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, 1999

[ ] 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
      Incorporation or Organization)                       Identification No.)

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, 1999:  $597,901

The  aggregate  market  value  of the  816,064  shares  of  Common  Stock of the
registrant issued and outstanding held by non-affiliates  was approximately $6.8
million based on the closing sales price of $8.375 per share of the registrant's
Common Stock on September 24, 1999 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 24, 1999: 1,074,098

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, 1999 (the "Annual Report"). (Parts I and II)
2.   Portions of the Proxy Statement for the registrant's 1999 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 a 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, 1999, the Company had total consolidated  assets of $96.9 million,  deposits
of $79.7 million, net loans receivable of $42.1 million and stockholders' equity
of $16.6 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 a  conservative  and  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 Bank,  at which time it also became a member of the  Federal  Home Loan
Bank ("FHLB") System and obtained federal deposit insurance.  The Bank currently
operates   through  four  banking  offices  located  in  Gadsden,   Albertville,
Guntersville and Centre, Alabama.

     In August 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.

     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").

YEAR 2000

     The Company has taken  certain  actions to address  issues  relating to the
Year 2000, and the proper functioning of computer and data processing equipment.
For more information,  see "Item 6. Management's Discussion and Analysis or Plan
of Operation."

                                       1
<PAGE>

SHAREHOLDER RIGHTS PLAN

     In July 1999,  the Board of Directors of the Company  adopted a shareholder
rights plan and declared a dividend  distribution  of one common stock  purchase
right on each  outstanding  share of the Company's  Common  Stock.  See Item 6 -
Management's Discussion and Analysis or Plan of Operation.

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 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
relatively strong 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 100,000.

     The economy in the Bank's market area  includes a mixture of  manufacturing
and agriculture. For years the two major industrial employers were Goodyear Tire
and Rubber  Company  and Gulf  States  Steel  Corporation.  On February 4, 1999,
Goodyear Tire and Rubber Company announced that it would cut approximately 1,320
jobs by year-end as it ceases tire  production  at the Gadsden,  Alabama  plant.

                                       2
<PAGE>
Approximately  200  workers  will remain  employed  at the  Gadsden  facility to
operate a  rubber-mixing  center and tire storage  site.  On July 1, 1999,  Gulf
States Steel  Corporation,  currently  employing  1,800,  filed for relief under
Chapter 11 Bankruptcy. While the company is allowed to continue operations under
Chapter 11, a  significant  negative  impact would be felt in the Bank's  market
area in the event Gulf  States is unable to  overcome  its  financial  problems.
According to the Alabama  Department of Industrial  Relations,  the unemployment
rates for June 1999 in Etowah,  Cherokee and Marshall  Counties were 6.7%,  4.8%
and 6.5%, respectively, as compared to 4.5% for the state of Alabama.

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 or 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 in the
Bank's market area.  The Bank also makes a variety of consumer loans and limited
amounts of  non-residential  real estate loans.  Historically,  the Bank has not
made commercial business loans.

     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, 1999, the maximum amount that the Bank could have loaned to any
one borrower without prior OTS approval was approximately $4.2 million.  At such
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower was approximately $263,000.

                                       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, 1999, the Bank had no  concentrations of loans
exceeding 10% of total loans that are not disclosed below.
<TABLE>
<CAPTION>

                                                                                At June 30,
                                                      -----------------------------------------------------------------
                                                                   1999                              1998
                                                      -------------------------------    ------------------------------
                                                          Amount            %                Amount            %
                                                          ------            -                ------            -
                                                                           (Dollars in thousands)

<S>                                                   <C>                 <C>           <C>                   <C>
Type of Loan:
Real estate loans:
  One- to four-family residential(1).............     $    36,702          87.17%       $     36,528           88.77%
  Non-residential................................             302            .72                 216            0.52
Consumer loans...................................           4,451          10.57               3,748            9.11
Savings account loans............................             647           1.54                 657            1.60
                                                      -----------         ------        ------------          ------
Total gross loans................................          42,102         100.00%             41,149          100.00%
                                                                          ======                              ======
Less:
  Unearned income................................             240                                245
  Discounts on loans purchased...................              --                                 --
  Deferred loan fees (costs), net................            (345)                              (325)
  Allowance for loan losses......................              98                                 76
                                                      -----------                        -----------
     Total.......................................     $    42,109                        $    41,153
                                                      ===========                        ===========
</TABLE>
---------------
(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, 1999 and 1998 were approximately $1.5 million and
     $974,000 million, respectively.

     The following  table sets forth  information at June 30, 1999 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 6/30/99      After 6/30/99        6/30/99          Total
                                                 -------------      -------------        -------          -----
                                                                  (In thousands)
<S>                                             <C>               <C>                <C>               <C>
Real estate mortgage(1)...............          $          25     $         2,609    $     34,370      $    37,004
Consumer and savings accounts.........                    160               2,936           2,002            5,098
                                                -------------     ---------------    ------------      -----------
    Total............................           $         185     $         5,545    $     36,372      $    42,102
                                                =============     ===============    ============      ===========
</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, 1999 totaled $1.5 million.

                                       4
<PAGE>
     The following table sets forth at June 30, 1999, 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.

                                          Predetermined          Floating or
                                               Rate           Adjustable Rates
                                               ----           ----------------
                                                     (In thousands)

Real estate............................... $     34,769         $     2,235
Consumer and savings account..............        5,098                  --
                                           ------------         -----------
    Total................................. $     39,867         $     2,235
                                           ============         ===========

     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 1998, the Bank purchased  three
real estate loans totaling  approximately  $220,000 from a financial institution
in  Tuscaloosa,  Alabama.  During the fiscal year ended June 30, 1999,  the Bank
originated and sold a total of $1.0 million 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  $50,000. At June 30, 1999, $36.7 million, or 87.2%, 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, 1999,  $34.8  million,  or 94.7%,  of the Bank's
one- to four-family residential loans had fixed rates and $2.2 million, or 6.1%,
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 January 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, 1999,  the Bank had originated  $7.3 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

                                       5
<PAGE>

that the borrower (or third party) provides additional collateral in the form of
a pledge of a savings deposit 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,
1999 included  adjustable rate loans with an aggregate principal balance of $1.2
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 on properties for which the
Bank  holds  the  first  mortgage.  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.  Further,  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  and 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 demand
loans secured by savings accounts at the Bank. These loans totaled approximately
$992,000, $3.5 million and $647,000,  respectively, at June 30, 1999. 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 65% 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 plus 1.5%.

     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 or the "Black Book."
The terms of such loans  generally  do not exceed 60 months with loans

                                       6
<PAGE>

for older used cars  underwritten  for shorter terms. The Bank requires that the
vehicles be insured  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  preliminarily  reviews  the  information  provided  and makes an  initial
determination  regarding the qualification of the borrower.  If not disapproved,
the application then is placed in processing, and a credit report, verifications
and other  information is generally  gathered  relating to the loan  applicant's
employment,  income and credit  standing.  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 environment 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

                                       7
<PAGE>

Chairman  of  the  Board.  Consumer  loans  up to  $15,000  may be  approved  by
individual  loan officers.  Consumer loans greater than $15,000 must be approved
by at least two members of the Bank's consumer 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  and  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.  All loans on which payments are 30
or more days delinquent 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, 1999,  the Bank had no assets  classified  as loss or  doubtful,  $10,000 of
assets  classified as substandard  and $915,000 of assets  designated as special
mention.

                                       8
<PAGE>

     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 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 and the industry's historical
and projected 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.  Federal  examiners  may  disagree  with an
institution's allowance for loan losses.

     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.  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.

     The Bank's  methodology for maintaining the allowance for loan losses takes
into consideration  probable losses that have been identified in connection with
specific assets as well as losses that have not yet been identified.  Management
conducts  regular reviews of the Bank's assets and evaluates the adequacy of its
allowance  for loan losses based on an  assessment  of risk in the Bank's assets
taking  into  consideration  the  composition  and  quality  of  the  portfolio,
delinquency  trends,  current  charge-off and loss experience,  the state of the
real estate market,  regulatory reviews conducted in the regulatory  examination
process  and  economic  conditions   generally.   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 security.

     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,  1999,  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.

                                                          Year Ended June 30,
                                                    ----------------------------
                                                       1999               1998
                                                       ----               ----
                                                            (In thousands)

Balance at beginning of period.................$         76         $         76
Charge-offs....................................          (5)                  --
Recoveries.....................................          --                   --
Provision for loan losses......................          27                   --
                                               ------------         ------------
Balance at end of period.......................$         98         $         76
                                               ============         ============
Ratio of net charge-offs during the
  period to average loans outstanding
  during the period............................       0.00%                0.00%
                                               ============         ============

     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,
                                            ----------------------------------------------------------------------
                                                         1999                                  1998
                                            --------------------------------     ---------------------------------
                                                               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               87.17%      $     48               88.77%
  Non-residential......................              --                0.72             --                0.52
Consumer and savings account loans.....              43               12.11             28               10.71
     Total allowance for loan losses...     $        98              100.00%      $     76              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.

                                                         At June 30,
                                              -------------------------------
                                                      1999             1998
                                                      ----             ----
                                                       (Dollars in thousands)

Loans accounted for on a non-accrual basis:(1)
 Real estate loans:
    One- to four-family residential..............  $       6         $      11
     Non-residential.............................         --                --
Consumer and savings account loans...............          4                --
Other loans......................................         --                --
                                                   ---------         ---------
   Total.........................................  $      10         $      11
                                                   =========         =========
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
   90 days past due loans........................  $      10         $      11
                                                   =========         =========
Percentage of total loans........................       0.02             0.03%
                                                   =========         =========
Other non-performing assets(2)...................  $      --         $      --
                                                   =========         =========
Percentage of total assets.......................      0.01%             0.01%
                                                   =========         =========
------------------
(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, 1999.

     At June  30,  1999,  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 yield 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,  1999,  investment  securities  with an  aggregate  amortized  cost of $21.7
million  and an  aggregate  fair value of $21.4  million  were  included  in the
portfolio of securities  designated as available for sale. The aggregate  impact
on equity was an decrease of approximately  $334,000 for the year ended June 30,
1999.  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.  For additional
information,  see Notes 8 and 9 of Notes to Consolidated Financial Statements in
the Annual Report filed as Exhibit 13 of this report.

     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."

     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-

                                       12
<PAGE>

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,
1999,  the Bank had $29.1 million in  mortgage-backed  securities  (representing
30.0% 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 $9.5 million at June 30, 1999
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 74 months and 6.2516%, respectively, at June 30, 1999.

                                       13
<PAGE>
     The following table sets forth the carrying value of the Bank's  investment
portfolio at the dates indicated.

                                                         At June 30,
                                                ------------------------------
                                                    1999            1998
                                                    ----            ----
                                                       (In thousands)

Securities available for sale:(1)

  U.S. Treasury securities:.....................$     5,306    $     7,938
  U.S. Government agency securities.............     15,321         13,506
  Federal Home Loan Bank stock..................        724            795
                                                -----------    -----------
    Total securities available for sale.........$    21,351    $    22,239
                                                ===========    ===========
Securities held to maturity:(2)

  U.S. Treasury securities:.....................$        --    $        --
  U.S. Government agency securities.............     23,706         34,077
                                                -----------    -----------
    Total securities held to maturity...........$    23,706    $    34,077
                                                ===========    ===========
Total securities................................$    45,057    $    56,316
                                                ===========    ===========

---------------
(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, 1999.
<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......     $ 1,000         6.4%     $  4,317      5.7%     $     --         --%
 U.S. Government agency
  Securities...................          --          --         6,243      6.0         5,595        6.8
 Federal Home Loan Bank stock..         724         7.3            --       --            --         --
                                    -------         ---      --------      ---      --------        ---
Total securities available for sale $ 1,724         6.7%     $ 10,560      5.9%     $  5,595        6.8%
                                    =======         ===      ========      ===      ========        ===

Securities held to maturity:(2)
 U.S. Government agency
  Securities...................     $    --          --%     $  2,840      8.0%     $ 13,553        6.9%
                                    -------         ---      --------      ---      --------        ---
Total securities available for sale $ 1,724         6.7%     $ 13,400      6.3%     $ 19,148        6.8%
                                    =======         ===      ========      ===      ========        ===
</TABLE>

<TABLE>
<CAPTION>
(continued from above)

                                           More than Ten Years          Total Investment Portfolio
                                          ---------------------     -----------------------------------
                                          Carrying   Average          Amortized    Fair       Average
                                            Value      Yield            Cost       Value       Yield
                                            -----      -----            ----       -----       -----
                                                            (Dollars in Thousands)

Securities available for sale:(1)
<S>                                     <C>            <C>        <C>           <C>              <C>
 U.S. treasury securities......         $     --        --%       $   5,317     $  5,306         5.8%
 U.S. Government agency
  Securities...................            3,806       6.6           15,644       15,321         6.3
 Federal Home Loan Bank stock..               --        --              724          724         7.3
                                        --------       ---        ---------     --------         ---
Total securities available for sale     $  3,806       6.6%       $  21,685     $ 21,351         6.3%
                                        ========       ===        =========     ========         ===

Securities held to maturity:(2)
 U.S. Government agency
  Securities...................         $  7,313       7.5%       $  23,706     $ 23,647         7.2%
                                        --------       ---        ---------     --------         ---
Total securities available for sale     $ 11,119       7.2%       $  45,391     $ 44,998         6.8%
                                        ========       ===        =========     ========         ===
</TABLE>
--------------------
(1)  Carrying values 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  values 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 8 and 9 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, 1999 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>
  1.97307%      None                 NOW Accounts                         $     100     $     407           0.51%
  2.74327       None                 Passbook Statement Accounts                100         4,533           5.69
  3.93221       None                 Gold Star Savings Account                  100         1,180           1.48
  4.62542       None                 Money Market Deposit Account             1,500           393           0.49
  2.47121       None                 High Yield Account                         100         3,009           3.77
  2.24968       None                 Best Checking Account                       50           224           0.28
  1.94381       None                 Merit Checking                              50           707           0.89
  2.25006       None                 Classic 55 Checking                         50         1,930           2.42
  0.00000       None                 Free Checking                               --           105           0.13
  0.00000       None                 Business Checking                           50            56           0.07
  2.04188       None                 First Checking                              50           984           1.23

                                     Certificates of Deposit
                                     -----------------------

  2.00000       91 Days              3-Month Money Market                     1,000             7           0.01
  2.79810       5 Month              Fixed Term, Fixed Rate                   1,000           298           0.37
  4.36455       182 Days             6-Month Money Market                     1,000         4,567           5.73
  3.08774       7 Month              Fixed Term, Fixed Rate                   1,000           212           0.27
  4.62021       8 Month              Fixed Term, Fixed Rate                   1,000         4,679           5.87
  3.15311       9 Month              Fixed Term, Fixed Rate                   1,000           659           0.83
  4.44752       10 Month             Fixed Term, Fixed Rate                   1,000         1,868           2.34
  4.38021       12 Month             Fixed Term, Fixed Rate                   1,000         1,869           2.34
  4.73898       14 Month             Fixed Term, Fixed Rate                   1,000        15,071          18.90
  5.13970       18 Month             Fixed Term, Fixed Rate                   1,000         3,425           4.30
  5.09234       18 Month-IRA         Fixed Term, Fixed Rate - IRA               250         4,479           5.62
  4.66243       20 Month             Fixed Term, Fixed Rate                   1,000         3,455           4.33
  5.39428       24 Month             Fixed Term, Fixed Rate                   1,000         4,217           5.29
  5.21805       30 Month             Fixed Term, Fixed Rate                   1,000         1,840           2.31
  5.59240       36 Month             Fixed Term, Fixed Rate                   1,000         3,965           4.97
  5.85175       48 Month             Fixed Term, Fixed Rate                   1,000         2.319           2.91
  5.77942       60 Month             Fixed Term, Fixed Rate                   1,000         5,359           6.72
  5.71195       72 Month             Fixed Term, Fixed Rate                   1,000           926           1.16
  5.14543       96 Month             Fixed Term, Fixed Rate                   1,000            37           0.05
  5.77269       120 Month            Fixed Term, Fixed Rate                   1,000           796           1.00
  4.33800       3-Month-State        Fixed Term, Fixed Rate                   1,000         1,325           1.66
  5.32271       Negotiated           Negotiated Jumbo                       100,000           155           0.19
  5.18202       11 Month             Fixed Term, Fixed Rate                   1,000         4,365           5.47
  5.29362       17 Month             Fixed Term, Fixed Rate                   1,000           315           0.40
                                                                                        ---------         ------
                                                                   Total................$  79,734         100.00%
                                                                                        =========         ======
</TABLE>
                                       17
<PAGE>
     The following  tables set forth the average  balances and average  interest
rates paid based on month-end  balances for deposits in the Bank as of the dates
indicated.
<TABLE>
<CAPTION>
                                                                Year Ended June 30,
                              ----------------------------------------------------------------------------------------
                                                1999                                          1998
                              ------------------------------------------    ------------------------------------------
                                             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..........     $  5,119     $    8,759     $   67,757        $    7,210   $    7,829     $     73,157
Average interest rate....         3.39%          2.82%          5.35%             2.85%        3.07%            5.65%
</TABLE>

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

                                                    At June 30,
                                           ------------------------------
                                               1999             1998
                                               ----             ----
                                                  (In thousands)

  2.00 - 4.00%....................         $    7,490        $      310
  4.01 - 6.00%....................             57,546            68,465
  6.01 - 8.00%....................              1,048             3,553
  8.01 - 10.00%...................                122               122
                                           ----------        ----------
                                           $   66,206        $   72,450
                                           ==========        ==========

     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, 1999.

                                                   Certificates
                 Maturity Period                   of Deposits
                 ---------------                   --------------
                                                   (In thousands)

  Three months or less....................       $      3,010
  Over three through six months...........              1,291
  Over six through 12 months..............              1,679
  Over 12 months..........................              3,649
                                                 ------------
       Total..............................       $      9,629
                                                 ============
                                       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 does not have any borrowings from the FHLB, 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, 1999, the Bank was authorized to invest  approximately  $1.9 million
in the stock of or loans to  subsidiaries.  The Bank  currently  does not have a
subsidiary.

                                   REGULATION

GENERAL

     As a  federal  savings  institution,  the Bank is  subject  to  regulation,
supervision  and  regular  examination  by the  OTS.  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
Savings  Association  Insurance  Fund ("SAIF")  administered  by the FDIC to the
maximum extent provided by law ($100,000 for each depositor).  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 depositors.

     As a savings  institution  holding  company,  the Company is subject to OTS
regulation,  examination,  supervision and reporting  requirements.  The Company
also is required to file certain  reports with,  and  otherwise  comply with the
rules and  regulations  of, the  Securities  and Exchange  Commission  under the
federal securities laws.

     The following  discussion  summarizes  certain of the  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.

REGULATION OF THE BANK

     Regulatory Capital.  The OTS's capital adequacy regulations require savings
institutions such as the Bank to meet three minimum capital standards:  a "core"
capital  requirement of between 3% and 5% of adjusted total assets, 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

                                       19
<PAGE>

ratio  of  Tier  1  capital  to  total  assets  of  less  than  4% (or 3% if the
institution is rated  composite 1 under the CAMELS  examination  rating system).
See "--Prompt Corrective Regulatory Action."

     At June 30, 1999,  the Bank  exceeded  its  tangible,  core and  risk-based
regulatory capital requirements. For more information, see "Item 6. Management's
Discussion  and  Analysis  or  Plan  of  Operation"  and  Note  4  of  Notes  to
Consolidated Financial Statements.

     PROMPT  CORRECTIVE  REGULATORY  ACTION.  The Federal Deposit  Insurance Act
("FDI Act") requires the federal  banking  regulators 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.  The joint regulations of the federal banking  agencies,  including
the OTS, classify insured depository  institutions by capital levels and provide
that the  applicable  agency  will take  various  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 the FDI  Act  and  the  implementing
regulations.  As of June 30, 1999, the Bank was "well-capitalized" as defined by
the regulations.

     QUALIFIED  THRIFT  LENDER TEST.  The Home Owners' Loan Act ("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.  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 would similarly be required to register as a bank
holding  company with the Federal  Reserve  Board.  At June 30,  1999,  the Bank
qualified as a QTL.

     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.  Under the OTS  capital  distribution  regulations,  a savings
institution   that  qualifies  for  expedited   treatment  of   applications  by
maintaining specified supervisory  examination ratings and that is not otherwise
restricted 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 are subject to prior OTS  approval.  In
addition,  even if a proposed capital distribution is less than the above limit,
a  savings  institution  must  give  notice  to the OTS at least 30 days  before
declaration of a capital distribution to its holding company.

                                       20
<PAGE>
     Under the OTS's prompt  corrective  action  regulations,  the Bank would be
prohibited   from   paying   dividends   if  the   Bank   were   classified   as
"undercapitalized"   under  such  rules.  See  "--Prompt  Corrective  Regulatory
Action."  Further,  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 Bank  without  payment of taxes at the
then current tax rate by Home Federal on the amount of earnings removed from the
reserves for such distributions.

     TRANSACTIONS WITH AFFILIATES AND INSIDERS. Generally,  transactions between
a savings  institution or its subsidiaries and its affiliates are required to be
on terms as favorable to the institution as transactions with non-affiliates. In
addition,  certain of these  transactions,  such as loans to an  affiliate,  are
restricted to a percentage of the association's capital.  Affiliates of the Bank
include the Company and any company that is under common  control with the Bank.
In addition,  a savings  association  may not lend to any  affiliate  engaged in
activities not  permissible for a bank holding company or acquire the securities
of most affiliates.  The OTS has the discretion to treat subsidiaries of savings
institutions as affiliates on a case by case basis.

     Certain  transactions with directors,  officers or controlling  persons are
also  subject to  conflict of interest  regulations  enforced by the OTS.  These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must  generally  be made on terms that are  substantially  the same as for
loans to unaffiliated individuals.

     RESERVE  REQUIREMENTS.  The Federal  Reserve Board  requires all depository
institutions  to  maintain  noninterest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts).  At June 30, 1999,  the Bank was in  compliance  with these
reserve  requirements.  The balances maintained to meet the reserve requirements
imposed  by  the  Federal  Reserve  Board  may  be  used  to  satisfy  liquidity
requirements that may be imposed by the OTS.

     LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulations 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 of its net withdrawable  short-term  savings deposits plus short-term
borrowings.  The current minimum liquid asset ratio required by the OTS is 4.0%.
For the  month  ended  June  30,  1999,  the  Bank  was in  compliance  with the
requirement, with an average daily liquidity ratio of 24.4%.

     FEDERAL  HOME LOAN BANK  SYSTEM.  The FHLB  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 of
Atlanta, 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, 1999 of $724,000.  Long-term  FHLB advances
may only be made for the  purpose of  providing  funds for  residential  housing
finance.  In July 1999, the Bank obtained a short-term  advance from the FHLB of
Atlanta in the amount of $5.0 million.

                                       21
<PAGE>

REGULATION OF THE COMPANY

     The  Company  is a unitary  savings  and loan  holding  company  subject to
regulatory  oversight  by the OTS. As such,  the Company is required to register
and file reports with the OTS and is subject to regulation  and  examination  by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings  institution  subsidiaries,  which  permits  the OTS to  restrict or
prohibit  activities  that are determined to be a serious risk to the subsidiary
savings association.

     As a unitary savings and loan holding company, the Company generally is not
subject to  activity  restrictions.  If the Company  were to acquire  control of
another savings association as a separate subsidiary, it would become a multiple
savings and loan holding  company,  and the activities of the Company and any of
its  subsidiaries  (other  than  the  Bank  or any  other  SAIF-insured  savings
association)  would become subject to restrictions  on its activities  under the
HOLA  unless  such other  association  qualifies  as a QTL and is  acquired in a
supervisory acquisition.

     If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to  continuing  after such  failure,  directly  or  through  its other
subsidiaries,  any  business  activity  other than those  approved  for multiple
savings and loan holding companies or their  subsidiaries.  In addition,  within
one year of such failure the Company would be required to register as, and would
become subject to, the restrictions  applicable to bank holding  companies.  The
activities  authorized for a bank holding  company are more limited than are the
activities  authorized  for a  unitary  or  multiple  savings  and loan  holding
company. See "--Qualified Thrift Lender Test."

     The Company must obtain approval from the OTS before  acquiring  control of
any other SAIF-insured  institution.  Such acquisitions are generally prohibited
if they  result in a  multiple  savings  and loan  holding  company  controlling
savings  institutions  in  more  than  one  state.   However,   such  interstate
acquisitions  are  permitted  based  on  specific  state  authorization  or in a
supervisory acquisition of a failing savings institution.

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

                                       22
<PAGE>

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 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 be  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, 1999,  the Bank's  post-1987  tax bad debt reserve
subject  to  recapture  was   approximately   $144,000.   The  Bank   recaptured
approximately $41,000 of this reserve into taxable income in the year ended June
30, 1999. 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,  1999,  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

                                       23
<PAGE>

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 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 13 of Notes to Consolidated  Financial  Statements in the Annual Report
filed as Exhibit 13 to this report.

     State  Taxation.  The state of  Alabama  imposes a 6.0%  excise  tax on the
earnings of financial institutions such as the Bank and the Company. The Company
also is subject to the Delaware franchise tax.

EMPLOYEES

     As of June 30,  1999,  the  Company and the Bank had 27  full-time  and two
part-time  employees,  none of whom was  represented by a collective  bargaining
agreement.

                                       24
<PAGE>
ITEM 2.  DESCRIPTION OF PROPERTY

     The following table sets forth information  regarding the Bank's offices at
June 30, 1999.
<TABLE>
<CAPTION>

                                                   Net Book                                Owned
                                       Year        Value at           Approximate            or
                                      Opened     June 30, 1999      Square Footage         Leased
                                      ------     -------------      --------------         ------
Main Office:
<S>                                    <C>     <C>                       <C>               <C>
221 South 6th Street                   1968    $     197,794             6,500             Owned
Gadsden, Alabama  35901

Branch Offices:
202 Sand Mountain Drive                1965            2,441             1,405             Leased
Albertville, Alabama  35950

395 Gunter Avenue                      1971               69             1,000             Leased
Guntersville, Alabama 35976

390 W. Main Street                     1994            6,022             2,263             Leased
Centre, Alabama  35960
</TABLE>

     The net book value of the Bank's  investment in  furnishings  and equipment
totaled $52,231 at June 30, 1999.

ITEM 3.  LEGAL PROCEEDINGS

     From  time to  time,  the  Bank is a party  to  various  legal  proceedings
incident to its business.  At June 30, 1999, there were no legal  proceedings to
which the Company or the Bank was a party, or to which any of their property was
subject, which were expected by management to result in a material loss.

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 1999.

                                       25
<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  4  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  sections  captioned  "Executive
Officers  Who Are Not  Directors"  in Item 1 of this  report  and  "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.

                                       26
<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.

  No.         Description
  ---       -----------

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  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.

                                       27
<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, 1998

     (b)  Reports on Form 8-K.  There were no Current  Reports on Form 8-K filed
during the last quarter of fiscal year 1999.

                                       28
<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 24, 1999     By:/s/ James B. Little, Jr.
                                 -----------------------------------------------
                                 James B. Little, Jr.
                                 Chairman, President 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.

By:  /s/ James B. Little                      By:  /s/ Thomas F. Dowling
     ---------------------------------             ----------------------------
      James B. Little                              Thomas F. Dowling
      Chairman, President and Chief                Director
      Executive Officer (Director and
      Principal Executive, Financial
      and Accounting Officer)

By:  /s/ Craig G. Cantrell                    By:  /s/ W. Roscoe Johnson, III
     ---------------------------------             ----------------------------
      Craig G. Cantrell                            W. Roscoe Johnson, III
      Director                                     Director

By:  /s/ Grady Gillam                         By:  /s/ Gates Little
     ---------------------------------             ----------------------------
      Grady Gillam                                 Gates Little
      Director                                     Director

By:  /s/ Rex G. Keeling, Jr.                  By:  /s/ Fred Taylor
     ---------------------------------             ----------------------------
      Rex G. Keeling, Jr.                          Fred Taylor
      Director                                     Director