1999

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

                         THE SOUTHERN BANC COMPANY, INC.

<PAGE>

                 [LETTERHEAD OF THE SOUTHERN BANC COMPANY, INC.]

         To Our Stockholders:

                  We are happy to present the Annual Report of The Southern Banc
         Company, Inc. for the fiscal year ended June 30, 1999. We invite you to
         review the Report and the Company's performance during fiscal 1999.

                  The year was a challenging one. We significantly increased our
         loan  production  and  increased  net  income in a period of  declining
         interest   rates.   This  was  done   while   maintaining   the  Bank's
         traditionally  high asset  quality,  preserving  the  integrity of your
         investment  and of the  depositors'  funds.  We continue  to  carefully
         monitor our  investments  in an  environment  where the  combination of
         optimism and competition  might draw some into more treacherous  areas.
         At the same time we must react to the  narrowing  interest rate spreads
         by  expanding  our  products and services to counter this effect on our
         bottom-line.

                  In  August  1999,  we  changed  the  corporate  title of First
         Federal  Savings and Loan  Association of Gadsden to "The Southern Bank
         Company."  We believe  that this change will  eliminate  any  confusion
         between the Company and the Bank,  our core holding,  and will increase
         public  awareness of the expanded  banking  services  which the Bank is
         authorized to offer.

                  We appreciate your  investment.  We are confident of our sound
         financial condition and look to the future with great anticipation.

                                                     Sincerely,

                                                     /s/ James B. Little, Jr.

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

     The Southern Banc Company,  Inc. (the  "Company") was  incorporated  at the
direction of management of The Southern  Bank  Company,  formerly  First Federal
Savings and Loan Association of Gadsden,  Alabama (the "Bank"),  for the purpose
of  serving  as a  savings  institution  holding  company  of the Bank  upon the
acquisition  of all of the capital stock issued by the Bank upon its  conversion
from mutual to stock form  effective  October 5, 1995. The Company is classified
as a unitary savings institution holding company and is subject to regulation by
the Office of Thrift  Supervision  ("OTS").  At June 30,  1999,  the Company had
total  consolidated  assets of $96.9  million,  deposits  of $79.7  million  and
stockholders' equity of $16.6 million, or 17.2% of total assets.

     The Bank was organized in 1936 as a federally  chartered mutual savings and
loan association, at which time it also became a member of the Federal Home Loan
Bank ("FHLB") System and obtained federal deposit insurance.  The Bank currently
operates   through  four  banking  offices  located  in  Gadsden,   Albertville,
Guntersville and Centre,  Alabama.  In August 1999, the Bank adopted its current
corporate title to eliminate any confusion  between the Company and the Bank and
to increase public  awareness of the expanded banking services which the Bank is
authorized to offer.

     The  Bank'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.

     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.


<PAGE>
                             MARKET FOR COMMON STOCK
                         AND RELATED STOCKHOLDER MATTERS

     The Company's  Common Stock began trading on the American Stock Exchange on
October 5, 1995,  under the symbol "SRN." At June 30, 1999, there were 1,074,098
shares of the Common Stock  outstanding and  approximately  311  stockholders of
record.  This total does not reflect the number of persons or entities  who hold
Common Stock in nominee or "street name" through various brokerage firms.

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

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

                                Price Per Share               Dividends
                          -----------------------------
                            High            Low              Per Share
                            ----            ---              ---------

Fiscal 1998

   First Quarter          $16.375          $15.313             $.0875
   Second Quarter         $18.000          $16.125             $.0875
   Third Quarter          $19.125          $16.500             $.0875
   Fourth Quarter         $17.125          $15.500             $.0875

Fiscal 1999

   First Quarter          $15.750          $13.688             $.0875
   Second Quarter         $13.688          $12.063             $.0875
   Third Quarter          $12.625          $11.000             $.0875
   Fourth Quarter         $12.625          $11.500             $.0875

                                       2
<PAGE>
                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>

                                                                          Year Ended June 30,
                                                  --------------------------------------------------------------------
                                                      1999         1998          1997          1996          1995
                                                      ----         ----          ----          ----          ----
                                                                 (In thousands, except per share data)

INCOME STATEMENT DATA
<S>                                               <C>           <C>          <C>            <C>          <C>
Interest income.............................      $    6,990    $    7,418   $    7,513     $   7,702    $    7,016
Interest expense............................           4,100         4,519        4,534         4,679         4,261
Net interest income.........................           2,890         2,899        2,979         3,023         2,755
Provision for loan losses...................              27            --           --            --            --
Net interest income after provision
  for loan losses...........................           2,863         2,899        2,979         3,023         2,715
Noninterest income..........................             196            92           92            77          (638)
Noninterest expense.........................           2,148         2,171        2,849         2,231         1,843
Income before provision for income taxes....             911           820          222           869           234
Provision for income taxes..................             313           277           79           294            75
Net income..................................      $      598    $      543          143           575           159
Earnings per share(1)
     Basic..................................      $     0.59    $     0.51   $     0.13     $    0.34    $       --
     Diluted................................      $     0.57    $     0.49   $     0.12     $    0.34    $       --
</TABLE>

<TABLE>
<CAPTION>
                                                                          Year Ended June 30,
                                                  --------------------------------------------------------------------
                                                      1999         1998          1997          1996          1995
                                                      ----         ----          ----          ----          ----
                                                                            (In thousands)

BALANCE SHEET DATA
<S>                                               <C>           <C>          <C>            <C>          <C>
Total assets................................      $   96,875    $  105,087   $  105,434     $ 107,029    $  101,773
Loans receivable, net.......................          42,109        41,153       36,180        33,145        26,465
Securities:
     Available for sale.....................          21,351        22,239       17,621        13,504        11,449
     Held to maturity.......................          23,706        34,077       44,158        52,822        53,126
Deposits....................................          79,734        85,926       86,759        85,847        91,407
Stockholders' equity........................          16,645        18,570       17,931        20,135         9,757
</TABLE>

<TABLE>
<CAPTION>
                                                                          Year Ended June 30,
                                                  --------------------------------------------------------------------
                                                      1999         1998          1997          1996          1995
                                                      ----         ----          ----          ----          ----
KEY OPERATING DATA
<S>                                                     <C>         <C>           <C>          <C>            <C>
Return on average assets....................            0.61%       0.52%         0.14%        0.53%          0.16%
Return on average equity....................            3.38        2.96          0.82         3.29           1.72
Average equity to average assets............           18.12       17.43         16.58        16.17           9.27
Dividend payout ratio(1)....................           59.32       68.63        424.07       127.53             --
Number of offices...........................               4           4             4            4              4
-----------------
(1) Earnings per share and dividend payout ratio are presented from the conversion date, October 5, 1995.
</TABLE>

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

GENERAL

     The principal  business of the Bank consists of accepting deposits from the
general public through its main and branch offices and investing  those funds in
loans  secured  by one- to  four-family  residential  properties  located in the
Bank's  primary  market area.  Due to the limited demand for one- to four-family
mortgage  loans in the Bank's  market  area,  the Bank  maintains a  substantial
portfolio of investment and mortgage-backed  securities and originates a limited
amount  of  consumer  loans.  The  Bank's  mortgage-backed  securities  are  all
guaranteed  as to  principal  and  interest by GNMA,  FHLMC or FNMA.  The Bank's
securities  portfolio  consists  primarily of U.S. Treasury notes and government
agency  securities,  including  agency  notes.  See  Notes 8 and 9 of  Notes  to
Consolidated  Financial  Statements.  The Bank maintains a substantial amount in
interest-bearing  deposits in other banks, primarily an interest-bearing account
with the FHLB of Atlanta.  Although the Bank has  originated a limited amount of
commercial real estate loans in the past, the Bank is not currently seeking such
loans.

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

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

POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS

     A great deal of information has been disseminated about the global computer
crash  that may occur in the year 2000.  Many  computer  programs  that can only
distinguish  the final  two  digits of the year  entered  (a common  programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900.  All of the  significant  data  processing  of the Bank that could be
affected  by this  problem is  provided by a third  party  service  bureau.  The
service  bureau  of the Bank has  advised  the Bank  that it has  resolved  this
potential  problem.  However,  if the  service  bureau  has  not  resolved  this
potential problem, the Bank would likely experience  significant data processing
delays,  mistakes or failures.  These delays,  mistakes or failures could have a
material adverse impact on the financial  condition and results of operations of
the Bank.

                                       4
<PAGE>

     Risks to the Company if its  computer  systems are not year 2000  compliant
include the inability to process customer  deposits or checks drawn on the Bank,
inaccurate interest accruals and maturity dates of loans and time deposits,  and
the  inability  to update  accounts for daily  transactions.  Other risks to the
Company exist if certain of its vendors',  suppliers'  and  customers'  computer
systems are not year 2000  compliant.  These risks  include the inability of the
Bank to communicate with its third party service bureau if phone systems are not
working,  the  interruption  of  business  in the  event of power  outages,  the
inability of loan customers to comply with repayment  terms if their  businesses
are  interrupted,  the  inability  to make payment for checks drawn on the Bank,
receive payment for checks deposited by the Bank's  customers,  or invest excess
funds if the  FHLB or  correspondent  banks  are not year  2000  compliant.  The
Company's most important  mission  critical  system is the software and hardware
responsible for maintaining and processing  general ledger,  deposits,  and loan
accounts.   The  Company's  year  2000  Compliance  and  Contingency  Plans  are
structured in accordance  with  regulatory  guidelines.  Remediation and testing
efforts  relating to the year 2000 were  completed in December 1998. The Company
has also contacted its key vendors,  suppliers and customers to determine  their
year 2000 compliance.

     Although  the  Company  currently  believes  that  it  will  be  year  2000
compliant,  the risk of system failures cannot be eliminated.  Also, the Company
cannot  guarantee the  performance  of third parties as to which it has material
relationships.  The Company  estimates that the cost of testing and updating its
systems for year 2000 compliance will be approximately $5,000.

SHAREHOLDER RIGHTS PLAN

     In July 1999,  the Board of Directors of the Company  adopted a shareholder
rights plan (the  "Plan")  and  declared a dividend  distribution  of one common
stock  purchase  right (a "Right") on each  outstanding  share of the  Company's
Common Stock.

     The Plan is designed to protect the Company's  stockholders against certain
unsolicited  attempts  to acquire the  Company,  including a partial or two-tier
tender offer that does not treat all stockholders  equally, a squeeze-out merger
and other abusive or unfair takeover  tactics that the Board believes are not in
the best  interests  of the  Company.  The Plan is not  intended  to  prevent an
acquisition  of the Company in which all  stockholders  are offered a fair price
for all of their shares.

     The Rights were issued to  stockholders  of record at the close of business
on August 2, 1999,  and they expire on July 15, 2009.  The Rights  automatically
trade with the Common Stock.

     The Rights would only become  exercisable  if one of the following  were to
occur:

(i)  a  public  announcement  that a  person  has  acquired  15% or  more of the
     outstanding Common Stock;
(ii) the  commencement  of, or  announcement  of an  intention to make, a tender
     offer that would result in the  acquisition  by a person or group of 15% or
     more of the outstanding Common Stock; or

                                       5
<PAGE>

(iii)the Company's Board of Directors  declares a 10% or greater  stockholder to
     be an "Adverse Person," as defined in the Plan.

     When the Rights first become exercisable, a holder would be entitled to buy
from  the  Company  one-hundredth  (1/100th)  of a share of  Common  Stock at an
exercise price of $30.00. Upon the occurrence of certain triggering events, each
Right would entitle the holder to purchase additional shares of Common Stock, or
securities  of a company that  acquires the Company,  at a 50% discount to their
respective market values at such time. In other words:

     o    If the Company is involved in a merger or other  business  combination
          at any time  after a person or group has  acquired  15% or more of the
          Common  Stock,  the Rights  would  entitle a holder to buy a number of
          shares of common stock of the acquiring  company having a market value
          of twice the exercise price of the Right. For example,  if at the time
          of the business combination the acquiring company's common stock has a
          per share value of $30.00,  the holder of each Right would be entitled
          to  receive  2 shares  of the  acquiring  company's  common  stock for
          $30.00.

     o    Upon  the  acquisition  by any  person  or group of 15% or more of the
          Common Stock, the "flip-in" provision of the Rights would be triggered
          and the Rights would  entitle the holder to buy a number of additional
          shares of Common  Stock  having a market  value of twice the  exercise
          price of the Right.  Thus, if at the time of the "flip-in," the Common
          Stock's  market  value  were $15 per  share,  the holder of each Right
          would be entitled to receive 4 shares of Common Stock for $30.00.

     The Rights do not interfere with the Company's business plans or affect its
financial position.  The issuance of the Rights had no dilutive effect, will not
affect earnings per share, were not taxable to stockholders or the Company,  and
did not change the way in which the Common Stock is traded on the American Stock
Exchange.  Depending on  individual  circumstances,  stockholders  may recognize
taxable income, but only when (and if) the Rights become exercisable or upon the
occurrence of certain events thereafter.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND JUNE 30, 1998

     Total assets  decreased  approximately  $8.2 million,  or 7.8%, from $105.1
million at June 30, 1998 to $96.9  million at June 30,  1999.  During the period
ended  June 30,  1999,  net loans  increased  approximately  $956,000,  or 2.3%,
securities  available for sale decreased  approximately  $888,000,  or 4.0%, and
securities held to maturity decreased approximately $10.4 million, or 30.4%. The
decrease in securities held to maturity was primarily  attributable to principal
payments received during the period ended June 30, 1999.

     Cash and cash equivalents  increased  approximately $2.1 million, or 32.1%,
from  $6.4  million  at June 30,  1998 to $8.5  million  at June 30,  1999.  The
increase in cash and cash equivalents was primarily attributable to the proceeds
from maturities and principal payments on securities available for sale and held
to maturity.

                                       6
<PAGE>

     Accrued interest and dividends receivable decreased approximately $135,000,
or 18.7%,  from $723,000 at June 30, 1998 to $588,000 at June 30, 1999.  Prepaid
expenses  and  other  assets  increased  approximately  $40,000,  or 17.9%  from
$222,000 at June 30, 1998 to $183,000 at June 30, 1999.

     Total deposits decreased  approximately  $6.2 million,  or 7.2%, from $85.9
million at June 30, 1998 to $79.7  million at June 30, 1999.  Other  liabilities
during the fiscal year ended June 30, 1999 increased  approximately  $95,000, or
16.1%,  from  $592,000  at June 30,  1998 to  $497,000  at June 30,  1999.  This
increase was primarily attributable to a decrease in taxes payable.

     Total equity decreased  approximately  $2.0 million,  or 10.6%,  from $18.6
million at June 30,  1998 to $16.6  million at June 30,  1999.  This  change was
primarily  attributable to the repurchase of approximately 156,000 shares of the
Company's outstanding Common Stock.

COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1999 AND
1998

     The Company  reported  net income for the fiscal  years ended June 30, 1999
and 1998 of $598,000 and $543,000,  respectively. The increase in net income for
the fiscal year ended June 30, 1999 was primarily attributable to a reduction in
operating expenses.

     Net Interest Income. Net interest income for each of the fiscal years ended
June  30,  1999  and 1998 was $2.9  million.  Total  interest  income  decreased
approximately  $428,000, or 5.8%, for the fiscal year ended June 30, 1999. Total
interest expense decreased  approximately $419,000, or 10.2% for the fiscal year
ended June 30, 1999 compared with the fiscal year ended June 30, 1998.

     Provision for Loan Losses.  During the fiscal year ended June 30, 1999, the
provision  for loan losses was  approximately  $27,000.  No  provision  for loan
losses  was  deemed  necessary  in the fiscal  year  ended  June 30,  1998.  The
allowance for loan losses is based on  management's  evaluation of possible loan
losses inherent in the Bank's loan portfolio.  Management considers, among other
factors, past loss experience,  current economic conditions,  volume, growth and
composition of the loan portfolio, and other relevant factors.

     Non-Interest Income.  Non-interest income increased approximately $104,000,
from  $92,000 for the fiscal year ended June 30, 1998 to $196,000 for the fiscal
year ended  June 30,  1999.  This  increase  was  primarily  attributable  to an
increase in prepayment penalties associated with mortgage loan refinances.

     Non-Interest Expense. Non-interest expense decreased approximately $23,000,
or 1.1%.  Non-interest  expenses were approximately $2.2 million for each of the
fiscal years ended June 30, 1999 and 1998.  Salaries and employee  benefits were
approximately  $1.44  million and $1.40  million for the fiscal years ended June
30,  1999  and  1998,  respectively.   Other  operating  expenses  decreased  by
approximately $46,000, or 7.3%, for the fiscal year ended June 30, 1999.

                                       7
<PAGE>

     Provision for Income Taxes. During the fiscal year ended June 30, 1999, the
provision for income tax expense increased approximately $36,000, or 12.8%. This
increase was primarily attributable to an increase in pre-tax earnings resulting
from a reduction in operating expenses.

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

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

     Net Interest  Income.  Net interest  income for the fiscal years ended June
30,  1998 and  1997 was $2.9  million  and  $3.0  million,  respectively.  Total
interest income decreased  approximately  $96,000,  or 1.3%, for the fiscal year
ended June 30, 1998. Total interest expense decreased  approximately  $15,000 or
0.3% for the fiscal year ended June 30, 1998 compared with the fiscal year ended
June 30, 1997.

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

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

     Non-Interest   Expense.   Non-interest   expense  decreased   approximately
$678,000, or 23.8%, for the fiscal year ended June 30, 1998 from $2.8 million to
$2.2  million.  This  decrease was  primarily  attributable  to the reduction in
deposit insurance  expense related to the recognition of the special  assessment
imposed by the SAIF in the amount of $591,000  during the fiscal year ended June
30, 1997.  Salaries and employee benefits  remained level at approximately  $1.4
million  for the fiscal  years  ended June 30,  1998 and 1997.  Other  operating
expenses  decreased by  approximately  $25,000 or 4.1% for the fiscal year ended
June 30, 1998.

     Provision for Income Taxes. During the fiscal year ended June 30, 1998, the
provision for income tax expense increased  approximately  $198,000,  or 249.0%.
This increase was  primarily  attributable  to a reduction in deposit  insurance
expense  related to the absence of any SAIF special  assessment in the amount of
$591,000 during the fiscal year June 30, 1998.

ASSET/LIABILITY MANAGEMENT

     Net interest  income,  the primary  component of the Bank's net income,  is
determined by the difference or "spread"  between the yield earned on the Bank's
interest-earning  assets and the

                                       8
<PAGE>

rates paid on its interest-bearing  liabilities and the relative amounts of such
assets and liabilities.  Key components of a successful asset/liability strategy
are the  monitoring  and  managing  of  interest  rate  sensitivity  on both the
interest-earning  assets and interest-bearing  liabilities.  The matching of the
Bank's assets and  liabilities  may be analyzed by examining the extent to which
its assets and  liabilities  are interest rate  sensitive and by monitoring  the
expected  effects of interest  rate changes on an  institution's  net  portfolio
value.

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

     The OTS requires  the Bank to measure its  interest  rate risk by computing
estimated  changes  in the net  present  value of its cash  flows  from  assets,
liabilities  and  off-balance  sheet  items  ("NPV")  in the event of a range of
assumed changes in market interest rates. These computations estimate the effect
on the Bank's NPV of sudden and  sustained 1% to 4% increases  and  decreases in
market  interest  rates.  The Bank's Board of Directors  has adopted an interest
rate risk policy which establishes maximum increases and decreases in the Bank's
estimated  NPV of 25%,  50% and 77% and 25%,  35% and 50% in the event of 1%, 2%
and 3% increases and decreases in market interest rates,  respectively.  At June
30,  1999,  based on the most  recent  information  provided  by the OTS, it was
estimated that the Bank's NPV would decrease 8%, 18% and 28% and increase 5%, 7%
and 9% in the event of 1%, 2% and 3% increases and decreases in market  interest
rates,  respectively.  These calculations indicate that the Bank's net portfolio
value could be adversely  affected by increases  in interest  rates.  Changes in
interest rates also may affect the Bank's net interest income, with increases in
rates  expected to decrease  income and decreases in rates  expected to increase
income, as the Bank's  interest-bearing  liabilities would be expected to mature
or reprice more quickly than the Bank's  interest-earning  assets. See Note 3 of
Notes to Consolidated Financial Statements.

     While  management  cannot predict future interest rates or their effects on
the Bank's  NPV or net  interest  income,  management  does not  expect  current
interest  rates to have a  material  adverse  effect  on the  Bank's  NPV or net
interest  income  in  the  future.   Computations  of  prospective   effects  of
hypothetical interest rate changes are based on numerous assumptions,  including
relative levels of market interest rates,  prepayments and deposit  run-offs and
should not be relied upon as indicative of actual results.  Certain shortcomings
are inherent in such  computations.  Although certain assets and liabilities may
have similar  maturity or periods of

                                       9
<PAGE>

repricing they may react at different times and in different  degrees to changes
in the market interest rates.  The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,  while
rates on other types of assets and  liabilities may lag behind changes in market
interest  rates.  Certain assets,  such as adjustable rate mortgages,  generally
have features which restrict changes in interest rates on a short term basis and
over  the  life of the  asset.  In the  event of a  change  in  interest  rates,
prepayments and early withdrawal levels could deviate  significantly  from those
assumed in making  calculations  set forth  above.  Additionally,  an  increased
credit risk may result as the ability of many  borrowers  to service  their debt
may decrease in the event of an interest rate increase.  Finally,  virtually all
of the adjustable rate loans in the Bank's  portfolio  contain  conditions which
restrict the periodic change in interest rate.

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

                                       10
<PAGE>

AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

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

     The table also presents  information for the periods  indicated and at June
30, 1999 with  respect to the  difference  between the  weighted  average  yield
earned  on  interest-earning  assets  and  the  weighted  average  rate  paid on
interest-bearing   liabilities,   or  "interest   rate  spread,"  which  savings
institutions have traditionally  used as an indicator of profitability.  Another
indicator  of an  institution's  net  interest  income  is  its  "net  yield  on
interest-earning  assets,"  which  is its net  interest  income  divided  by the
average balance of  interest-earning  assets. Net interest income is affected by
the interest rate spread and by the relative amounts of interest-earning  assets
and interest-bearing  liabilities.  When interest-earning  assets approximate or
exceed  interest-bearing  liabilities,  any positive  interest  rate spread will
generate net interest income.
<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                        ------------------------------------------------------------------------------
                                                      1999                                    1998
                                        -----------------------------------     --------------------------------------
                                                                Average                                     Average
                                        Average                 Yield/          Average                     Yield/
                                        Balance     Interest      Cost          Balance      Interest         Cost
                                        -------     --------      ----          -------      --------         ----
                                                                  (Dollars in thousands)

Interest-earning assets:
<S>                                     <C>         <C>          <C>            <C>          <C>             <C>
  Loans receivable.................     $  41,508   $   3,185      7.67%        $  38,751    $    3,081        7.95%
  Securities.......................        52,145       3,502      6.72            58,426         4,046        6.92
  Other interest-earning assets....         6,828         303      4.44             6,252           291        4.65
                                        ---------   ---------                   ---------    ----------
    Total interest-earning assets..       100,481       6,990      6.96           103,429         7,418        7.17
Non-interest-earning assets........         2,009                                   1,844
                                        ---------                               ---------
    Total assets...................     $ 102,490                               $ 105,273
                                        =========                               =========
Interest-bearing liabilities:
  Deposits.........................     $  83,137       4,100      4.93         $  85,262         4,519        5.30
                                        ---------   ---------                   ---------    ----------
    Total interest-bearing liabilities     83,137       4,100      4.93            85,262         4,519        5.30
                                                    ---------                                ----------
Non-interest-bearing liabilities...         1,106                                   1,667
                                        ---------                               ---------
    Total liabilities..............        84,243
Equity.............................        18,247                                  18,344
                                        ---------                               ---------
    Total liabilities and equity...     $ 102,490                               $ 105,273
                                        =========                               =========
Net interest income..............                   $   2,890                                $    2,899
                                                    =========                                ==========
Interest rate spread.............                                 2.03%                                        1.87%
                                                                ======                                       ======
Net interest margin..............                                 2.88%                                        2.80%
                                                                ======                                       ======
Ratio of average interest-earning
   assets to average interest-bearing
  liabilities....................                               120.86%                                      121.31%
                                                                ======                                       ======
</TABLE>

(continued from above)
                                                    Year Ended June 30,
                                           -------------------------------------
                                                          1997
                                           -------------------------------------
                                                                     Average
                                           Average                   Yield/
                                           Balance      Interest       Cost
                                           -------      --------       ----
                                               (Dollars in thousands)

Interest-earning assets:
  Loans receivable.................        $  34,149       $2,734        8.01%
  Securities.......................           62,113        4,491        8.04
  Other interest-earning assets....            7,518          288        3.82
                                          ----------       ------
    Total interest-earning assets..          103,780        7,513        7.24
Non-interest-earning assets........            1,751
                                           ---------
    Total assets...................        $ 105,531
                                           =========
Interest-bearing liabilities:
  Deposits.........................        $  86,743        4,534        5.23
                                          ----------       ------
    Total interest-bearing liabilities        86,743        4,534        5.23

Non-interest-bearing liabilities...            1,286
                                          ----------
    Total liabilities..............           88,029
Equity.............................           17,502
                                           ---------
    Total liabilities and equity...        $ 105,531
                                           =========
Net interest income..............                          $2,979
                                                           ======
Interest rate spread.............                                        2.01%
                                                                       ======
Net interest margin..............                                        2.87%
                                                                       ======
Ratio of average interest-earning
   assets to average interest-bearing
  liabilities....................                                      119.64%
                                                                       ======
                                       11
<PAGE>
RATE/VOLUME ANALYSIS

     The table  below  sets  forth  certain  information  regarding  changes  in
interest income and interest  expense of the Company for the periods  indicated.
For each  category of  interest-earning  asset and  interest-bearing  liability,
information  is  provided  on changes  attributable  to:  (i)  changes in volume
(changes in volume  multiplied by old rate) and (ii) changes in rates (change in
rate multiplied by old volume).
<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                            ------------------------------------------------------------------------------
                                                          1999 vs. 1998                            1998 vs. 1997
                                            ------------------------------------    --------------------------------------
                                                       Increase (Decrease)                      Increase (Decrease)
                                                             Due to                                   Due to
                                            ------------------------------------    --------------------------------------
                                               Rate        Volume       Total           Rate       Volume        Total
                                               ----        ------       -----           ----       ------        -----
                                                                           (In thousands)
Interest income
<S>                                         <C>        <C>           <C>            <C>         <C>          <C>
  Loans.................................    $  (114)   $    219      $   105        $    (19)   $      366   $      347
  Securities............................        (78)       (431)        (509)           (185)         (260)        (445)
  Other interest-earning assets.........         47         (71)         (24)             14           (11)           3
    Total interest-earning assets.......       (145)       (283)        (428)           (190)           95          (95)

Interest expense
  Deposits.............................        (306)       (113)        (419)             68           (83)         (15)
   Total interest-bearing liabilities...       (306)       (113)        (419)             68           (83)         (15)

Change in net interest income...........    $    161   $   (170)     $    (9)       $   (258)   $     (178)  $      (80)
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     As a holding  company,  the  Company  conducts  its  business  through  its
subsidiary,  the Bank,  which is required to maintain  minimum  levels of liquid
assets as defined by regulations of the OTS. The requirement,  which varies from
time to time depending upon economic conditions and deposit flows, is based upon
a percentage of deposits and short-term borrowings. The required ratio currently
is 4.0%. The Bank adjusts its liquidity levels in order to meet funding needs of
deposit outflows,  repayment of borrowings and loan  commitments.  The Bank also
adjusts  liquidity as  appropriate  to meet its asset and  liability  management
objectives.

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

     The Bank  continues  to maintain a high level of liquid  assets in order to
meet its funding requirements.  At June 30, 1999 the Bank had approximately $8.5
million in cash on hand and  interest-bearing  deposits  in other  banks,  which
represented  8.8% of total  assets.  The  Bank's

                                       12
<PAGE>

average  liquidity  ratio well  exceeded the required  minimum at and during the
fiscal year ended June 30, 1999.  At June 30,  1999,  the Bank's level of liquid
assets, as measured for regulatory  compliance  purposes,  was $19.4 million, or
24.4%.

     At June 30, 1999,  the Bank had $16.6 million of total equity,  or 17.2% of
total assets.  The Bank continued to exceed its regulatory  capital  requirement
ratios at June 30,  1999.  Tangible  capital  and core  capital  were each $15.6
million,  which  represented  16.2% of adjusted  total  assets,  and  risk-based
capital was $15.8 million, which represented 56.0% of total risk-weighted assets
at June 30, 1999. Such amounts  exceeded the respective  minimum required ratios
of 1.5%, 4.0% and 8.0% by 14.7%, 12.2% and 7.8%, respectively. At June 30, 1999,
the Bank continued to meet the definition of a  "well-capitalized"  institution,
the highest of the five categories under the prompt  corrective action standards
adopted by the OTS. See Note 4 of Notes to Consolidated Financial Statements.

NEW ACCOUNTING PRONOUNCEMENTS

     See Note 1 of Notes to Consolidated Financial Statements.

FORWARD-LOOKING STATEMENTS

     Management's  discussion  and  analysis  includes  certain  forward-looking
statements  addressing,  among other things,  the Bank's prospects for earnings,
asset growth and net interest margin. Forward-looking statements are accompanied
by, and identified  with, such terms as  "anticipates,"  "believes,"  "expects,"
"intends," and similar phrases.  Management's expectations for the Bank's future
involve a number of assumptions  and estimates.  Factors that could cause actual
results to differ from the expectations  expressed  herein include:  substantial
changes in interest rates,  and changes in the general  economy;  changes in the
Bank's strategies for credit-risk management,  interest-rate risk management and
investment  activities.  Accordingly,  any  forward-looking  statements included
herein do not purport to be  predictions of future events or  circumstances  and
may not be realized.

                                       13
<PAGE>
                       [Letterhead of Arthur Andersen LLP]

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Southern Banc Company, Inc.:

We have audited the accompanying  consolidated statements of financial condition
of THE SOUTHERN BANC COMPANY, INC. (a Delaware corporation) AND SUBSIDIARY as of
June 30,  1999  and 1998 and the  related  consolidated  statements  of  income,
stockholders'  equity and cash  flows for each of the three  years in the period
ended  June  30,  1999.  These   consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of The Southern Banc
Company,  Inc.  and  Subsidiary  as of June 30, 1999 and 1998 and the results of
their  operations and cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.

                                               /s/ Arthur Andersen LLP

Birmingham, Alabama
August 20, 1999

<PAGE>
                         THE SOUTHERN BANC COMPANY, INC.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                             JUNE 30, 1999 AND 1998

                              ASSETS                 1999             1998
                              ------                 ----             ----

CASH AND EQUIVALENTS:
    Cash on hand and in other banks                $  1,379,871  $    1,171,354
    Interest-bearing deposits in other banks          7,300,785       5,250,164
                                                   ------------  --------------
                                                      8,680,656       6,421,518

Securities available for sale, at fair value         21,350,466      22,238,866
Securities held to maturity (fair values
    of $23,646,445 and $34,811,021, respectively)    23,706,524      34,077,096
                                                   ------------  --------------
LOANS RECEIVABLE, net                                42,108,709      41,153,338
                                                   ------------  --------------
PREMISES AND EQUIPMENT, net                             258,557         251,373
accrued interest and dividends receivable               587,656         723,024
PREPAID EXPENSES AND OTHER ASSETS                       182,487         222,142
                                                   ------------  --------------
              Total assets                          $96,875,055    $105,087,357
                                                   ============    ============
<PAGE>
<TABLE>
<CAPTION>

               LIABILITIES AND STOCKHOLDERS' EQUITY                            1999                1998
               ------------------------------------                            ----                ----


<S>                                                                           <C>              <C>
DEPOSITS                                                                      $79,733,677      $  85,925,834

OTHER LIABILITIES:
    Accrued interest payable                                                       40,700             59,106
    Advance payments by borrowers for taxes
       and insurance                                                               46,681             60,797
    Taxes payable                                                                 101,470            213,504
    Other                                                                         307,787            258,182
                                                                              -----------       ------------
              Total liabilities                                                80,230,315         86,517,423
                                                                              -----------       ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
    Preferred stock, par value $.01 per share; 500,000 shares
       authorized; shares issued and outstanding--none                                  0                  0
    Common stock, par value $.01 per share; 3,500,000 shares
       authorized; 1,454,750 shares issued                                         14,548             14,548
    Additional paid-in capital                                                 13,684,237         13,676,507
    Retained earnings                                                           9,684,032          9,433,341
    Unearned compensation                                                      (1,531,981)        (1,601,861)
    Treasury stock at cost, 380,652 and 224,427 shares in 1999
       and 1998, respectively                                                  (4,991,316)        (3,000,128)
    Unrealized gain (loss) on securities available
       for sale, net                                                             (214,780)            47,527
                                                                              -----------       ------------
              Total stockholders' equity                                       16,644,740         18,569,934
                                                                              -----------       ------------
              Total liabilities and stockholders' equity                      $96,875,055       $105,087,357
                                                                              ===========       ============
</TABLE>
     The  accompanying   notes  are  an  integral  part  of  these  consolidated
statements.

<PAGE>

                         THE SOUTHERN BANC COMPANY, INC.

                        CONSOLIDATED STATEMENTS OF INCOME

                FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>

                                                                                   1999             1998            1997
                                                                                   ----             ----            ----
INTEREST INCOME:
<S>                                                                              <C>              <C>             <C>
    Interest and fees on loans                                                   $3,221,414       $3,080,942      $2,734,183
    Interest and dividends on securities available for sale                       1,286,155        1,253,456       1,005,783
    Interest and dividends on securities held to maturity                         2,068,895        2,792,400       3,485,439
    Other interest income                                                           414,190          290,785         287,880
                                                                                 ----------       ----------      ----------
              Total interest income                                               6,990,654        7,417,583       7,513,285

INTEREST EXPENSE ON DEPOSITS                                                      4,100,296        4,518,576       4,533,837
                                                                                 ----------       ----------      ----------
         Net interest income                                                      2,890,358        2,899,007       2,979,448

PROVISION FOR LOAN LOSSES                                                            27,000                0               0
                                                                                 ----------       ----------      ----------
         Net interest income after provision for loan losses                      2,863,358        2,899,007       2,979,448
                                                                                 ----------       ----------      ----------
NONINTEREST INCOME:
    Customer service fees                                                           153,362           88,523          90,643
    Miscellaneous income, net                                                        41,015            3,277           1,171
                                                                                 ----------       ----------      ----------
              Total noninterest income                                              194,377           91,800          91,814
                                                                                 ----------       ----------      ----------
NONINTEREST EXPENSE:
    Salaries and employee benefits                                                1,439,904        1,400,837       1,429,250
    Office building and equipment expense                                            77,503           91,264         101,256
    Deposit insurance expense                                                        52,213           55,657         712,962
    Other expense                                                                   577,656          623,121         605,772
                                                                                 ----------       ----------      ----------
              Total noninterest expense                                           2,147,276        2,170,879       2,849,240
                                                                                 ----------       ----------      ----------
              Income before provision for income taxes                              910,459          819,928         222,022

PROVISION FOR INCOME TAXES                                                          312,558          277,043          79,391
                                                                                 ----------       ----------      ----------
              Net income                                                        $   597,901      $   542,885     $   142,631
                                                                                ===========      ===========     ===========

EARNINGS PER SHARE
    Basic                                                                              $.59             $.51            $.13
    Diluted                                                                            $.57             $.49            $.12

AVERAGE SHARES OUTSTANDING--BASIC                                                 1,014,959        1,061,133       1,095,959
AVERAGE SHARES OUTSTANDING--DILUTED                                               1,048,023        1,118,613       1,152,523
</TABLE>

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

<PAGE>
                         THE SOUTHERN BANC COMPANY, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
                                                                                      Additional
                                                                            Common     Paid-In      Retained      Unearned
                                                                            Stock      Capital      Earnings    Compensation
                                                                            -----      -------      --------    ------------

<S>                                                                         <C>       <C>           <C>          <C>
BALANCE, June 30, 1996                                                      14,548    $13,572,806   $9,701,971   $(2,117,393)
    Net income                                                                   0              0      142,631             0
    Change in unrealized gain (loss) on securities
       available for sale, net                                                   0              0            0             0
    Comprehensive income
    Purchase of treasury stock, at cost                                          0              0            0             0
    Amortization of unearned compensation                                        0         34,045            0       275,135
    Dividends declared ($.525 per share)                                         0              0     (591,252)            0
    Valuation adjustment on unallocated stock plan shares                        0         35,772            0       (35,772)
    Contributions to stock plan trusts                                           0              0            0       (45,434)
    Exercise of stock options (545 shares)                                       0              0            0         6,370
                                                                            ------     ----------    ---------    ----------
BALANCE, June 30, 1997                                                      14,548     13,642,623    9,253,350    (1,917,094)
    Net income                                                                   0              0      542,885             0
    Change in unrealized gain (loss) on securities
        available for sale, net                                                  0              0            0             0
    Comprehensive income
    Amortization of unearned compensation                                        0         32,470            0       237,758
    dividends declared ($.35 per share)                                          0              0     (362,894)            0
    Valuation adjustment on unallocated stock plan shares                        0          1,414            0        (1,414)
    Exercise of stock options (8,599 shares)                                     0              0            0       100,489
      contributions to stock plan trusts                                         0              0            0       (21,600)
                                                                            ------     ----------    ---------    ----------
BALANCE, June 30, 1998                                                      14,548     13,676,507    9,433,341    (1,601,861)
    Net income                                                                   0              0      597,901             0
    Change in unrealized gain (loss) on securities
       available for sale, net                                                   0              0            0             0
    Comprehensive income
    Purchase of treasury stock, at cost                                          0              0            0             0
    Amortization of unearned compensation                                        0         48,056            0       333,362
    dividends declared ($.35 per share)                                          0              0     (347,210)            0
    Valuation adjustment on unallocated stock plan shares                        0        (40,326)           0        40,326
    contributions to stock plan trusts                                           0              0            0      (303,808)
                                                                            ------     ----------    ---------    ----------
BALANCE, June 30, 1999                                                      14,548    $13,684,237   $9,684,032   $(1,531,981)
                                                                            ======    ===========   ==========   ===========

</TABLE>
     The  accompanying   notes  are  an  integral  part  of  these  consolidated
statements.
<PAGE>
                         THE SOUTHERN BANC COMPANY, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997

(continued from above)
<TABLE>
<CAPTION>
                                                                                                                        Non-Owner
                                                                              Treasury     Unrealized                  Changes in
                                                                                Stock      Gain (Loss)      Total        Equity
                                                                                -----      -----------      -----        ------


<S>                                                                          <C>             <C>          <C>             <C>
BALANCE, June 30, 1996                                                       $   (957,590)   $  (79,587)  $20,134,755
    Net income                                                                         0              0       142,631     $142,631
    Change in unrealized gain (loss) on securities available for sale, net             0         17,474        17,474       17,474
                                                                                                                           -------
    Comprehensive income                                                                                                   160,105
    Purchase of treasury stock, at cost                                       (2,042,538)             0    (2,042,538)
    Amortization of unearned compensation                                              0              0       309,180
    Dividends declared ($.525 per share)                                               0              0      (591,252)
    Valuation adjustment on unallocated stock plan shares                              0              0             0
    Contributions to stock plan trusts                                                 0              0       (45,434)
    Exercise of stock options (545 shares)                                             0              0         6,370
                                                                              ----------        -------    ----------      -------
BALANCE, June 30, 1997                                                        (3,000,128)       (62,113)   17,931,186
    Net income                                                                         0              0       542,885      542,885
    Change in unrealized gain (loss) on securities available for sale, net             0        109,640       109,640      109,640
                                                                                                                           -------
    Comprehensive income                                                                                                   652,525
    Amortization of unearned compensation                                              0              0       270,228
    dividends declared ($.35 per share)                                                0              0      (362,894)
    Valuation adjustment on unallocated stock plan shares                              0              0             0
    Exercise of stock options (8,599 shares)                                           0              0       100,489
    contributions to stock plan trusts                                                 0              0       (21,600)
                                                                              ----------        -------    ----------      -------
BALANCE, June 30, 1998                                                        (3,000,128)        47,527    18,569,934
    Net income                                                                         0              0       597,901      597,901
    Change in unrealized gain (loss) on securities available for sale, net             0       (262,307)     (262,307)    (262,307)
                                                                                                                           -------
    Comprehensive income                                                                                                   335,594
    Purchase of treasury stock, at cost                                        (1,991,189)            0    (1,991,189)
    Amortization of unearned compensation                                              0              0       381,418
    dividends declared ($.35 per share)                                                0              0      (347,210)
    Valuation adjustment on unallocated stock plan shares                              0              0             0
    contributions to stock plan trusts                                                 0              0      (303,808)
                                                                              ----------        -------    ----------      -------
BALANCE, June 30, 1999                                                       $(4,991,316)     $(214,780)  $16,644,740
                                                                             ===========      =========   ===========
</TABLE>
     The  accompanying   notes  are  an  integral  part  of  these  consolidated
statements.
<PAGE>

                         THE SOUTHERN BANC COMPANY, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
                                                                                  1999             1998            1997
                                                                                  ----             ----            ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                          <C>                <C>             <C>
    Net income                                                               $     597,901      $   542,885     $   142,631
    Adjustments  to  reconcile  net  income to net cash
       provided  by  operating activities:
          Depreciation                                                              38,186           46,176          48,391
          Amortization (accretion), net                                           (187,428)         (15,581)         56,293
          Amortization of intangible asset                                          32,973           38,847          46,356
          Amortization of unearned compensation                                    381,418          270,228         309,180
          Loss on sale of real estate owned, net                                         0                0           7,288
          Provision for loan losses                                                 27,000                0               0
          Deferred income tax provision (benefit)                                  (77,771)          31,167        (105,788)
    Change in assets and liabilities:
       Decrease in accrued interest and dividends receivable                       135,368           23,876         109,481
       Decrease in prepaid expenses and other assets                                 6,682          392,588       1,188,958
       Increase (decrease) in accrued interest payable                             (18,406)          14,077         (14,136)
       Increase (decrease) in income taxes payable                                  96,872         (346,299)        461,363
       Increase (decrease) in other liabilities                                     49,605          140,427        (633,797)
                                                                                ----------       ----------       ---------
              Net cash provided by operating activities                          1,082,400        1,138,391       1,616,220
                                                                                ----------       ----------       ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of securities available for sale                                 (16,350,702)     (12,304,906)     (6,728,677)
    Proceeds from sale of real estate owned                                              0                0          13,808
    Proceeds from maturities and principal payments on securities
       available for sale                                                       16,946,256        7,808,031       2,641,104
    Purchases of securities held to maturity                                    (5,780,036)      (5,004,063)       (728,320)
    Proceeds from maturities and principal payments on securities
       held to maturity                                                         16,237,440       15,110,735       9,368,961
    Purchase of loans                                                                    0         (685,400)       (291,151)
    Net increase in loans                                                         (982,371)      (4,287,542)     (2,796,725)
    Capital expenditures                                                           (45,370)         (30,812)        (36,040)
                                                                                ----------       ----------       ---------
              Net cash provided by investing activities                         10,025,217          606,043       1,442,960
                                                                                ----------       ----------       ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                 1999             1998            1997
                                                                                 ----             ----            ----

CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                                           <C>              <C>                <C>
    Contributions to stock plan trusts                                        $   (303,808)    $    (21,600)      $  (45,434)
    Purchase of treasury stock                                                  (1,991,189)               0      (2,042,538)
    Cash dividends paid                                                           (347,209)        (362,894)       (591,252)
    Increase (decrease) in deposits, net                                        (6,192,157)        (832,879)        912,113
    Increase (decrease) in advance payments by borrowers
       for taxes and insurance                                                     (14,116)         (13,232)        (25,787)
    Proceeds from exercise of stock options                                              0          100,489           6,370
                                                                                ----------       ----------       ---------
              Net cash used in financing activities                             (8,848,479)      (1,130,116)     (1,786,528)
                                                                                ----------       ----------       ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

                                                                                 2,259,138          614,318       1,272,652
CASH AND CASH EQUIVALENTS, beginning of period                                   6,421,518        5,807,200       4,534,548
                                                                                ----------       ----------      ----------
CASH AND CASH EQUIVALENTS, end of period                                        $8,680,656       $6,421,518      $5,807,200
                                                                                ==========       ==========      ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
    Cash paid during the period for:
       Income taxes, net of refund received                                   $    284,079     $    224,222     $   104,679
                                                                                ==========       ==========      ==========
       Interest                                                               $  4,059,596     $  4,504,499      $4,547,973
                                                                                ==========       ==========      ==========
    Noncash transactions:
       Real estate owned, obtained through foreclosure                        $          0     $          0     $    21,096
       Change in unrealized net gain (loss) on securities available
           for sale, net of deferred taxes (benefit)                              (262,307)         109,640          17,474
                                                                                ==========       ==========      ==========
</TABLE>
     The  accompanying   notes  are  an  integral  part  of  these  consolidated
statements.

<PAGE>
                         THE SOUTHERN BANC COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 1999 AND 1998

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      ORGANIZATION, NATURE OF OPERATIONS, AND PRINCIPLES OF CONSOLIDATION

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

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

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

      USE OF ESTIMATES

      The accounting  principles and reporting policies of the Company,  and the
      methods of applying  these  principles,  conform with  generally  accepted
      accounting  principles  ("GAAP")  and with  general  practices  within the
      thrift  industry.  In preparing  the financial  statements,  management is
      required  to make  estimates  and  assumptions  that  affect the  reported
      amounts  of assets  and  liabilities  as of the date of the  statement  of
      financial condition and revenues and expenses for the period.

      Actual results could differ  significantly from those estimates.  Material
      estimates that are particularly  susceptible to significant changes in the
      near term relate to the determination of the allowance for loan losses and
      the valuation of real estate acquired in connection  with  foreclosures or
      in  satisfaction of loans.  In connection  with the  determination  of the
      allowances  for loan  losses and real  estate  owned,  management  obtains
      independent appraisals for significant  properties,  evaluates the overall
      portfolio   characteristics   and   delinquencies  and  monitors  economic
      conditions.

<PAGE>

      A substantial portion of the Company's loans are secured by real estate in
      its primary market area.  Accordingly,  the ultimate  collectibililty of a
      substantial  portion of the Company's loan portfolio and the recovery of a
      portion of the carrying  amount of foreclosed  real estate are susceptible
      to changes in economic conditions in the Company's primary market areas.

      SECURITIES

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

      Securities  designated as held to maturity are carried at amortized  cost,
      as the Company has both the ability and management has the positive intent
      to hold these  securities  to  maturity.  The  Company  had no  securities
      classified as trading at June 30, 1999 and 1998.

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

      LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

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

                                       2
<PAGE>
      The provision for loan losses  increases the allowance for loan losses,  a
      valuation  account  which is  netted  against  loans on the  statement  of
      financial  condition.  As  the  amount  of a loan  loss  is  confirmed  by
      gathering  additional  information,  taking  collateral in full or partial
      settlement  of the loan,  bankruptcy of the  borrower,  etc.,  the loan is
      written down,  reducing the allowance for loan losses. If, subsequent to a
      writedown,  the Association is able to collect additional amounts from the
      customer  or  obtain  control  of  collateral   worth  more  than  earlier
      estimated,  a recovery is  recorded,  increasing  the  allowance  for loan
      losses.

      Impaired loans are measured based on the present value of expected  future
      cash flows discounted at each loan's original  effective interest rate. As
      a practical  expedient,  impairment  may be  measured  based on the loan's
      observable market price or the fair value of the collateral if the loan is
      collateral  dependent.  When the measure of the impaired loan is less than
      the recorded  investment of the loan, the impairment is recorded through a
      valuation allowance.

      LOAN ORIGINATION FEES AND RELATED COSTS AND DISCOUNTS

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

      PREMISES AND EQUIPMENT

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

        Building and improvements       10-40 years   Accelerated/Straight-line
        Leasehold improvements          10 years      Straight-line
        Furniture and equipment         5-20 years    Accelerated/Straight-line
        Automobile                      3 years       Straight-line

      REAL ESTATE OWNED

      Real  estate  owned is recorded  at the fair value of the  property,  less
      estimated costs of disposition. Any excess of the recorded investment over
      fair value of the property is charged to the  allowance for loan losses at
      the  time of  foreclosure.  Costs  relating  to  improvement  of  property
      incurred subsequent to acquisition are capitalized, whereas costs relating
      to the holding of property are expensed.  The amounts expensed in 1999 and
      1998 were $0 and $0,  respectively.  There were no amounts  capitalized in
      either year.

      Subsequent to foreclosure, real estate owned is evaluated on an individual
      basis for  changes in fair  value.  Future  declines  in fair value of the
      asset,  less cost of disposition,  below its carrying amount increases the
      valuation allowance account.  Future increases in fair value of the asset,
      less costs of disposition,  above its carrying amount reduce the valuation
      allowance  account,  but not below zero.  Increases  or  decreases  in the
      valuation allowance are charged or credited to income. The Association had
      no real estate owned at June 30, 1999 and 1998.

                                       3
<PAGE>

      CORE DEPOSIT PREMIUM

      The premium paid to acquire the deposits of another financial  institution
      has been shown as an intangible  asset and is included in Prepaid expenses
      and other assets in the accompanying  consolidated statements of financial
      condition.  This net core deposit  premium  ($104,262 and $137,235 at June
      30, 1999 and 1998,  respectively)  is being amortized using an accelerated
      method over a ten year period which approximates the expected lives of the
      purchased deposit relationships (amortization expense of $32,973, $38,847,
      and $46,356 in fiscal years 1999, 1998, and 1997, respectively).

      STATEMENTS OF CASH FLOWS

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

      PENDING ACCOUNTING PRONOUNCEMENTS

      In June 1999, the Financial  Accounting  Standards  board ("FASB")  issued
      Statement of Financial  Accounting  Standards ("SFAS") No. 137, Accounting
      for  Derivative   Instruments  and  Hedging   Activities-Deferral  of  the
      Effective  Date of FASB  Statement  No.  133.  This  statement  encourages
      earlier  application,  but delays the effective date of Statement 133 from
      fiscal  quarters  of all fiscal  years  beginning  after June 15,  1999 to
      fiscal  quarters of all fiscal years  beginning  after June 15,  2000.  In
      accordance with the new standard, management will continue to evaluate the
      impact and defer implementations as the standard allows.

      PRIOR YEAR CLASSIFICATION

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

2.    STOCK CONVERSION

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

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

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

                                       4
<PAGE>

      liquidation  account or if stockholders' equity would be reduced below the
      amount required by the OTS. (See Note 4).

3.    INTEREST-RATE SENSITIVITY

      Fixed-rate  mortgage  loans  and  mortgage-backed  securities  comprise  a
      substantial   portion  of  the   Association's   interest-earning   assets
      (approximately  58% at June 30, 1999), while its principal source of funds
      consists of savings deposits with maturities of three years or less (86%).
      Because  of the  short-term  nature of the  savings  deposits,  their cost
      generally reflects returns currently available in the market. Accordingly,
      the  Association's  savings  deposits have a high degree of  interest-rate
      sensitivity  while its earning  assets are  relatively  fixed and are much
      less sensitive to changes in current market rates.  Therefore,  changes in
      market  interest  rates tend to directly  affect the level of net interest
      income related to such earning assets.

      At  June  30,  1999,  based  on  information  provided  by the  OTS it was
      estimated  that the  Association's  net  portfolio  value ("NPV") (the net
      present value of the  Association's  cash flows from assets,  liabilities,
      and off-balance sheet items) would decrease 8%, 18%, and 28%, and increase
      5%, 7%, and 9% in the event of 1%, 2%, and 3% increases  and  decreases in
      market interest rates, respectively.  These calculations indicate that the
      Association's  NPV could be  adversely  affected by  increases in interest
      rates but could be  favorably  affected by  decreases  in interest  rates.
      Computations of prospective effects of hypothetical  interest rate changes
      are based on numerous  assumptions,  including  relative  levels of market
      interest rates, prepayments, and deposit run-offs and should not be relied
      upon as indicative of actual results. Certain shortcomings are inherent in
      such  computations.  In order to  mitigate  its  interest  rate risk,  the
      Association  maintains  substantial  liquidity  and  capital  levels  that
      management  believes are  sufficient to sustain  unfavorable  movements in
      market interest rates.

4.    REGULATORY MATTERS

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

      Quantitative measures established by regulation to ensure capital adequacy
      require the Association to maintain  minimum amounts and ratios (set forth
      in the table which follows) of Total and Tier 1 capital (as defined in the
      regulations) to Risk-weighted  assets (as defined),  and of Tier 1 capital
      (as defined) to Average assets (as defined).  Management  believes,  as of
      June 30, 1999 and 1998,  that the Association  meets all capital  adequacy
      requirements to which it is subject.

                                       5
<PAGE>

      As of June  30,  1999 and  1998,  the most  recent  notification  from the
      regulatory  authorities  categorized the  Association as well  capitalized
      under  the  regulatory  framework  for  prompt  corrective  action.  To be
      categorized as well  capitalized,  the Association  must maintain  minimum
      Total risk-based,  Tier 1 risk-based,  Tier 1 leverage ratios as set forth
      in the table which follows.

      Actual capital amounts and ratios are presented in the table below for the
      Association:
<TABLE>
<CAPTION>
                                                                                                              To Be Well
                                                                                                           Capitalized Under
                                                                    Actual         For Capital Adequacy    Prompt Corrective
                                                                                         Purposes          Action Provisions
                                                              -----------------    -------------------     -----------------
                                                              Amount      Ratio      Amount     Ratio      Amount     Ratio
                                                              ------      -----      ------     -----      ------     -----
                                                                                   (Dollars in thousands)
JUNE 30, 1999:
<S>                                                           <C>          <C>        <C>          <C>      <C>        <C>
         Total capital (to risk weighted assets)              $15,848      56.0%      $2,266       8.0%     $2,832     10.0%

         Tier 1 (core)  capital (to risk weighted              15,750      55.6        1,133       4.0       1,699      6.0
            assets)

         Tier 1 (core) capital (to adjusted total              15,750      16.2        3,893       4.0       4,867      5.0
            assets)

         Tangible capital (to adjusted total assets)           15,750      16.2        1,460       1.5%       N/A       N/A

     JUNE 30, 1998:

         Total capital (to risk weighted assets)              $15,845      56.9%      $2,228       8.0%     $2,785     10.0%

         Tier 1 (core)  capital (to risk weighted              15,769      56.6          N/A       N/A       1,671      6.0
            assets)

         Tier 1 (core) capital (to adjusted total              15,769      14.9        3,165       3.0       5,276      5.0
            assets)

         Tangible capital (to adjusted total assets)           15,769      14.9        1,583       1.5         N/A      N/A
</TABLE>

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

                                                       1999         1998
                                                       ----         ----
                                                         (In thousands)

      Stockholder's equity                            $15,639     $  15,953
      Intangible assets                                  (104)         (137)
      Unrealized (gain) loss on securities
        available for sale                                215           (47)
                                                      -------     ---------
          Tangible and Tier 1 capital                  15,750        15,769
      Allowance for loan losses                            98            76
                                                      -------     ---------
          Total risk based capital                    $15,848     $  15,845
                                                      =======     =========

      Total assets                                    $97,225      $105,105
      Adjusted total assets                            97,336       105,511
      Total risk weighted assets                       28,324        27,845

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

                                       6
<PAGE>

      beginning of the calendar  year, or (ii) 75% of its net  income  over  the
      most  recent  four-quarter  period.  Any  additional capital distributions
      require prior regulatory approval.

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

5.    EARNINGS PER SHARE

      Basic  earnings  per share were  computed  by  dividing  net income by the
      weighted average number of shares of common stock  outstanding  during the
      years  ended June 30,  1999,  1998,  and 1997.  Common  stock  outstanding
      consists of issued shares less unallocated ESOP shares and shares owned by
      the stock plan trust.  Diluted earnings per share for the years ended June
      30,  1999,  1998,  and 1997,  were  computed by dividing net income by the
      weighted  average  number of shares of common  stock  outstanding  and the
      dilutive  effects of the shares awarded under the  Management  Recognition
      Plan ("MRP") and the Stock Option Plan, based on the treasury stock method
      using an average  fair  market  value of the stock  during the  respective
      periods.

      The following table represents the earnings per share calculations for the
      years ended June 30, 1999,  1998,  and 1997  accompanied  by the effect of
      this accounting change on previously reported earnings per share:

                                                                      Per Share
                                            Income        Shares        Amount
                                            ------        ------        ------

1999:
    Basic earnings per share                 $597,901     1,014,959      $.59
                                                                         ====
    Diluted securities:
       Management recognition plan shares           0        22,401
       Incentive stock option plan shares           0        10,663
                                             --------     ---------
       Diluted earnings per share            $597,901     1,048,023      $.57
                                             ========     =========      ====


                                                                      Per Share
                                            Income        Shares        Amount
                                            ------        ------        ------
1998:
    Basic earnings per share                 $542,885     1,061,133      $.51
                                                                         ====
    Diluted securities:
       Management recognition plan shares           0        24,449
       Incentive stock option plan shares           0        33,031
                                             --------     ---------
       Diluted earnings per share            $542,885     1,118,613      $.49
                                             ========     =========      ====

                                       7
<PAGE>
                                                                      Per Share
                                            Income        Shares        Amount
                                            ------        ------        ------
1997:
    Basic earnings per share                $142,631     1,095,959      $.13
                                                                        ====
    Diluted securities:
       Management recognition plan shares          0        32,590
       Incentive stock option plan shares          0        23,974
                                            --------     ---------
       Diluted earnings per share           $142,631     1,152,523      $.12
                                            ========     =========      ====

6.    EMPLOYEE RETIREMENT AND SAVINGS PLANS

      EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")

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

      Expense  related to the ESOP was  approximately  $285,000,  $166,000,  and
      $170,000 for 1999, 1998, and 1997.  Unearned  compensation  related to the
      ESOP was  approximately  $515,000  and $757,000 at June 30, 1999 and 1998,
      respectively,  and is shown as a reduction of stockholders'  equity in the
      accompanying consolidated statements of financial condition.

      Unearned  compensation  is amortized  into  compensation  expense based on
      employee services rendered in relation to shares which are committed to be
      released  based on the fair value of shares.  The  difference  between the
      fair value of shares committed to be released and the cost of those shares
      to the ESOP is credited to additional  paid-in  capital in accordance with
      Statement  of Position  93-6  Employers'  Accounting  for  Employee  Stock
      Ownership  Plans.  The 1999  increase  is due to  increased  debt  service
      payments on the ESOP loan which increased the shares to be released.

      MANAGEMENT RECOGNITION PLAN ("MRP")

      During fiscal 1996,  the  Association  established  a MRP which  purchased
      58,190  shares of the Company's  common stock on the open market.  The MRP
      provides  for awards of common  stock to  directors  and  officers  of the
      Association.  The aggregate  fair market value of the shares  purchased by
      the MRP is considered  unearned  compensation  at the time of purchase and
      compensation  is earned ratably over the stipulated  vesting  period.  The
      expense  related  to the MRP was  approximately  $112,000,  $104,000,  and
      $142,000 for 1999,  1998, and 1997,  respectively.  Unearned  compensation
      related to the MRP was  approximately  $355,000  and $492,000 for 1999 and
      1998, respectively, and is shown as a reduction to stockholders' equity in
      the   accompanying   consolidated   statements  of  financial   condition.
      Contributions  to the MRP,  usually in the form of  dividend  equivalents,
      which will result in future  compensation  to the employees are debited to
      unearned compensation.

                                       8
<PAGE>

      SIMPLIFIED EMPLOYEE PENSION PLAN

      The Company established a Simplified Employee Pension Plan ("SEP") for all
      employees  who have  completed  one year of  service,  pursuant to Section
      408(k)  of the  Internal  Revenue  Code  of  1986.  The  Company  makes  a
      discretionary  contribution  to the SEP each year. The cost to the Company
      under the SEP was  $38,132,  $94,996,  and $111,190 for fiscal years 1999,
      1998, and 1997, respectively.

      SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT

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

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

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

      The Company recognized  approximately  $60,000 in compensation expense for
      the years ended June 30, 1999 and 1998 related to the SERA.  The projected
      benefit obligation,  accumulated  benefit  obligation,  and vested benefit
      obligation  were all  $197,546  and  $189,040  at June 30,  1999 and 1998,
      respectively. The components of the net periodic cost as of 1999 and 1998,
      respectively,  are service  costs of $5,186 and $4,444,  interest  cost of
      $13,233 and $11,047, and net amortization and deferred cost of $33,900 and
      $28,482.  In  determining  the  actuarial  present  value of the projected
      benefit  obligation,  the  discount  rate was 7% and the increase in share
      value was 10%.

                                       9
<PAGE>
      EMPLOYMENT AGREEMENT

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

7.    STOCK-BASED COMPENSATION PLANS

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

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

      Under the Option Plan,  the Company may grant options up to 145,475 shares
      and has granted  options  outstanding  of 123,577  shares through June 30,
      1999.  Under the Option  Plan,  the  options  vest 20% per year and become
      exercisable  upon the  participant's  completion  of each of five years of
      service.  Contributions  to the stock option plan during 1999 were for the
      purchase of 24,085  shares which will be used for the exercise of options.
      The amount of the contributions,  which equalled the share purchase price,
      was debited to unearned compensation.

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

                                       1999            1998           1997
                                       ----            ----           ----

      Net income:
          As reported                $597,901       $542,885        $142,631
          Pro forma                   555,592        494,676          66,438
      Earnings per share:
          As reported:
             Basic                       $.59           $.51            $.13
             Diluted                      .55            .49             .12
          Pro forma:
             Basic                        .57            .47             .06
             Diluted                      .53            .44             .06

                                       10
<PAGE>

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

      Unearned  compensation  related  to  the  Option  Plan  was  approximately
      $362,707  and  $352,000  at June 30, 1999 and 1998,  respectively,  and is
      shown  as  a  reduction  of  stockholders'   equity  in  the  accompanying
      statements  of  financial  condition.  A  summary  of  the  status  of the
      Company's  stock  option  plan at June 30,  1999 and 1998 and the  changes
      during the years then ended is as follows:

                                                        1999
                                                ------------------------
                                                               Weighted
                                                                Average
                                                               Exercise
                                                 Shares          Price
                                                 ------          -----

 Outstanding at beginning of year               111,777         $11.69
     Granted                                     11,800          14.56
                                                -------         ------
 Outstanding at end of year                     123,577         $11.96
                                                =======         ======
 Exercisable at end of year                      68,114         $11.69
                                                =======         ======
 Weighted average fair value of the
     options granted                              $1.74
                                                =======

                                                        1998
                                                ------------------------
                                                               Weighted
                                                                Average
                                                               Exercise
                                                 Shares          Price
                                                 ------          -----

 Outstanding at beginning of year               120,376         $11.69
     Forfeitures                                      0           0.00
     Exercised                                   (8,599)         11.69
                                                -------         ------
 Outstanding at end of year                     111,777         $11.69
                                                =======         ======
 Exercisable at end of year                      43,402         $11.69
                                                =======         ======
 Weighted average fair value of the
     options granted                              $1.70
                                                =======

                                       11
<PAGE>
                                                        1997
                                                ------------------------
                                                               Weighted
                                                                Average
                                                               Exercise
                                                 Shares          Price
                                                 ------          -----

 Outstanding at beginning of year               126,376         $11.69
     Forfeitures                                      0           0.00
     Exercised                                     (545)         11.69
                                                -------         ------
 Outstanding at end of year                     120,376         $11.69
                                                =======         ======
 Exercisable at end of year                      23,639         $11.69
                                                =======         ======
 Weighted average fair value of the
     options granted                              $1.70
                                                =======

      The fair  value of each  option  grant is  estimated  on the date of grant
      using  the   Black-Scholes   option   pricing  model  with  the  following
      weighted-average  assumptions used for grants in 1999:  risk-free interest
      rate of 6.22%;  expected life of the options is 20% per year over the next
      five years and  expected  volatility  and  dividend  yields of 17% and 3%,
      respectively.

8.    SECURITIES AVAILABLE FOR SALE

      The amortized  cost,  gross  unrealized  gain and loss,  and fair value of
      securities designated as available for sale are summarized as follows:
<TABLE>
<CAPTION>
                                                                                  June 30, 1999
                                                         -------------------------------------------------------------------
                                                                              Gross            Gross
                                                          Amortized         Unrealized        Unrealized
                                                            Cost              Gain             (Loss)            Fair Value
                                                            ----              ----             ------            ----------
<S>                                                       <C>                  <C>           <C>                <C>
     U.S. Treasury securities                             $  5,316,831         $37,489       $  (48,977)        $  5,305,343
     U.S. Government agency securities                      15,644,198           6,197         (329,672)          15,320,723
     Federal Home Loan Bank stock                              724,400               0                0              724,400
                                                           -----------         -------        ---------          -----------
                                                          $ 21,685,429         $43,686        $(378,649)        $ 21,350,466
                                                          ============         =======        =========         ============
</TABLE>
                                       12
<PAGE>
<TABLE>
<CAPTION>
                                                                                  June 30, 1998
                                                         -------------------------------------------------------------------
                                                                              Gross            Gross
                                                          Amortized         Unrealized        Unrealized
                                                            Cost              Gain             (Loss)            Fair Value
                                                            ----              ----             ------            ----------

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

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

                                                       June 30, 1999
                                              ---------------------------------
                                               Amortized
                                                  Cost               Fair Value
                                                  ----               ----------

  Due in one year or less                      $  1,000,000        $  1,000,938
  Due after one year through five years          10,559,518          10,406,773
  Due after five years through ten years          5,594,718           5,478,036
  Due after ten years                             3,806,793           3,740,319
                                                -----------        ------------
                                                 20,961,029          20,626,066
  Federal Home Loan Bank stock                      724,400             724,400
                                                -----------        ------------
                                                $21,685,429         $21,350,466
                                                ===========         ===========

      A security  designated as available  for sale with a carrying  value (fair
      value) of  $1,278,469  has been pledged as  collateral  for certain  large
      deposits  (public  funds) with an aggregate  balance of $1,325,000 at June
      30, 1999.

9.    SECURITIES HELD TO MATURITY

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

                                                June 30, 1999
                          ----------------------------------------------------
                                           Gross         Gross
                            Amortized     Unrealized   Unrealized
                              Cost          Gain         (Loss)     Fair Value
                              ----          ----         ------     ----------
   U.S. Government
    agency securities     $23,706,524    $231,055     $(291,134)    $23,646,445
                          -----------    --------     ---------     -----------
                          $23,706,524    $231,055     $(291,134)    $23,646,445
                          ===========    ========     =========     ===========

                                       13
<PAGE>
                                                June 30, 1998
                          ----------------------------------------------------
                                           Gross         Gross
                            Amortized     Unrealized   Unrealized
                              Cost          Gain         (Loss)     Fair Value
                              ----          ----         ------     ----------

   U.S. Government
    agency securities     $34,077,096     $780,511     $(46,586)   $34,811,021
                          -----------     --------     --------    -----------
                          $34,077,096     $780,511     $(46,586)   $34,811,021
                          ===========     ========     ========    ===========

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

                                                        June 30, 1999
                                              --------------------------------
                                               Amortized
                                                 Cost               Fair Value
                                                 ----               ----------

Due in one year or less                        $         0         $         0
Due after one year through five years            3,311,836           3,336,664
Due after five years through ten years          16,101,132          16,051,127
Due after ten years                              4,293,556           4,258,654
                                               -----------         -----------
                                               $23,706,524         $23,646,445
                                               ===========         ===========

10.   LOANS RECEIVABLE

      Loans receivable are summarized as follows:

                                                           June 30,
                                                  ---------------------------
                                                      1999           1998
                                                      ----           ----

    Mortgage loans:
         Secured by one to four family
            residential properties                $36,702,144    $36,528,215
         Secured by nonresidential properties         301,936        216,000
     Consumer loans                                 4,450,682      3,748,379
     Savings account loans                            647,406        656,743
                                                  -----------    -----------
                                                   42,102,168     41,149,337

     Less:
         Unearned interest income                     240,453        244,711
         Discount on loans                                 34            530
         Deferred loan fees (costs), net             (344,864)      (324,915)
         Allowance for loan losses                     97,836         75,673
                                                  -----------    -----------
                   Loans receivable, net          $42,108,709    $41,153,338
                                                  ===========    ===========

                                       14
<PAGE>
      Loans secured by one to four family residential  properties include second
      mortgage  loans on properties  for which the  Association  holds the first
      mortgage.  The  proceeds  on these  second  mortgage  loans  were used for
      improvements and consumer purposes.  Second mortgage loan balances at June
      30,   1999  and  1998  were   approximately   $1,464,000   and   $974,000,
      respectively.

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

      In the normal course of business,  loans are made to officers,  directors,
      and employees of the Company and the Association.  These loans are made on
      substantially the same terms, including interest rates and collateral,  as
      those prevailing for comparable  transactions  with others. As of June 30,
      1999 and 1998,  $442,075 and $395,768,  respectively,  of these loans were
      outstanding.  During  fiscal  1999,  $294,154  of new loans  were made and
      repayments totaled $247,847.

      An analysis of the Company's allowance for loan losses is as follows:

                                                For the Years Ended
                                                      June 30,
                                       ----------------------------------------
                                         1999          1998           1997
                                         ----          ----           ----

   Balance, beginning of year            $75,673       $75,673        $78,070
   Provision for loan losses              27,000             0              0
   Charge-offs, net of recovery           (4,837)            0         (2,397)
                                         -------       -------        -------
   Balance, end of year                  $97,836       $75,673        $75,673
                                         =======       =======        =======

      At June 30, 1999, nonaccrual loans totaled approximately  $10,333. At June
      30, 1998, nonaccrual loans totaled approximately $11,000.  Interest income
      foregone on nonaccrual loans was not significant for fiscal years 1999 and
      1998.

                                       15
<PAGE>

11.   PREMISES AND EQUIPMENT

      Premises and equipment are summarized as follows:

                                                         June 30,
                                                -----------------------------
                                                  1999              1998
                                                  ----              ----

  Land                                          $   170,085      $   170,085
  Building and improvements                         254,677          250,623
  Leasehold improvements                             58,793           57,050
  Furniture, fixtures, and equipment                561,421          538,482
                                                  1,044,977        1,016,240
  Less accumulated depreciation                    (786,420)        (764,867)
                                                $   258,557      $   251,373

      Depreciation  expense charged to office building and equipment  expense in
      1999, 1998, and 1997, totaled approximately $38,000, $46,000, and $48,000,
      respectively.

12.   DEPOSITS

      Deposits are summarized as follows:
<TABLE>
<CAPTION>

                                                                       June 30, 1999                 June 30, 1998
                                                                   -----------------------      ------------------------
                                                                   Amount         Percent         Amount         Percent
                                                                   ------         -------         ------         -------

<S>                                                                <C>            <C>           <C>              <C>
     Demand, NOW, and Money Market accounts, including
         noninterest bearing deposits of $162,173 and
         $171,064 at June 30, 1999 and June 30, 1998,
         respectively                                              $ 7,814,777      9.81%        $ 8,277,383       9.63%
     Passbook savings                                                5,713,307      7.17           5,198,093       6.05
                                                                   -----------    ------         -----------     ------
                                                                    13,528,079     16.98          13,475,476      15.68
     Certificates of deposit:
           2.00-  4.00%                                              7,490,137      9.39             310,238        .36
           4.01-  6.00%                                             57,545,898     72.17          68,464,845      79.68
           6.01-  8.00%                                              1,047,695      1.31           3,553,214       4.14
           8.01-10.00%                                                 121,868       .15             122,061        .14
                                                                   -----------    ------         -----------     ------
                                                                    66,205,598     83.02          72,450,358      84.32
                                                                   -----------    ------         -----------     ------
                                                                   $79,733,677    100.00%        $85,925,834     100.00%
                                                                   ===========    ======         ===========     ======
</TABLE>
      The  aggregate  amount of jumbo  certificates  of  deposit  with a minimum
      denomination  of $100,000 was $6,092,582 and  $10,659,343 at June 30, 1999
      and 1998, respectively.

                                       16
<PAGE>

      Scheduled  maturities of  certificates  of deposit at June 30, 1999 are as
      follows:
<TABLE>
<CAPTION>

                                                                    Year Ending June 30,
                                       ----------------------------------------------------------------------------
                                            2000             2001            2002          2003            Total
                                            ----             ----            ----          ----            -----
       <S>                              <C>             <C>              <C>           <C>             <C>
       2.00-  4.00%                     $ 5,990,754     $ 1,499,383      $      0      $        0      $ 7,490,137
       4.01-  6.00                       40,921,358      12,493,424       714,478       3,416,637       57,545,897
       6.01-  8.00                          540,822          46,348       217,436         243,088        1,047,694
       8.01-10.00                             7,728         114,140             0               2          121,870
                                        -----------     -----------      --------      ----------      -----------
                Total                   $47,460,662     $14,153,295      $931,914      $3,659,727      $66,205,598
                                        ===========     ===========      ========      ==========      ===========
</TABLE>

      Interest expense on deposits consisted of the following:

                                           For the Years Ended June 30,
                                    --------------------------------------------
                                       1999            1998             1997
                                       ----            ----             ----

   Passbook savings                  $  173,306      $  149,106       $  228,747
   NOW accounts                         247,099         240,356          158,914
   Certificates of deposit            3,679,891       4,129,114        4,146,176
                                     ----------      ----------       ----------
                                     $4,100,296      $4,518,576       $4,533,837
                                     ==========      ==========       ==========
13.   INCOME TAXES

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

                                           For the Years Ended June 30,
                                    --------------------------------------------
                                       1999            1998             1997
                                       ----            ----             ----

   Current Provision:
       Federal                      $342,262        $216,746         $164,392
       State                          48,067          29,130           20,787
                                    --------        --------        ---------
                                     390,329         245,876          185,179
   Deferred provision (benefit)      (77,771)         31,167         (105,788)
                                    --------        --------        ---------
                                    $312,558        $277,043        $  79,391
                                    ========        ========        =========

                                       17
<PAGE>

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

                                           For the Years Ended June 30,
                                    --------------------------------------------
                                       1999            1998             1997
                                       ----            ----             ----

 Pretax income at statutory rates   $313,813        $273,142          $75,487
 Add (deduct):
     State income tax, net of
        federal tax benefit           26,183          21,494            6,022
     Other, net                      (27,438)        (17,593)          (2,118)
                                    $312,558        $277,043          $79,391
                                    --------        --------          -------
 Effective income tax rate                34%             35%              36%
                                    ========        ========          =======

      The net  deferred  tax  liability  was  included  in taxes  payable in the
      accompanying  consolidated  statements of financial  condition at June 30,
      1999 and 1998.  The  components of the net deferred tax asset or liability
      at June 30, 1999 and 1998 were as follows:

                                                            June 30,
                                                    -------------------------
                                                       1999           1998
                                                       ----           ----

   Amortization of intangibles                      $   68,552     $   53,291
   Reserves for employee benefit plans                 160,547        119,612
   Depreciation                                          5,362          1,715
   Unrealized net loss on securities
       available for sale                               81,616              0
   Other                                                14,703         11,200
                                                    ----------     ----------
                 Deferred tax asset                    330,780        185,818
                                                    ----------     ----------
   Unrealized net gain on securities
       available for sale                                    0        (29,129)
   FHLB stock dividend                                 (58,919)       (57,869)
   Bad debt reserve, net                               (17,462)       (41,648)
   Accretion of discount on securities                (133,887)      (139,800)
   Deferred loan fees and costs, net                  (144,900)      (123,468)
   Other                                                  (112)        (6,921)
                                                    ----------     ----------
                 Deferred tax liability               (355,280)      (398,835)
                                                    ----------     ----------
                 Net deferred tax liability         $  (24,500)    $ (213,017)
                                                    ==========     ==========

      The portion of a thrift's  tax bad debt  reserve  that was not  recaptured
      under the  provisions of the Small Business Job Protection Act of 1996 are
      only  subject to recapture  at a later date under  certain  circumstances.
      These include stock repurchases redemptions by the thrift or if the thrift
      converts  to a type of  institution  (such as a credit  union) that is not
      considered a bank for tax purposes. However, no further recapture would be
      required  if the thrift  converted  to a  commercial  bank  charter or was
      acquired by a bank. The  Association  does not anticipate  engaging in any
      transactions at this time that would require the recapture of its pre-1988
      tax bad debt reserves of approximately $2.8 million.

                                       18
<PAGE>

14.   ACCRUED INTEREST AND DIVIDENDS RECEIVABLE

      Accrued interest and dividends receivable is summarized as follows:

                                                          June 30,
                                                     -----------------------
                                                       1999           1998
                                                       ----           ----

   Securities available for sale                     $254,431       $299,919
   Securities held to maturity                        145,540        241,546
   Loans receivable                                   180,399        176,980
   Interest-bearing deposits in other banks             7,286          4,579
                                                     --------       --------
                                                     $587,656       $723,024
                                                     ========       ========

15.   COMMITMENTS AND CONTINGENCIES

      LEASES

      The Company has lease  agreements for its branch  offices.  Rental expense
      under these leases  aggregated  $18,546 $16,694,  and $16,889,  for fiscal
      years 1999,  1998, and 1997,  respectively.  The aggregate  annual minimum
      rental commitments under the terms of all noncancelable leases at June 30,
      1999 are as follows:

                                   Fiscal Year              Amount
                                   -----------              ------

                                       2000                  $19,848
                                       2001                   14,148
                                       2002                   14,148
                                       2003                   14,148
                                       2004                   14,148
                                                             -------
                                                             $76,440
                                                             =======
      OFF-BALANCE-SHEET ITEMS

      The Company's  policies as to collateral and assumption of credit risk for
      off-balance sheet items are essentially the same as those for extension of
      credit to its customers.  Generally,  the only off-balance  sheet exposure
      the  Association  has is its  commitments to originate  loans; at June 30,
      1999,  the Company had $844,751 in  outstanding  commitments  to originate
      residential  real  estate  loans at fixed rates  between  7.00% and 9.25%.
      Additionally, at June 30, 1999, the Association had provided approximately
      $437,367 in unused lines of credit.

      LITIGATION

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

                                       19
<PAGE>

      FDIC ASSESSMENT

      The  deposits  of the  Association  are  currently  insured by the Savings
      Association Insurance Fund ("SAIF").  Both the SAIF and the Bank Insurance
      Fund ("BIF"),  the federal deposit insurance fund that covers the deposits
      of state and national banks and certain state savings banks,  are required
      by law to attain  and  thereafter  maintain  a  reserve  ratio of 1.25% of
      insured deposits.

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

16.   FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

                                       20
<PAGE>

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

                                                      At June 30, 1999            At June 30, 1998
                                                      ----------------            ----------------
                                                   Carrying     Estimated      Carrying     Estimated
                                                    Amount     Fair Value     Amount      Fair Value
                                                    ------     ----------     ------      ----------
                                                                 (Dollars in thousands)
ASSETS:
<S>                                                 <C>          <C>           <C>           <C>
    Cash on hand and in banks                       $  8,681     $  8,681      $  6,422      $  6,422
    Securities--AFS                                   21,350       21,350        22,239        22,239
    Securities--HTM                                   23,706       23,646        34,077        34,811
    Loans receivable, net                             42,109       42,530        41,153        42,033

LIABILITIES:
    Deposits                                          79,734       79,730        85,926        86,338
    Other liabilities and borrowed funds                  87           86           120           120
</TABLE>

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

      CASH AND CASH EQUIVALENTS

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

      SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY

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

      LOANS RECEIVABLE, NET

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

                                       21
<PAGE>

      DEPOSITS

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

      OTHER LIABILITIES AND BORROWED FUNDS

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

      OFF-BALANCE-SHEET INSTRUMENTS

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

                                       22
<PAGE>

17.   PARENT COMPANY FINANCIAL STATEMENTS

      Separate condensed financial statements of The Southern Banc Company, Inc.
      (the "Parent  Company")  as  of  and for the years ended June 30, 1999 and
      1998 are presented below:

                        STATEMENT OF FINANCIAL CONDITION

                             JUNE 30, 1999 AND 1998

                          (DOLLAR AMOUNTS IN THOUSANDS)

                                                           1999        1998
                                                           ----        ----

ASSETS:

    Cash and cash equivalents                            $     403     $ 1,860
    Investment in subsidiary                                15,640      15,953
    ESOP loan receivable                                       654         826
    Other assets                                                35          44
                                                         ---------     -------
              Total assets                               $  16,732     $18,683
                                                         =========     =======

LIABILITIES:
    Other liabilities                                    $      87     $   113
                                                         ---------     -------
STOCKHOLDERS' EQUITY:
    Preferred stock                                              0           0
    Common stock                                                15          15
    Paid-in capital                                         13,684      13,676
    Retained earnings                                        9,684       9,433
    Unearned compensation                                   (1,532)     (1,602)
    Treasury stock                                          (4,991)     (3,000)
    Unrealized gain (loss) on securities
        available for sale, net                               (215)         48
                                                         ---------     -------
           Total stockholders' equity                       16,645      18,570
                                                         ---------     -------
           Total liabilities and stockholders' equity     $ 16,732     $18,683
                                                         =========     =======

                                       23
<PAGE>
                               STATEMENT OF INCOME

                   FOR THE YEARS ENDED JUNE 30, 1999 AND 1998

                          (DOLLAR AMOUNTS IN THOUSANDS)

                                                                 1999      1998
                                                                 ----      ----

INCOME FROM SUBSIDIARY:
    Dividends                                                   $1,000   $    0
    Interest                                                       102      142
                                                                ------   ------
              Total income                                       1,102      142
OPERATING EXPENSE                                                   66      128
                                                                ------   ------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
    CURRENT YEAR SUBSIDIARY EARNINGS                             1,036       14

INCOME TAXES                                                        16        3
                                                                ------   ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED CURRENT YEAR
    SUBSIDIARY EARNINGS                                          1,020       11

DISTRIBUTIONS (OVER) UNDER CURRENT YEAR SUBSIDIARY EARNINGS       (422)     532
                                                                ------   ------
              Net income                                       $   598   $  543
                                                               =======   ======


                             STATEMENT OF CASH FLOWS

                   FOR THE YEARS ENDED JUNE 30, 1999 AND 1998

                          (DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                                        1999       1998

     OPERATING ACTIVITIES:
<S>                                                                                                   <C>        <C>
         Net income                                                                                   $   598    $   543
         Distributions over (under) current year subsidiary earnings                                      422       (532)
                                                                                                      -------    -------
                                                                                                        1,020         11
         Adjustments  to reconcile  net income to net cash provided by
          operating activities:
            Decrease in other assets                                                                        9          6
            Increase (decrease) in other liabilities                                                      (26)        39
                                                                                                      -------    -------
                   Net cash provided (used in) operating activities                                     1,003         56
                                                                                                      -------    -------
     INVESTING ACTIVITIES:
                   Net cash provided by investing activities                                                0          0
                                                                                                      -------    -------
     FINANCING ACTIVITIES:
         Capital contributions to subsidiary                                                                        (145)
         Capital contributions to plan trust                                                             (304)       (22)
         Payments received on ESOP loan                                                                   182        106
         Proceeds from exercise of stock options                                                            0        100
         Purchase of treasury stock                                                                    (1,991)         0
         Dividends paid                                                                                  (347)      (363)
                                                                                                      -------    -------
                   Net cash used in financing activities                                               (2,460)      (324)
                                                                                                      -------    -------
     DECREASE IN CASH AND CASH EQUIVALENTS                                                             (1,457)      (268)
     CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                     1,860      2,128
                                                                                                      -------    -------
     CASH AND CASH EQUIVALENTS AT END OF YEAR                                                         $   403    $ 1,860
                                                                                                      =======    =======
</TABLE>
                                       24
<PAGE>
                              CORPORATE INFORMATION

Directors and Executive Officers:                 Main Office:

James B. Little, Jr.                              221 S. 6th Street
   Chairman of the Board, President               Gadsden, Alabama
   and Chief Executive Officer of the
   Company and the Bank                           Branch Offices:

Craig G. Cantrell                                 202 Sand Mountain Drive
   Retired                                        Albertville, Alabama

Thomas F. Dowling                                 395 Gunter Avenue
   Dentist                                        Guntersville, Alabama
   Gadsden, Alabama
                                                  390 W. Main Street
Grady Gillam                                      Centre, Alabama
   Retired
                                                  Independent Auditor:
W. Roscoe Johnson, III
   Partner in law firm of Inzer, Haney,           Arthur Andersen LLP
   Johnson & McWhorter, P.A.                      Birmingham, Alabama
   Gadsden, Alabama
                                                  General Counsel:
Rex G. Keeling, Jr.
   Property/Casualty Salesman with Insurance      Inzer, Haney, Johnson &
   Facilities                                     McWhorter, P.A.
                                                  Gadsden, Alabama
Gates Little
   Executive Vice President of the Company        Securities and Regulatory
   and the Bank                                   Counsel:

Fred Taylor                                       Kutak Rock
   Owner of Taylor Realty                         Washington, D.C.
   Albertville, Alabama
                                                  Annual Stockholders Meeting:
Officers:
                                                  November 17, 1999 - 5:00 p.m.
Rodney Rich                                       The Southern Bank Company
   Vice President of the Bank                     221 S. 6th Street
                                                  Gadsden, Alabama
Margaret Stewart                                  Record Date-September 24, 1999
   Secretary of the Bank
                                      A COPY OF THE ANNUAL REPORT ON FORM 10-KSB
Janice Stephens                       FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AS
   Comptroller of the Bank            FILED  WITH  THE  SEC WILL BE FURNISHED TO
                                      STOCKHOLDERS  AS  OF  THE RECORD DATE UPON
Teresa Elkins                         WRITTEN  REQUEST TO THE  SECRETARY  OF THE
   Vice President of the Bank         COMPANY,  221  SOUTH  6TH STREET, GADSDEN,
                                      AL 35901.
Peggy Smith
   Secretary of the Company and
   Treasurer of the Bank

Martha Garrett
   Vice President of the Bank

Annette Espy
   Vice President of the Bank

                                       15
<PAGE>
================================================================================


                         THE SOUTHERN BANC COMPANY, INC.

         221 SOUTH 6TH STREET o GADSDEN, ALABAMA 35901 o (256) 543-3860


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