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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-KSB/A



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



For the fiscal year ended December 31, 2002



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



Commission File Number: 0-25478



FIRST SOUTHERN BANCSHARES, INC.

(Name of Small Business Issuer in Its Charter)



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



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

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

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



Common Stock, par value $0.01 per share

(Title of Class)



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



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. ̈



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



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



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



DOCUMENTS INCORPORATED BY REFERENCE:



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



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



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INDEX



|                                                                  |  | Page
|----------------------------------------------------------------- |  | ----
|INTRODUCTORY NOTE                                                 |  | 2   
|PART II                                                           |  |     
|                                                                  | 
|Item 6. Managements Discussion and Analysis or Plan of Operation |  | 2   
|                                                                  | 
|Item 7. Financial Statements                                      |  | 12  
|PART IV                                                           |  |     
|                                                                  | 
|Item 13. Exhibits and Reports on Form 8-K                         |  | 12  
|                                                                  | 
|SIGNATURES                                                        |  | 14  





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INTRODUCTORY NOTE



On April 15,
2003, First Southern Bancshares, Inc. (the Company) filed its annual report on Form 10-KSB for the fiscal year ended December 31, 2002. The Company has restated its Consolidated Financial Statements at and for the years ended December
31, 2001 and 2002 to conform its accounting treatment of the derivative debt instrument embedded in the Companys Series A redeemable preferred stock, and the charges for cumulative dividends and the redemption premium accretion related to its
Series A and Series B redeemable preferred stock, with generally accepted accounting principles. The consolidated statements of financial condition as of December 31, 2001 and 2002 have been restated to record the fair value of the derivative debt
instrument as a liability and to reduce the carrying value of the Series A redeemable preferred stock accordingly. The consolidated statements of operations for the years ended December 31, 2001 and 2002 have been restated to reflect the change in
fair value of the derivative debt instrument and to revise the cumulative dividend arrearages and premium accretion on the Series A and Series B redeemable preferred stock for each period. The 2001 net effect of the restatements is to increase the
previously reported basic loss applicable to common shareholders from $7,867,000 to $8,023,000, or a diluted loss per common share of $6.38 as compared to a diluted loss per common share of $6.26 previously reported. The 2002 net effect of the
restatements is to decrease the basic loss applicable to common shareholders from $411,000 to $189,000, or a diluted loss per common share of $0.15 as compared to diluted loss per common share of $0.33 previously reported. This amendment is being
filed to file the Companys restated Consolidated Financial Statements at and for the years ended December 31, 2001 and 2002 which contain the unqualified opinion of Kraft Bros., Esstman, Patton & Harrell, PLLC. The Auditors report
includes an emphasis of a matter paragraph that emphasizes that the consolidated financial statements are prepared under an assumption that the Company is a going concern.



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



PART II



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



General



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



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



2



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expenses, such as compensation and benefits, building and occupancy expense, and provisions for federal and state taxes.



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



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES



General



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



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



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



Total liabilities decreased $36.4
million from $126.4 million at December 31, 2001 to $90.0 million at December 31, 2002. The sale of the branch offices included the transfer of $20.7 million in deposits. During the year ended December 31, 2002, deposits decreased $37.6 million. The
decrease in deposits was partially offset by borrowings of approximately $1.3 million from certain of the Companys directors.



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



Critical Accounting Policies



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



Cash and Cash Equivalents



Cash and cash equivalents at December 31, 2002 of $7.0 million, or 7.4% of total assets, decreased from $14.2 million, or 10.8% of total assets, at
December 31, 2001. The Banks interest bearing balances of cash and



3



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cash equivalents decreased by $7.2 million during the year ended December 31, 2002, from $9.8 million at December 31, 2001 to $2.6 million at December 31,
2002. Interest bearing balances consist of FHLB overnight account balances.



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



Investment Securities



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



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



Loans



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



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



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



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



The Companys combined commercial and consumer loan
portfolio declined $9.5 million to $22.3 million at December 31, 2002 from $31.8 million at December 31, 2001. This decline is primarily the result of increased emphasis on collection efforts and credit quality on commercial business loans and
consumer loans resulting in repayments, payoffs as a result of refinancing at other institutions and problem loan charge-offs. Loan sales in connection with the sale of two branch offices also contributed to the decrease. As noted previously, it is
not managements intention to curtail lending to the commercial business and consumer market sectors. However, the



4



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focus since January 1, 2001 has been on improving credit quality, granting primary attention to the existing portfolio and reevaluating policies and
procedures rather than soliciting new business. As a result, new loan business has not offset the level of repayments.



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



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



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



Non-performing Assets



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



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



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



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

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



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



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



Allowance for Loan Losses



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



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



6



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ultimately confirmed will vary from original estimates and adjustments, as necessary, are made in the period in which these factors and other considerations
become known.



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



Deposits, FHLB Advances and Other Notes Payable



Deposit balances decreased $37.7 million from $118.7 million at December 31, 2001 to $81.0 million at December 31, 2002. The
$37.7 million decrease during year ended December 31, 2002 includes $20.7 million in deposits transferred as the result of the sale of the assets and the transfer of certain related liabilities of two branch offices during the third quarter of 2002.
Prior to May 2002, management set rates on savings certificates lower than much of the competition in an effort to reduce the size of the Company, improve the Companys cost of funds for deposits and maximize the use of excess cash held in the
FHLB overnight account. As a result, the Companys savings certificates decreased $11.1 million during the six months ended June 30, 2002 from $82.4 million at December 31, 2001 to $71.3 million at June 30, 2002. Beginning in May of 2002,
management set more competitive rates and offered special term certificates to stabilize the deposit base. As a result, the Companys savings certificates decreased only $2.1 million, net of the $14.3 million transferred as a result of the sale
of two branches, from $71.3 million at June 30, 2002 to $54.9 million at December 31, 2002. Demand accounts decreased $10.1 million from $36.3 million at December 31, 2001 to $26.2 million at December 31, 2002. The $10.1 million decrease includes
$6.4 million transferred as a result of the sale of two branches. The interest rate paid on the average balance of interest-bearing deposits decreased from 4.77% for the year ended December 31, 2001 to 3.05% for the year ended December 31, 2002.



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



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



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



Stockholders Equity



Stockholders
equity increased $116,000 from $1.1 million at December 31, 2001 to $1.2 million at December 31, 2002. The increase in stockholders equity was primarily the result of a net operating profit of $222,000, a $297,000 net unrealized gain in
securities available for sale and $8,000 related to the issuance of stock warrants. This increase in stockholders equity was partially offset by a $411,000 non-cash charge to retained earnings to reflect cumulative dividend arrearages and
premium accretion in the Companys redeemable preferred stock.



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



7



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other factors. Based on the risk-based capital rules and definitions prescribed by the banking regulators, should an institutions capital ratios
decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions.



The Company and the Bank are subject to certain regulatory capital requirements. As a result of the MOU with the Federal Reserve Bank, the Company has
adopted a capital restoration plan and capital and dividend policy. The Company is required to submit quarterly progress reports to the Federal Reserve. The MOU will remain in effect until modified or terminated by the Federal Reserve. As a result
of the Consent Order with the FDIC and the Alabama State Banking Department, which became effective March 25, 2002, the Banks Tier 1 capital was required to equal or exceed 5.00% of total assets within 60 days from the effective date of the
Order. Within 120 days of the effective date of the Order and for as long as the Order remains in effect, the Banks Tier 1 capital must equal or exceed 7.00% of total assets. The Bank must develop and adopt a plan designed to meet and maintain
the FDICs minimum risk-based capital requirements for each year in which the plan is in effect.



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



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



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



Liquidity



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



8



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



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



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



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



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



COMPARISON OF OPERATING RESULTS FOR THE

YEARS ENDED DECEMBER 31, 2002 AND 2001



General



Consolidated net income before effect of cumulative dividends and premium accretion on preferred stock for the year ended December 31, 2002 was $222,000 as compared to a net loss of $7.9 million for the year ended
December 31, 2001. Consolidated net loss applicable to common shareholders for the year ended December 31, 2002 was $189,000 as compared to a net loss of $8.0 million for the comparable period in 2001. Basic and diluted loss per common share for the
year ended December 31, 2002 was $0.15 as compared to a basic and diluted loss per common share of $6.38 for the year ended December 31, 2001.



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



Net Interest Income



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



9



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



Interest Income



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



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



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



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



Interest Expense



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



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



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



10



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Provision for Loan Losses



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



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



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



Non-interest Income



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



Non-interest Expense



Non-interest expense decreased $600,000 from $5.6 million for year ended December 31, 2001 to $5.0 million for year ended
December 31, 2002. Insurance expense increased $75,000 from $237,000 for the year ended December 31, 2001 to $312,000 for the comparable period in 2002 due to increased FDIC insurance premiums. The FDIC assesses insurance premiums to each
institution based both on the balance of insured deposits held during the previous two quarters as well as on the degree of risk the institution poses to the insurance fund. FDIC insurance premiums totaled $250,000 for the year ended December 31,
2002 as compared to $172,000 for the same period in 2001. This increase in non-interest expense was more than offset by decreases in compensation and employee benefits, building and occupancy expense, data processing expense, advertising expense,
and other non-interest expense. Other non-interest expenses decreased $509,000 from $1.7 million for the year ended December 31, 2001 to $1.1 million for the comparable period in 2002. Other non-interest expense decreased as a result of decreases in
FHLB advance prepayment penalties, professional fees and other loan expenses. Other non-interest expense for the year ended December 31, 2001 included $276,000 in FHLB advance prepayment penalties as compared to no prepayment penalties for the
comparable period in 2002.



Income Taxes



The Company recorded an income tax benefit for the year ended December 31,
2002 of $272,000 as compared to an income tax provision of $12,000 for the year ended December 31, 2001. The income tax provision



11



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of $12,000 on a pre-tax loss of $7.9 million for the year ended December 31, 2001 resulted primarily from the creation of a valuation allowance for the
Banks net deferred tax assets that more than offsets the carryback benefits available for 2001. The 2002 benefit of $272,000 on a pre-tax loss of $50,000 reflects the effect of permanent book/tax differences and the exclusion of the effect of
deferred items on the income tax provision for the period. As discussed earlier, a valuation allowance for all of the Companys net deferred tax assets remains in place as of December 31, 2002. As a result, the income tax benefit for the year
ended December 31, 2002, reflects the Federal loss carryback benefit available from 1999 for the 2002 loss for tax purposes.



Cumulative Dividends and Premium Accretion



The Company recorded $411,000 in cumulative dividends and premium accretion related to the redeemable preferred stock outstanding during the year ended
December 31, 2002 as compared to $133,000 during the year ended December 31, 2001. The increase is a result of the redeemable preferred stock being outstanding for all of 2002 as compared to four months in 2001.



Item 7. Financial Statements



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



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

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

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

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

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

Notes to Consolidated Financial Statements



PART IV



Item 13. Exhibits and Reports on Form 8-K



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

|      | 
|----- | 
|3(a)  | 
|      | 
|3(b)  | 
|      | 
|3(c)  | 
|      | 
|3(d)  | 
|      | 
|4(a)  | 
|      | 
|4(b)  | 
|      | 
|10(a) | 
|      | 
|10(b) | 
|      | 
|10(c) | 
|      | 
|10(d) | 
|      | 
|10(e) | 
|      | 
|10(f) | 
|      | 
|10(g) | 
|      | 
|10(h) | 
|      | 
|10(i) | 
|      | 
|11    | 
|      | 
|21    | 



12



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|      | 
|----- | 
|23    | 
|      | 
|31(a) | 
|      | 
|31(b) | 
|      | 
|32    | 
|      | 
|99    | 

---

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

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

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

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

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

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

|(7) | Incorporated by reference to the Companys Annual Report on Form 10-KSB for the period ended December 31, 2002.
|--- | ---------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Note 1 of the Notes to Consolidated Financial Statements.
|--- | --------------------------------------------------------------------------------------



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



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



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SIGNATURES



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



|                        |  |  |  | FIRST SOUTHERN BANCSHARES, INC.
|----------------------- |  |  |  | -------------------------------
|                        |  |  | 
|Date: December 17, 2003 |  |  |  | By:                            
|                        |  |  |  |                                



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