at December 31, 2003.



NOTE 14 - COMPANY DIVIDEND RESTRICTIONS



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. 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. As of December 31,
2003, and as incorporated in the Order, the Bank is restricted from paying dividends without the approval of the FDIC and the State Banking Department.



Bancshares is also restricted by the MOU from paying dividends to shareholders without the written approval of the Federal Reserve. Bancshares, as a Delaware corporation,
is also subject to the requirements of Delaware law, which generally limit the amount of dividends that Bancshares may declare and pay to an amount equal to the excess of its net assets over its stated capital or, if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.



F - 34



---

NOTE 15 - 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 SHEETS

(Dollars in thousands)



|                                            |  |                  |       |                  |   |      
|------------------------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|                                            |  | December 31,2003 |       | December 31,2002
|ASSETS                                      |  |                  |       |                  |   |      
|                                            |  |                 
|Cash and cash equivalents                   |  | $                | 974   |                  | $ | 119  
|Investment in wholly-owned subsidiary       |  |                  | 8,039 |                  |   | 8,238
|Loans receivable                            |  |                  | 300   |                  |   |     
|Other assets                                |  |                  | 88    |                  |   | 1    
|                                            |  |                  |       |                  |   |      
|Total assets                                |  | $                | 9,401 |                  | $ | 8,358
|                                            |  |                  |       |                  |   |      
|LIABILITIES AND STOCKHOLDERS EQUITY        |  |                  |       |                  |   |      
|                                            |  |                 
|Liabilities:                                |  |                  |       |                  |   |      
|Notes payable to banks                      |  | $                |      |                  | $ | 750  
|Notes payable to directors                  |  |                  | 1,000 |                  |   | 1,250
|Subordinated capital notes, net of discount |  |                  | 6,411 |                  |   |     
|Other accrued liabilities                   |  |                  | 85    |                  |   | 24   
|Derivative debt instrument                  |  |                  | 196   |                  |   | 990  
|                                            |  |                  |       |                  |   |      
|Total liabilities                           |  |                  | 7,692 |                  |   | 3,014
|                                            |  |                 
|Redeemable preferred stock                  |  |                  | 586   |                  |   | 4,134
|Stockholders equity                        |  |                  | 1,123 |                  |   | 1,210
|                                            |  |                  |       |                  |   |      
|Total liabilities and stockholders equity  |  | $                | 9,401 |                  | $ | 8,358
|                                            |  |                  |       |                  |   |      



F - 35



---

NOTE 15 - FIRST SOUTHERN BANCSHARES, INC. PARENT COMPANY ONLY FINANCIAL
STATEMENTS (CONTINUED)



CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)



|                                                                       |  |                        |       |   |      |   |       |  
|---------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | -
|                                                                       |  | Year endedDecember 31, |      
|                                                                       |  | 2003                   |       |   | 2002 |  
|INCOME                                                                 |  |                        |       |   |      |   |       |  
|Equity in earnings of wholly-owned subsidiary                          |  | $                      | 236   |   |      | $ | 776   |  
|Other                                                                  |  |                        | 74    |   |      |   |      |  
|                                                                       |  |                        |       |   |      |   |       |  
|Total income                                                           |  |                        | 310   |   |      |   | 776   |  
|EXPENSES                                                               |  |                        | 454   |   |      |   | 554   |  
|                                                                       |  |                        |       |   |      |   |       |  
|Income (loss) before income taxes                                      |  |                        | (144  | ) |      |   | 222   |  
|Provision for income taxes                                             |  |                        |      |   |      |   |      |  
|                                                                       |  |                        |       |   |      |   |       |  
|Net income (loss)                                                      |  |                        | (144  | ) |      |   | 222   |  
|Cumulative dividend arrearage and premium accretion on preferred stock |  |                        | (339  | ) |      |   | (411  | )
|Gain on exchange of subordinated capital notes for preferred stock     |  |                        | 312   |   |      |   |      |  
|Gain on repurchase of preferred stock                                  |  |                        | 66    |   |      |   |      |  
|                                                                       |  |                        |       |   |      |   |       |  
|Basic loss applicable to common shareholders                           |  | $                      | (105  | ) |      | $ | (189  | )
|                                                                       |  |                        |       |   |      |   |       |  
|Basic loss per common share                                            |  | $                      | (0.08 | ) |      | $ | (0.15 | )
|                                                                       |  |                        |       |   |      |   |       |  
|Diluted loss per common share                                          |  | $                      | (0.10 | ) |      | $ | (0.15 | )
|                                                                       |  |                        |       |   |      |   |       |  
|Dividends per common share                                             |  | $                      |      |   |      | $ |      |  
|                                                                       |  |                        |       |   |      |   |       |  



F - 36



---

NOTE 15 - FIRST SOUTHERN BANCSHARES, INC. PARENT COMPANY ONLY FINANCIAL
STATEMENTS (CONTINUED)



CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



|                                                                                                                 |  |                         |       |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ------ | -
|                                                                                                                 |  | Year ended December 31, |      
|                                                                                                                 |  | 2003                    |       |   | 2002 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                            |  |                         |       |   |      |   |        |  
|                                                                                                                 |  |                        
|Net income (loss)                                                                                                |  | $                       | (144  | ) |      | $ | 222    |  
|Adjustments to reconcile net income (loss) to net cash used in operations:                                       |  |                         |       |   |      |   |        |  
|Equity in (earnings) losses of wholly-owned subsidiary                                                           |  |                         | (236  | ) |      |   | (776   | )
|Change in fair value of derivative debt instrument                                                               |  |                         | 61    |   |      |   | 68     |  
|Amortization of discount on subordinated capital notes                                                           |  |                         | 10    |   |      |   |       |  
|Amortization of issuance costs on subordinated capital notes                                                     |  |                         | 4     |   |      |   |       |  
|Gain on extinguishment of derivative debt instrument                                                             |  |                         | (73   | ) |      |   |       |  
|Fair value of common stock warrants issued                                                                       |  |                         |      |   |      |   | 8      |  
|(Increase) decrease in other assets                                                                              |  |                         | (15   | ) |      |   | 9      |  
|Increase (decrease) in other liabilities                                                                         |  |                         | 7     |   |      |   | (15    | )
|                                                                                                                 |  |                         |       |   |      |   |        |  
|Net cash used in operating activities                                                                            |  |                         | (386  | ) |      |   | (484   | )
|                                                                                                                 |  |                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                            |  |                         |       |   |      |   |        |  
|                                                                                                                 |  |                        
|Dividend from subsidiary bank                                                                                    |  |                         | 250   |   |      |   | 200    |  
|Capital contributions to subsidiary bank                                                                         |  |                         |      |   |      |   | (1,000 | )
|Purchase of loans from subsidiary bank                                                                           |  |                         | (300  | ) |      |   |       |  
|                                                                                                                 |  |                         |       |   |      |   |        |  
|Net cash used in investing activities                                                                            |  |                         | (50   | ) |      |   | (800   | )
|                                                                                                                 |  |                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                            |  |                         |       |   |      |   |        |  
|                                                                                                                 |  |                        
|Repayment of notes payable to banks                                                                              |  |                         | (750  | ) |      |   |       |  
|Net proceeds from (repayment of) notes payable to directors                                                      |  |                         | (250  | ) |      |   | 1,250  |  
|Proceeds from issuance of subordinated capital notes and common stock warrants, net of $76,000 in issuance costs |  |                         | 3,059 |   |      |   |       |  
|Repurchase of preferred stock                                                                                    |  |                         | (650  | ) |      |   |       |  
|Payment of premiums on exchange of subordinated capital notes for preferred stock                                |  |                         | (118  | ) |      |   |       |  
|                                                                                                                 |  |                         |       |   |      |   |        |  
|Net cash provided by financing activities                                                                        |  |                         | 1,291 |   |      |   | 1,250  |  
|                                                                                                                 |  |                        
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                 |  |                         | 855   |   |      |   | (34    | )
|                                                                                                                 |  |                        
|Cash and cash equivalents at beginning of year                                                                   |  |                         | 119   |   |      |   | 153    |  
|                                                                                                                 |  |                         |       |   |      |   |        |  
|Cash and cash equivalents at end of year                                                                         |  | $                       | 974   |   |      | $ | 119    |  
|                                                                                                                 |  |                         |       |   |      |   |        |  



F - 37



---

NOTE 16 - CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS



The carrying amounts and fair value of financial instruments as of December 31, 2003 and
2002 are summarized as follows:



|                                            |  |                        |        |           |   |                |  |           |        |  |   |       
|------------------------------------------- |  | ---------------------- | ------ | --------- | - | -------------- |  | --------- | ------ |  | - | ------
|                                            |  | At December 31,       
|                                            |  | 2003                   |        | 2002     
|                                            |  | CarryingAmount         |        | FairValue |   | CarryingAmount |  | FairValue
|                                            |  | (Dollars in thousands)
|FINANCIAL ASSETS:                           |  |                        |        |           |   |                |  |           |        |  |   |       
|                                            |  |                        |        |          
|Cash and cash equivalents                   |  | $                      | 10,468 |           | $ | 10,468         |  | $         | 7,011  |  | $ | 7,011 
|Investment securities, available for sale   |  |                        | 12,711 |           |   | 12,711         |  |           | 15,482 |  |   | 15,482
|Loans held for sale                         |  |                        | 77     |           |   | 77             |  |           | 271    |  |   | 271   
|Loans receivable, net                       |  |                        | 69,622 |           |   | 70,027         |  |           | 67,640 |  |   | 71,913
|Federal Home Loan Bank stock                |  |                        | 383    |           |   | 383            |  |           | 684    |  |   | 684   
|Accrued dividends and interest receivable   |  |                        | 489    |           |   | 489            |  |           | 593    |  |   | 593   
|                                            |  |                        |        |          
|FINANCIAL LIABILITIES:                      |  |                        |        |           |   |                |  |           |        |  |   |       
|                                            |  |                        |        |          
|Deposits:                                   |  |                        |        |           |   |                |  |           |        |  |   |       
|Demand accounts                             |  | $                      | 32,117 |           | $ | 32,117         |  | $         | 26,193 |  | $ | 26,193
|Certificate accounts                        |  |                        | 49,505 |           |   | 50,069         |  |           | 54,855 |  |   | 56,381
|Advances from Federal Home Loan Bank        |  |                        | 5,716  |           |   | 6,195          |  |           | 5,738  |  |   | 7,303 
|Notes payable to banks                      |  |                        |       |           |   |               |  |           | 750    |  |   | 750   
|Notes payable to directors                  |  |                        | 1,000  |           |   | 1,000          |  |           | 1,250  |  |   | 1,250 
|Subordinated capital notes, net of discount |  |                        | 6,411  |           |   | 6,955          |  |           |       |  |   |      
|Derivative debt instrument                  |  |                        | 196    |           |   | 196            |  |           | 990    |  |   | 990   
|                                            |  |                        |        |          
|Redeemable preferred stock                  |  |                        |        |           |   |                |  |           |        |  |   |       
|Series A                                    |  |                        | 586    |           |   | 586            |  |           | 2,911  |  |   | 2,911 
|Series B                                    |  |                        |       |           |   |               |  |           | 1,223  |  |   | 1,223 
|Off-balance-sheet commitments               |  |                        |       |           |   |               |  |           |       |  |   |      



The fair value of a financial
instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for
the Companys various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.



F - 38



---

NOTE 16 - CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)



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 - The carrying amounts of cash and cash equivalents approximates fair value.
| | - | ------------------------------------------------------------------------------------------------------



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



| |  | Loans receivable and loans held for sale - For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Fair values for certain loans with a readily available market are based on quoted market prices of similar loans. The fair value of other loans was estimated using discounted cash flow analyses, based on interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Federal Home Loan Bank stock - The carrying value of the Federal Home Loan Bank stock is believed to reasonably reflect its fair value.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | Accrued dividends and interest receivable - The carrying amount approximates fair value.
| | - | ----------------------------------------------------------------------------------------



| |  | Deposits - The carrying value of demand deposits and other deposit accounts with no fixed maturity reflects the amount payable on demand and therefore is, by definition, its fair
value. 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Subordinated capital notes, net of discount  The estimated fair value of the Notes is determined by discounting future cash flows using the current prime rate.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivative debt instrument - The carrying value of the derivative debt instrument is the estimated fair value.
| | - | --------------------------------------------------------------------------------------------------------------



| |  | Redeemable preferred stock - The carrying value of the redeemable preferred stock approximates its fair value.
| | - | --------------------------------------------------------------------------------------------------------------



| |  | Off-balance-sheet financial commitments - The Company had $6.6 million of off-balance-sheet financial commitments as of December 31, 2003, which are commitments to originate loans,
unused lines of credit and standby letters of credit. The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees, if applicable.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 39



---

NOTE 17 - QUARTERLY DATA (UNAUDITED)



|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  
|---------------------------------------------------------------------- |  | ----------------------------------------- | ----- | - | ------------- | - | ----- | ------------ |  | - | ------------- | - |  | ------------ | ----- | - | ------------- | - | ----- | ------------ |  | - | ------------- | - |  | - | ----- | - |  | - | ----- | -
|                                                                       |  | Years Ended December 31,                  |      
|                                                                       |  | 2003                                      |       |   | 2002          |  
|                                                                       |  | FirstQuarter                              |       |   | SecondQuarter |   |       | ThirdQuarter |  |   | FourthQuarter |   |  | FirstQuarter |       |   | SecondQuarter |   |       | ThirdQuarter |  |   | FourthQuarter |  
|                                                                       |  | (Dollars in thousands, except share data) |      
|Interest income                                                        |  | $                                         | 1,271 |   |               | $ | 1,283 |              |  | $ | 1,225         |   |  | $            | 1,212 |   |               | $ | 1,844 |              |  | $ | 1,729         |   |  | $ | 1,577 |   |  | $ | 1,356 |  
|Interest expense                                                       |  |                                           | 556   |   |               |   | 509   |              |  |   | 478           |   |  |              | 515   |   |               |   | 1,078 |              |  |   | 914           |   |  |   | 786   |   |  |   | 613   |  
|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  
|Net interest income                                                    |  |                                           | 715   |   |               |   | 774   |              |  |   | 747           |   |  |              | 697   |   |               |   | 766   |              |  |   | 815           |   |  |   | 791   |   |  |   | 743   |  
|Provision (reduction of provision) for loan losses                     |  |                                           | (200  | ) |               |   | (189  | )            |  |   | 101           |   |  |              |      |   |               |   | 170   |              |  |   | 113           |   |  |   | 350   |   |  |   |      |  
|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  
|Net interest income after provision for loan losses                    |  |                                           | 915   |   |               |   | 963   |              |  |   | 646           |   |  |              | 697   |   |               |   | 596   |              |  |   | 702           |   |  |   | 441   |   |  |   | 743   |  
|Noninterest income                                                     |  |                                           | 230   |   |               |   | 263   |              |  |   | 272           |   |  |              | 47    |   |               |   | 223   |              |  |   | 245           |   |  |   | 1,806 |   |  |   | 183   |  
|Noninterest expense                                                    |  |                                           | 1,053 |   |               |   | 1,054 |              |  |   | 1,018         |   |  |              | 1,048 |   |               |   | 1,323 |              |  |   | 1,265         |   |  |   | 1,308 |   |  |   | 1,093 |  
|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  
|Income (loss) before income taxes                                      |  |                                           | 92    |   |               |   | 172   |              |  |   | (100          | ) |  |              | (304  | ) |               |   | (504  | )            |  |   | (318          | ) |  |   | 939   |   |  |   | (167  | )
|Income tax expense (benefit)                                           |  |                                           |      |   |               |   | 5     |              |  |   |              |   |  |              |      |   |               |   |      |              |  |   | (60           | ) |  |   | 80    |   |  |   | (292  | )
|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  
|Net income (loss)                                                      |  |                                           | 92    |   |               |   | 167   |              |  |   | (100          | ) |  |              | (304  | ) |               |   | (504  | )            |  |   | (258          | ) |  |   | 859   |   |  |   | 125   |  
|Cumulative dividend arrearage and premium accretion on preferred stock |  |                                           | (104  | ) |               |   | (105  | )            |  |   | (106          | ) |  |              | (24   | ) |               |   | (102  | )            |  |   | (102          | ) |  |   | (103  | ) |  |   | (104  | )
|Gain on exchange of subordinated capital notes for preferred stock     |  |                                           |      |   |               |   |      |              |  |   | 237           |   |  |              | 75    |   |               |   |      |              |  |   |              |   |  |   |      |   |  |   |      |  
|Gain on repurchase of preferred stock                                  |  |                                           |      |   |               |   |      |              |  |   |              |   |  |              | 66    |   |               |   |      |              |  |   |              |   |  |   |      |   |  |   |      |  
|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  
|Basic income (loss) applicable to common shareholders                  |  | $                                         | (12   | ) |               | $ | 62    |              |  | $ | 31            |   |  | $            | (187  | ) |               | $ | (606  | )            |  | $ | (360          | ) |  | $ | 756   |   |  | $ | 21    |  
|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  
|Basic earnings (loss) per common share                                 |  | $                                         | (0.01 | ) |               | $ | 0.05  |              |  | $ | 0.03          |   |  | $            | (0.15 | ) |               | $ | (0.48 | )            |  | $ | (0.29         | ) |  | $ | 0.60  |   |  | $ | 0.02  |  
|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  
|Diluted earnings (loss) per common share                               |  | $                                         | (0.01 | ) |               | $ | 0.05  |              |  | $ | (0.05         | ) |  | $            | (0.15 | ) |               | $ | (0.48 | )            |  | $ | (0.29         | ) |  | $ | 0.54  |   |  | $ | 0.02  |  
|                                                                       |  |                                           |       |   |               |   |       |              |  |   |               |   |  |              |       |   |               |   |       |              |  |   |               |   |  |   |       |   |  |   |       |  



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



NOTE 18 -
OTHER MATTERS



The Company purchases insurance, leases automobiles and
contracts for professional services through certain Board members. The total of such expenses amounted to $133,000 in 2003 and $248,000 in 2002.



F - 40