SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

(Mark One)

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

For the fiscal year ended June 30, 2000

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

For the transition period from                to
                               --------------     ---------------

                         Commission File Number: 1-13964

                         THE SOUTHERN BANC COMPANY, INC.
                         -------------------------------
                 (Name of Small Business Issuer in Its Charter)

          DELAWARE                                   63-1146351
--------------------------------         ------------------------------------
(State or Other Jurisdiction of          (I.R.S. Employer Identification No.)
 Incorporation or Organization)

221 S. 6TH STREET, GADSDEN, ALABAMA            35901
--------------------------------------       --------
(Address of Principal Executive Offices)    (Zip Code)

         Issuer's Telephone Number, Including Area Code: (256) 543-3860

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

COMMON STOCK, PAR VALUE $.01 PER SHARE          AMERICAN STOCK EXCHANGE
--------------------------------------    --------------------------------------
             (Title of Class)             (Name of Exchange on Which Registered)

           Securities registered pursuant to Section 12(g) of the Act:
                                 Not Applicable

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

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

Registrant's revenues for the fiscal year ended June 30, 2000:  $645,725

The  aggregate  market  value  of the  757,817  shares  of  Common  Stock of the
registrant issued and outstanding held by non-affiliates  was approximately $8.0
million based on the closing sales price of $10.56 per share of the registrant's
Common Stock on September 25, 2000 as listed on the American Stock Exchange. For
purposes of this calculation,  it is assumed that directors,  executive officers
and beneficial  owners of more than 10% of the registrant's  outstanding  voting
stock are affiliates.

Number of shares of Common Stock outstanding as of September 25, 2000: 1,006,498

Transitional Small Business Disclosure Format   Yes              No    X
                                                    --------        ------

                       DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents incorporated by reference and the part of this
report into which the document is incorporated:

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year Ended
     June 30, 2000 (the "Annual Report"). (Parts I and II)

2.   Portions of the Proxy Statement for the registrant's 2000 Annual Meeting of
     Stockholders (the "Proxy Statement"). (Part III)


<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         The Southern  Banc Company,  Inc. The Southern Banc Company,  Inc. (the
"Company") was incorporated  under the laws of the State of Delaware in May 1995
at the direction of management  of The Southern  Bank  Company,  formerly  First
Federal Savings and Loan Association of Gadsden (the "Bank"), for the purpose of
serving  as the  savings  institution  holding  company  of the  Bank  upon  the
Company's  acquisition  of  all of the  capital  stock  issued  by the  Bank  in
connection with the Bank's conversion from mutual to stock form.

         The  holding  company  structure  permits  the  Company  to expand  the
financial  services offered through the Bank. As a holding company,  the Company
has greater  flexibility  than the Bank to  diversify  its  business  activities
through existing or newly formed  subsidiaries or through  acquisition or merger
with other financial  institutions.  The Company  qualifies as a unitary savings
institution holding company and is subject to regulation by the Office of Thrift
Supervision  ("OTS").  The Company's  principal  business is the business of the
Bank.  At June 30,  2000,  the  Company had total  consolidated  assets of $98.1
million,  deposits of $81.4 million,  net loans  receivable of $39.8 million and
stockholders' equity of $16.3 million.

         The  Company's  executive  offices  are  located at 221 S. 6th  Street,
Gadsden, Alabama 35901, and its telephone number is (256) 543-3860.

         The   Southern   Bank   Company.    The   Bank   is   an    independent
community-oriented  savings institution  dedicated to providing quality customer
service.  The Bank 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.

         In 1999,  the Bank  changed  it  corporate  title from  "First  Federal
Savings and Loan  Association  of Gadsden" to "The Southern  Bank  Company." The
change of name was made to eliminate any  confusion  between the Company and the
Bank and to increase public awareness of the expanded banking services which the
Bank  is  authorized  to  offer.  The  Bank  currently   operates  through  four
full-service banking offices located in Gadsden,  Albertville,  Guntersville and
Centre, Alabama.

         As a federally  chartered savings  institution,  the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory  requirements,  and the OTS
periodically   examines  the  Bank  for  compliance   with  various   regulatory
requirements.  The Federal Deposit Insurance  Corporation  ("FDIC") also has the
authority to conduct special  examinations.  The Bank 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").

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

         Certain  matters  discussed  in  this  document  are  "forward  looking
statements," intended to qualify for the safe harbors from liability established
by the Private Securities  Legislation Reform Act of 1995. These forward looking
statements  can  generally  be  identified  as such  because  the context of the
statement  will  include  words such as the Company  "believes,"  "anticipates,"
"expects," "estimates," or words of similar import.  Similarly,  statements that
describe  the  Company's  future  plans,  objectives  or goals are also  forward
looking statements. Such forward looking statements are subject to certain risks
and

                                       1
<PAGE>

uncertainties  which are  described in close  proximity to such  statements  and
which could cause actual results to differ  materially from those anticipated as
of the date of this report. Stockholders, potential investors, and other readers
are cautioned not to place undue  reliance on such  forward-looking  statements.
The  forward-looking  statements included herein are only made as of the date of
this report and the Company  undertakes no  obligation  to publicly  update such
forward-looking statements to reflect subsequent events or circumstances.

BUSINESS STRATEGY

         The Bank's  business  strategy has been to operate as a profitable  and
independent   community-oriented  savings  institution  dedicated  to  providing
quality  customer  service.  Generally,  the Bank 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
Bank's market area,  U.S.  government  and agency  securities,  interest-earning
deposits, cash and equivalents, and consumer loans. The Bank'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 retail
deposit base from the communities served by the Bank'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.

MARKET AREA

         The Bank  considers  its  primary  market  area to  consist  of Etowah,
Cherokee and Marshall Counties in which the Bank has its four offices.  The City
of Gadsden,  in which the Bank's main  office is located,  is in Etowah  County,
approximately  65 miles  northeast of Birmingham,  Alabama.  Based upon the 1990
population  census,  the combined  population  of Etowah,  Cherokee and Marshall
Counties was approximately 190,000.

         The  economy  in  the  Bank's   market  area   includes  a  mixture  of
manufacturing and agriculture. For many years the two major industrial employers
were  Goodyear  Tire and  Rubber  Company  ("Goodyear")  and Gulf  States  Steel
Corporation ("Gulf States"). At present, Goodyear employs 1,205 workers which is
a decline from 1,600  workers as of January  1999.  Negotiations  are  currently
underway  between  Goodyear and state and local  government  for  assistance  in
modernizing the Gadsden plant. If successful,  the modernization  would increase
production and create  approximately  300 jobs.  Gulf States,  which  previously
employed 1,850  workers,  ceased  production on August 21, 2000 after  operating
under Chapter 11 Bankruptcy since July 1999.  Currently,  Honda Motor Company is
constructing a  manufacturing  plant in Talladega  County only 17 miles from the
Etowah County line.  According to  projections,  the Honda Plant,  suppliers and
additional   economic   opportunities   for  local   businesses   could  produce
approximately  900 jobs for Etowah  County  residents.  According to the Alabama
Department of Industrial  Relations,  the unemployment  rates for August 2000 in
Etowah,  Cherokee and Marshall Counties were 6.0%, 5.3% and 4.9%,  respectively,
as compared to 4.5% for the State of Alabama.

                                       2
<PAGE>

COMPETITION

         The Bank  experiences  substantial  competition  both in attracting and
retaining savings deposits and in the making of mortgage and other loans.

         Direct  competition  for  savings  deposits  comes from  other  savings
institutions,  credit  unions,  regional bank holding  companies and  commercial
banks located in its primary market area. Significant competition for the Bank's
other  deposit  products and services  comes from money market  mutual funds and
brokerage  firms.  The primary factors in competing for loans are interest rates
and loan origination fees and the range of services offered by various financial
institutions.  Competition  for  origination of real estate loans normally comes
from other savings  institutions,  commercial  banks,  credit  unions,  mortgage
bankers, and mortgage brokers.

         The Bank's primary competition comes from institutions headquartered in
the Bank's  market area as well as numerous  additional  commercial  banks which
have branch offices located in the Bank's market area. Many competing  financial
institutions have financial  resources  substantially  greater than the Bank and
offer a wider variety of deposit and loan products.

LENDING ACTIVITIES

         General.   The  Bank's  principal  lending  activity  consists  of  the
origination  of  loans  secured  by  mortgages  on  existing  one-to-four-family
residences  and a variety of consumer  loans in the Bank's market area. The Bank
also makes limited  amounts of  non-residential  real estate loans.  The Bank is
authorized to make  commercial  business loans;  however,  that has not been its
focus historically.

         Savings  institutions  generally  are  subject  to the  lending  limits
applicable  to national  banks.  With certain  limited  exceptions,  the maximum
amount that a savings  institution  or a national  bank may lend to any borrower
(including  certain related entities of the borrower) at one time may not exceed
15% of the unimpaired capital and surplus of the institution, plus an additional
10% of  unimpaired  capital  and  surplus  for loans  fully  secured  by readily
marketable collateral.  Savings institutions are additionally authorized to make
loans to one borrower,  for any purpose, in an amount not to exceed $500,000 or,
by order of the  Director  of OTS,  in an  amount  not to exceed  the  lesser of
$30,000,000  or 30% of  unimpaired  capital and  surplus to develop  residential
housing,  provided: (i) the purchase price of each single-family dwelling in the
development  does not  exceed  $500,000;  (ii)  the  savings  institution  is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable  loan-to-value  requirements,  and; (iv) the aggregate amount of
loans made under this  authority  does not exceed 15% of unimpaired  capital and
surplus.

         At June 30, 2000, the maximum amount that the Bank could have loaned to
any one borrower without prior OTS approval was approximately  $4.1 million.  At
such date, the largest  aggregate  amount of loans that the Bank had outstanding
to any one borrower was approximately $252,000.

                                       3
<PAGE>

         Loan  Portfolio  Composition.  The following  table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated.  At June 30, 2000, the Bank had no  concentrations of loans
exceeding 10% of total loans that are not disclosed below.
<TABLE>
<CAPTION>

                                                                                At June 30,
                                                      -----------------------------------------------------------------
                                                                   2000                              1999
                                                      -------------------------------    ------------------------------
                                                          AMOUNT            %                AMOUNT            %
                                                          ------          -----              ------          ---
                                                                           (Dollars in thousands)

TYPE OF LOAN:
------------
Real estate loans:
<S>                                                   <C>                  <C>           <C>                  <C>
  One-to-four-family residential(1)..............     $    33,401          83.48%        $     36,702         87.17%
  Non-residential................................              96           0.24                  302          0.72
Consumer loans...................................           5,746          14.36                4,451         10.57
Savings account loans............................             769           1.92                  647          1.54
                                                      -----------     ----------         ------------    ----------
Total gross loans................................          40,012         100.00%              42,102        100.00%
                                                                      ===========                        ===========

LESS:
----
  Unearned income................................             383                                 240
  Discounts on loans purchased...................               9                                  --
  Deferred loan fees (costs), net................            (335)                               (345)
  Allowance for loan losses......................             115                                  98
                                                      -----------                        ------------
     Total.......................................     $     39,840                       $     42,109
                                                      ============                       ============

---------------
(1)  One-to-four-family  residential includes second mortgage loans on which the
     Bank also has the first  mortgage.  The proceeds of these  second  mortgage
     loans were used for  improvements  and consumer  purposes.  Second mortgage
     loan balances at June 30, 2000 and 1999 were  approximately  $1,462,000 and
     $1,464,000, respectively.
</TABLE>

         The following  table sets forth  information at June 30, 2000 regarding
the dollar amount of loans maturing or repricing in the Bank's portfolio,  based
on contractual terms to maturity or repricing period. Demand loans, loans having
no schedule of repayments and no stated  maturity and overdrafts are reported as
due in one year or less.
<TABLE>
<CAPTION>

                                                                      Due After
                                                  Due Within          1 through         Due After
                                                    1 Year             5 Years        5 Years After
                                                 AFTER 6/30/00      AFTER 6/30/00        6/30/00          TOTAL
                                                 -------------      -------------        -------          -----
                                                                   (In thousands)

<S>                                            <C>                <C>                <C>               <C>
Real estate mortgage(1).................  .    $         233      $         2,081    $     31,183      $    33,497
Consumer and savings account loans...                  1,856                4,212             447            6,515
                                               -------------      ---------------    ------------      -----------
    Total................................      $       2,089      $         6,293    $     31,630      $    40,012
                                               =============      ===============    ============      ===========
</TABLE>
---------------
(1)  Real estate mortgage loans includes second mortgage loans on which the Bank
     also has the first  mortgage.  The proceeds of these second  mortgage loans
     were used for  improvements  and consumer  purposes.  Second  mortgage loan
     balances at June 30, 2000 totaled $1,462,000.

                                       4
<PAGE>

         The following  table sets forth at June 30, 2000,  the dollar amount of
gross loans due after one year after that date, based upon contractual  maturity
dates or period to  reprice,  and  whether  such loans have fixed or  adjustable
rates.
<TABLE>
<CAPTION>
                                                              Predetermined                        Floating or
                                                                   RATE                         ADJUSTABLE RATES
                                                             ----------------                   ----------------
                                                                                (In thousands)

<S>                                                            <C>                                <C>
Real estate....................................                $     31,248                       $     2,249
Consumer and savings account loans.............                       6,515                                --
                                                               ------------                      ------------
    Total......................................                $     37,763                       $     2,249
                                                               ============                       ===========
</TABLE>

         Scheduled  contractual principal repayments of loans do not necessarily
reflect the actual life of such assets.  The average life of long-term  loans is
substantially less than their contractual terms, due to prepayments. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are higher than rates on  existing  mortgage  loans and tends to  decrease  when
current  mortgage  loan market  rates are lower than rates on existing  mortgage
loans.

         Originations,  Purchases  and  Sales of  Loans.  The  Bank's  loans are
primarily  originated by salaried  loan officers of the Bank. In addition,  from
time to time, the Bank purchases  loans.  During fiscal 2000, the Bank purchased
one real  estate loan  totaling  approximately  $40,000.  During the fiscal year
ended June 30, 2000,  the Bank  originated and sold a total of $596,000 in loans
to the secondary market.

         One-to-Four-Family   Residential  Lending.   Historically,  the  Bank's
principal  lending activity has been the origination of fixed rate loans secured
by first  mortgages  on  existing  one-to-four-family  residences  in the Bank's
market area.  The purchase price or appraised  value of most of such  residences
generally has been between  $24,000 and  $290,000,  with the Bank's loan amounts
averaging  approximately  $54,000.  At June 30, 2000, $33.4 million, or 83.5% of
the  Bank's  total  loans  were  secured  by  one-to-four-family  residences,  a
substantial  portion  of  which  were  existing,  owner-occupied,  single-family
residences in the Bank's market area. At June 30, 2000, $31.2 million,  or 93.4%
of the Bank's  one-to-four-family  residential  loans had fixed rates,  and $2.2
million, or 6.6%, had adjustable rates.

         The Bank's one-to-four-family  residential mortgage loans generally are
for terms of up to 21 years,  amortized on a monthly  basis,  with principal and
interest due each month. The majority of the Bank's one-to-four-family  mortgage
loans are underwritten  with terms of 15 years or less.  Residential real estate
loans often remain  outstanding  for  significantly  shorter  periods than their
contractual terms. These loans customarily contain  "due-on-sale"  clauses which
permit the Bank to accelerate  repayment of a loan upon transfer of ownership of
the mortgaged property. In 1995, the Bank introduced a new mortgage loan product
which  provides for a term of up to 21 years with the interest  rate  increasing
one percentage point every seven years. This increase is not contingent upon any
corresponding  increase in market  interest rates. As of June 30, 2000, the Bank
had originated $7.4 million of these  graduated rate loans.  The Bank intends to
continue originating such loans subject to market demands.

         The Bank's lending policies  generally limit the maximum  loan-to-value
ratio on one-to-four-family residential mortgage loans secured by owner-occupied
properties to 97% of the lesser of the appraised  value or purchase  price.  The
Bank's lending policies  generally  require private  mortgage  insurance for any
loan that exceeds an 80% loan-to-value  ratio.  Pursuant to its "First-Time Home
Buyer  Plan,"  the  Bank  may  lend  up to  100%  of  the  purchase  price  of a
one-to-four-family  residence  provided  that  the  borrower  (or  third  party)
provides  additional  collateral in the form of a pledge of a savings deposit

                                       5
<PAGE>

or  certificate  of deposit  equal to 25% of the loan  amount for loans up to 15
years and 28% of the loan amount for loans with terms  greater  than 15 years up
to 21 years.  Securities may also be pledged as additional collateral,  but such
securities  must  have a  current  market  value  equal to 140% of the  required
collateral amount.

         The Bank has not  originated any  adjustable  rate,  one-to-four-family
residential  mortgage  loans in recent years.  However,  total loans at June 30,
2000 included  adjustable rate loans with an aggregate principal balance of $2.2
million, substantially all of which were purchased during fiscal 1996. The rates
at which interest accrues on these loans are adjustable annually, generally with
limitations on  adjustments  of 2.0% per adjustment  period and 6.0% - 6.5% over
the life of the loan.  While such loans may include  initial  discounted  rates,
they were  underwritten  and borrowers were qualified based on the fully indexed
interest  rate.  The  Bank's  adjustable  rate  loans  do  not  permit  negative
amortization.

         The Bank also  originates  second  mortgage  loans.  Such  loans,  when
combined with the first mortgage,  generally are limited to 75% of the appraised
value. Such loans have a fixed rate and a maximum term of 10 years.

         The  retention of  adjustable  and  graduated  rate loans in the Bank's
portfolio  helps reduce the Bank's  exposure to increases in  prevailing  market
interest rates.  However,  there are unquantifiable  credit risks resulting from
potential  increases in costs to  borrowers in the event of upward  repricing of
adjustable  rate loans.  It is possible that during  periods of rising  interest
rates,  the risk of default on adjustable  and graduated rate loans may increase
due to increases in interest  costs to borrowers.  Adjustable and graduated rate
loans which provide for initial rates of interest  below the fully indexed rates
may be subject to increased risk of delinquency or default as the higher,  fully
indexed rate of interest subsequently replaces the lower, initial rate. Further,
although adjustable rate loans allow the Bank to increase the sensitivity of its
interest-earning  assets  to  changes  in  interest  rates,  the  extent of this
interest  sensitivity  is limited by the initial  fixed rate  period  before the
first   adjustment,   the  periodic  and  lifetime   interest  rate   adjustment
limitations,  and the ability of  borrowers to convert the loans to fixed rates.
Accordingly, there can be no assurance that yields on the Bank's adjustable rate
loans will fully adjust to compensate for increases in the Bank's cost of funds.
Finally,  adjustable  rate loans  increase  the Bank's  exposure to decreases in
prevailing market interest rates, although decreases in the Bank's cost of funds
tend to offset this effect.

         Consumer  Lending.  The Bank's consumer loans consist primarily of home
equity lines of credit  secured by first or second  mortgages  on  single-family
residences in the Bank's market area, new and used automobile loans, and secured
demand loans. These loans totaled  approximately $1.1 million,  $4.6 million and
$800,000,  respectively,  at June 30,  2000.  Management  plans to continue  the
Bank's expansion of these programs as part of the Bank's plan to provide a wider
range of financial  services to the Bank's customers while increasing the Bank's
portfolio yields.

         The Bank makes home equity  lines of credit  secured by the  borrower's
residence.  These loans, combined with the first mortgage loan, which usually is
from the  Bank,  generally  are  limited  to 75% of the  appraised  value of the
residence as long as the first mortgage is held by the Bank and 70% if the first
mortgage is held by another  lender.  Home equity  lines of credit are  open-end
with  the rate on such  loans  adjusting  monthly  based  on the  Prime  Rate as
published in The Wall Street Journal as of the first day of the month.

         The Bank's new and used automobile  loans generally are underwritten in
amounts  up to 85% of the  purchase  price,  dealer  cost or the  loan  value as
published by the  National  Automobile  Dealers  Association  (i.e.,  the "Black
Book"). The terms of such loans generally do not exceed 60 months with loans for
older used cars  underwritten  for shorter  terms.  The Bank  requires  that the
vehicles be insured

                                       6
<PAGE>

and that the Bank be listed as loss payee on the  insurance
policy.  The Bank  originates a portion of its  automobile  loans on an indirect
basis  through  various  dealerships  located in its market area.  See " -- Loan
Solicitation and Processing."

         The Bank  generally  makes  savings  account loans for up to 80% of the
balance of the  account.  The  interest  rate on these  loans is  generally  two
percentage points above the rate paid on the account,  and interest is billed on
a monthly  basis.  These  loans are payable on demand,  and the account  must be
pledged as collateral to secure the loan.

         Consumer loans  generally  involve more risk than first mortgage loans.
Repossessed  collateral for a defaulted loan may not provide an adequate  source
of repayment  of the  outstanding  loan  balance as a result of damage,  loss or
depreciation,  and the  remaining  deficiency  often  does not  warrant  further
substantial   collection  efforts  against  the  borrower.  In  addition,   loan
collections are dependent on the borrower's continuing financial stability,  and
thus are more likely to be adversely affected by job loss,  divorce,  illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower  against the Bank,  and a borrower may be able to assert  against the
Bank  claims and  defenses  which it has  against  the seller of the  underlying
collateral.  In underwriting  consumer loans,  the Bank considers the borrower's
credit history,  an analysis of the borrower's  income,  expenses and ability to
repay the loan, and the value of the collateral.

         Loan  Solicitation  and Processing.  The Bank's loan  originations  are
derived from a number of sources,  including  referrals  by realtors,  builders,
depositors,  borrowers,  as well as walk-in  customers.  In  addition,  the Bank
originates  a portion  of its  automobile  loans on an  indirect  basis  through
various  dealerships  located in the Bank's market area. The Bank's solicitation
programs  consist of calls by the Bank's officers to local realtors and builders
and  advertisements  in local  newspapers,  billboards  and real  estate-related
periodicals.  Real estate loans are originated by the Bank's staff loan officers
and executive officers, none of whom receives commissions for loan originations.
Loan  applications are accepted at each of the Bank's offices for processing and
approval.

         Upon receipt of a loan  application  from a prospective  borrower,  the
Bank's staff  obtains the necessary  information  and then prepares the file for
processing.  Once in processing,  a credit report and  verifications of the loan
applicant's  employment,  income and credit  standing are made. It is the Bank's
policy to obtain an appraisal  of the real estate  intended to secure a proposed
mortgage loan from a Bank-approved appraiser. The Bank generally does not obtain
a formal  environmental  report  on the real  estate at the time a loan is made,
except  when  the  Bank  becomes  aware of a  particular  risk of  environmental
contamination.

         It is the Bank's  policy to record a lien on the real  estate  securing
the loan and,  in most  instances,  to  obtain a title  insurance  policy  which
insures that the  property is free of prior  encumbrances.  Borrowers  must also
obtain hazard insurance policies prior to closing and, when the property is in a
designated flood plain, paid flood insurance policies are required.

         The Board of Directors has the overall responsibility and authority for
general  supervision  of the Bank's  loan  policies.  The Board has  established
written lending policies for the Bank. The Bank has established a loan committee
which is comprised of Board members and Executive  Officers.  Any loan committee
member  has the  authority  to  approve  mortgage  loans of  $200,000  or under.
Mortgage  loans over  $200,000  require  the  approval of one  committee  member
accompanied  by the approval of the Chairman of the Board.  Consumer loans up to
$20,000 may be approved by individual loan officers. Consumer loans greater than
$20,000  must be approved by at least two  members of the Bank's  consumer

                                       7
<PAGE>

loan  committee  which is  comprised  of all of the Bank's loan  officers.  Loan
applicants  are  promptly  notified  of the  decision  of the Bank.  It has been
management's experience that substantially all approved loans are funded.

         Interest  Rates and Loan Fees.  Interest  rates  charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market  area and the Bank's  minimum  yield  requirements.  Mortgage  loan rates
reflect factors such as prevailing  market  interest rate levels,  the supply of
money  available to the savings  industry  and the demand for such loans.  These
factors  are in turn  affected  by general  economic  conditions,  the  monetary
policies of the federal  government,  including the Federal  Reserve Board,  the
general  supply of money in the economy,  tax policies and  governmental  budget
matters.

         The Bank  receives  fees in  connection  with loan  originations,  loan
modifications,   late  payments,   changes  of  property   ownership,   and  for
miscellaneous   services  related  to  its  loans.  Loan  origination  fees  are
calculated as a percentage of the loan  principal.  The Bank typically  receives
fees of up to 1.0% in  connection  with the  origination  of fixed rate mortgage
loans. The excess, if any, of loan origination fees over direct loan origination
expenses is deferred and accreted into income over the  contractual  life of the
loan using the interest  method.  If a loan is prepaid,  refinanced or sold, all
remaining  deferred fees with respect to such loan are taken into income at such
time.

         Collection Policies. When a borrower fails to make a payment on a loan,
the Bank generally takes prompt steps to have the delinquency cured and the loan
restored to current  status.  Once the payment grace period has expired (in most
instances 15 days after the due date),  a late notice is mailed to the borrower,
and a late charge is imposed,  if applicable.  Loans on which payments are 30 or
more days delinquent and possess credit deficiencies or potential weaknesses are
designated as "special mention." The Bank's Board of Directors reviews a list of
all  classified  assets  on a  monthly  basis.  See " --  Asset  Classification,
Allowances for Losses and  Non-performing  Assets." If a loan remains delinquent
90 days or more,  the Bank generally  makes demand for payment and/or  initiates
foreclosure or other legal proceedings.

         Asset Classification,  Allowances for Losses and Non-performing Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be  inadequately  protected by the current net worth and paying
capacity  of the  obligor  or of the  collateral  pledged,  if any.  An asset is
classified as doubtful if full collection is highly  questionable or improbable.
An asset is  classified  as loss if it is  considered  uncollectible,  even if a
partial  recovery could be expected in the future.  The regulations also provide
for a special  mention  designation,  described as assets which do not currently
expose an institution to a sufficient  degree of risk to warrant  classification
but  do  possess  credit   deficiencies   or  potential   weaknesses   deserving
management's  close  attention.  Assets  classified as  substandard  or doubtful
require an institution to establish  general  allowances for loan losses.  If an
asset or  portion  thereof  is  classified  loss,  an  institution  must  either
establish  a specific  allowance  for loss in the  amount of the  portion of the
asset classified loss, or charge off such amount. Federal examiners may disagree
with an institution's classifications.  If an institution does not agree with an
examiner's  classification of an asset, it may appeal this  determination to the
OTS  Regional  Director.  The Bank  regularly  reviews  its assets to  determine
whether any assets require  classification  or  re-classification.  The Board of
Directors reviews and approves all  classifications  on a monthly basis. At June
30, 2000, the Bank had $1,772 of assets classified as loss, no assets classified
as doubtful,  $36,104 of assets classified as substandard and $752,249 of assets
designated as special mention.

         In extending  credit,  the Bank  recognizes  that losses will occur and
that the risk of loss will vary with,  among  other  things,  the type of credit
being  extended,  the  creditworthiness  of the  obligor  over  the

                                       8
<PAGE>

term of the  obligation,  general  economic  conditions  and,  in the  case of a
secured  obligation,  the quality of the security.  It is management's policy to
maintain allowances for losses based on, among other things,  regular reviews of
delinquencies  and credit  portfolio  quality,  character  and size,  the Bank's
historical loss experience and current and forecasted economic  conditions.  The
Bank  increases its allowance for loan losses by charging  provisions for losses
against the Bank's income.

         Management  actively  monitors the Bank's asset quality and charges off
loans against the allowance for losses on such loans and makes  additional  loss
provisions in its discretion.  Allowances are provided for individual assets, or
portions  of assets,  when  ultimate  collection  is  considered  improbable  by
management  based on the current payment status of the assets and the fair value
or net realizable value of the collateral.  Although management believes it uses
the best  information  available  to make  determinations  with  respect  to the
allowance for losses, future adjustments may be necessary if economic conditions
differ  substantially  from the economic  conditions in the assumptions  used in
making the initial determinations.

         At the date of  foreclosure or other  repossession,  the Bank transfers
the  property to real estate  acquired  in  settlement  of loans at the lower of
recorded  investment  in the  loan  or  fair  value,  net of  estimated  cost of
disposition.  Fair value is  defined  as the  amount in cash or  cash-equivalent
value of other  consideration  that a  property  would  yield in a current  sale
between a willing buyer and a willing  seller.  Fair value is measured by market
transactions.  If a market  does  not  exist,  fair  value  of the  property  is
estimated based on selling prices of similar properties in active markets or, if
there are no active markets for similar properties, by discounting a forecast of
expected cash flows at a rate  commensurate  with the risk involved.  Fair value
generally is  determined  through an appraisal at the time of  foreclosure.  Any
amount  of the  recorded  investment  in the  loan in  excess  of fair  value is
charged-off  against the allowance for loan losses.  Subsequent to  foreclosure,
the  property is  periodically  evaluated  by  management  and an  allowance  is
established if the estimated fair value of the property, less estimated costs to
sell,  declines.  If,  upon  ultimate  disposition  of the  property,  net sales
proceeds  exceed the net carrying value of the property,  a gain on sale of real
estate may be recorded if certain conditions are met. At June 30, 2000, the Bank
had no properties acquired in settlement of loans.

                                       9
<PAGE>


         The following table sets forth an analysis of the Bank's  allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
                                                                             Year Ended June 30,
                                                                  ------------------------------------------
                                                                         2000                  1999
                                                                         ----                  ----
                                                                               (In thousands)
<S>                                                               <C>                  <C>
Balance at beginning of period............................        $         98         $         76

Charge-offs...............................................                  --                  (5)

Recoveries................................................                  --                   --

Provision for loan losses.................................                  17                   27
                                                                  ------------         ------------

Balance at end of period..................................        $        115         $         98
                                                                  ============         ============

Ratio of net charge-offs during the period to average
  loans outstanding during the period.....................                0.00%               0.00%
                                                                  ============        =============
</TABLE>

         The  following  table  allocates the allowance for loan losses by asset
category  at the  dates  indicated.  The  allocation  of the  allowance  to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
                                                                         At June 30,
                                            ----------------------------------------------------------------------
                                                         2000                                  1999
                                            --------------------------------     ---------------------------------
                                                               Percent of                           Percent of
                                                                Loans in                             Loans in
                                                                Category                             Category
                                                                to Total                             to Total
                                               AMOUNT             LOANS              AMOUNT           LOANS
                                              --------         -----------        ------------     --------
                                                                   (Dollars in thousands)
Real estate loans:
<S>                                         <C>                    <C>           <C>                   <C>
  One-to four-family residential.......     $        55             83.48%       $        55            87.17%
  Non-residential......................              --               .24                 --             0.72
Consumer and savings account loans.....              60             16.28                 43            12.11
                                            -----------       -----------        -----------      -----------
     Total allowance for loan losses...     $       115            100.00%       $        98           100.00%
                                            ===========       ============       ===========      ===========
</TABLE>

         The Bank ceases  accrual of interest on a loan when payment on the loan
is delinquent in excess of 90 days.  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.

                                       10
<PAGE>


         The following table sets forth  information  with respect to the Bank's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
                                                                              At June 30,
                                                                  ----------------------------------
                                                                         2000                  1999
                                                                         ----                  ----
                                                                           (Dollars in thousands)

Loans accounted for on a non-accrual basis:(1) Real estate loans:
<S>                                                               <C>                  <C>
    One-to-four-family residential........................        $         18         $          6
     Non-residential......................................                  --                   --
Consumer and savings account loans........................                   1                    4
Other loans...............................................                  --                   --
                                                                  ------------         ------------
   Total..................................................        $         19         $         10
                                                                  ============         ============

Accruing loans which are contractually past due 90 days or more:
  Real Estate loans:
  One-to-four-family residential..........................        $         --         $         --
  Non-residential.........................................                  --                   --
Consumer and savings account loans........................                  --                   --
Other loans...............................................                  --                   --
                                                                  ------------         ------------
   Total..................................................        $         --         $         --
                                                                  ============         ============
   Total of non-accrual and accruing loans

Percentage of total loans.................................                0.05%                0.02%
                                                                  ============         ============
Other non-performing assets(2)............................        $         --         $         --
                                                                  ============         ============
Percentage of total assets................................                0.02%                0.01%
                                                                  ============         ============
</TABLE>
------------------
(1)  The Bank ceases  accrual of interest on a loan when  payment on the loan is
     delinquent in excess of 90 days. 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.
(2)  Other  non-performing  assets  may  include  real  estate  or other  assets
     acquired by the Bank through foreclosure or repossession. Real estate owned
     is recorded  at the lower of the  recorded  investment  in the loan or fair
     value of the property, less estimated costs of disposition.

         Interest   income   foregone  on   non-accrual   loans  was  considered
insignificant for the year ended June 30, 2000.

         At June 30, 2000,  management  had  identified  no loans which were not
reflected  in the  preceding  table  but as to  which  known  information  about
possible credit problems of borrowers caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms.

                                       11
<PAGE>

INVESTMENT ACTIVITIES

         The Bank is permitted  under  federal law to make certain  investments,
including investments in securities issued by FNMA, FHLMC, GNMA, various federal
agencies and state and municipal  governments;  deposits at the FHLB of Atlanta;
certificates of deposits in federally  insured  institutions;  certain  bankers'
acceptances;  and federal  funds.  The Bank may also invest,  subject to certain
limitations,  in  commercial  paper  having  one of the two  highest  investment
ratings of a nationally recognized credit rating agency, and certain other types
of corporate debt securities and mutual funds.  Federal  regulations require the
Bank to maintain an investment in FHLB of Atlanta stock and a minimum  amount of
liquid assets which may be invested in cash and specified securities.  From time
to  time,  the OTS  adjusts  the  percentage  of  liquid  assets  which  savings
institutions  are  required  to  maintain.  For  additional   information,   see
"Regulation -- Regulation of the Bank -- Liquidity Requirements."

         The Bank invests in  investment  securities  in order to diversify  its
assets, manage cash flow and interest rate risk, obtain yields, and maintain the
minimum   levels  of  qualified  and  liquid   assets   required  by  regulatory
authorities.  The  investment  activities  of  the  Bank  consist  primarily  of
investments in  mortgage-backed  securities,  U.S. Treasury and U.S.  Government
agency securities, and other securities. Investment decisions are generally made
by the  President  of the  Bank and are  ratified  by the  Board  of  Directors.
Investment and aggregate investment limitations and credit quality parameters of
each class of investment are  prescribed in the Bank's  investment  policy.  The
Bank's  investment  policy  does not permit  the Bank to invest in any  futures,
options or high risk  mortgage  derivatives,  including  residual  interests  in
collateralized  mortgage  obligations and other real estate mortgage  investment
conduits, stripped mortgage-backed securities and other investments that exhibit
a high degree of price volatility.

         Securities designated as "available for sale" are carried at their fair
value with unrealized gains or losses, net of tax effect,  recognized in equity.
Securities designated as held to maturity are carried at amortized cost. At June
30,  2000,  investment  securities  with an  aggregate  amortized  cost of $27.8
million  and an  aggregate  fair value of $27.1  million  were  included  in the
portfolio of securities  designated as available for sale. The aggregate  impact
on equity was a net decrease of  approximately  $254,000 for the year ended June
30, 2000.  The gross  unrealized  loss on securities  available for sale for the
year ended June 30, 2000 was approximately $734.000. For additional information,
see Consolidated  Statements of Stockholders'  Equity and Note 6 to Consolidated
Financial  Statements  in the Annual  Report filed as Exhibit 13 to this Report.
Securities  designated as "held to maturity" are those assets which the Bank has
the ability and management has the intent to hold to maturity. Upon acquisition,
securities are classified as to the Bank's intent.

         Mortgage-Backed  Securities. The Bank maintains a substantial portfolio
of mortgage-backed  securities in the form of GNMA, FHLMC and FNMA participation
certificates.  GNMA,  FHLMC and FNMA  certificates  are each guaranteed by their
respective  agencies as to principal and  interest,  and GNMA  certificates  are
backed by the full  faith and  credit  of the U.S.  Government.  Mortgage-backed
securities  generally entitle the Bank to receive a pro rata portion of the cash
flows from an identified pool of mortgages.  Although mortgage-backed securities
generally  yield less than the loans which are  exchanged  for such  securities,
they  present  substantially  lower  credit  risk,  they  are more  liquid  than
individual mortgage loans, and they may be used to collateralize  obligations of
the Bank.  In  addition,  the Bank's  portfolio  of  mortgage-backed  securities
qualify as "Qualified Thrift Investments" for purposes of determining the Bank's
compliance  with the  "Qualified  Thrift Lender" test and may also be considered
for purposes of meeting certain  definitional  tests  prescribed by the Internal
Revenue Code which entitle thrift  institutions to favorable tax treatment.  See
"Regulation -- Regulation of the Bank -- Qualified  Thrift Lender Test" and " --
Taxation -- Federal Income Taxation."

                                       12
<PAGE>

         Mortgage-backed  securities  typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest  rates  that  are  within  a range  and have  similar  maturities.  The
underlying   pool  of  mortgages  can  be  composed  of  either   fixed-rate  or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  generally  are
referred to as mortgage participation certificates or pass-through certificates.
As a result,  the interest rate risk  characteristics  of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate,  as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security is equal to the life of the underlying mortgages.

         The actual maturity of a mortgage-backed  security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying  mortgages may shorten the life of the investment,  thereby adversely
affecting   its  yield  to  maturity  and  the  related   market  value  of  the
mortgage-backed  security.  The yield is based upon the interest  income and the
amortization  of the  premium  or  accretion  of  the  discount  related  to the
mortgage-backed security.  Premiums and discounts on mortgage-backed  securities
are  amortized or accreted  over the estimated  life of the  securities  using a
level yield  method.  Prepayments  of the  underlying  mortgages  depend on many
factors,  including  the  type of  mortgage,  the  coupon  rate,  the age of the
mortgages,   the   geographical   location   of  the   underlying   real  estate
collateralizing  the mortgages and general levels of market interest rates.  The
difference  between  the  interest  rates on the  underlying  mortgages  and the
prevailing  mortgage  interest rates is an important  determinant in the rate of
prepayments.  During periods of falling  mortgage  interest  rates,  prepayments
generally increase, and, conversely,  during periods of rising mortgage interest
rates,  prepayments  generally  decrease.  If the coupon rate of the  underlying
mortgage  significantly exceeds the prevailing market interest rates offered for
mortgage loans,  refinancing  generally increases and accelerates the prepayment
of the underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable-rate mortgage-backed securities.

         The Bank's  mortgage-backed  securities portfolio consists primarily of
seasoned fixed-rate and adjustable rate mortgage-backed  securities. At June 30,
2000,  the Bank had $23.9 million in  mortgage-backed  securities  (representing
24.4% of total assets) which are considered to be held to maturity and which are
insured or guaranteed by FNMA, FHLMC or GNMA.

         Agency  Notes.  The Bank has also invested in notes issued by the FHLB,
FHLMC and FNMA. Such notes had an aggregate balance of $15.8 million at June 30,
2000 and are neither  insured nor guaranteed by the United  States.  The issuing
agency   has  the  right  to  prepay   such  notes  at  face  value  at  certain
pre-established  dates.  The  weighted  average  maturity and coupon rate of the
Bank's agency notes were 65 months and 6.729%, respectively, at June 30, 2000.

                                       13
<PAGE>

         The  following  table  sets  forth  the  carrying  value of the  Bank's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                                             At June 30,
                                                                                    ------------------------------
                                                                                        2000            1999
                                                                                        ----            ----
                                                                                           (In thousands)

Securities available for sale:(1)
<S>                                                                                 <C>            <C>
  U.S. Treasury securities.................................................         $     4,273    $     5,306
  U.S. Government agency securities........................................              22,112         15,321
  Federal Home Loan Bank stock.............................................                 724            724
                                                                                    -----------    -----------
    Total securities available for sale....................................         $    27,109    $    21,351
                                                                                    ===========    ===========

Securities held to maturity:(2)
  U.S. Government agency securities........................................         $    23,886    $    23,706
                                                                                    -----------    -----------
    Total securities held to maturity......................................         $    23,886    $    23,706
                                                                                    ===========    ===========
Total securities...........................................................         $    50,995    $    45,057
                                                                                    ===========    ===========
</TABLE>

---------------
(1) The  carrying  value is the  approximate  fair value of the security at each
reporting  date. (2) The carrying value is the amortized cost of the security at
each reporting date.

                                       14
<PAGE>

         The  following  table sets forth  information  regarding  the scheduled
maturities,  amortized  costs,  fair values and weighted  average yields for the
Bank's investment securities at June 30, 2000.
<TABLE>
<CAPTION>

                                      One Year or Less         One to Five Years         Five to Ten Years
                                    ---------------------    ---------------------    ----------------------
                                    Carrying   Average       Carrying   Average       Carrying    Average
                                      VALUE      YIELD         VALUE      YIELD         VALUE       YIELD
                                    ---------  ---------     ---------  ---------     ---------   ---------
                                                                                      (Dollars in Thousands)
Securities available for sale:(1)
<S>                                 <C>             <C>      <C>            <C>      <C>               <C>
 U.S. treasury securities......     $ 3,288         5.7%     $    985        5.7%     $     --         --%
 U.S. Government agency
 Federal Home Loan Bank stock..         724         7.7            --         --            --         --
                                    -------     -------      --------   --------      --------    -------
Total securities available for sale $ 4,662         6.1%     $ 11,007        6.3%     $  5,962        7.0%
                                    =======    ========      ========   ========      ========    =======

Securities held to maturity:(2)
 U.S. Government agency
Total securities...............     $ 4,858         6.1%     $ 14,956        6.6%     $ 19,141        7.0%
                                    =======    ========      ========   ========      ========    =======
</TABLE>
<TABLE>
<CAPTION>
(TABLE CONTINUED)

                                       More than Ten Years          Total Investment Portfolio
                                      ---------------------     -----------------------------------
                                      Carrying   Average        Amortized      Fair     Average
                                        VALUE      YIELD            COST       VALUE       YIELD
                                      ---------  ---------      -----------  ---------  --------

Securities available for sale:(1)
<S>                                   <C>            <C>       <C>         <C>              <C>
 U.S. treasury securities......       $     --       --%       $   3,955   $  4,273         5.7%
 U.S. Government agency
 Federal Home Loan Bank stock..             --       --              724        724         7.7
                                      --------   ------        ---------   --------    --------
Total securities available for sale   $  5,478      6.6%       $  27,843   $ 27,109         6.5%
                                      ========   ======        =========   ========    ========

Securities held to maturity:(2)
 U.S. Government agency
Total securities...............       $ 12,040      6.9%       $  51,729   $ 50,750          6.8%
                                      ========   ======        =========   ========    =========
</TABLE>

--------------------
(1)      Carrying  value of securities  available for sale is their  approximate
         fair value at the reporting date. Average yield on securities available
         for sale is based on their amortized  historical costs at the reporting
         date.
(2)      Carrying  value of  securities  held to  maturity  is  their  amortized
         historical cost at their  reporting  date.  Average yield on securities
         held to maturity  is based on their  amortized  historical  cost at the
         reporting date.

         For additional information,  see Notes 6 and 7 of Notes to Consolidated
Financial Statements in the Annual Report filed as Exhibit 13 to this Report.

                                       15
<PAGE>

DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS

         General.  Deposits  are the  primary  source  of the  Bank's  funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds  from  loan   principal   repayments,   interest   payments  and  maturing
investments.  Loan  repayments  and interest  payments  are a relatively  stable
source of funds, while deposit inflows and outflows are significantly influenced
by prevailing market interest rates and money market conditions.

         Deposits. The Bank attracts deposits principally from within its market
area by offering a variety of deposit  instruments,  including regular checking,
passbook,  statement savings accounts and certificates of deposit which range in
term from seven days to ten years. Deposit terms vary,  principally on the basis
of the  minimum  balance  required,  the length of time the funds must remain on
deposit  and the  interest  rate.  The Bank also  offers  Individual  Retirement
Accounts ("IRAs").

         The Bank's  policies are designed  primarily to attract  deposits  from
local  residents  through the Bank's branch network rather than from outside the
Bank's market area.  The Bank's  interest  rates,  maturities,  service fees and
withdrawal  penalties on deposits are  established  by  management on a periodic
basis.  Management determines deposit interest rates and maturities based on the
Bank's  funds  acquisition  and  liquidity  requirements,  the rates paid by the
Bank's  competitors,   the  Bank's  growth  goals,  and  applicable   regulatory
restrictions and  requirements.  The Bank does not solicit deposits from brokers
and currently does not bid for public unit funds.

         The Bank plans to remain  competitive  in its  primary  market  area by
introducing  new products and services which include  various  checking  account
products,  enhancements to the savings portfolio,  offering competitive interest
rates and fees, and to attract new customers by providing full service banking.

                                       16
<PAGE>


         Deposits  in the  Bank as of June  30,  2000  were  represented  by the
various programs described below.
<TABLE>
<CAPTION>

Interest              Minimum                                               Minimum                    Percentage of
RATE                   TERM                       CATEGORY                   AMOUNT        BALANCES    TOTAL SAVINGS
----                   ----                       --------                   ------        --------    -------------
                                                                                       (In thousands)

<S>             <C>                  <C>                                  <C>           <C>                  <C>
1.961%          None                 NOW Accounts                         $     100     $         362       0.44%
2.520           None                 Passbook Statement Accounts                100             3,608       4.43
3.989           None                 Gold Star Savings Account                  100             1,628       2.00
2.020           None                 Money Market Deposit Account             1,500               345       0.42
1.752           None                 High Yield Account                         100             1,458       1.79
2.250           None                 Best Checking Account                       50               202       0.25
1.944           None                 Merit Checking                              50               674       0.83
2.249           None                 Classic 55 Checking                         50             1,522       1.87
0.000           None                 Free Checking                               --               111       0.14
0.000           None                 Business Checking                           50                44       0.05
2.128           None                 First Checking                              50             1,391       1.71

                                     CERTIFICATES OF DEPOSIT
                                     -----------------------

2.000           91 Days              3-Month Money Market                     1,000                 7       0.01
5.884           5 Month              Fixed Term, Fixed Rate                   1,000             5,034       6.18
4.300           182 Days             6-Month Money Market                     1,000             1,796       2.21
5.730           7 Month              Fixed Term, Fixed Rate                   1,000             4,027       4.95
4.992           8 Month              Fixed Term, Fixed Rate                   1,000             4,364       5.36
3.000           9 Month              Fixed Term, Fixed Rate                   1,000               380       0.47
4.100           10 Month             Fixed Term, Fixed Rate                   1,000               881       1.08
4.000           12 Month             Fixed Term, Fixed Rate                   1,000             1,229       1.51
4.005           14 Month             Fixed Term, Fixed Rate                   1,000             2,337       2.87
4.083           18 Month             Fixed Term, Fixed Rate                   1,000             1,270       1.56
4.276           18 Month-IRA         Fixed Term, Fixed Rate - IRA               250             1,890       2.32
4.285           20 Month             Fixed Term, Fixed Rate                   1,000             2,507       3.08
4.866           24 Month             Fixed Term, Fixed Rate                   1,000             2,405       2.95
5.325           30 Month             Fixed Term, Fixed Rate                   1,000             4,971       6.10
6.093           36 Month             Fixed Term, Fixed Rate                   1,000             7,934       9.74
5.560           48 Month             Fixed Term, Fixed Rate                   1,000             1,633       2.01
5.347           60 Month             Fixed Term, Fixed Rate                   1,000             4,263       5.24
4.924           72 Month             Fixed Term, Fixed Rate                   1,000               146       0.18
5.525           96 Month             Fixed Term, Fixed Rate                   1,000                37       0.05
5.733           120 Month            Fixed Term, Fixed Rate                   1,000               852       1.05
5.745           3-Month-State        Fixed Term, Fixed Rate                   1,000             1,325       1.63
5.000           Negotiated           Negotiated Jumbo                       100,000                58       0.07
5.500           11 Month             Fixed Term, Fixed Rate                   1,000             3,081       3.78
5.481           17 Month             Fixed Term, Fixed Rate                   1,000             3,556       4.37
7.000           19 Month             Fixed Term, Fixed Rate                   1,000            14,109      17.32
                                                                                               ------  ---------
                                                                   Total..............       $ 81,437     100.00%
                                                                                             ========  =========
</TABLE>

                                       17

<PAGE>

         The  following  tables  set  forth the  average  balances  and  average
interest rates paid for deposits in the Bank as of the dates indicated.
<TABLE>
<CAPTION>
                                                               Year Ended June 30,
                             -----------------------------------------------------------------------------------------
                                               2000                                           1999
                             ------------------------------------------    -------------------------------------------
                                           Interest-                                       Interest-
                                            Bearing                                         Bearing
                              Passbook       Demand      Certificates        Passbook       Demand      Certificates
                               SAVINGS      DEPOSITS      OF DEPOSIT         SAVINGS       DEPOSITS      OF DEPOSIT
                               -------      --------      ----------         -------       --------      ----------
                                                            (Dollars in thousands)

<S>                          <C>          <C>           <C>                <C>           <C>            <C>
Average balance..........    $   5,106    $    6,160    $   70,006         $    5,119    $    8,759     $     67,757
Average interest rate....         3.92%         2.44%         5.07%              3.39%         2.82%           5.35%
</TABLE>

         The following table sets forth the  certificates of deposit in the Bank
classified by rates at the dates indicated.

                                               At June 30,
                                      ------------------------------
                                          2000             1999
                                        --------         ------
                                             (In thousands)


               2.00 - 4.00%......     $    5,400        $    7,490
               4.01 - 6.00%......         37,066            57,546
               6.01 - 8.00%......         27,509             1,048
               8.01 - 10.00%.....            118               122
                                      ----------        ----------
                                      $   70,093        $   66,206
                                      ==========        ==========


         The following table indicates the amount of the certificates of deposit
of $100,000  or more in the Bank by time  remaining  until  maturity at June 30,
2000.

                                                         Certificates
                       MATURITY PERIOD                   OF DEPOSITS
                       ---------------                   -----------
                                                        (In thousands)

        Three months or less....................       $      2,255
        Over three through six months...........              1,683
        Over six through twelve months..........              1,389
        Over twelve months......................              6,287
                                                       ------------
             Total..............................       $     11,614
                                                       ============

                                       18
<PAGE>

         Borrowings.  Savings deposits historically have been the primary source
of funds for the Bank's lending,  investment and general  operating  activities.
The Bank is  authorized,  however,  to use advances  from the FHLB of Atlanta to
supplement  its  supply  of  lendable  funds  and  to  meet  deposit  withdrawal
requirements.  The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB system, the Bank is required to own stock in the FHLB of
Atlanta and is authorized  to apply for advances.  Advances are made pursuant to
several different programs, each of which has its own interest rate and range of
maturities.  The Bank had no borrowings  from the FHLB as of June 30, 2000,  and
management currently does not expect to borrow from the FHLB in the future.

SUBSIDIARY ACTIVITIES

         Federally chartered savings  institutions are permitted to invest up to
2% of their assets in subsidiary service corporations,  plus an additional 1% in
subsidiaries engaged in specific community purposes.  Under such limitation,  as
of June 30, 2000, the Bank was authorized to invest  approximately  $2.0 million
in the stock of or loans to  subsidiaries.  The Bank  currently  does not have a
subsidiary.

                                   REGULATION

GENERAL

         The Bank is chartered as a federal savings  institution  under the Home
Owners' Loan Act, as amended (the "HOLA"),  which is  implemented by regulations
adopted and administered by the OTS. As a federal savings institution,  the Bank
is subject to regulation,  supervision  and regular  examination by the OTS. The
OTS also has extensive  enforcement  authority over all savings institutions and
their holding  companies,  including the Bank and the Company.  Federal  banking
laws and regulations control,  among other things, the Bank's required reserves,
investments,  loans, mergers and consolidations,  payment of dividends and other
aspects of the Bank's  operations.  The  deposits of the Bank are insured by the
SAIF  administered  by the  FDIC to the  maximum  extent  provided  by  law.  In
addition,  the  FDIC has  certain  regulatory  and  examination  authority  over
OTS-regulated savings institutions and may recommend enforcement actions against
savings  institutions  to the OTS. The supervision and regulation of the Bank is
intended  primarily  for the  protection of the deposit  insurance  fund and the
Bank's  depositors  rather  than for holders of the  Company's  stock or for the
Company as the holder of the stock of the Bank.

         As a savings and loan holding  company,  the Company is registered with
the OTS and  subject  to OTS  regulation  and  supervision  under the HOLA.  The
Company also is required to file certain reports with, and otherwise comply with
the rules and regulations of, the Commission under the federal securities laws.

         The  following  discussion  is  intended  to be a  summary  of  certain
statutes,  rules and regulations affecting the Bank and the Company. A number of
other statutes and regulations have an impact on their operations. The following
summary of applicable  statutes and regulations  does not purport to be complete
and is qualified in its entirety by reference to such statutes and regulations.

FINANCIAL MODERNIZATION LEGISLATION

         On November  12,  1999,  the  Gramm-Leach-Bliley  Act of 1999 (the "GLB
Act") was enacted into law. The GLB Act makes sweeping changes in the authorized
activities of banks and their holding  companies.  In  particular,  the GLBA Act
repealed  the  Glass-Steagall  Act,  which had  generally  prevented

                                       19
<PAGE>

banks from  affiliating  with securities  firms, and also permitted bank holding
companies  for the first  time to  affiliate  with  insurance  companies.  A new
"financial  holding  company," which owns only well capitalized and well-managed
banks,  will be  permitted  to  engage  in a variety  of  financial  activities,
including insurance and securities underwriting and insurance agency activities.
The financial holding company provisions of the GLB Act are not expected to have
a material effect on the Company or the Bank.

         The GLB Act also places  substantial  restrictions on the activities of
companies that apply to become savings and loan holding  companies  after May 4,
1999. However, the GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999,  including  the Company,  to continue to engage in all
activities  that they were  permitted to engage in prior to the enactment of the
Act.  Under such  authority,  the  Company's  business  powers  are  essentially
unlimited,  provided that the Bank remains a qualified  thrift lender.  However,
the GLB Act further  provides that a unitary thrift holding company in existence
on May 4, 1999,  will lose its exempt status if it or its  subsidiary  thrift is
sold to any unaffiliated company other than another grandfathered unitary thrift
holding  company.  The GLB Act is not expected to have a material  effect on the
activities  in which the Company and the Bank  currently  engage,  except to the
extent that  competition  with banks and bank holding  companies may increase as
they engage in activities not permitted prior to enactment of the GLB Act.

         In  addition,  the GLB Act  adopts a number  of  consumer  protections,
including  provisions  intended to protect privacy of bank customers'  financial
information and new requirements for the disclosure of ATM fees imposed by banks
on  customers  of other  banks.  Most of the GLB Act's  provisions  have delayed
effective  dates  and  require  the  adoption  of  implementing  regulations  to
implement the statutory provisions. Accordingly, at this time the Bank is unable
to predict the eventual impact of the Act on its operations.

REGULATION OF THE BANK

         BUSINESS ACTIVITIES. The Bank derives its lending and investment powers
from the HOLA and the  regulations of the OTS  thereunder.  Under these laws and
regulations,  the Bank may invest in mortgage loans secured by  residential  and
commercial  real  estate,  commercial  and  consumer  loans,  certain  types  of
commercial  paper and debt  securities,  and certain other assets.  The Bank may
also establish service  corporations that may engage in activities not otherwise
permissible for the Bank,  including certain real estate equity  investments and
securities  and  insurance  brokerage.  These  investment  powers are subject to
various limitations.

         BRANCHING.  Subject to certain limitations,  OTS regulations  currently
permit a federally  chartered  savings  institution  like the Bank to  establish
branches in any state of the United  States,  provided that the federal  savings
institution  qualifies as a "domestic  building and loan association"  under the
Internal  Revenue Code. See "-- Qualified Thrift Lender Test." The authority for
a federal  savings  institution to establish an interstate  branch network would
facilitate a geographic diversification of the institution's activities.

         REGULATORY  CAPITAL.  The OTS'  capital  adequacy  regulations  require
savings institutions such as the Bank to meet three minimum capital standards: a
"core"  capital  requirement  of 4% of  adjusted  total  assets  (or  3% if  the
institution is rated Composite 1 under the CAMELS  examination rating system), a
"tangible"  capital  requirement  of  1.5%  of  adjusted  total  assets,  and  a
"risk-based"  capital  requirement  of 8% of total  risk-based  capital to total
risk-weighted  assets.  In addition,  the OTS has adopted  regulations  imposing
certain  restrictions  on  savings  institutions  that  have a total  risk-based
capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets
of less  than 4% or a ratio of Tier 1 capital  to total  assets of less than 4%.
See "-- Prompt Corrective Regulatory Action."

                                       20
<PAGE>

         The core capital, or "leverage ratio,"  requirement  mandates that most
savings  institutions  maintain  core  capital  equal to at least 3% of adjusted
total assets.  "Core capital"  includes common  stockholders'  equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries and
certain  nonwithdrawable  accounts and pledged deposits and is generally reduced
by the amount of the  savings  institution's  intangible  assets,  with  limited
exceptions for  permissible  mortgage  servicing  rights  ("MSRs") and purchased
credit card  relationships.  Core capital is further  reduced by the amount of a
savings  institution's  investments  in and  loans to  subsidiaries  engaged  in
activities not permissible for national banks. At June 30, 2000, the Bank had no
such investments.

         The risk-based capital standards of the OTS require maintenance of core
capital equal to at least 4% of risk-weighted  assets and total capital equal to
at least 8% of  risk-weighted  assets.  For purposes of the  risk-based  capital
requirement,  "total capital" includes core capital plus supplementary  capital,
provided that the amount of supplementary  capital does not exceed the amount of
core  capital.  Supplementary  capital  includes  preferred  stock that does not
qualify as core capital,  nonwithdrawable  accounts and pledged  deposits to the
extent  not  included  in core  capital,  perpetual  and  mandatory  convertible
subordinated   debt  and  maturing   capital   instruments   meeting   specified
requirements and a portion of the institution's loan and lease loss allowance.

         The risk-based  capital  requirement is measured against  risk-weighted
assets,  which equal the sum of each asset and the  credit-equivalent  amount of
each  off-balance  sheet item after being multiplied by an assigned risk weight,
which range from 0% to 100% as assigned by the OTS capital  regulations based on
the risks the OTS believes are  inherent in the type of asset.  Comparable  risk
weights are assigned to off-balance sheet assets.

         The OTS risk-based  capital  regulation  also includes an interest rate
risk ("IRR")  component  that requires  savings  institutions  with greater than
normal  IRR,  when   determining   compliance   with  the   risk-based   capital
requirements,  to  maintain  additional  total  capital.  The OTS has,  however,
indefinitely deferred enforcement of its IRR requirements.

         The  following  table  sets  forth  the  Bank's   compliance  with  its
regulatory capital requirements at June 30, 2000.
<TABLE>
<CAPTION>


                                     The Bank's Capital        Capital Requirements        Excess Capital
                                   -----------------------    ----------------------    ---------------------
                                     AMOUNT      PERCENT        AMOUNT     PERCENT        AMOUNT     PERCENT
                                     ------      -------        ------     -------        ------     -------
                                                             (Dollars in thousands)
<S>                                <C>              <C>       <C>              <C>      <C>             <C>
Tangible capital..............     $  14,654        14.8%     $  1,484         1.5%     $  13,170       13.3%
Core capital..................     $  14,654        14.8%     $  3,956         4.0%     $  10,698       10.8%
Total risk-based capital......     $  14,769        50.0%     $  2,367         8.0%     $  12,402       42.0%
</TABLE>

         PROMPT CORRECTIVE  REGULATORY  ACTION.  Under the OTS prompt corrective
action  regulations,  the federal banking regulators are required to take prompt
corrective action in respect of depository institutions that do not meet certain
minimum  capital  requirements,  including  a  leverage  limit and a  risk-based
capital requirement.  All institutions,  regardless of their capital levels, are
restricted  from making any capital  distribution  or paying any management fees
that would cause the institution to become undercapitalized. The federal banking
regulators,  including the OTS, have issued  regulations  that classify  insured
depository institutions by capital levels and provide that the applicable agency
will take  various

                                       21
<PAGE>

prompt corrective  actions to resolve the problems of any institution that fails
to satisfy the capital standards.

         Under   the   joint   prompt   corrective   action    regulations,    a
"well-capitalized"  institution  is one that is not  subject  to any  regulatory
order or directive to meet any  specific  capital  level and that has or exceeds
the following capital levels: a total risk-based  capital ratio of 10%, a Tier 1
risk-based  capital  ratio of 6%, and a ratio of Tier 1 capital to total  assets
("leverage  ratio") of 5%. An "adequately  capitalized"  institution is one that
does not  qualify  as "well  capitalized"  but meets or  exceeds  the  following
capital  requirements:  a total  risk-based  capital of 8%, a Tier 1  risk-based
capital  ratio of 4%,  and a  leverage  ratio of either (i) 4% or (ii) 3% if the
institution has the highest  composite  examination  rating.  An institution not
meeting  these  criteria  is  treated  as   "undercapitalized,"   "significantly
undercapitalized," or "critically  undercapitalized"  depending on the extent to
which its capital levels are below these  standards.  An institution  that falls
within any of the three "undercapitalized" categories will be subject to certain
severe regulatory  sanctions  required by OTS regulations.  As of June 30, 2000,
the Bank was "well-capitalized" as defined by the regulations.

         FEDERAL DEPOSIT INSURANCE.  The FDIC has adopted a risk-based insurance
assessment system for determining the deposit  insurance  assessments to be paid
by insured  depository  institutions.  The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the  reporting  period  ending  seven  months  before  the  assessment   period,
consisting  of  (1)  well  capitalized,   (2)  adequately   capitalized  or  (3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory  subgroup to which an institution is assigned is based on
a  supervisory  evaluation  provided  to the FDIC by the  institution's  primary
federal regulator and information that the FDIC determines to be relevant to the
institution's  financial  condition and the risk posed to the deposit  insurance
funds. Assessment rates for SAIF-member institutions like the Bank depend on the
capital  category  and  supervisory  category  to which  they are  assigned  and
currently  range  from 0 basis  points  to 27 basis  points.  In  addition,  all
FDIC-insured  institutions  are required to pay  assessments to the FDIC to help
fund  interest  payments on certain  bonds issued by the  Financing  Corporation
("FICO"),  an agency of the federal  government  established to recapitalize the
predecessor  to the  SAIF.  The  assessment  rate for  FICO  bond  servicing  is
approximately .0216% of insured deposits for the year 2000.

         The Federal  Deposit  Insurance Act also provides that the FDIC may not
assess regular insurance assessments for the SAIF unless required to maintain or
to achieve the designated reserve ratio of 1.25%, except for such assessments on
those  institutions that are not classified as  "well-capitalized"  or that have
been  found  to  have  "moderately   severe"  or   "unsatisfactory"   financial,
operational   or   compliance   weaknesses.    The   Bank   is   classified   as
"well-capitalized"  and has not been  found by the OTS to have such  supervisory
weaknesses.

         QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations  require all
savings institutions to satisfy one of two Qualified Thrift Lender ("QTL") tests
or to suffer a number of sanctions,  including  restrictions  on activities.  To
qualify as a QTL, a savings  institution  must  either (i) be deemed a "domestic
building and loan  association"  under the Internal Revenue Code (the "Code") by
maintaining  at least 60% of its  total  assets in  specified  types of  assets,
including cash, certain government securities, loans secured by and other assets
related to residential  real property,  educational  loans,  and  investments in
premises of the  institution  or (ii) satisfy the HOLA's QTL test by maintaining
at least 65% of "portfolio  assets" in certain  "Qualified Thrift  Investments."
For  purposes  of the HOLA's  QTL test,  portfolio  assets are  defined as total
assets less intangibles,  property used by a savings institution in its business
and liquidity  investments  in an amount not exceeding 20% of assets.  Qualified
Thrift Investments  consist of (a) loans, equity positions or securities related
to domestic,  residential  real estate or manufactured  housing,  (b) 50% of the
dollar  amount of  residential  mortgage  loans  subject to sale  under  certain
conditions,  and (c) loans to small  businesses,  student  loans and credit card
loans.  In  addition,  subject  to a 20%  of  portfolio  assets

                                       22
<PAGE>

limit,  savings  institutions are able to treat as Qualified Thrift  Investments
200% of their  investments  in loans to  finance  "starter  homes" and loans for
construction,  development  or  improvement  of housing  and  community  service
facilities or for financing small business in "credit needy" areas.

         A savings  institution  must  maintain its status as a QTL on a monthly
basis in at least nine out of every 12 months.  An initial failure to qualify as
a QTL results in a number of  sanctions,  including  the  imposition  of certain
operating  restrictions and a restriction on obtaining  additional advances from
its Federal Home Loan Bank. If a savings  institution  does not requalify  under
the QTL test within the three-year  period after it fails the QTL test, it would
be required to terminate  any activity not  permissible  for a national bank and
repay as promptly as possible  any  outstanding  advances  from its Federal Home
Loan Bank. In addition, the holding company of such an institution,  such as the
Company,  would similarly be required to register as a bank holding company with
the Federal Reserve Board. At June 30, 2000, the Bank qualified as a QTL.

         SAFETY  AND  SOUNDNESS  STANDARDS.  The FDI Act  requires  the  federal
banking  agencies,  including the OTS, to prescribe  for all insured  depository
institutions  standards  relating to,  among other  things,  internal  controls,
information systems and audit systems, loan documentation,  credit underwriting,
interest rate risk exposure, asset growth, asset quality and compensation,  fees
and benefits and such other operational and managerial standards as the agencies
deem  appropriate.  The federal banking agencies have adopted final  regulations
and  Interagency  Guidelines  Establishing  Standards  for Safety and  Soundness
("Guidelines")  to  implement  safety and  soundness  standards  pursuant to the
statute.  The Guidelines  set forth the safety and soundness  standards that the
federal  banking  agencies  use to  identify  and  address  problems  at insured
depository  institutions before capital becomes impaired. The Guidelines address
internal  controls and  information  systems;  internal  audit  systems;  credit
underwriting;  loan  documentation;  interest rate risk exposure;  asset growth;
asset quality; earnings; and compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the  Guidelines,  the agency may require the institution to submit
to the agency an acceptable  plan to achieve  compliance  with the standard,  as
required  by the FDI Act.  The final  regulations  establish  deadlines  for the
submission and review of such safety and soundness compliance plans.

         LIMITATIONS   ON  CAPITAL   DISTRIBUTIONS.   OTS   regulations   impose
limitations  upon capital  distributions by savings  institutions,  such as cash
dividends,  payments to repurchase or otherwise acquire its shares,  payments to
stockholders of another institution in a cash-out merger and other distributions
charged against  capital.  A savings  institution must give notice to the OTS at
least 30 days  before  declaration  of a proposed  capital  distribution  to its
holding company, and capital distributions in excess of specified earnings or by
certain  institutions  are subject to approval by the OTS. Under the OTS capital
distribution regulations, a savings institution that (i) qualifies for expedited
treatment of  applications  by  maintaining  one of the two highest  supervisory
examination  ratings,  (ii) will be at least  adequately  capitalized  after the
proposed  capital   distribution  and  (iii)  is  not  otherwise  restricted  by
applicable law in making capital  distributions  may,  without prior approval by
the OTS,  make  capital  distributions  during a calendar  year equal to its net
income for such year plus its retained net income for the  preceding  two years.
Capital distributions in excess of such amount would require prior OTS approval.

         Under OTS regulations, the Bank would not be permitted to pay dividends
on its capital  stock if its  regulatory  capital would thereby be reduced below
the amount then required for the liquidation account established for the benefit
of certain  depositors of the Bank at the time of the  Conversion.  In addition,
under the prompt  corrective  action  regulations  of the OTS, the Bank would be
prohibited   from   paying   dividends   if  the   Bank   were   classified   as
"undercapitalized"  under  such  rules.  See "--  Prompt  Corrective  Regulatory
Action."

                                       23
<PAGE>

         In addition to the foregoing,  earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of dividends or other  distributions  to the Company  without payment of
taxes at the then current tax rate by the Bank on the amount of earnings removed
from the reserves for such distributions. See "Taxation."

         TRANSACTIONS  WITH  AFFILIATES.  The Bank is  subject  to  restrictions
imposed by Sections  23A and 23B of the Federal  Reserve  Act on  extensions  of
credit  to,  and  certain  other   transactions  with,  the  Company  and  other
affiliates,  and on investments in the stock or other securities  thereof.  Such
restrictions  prevent the Company and such other  affiliates from borrowing from
the Bank unless the loans are secured by specified collateral,  and require such
transactions to have terms comparable to terms of arms-length  transactions with
third  persons.   Further,   such  secured  loans  and  other  transactions  and
investments by the Bank are generally limited in amount as to the Company and as
to any other  affiliate  to 10% of the Bank's  capital and surplus and as to the
Company and all other  affiliates  to an aggregate of 20% of the Bank's  capital
and surplus.  These restrictions may limit the Company's ability to obtain funds
from the Bank for its cash  needs,  including  funds  for  acquisitions  and for
payment of dividends, interest and operating expenses.

         RESERVE  REQUIREMENTS.  Pursuant to regulations of the Federal  Reserve
Board (the  "FRB"),  all  FDIC-insured  depository  institutions  must  maintain
average daily  reserves  against  their  transaction  accounts.  No reserves are
required to be maintained on the first $5.0 million of transaction accounts, and
reserves equal to 3% must be maintained on the next $44.3 million of transaction
accounts,  plus reserves equal to 10% on the remainder.  These  percentages  are
subject to adjustment by the FRB. Because  required  reserves must be maintained
in the form of vault  cash or in a  non-interest-bearing  account  at a  Federal
Reserve Bank,  the effect of the reserve  requirement is to reduce the amount of
the institution's interest-earning assets. As of June 30, 2000, the Bank met its
reserve requirements.

         LIQUIDITY  REQUIREMENTS.  The Bank is  required  by OTS  regulation  to
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers'  acceptances,   highly  rated  corporate  debt  and  commercial  paper,
qualifying mortgage-related securities and mortgage loans, securities of certain
mutual funds,  and specified United States  government,  state or federal agency
obligations)  equal  to the  monthly  average  of  not  less  than  a  specified
percentage  (currently  4%) of its net  withdrawable  accounts  plus  short-term
borrowings.  The average daily  liquidity  ratio of the Bank for the month ended
June 30, 2000 was 22.9%.

         FEDERAL  HOME LOAN  BANK  SYSTEM.  The  Federal  Home Loan Bank  System
consists of 12  district  Federal  Home Loan Banks  subject to  supervision  and
regulation by the Federal Housing Finance Board ("FHFB").  The Federal Home Loan
Banks provide a central credit facility primarily for member institutions.  As a
member of the FHLB,  the Bank is  required to acquire and hold shares of capital
stock in the FHLB in an  amount  at least  equal to 1% of the  aggregate  unpaid
principal of its home  mortgage  loans,  home  purchase  contracts,  and similar
obligations at the beginning of each year, or 1/20 of its advances  (borrowings)
from the  FHLB,  whichever  is  greater.  The Bank was in  compliance  with this
requirement,  with an  investment  in FHLB stock at June 30,  2000 of  $724,000.
Banks and savings associations generally may obtain long-term FHLB advances only
for the purpose of providing funds for  residential  housing  finance;  however,
depository  institutions  with less than $500  million in assets may also obtain
such  financing for use in small  business and small farm  lending.  At June 30,
2000, the Bank had no advances outstanding from the FHLB.

REGULATION OF THE COMPANY

         The Company is a savings and loan holding  company  under the HOLA and,
as such, is subject to OTS regulation, supervision and examination. In addition,
the  OTS  has  enforcement  authority  over  the

                                       24
<PAGE>

Company  and  its  non-savings  institution  subsidiaries  and may  restrict  or
prohibit  activities  that are  determined  to  represent a serious  risk to the
safety,  soundness  or  stability  of the Bank or any other  subsidiary  savings
institution.

         Under the HOLA,  a savings  and loan  holding  company is  required  to
obtain  the  prior  approval  of  the  OTS  before  acquiring   another  savings
institution  or savings and loan  holding  company.  A savings and loan  holding
company  may  not  (i)  acquire,  with  certain  exceptions,  more  than 5% of a
non-subsidiary  savings institution or a non-subsidiary savings and loan holding
company;  or (ii) acquire or retain control of a depository  institution that is
not insured by the FDIC.  In addition,  while the Bank  generally  may acquire a
savings institution by merger in any state without restriction by state law, the
Company could acquire  control of an additional  savings  institution in a state
other than Kentucky only if such  acquisition is permitted under the laws of the
target institution's home state.

         As a unitary savings and loan holding company,  grandfathered under the
GLB Act, the Company generally is not subject to any restriction as to the types
of business activities in which it may engage,  provided that the Bank continues
to satisfy the QTL test. See "Regulation - Financial Modernization  Legislation"
and "-- Regulation and Supervision of the Bank -- Qualified Thrift Lender Test."
Upon  any  non-supervisory   acquisition  by  the  Company  of  another  savings
institution  that is held as a separate  subsidiary,  the Company would become a
multiple savings and loan holding company and would be subject to limitations on
the types of business  activities in which it could engage.  The HOLA limits the
activities of a multiple  savings and loan holding  company and its  non-insured
institution  subsidiaries  primarily to  activities  permissible  for  financial
holding  companies  under the Bank  Holding  Company  Act,  subject to the prior
approval of the OTS, and to other activities authorized by OTS regulation.

TAXATION

         GENERAL.  The Company and the Bank file a  consolidated  federal income
tax return on a calendar  year basis.  Consolidated  returns  have the effect of
eliminating   intercompany   distributions,   including   dividends,   from  the
computation  of  consolidated  taxable  income for the taxable year in which the
distributions occur.

         FEDERAL  INCOME  TAXATION.  Savings  institutions,  such  as the  Bank,
generally are subject to the provisions of the Internal Revenue Code of 1986, as
amended,  in the same  manner as other  corporations.  For tax  years  beginning
before December 31, 1995,  however,  by meeting certain  definitional  tests and
other conditions  prescribed by the Internal Revenue Code,  thrift  institutions
could  benefit  from  special  deductions  for annual  additions to tax bad debt
reserves with respect to loans. For purposes of the bad debt reserve  deduction,
loans were separated into "qualifying real property loans," which generally were
loans secured by interests in improved real property, and "nonqualifying loans,"
which were all other  loans.  The bad debt  reserve  deduction  with  respect to
nonqualifying  loans was based on actual loss  experience.  The bad debt reserve
deduction  with respect to qualifying  real  property  loans could be based upon
actual loss  experience  (the  "experience  method") or a percentage  of taxable
income  determined  without regard to such deduction (the "percentage of taxable
income  method").  The Bank  historically  used whichever method resulted in the
highest bad debt reserve deduction in any given year.

         Legislation  enacted in August 1996 repealed the  percentage of taxable
income method of calculating the bad debt reserve.  Savings  institutions,  like
the Bank,  which have previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves calculated under the
experience  method over a six-year period  beginning with the first taxable year
beginning  after  December 31, 1995.  The start of such recapture may be delayed
until the third  taxable year  beginning  after  December 31, 1995 if the dollar
amount of the  institution's  residential loan  originations in each year is not
less than the average  dollar amount of residential  loan  originated in each

                                       25
<PAGE>

of the six most recent years  disregarding the years with the highest and lowest
originations  during such period.  For purposes of this test,  residential  loan
originations would not include refinancings and home equity loans.

         Beginning  with the first  taxable year  beginning  after  December 31,
1995,  savings  institutions,  such as the Bank,  have been  treated the same as
commercial  banks.  Institutions with $500 million or more in assets are able to
take a tax deduction only when a loan is actually charged off. Institutions with
less than $500 million in assets are still permitted to make deductible bad debt
additions  to  reserves,  but only  using the  experience  method.  As a result,
thrifts must recapture into taxable income the amount of their post-1987 tax bad
debt reserves over a six-year period beginning after 1995. This recapture can be
deferred  for up to two  years  if  the  thrift  satisfies  a  residential  loan
portfolio  test.  At June 30, 2000,  the Bank's  post-1987  tax bad debt reserve
subject  to  recapture   was   approximately   $93,000.   The  Bank   recaptured
approximately $46,000 of this reserve into taxable income in the year ended June
30, 2000. The recapture did not have any effect on the Bank's net income because
the related tax expense had already been accrued.

         Under the experience  method,  the bad debt deduction to an addition to
the reserve for qualifying real property loans is an amount  determined  under a
formula  based  generally  on the bad  debts  actually  sustained  by a  savings
institution  over a period of years.  Under the  percentage  of  taxable  income
method,  the bad debt reserve  deduction for qualifying  real property loans was
computed as 8% of the thrift's  taxable income.  The maximum  deduction could be
taken as long as not less than 60% of the total  dollar  amount of the assets of
an  institution  fell within  certain  designated  categories.  If the amount of
qualifying  assets fell below 60%, the  institution  would get no deduction  and
could be required to recapture,  generally over a period of years,  its existing
bad debt reserves  (although net operating loss  carryforwards  could be used to
offset such recapture).

         The bad debt  deduction  under the  percentage of taxable income method
was limited to the extent that the amount  accumulated in the reserve for losses
on qualifying  real property loans exceeded 6% of such loans  outstanding at the
end of the taxable year. In addition, the amount claimed as a bad debt deduction
when added to  accumulated  loss reserves was limited to the excess,  if any, of
12% of total  deposits or  withdrawable  accounts of  depositors  at year-end in
excess of the sum of surplus, undivided profits and reserves at the beginning of
the year.  The  percentage  bad debt  deduction was reduced by the deduction for
losses on nonqualifying loans.

         Earnings  appropriated  to the Bank's tax bad debt reserves and claimed
as tax  deductions  will not be available  for the payment of cash  dividends or
other   distributions  to  the  Company   (including   distributions  made  upon
dissolution or liquidation), unless the Bank includes the amounts distributed in
taxable  income,  along with the amounts  deemed  necessary to pay the resulting
federal income tax. At June 30, 2000, the Bank had approximately $2.8 million of
pre-1988  accumulated  bad debt reserves for which federal income taxes have not
been provided.

         For taxable years beginning  after June 30, 1986, the Internal  Revenue
Code  imposes  an  alternative  minimum  tax at a rate of 20%.  The  alternative
minimum tax generally  applies to a base of regular  taxable income plus certain
tax preferences  ("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI exceeds an exemption  amount.  The Internal Revenue Code
provides that an item of tax  preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount  allowable under the experience  method.  The other items of tax
preference that constitute AMTI include (a) tax-exempt  interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain  qualified  bonds and (b) for taxable years including 1987 through 1989,
50% of the excess of (i) the  taxpayer's  pre-tax  adjusted net book income over
(ii) AMTI  (determined  without  regard to this latter  preference  and prior to
reduction by net operating losses). For taxable years beginning after 1989, this
latter  preference  has  been  replaced  by 75% of the  excess  (if  any) of (i)
adjusted  current  earnings as defined in the Internal  Revenue Code,  over (ii)
AMTI (determined without regard to this preference and

                                       26
<PAGE>

prior to  reduction by net  operating  losses).  For any taxable year  beginning
after 1986,  net operating  losses can offset no more than 90% of AMTI.  Certain
payments of alternative minimum taxes may be used as credits against regular tax
liabilities  in future  years.  In  addition,  for taxable  years after 1986 and
before 1992, corporations,  including savings institutions,  are also subject to
an  environmental  tax equal to 0.12% of the excess of AMTI for the taxable year
(determined  without  regard to net  operating  losses and the deduction for the
environmental  tax) over $2.0  million.  The Bank is not  currently  paying  any
amount of  alternative  minimum  tax but may,  depending  on future  results  of
operations, be subject to this tax.

         The Bank's  federal  income tax returns  have not been  examined by the
regulatory  authorities within the past five years. For additional  information,
see Note 11 of Notes to Consolidated  Financial  Statements in the Annual Report
filed as Exhibit 13 to this Report.

EMPLOYEES

         As of June  30,  2000,  the  Company  and  the  Bank  had 28  full-time
employees, none of whom was represented by a collective bargaining agreement.

                                       27
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

         The following table sets forth information regarding the Bank's offices
at June 30, 2000.
<TABLE>
<CAPTION>
                                                                   Net Book                                Owned
                                                  Year             Value at           Approximate            or
                                                 OPENED          JUNE 30, 2000      SQUARE FOOTAGE         LEASED
                                               ----------        -------------      --------------       --------

MAIN OFFICE:
<S>                                               <C>          <C>                       <C>               <C>
221 South 6th Street                              1968         $     216,529             6,500             Owned
Gadsden, Alabama  35901

BRANCH OFFICES:
202 Sand Mountain Drive                           1965                 2,901             1,405             Leased
Albertville, Alabama  35950

2204 Henry Street                                 2000               198,293             1,100             Owned
Guntersville, Alabama 35976

390 W. Main Street                                1994                 6,637             2,263             Leased
Centre, Alabama  35960
</TABLE>

         The  net  book  value  of the  Bank's  investment  in  furnishings  and
equipment totaled $48,155 at June 30, 2000.

ITEM 3.  LEGAL PROCEEDINGS

         From time to time,  the Bank is a party to  various  legal  proceedings
incident  to its  business.  At June  30,  2000,  the  Company  was a  party  to
litigation  and  claims in the  normal  course of  business.  Management,  after
consultation with legal counsel, believes that the liabilities,  if any, arising
from  such  litigation  and  claims  will not be  material  to the  consolidated
financial statements.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of fiscal 2000.

                                       28
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The  information  required by this item is incorporated by reference to
"Item 1.  Description  of  Business  -  Regulation  -  Regulation  of the Bank -
Limitations  on Capital  Distributions"  herein and "Market for Common Stock and
Related Stockholder  Matters" and Note 2 of the Notes to Consolidated  Financial
Statements  in the  portions  of the Annual  Report  filed as Exhibit 13 to this
Report.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The  information  required by this item is incorporated by reference to
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  in the  portions of the Annual  Report  filed as Exhibit 13 to this
Report.

ITEM 7.  FINANCIAL STATEMENTS

         The  financial  statements  required by this item are  incorporated  by
reference  to the  Consolidated  Financial  Statements,  Notes  to  Consolidated
Financial  Statements and  Independent  Auditors'  Report in the portions of the
Annual Report filed as Exhibit 13 to this Report.

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

         Not applicable.


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

         Information  concerning  the directors  and  executive  officers of the
Company is incorporated  herein by reference to the section captioned  "Election
of Directors" in the Proxy Statement.

ITEM 10.  EXECUTIVE COMPENSATION

         The  information  required  by this  item  is  incorporated  herein  by
reference  to  the  section  captioned   "Election  of  Directors  --  Executive
Compensation" in the Proxy Statement.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required  by this  item  is  incorporated  herein  by
reference to the sections captioned "Voting Securities and Beneficial Ownership"
and "Election of Directors" in the Proxy Statement.

                                       29
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required  by this  item  is  incorporated  herein  by
reference to the section  captioned  "Election of Directors -- Transactions with
Management" in the Proxy Statement.

ITEM 13.  EXHIBITS LIST AND REPORTS ON FORM 8-K

         (a)      The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
NO.                                 DESCRIPTION
<S>                        <C>
3.1 *                      Certificate of Incorporation of The Southern Banc Company, Inc.

3.2 *                      Bylaws of The Southern Banc Company, Inc.

4.1 *                      Specimen Common Stock Certificate of The Southern Banc Company, Inc.

4.2**                      Rights Agreement

10.1 ***                   Employment  Agreements  between The Southern Banc Company,  Inc. and First Federal Savings and Loan
                           Association of Gadsden and James B. Little Jr.

10.2 ***                   First Federal Savings and Loan Association of Gadsden  Supplemental  Executive  Retirement Agreement

10.3 ****                  The Southern Banc Company, Inc. 1996 Stock Option and Incentive Plan and trust

10.4 ****                  First Federal  Savings and Loan  Association of Gadsden  Management  Recognition  Plan and trust

10.5 *****                 1997  Amendments to  Employment  Agreements  between the Southern  Banc Company,  Inc. and First Federal
                           Savings and Loan Association of Gadsden and James B. Little Jr.

10.6 *****                 Employment  Agreements  between The Southern Banc Company,  Inc. and First Federal Savings and Loan
                           Association of Gadsden and Gates Little

13                         Annual  Report  to  Stockholders.  Except  for  these  portions  of the  Annual  Report to Stockholders
                           which are expressly incorporated herein by reference, such Annual Report is furnished for the information
                           of the Commission and is not to be deemed "filed" as part of this Report.

                                       30
<PAGE>

21                         Subsidiaries

23                         Consent of Arthur Andersen LLP

27                         Financial Data Schedule (SEC use only)

----------------
*        Incorporated by reference to Registration Statement on Form 8-A (No. 1-13964).
**       Incorporated by reference to Current Report on Form 8-K dated July 15, 1999.
***      Incorporated by reference to Registration Statement on Form S-1 (No. 33-93218).
****     Incorporated by reference to Registration Statement on Form S-8 (No. 333-3546).
*****    Incorporated by reference to Annual Report on Form 10-KSB for fiscal year ended June 30, 2000
</TABLE>

     (b)  Reports on Form 8-K.  There were no Current  Reports on Form 8-K filed
during the last quarter of fiscal year 2000.

                                       31
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its  behalf  by the  undersigned,  thereunto  duly  authorized,  as of the  date
indicated below.

                                      THE SOUTHERN BANC COMPANY, INC.


Date:  September 27, 2000             By:      /S/ JAMES B. LITTLE JR.
                                           -------------------------------------
                                           James B. Little Jr.
                                           Chairman of the Board and Chief
                                           Executive Officer
                                           (Duly Authorized Representative)


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant in the capacities indicated below as of the date indicated above.
<TABLE>
<CAPTION>
<S>                                                                    <C>
By:  /S/ JAMES B. LITTLE, JR.                                          By:  /S/ THOMAS F. DOWLING
     ---------------------------------------------------------              ---------------------
      James B. Little, Jr.                                                  Thomas F. Dowling
      Chairman of the Board and Chief Executive Officer                     Director
      (Director and Principal Executive, Financial
      and Accounting Officer)


By:  /S/ CRAIG G. CANTRELL                                             By:  /S/ JAMES B. LITTLE III
     ---------------------------------------------------------              -----------------------
      Craig G. Cantrell                                                     James B. Little III
      Director                                                              Director


By:  /S/ GRADY GILLAM                                                  By:  /S/ GATES LITTLE
     ---------------------------------------------------------              ----------------
      Grady Gillam                                                          Gates Little
      Director                                                              President and Director


By:  /S/ REX G. KEELING, JR.                                           By:  /S/ FRED TAYLOR
     ---------------------------------------------------------              ---------------
      Rex G. Keeling, Jr.                                                   Fred Taylor
      Director                                                              Director
</TABLE>

                                       32