<PAGE>
 
================================================================================


                                     1998

                          A N N U A L     R E P O R T


================================================================================


                        THE SOUTHERN BANC COMPANY, INC.
<PAGE>
 
                [LETTERHEAD OF THE SOUTHERN BANC COMPANY, INC.]


     To Our Stockholders:


          We are happy to present the third annual report of The Southern Banc
     Company, Inc.  We invite you to review the report and the Company's
     performance during fiscal 1998.

          The year was a good one. We significantly increased our loan
     production and increased net income in a period of declining interest
     rates. This was done while maintaining the Association's traditionally high
     asset quality, preserving the integrity of your investment and the safety
     of the depositors funds. We continue to carefully monitor our investments
     in an environment where the combination of optimism and competition might
     draw some into more treacherous areas.

          We appreciate your investment in The Southern Banc Company, Inc., and
     invite your continued support of First Federal, our core holding.  We are
     confident of our sound financial condition and look to the future with
     great anticipation.

                                             Sincerely,             
                                                                    
                                             /s/ James B. Little, Jr.
                                                                    
                                             James B. Little, Jr.    
<PAGE>
 
                        THE SOUTHERN BANC COMPANY, INC.


     The Southern Banc Company, Inc. (the "Company") was incorporated at the
direction of management of First Federal Savings and Loan Association of Gadsden
(the "Association") for the purpose of serving as a savings institution holding
company of the Association upon the acquisition of all of the capital stock
issued by the Association upon its conversion from mutual to stock form (the
"Conversion") effective October 5, 1995.  The Company is classified as a unitary
savings institution holding company and is subject to regulation by the Office
of Thrift Supervision ("OTS").  At June 30, 1998, the Company had total assets
of $105.1 million, deposits of $85.9 million and stockholders' equity of $18.6
million, or 17.67% of total assets.

     The Association was organized in 1936 as a federally chartered mutual
savings and loan association, at which time it also became a member of the
Federal Home Loan Bank ("FHLB") System and obtained federal deposit insurance.
The Association currently operates through four banking offices located in
Gadsden, Albertville, Guntersville and Centre, Alabama.

     The Association's business strategy has been to operate as a profitable and
independent community-oriented savings institution dedicated to providing
quality customer service.  Generally, the Association has sought to implement
this strategy by using retail deposits as its sources of funds and maintaining
most of its assets in mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Government National Mortgage Association
("GNMA") and the Federal National Mortgage Association ("FNMA"), loans secured
by owner-occupied one- to four-family residential real estate located in the
Association's market area, U.S. government and agency securities, interest-
earning deposits, cash and equivalents and consumer loans.  The Association's
business strategy incorporates the following key elements: (1) remaining a
community-oriented financial institution while maintaining a strong core
customer base by providing quality service and offering customers the access to
senior management and services that a community-based institution can offer; (2)
attracting a relatively strong retail deposit base from the communities served
by the Association's four banking offices; (3) maintaining asset quality by
emphasizing investment in local residential mortgage loans, mortgage-backed
securities and other securities issued or guaranteed by the U.S. government or
agencies thereof; and (4) maintaining liquidity and capital substantially in
excess of regulatory requirements.

     As a federally chartered savings institution, the Association is subject to
extensive regulation by the OTS.  The lending activities and other investments
of the Association must comply with various federal regulatory requirements, and
the OTS periodically examines the Association for compliance with various
regulatory requirements.  The Federal Deposit Insurance Corporation ("FDIC")
also has the authority to conduct special examinations.  The Association must
file reports with OTS describing its activities and financial condition and is
also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board").

                                       1
<PAGE>
 
                            MARKET FOR COMMON STOCK
                        AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock began trading on the American Stock Exchange on
October 5, 1995, under the symbol "SRN."  At June 30, 1998, there were 1,230,313
shares of the Common Stock outstanding and approximately 336 stockholders of
record.

     The payment of dividends on the Common Stock is subject to determination
and declaration by the Board of Directors of the Company.  The Board of
Directors has adopted a policy of paying quarterly cash dividends on the Common
Stock.  In addition, from time to time, the Board of Directors may determine to
pay special cash dividends in addition to, or in lieu of, regular cash
dividends.  The payment of future dividends will be subject to the requirements
of applicable law and the determination by the Board of Directors of the Company
that the net income, capital and financial condition of the Company and the
Association, thrift industry trends and general economic conditions justify the
payment of dividends, and there can be no assurance that dividends will be paid
or, if paid, will continue to be paid in the future.

     The following table sets forth information as to high and low sales prices
of the Company's Common Stock and cash dividends declared per share of common
stock for the calendar quarters indicated.

<TABLE>
<CAPTION>
                                                Price Per Share                 Dividends Per Share
                                            ------------------------         -------------------------
                                            High              Low            Regular          Special
                                            ----              ---            -------          -------  
<S>                                         <C>               <C>            <C>              <C>
FISCAL 1997                                                              
 First Quarter                              $13.500           $12.000        $.0875           $.1750
 Second Quarter                             $13.750           $12.250        $.0875           $   --
 Third Quarter                              $14.625           $13.250        $.0875           $   --
 Fourth Quarter                             $15.500           $14.250        $.0875           $   --
                                                                         
FISCAL 1998                                                              
 First Quarter                              $16.375           $15.313        $.0875           $   --
 Second Quarter                             $18.000           $16.125        $.0875           $   --
 Third Quarter                              $19.125           $16.500        $.0875           $   --
 Fourth Quarter                             $17.125           $15.500        $.0875           $   --
</TABLE>

                                       2
<PAGE>
 
                SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

<TABLE>
<CAPTION>
                                                                               YEAR ENDED JUNE 30,                       
                                                     --------------------------------------------------------------------
                                                       1998            1997         1996           1995          1994    
                                                     -------         --------     --------       --------      --------   
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)                  
<S>                                                  <C>             <C>          <C>            <C>           <C>
INCOME STATEMENT DATA
Interest income...........................          $  7,418         $  7,513     $  7,702       $  7,016      $ 5,814 
Interest expense..........................             4,519            4,534        4,679          4,261        3,330
                                                    --------         --------     --------       --------      -------
Net interest income.......................             2,899            2,979        3,023          2,755        2,484
Provision for loan losses.................                --               --           --             40           --
                                                    --------         --------     --------       --------      -------
Net interest income after provision                                                                                   
 for loan losses..........................             2,899            2,979        3,023          2,715        2,484
Noninterest income........................                92               92           77           (638)          69
Noninterest expense.......................             2,171            2,849        2,231          1,843        1,499
                                                    --------         --------     --------       --------      -------
Income before provision for income taxes..               820              222          869            234        1,054
Provision for income taxes................               277               79          294             75          358
                                                    --------         --------     --------       --------      -------
Net income................................          $    543         $    143     $    575       $    159      $   696
                                                    ========         ========     ========       ========      =======
Earnings per share (1)                                                                                                
   Basic..................................          $   0.51         $   0.13     $   0.34       $     --      $    --
                                                    ========         ========     ========       ========      =======
   Diluted................................          $   0.49         $   0.12     $   0.34       $     --      $    --
                                                    ========         ========     ========       ========      =======
 
<CAPTION>  
                                                                                AT JUNE 30,
                                                     --------------------------------------------------------------------
                                                       1998            1997         1996           1995          1994    
                                                     -------         --------     --------       --------      --------  
                                                                               (IN THOUSANDS)
<S>                                                  <C>             <C>          <C>            <C>           <C> 
BALANCE SHEET DATA
Total assets..............................           $105,087        $105,434     $107,029       $101,773      $98,072 
Loans receivable, net.....................             41,153          36,180       33,145         26,465       25,745
Securities:                                                                                                           
  Available for sale......................             22,239          17,621       13,504         11,449       15,588
  Held to maturity........................             34,077          44,158       52,822         53,126       39,911
Deposits..................................             85,926          86,759       85,847         91,407       88,672
Stockholders' equity......................             18,570          17,931       20,135          9,757        9,109
 
<CAPTION>  
                                                                               YEAR ENDED JUNE 30,                       
                                                     --------------------------------------------------------------------
                                                       1998            1997         1996           1995          1994    
                                                     -------         --------     --------       --------      -------- 
<S>                                                  <C>             <C>          <C>            <C>           <C> 
KEY OPERATING DATA
Return on average assets..................               0.52%            0.14%      0.53%            0.16%         0.83% 
Return on average equity..................               2.96             0.82       3.29             1.72          7.54 
Average equity to average assets..........              17.43            16.58      16.17             9.27         11.03 
Dividend payout ratio.....................              68.63           424.07     127.53               --            -- 
Number of offices.........................                  4                4          4                4             4 
</TABLE> 

____________
(1)    Earnings per share and dividend payout ratio are presented from the
       conversion date, October 5, 1995.

                                       3
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

          The principal business of the Association consists of accepting
deposits from the general public through its main and branch offices and
investing those funds in loans secured by one- to four-family residential
properties located in the Association's primary market area.  Due to the limited
demand for one- to four-family mortgage loans in the Association's market area,
the Association maintains a substantial portfolio of investment and mortgage-
backed securities and originates a limited amount of consumer loans.  The
Association's mortgage-backed securities are all guaranteed as to principal and
interest by GNMA, FHLMC or FNMA.  The Association's securities portfolio
consists primarily of U.S. Treasury notes and government agency securities,
including agency notes.  See "Business of the Association -- Investment
Activities" for a description of these investments.  The Association maintains a
substantial amount in interest-bearing deposits in other banks, primarily an
interest-bearing account with the FHLB of Atlanta.  Although the Association has
originated a limited amount of commercial real estate loans in the past, the
Association is not currently seeking such loans.

          The Association's net income is dependent primarily on its net
interest income, which is the difference between interest income earned on its
loans, mortgage-backed securities and securities portfolio and interest paid on
customers' deposits.  The Association's net income is also affected by the level
of non-interest income, such as service charges on customers' deposit accounts,
net gains or losses on the sale of securities and other fees.  In addition, net
income is affected by the level of non-interest expense primarily consisting of
compensation and employee benefit expense, SAIF deposit insurance premiums and
other expenses.

          The operations of  the Association and the thrift industry as a whole
are significantly affected by prevailing economic conditions, competition and
the monetary and fiscal policies of governmental agencies.  Lending activities
are influenced by demand for and supply of housing and competition among lenders
and the level of interest rates in the Association's market area.  The
Association's deposit flows and costs of funds are influenced by prevailing
market rates of interest, primarily on competing investments, account maturities
and the levels of personal income and savings in the Association's market area.

POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS

          A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000.  Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900.  All of the significant data processing of the Association that could
be affected by this problem is provided by a third party service bureau.  The
service bureau of the Association has advised the Association that it expects to
resolve this potential problem before the year 2000.  However, if the service
bureau is unable to resolve this potential problem in time, the Association
would likely experience significant data processing delays, mistakes or
failures.  These delays, mistakes or failures could have a material adverse
impact on the financial condition and results of operations of the Association.

          Risks to the Company if its computer systems are not year 2000
compliant include the inability to process customer deposits or checks drawn on
the Association, inaccurate interest accruals and maturity dates of loans and
time deposits, and the inability to update accounts for daily transactions.
Other risks to the Company exist if certain of its vendors', suppliers' and
customers' computer systems are not Year 2000 compliant.  These risks include
the inability of the Association to communicate with its third party service
bureau if phone systems are not working, the interruption of business in the
event of power outages, the inability of loan customers to comply with repayment
terms if their businesses are interrupted, the inability to make payment for
checks drawn on the Association, receive payment for checks deposited by the
Association's customers, or invest excess funds if the Federal Home Loan Bank or
correspondent banks are not Year 2000 compliant.  The Company's most important
mission critical system is the 

                                       4
<PAGE>
 
software and hardware responsible for maintaining and processing general ledger,
deposits, and loan accounts. The Company's Year 2000 Compliance and Contingency
Plans are structured in accordance with the OTS and the FFIEC guidelines.
Remediation and testing efforts relating to the Year 2000 are on schedule and
are expected to be completed by December 1998. The Company is in the process of
contacting its key vendors, suppliers and customers to determine their Year 2000
compliance. The Company estimates that the cost of testing and updating its
systems for Year 2000 compliance will not be material.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997

          Total assets decreased approximately $346,000, or 0.33%, from $105.4
million at June 30, 1997 to $105.1 million at June 30, 1998.  During the period
ended June 30, 1998, net loans increased approximately $5.0 million, or 13.74%,
securities available for sale increased approximately $4.6 million, or 26.20%,
and securities held to maturity decreased approximately $10.1 million or 22.83%.
The decrease in securities held to maturity was primarily attributable to
principal payments received during the period ended June 30, 1998.

          Cash and cash equivalents increased approximately $614,000, or 10.58%,
from $5.8 million to $6.4 million at June 30, 1998.  The increase in cash and
cash equivalents was primarily attributable to the proceeds from maturities and
principal payments on securities available for sale and held to maturity.

          Accrued interest and dividends receivable decreased approximately
$24,000, or 3.20%, from $747,000 at June 30, 1997 to $723,000 at June 30, 1998.
Prepaid expenses and other assets decreased approximately $431,000 or 66.01%
from $654,000 at June 30, 1997 to $222,000 at June 30, 1998.

          Total deposits decreased approximately $833,000, or 0.96%, from $86.8
million at June 30, 1997 to $85.9 million at June 30, 1998.  Other liabilities
during the period ended June 30, 1998 decreased approximately $152,000,  20.45%,
from $744,000 at June 30, 1997 to $592,000 at June 30, 1998.  This decrease was
primarily attributable to a decrease in accrued federal and state income taxes.

          Total equity increased approximately $639,000, or 3.56%, from $17.9
million at June 30, 1997 to $18.6 million at June 30, 1998.  This change was
primarily attributable to an increase in retained earnings, additional paid-in
capital, and amortization of unearned compensation, offset in part by the
payment of dividends on the Common Stock.  Treasury stock at June 30, 1998 was
$3.0 million.

COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND
1997

          The Company reported net income for the fiscal years ended June 30,
1998 and 1997 of $543,000 and $143,000, respectively.  The increase in net
income for the fiscal year ended June 30, 1998 was primarily attributable to a
reduction in deposit insurance expense, offset in part by an increase in income
tax expense.  Net income during the fiscal year ended June 30, 1997 included the
recognition of the special assessment imposed upon all institutions with
deposits insured by the SAIF.  This amounted to approximately $591,000, offset
in part by a $214,000 reduction in income tax expense.

          Net Interest Income.  Net interest income for the fiscal years ended
June 30, 1998 and 1997 was $2.9 million and $3.0 million, respectively.  Total
interest income decreased approximately $96,000, or 1.27%, for the fiscal year
ended June 30, 1998.  Total interest expense decreased approximately $15,000 or
0.34% for the fiscal year ended June 30, 1998 compared with the fiscal year
ended June 30, 1997.

          Provision for Loan Losses.  No provision for loan losses was deemed
necessary in either of the fiscal years ended June 30, 1998 or 1997.  The
allowance for loan losses is based on management's evaluation of possible loan
losses inherent in the Association's loan portfolio.  Management considers,
among other factors, past loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.

                                       5
<PAGE>
 
          Non-interest Income.  Non-interest income was approximately $92,000
for the fiscal years ended June 30, 1998 and June 30, 1997.

          Non-Interest Expense.  Non-interest expense decreased approximately
$678,000, or 23.81%, for the fiscal year ended June 30, 1998 from $2.8 million
to $2.2 million.  This decrease was primarily attributable to the reduction in
deposit insurance expense related to the recognition of the special assessment
imposed by the SAIF in the amount of $591,000 during the fiscal year ended June
30, 1997.  Salaries and employee benefits remained level  at approximately $1.4
million for the fiscal years ended June 30, 1998 and 1997.  Other operating
expenses decreased by approximately $25,000 or 4.12% for the fiscal year ended
June 30, 1998.

          Provision for Income Taxes.  During the fiscal year ended June 30,
1998, the provision for income tax expense increased approximately $198,000 or
248.96%.  This increase was primarily attributable to a reduction in deposit
insurance expense related to the absence of any SAIF special assessment in the
amount of $591,000 during the fiscal year June 30, 1998.

          Liquidity and Capital Resources.  As a holding company, the Company
conducts its business through its subsidiary, the Association.  The Association
is required to maintain minimum levels of liquid assets as defined by
regulations of the OTS.  The requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings.  The required ratio currently is 4.0%.
The Association's average liquidity ratio well exceeded the required minimums at
and during the fiscal year ended June 30, 1998.  The Association adjusts its
liquidity levels in order to meet funding needs of deposit outflows, repayment
of borrowings and loan commitments.  The Association also adjusts liquidity as
appropriate to meet its asset and liability management objectives.

          The Association's primary sources of funds are deposits, payment of
loans and mortgage-backed securities, maturities of investment securities and
other investments.  While scheduled principal repayments on loans and mortgage-
backed securities are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions, and competition.  The Association invests in short-term interest-
earning assets which provide liquidity to meet lending requirements.

          The Association is required to maintain certain levels of regulatory
capital.  At June 30, 1998, the Association exceeded all minimum regulatory
capital requirements.

COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND
1996

          The Association reported net income for the fiscal years ended June
30, 1997 and 1996 of $143,000 and $575,000, respectively.  The decrease in the
net income during the year was primarily attributable to the recognition of the
one-time special assessment of approximately $591,000 by the FDIC, offset in
part by a $214,000 reduction in income tax expense.

          Net Interest Income.  Net interest income decreased $43,000 or 1.42%
for the fiscal year ended June 30, 1997.  This decrease was primarily
attributable to a decrease in total interest income of $188,000 which resulted
primarily from volume decreases in securities held to maturity.  This decrease
was partially offset by a decrease in interest paid on deposits of $145,000.

          Provision for Loan Losses.  No provision for loan losses was deemed
necessary in either of the fiscal years ended June 30, 1997 or 1996.  The
allowance for loan losses is based on management's evaluation of possible loan
losses inherent in the Association's loan portfolio.  Management considers,
among other factors, past loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.

                                       6
<PAGE>
 
          Non-interest Income.  Non-interest income increased $14,000 or 18.59%.
This increase was primarily attributable to an increase in customer service
fees.

          Non-interest Expense.  Non-interest expense increased $618,000 or
27.70% for the fiscal year ended June 30, 1998 from $2.2 million to $2.8 million
at June 30, 1996 and 1997, respectively. This increase was primarily
attributable to the recognition of the one-time special assessment by the FDIC
in the amount of $591,000. Salaries and employee benefits increased $102,000 or
7.68% for the fiscal year ended June 30, 1997 compared with the fiscal year
ended June 30, 1996. This increase is primarily attributable to the expenses
related to the establishment of certain employee benefit plans, subsequent to
the conversion. Other operating expenses increased $29,000 or 5.06% for the
fiscal year ended June 30, 1997. This increase was primarily attributable to
operating expenses relating to the operation of the holding company and
professional fees associated with back-office operational improvements.

          Provision for Income Taxes.  During the fiscal year ended June 30,
1997, the provision for income taxes decreased $214,000 or 72.96%.  This
decrease was primarily attributable to reduced income related to the recognition
of the one-time special assessment by the FDIC in the amount of $591,000.  As a
result, income before income taxes decreased $647,000 or 74.44%.

ASSET/LIABILITY MANAGEMENT

          Net interest income, the primary component of the Association's net
income, is determined by the difference or "spread" between the yield earned on
the Association's interest-earning assets and the rates paid on its interest-
bearing liabilities and the relative amounts of such assets and liabilities.
Key components of a successful asset/liability strategy are the monitoring and
managing of interest rate sensitivity on both the interest-earning assets and
interest-bearing liabilities.  The matching of the Association's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on an institution's net portfolio value.

          An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period.  If the
Association's assets mature or reprice more quickly or to a greater extent than
its liabilities, the Association's net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates.  If the Association's assets mature or
reprice more slowly or to a lesser extent than its liabilities, the
Association's net portfolio value and net interest income would tend to decrease
during periods of rising interest rates but increase during periods of falling
interest rates.  The Association's policy has been to mitigate the interest rate
risk inherent in the historical savings institution business of originating long
term loans funded by short term deposits by pursuing the following strategies:
(i) the Association has historically maintained substantial liquidity and
capital levels to sustain unfavorable movements in market interest rates; and
(ii) in order to minimize the adverse effect of interest rate risk on future
operations, the Association purchases adjustable- and fixed-rate securities with
maturities of primarily one to five years and originates limited amounts of
shorter term consumer loans.

          Historically, the Association measured its interest rate sensitivity
by computing the "gap" between the assets and liabilities which were expected to
mature or reprice within certain periods, based on assumptions regarding loan
prepayment and deposit decay rates formerly provided by the OTS.  However, the
OTS now requires the Association to measure its interest rate risk by computing
estimated changes in the net present value of its cash flows from assets,
liabilities and off-balance sheet items ("NPV") in the event of a range of
assumed changes in market interest rates.  These computations estimate the
effect on the Association's NPV of sudden and sustained 1% to 4% increases and
decreases in market interest rates.  The Association's Board of Directors has
adopted an interest rate risk policy which establishes maximum decreases in the
Association's estimated NPV of 25%, 50%, 77% and 93% and 25%, 35%, 50% and 50%
in the event of 1%, 2%, 3% and 4% increases and decreases in market interest
rates, respectively.   At June 30, 1998, based on the most recent information
provided by the OTS, it was estimated that the Association's NPV would decrease
9%, 19%, 30% and 41% and increase 6%, 11%, 16% and 21% in the event of 1%, 2%,
3% and 4% increases and decreases in market interest rates, respectively.  These
calculations indicate that the Association's net portfolio value 

                                       7
<PAGE>
 
could be adversely affected by increases in interest rates. Changes in interest
rates also may affect the Association's net interest income, with increases in
rates expected to decrease income and decreases in rates expected to increase
income, as the Association's interest-bearing liabilities would be expected to
mature or reprice more quickly than the Association's interest-earning assets.

          While management cannot predict future interest rates or their
on the Association's NPV or net interest income, management does not expect
current interest rates to have a material adverse effect on the Association's
NPV or net interest income in the future. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments and deposit run-offs and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in such computations. Although certain assets and liabilities may
have similar maturity or periods of repricing they may react at different times
and in different degrees to changes in the market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while rates on other types of assets and
liabilities may lag behind changes in market interest rates. Certain assets,
such as adjustable rate mortgages, generally have features which restrict
changes in interest rates on a short term basis and over the life of the asset.
In the event of a change in interest rates, prepayments and early withdrawal
levels could deviate significantly from those assumed in making calculations set
forth above. Additionally, an increased credit risk may result as the ability of
many borrowers to service their debt may decrease in the event of an interest
rate increase. Finally, virtually all of the adjustable rate loans in the
Association's portfolio contain conditions which restrict the periodic change in
interest rate.

          The Association's Board of Directors is responsible for reviewing the
Association's asset and liability policies.  On at least a quarterly basis, the
Board reviews interest rate risk and trends, as well as liquidity and capital
ratios and requirements.  The Association's management is responsible for
administering the policies and determinations of the Board of Directors with
respect to the Association's asset and liability goals and strategies.
Management expects that the Association's asset and liability policies and
strategies will continue as described above so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.

                                       8
<PAGE>
 
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

          The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for the
periods and at the date indicated.  Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods indicated.

          The table also presents information for the periods indicated and at
June 30, 1998 with respect to the difference between the weighted average yield
earned on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of profitability.  Another
indicator of an institution's net interest income is its "net yield on interest-
earning assets," which is its net interest income divided by the average balance
of interest-earning assets.  Net interest income is affected by the interest
rate spread and by the relative amounts of interest-earning assets and interest-
bearing liabilities.  When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income.

<TABLE>
<CAPTION>
                                                                                Year Ended June 30,
                                 ---------------------------------------------------------------------------------------------------

                                           1998                                          1997                           1996
                                 ---------------------------------------   -----------------------------  --------------------------

                                                                 Average                        Average                      Average

                                       Average                    Yield/    Average              Yield/   Average             Yield/

                                       Balance         Interest    Cost     Balance   Interest    Cost    Balance   Interest  Cost
                                 --------------------  --------  --------  ---------  ---------  -------  --------  --------  ------
                                                                           (Dollars in thousands)
<S>                              <C>                   <C>       <C>       <C>        <C>        <C>      <C>       <C>       <C>
Interest-earning assets:
  Loans receivable.............             $ 38,751     $3,081     7.95%  $ 34,149    $ 2,734     8.01%  $ 30,183    $2,467  8.17%
  Securities...................               58,426      4,046     6.92     62,113      4,491     8.04     68,460     4,814  7.03
  Other interest-earning assets                6,252        291     4.65      7,518        288     3.82      6,436       420  6.53
                                            --------     ------            --------    -------            --------    ------
    Total interest-earning
     assets....................              103,429      7,418     7.17    103,780      7,513     7.24    105,079     7,701  7.33
Non-interest-earning assets....                1,844                          1,751                          3,083
                                            --------                       --------                       --------
    Total assets...............             $105,273                       $105,531                       $108,162
                                            ========                       ========                       ========
 
Interest-bearing liabilities:
  Deposits.....................             $ 85,262      4,519     5.30   $ 86,743      4,534     5.23   $ 88,785     4,679  5.27
                                            --------     ------            --------    -------            --------    ------
     Total interest-bearing
      liabilities..............               85,262      4,519     5.30     86,743      4,534     5.23     88,785     4,679  5.27
                                                         ------                        -------                        ------
Non-interest-bearing
 liabilities...................                1,667                          1,286                          1,886
                                            --------                       --------                        -------
    Total liabilities..........                                              88,029                         90,671
Equity.........................               18,344                         17,502                         17,491
                                            --------                       --------                        -------
    Total liabilities and
     equity....................             $105,273                       $105,531                       $108,162
                                            ========                       ========                       ========
Net interest income............                         $ 2,899                        $ 2,979                        $3,022
                                                        =======                        =======                        ====== 
Interest rate spread...........                                     1.87%                          2.01%                      2.06%
                                                                  ======                         ======                     ======
Net interest margin............                                     2.80%                          2.87%                      2.88%
                                                                  ======                         ======                     ======
Ratio of average
 interest-earning
  assets to average
   interest-bearing
  liabilities..................                                   121.31%                        119.64%                    118.35%
                                                                  ======                         ======                     ======
</TABLE>
                                       9
<PAGE>

RATE/VOLUME ANALYSIS

          The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate) and (ii) changes in rates (change in
rate multiplied by old volume).

<TABLE>
<CAPTION>
                                                                    Year Ended June 30,
                                          ---------------------------------------------------------------------------
                                                1998      vs.     1997               1997         vs.        1996
                                          ---------------------------------      ------------------------------------
                                                   Increase (Decrease)                   Increase (Decrease)
                                                         Due to                                Due to
                                          ---------------------------------      ------------------------------------
                                          Rate          Volume        Total      Rate          Volume           Total
                                          ----          ------        -----      ----          ------           -----
                                                                        (In thousands)
<S>                                       <C>           <C>           <C>        <C>           <C>              <C> 
Interest income:
  Loans.................................  $ (19)        $ 366         $ 347      $ (49)        $ 316            $ 267        
  Securities............................   (185)         (260)         (445)       141          (464)            (323)
  Other interest-earning assets.........     14           (11)            3       (223)           91             (132)
                                          -----         -----         -----      -----         -----            ----- 
    Total interest-earning assets.......   (190)           95           (95)      (131)          (57)            (188)
                                          -----         -----         -----      -----         -----            ----- 
                                                                                                                      
Interest expense:                                                                                                     
  Deposits..............................     68           (83)          (15)       (38)         (107)            (145)
                                          -----         -----         -----      -----         -----            ----- 
    Total interest-bearing liabilities..     68           (83)          (15)       (38)         (107)            (145)
                                          -----         -----         -----      -----         -----            ----- 
                                                                                                                      
Change in net interest income...........  $(258)        $ 178         $ (80)     $ (93)        $  50            $ (43)
                                          =====         =====         =====      =====         =====            ===== 
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

          The Association continues to maintain a high level of liquid assets in
order to meet its funding requirements.  At June 30, 1998 the Association had
approximately $6.4 million in cash on hand and interest-bearing deposits in
other banks which represented 6.11% of total assets.  At June 30, 1998, the
Association's level of liquid assets, as measured for regulatory compliance
purposes was 26.02%, or $19.1 million, in excess of the minimum liquidity
requirement of 4%.

          At June 30, 1998 the Association had $18.6 million of total equity or
17.67% of total assets.  The Association continues to exceed its regulatory
capital requirement ratios at June 30, 1998.  Tangible capital and core capital
were $15.8 million, which represented 14.9% of adjusted total assets and risk-
based capital was $15.8 million which represented 56.9% of total risk-weighted
assets at June 30, 1998.  Such amounts exceeded the minimum required ratios of
1.5%, 3.0% and 8.0%, respectively by 13.4%, 11.9% and 48.9%, respectively.  At
June 30, 1998, the Association continued to meet the definition of a "well-
capitalized" institution the highest of the five categories under the prompt
corrective action standards adopted by the OTS.

                                      10
<PAGE>
 
                      [Letterhead of Arthur Andersen LLP]



                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To The Southern Banc Company, Inc.:

We have audited the accompanying consolidated statements of financial condition
of THE SOUTHERN BANC COMPANY, INC. (a Delaware corporation) AND SUBSIDIARY as of
June 30, 1998 and 1997 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Southern Banc
Company, Inc. and Subsidiary as of June 30, 1998 and 1997 and the results of
their operations and cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.


                                         /s/ Arthur Andersen LLP


Birmingham, Alabama
July 31, 1998
                                      11
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                  THE SOUTHERN BANC COMPANY, INC.

                                          CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                                      JUNE 30, 1998 AND 1997


                             ASSETS                                           1998                1997
--------------------------------------------------                        --------------     --------------
<S>                                                                       <C>                <C> 
CASH AND EQUIVALENTS:
    Cash on hand and in other banks                                        $   1,171,354      $   1,074,824
    Interest-bearing deposits in other banks                                   5,250,164          4,732,376
                                                                           -------------      -------------  
                                                                               6,421,518          5,807,200
                                                                           -------------      ------------- 

SECURITIES AVAILABLE FOR SALE                                                 22,238,866         17,621,290

SECURITIES HELD TO MATURITY (fair values
    of $34,811,021 and $44,249,863, respectively)                             34,077,096         44,157,426
                                                                                         

LOANS RECEIVABLE, net                                                         41,153,338         36,180,396

PREMISES AND EQUIPMENT, net                                                      251,373            266,737
                                           
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE                                        723,024            746,900
                                                                                 
PREPAID EXPENSES AND OTHER ASSETS                                                222,142            653,577
                                                                           -------------      -------------    
              Total assets                                                 $ 105,087,357      $ 105,433,526
                                                                           =============      =============
</TABLE> 

<TABLE> 
<CAPTION> 
              LIABILITIES AND STOCKHOLDERS' EQUITY                            1998                1997
              ------------------------------------                         -------------      -------------      
<S>                                                                        <C>                <C> 
DEPOSITS                                                                   $  85,925,834      $  86,758,713

OTHER LIABILITIES:
    Accrued interest payable                                                      59,106             45,029
    Advance payments by borrowers for taxes
       and insurance                                                              60,797             74,029
    Taxes payable                                                                213,504            506,814
    Other                                                                        258,182            117,755
                                                                           -------------       ------------    
              Total liabilities                                               86,517,423         87,502,340
                                                                           -------------       ------------  
COMMITMENTS AND CONTINGENCIES (Note 15)

STOCKHOLDERS' EQUITY:
    Preferred stock, par value $.01 per share; 500,000
       shares authorized; shares issued and outstanding--none                          0                  0
    Common stock, par value $.01 per share; 3,500,000 shares
       authorized; 1,454,750 shares issued                                        14,548             14,548 
    Additional paid-in capital                                                13,676,507         13,642,623
    Retained earnings                                                          9,433,341          9,253,350
    Unearned compensation                                                     (1,601,861)        (1,917,094)
    Treasury stock at cost, 224,437 shares in 1998 and 1997                   (3,000,128)        (3,000,128)
    Unrealized gain (loss) on securities available for sale, net                  47,527            (62,113) 
                                                                           -------------       ------------  
              Total stockholders' equity                                      18,569,934         17,931,186
                                                                           -------------       ------------ 
              Total liabilities and stockholders' equity                    $105,087,357       $105,433,526
                                                                           =============       ============ 
</TABLE> 

 The accompanying notes are an integral part of these consolidated statements.


                                      12
<PAGE>
 
                        THE SOUTHERN BANC COMPANY, INC.


                       CONSOLIDATED STATEMENTS OF INCOME

               FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996



<TABLE>
<CAPTION>
                                                                           1998            1997            1996
                                                                        ----------      ----------      ---------- 
<S>                                                                     <C>             <C>             <C> 
INTEREST INCOME:
   Interest and fees on loans                                           $3,080,942      $2,734,183      $2,466,817
   Interest and dividends on securities available for sale               1,253,456       1,005,783         790,809
   Interest and dividends on securities held to maturity                 2,792,400       3,485,439       4,023,246
   Other interest income                                                   290,785         287,880         420,827
                                                                        ----------      ----------      ---------- 
         Total interest income                                           7,417,583       7,513,285       7,701,699
   
INTEREST EXPENSE ON DEPOSITS                                             4,518,576       4,533,837       4,679,246
                                                                        ----------      ----------      ---------- 
         Net interest income                                             2,899,007       2,979,448       3,022,453
   
PROVISION FOR LOAN LOSSES                                                        0               0               0
                                                                        ----------      ----------      ---------- 
         Net interest income after provision for
           loan losses                                                   2,899,007       2,979,448       3,022,453
                                                                        ----------      ----------      ---------- 
NONINTEREST INCOME:
   Customer service fees                                                    88,523          90,643          77,420
   Miscellaneous income, net                                                 3,277           1,171               0
                                                                        ----------      ----------      ---------- 
         Total noninterest income (expense)                                 91,800          91,814          77,420
                                                                        ----------      ----------      ---------- 
NONINTEREST EXPENSE:
   Salaries and employee benefits                                        1,400,837       1,429,250       1,327,274
   Office building and equipment expense                                    91,264         101,256         120,975
   Deposit insurance expense                                                55,657         712,962         213,229
   Loss on sale of REO                                                           0           7,288               0
   Other expense                                                           623,121         598,484         569,664
                                                                        ----------      ----------      ---------- 
         Total noninterest expense                                       2,170,879       2,849,240       2,231,142
                                                                        ----------      ----------      ---------- 
         Income before provision for income taxes                          819,928         222,022         868,731
   
PROVISION FOR INCOME TAXES                                                 277,043          79,391         293,658
                                                                        ----------      ----------      ---------- 
         Net income                                                     $  542,885      $  142,631      $  575,073
                                                                        ==========      ==========      ==========    
EARNINGS PER SHARE
   Basic                                                                      $.51            $.13            $.34
                                                                        ==========      ==========      ========== 
   Diluted                                                                    $.49            $.12            $.34
                                                                        ==========      ==========      ========== 
</TABLE>



 The accompanying notes are an integral part of these consolidated statements.

                                      13
<PAGE>
 
                        THE SOUTHERN BANC COMPANY, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

               FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
                                                                                           ADDITIONAL
                                                                                COMMON      PAID-IN      RETAINED      UNEARNED     
                                                                                 STOCK      CAPITAL      EARNINGS    COMPENSATION   
                                                                                -------   -----------   ----------   ------------   
<S>                                                                             <C>       <C>           <C>          <C>            
BALANCE, JUNE 30, 1995                                                          $     0   $         0   $9,706,101   $          0   
                                                                                                                                   
  Net income                                                                          0             0      575,073              0   
  Issuance of common stock                                                       14,548    13,653,822            0     (1,163,800)  
  Change in unrealized gain (loss) on securities available for sale, net              0             0            0              0   
  Purchase of treasury stock, at cost                                                 0             0            0              0   
  Repurchase of stock for stock plan trusts                                           0      (105,790)           0     (1,117,665)  
  Amortization of unearned compensation                                               0        27,084            0        168,097   
  Valuation adjustment on unallocated stock plan shares                               0        (2,310)           0          2,310   
  Contributions to stock plans                                                        0             0            0         (6,335)  
  Dividends declared ($.4375 per share)                                               0             0     (579,203)             0   
                                                                                 ------   -----------   ----------    -----------   
BALANCE, JUNE 30, 1996                                                           14,548    13,572,806    9,701,971     (2,117,393)  
                                                                                                                                   
  Net income                                                                          0             0      142,631              0  
  Purchase of treasury stock, at cost                                                 0             0            0              0   
  Amortization of unearned compensation                                               0        34,045            0        275,135   
  Dividends declared ($.525 per share)                                                0             0     (591,252)             0   
  Valuation adjustment on unallocated stock plan shares                               0        35,772            0        (35,772)  
  Contributions to stock plan trusts                                                  0             0            0        (45,434)  
  Exercise of stock options (545 shares)                                              0             0            0          6,370   
  Change in unrealized gain (loss) on securities available for sale, net              0             0            0              0   
                                                                                -------   -----------   ----------    -----------  
BALANCE, JUNE 30, 1997                                                           14,548    13,642,623    9,253,350     (1,917,094)  
                                                                                                                                   
  Net income                                                                          0             0      542,885              0   
  Amortization of unearned compensation                                               0        32,470            0        237,758 
  Dividends declared ($.35 per share)                                                 0             0     (362,894)             0   
  Valuation adjustment on unallocated stock plan shares                               0         1,414            0         (1,414) 
  Exercise of stock options (8,599 shares)                                            0             0            0        100,489  
  Contributions to stock plan trusts                                                  0             0            0        (21,600) 
  Change in unrealized gain (loss) on securities available for sale, net              0             0            0              0   
                                                                                -------   -----------   ----------    ----------- 
BALANCE, JUNE 30, 1998                                                          $14,548   $13,676,507   $9,433,341    $(1,601,861) 
                                                                                =======   ===========   ==========    ===========  

<CAPTION> 
                                                                                    TREASURY     UNREALIZED
                                                                                     STOCK       GAIN (LOSS)       TOTAL
                                                                                  -----------    ----------     ----------- 
<S>                                                                               <C>            <C>            <C>
BALANCE, JUNE 30, 1995                                                            $         0    $   51,316     $ 9,757,417
                                                                                                            
  Net income                                                                                0             0         575,073
  Issuance of common stock                                                                  0             0      12,504,570
  Change in unrealized gain (loss) on securities available for sale, net                    0      (130,903)       (130,903)
  Purchase of treasury stock, at cost                                                (957,590)            0        (957,590)
  Repurchase of stock for stock plan trusts                                                 0             0      (1,223,455)
  Amortization of unearned compensation                                                     0             0         195,181
  Valuation adjustment on unallocated stock plan shares                                     0             0               0
  Contributions to stock plans                                                              0             0          (6,335)
  Dividends declared ($.4375 per share)                                                     0             0        (579,203)
                                                                                  -----------    ----------     ----------- 
BALANCE, JUNE 30, 1996                                                               (957,590)      (79,587)     20,134,755
                                                                                                            
  Net income                                                                                0             0         142,631
  Purchase of treasury stock, at cost                                              (2,042,538)            0      (2,042,538)
  Amortization of unearned compensation                                                     0             0         309,180
  Dividends declared ($.525 per share)                                                      0             0        (591,252)
  Valuation adjustment on unallocated stock plan shares                                     0             0               0
  Contributions to stock plan trusts                                                        0             0         (45,434)
  Exercise of stock options (545 shares)                                                    0             0           6,370
  Change in unrealized gain (loss) on securities available for sale, net                    0        17,474          17,474
                                                                                  -----------    ----------     ----------- 
BALANCE, JUNE 30, 1997                                                             (3,000,128)      (62,113)     17,931,186
                                                                                                            
  Net Income                                                                                0             0         542,885
  Amortization of unearned compensation                                                     0             0         270,228
  Dividends declared ($.35 per share)                                                       0             0        (362,894)
  Valuation adjustment on unallocated stock plan shares                                     0             0               0
  Exercise of stock options (8,599 shares)                                                  0             0         100,489
  Contributions to stock plan trusts                                                        0             0         (21,600)
  Change in unrealized gain (loss) on securities available for sale, net                    0       109,640         109,640
                                                                                  -----------    ----------     ----------- 
BALANCE, JUNE 30, 1998                                                            $(3,000,128)   $   47,527     $18,569,934
                                                                                  ===========    ==========     =========== 
</TABLE>

 The accompanying notes are an integral part of these consolidated statements.

                                      14
<PAGE>
 
                        THE SOUTHERN BANC COMPANY, INC.


                     CONSOLIDATED STATEMENTS OF CASH FLOWS

               FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
                                                                                 1998           1997          1996
                                                                             ------------   ------------  ------------ 
<S>                                                                          <C>            <C>           <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                 $    542,885   $   142,631   $    575,073
  Adjustments to reconcile net income to net cash provided by
    operating activities:
       Depreciation                                                                46,176        48,391         62,568
       Amortization (accretion), net                                              (15,581)       56,293          7,884
       Amortization of intangible asset                                            38,847        46,356         49,706
       Amortization of unearned compensation                                      270,228       309,180        195,181
       Loss on sale of real estate owned, net                                           0         7,288              0
       Provision for loan losses                                                        0             0              0
       Deferred income tax provision (benefit)                                     31,167      (105,788)        44,747
  Change in assets and liabilities:
    (Increase) decrease in accrued interest and             
       dividends receivable                                                        23,876       109,481       (108,950)
    (Increase) decrease in prepaid expenses and other assets                      392,588     1,188,958        221,929
    Increase (decrease) in accrued interest payable                                14,077       (14,136)        (6,751)
    Increase (decrease) in income taxes payable                                  (346,299)      461,363       (123,645)
    Increase (decrease) in other liabilities                                      140,427      (633,797)       645,507
                                                                             ------------   -----------   ------------ 
          Net cash provided by operating activities                             1,138,391     1,616,220      1,563,249
                                                                             ------------   -----------   ------------  
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of securities available for sale                                  (12,304,906)   (6,728,677)    (7,714,153)
  Proceeds from sale of real estate owned                                               0        13,808              0
  Proceeds from maturities and principal payments on securities
     available for sale                                                         7,808,031     2,641,104      3,962,049
  Purchases of securities held to maturity                                     (5,004,063)     (728,320)   (13,600,221)
  Proceeds from maturities and principal payments on securities
     held to maturity                                                          15,110,735     9,368,961     13,891,264
  Purchase of loans                                                              (685,400)     (291,151)    (4,178,768)
  Net increase in loans                                                        (4,287,542)   (2,796,725)    (2,501,051)
  Capital expenditures                                                            (30,812)      (36,040)        (8,292)
                                                                             ------------   -----------   ------------   
          Net cash provided by (used in) investing activities                     606,043     1,442,960    (10,149,172)
                                                                             ------------   -----------   ------------   
</TABLE>

                                      15
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                 1998           1997          1996
                                                                             ------------   ------------ ------------ 
<S>                                                                          <C>            <C>          <C>          
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of common stock                                 $         0    $        0   $12,504,570
  Contributions to stock plan trusts                                             (21,600)      (45,434)       (6,335)
  Repurchase of common stock for stock plans                                           0             0    (1,223,455)
  Purchase of treasury stock                                                           0    (2,042,538)     (957,590)
  Dividends paid                                                                (362,894)     (591,252)     (579,203)
  Increase (decrease) in deposits, net                                          (832,879)      912,113    (5,560,200)
  Increase (decrease) in advance payments by borrowers
      for taxes and insurance                                                    (13,232)      (25,787)      (48,462)
  Proceeds from exercise of stock options                                        100,489         6,370             0
                                                                             -----------   -----------   -----------     
            Net cash provided by (used in) financing activities               (1,130,116)   (1,786,528)    4,129,325
                                                                             -----------   -----------   -----------      
NET INCREASE (DECREASE) IN CASH AND CASH            
  EQUIVALENTS                                                                    614,318     1,272,652    (4,456,598)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                 5,807,200     4,534,548     8,991,146
                                                                             -----------   -----------   -----------      
CASH AND CASH EQUIVALENTS, END OF PERIOD                                     $ 6,421,518   $ 5,807,200   $ 4,534,548
                                                                             ===========   ===========   ===========      

SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid during the period for:                     
    Income taxes, net of refund received                                     $   224,222   $   104,679   $   427,767
                                                                             ===========   ===========   ===========     

    Interest                                                                 $ 4,504,499   $ 4,547,973   $ 4,685,997
                                                                             ===========   ===========   ===========       
  Noncash transactions:                                
    Transfer of matured securities to prepaid expenses 
       and other assets                                                      $         0   $         0   $ 1,500,000
    Real estate owned, obtained through foreclosure                                    0        21,096             0
    Change in unrealized net gain (loss) on securities 
       available for sale, net of deferred taxes (benefit)                       109,640        17,474      (130,903)
                                                                             ===========   ===========   ===========       
</TABLE>

 The accompanying notes are an integral part of these consolidated statements.

                                      16
<PAGE>
 
                        THE SOUTHERN BANC COMPANY, INC.


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1998 AND 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   ORGANIZATION, NATURE OF OPERATIONS, AND PRINCIPLES OF CONSOLIDATION

   The Southern Banc Company, Inc. (the "Company") was incorporated in the State
   of Delaware in May 1995, for the purpose of becoming a holding company to own
   all of the outstanding capital stock of First Federal Savings and Loan
   Association of Gadsden (the "Association") upon the Association's conversion
   from a federally chartered mutual savings association to a federally
   chartered stock savings association (the "Conversion").  The accounting for
   the conversion is in a manner similar to that utilized in a pooling of
   interests.

   The Association received its federal charter in 1936 and was converted to a
   federally chartered stock organization on October 5, 1995 through the sale of
   all of its common stock to the Company.  The Association is primarily engaged
   in the business of obtaining funds in the form of various savings deposit
   products and investing those funds in mortgage loans or single family real
   estate and, to a lesser extent, in consumer loans.  The Association operates
   from its four offices in the northeast portion of Alabama, and originates the
   majority of its loans in this market area.

   The accompanying consolidated financial statements include the accounts of
   the Company, the Association, and the Association's wholly owned subsidiary,
   First Service Corporation.  All significant intercompany balances and
   transactions have been eliminated in consolidation.

   USE OF ESTIMATES

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

   SECURITIES

   Securities have been classified as either trading, available for sale, or
   held to maturity based on Management's intentions at the time of purchase.
   Securities classified as available for sale are carried at fair value.  The
   unrealized difference between amortized cost and fair value on securities
   available for sale is excluded from earnings and is reported net of deferred
   taxes as a separate component of stockholders' equity.  The available for
   sale classification includes securities that Management intends to use as
   part of its asset/liability management strategy or that may be sold in
   response to changes in interest rates, liquidity needs, or for other
   purposes.

                                      17
<PAGE>
 
   Securities designated as held to maturity are carried at amortized cost, as
   the Company has both the ability and management has the positive intent to
   hold these securities to maturity.  The Company had no securities classified
   as trading at June 30, 1998 and 1997.

   Amortization of premiums and accretion of discounts on mortgage-backed
   securities and other investments are computed using the level yield method
   and the straight-line method, respectively.  The adjusted cost of the
   specific security sold is used to compute gain or loss on the sale of
   securities.

   LOANS AND ALLOWANCE FOR LOAN LOSSES

   Loans receivable are stated at unpaid principal balances, less the allowance
   for loan losses, discounts/rebates on loans, unearned interest income, and
   net deferred loan fees/costs.  Unearned interest income on consumer loans is
   amortized to income by use of a method which approximates level yield over
   the lives of the related loans.

   The Company ceases accrual of interest on a loan when payment on the loan is
   in excess of 90 days past due.  Income is subsequently recognized only to the
   extent that cash payments are received until, in management's judgment, the
   borrower's ability to make periodic interest and principal payments has been
   reestablished, in which case the loan is returned to accrual status.

   The allowance for loan losses is maintained at a level which management
   considers adequate to absorb losses inherent in the loan portfolio at each
   reporting date.  To serve as a basis for making this provision each quarter,
   the Association maintains an extensive credit risk monitoring process that
   considers several factors including:  current economic conditions affecting
   the Association's customers, the payment performance of individual large
   loans and pools of homogeneous small loans, distribution of loans by risk
   class, portfolio seasoning, changes in collateral values, and detailed
   reviews of specific large loan relationships.  Though management believes the
   allowance for loan losses to be adequate, ultimate losses may vary from their
   estimates; however, estimates are reviewed periodically and, as adjustments
   become necessary, they are reported in earnings in the periods in which they
   become known.

   The provision for loan losses increases the allowance for loan losses, a
   valuation account which is netted against loans on the statement of financial
   condition.  As the amount of a loan loss is confirmed by gathering additional
   information, taking collateral in full or partial settlement of the loan,
   bankruptcy of the borrower, etc., the loan is written down, reducing the
   allowance for loan losses.  If, subsequent to a writedown, the Association is
   able to collect additional amounts from the customer or obtain control of
   collateral worth more than earlier estimated, a recovery is recorded,
   increasing the allowance for loan losses.

   The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
   114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,
   Accounting by Creditors for Impairment of a Loan--Income Recognition and
   Disclosures, as of July 1, 1995.  SFAS No. 114 requires that certain impaired
   loans be measured based on the present value of expected future cash flows
   discounted at each loan's original effective interest rate.  As a practical
   expedient, impairment may be measured based on the loan's observable market
   price or the fair value of the collateral if the loan is collateral
   dependent.  When the measure of the impaired loan is less than the recorded
   investment of the loan, the impairment is recorded through a valuation
   allowance.  The Company had previously measured the allowance for loan losses
   using methods similar to those prescribed in SFAS No. 114.  Accordingly, as a
   result of adopting these statements, no additional provision to the allowance
   for loan losses was required as of July 1, 1995.  Because the Company's loan
   portfolio consists primarily of one-to-four family residential mortgages and
   consumer installment loans, which are exempt from SFAS No. 114 when evaluated
   collectively for 

                                      18
<PAGE>
 
   impairment, as is done by the Company, the Company had no loans designated as
   impaired under the provisions of SFAS No. 114 at June 30, 1998.

   LOAN ORIGINATION FEES AND RELATED COSTS AND DISCOUNTS

   Loan fees and certain direct costs of loan origination are deferred, and the
   net fee or cost is recognized as an adjustment to Interest and fees on loans
   in the accompanying consolidated statements of income using the level yield
   method over the contractual life of the loans.  Discounts associated with
   loans purchased are deferred and accreted to income using the level yield
   method.

   PREMISES AND EQUIPMENT

   Land is carried at cost.  Property and equipment are stated at cost, less
   accumulated depreciation.  Depreciation methods and estimated service lives
   are as follows:

<TABLE> 
<CAPTION> 
            <S>                             <C>                  <C>     
            Building and improvements       10-40 years          Accelerated/Straight-line
            Leasehold improvements          10 years             Straight-line            
            Furniture and equipment         5-20 years           Accelerated/Straight-line
            Automobile                      3 years              Straight-line             
</TABLE>

   REAL ESTATE OWNED

   Real estate owned is recorded at the fair value of the property, less
   estimated costs of disposition.  Any excess of the recorded investment over
   fair value of the property is charged to the allowance for loan losses at the
   time of foreclosure.  Costs relating to improvement of property incurred
   subsequent to acquisition are capitalized, whereas costs relating to the
   holding of property are expensed.  The amounts expensed in 1998 and 1997 were
   $0 and $808, respectively.  There were no amounts capitalized in either year.

   Subsequent to foreclosure, real estate owned is evaluated on an individual
   basis for changes in fair value.  Future declines in fair value of the asset,
   less cost of disposition, below its carrying amount increases the valuation
   allowance account.  Future increases in fair value of the asset, less costs
   of disposition, above its carrying amount reduce the valuation allowance
   account, but not below zero. Increases or decreases in the valuation
   allowance are charged or credited to income.  The Association had no real
   estate owned at June 30, 1998 and 1997.

   The recognition of gains and losses on the sale of real estate owned is
   dependent upon whether the nature and terms of the sale and future
   involvement of the Company in the property meet certain requirements.  If the
   transaction does not meet these requirements, sale or income recognition is
   deferred and recognized under an alternative method in accordance with SFAS
   No. 66, Accounting for Sales of Real Estate.

   INCOME TAXES

   Provisions for income taxes are based on taxes payable or refundable for the
   current year (after exclusion of nontaxable income) and deferred income taxes
   on temporary differences between the tax bases of assets and liabilities and
   their reported amounts in the financial statements.  Deferred tax assets and
   liabilities are included in the financial statements at currently enacted
   income tax rates applicable to the period in which the deferred tax assets
   and liabilities are expected to be realized or settled.  As changes in tax
   laws or rates are enacted, deferred tax assets and liabilities are adjusted
   through the provision for income taxes in the period of enactment.

                                      19
<PAGE>
 
   CORE DEPOSIT PREMIUM

   The premium paid to acquire the deposits of another financial institution has
   been shown as an intangible asset and is included in Prepaid expenses and
   other assets in the accompanying consolidated statements of financial
   condition.  This net core deposit premium ($137,235 and $176,082 at June 30,
   1998 and 1997, respectively) is being amortized using an accelerated method
   over a ten year period which approximates the expected lives of the purchased
   deposit relationships (amortization expense of $38,847, $46,356, and $49,706
   in fiscal years 1998, 1997, and 1996, respectively).

   STATEMENTS OF CASH FLOWS

   For purposes of the consolidated statements of cash flows, the Company
   considers Cash on hand and in other banks and Interest-bearing deposits in
   other banks to be cash and cash equivalents.

   PENDING ACCOUNTING PRONOUNCEMENTS

   In June 1997, the Financial Accounting Standards Board ("FASB") issued
   Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting of
   Comprehensive Income.  This Statement established standards for reporting and
   display of comprehensive income and its components (revenues, expenses,
   gains, and losses) in a full set of financial statements.  This Statement
   also requires that all items that are required to be recognized under
   accounting standards as components of comprehensive income, be reported in
   financial statements and be displayed with the same prominence as other
   financial statements.  This Statement is effective for fiscal years beginning
   after December 15, 1997.  Earlier application is permitted.  Reclassification
   of financial statements for earlier periods provided for comparative purposes
   is required.

   In June 1997, FASB issued SFAS No. 131, Disclosures About Segments of an
   Enterprise and Related Information.  This Statement establishes standards for
   the way that public business enterprises report information about operating
   segments in annual financial statements and requires that those enterprises
   report selected information about operating segments in interim financial
   reports issued to stockholders.  This Statement also establishes standards
   for related disclosures about products and services, geographic areas, and
   major customers.  This Statement requires the reporting of financial and
   descriptive information about an enterprise's reportable operating segments.
   This Statement is effective for financial statements for periods beginning
   after December 15, 1997.  In the initial year of application comparative
   information for earlier years is to be restated.

   In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures About
   Pensions and Other Postretirement Benefits.  This Statement revises
   employers' disclosures about pension and other postretirement benefit plans.
   It does not change the measurement or recognition of those plans.  It
   standardizes the disclosure requirements for pensions and other
   postretirement benefits to the extent practicable, requires additional
   information on changes in the benefit obligations and fair values of plan
   assets that will facilitate financial analysis, and eliminates certain
   disclosures that are no longer as useful and suggests combined formats for
   presentation of pension and other postretirement benefit disclosures.  This
   Statement is effective for fiscal years beginning after December 15, 1997.
   Earlier application is encouraged.  Restatement of disclosures for earlier
   periods provided for comparative purposes is required unless the information
   is not readily available, in which case the notes to the financial statements
   should include all available information and a description of the information
   not available.

   In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
   Instruments and Hedging Activities.  This Statement establishes accounting
   and reporting standards for derivative instruments, including certain
   derivative instruments embedded in other contracts (collectively referred to
   as 

                                      20
<PAGE>
 
   derivatives), and for hedging activities. This Statement is effective for all
   fiscal quarters of fiscal years beginning after June 15, 1999. Initial
   application of this Statement should be as of the beginning of an entity's
   fiscal quarter; on that date, hedging relationships must be designated anew
   and documented pursuant to the provisions of this Statement.  Earlier
   application of all of the provisions of this Statement is encouraged, but it
   is permitted only as of the beginning of any fiscal quarter that begins after
   issuance of this Statement.  This Statement should not be applied
   retroactively to financial statements of prior periods.

   Management believes there will be no material effect on the consolidated
   financial statements from the adoption of these pronouncements.

   PRIOR YEAR CLASSIFICATION

   Certain prior year amounts have been reclassified to conform to the current
   year presentation.

2. STOCK CONVERSION

   On October 5, 1995, the Conversion of the Association from a Federally-
   chartered mutual institution to a Federally-chartered stock savings
   association through amendment of its charter and issuance of common stock to
   the Company was completed.  Related thereto, the Company sold 1,454,750
   shares of common stock, par value $.01 per share, at an initial price of $10
   per share in subscription and community offerings.  Costs associated with the
   Conversion were approximately $880,000, including underwriting fees.  These
   conversion costs were deducted from the gross proceeds of the sale of the
   common stock.

   In connection with the Offering, the Association established a liquidation
   account in an amount equal to its regulatory capital as of the latest
   practicable date prior to consummation of the Offering.

                                      21
<PAGE>
 
   The Company's ability to pay dividends will be largely dependent upon
   dividends to the Company from the Association.  Pursuant to the Office of
   Thrift Supervision ("OTS") regulations, the Association will not be permitted
   to pay dividends on its capital stock or repurchase shares of its stock if
   its stockholders' equity would be reduced below the amount required for the
   liquidation account or if stockholders' equity would be reduced below the
   amount required by the OTS.  (See Note 4).

3. INTEREST-RATE SENSITIVITY

   Fixed-rate mortgage loans and mortgage-backed securities comprise a
   substantial portion of the Association's interest-earning assets
   (approximately 70% at June 30, 1998), while its principal source of funds
   consists of savings deposits with maturities of three years or less (79%).
   Because of the short-term nature of the savings deposits, their cost
   generally reflects returns currently available in the market.  Accordingly,
   the Association's savings deposits have a high degree of interest-rate
   sensitivity while its earning assets are relatively fixed and are much less
   sensitive to changes in current market rates.  Therefore, changes in market
   interest rates tend to directly affect the level of net interest income
   related to such earning assets.

   At June 30, 1998, based on information provided by the OTS it was estimated
   that the Association's net portfolio value ("NPV") (the net present value of
   the Association's cash flows from assets, liabilities, and off-balance sheet
   items) would decrease 9%, 19%, 30%, and 41%, and increase 6%, 11%, 16%, and
   21% in the event of 1%, 2%, 3%, and 4% increases and decreases in market
   interest rates, respectively.  These calculations indicate that the
   Association's NPV could be adversely affected by increases in interest rates
   but could be favorably affected by decreases in interest rates.  Computations
   of prospective effects of hypothetical interest rate changes are based on
   numerous assumptions, including relative levels of market interest rates,
   prepayments, and deposit run-offs and should not be relied upon as indicative
   of actual results.  Certain shortcomings are inherent in such computations.
   In order to mitigate its interest rate risk, the Association maintains
   substantial liquidity and capital levels that management believes are
   sufficient to sustain unfavorable movements in market interest rates.

   Capital requirements continue to be under study by the OTS.  Management
   continues to monitor these requirements and contemplated changes and believes
   that the Association will continue to exceed its regulatory minimum
   requirements.  As a result of the Association's exposure to interest rate
   risk, the OTS will continue to monitor the Association's interest rate risk
   management strategy and activities.

                                      22
<PAGE>
 
4. REGULATORY MATTERS

   The Association is subject to various regulatory capital requirements
   administered by the federal banking agencies. Failure to meet minimum capital
   requirements can initiate certain mandatory and possibly additional
   discretionary actions by regulators that, if undertaken, could have a direct
   material effect on the Association's financial statements. Under capital
   adequacy guidelines and the regulatory framework for prompt corrective
   action, the Association must meet specific capital guidelines that involve
   quantitative measures of the Association's assets, liabilities, and certain
   off-balance sheet items as calculated under regulatory accounting practices.
   The Association's capital amounts and classifications are also subject to
   qualitative judgments by the regulators about components, risk weightings,
   and other factors.

   Quantitative measures established by regulation to ensure capital adequacy
   require the Association to maintain minimum amounts and ratios (set forth in
   the table which follows) of Total and Tier 1 capital (as defined in the
   regulations) to Risk-weighted assets (as defined), and of Tier 1 capital (as
   defined) to Average assets (as defined).  Management believes, as of June 30,
   1998 and 1997, that the Association meets all capital adequacy requirements
   to which it is subject.

   As of June 30, 1998 and 1997, the most recent notification from the
   regulatory authorities categorized the Association as well capitalized under
   the regulatory framework for prompt corrective action.  To be categorized as
   well capitalized, the Association must maintain minimum Total risk-based,
   Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table which
   follows.

   Actual capital amounts and ratios are presented in the table below for the
   Association:

<TABLE>
<CAPTION>
                                                                                                 FOR CAPITAL ADEQUACY  
                                                                              ACTUAL                  PURPOSES
                                                                          -----------------   -------------------------          
                                                                          AMOUNT     RATIO       AMOUNT          RATIO      
                                                                          -------   -------   -----------     ---------
                                                                                                (Dollars in thousands) 
<S>                                                                       <C>       <C>       <C>             <C>            
JUNE 30, 1998:                                                                                                            
Total capital (to risk weighted assets)                                   $15,845     56.9%        $2,228           8.0%
                                                                                                                          
   Tier 1 (core)  capital (to risk weighted assets)                        15,769     56.6            N/A           N/A        
                                                                                                                          
   Tier 1 (core) capital (to adjusted total assets)                        15,769     14.9          3,165           3.0   
                                                                                                                          
   Tangible capital (to adjusted total assets)                             15,769     14.9          1,583           1.5   
                                                                                                                          
JUNE 30, 1997:                                                                                                            
   Total capital (to risk weighted assets)                                $14,857     60.7%        $1,956           8.0%
                                                                                                                          
   Tier 1 (core)  capital (to risk weighted assets)                        14,781     60.4            N/A           N/A        
                                                                                                                          
   Tier 1 (core) capital (to adjusted total assets)                        14,781     14.0          3,165           3.0   
                                                                                                                          
   Tangible capital (to adjusted total assets)                             14,781     14.0          1,580           1.5   

<CAPTION> 
                                                                                 TO BE WELL  
                                                                             CAPITALIZED UNDER
                                                                             PROMPT CORRECTIVE
                                                                             ACTION PROVISIONS
                                                                             -----------------
                                                                              AMOUNT     RATIO
                                                                             --------  -------
                                                                           (Dollars in thousands)
<S>                                                                          <C>       <C> 
JUNE 30, 1998:                                                                               
Total capital (to risk weighted assets)                                        $2,785     10.0
                                                                                             
   Tier 1 (core)  capital (to risk weighted assets)                             1,671      6.0
                                                                                             
   Tier 1 (core) capital (to adjusted total assets)                             5,276      5.0
                                                                                             
   Tangible capital (to adjusted total assets)                                    N/A      N/A   
                                                                                             
JUNE 30, 1997:                                                                               
   Total capital (to risk weighted assets)                                     $2,446     10.0
                                                               
   Tier 1 (core)  capital (to risk weighted assets)                             1,467      6.0
                                                                                             
   Tier 1 (core) capital (to adjusted total assets)                             5,275      5.0
                                                                                            
   Tangible capital (to adjusted total assets)                                    N/A      N/A
</TABLE> 

                                      23
<PAGE>
 
   The following table is a reconcilitation of the Association's stockholder's
   equity to Tangible, Tier 1, and Risk-based capital as required by the OTS:

<TABLE> 
<CAPTION> 
                                                                                              1998          1997 
                                                                                           ----------     ---------
                                                                                               (In thousands)
          <S>                                                                              <C>            <C>
          Stockholder's equity                                                              $ 15,953        $ 14,895  
          Intangible assets                                                                     (137)           (176) 
          Unrealized (gain) loss on securities available                                                              
            for sale                                                                             (47)             62  
                                                                                           ----------      ---------
                     Tangible and Tier 1 capital                                              15,769          14,781  
          Allowance for loan losses                                                               76              76  
                                                                                           ----------      ---------
                     Total risk based capital                                               $ 15,845        $ 14,857  
                                                                                           ==========      =========

          Total assets                                                                      $105,105        $105,451  
          Adjusted total assets                                                              105,511         105,337  
          Total risk weighted assets                                                          27,845          24,456   
</TABLE>

   Pursuant to OTS regulations, an institution that exceeds all fully phased-in
   capital requirements before and after a proposed capital distribution and has
   not been advised by the OTS that it is in need of more than the normal
   supervision can, after prior notice but without the approval of the OTS, make
   capital distributions during a calendar year equal to the greater of (i) 100%
   of its net income to date during the calendar year plus the amount that would
   reduce by one-half its "surplus capital ratio" (the excess capital over its
   fully phased-in capital requirements) at the beginning of the calendar year,
   or (ii) 75% of its net income over the most recent four-quarter period. Any
   additional capital distributions require prior regulatory approval.

   The Company's principal source of funds for dividend payments is dividends
   from the Association.  Certain restrictions exist regarding the ability of
   the Association to pay dividends to the Company.  At July 1, 1998, dividend
   payments by the Association were subject to regulatory approval.

 5. EARNINGS PER SHARE

   In 1998, the Company adopted SFAS No. 128, Earnings Per Share, effective
   December 15, 1997.  Basic earnings per share were computed by dividing net
   income by the weighted average number of shares of common stock outstanding
   during the years ended June 30, 1998, 1997, and 1996.  Diluted earnings per
   share for the years ended June 30, 1998, 1997, and 1996, were computed by
   dividing net income by the weighted average number of shares of common stock
   outstanding and the dilutive effects of the shares awarded under the
   Management Recognition Plan ("MRP") and the Stock Option Plan, based on the
   treasury stock method using an average fair market value of the stock during
   the respective periods.  As a result, the Company's reported earnings per
   share for 1997 and 1996 were restated.  Earnings per share for the period
   from October 5, 1995, the date of Conversion, to June 30, 1996, have been
   computed based on the earnings during that period and on the weighted average
   number of shares of common stock and common stock equivalents outstanding
   during that period.  The weighted average number of shares used for the
   period from October 5, 1995 through June 30, 1996, was 1,340,743.

   The following table represents the earnings per share calculations for the
   years ended June 30, 1998, 1997, and 1996 accompanied by the effect of this
   accounting change on previously reported earnings per share:

                                      24
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                                 PER SHARE
                                                                                 INCOME         SHARES            AMOUNT
                                                                              ---------       ----------      ------------ 
<S>                                                                           <C>             <C>             <C>  
1998:
   Net income                                                                  $542,885
   Basic earnings per share: 
      Income available to common shareholders                                   542,885        1,061,133              $.51
                                                                                                              ============
   Diluted securities: 
      Management recognition plan shares                                              0           24,449
      Incentive stock option plan shares                                              0           33,031
                                                                              ---------       ---------- 
   Dilued earnings per share:
      Income available to common shareholders plus assumed conversions
                                                                               $542,885        1,118,613              $.49
                                                                              =========       ==========      ============ 

<CAPTION> 
                                                                                                               Per Share
                                                                               Income           Shares           Amount
                                                                              ---------       ----------      ------------ 
<S>                                                                           <C>             <C>             <C>  
1997:
   Net income                                                                  $142,631
   Basic earnings per share: 
      Income available to common shareholders                                   142,631        1,095,959              $.13
                                                                                                              ============ 
   Diluted securities: 
      Management recognition plan shares                                              0           32,590
      Incentive stock option plan shares                                              0           23,974
                                                                              ---------       ---------- 
   Diluted earnings per share: 
      Income available to common shareholders plus assumed conversions 
                                                                               $142,631        1,152,523              $.12
                                                                              =========       ==========      ============ 

<CAPTION>
                                                                                                                Per Share
                                                                                Income          Shares            Amount
                                                                              ---------       ----------      ------------ 
<S>                                                                           <C>             <C>             <C>  
1996:
   Net income from October 5, 1995 (date of conversion)                        $455,853
   Basic earnings per share: 
      Income available to common shareholders                                   455,853        1,326,039              $.34
                                                                                                              ============
   Diluted securities: 
      Management recognition plan shares                                              0           14,236
      Incentive stock option plan shares                                              0              469
                                                                              ---------       ---------- 
   Diluted earnings per share: 
      Income available to common shareholders plus assumed conversions 
                                                                               $455,853        1,340,744              $.34
                                                                              =========       ==========      ============ 
</TABLE>

                                      25
<PAGE>
 
  Changes in previously reported earnings per share were as follows for the
  years ended June 30, 1997 and 1996:

                                                        1997         1996     
                                                        -----       -----     
                                                                              
          Earnings per share, as reported               $ .12       $ .34     
          Earnings per share, as amended:                                     
           Basic                                          .13         .34     
           Diluted                                        .12         .34     

6. EMPLOYEE RETIREMENT AND SAVINGS PLANS

   EMPLOYEE STOCK OWNERSHIP PLAN

   In connection with the Conversion, the Association established an ESOP for
   eligible employees. The ESOP purchased 116,380 shares of the Company's common
   stock with the proceeds of a $1,163,800 note payable from the Association and
   secured by the Common Stock owned by the ESOP. Principal payments under the
   note are due in equal and annual installments through December 2005; interest
   is payable annually at a variable rate which is adjusted each January 1.
   Impact of this financing is eliminated in the consolidated financial
   statement presentation.

   Expense related to the ESOP was approximately $166,000 and $170,000 for 1998
   and 1997, respectively, a significant portion of which was to provide for
   individuals' service prior to Conversion. Unearned compensation related to
   the ESOP was approximately $757,000 and $891,000 at June 30, 1998 and 1997,
   respectively, and is shown as a reduction of stockholders' equity in the
   accompanying consolidated statements of financial condition. Unearned
   compensation is amortized into compensation expense based on employee
   services rendered in relation to shares which are committed to be released.

   MANAGEMENT RECOGNITION PLAN

   During fiscal 1996, the Association established a MRP which purchased 58,190
   shares of the Company's common stock on the open market subsequent to the
   Conversion. The MRP provides for awards of common stock to directors and
   officers of the Association. The aggregate fair market value of the shares
   purchased by the MRP is considered unearned compensation at the time of
   purchase and compensation is earned ratably over the stipulated vesting
   period. The expense related to the MRP was approximately $104,000 and
   $142,000 for 1998 and 1997, respectively. Unearned compensation related to
   the MRP was approximately $492,000 and $587,000 for 1998 and 1997,
   respectively, and is shown as a reduction to stockholders' equity in the
   accompanying consolidated statements of financial condition.

   SIMPLIFIED EMPLOYEE PENSION PLAN

   The Company established a Simplified Employee Pension Plan ("SEP") for all
   employees who have completed one year of service, pursuant to Section 408(k)
   of the Internal Revenue Code of 1986.  The Company makes a discretionary
   contribution to the SEP each year.  The cost to the Company under the SEP was
   $94,996, $111,190, and $88,095 for fiscal years 1998, 1997, and 1996,
   respectively.

                                      26
<PAGE>
 
   SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT

   During fiscal 1996, the Company entered into a Supplemental Executive
   Retirement Agreement ("SERA") with an executive of the Company. Under the
   provisions of the SERA, the Company will establish an account for the
   executive and will credit to the executive's account an amount equal to the
   difference between 25% of his compensation for the plan year and the annual
   additions credited to him under any tax-qualified plans sponsored by the
   Company (including the ESOP and the SEP). For each plan year, the amount
   credited to the executive's account shall appreciate at a rate equal to the
   highest rate paid by the Association on certificates of deposit (regardless
   of their term). Said account shall be paid to the executive in five
   substantially equal annual installments, with the first installment due on
   the first day of the second month after he leaves employment.

   In the event that the Executive retires before the Company and the
   Association fully repay the loan by which the ESOP purchased common stock in
   the initial public offering, the Company will pay the executive an amount
   having a fair market value equal to (i) the benefits he would have accrued
   under the ESOP if the loan had been discharged on the date of his retirement
   through a contribution, on said date, by the Company to the ESOP, and if all
   assets of the ESOP were thereupon allocated to the accounts of participants,
   plus (ii) a tax bonus equal to 40% of the amount he recognizes as ordinary
   income pursuant to clause (i) hereof. The executive will forfeit the right to
   receive any benefits under this Article if he is discharged from employment
   for just cause.

   In the event that the executive dies before he has received all benefit
   payments provided under this plan (calculated as if the executive retired on
   the date of his death), the Company shall pay to the executive's beneficiary
   a lump sum payment, within 60 days following the executive's death, in an
   amount equal to the balance of the executive's account.

   The Company recognized approximately $60,000 in compensation expense for the
   years ended June 30, 1998 and 1997 related to the SERA. The projected benefit
   obligation, accumulated benefit obligation, and vested benefit obligation
   were all $189,040 and $157,810 at June 30, 1998 and 1997, respectively. The
   components of the net periodic cost as of 1998 and 1997, respectively, are
   service costs of $4,444 and $5,103, interest cost of $11,047 and $12,351, and
   net amortization and deferred cost of $28,482 and $33,900. In determining the
   actuarial present value of the projected benefit obligation, the discount
   rate was 7% and the increase in share value was 10%.

   EMPLOYMENT AGREEMENT

   The Company has a 36-month employment agreement with its President. This
   agreement provides that if his employment under the agreement is terminated
   by the Company in connection with or within 12 months after any change in
   control of the Company, he shall be paid approximately 3 times his salary.

                                      27
<PAGE>
 
7. STOCK-BASED COMPENSATION PLANS

   The Company has a stockholder approved Option Plan. The Option Plan provides
   for the grant of incentive stock options ("ISO's") to employees and
   nonincentive stock options ("non-ISO's") to nonemployee directors. The
   Company utilizes the intrinsic value method of accounting for stock option
   grants. As the option price is considered to be equal to the fair value of
   the stock at the date of grant, no compensation cost is recognized.

   The Company has adopted the disclosure requirements of SFAS No. 123,
   Accounting for Stock-Based Compensation. This Statement establishes financial
   accounting and reporting standards for stock-based employee compensation
   plans. Those plans include all arrangements by which employees receive shares
   of stock or other equity instruments of the employer or the employer incurs
   liabilities to employees in amounts based on the price of the employer's
   stock. Examples are stock purchase plans, stock options, restricted stock and
   stock appreciation rights.

   Under the Option Plan, the Company may grant options up to 145,475 shares and
   has granted options outstanding of 123,577 shares through June 30, 1998.
   Under the Option Plan, the options vest 20% per year and become exercisable
   upon the participant's completion of each of five years of service.

   Had compensation costs for these plans been determined consistent with SFAS
   No. 123, the Company's net income and earnings per share would have been
   reduced to the following pro forma amounts:

<TABLE> 
<CAPTION> 
                                                           1998           1997
                                                         --------       -------- 
              <S>                                        <C>            <C> 
              Net income:                                                                                      
               As reported                               $542,885       $142,631 
               Pro forma                                  494,676         66,438 
                                                                                                               
              Earnings per share:                                                                              
               As reported:                                                                                    
                 Basic                                   $    .51       $    .13 
                 Diluted                                      .49            .12 
               Pro forma:                                                                                      
                 Basic                                        .47            .06 
                 Diluted                                      .44            .06  
</TABLE> 

   Because the SFAS No. 123 method of accounting has not been applied to options
   granted prior to October 5, 1995, the resulting pro forma compensation costs
   may not be representative of that to be expected in future years.

                                      28
<PAGE>
 
   Unearned compensation related to the Option Plan was approximately $352,000
   and $446,000 at June 30, 1998 and 1997, respectively, and is shown as a
   reduction of stockholders' equity in the accompanying statements of financial
   condition. A summary of the status of the Company's stock option plan at June
   30, 1998 and 1997 and the changes during the years then ended is as follows:

<TABLE>
<CAPTION>
                                                                                               1998                          
                                                                             -------------------------------------------  
                                                                                             WEIGHTED                        
                                                                                              AVERAGE       OPTION          
                                                                                             EXERCISE        PRICE          
                                                                              SHARES          PRICE         PER SHARE        
                                                                             -------         --------       ---------        
          <S>                                                                <C>             <C>            <C>              
          Outstanding at beginning of year                                   120,376           $11.69          $11.69        
           Forfeitures                                                             0             0.00            0.00        
           Exercised                                                          (8,599)           11.69           11.69        
                                                                             -------         --------       ---------        
          Outstanding at end of year                                         111,777           $11.69          $11.69        
                                                                             =======         ========       =========        
                                                                                                                             
          Exercisable at end of year                                          43,402           $11.69                        
                                                                             =======         ========                        
                                                                                                                             
          Weighted average fair value of the                                                                                 
           options granted                                                   $  1.70                                         
                                                                             =======                                         
</TABLE>                                       

<TABLE> 
<CAPTION> 
                                                                                              1997                           
                                                                             -------------------------------------------     
                                                                                            Weighted                         
                                                                                             Average          Option         
                                                                                             Exercise         Price          
                                                                              Shares           Price         Per Share       
                                                                             -------       ----------      -----------       
          <S>                                                                <C>           <C>             <C>  
          Outstanding at beginning of year                                   126,376           $11.69          $11.69        
           Granted                                                                 0             0.00            0.00        
           Forfeitures                                                        (5,455)           11.69           11.69        
           Exercised                                                            (545)           11.69           11.69        
                                                                            --------       ----------      -----------       
          Outstanding at end of year                                         120,376           $11.69          $11.69        
                                                                            ========       ==========      ===========       
                                                                                                                             
          Exercisable at end of year                                          23,639           $11.69                        
                                                                            ========       ==========

          Weighted average fair value of the                                                                                 
           options granted                                                   $  1.70                                         
                                                                            ========                                          
</TABLE>

   The fair value of each option grant is estimated on the date of grant using
   the Black-Scholes option pricing model with the following weighted-average
   assumptions used for grants in 1997: risk-free interest rate of 6.22%;
   expected life of the options is 20% per year over the next five years and
   expected volatility and dividend yields of 17% and 2.99%, respectively.

 
<PAGE>
 
8. SECURITIES AVAILABLE FOR SALE

   The amortized cost, gross unrealized gain and loss, and fair value of
   securities designated as available for sale are summarized as follows:

<TABLE>
<CAPTION>
                                                                                 June 30, 1998                                     
                                                  ---------------------------------------------------------------------
                                                                        GROSS             GROSS                             
                                                     AMORTIZED        UNREALIZED        UNREALIZED                          
                                                       COST             GAIN             (LOSS)           FAIR VALUE       
                                                  ---------------     ----------       -----------      ---------------     
   <S>                                            <C>                 <C>              <C>              <C>                  
   U.S. Treasury securities                         $ 7,879,031         $ 63,751          $ (5,094)        $ 7,937,688      
   U.S. Government agency securities                                                                                        
                                                     13,487,978           46,077           (28,077)         13,505,978      
   Federal Home Loan Bank stock                         795,200                0                 0             795,200      
                                                  ---------------     ----------       -----------      ---------------     
                                                    $22,162,209         $109,828         $ (33,171)       $ 22,238,866      
                                                  ===============     ==========       ===========      ===============      
</TABLE>

<TABLE>
<CAPTION>
                                                                              June 30, 1997                               
                                                --------------------------------------------------------------------------
                                                                         Gross            Gross                           
                                                   Amortized          Unrealized        Unrealized                        
                                                     Cost                Gain             (Loss)          Fair Value      
                                                ---------------     --------------   --------------    ------------------- 
   <S>                                          <C>                 <C>              <C>               <C>                
   U.S. Treasury securities                      $  6,620,331        $   75,480       $  (34,749)       $     6,661,062   
   U.S. Government agency securities                                                                                      
                                                   10,260,565            11,231         (106,768)            10,165,028   
   Federal Home Loan Bank stock                       795,200                 0                0                795,200   
                                                ------------------  --------------   --------------    -------------------
                                                 $ 17,676,096        $   86,711       $ (141,517)           $17,621,290   
                                                ==================  ==============   ==============    =================== 
</TABLE>

   The amortized cost and fair value of debt securities available for sale by
   contractual maturity are shown below.  Expected maturities may differ from
   contractual maturities because issuers may have the right to call or prepay
   obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                                       June 30, 1998             
                                                                             -----------------------------------  
                                                                                AMORTIZED                        
                                                                                   COST           FAIR VALUE     
                                                                             ---------------    ---------------- 
       <S>                                                                   <C>                <C>              
       Due in one year or less                                                $   6,071,900      $  6,065,382    
       Due after one year through five years                                      7,071,544         7,128,571    
       Due after five years through ten years                                     5,847,255         5,862,491    
       Due after ten years                                                        2,376,310         2,387,222    
                                                                             ----------------   ----------------- 
                                                                                 21,367,009        21,443,666    
       Federal Home Loan Bank stock                                                 795,200           795,200    
                                                                             ----------------   ----------------- 
                                                                              $  22,162,209      $ 22,238,866    
                                                                             ================   ================= 
</TABLE>

   There were no sales of securities during fiscal years 1998 and 1997.

                                      30
<PAGE>
 
   A security designated as available for sale with a carrying value (fair
   value) of $1,595,500 has been pledged as collateral for certain large
   deposits (public funds) with an aggregate balance of $1,425,000 at June 30,
   1998.

9. SECURITIES HELD TO MATURITY

   The amortized cost, gross unrealized gain and loss, and fair value of
   securities designated as held to maturity are summarized as follows:

<TABLE>
<CAPTION>
                                                                             June 30, 1998                              
                                                    --------------------------------------------------------------------
                                                                        GROSS            GROSS                          
                                                    AMORTIZED        UNREALIZED        UNREALIZED                       
                                                       COST             GAIN             (LOSS)            FAIR VALUE   
                                                    -------------    ------------     -------------     ----------------
   <S>                                              <C>              <C>              <C>               <C>             
   U.S. Government agency securities                                                                                    
                                                     $34,077,096        780,511          $(46,586)         $34,811,021  
                                                    -------------    ------------     --------------    ---------------- 
                                                     $34,077,096       $780,511          $(46,586)         $34,811,021  
                                                    =============    ============     ==============    ================ 
</TABLE>

<TABLE>
<CAPTION>
                                                                             June 30, 1997                            
                                                    -------------------------------------------------------------------
                                                                        Gross            Gross                        
                                                    Amortized        Unrealized        Unrealized                     
                                                       Cost             Gain             (Loss)            Fair Value 
                                                    -----------      -------------    ------------      ---------------
   <S>                                              <C>              <C>              <C>               <C>           
   U.S. Treasury securities                           $ 1,000,069         $  6,181        $       0        $ 1,006,250
   U.S. Government agency securities                                                                                  
                                                       43,157,357          576,248         (489,992)        43,243,613
                                                    -------------    -------------    --------------    -------------- 
                                                      $44,157,426         $582,429        $(489,992)       $44,249,863
                                                   ==============    =============    ==============    ============== 
</TABLE>

The amortized cost and fair value of debt securities held to maturity by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
                                                                                       JUNE 30, 1998                   
                                                                                -------------------------------    
                                                                                  AMORTIZED                        
                                                                                    COST           FAIR VALUE      
                                                                                -------------    --------------    
       <S>                                                                      <C>              <C>               
       Due in one year or less                                                   $    27,952      $    29,435      
       Due after one year through five years                                       4,764,079        4,861,434      
       Due after five years through ten years                                     10,412,184       10,596,308      
       Due after ten years                                                        18,872,881       19,323,844      
                                                                                -------------    --------------    
                                                                                 $34,077,096      $34,811,021      
                                                                                =============    ==============     
</TABLE>

                                      31
<PAGE>
 
10.  LOANS RECEIVABLE

     Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                                             June 30,
                                                                                 --------------------------------
                                                                                       1998               1997
                                                                                 ----------------   -------------
<S>                                                                              <C>                <C> 
     Mortgage loans:                                       
       Secured by one to four family residential properties                        $36,528,215        $32,678,216
       Secured by nonresidential properties                                            216,000            278,000
     Consumer loans                                                                  3,748,379          2,617,095
     Savings account loans                                                             656,743            608,663
                                                                                   -----------        -----------
                                                                                    41,149,337         36,181,974
     Less:                                                 
       Unearned interest income                                                        244,711            132,940
       Discount (rebate) on loans                                                          530                (57)
       Deferred loan fees (costs), net                                                (324,915)          (206,978)
       Allowance for loan losses                                                        75,673             75,673
                                                                                   -----------        -----------
              Loans receivable, net                                                $41,153,338        $36,180,396
                                                                                   ===========        ===========
</TABLE>

     Loans secured by one to four family residential properties include second
     mortgage loans on properties for which the Association holds the first
     mortgage. The proceeds on these second mortgage loans were used for
     improvements and consumer purposes. Second mortgage loan balances at June
     30, 1998 and 1997 were approximately $974,000 and $1,065,000, respectively.

     As a savings and loan institution, the Association has a credit
     concentration in residential real estate mortgage loans. Substantially all
     of the Association's customers are located in its trade area of Etowah,
     Marshall, and Cherokee Counties in Alabama. Although the Association has
     generally conservative underwriting standards, including a collateral
     policy calling for low loan to collateral values, the ability of its
     borrowers to meet their residential mortgage obligations is dependent upon
     local economic conditions.

     In the normal course of business, loans are made to officers, directors,
     and employees of the Company and the Association. These loans are made on
     substantially the same terms, including interest rates and collateral, as
     those prevailing for comparable transactions with others. As of June 30,
     1998 and 1997, $395,768 and $442,792, respectively, of these loans were
     outstanding. During fiscal 1998, $441,859 of new loans were made and
     repayments totaled $488,883.

                                      32
<PAGE>
 
     An analysis of the Company's allowance for loan losses is as follows:

<TABLE>
<CAPTION>
                                                                             For the Years Ended
                                                                                   June 30,
                                                                  -----------------------------------------
                                                                      1998          1997           1996
                                                                  ------------   -----------   ------------
<S>                                                               <C>            <C>           <C>
            Balance, beginning of year                              $75,673       $78,070        $80,000   
            Provision for loan losses                                     0             0              0   
            Charge-offs, net of recovery                                  0        (2,397)        (1,930)   
                                                                  ---------      --------      --------- 
            Balance, end of year                                    $75,673       $75,673        $78,070    
                                                                  =========      ========      =========
</TABLE>

     At June 30, 1998, nonaccrual loans totaled approximately $11,000. The
     Association did not have any loans on nonaccrual status at June 30, 1997.
     Interest income foregone on nonaccrual loans was not significant for fiscal
     years 1998 and 1997.

11.  PREMISES AND EQUIPMENT

     Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                                                       June 30,
                                                                            -------------------------------
                                                                                 1998              1997
                                                                            --------------     ------------
<S>                                                                         <C>                <C>
            Land                                                              $  170,085        $ 170,085  
            Building and improvements                                            250,623          244,773  
            Leasehold improvements                                                57,050           50,652  
            Furniture, fixtures, and equipment                                   538,482          519,918  
                                                                              ----------        --------- 
                                                                               1,016,240          985,428  
            Less accumulated depreciation                                       (764,867)        (718,691)  
                                                                              ----------        ---------
                                                                              $  251,373        $ 266,737   
                                                                              ==========        =========
</TABLE>

     Depreciation expense charged to office building and equipment expense in
     1998, 1997, and 1996, totaled approximately $46,000, $48,000, and $63,000,
     respectively.

                                      33
<PAGE>
 
12.  DEPOSITS

     Deposits are summarized as follows:

<TABLE>
<CAPTION>
 
                                                                    JUNE 30, 1998               June 30, 1997
                                                              ---------------------------   ------------------------
                                                                  AMOUNT       PERCENT        AMOUNT       PERCENT
                                                              ------------  -------------   -----------  -----------
     <S>                                                      <C>           <C>             <C>          <C>
     Demand, NOW, and Money Market accounts,          
       including noninterest bearing deposits of $171,064
       and $217,814 at June 30, 1998 and June 30, 1997, 
       respectively                                            $ 8,277,383       9.63%      $ 7,425,269      8.56%
     Passbook savings                                            5,198,093       6.05         5,213,413      6.01
                                                                -----------    ------       -----------    ------
                                                                13,475,476      15.68        12,638,682     14.57
     Certificates of deposit:
         2.00-  4.00%                                              310,238        .36           326,059       .37  
         4.01-  6.00%                                           68,464,845      79.68        62,271,432     71.78  
         6.01-  8.00%                                            3,553,214       4.14        11,403,980     13.14  
         8.01- 10.00%                                              122,061        .14           118,560       .14  
                                                                -----------    ------       -----------    ------  
                                                                72,450,358      84.32        74,120,031     85.43  
                                                                -----------    ------       -----------    ------  
                                                               $85,925,834     100.00%      $86,758,713    100.00% 
                                                                -----------    ------       -----------    ------   
</TABLE>

     The aggregate amount of jumbo certificates of deposit with a minimum
     denomination of $100,000 was $10,659,343 and $8,026,770, at June 30, 1998
     and 1997, respectively.

     Scheduled maturities of certificates of deposit at June 30, 1998 are as
     follows:

<TABLE>
<CAPTION>
                                                                              YEAR ENDING JUNE 30,
                                             -----------------------------------------------------------------------------------
                                                   1999               2000             2001              2002          TOTAL
                                             -----------------   --------------   --------------    -------------  -------------
     <S>                                     <C>                 <C>              <C>               <C>            <C> 
     2.00-  4.00%                               $   200,291        $    93,947      $   16,000        $        0     $   310,238
     4.01-  6.00                                 47,328,010         12,711,482       5,577,832         2,847,521      68,464,845
     6.01-  8.00                                  2,544,358            517,224          44,316           447,316       3,553,214
     8.01- 10.00                                      4,000              7,118         110,943                 0         122,061
                                              -------------      -------------    ------------      ------------   ------------- 
              Total                             $50,076,659        $13,329,771      $5,749,091        $3,294,837     $72,450,358
                                              =============      =============    ============      ============   =============
</TABLE>

     Interest expense on deposits consisted of the following:

<TABLE>
<CAPTION>
                                                                          For the Years Ended June 30,
                                                                -------------------------------------------------
                                                                    1998              1997              1996
                                                                ------------      ------------      -------------
          <S>                                                   <C>               <C>               <C>
          Passbook savings                                       $  149,106        $  228,747        $  292,124    
          NOW accounts                                              240,356           158,914           255,133    
          Certificates of deposit                                 4,129,114         4,146,176         4,131,989    
                                                                 ----------        ----------        ---------- 
                                                                 $4,518,576        $4,533,837        $4,679,246
                                                                 ==========        ==========        ========== 
</TABLE>

                                      34
<PAGE>

 
13.  INCOME TAXES

     The provision (benefit) for income taxes for the periods indicated is
     summarized as follows:

<TABLE>
<CAPTION>
                                                                                 For the Years Ended June 30,
                                                                       -------------------------------------------------
                                                                            1998             1997             1996
                                                                       -------------    -------------     --------------
          <S>                                                          <C>              <C>               <C>
          Current Provision:         
             Federal                                                     $216,746         $ 164,392          $222,637   
             State                                                         29,130            20,787            26,274   
                                                                       ----------       -----------       ----------- 
                                                                          245,876           185,179           248,911   
          Deferred provision (benefit)                                     31,167          (105,788)           44,747   
                                                                       ----------       -----------       ----------- 
                                                                         $277,043         $  79,391          $293,658   
                                                                       ==========       ===========       =========== 
</TABLE>

     The differences between the provision (benefit) for income taxes and the
     amount computed by applying the statutory federal income tax rate of 34% to
     income before taxes were as follows:

<TABLE>
<CAPTION>
                                                                   For the Years Ended June 30,
                                                            ------------------------------------------
                                                                 1998          1997          1996
                                                            ------------    ----------   -------------
          <S>                                               <C>             <C>          <C>
          Pretax income at statutory rates                    $273,142        $75,487        $295,369
          Add (deduct):                               
            State income tax, net of federal tax benefit        21,494          6,022          20,599
            Other, net                                         (17,593)        (2,118)        (22,310)
                                                            ----------      ---------    ------------  
                                                              $277,043        $79,391        $293,658
                                                            ==========      =========    ============    
          Effective income tax rate                                 35%            36%             34%
                                                            ==========      =========    ============    
</TABLE>

     The net deferred tax liability was included in Taxes payable in the
     accompanying consolidated statements of financial condition at June 30,
     1998 and 1997. The components of the net deferred tax asset or liability at
     June 30, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                                                                                 June 30,
                                                                                      -----------------------------
                                                                                          1998             1997
                                                                                      -------------   -------------
          <S>                                                                         <C>             <C>
          Unrealized net loss on securities available for sale                         $       0       $  35,980
          Amortization of intangible                                                      53,291          36,854
          Employee benefit plans                                                         119,612          80,511
          Depreciation                                                                     1,715           3,044
          Other                                                                           11,200          13,252
                                                                                      ----------      ---------- 
                       Deferred tax asset                                                185,818         169,641
                                                                                      ----------      ----------   
          Unrealized net gain on securities available for sale                           (29,129)              0
          FHLB stock dividend                                                            (57,869)        (57,869)
          Bad debt reserve, net                                                          (41,648)        (80,637)
          Accretion of discount on securities                                           (139,800)        (92,657)
          Deferred loan fees and costs, net                                             (123,468)        (45,561)
          Other                                                                           (6,921)         (9,658)
                                                                                      ----------      ---------- 
                       Deferred tax liability                                           (398,835)       (286,382)
                                                                                      ----------      ---------- 
                       Net deferred tax liability                                      $(213,017)      $(116,741)
                                                                                      ==========      ========== 
</TABLE>

                                      35
<PAGE>
 
     Thrift institutions, in determining taxable income, were historically
     allowed special bad debt deductions based on specified experience formulae
     or on a percentage of taxable income before such deductions. The bad debt
     deduction based on the latter was gradually reduced to 8%, when in August
     1996, Congress passed the Small Business Job Protection Act that, among
     other things, repealed the tax bad debt reserve method for thrifts
     effective for taxable years beginning after December 31, 1995. As a result,
     thrifts began recapturing into taxable income the amount of their post-1987
     tax bad debt reserves over a six-year period beginning after 1995. At June
     30, 1998, the Association's post-1987 tax bad debt reserve, subject to
     recapture, was approximately $185,000. The Association recaptured
     approximately $103,000 of this reserve into taxable income in the current
     year. The recapture did not have any effect on the Association's net income
     because the related tax expense has already been accrued.

     Because of such repeal, thrifts such as the Association may only use the
     same tax bad debt reserve that is allowed for banks. Accordingly, a thrift
     with assets of $500 million or less may only add to its tax bad debt
     reserves based upon its moving six-year average experience of actual loan
     losses (i.e., the experience method).

     The portion of a thrift's tax bad debt reserve that is not recaptured under
     the provisions above is only subject to recapture at a later date under
     certain circumstances. These include stock repurchases redemptions by the
     thrift or if the thrift converts to a type of institution (such as a credit
     union) that is not considered a bank for tax purposes. However, no further
     recapture would be required if the thrift converted to a commercial bank
     charter or was acquired by a bank. The Association does not anticipate
     engaging in any transactions at this time that would require the recapture
     of its pre-1988 tax bad debt reserves of approximately $2.8 million.

14.  ACCRUED INTEREST AND DIVIDENDS RECEIVABLE

     Accrued interest and dividends receivable is summarized as follows:

<TABLE>
<CAPTION>
                                                                                      June 30,
                                                                           ------------------------------
                                                                                1998           1997
                                                                           -------------    -------------
          <S>                                                              <C>              <C>
          Securities available for sale                                      $299,919         $273,696    
          Securities held to maturity                                         241,546          303,524  
          Loans receivable                                                    176,980          166,425  
          Interest-bearing deposits in other banks                              4,579            3,255  
                                                                           ----------       ---------- 
                                                                             $723,024         $746,900   
                                                                           ==========       ========== 
</TABLE>

                                      36
<PAGE>
 
15.  COMMITMENTS AND CONTINGENCIES

     LEASES

     The Company has lease agreements for its branch offices. Rental expense
     under these leases aggregated $16,694, $16,889, and $16,064, for fiscal
     years 1998, 1997, and 1996, respectively. The aggregate annual minimum
     rental commitments under the terms of all noncancelable leases at June 30,
     1998 are as follows:

<TABLE>
<CAPTION>
                              FISCAL YEAR                   AMOUNT
                         ---------------------            ---------
                         <S>                              <C>
                                 1999                      $17,764
                                 2000                        8,664
                                 2001                        6,164
                                 2002                          514
                                 2003                            0
                                                          ---------
                                                           $33,106
                                                          =========
</TABLE>

     OFF-BALANCE-SHEET ITEMS

     The Company's policies as to collateral and assumption of credit risk for
     off-balance sheet items are essentially the same as those for extension of
     credit to its customers. Generally, the only off-balance sheet exposure the
     Association has is its commitments to originate loans; at June 30, 1998,
     the Company had $729,164 in outstanding commitments to originate
     residential real estate loans at fixed rates between 6.75% and 10%.
     Additionally, at June 30, 1998, the Association had provided approximately
     $361,000 in unused lines of credit.

     LITIGATION

     Though Management, after consultation with legal counsel, is not aware of
     any litigation or claims against the Company, in the normal course of
     business the Company may become subject to such litigation or claims.

     FDIC ASSESSMENT

     The deposits of the Association are currently insured by the Savings
     Association Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance
     Fund ("BIF"), the federal deposit insurance fund that covers the deposits
     of state and national banks and certain state savings banks, are required
     by law to attain and thereafter maintain a reserve ratio of 1.25% of
     insured deposits. The BIF has achieved the required reserve rate, and, as
     discussed below, during the prior year the FDIC reduced the average deposit
     insurance premium paid by BIF-insured banks to a level substantially below
     the average premium paid by savings institutions.

                                      37
<PAGE>
 
     Banking legislation was enacted September 30, 1996 to eliminate the premium
     differential between SAIF-insured institutions and BIF-insured
     institutions. The FDIC Board of Directors established a special assessment
     necessary to recapitalize the SAIF at 65.7 basis points of SAIF assessable
     deposits held by affected institutions as of March 31, 1995. Based upon its
     level of SAIF deposits as of March 31, 1995, the Association paid a special
     assessment of approximately $591,000 during the year ended June 30, 1997.
     Upon recapitalization of the SAIF, premiums paid by SAIF-insured
     institutions were reduced. The legislation also provides for the merger of
     the BIF and the SAIF, with such merger being conditioned upon the prior
     elimination of the thrift charter.

16.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     In December 1991, the FASB issued SFAS No. 107, Disclosures About Fair
     Value of Financial Instruments. SFAS No. 107 requires all entities to
     disclose the fair value of financial instruments (both assets and
     liabilities recognized and not recognized in the statements of financial
     condition) for which it is practicable to estimate the fair value, except
     those financial instruments specifically excluded by the Statement.
     Financial instruments are defined as cash, evidence of ownership in an
     entity, contracts that convey either a right to receive cash or other
     financial instrument or an obligation to deliver cash or other financial
     instruments, or contracts that convey the right or obligation to exchange
     financial instruments on potentially favorable or unfavorable terms. This
     disclosure should include the methods and assumptions used to estimate the
     fair value of a financial instrument or a class of financial instruments as
     well as why it is not practicable to estimate the fair value. This
     statement was adopted by the Company for fiscal year 1997 as was required
     for entities with assets of less than $150 million.

     The Company has a variety of financial instruments which include items
     recorded on the consolidated statement of financial condition and items
     which, by their nature, are not recorded on the consolidated statement of
     financial condition. Quoted market prices, if available, are utilized as an
     estimate of the fair value of financial instruments. In cases where quoted
     market prices are not available, fair values have been estimated using
     present value or other valuation techniques. These methods are highly
     sensitive to the assumptions used by management, such as those concerning
     appropriate discount rates and estimates of future cash flows. Different
     assumptions could significantly affect the estimated fair value amounts
     presented below. In this regard, the derived fair value estimates cannot be
     substantiated by comparison to independent markets and, in many cases,
     could not be realized in the immediate settlement of the instrument.
     Further, assets that are not financial instruments are not included in the
     following table. Accordingly, the aggregated estimated fair value amounts
     presented do not represent the underlying value of the Company.

                                      38
<PAGE>
 
     This table summarizes the Company's disclosure of fair values of financial
     instruments made in accordance with the requirements of SFAS No. 107:

<TABLE>
<CAPTION>
                                                                 AT JUNE 30, 1998             At June 30, 1997
                                                          -----------------------------  ----------------------------
                                                            CARRYING        ESTIMATED      Carrying      Estimated
                                                             AMOUNT        FAIR VALUE       Amount      Fair Value
                                                          ------------   --------------  -----------  ---------------
                                                                             (Dollars in thousands)
<S>                                                       <C>            <C>             <C>          <C> 
          ASSETS:                             
            Cash on hand and in banks                        $ 6,422         $ 6,422        $ 5,807        $ 5,807  
            Securities--AFS                                   22,239          22,239         17,621         17,621  
            Securities--HTM                                   34,077          34,811         44,157         44,250  
            Loans receivable, net                             41,153          42,033         36,180         36,006  
                                                                                                                    
          LIABILITIES:                                                                                              
            Deposits                                          85,926          86,338         86,759         87,069  
            Other liabilities and borrowed                                                                          
               funds                                             120             120            119            119  
</TABLE>

     The following methods and assumptions were used by the Company in
     estimating the fair values provided above:

     CASH AND CASH EQUIVALENTS

     The carrying value of highly liquid instruments, such as cash on hand and
     cash equivalents are considered to approximate their fair value.

     SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY

     Substantially all of the Company's securities available for sale have a
     readily determinable fair value. Fair values for these securities are based
     on quoted market prices, where available. If not available, fair values are
     based on market prices of comparable instruments. The carrying value of
     accrued interest on these instruments approximates fair value.

     LOANS RECEIVABLE, NET

     For loans with rates which are repriced in coordination with movements in
     market rates and with no significant change in credit risk, fair value
     estimates are based on carrying values. The fair values for certain
     mortgage loans are based on quoted market prices of similar loans sold in
     conjunction with securitizing transactions, adjusted for differences in
     loan characteristics. The fair values of other loans are estimated by
     discounting future cash flows using current rates at which loans with
     similar terms would be made to borrowers of similar credit ratings. The
     carrying amount of accrued interest on loans approximates fair values.

                                      39
<PAGE>
 
     DEPOSITS

     The fair value of deposits with no stated maturity, such as interest and
     non-interest demand deposits, NOW accounts, savings accounts, and money
     market accounts, is, by definition, equal to the amount payable on demand
     at the reporting date (i.e., their carrying amounts). Fair values for
     certificates of deposit are estimated using a discounted cash flow analysis
     that applies rates currently offered for certificates of similar remaining
     maturities. The carrying amount of accrued interest payable on deposits
     approximates its fair value.

     OTHER LIABILITIES AND BORROWED FUNDS

     The carrying amount of accrued interest payable and advance payments by
     borrowers approximates its fair value.

     OFF-BALANCE-SHEET INSTRUMENTS

     Off-balance-sheet financial instruments include commitments to extend
     credit. The fair value of such commitments is negligible since the
     arrangements are at current rates, are for short periods, and there is no
     known credit exposure.

                                      40
<PAGE>
 
17.  PARENT COMPANY FINANCIAL STATEMENTS

     Separate condensed financial statements of The Southern Banc Company, Inc.
     (the "Parent Company") as of and for the years ended June 30, 1998 and 1997
     are presented below:

                       STATEMENT OF FINANCIAL CONDITION

                            JUNE 30, 1998 AND 1997

                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                               1998        1997
                                                                           -----------  ----------
     <S>                                                                   <C>          <C> 
     ASSETS:
       Cash and cash equivalents                                             $ 1,860      $ 2,128
       Investment in subsidiary                                               15,953       14,895
       ESOP loan receivable                                                      826          932
       Other assets                                                               44           50
                                                                           ---------    --------- 
                Total assets                                                 $18,683      $18,005
                                                                           =========    =========
     LIABILITIES:                                                                                
       Other liabilities                                                     $   113      $    74
                                                                           ---------    --------- 
     STOCKHOLDERS' EQUITY:                                                                       
       Preferred stock                                                             0            0
       Common stock                                                               15           15
       Paid-in capital                                                        13,676       13,642
       Retained earnings                                                       9,433        9,253
       Unearned compensation                                                  (1,602)      (1,917)
       Treasury stock                                                         (3,000)      (3,000)
       Unrealized gain (loss) on securities available for sale, net               48          (62)
                                                                           ---------    --------- 
                Total stockholders' equity                                    18,570       17,931
                                                                           ---------    --------- 
                Total liabilities and stockholders' equity                   $18,683      $18,005 
                                                                           =========    ========= 
</TABLE>

                                      41
<PAGE>
 
                              STATEMENT OF INCOME

                  FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                       1998        1997
                                                                                                    ----------  ---------
     <S>                                                                                            <C>         <C> 
     INCOME FROM SUBSIDIARY:                                             
       Dividends                                                                                       $   0      $1,000 
       Interest                                                                                          142         165  
                                                                                                    --------    -------- 
              Total income                                                                               142       1,165  
     OPERATING EXPENSE                                                                                   128         110  
                                                                                                    --------    -------- 
     INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED CURRENT YEAR                                                  
                  SUBSIDIARY EARNINGS                                                                     14       1,055  
                                                                                                                          
     INCOME TAXES                                                                                          3          14  
                                                                                                    --------    -------- 
     INCOME BEFORE EQUITY IN UNDISTRIBUTED CURRENT YEAR                                                                   
     SUBSIDIARY EARNINGS                                                                                  11       1,041  
                                                                                                                          
     DISTRIBUTIONS (OVER) UNDER CURRENT YEAR SUBSIDIARY EARNINGS                                         532        (899)  
                                                                                                    --------    -------- 
               Net income                                                                              $ 543      $  142   
                                                                                                    ========    ======== 
</TABLE> 
 
                            STATEMENT OF CASH FLOWS

                  FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                       1998        1997
                                                                                                    ----------  ---------
     <S>                                                                                            <C>         <C> 
     OPERATING ACTIVITIES:                                                              
      Net income                                                                                      $  543     $   142      
      Distributions over (under) current year subsidiary earnings                                       (532)        899      
                                                                                                    --------    -------- 
                                                                                                          11       1,041      
      Adjustments to reconcile net income to net cash provided by operating activities:                                       
        Decrease in other assets                                                                           6           1      
        Increase (decrease) in other liabilities                                                          39        (631)     
                                                                                                    --------    -------- 
            Net cash provided (used in) operating activities                                              56         411      
                                                                                                    --------    -------- 
     INVESTING ACTIVITIES:                                                                                                    
            Net cash provided by investing activities                                                      0           0      
                                                                                                    --------    -------- 
     FINANCING ACTIVITIES:                                                                                                    
      Capital contributions to subsidiary                                                               (145)        (68)     
      Capital contributions to plan trust                                                                (22)        (46)     
      Payments received on ESOP loan                                                                     106          95      
      Proceeds from exercise of stock options                                                            100           6      
      Purchase of treasury stock                                                                           0      (2,042)     
      Dividends paid                                                                                    (363)       (591)     
                                                                                                    --------    -------- 
            Net cash used in financing activities                                                       (324)     (2,646)     
                                                                                                    --------    -------- 
     DECREASE IN CASH AND CASH EQUIVALENTS                                                              (268)     (2,235)     
                                                                                                                              
     CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                    2,128       4,363      
                                                                                                    --------    -------- 
     CASH AND CASH EQUIVALENTS AT END OF YEAR                                                         $1,860     $ 2,128      
                                                                                                    ========    ======== 
</TABLE>

                                      42
<PAGE>
 
                             CORPORATE INFORMATION

Directors:

James B. Little, Jr.
 Chairman of the Board, President and Chief
   Executive Officer of the Company and the
   Association

Craig G. Cantrell
 Retired

Thomas F. Dowling
 Dentist
 Gadsden, Alabama

Grady Gillam
 Retired

W. Roscoe Johnson, III
 Partner in law firm of Inzer, Haney, Johnson
     & McWhorter, P.A.
 Gadsden, Alabama

Rex G. Keeling, Jr.
 Property/Casualty Salesman with Insurance Facilities

Gates Little
 Executive Vice President of the Company and
 the Association

Fred Taylor
 Owner of Taylor Realty
 Albertville, Alabama

Officers:

James B. Little, Jr.
 President and Chief Executive Officer of the
 Company and the Association

Gates Little
 Executive Vice President of the Company and
 the Association

Rodney Rich
 Vice President of the Association

Martha Stewart
 Secretary of the Association

Janice Stephens
 Comptroller of the Association

Teresa Elkins
 Vice President of the Association

Officers (continued):

Peggy Smith
 Secretary of the Company and Treasurer of the
 Association

Martha Garrett
 Vice President of the Association

Main Office:

 221 S. 6th Street
 Gadsden, Alabama

Branch Offices:

 202 Sand Mountain Drive
 Albertville, Alabama

 395 Gunter Avenue
 Guntersville, Alabama

 390 W. Main Street
 Centre, Alabama

Independent Auditor:

 Arthur Andersen LLP
 Birmingham, Alabama

General Counsel:

 Inzer, Haney, Johnson & McWhorter, P.A.
 Gadsden, Alabama

Securities and Regulatory Counsel:

 Housley Kantarian & Bronstein, P.C.
 1220 19th Street, NW, Suite 700
 Washington, D.C.

Annual Stockholders Meeting:

 November 12, 1998 - 5:00 p.m.
 First Federal Savings and Loan Association of Gadsden
 221 S. 6th Street
 Gadsden, Alabama
 Record Date - September 25, 1998
<PAGE>
 
================================================================================









































================================================================================

                        THE SOUTHERN BANC COMPANY, INC.

        221 SOUTH 6TH  STREET . GADSDEN, ALABAMA 35901 . (205) 543-3860