<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended June 30, 1997

                        Commission File Number: 1-13964

                        THE SOUTHERN BANC COMPANY, INC.
    ______________________________________________________________________
       (Exact name of small business issuer as specified in its charter)

         Delaware                                       63-1146351
________________________________           ____________________________________
(State or other jurisdiction of            (I.R.S. Employer Identification No.) 
incorporation or organization)                    

221 S. 6th Street, Gadsden, Alabama                                  35901
_________________________________________                        _____________
(Address of principal executive offices)                           (Zip Code)

     The registrant's telephone number, including area code: (205) 543-3860

     Securities registered pursuant to Section 12(g) of the Act: Common Stock, 
                           par value $0.01 per share

The registrant (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the past 12 months and (2) has
been subject to such filing requirements for the past 90 days.

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is
contained in this form, and disclosure will be contained, to the best of the
registrant's knowledge, in the definitive proxy statement incorporated by
reference in Part III of this Form 10-KSB.

The registrant's revenues for its most recent fiscal year were $142,631.

The aggregate market value of the registrant's outstanding common stock held by
non-affiliates of the registrant at September 19, 1997 was approximately $15.4
million (based on 953,809 shares at the most recent trading price of which
management was aware ($16.125 on September 19, 1997) (for this purpose, the
registrant's directors and executive officers and stock benefit plans and trusts
have not been deemed to be non-affiliates).

The total number of outstanding shares of the registrant's common stock at
September 19, 1997 was 1,230,313.

Transitional small business disclosure format: No.

                      DOCUMENTS INCORPORATED BY REFERENCE

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

1.   Portions of the Annual Report to Stockholders for the Fiscal Year Ended
     June 30, 1997 (the "Annual Report"). (Parts I and II)

2.   Portions of the Proxy Statement for the registrant's 1997 Annual Meeting of
     Stockholders (the "Proxy Statement"). (Part III)
<PAGE>
 
                                 PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

GENERAL

          The Southern Banc Company, Inc.  The Southern Banc Company, Inc. (the
"Company") was incorporated under the laws of the State of Delaware in May 1995
at the direction of management of First Federal Savings and Loan Association of
Gadsden (the "Association") for the purpose of serving as a savings institution
holding company of the Association upon the acquisition of all of the capital
stock issued by the Association upon the Conversion.  Before the Conversion, the
Company did not engage in any material operations.  After the Conversion, the
Company's principal assets have been the outstanding capital stock of the
Association, a portion of the net proceeds of the Conversion and a note
receivable from the Company's Employee Stock Ownership Plan ("ESOP"), and the
Company's principal business has been the business of the Association and its
subsidiaries.

          The holding company structure permits the Company to expand the
financial services offered through the Association.  As a holding company, the
Company has greater flexibility than the Association to diversify its business
activities through existing or newly formed subsidiaries or through acquisition
or merger with other financial institutions.   The Company is classified as a
unitary savings institution holding company and is subject to regulation by the
Office of Thrift Supervision ("OTS").  As long as the Company remains a unitary
savings institution holding company, under current law the Company could
diversify its activities in such a manner as to include any activities allowed
by law or regulation to a unitary savings institution holding company.  See
"Proposed Regulatory Changes" below.

          The Company's executive offices are located at 221 S. 6th Street,
Gadsden, Alabama 35901, and its telephone number is (205) 543-3860.

          First Federal Savings and Loan Association of Gadsden.  The
Association is a conservative and independent community-oriented savings
institution dedicated to providing quality customer service.   The Association
was organized in 1936 as a federally chartered mutual savings and loan
association, at which time it also became a member of the Federal Home Loan Bank
("FHLB") System and obtained federal deposit insurance.  The Association
currently operates through four banking offices located in Gadsden, Albertville,
Guntersville and Centre, Alabama.  At June 30, 1997, the Association had total
assets of $105.4 million, deposits of $86.8 million and stockholders' equity of
$17.9 million, or 17.0% of total assets.

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

PROPOSED REGULATORY CHANGES

          Legislation proposed in the United States Congress could have a
profound impact on the banking and thrift industries and the operations of
commercial banks and thrift institutions, including the Association.  Such
legislation includes proposals to eliminate regulatory distinctions between
institutions chartered as banks and savings associations under federal law and
would ease the merger of the Savings Association Insurance Fund ("SAIF") and the
Bank Insurance Fund ("BIF"), the two deposit insurance funds.  The legislation
also could require federally chartered savings associations to convert to
federally chartered commercial banks or to state chartered institutions,
probably by a specified date.  The legislation under consideration is subject to
continuing review and major revision and might not be adopted soon or ever.

                                       1
<PAGE>
 
BUSINESS STRATEGY

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

MARKET AREA

          The Association considers its primary market area to consist of
Etowah, Cherokee and Marshall Counties in which the Association has its four
offices.  The City of Gadsden in which the Association's main office is located
is in Etowah County, approximately 65 miles northeast of Birmingham, Alabama.
Based upon the 1990 population census, the combined population of Etowah,
Cherokee and Marshall Counties was approximately 100,000.

          The economy in the Association's market area includes a mixture of
manufacturing and agriculture.  Large local employers include Goodyear Tire and
Rubber Company which has a plant located in Etowah County and Gulf States Steel
Corp., a local manufacturer of steel.  According to the Alabama Department of
Industrial Relations, the unemployment rates for June 1997 in Etowah, Cherokee
and Marshall Counties were 5.2%, 4.6% and 5.6%, respectively, as compared to
4.5% for the state of Alabama.

COMPETITION

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

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

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

                                       2
<PAGE>
 
LENDING ACTIVITIES

          General.  The Association's principal lending activity consists of the
origination of loans secured by mortgages on existing one- to four-family
residences in the Association's market area.  The Association also makes a
variety of consumer loans and limited amounts of non-residential real estate
loans.  Historically, the Association has not made commercial business loans.

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

          At June 30, 1997, the maximum amount that the Association could have
loaned to any one borrower without prior OTS approval was $4.5 million.  At such
date, the largest aggregate amount of loans that the Association had outstanding
to any one borrower was approximately $200,000.

          Loan Portfolio Composition.  The following table sets forth selected
data relating to the composition of the Association's loan portfolio by type of
loan at the dates indicated.  At June 30, 1997, the Association had no
concentrations of loans exceeding 10% of total loans that are not disclosed
below.

<TABLE>
<CAPTION>
                                                       At June 30,
                                        -----------------------------------
                                              1997                1996
                                        ----------------   ----------------
                                        Amount       %     Amount       %
                                        ------    ------   -------   ------ 
                                                  (Dollars in thousands)
<S>                                     <C>       <C>      <C>       <C> 
Type of Loan:
------------
Real estate loans:
 One- to four-family residential (1)..  $32,678    90.32%  $30,627    92.40%
 Non-residential......................      278     0.77       178     0.54
Consumer and savings account loans....    3,226     8.91     2,420     7.30
Other loans...........................       --       --        22     0.07
                                        -------   ------   -------   ------ 
Total gross loans.....................   36,182   100.00    33,247   100.31
 
Less:
 Unearned income......................      133     0.37       124     0.37
 Discounts on loans purchased.........       --       --        (1)      --
 Deferred loan fees (costs), net......     (207)   (0.58)      (99)   (0.30)
 Allowance for loan losses............       76     0.21        78     0.24
                                        -------   ------   -------   ------
  Total...............................  $36,180   100.00%  $33,145   100.00%
                                        =======   ======   =======   ======
</TABLE> 

_______________
(1)  One- to four-family residential includes second mortgage loans on which the
     Association also has the first mortgage. The proceeds of these second
     mortgage loans were used for improvements and consumer purposes. Second
     mortgage loan balances at June 30, 1997 and 1996 were approximately $1.1
     million and $580,000, respectively.

                                       3
<PAGE>
 
          The following table sets forth information at June 30, 1997 regarding
the dollar amount of loans maturing or repricing in the Association's portfolio,
based on contractual terms to maturity or repricing period.   Demand loans,
loans having no schedule of repayments and no stated maturity and overdrafts are
reported as due in one year or less.

<TABLE>
<CAPTION>                                                                            
                                                                             Due after    
                                                                             3 through       Due after     Due after  
                                                                            5 years after    5 through     10 through 
                                                                               after       10 years after   20 years         
                                         Due during the year ending June 30,  June 30,         June 30,     June  30, 
                                         ----------------------------------                                                       
                                             1998        1999        2000     1997            1997          1997       Total    
                                             ----        ----        ----     ----            ----          ----       -----   
                                                                                  (In thousands)      
<S>                                      <C>            <C>          <C>       <C>            <C>          <C>         <C> 
 Real estate (1)...................        $  785       $ 211        $ 217      $1,516        $9,806       $20,421     $32,956 
Consumer and savings                                                                                                             
  accounts.........................         1,933         156          402         735            --            --       3,226  
                                           ------       -----        -----      ------        ------       -------     -------  
Total..............................        $2,718       $ 367        $ 619      $2,251        $9,806       $20,421     $36,182  
                                           ======       =====        =====      ======        ======       =======     ======= 
</TABLE>

______________
(1)  Real estate mortgage loans includes second mortgage loans on which the
     Association also has the first mortgage. The proceeds of these second
     mortgage loans were used for improvements and consumer purposes. Second
     mortgage loan balances at June 30, 1997 totaled $1.1 million.

          The following table sets forth at June 30, 1997, the dollar amount of
     gross loans due after one year after that date, based upon contractual
     maturity dates or period to reprice, and whether such loans have fixed or
     adjustable rates.

<TABLE>
<CAPTION>
                                          Predetermined    Floating or
                                              Rate       Adjustable Rates
                                          -------------  ----------------
                                                 (In thousands) 
         <S>                              <C>            <C> 
         Real estate....................       $29,162          $3,794
         Consumer and savings account...         3,226              --
                                               -------          ------
             Total......................       $32,388          $3,794
                                               =======          ======
</TABLE>

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

          Originations, Purchases and Sales of Loans. The following table sets
     forth information with respect to the Association's originations of loans
     during the periods indicated. The increase in originations during fiscal
     1997 and 1996 was attributed to increased marketing efforts.

<TABLE>
<CAPTION>
                                        Year Ended June 30, 
                                     -----------------------------
                                      1997         1996       1995
                                     ------       ------     -----
                                             (In thousands)
<S>                                  <C>     <C>            <C> 
Loans originated:
 Real estate loans:
  One- to four-family..............  $7,578      $7,283     $3,528
  Non-residential..................     125          --         --
 Consumer and savings account (1)..   2,069       1,797      2,328
                                     ------      ------     ------
   Total loans originated..........  $9,772      $9,080     $5,856
                                     ======      ======     ====== 
</TABLE>

____________
(1)  Consumer and savings account includes second mortgage loans on which the
     Association also has the first mortgage. The proceeds of these second
     mortgage loans were used for improvements and consumer purposes. Second
     mortgage loans originations for the years ended June 30, 1997, 1996 and
     1995 were $354,827, $167,935 and $338,593, respectively.

     During fiscal 1997, the Association purchased 3 real estate loans totalling
$291,151 from a financial institution in Tuscaloosa, Alabama. The Association
has not sold any loans in recent years.

                                       4
<PAGE>
 
          One- to Four-Family Residential Lending.  Historically, the
Association's principal lending activity has been the origination of fixed rate
loans secured by first mortgages on existing one- to four-family residences in
the Association's market area.  The purchase price or appraised value of most of
such residences generally has been between $24,000 and $290,000, with the
Association's loan amounts averaging approximately $50,000.  At June 30, 1997,
$32.7 million, or 90.3%, of the Association's total loans were secured by one-to
four-family residences, a substantial portion of which were existing, owner-
occupied, single-family residences in the Association's market area.  At June
30, 1997, $29.2 million, or 89.2%, of the Association's one- to four-family
residential loans had fixed rates and $3.5 million, or 10.8%, had adjustable
rates.

          The Association's one- to four-family residential mortgage loans
generally are for terms of up to 21 years, amortized on a monthly basis, with
principal and interest due each month.  The majority of the Association's one-
to four-family mortgage loans are underwritten with terms of 15 years or less.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms.  These loans customarily contain "due-on-
sale" clauses which permit the Association to accelerate repayment of a loan
upon transfer of ownership of the mortgaged property.  In January 1995, the
Association introduced a new mortgage loan product which provides for a term of
up to 21 years with the interest rate increasing one percentage point every
seven years.  This increase is not contingent upon any corresponding increase in
market interest rates.  As of June 30, 1997, the Association had originated $2.3
million of these graduated rate loans.  The Association intends to continue
originating such loans subject to market demands.

          The Association's lending policies generally limit the maximum loan-
to-value ratio on one- to four-family residential mortgage loans secured by
owner-occupied properties to 90% of the lesser of the appraised value or
purchase price for loans up to $250,000.  The Association's lending policies
generally require private mortgage insurance for any loan that exceeds an 80%
loan-to-value ratio.  Pursuant to its "First-Time Home Buyer Plan," the
Association may lend up to 100% of the purchase price of a one- to four-family
residence provided that the borrower (or third party) provides additional
collateral in the form of a pledge of a savings deposit or certificate of
deposit equal to 25% of the loan amount for loans up to 15 years and 28% of the
loan amount for loans with terms greater than 15 years up to 21 years.
Securities may also be pledged as additional collateral but such securities must
have a current market value equal to 140% of the required collateral amount.

          The Association has not originated any adjustable rate, one- to four-
family residential mortgage loans in recent years.  However, total loans at June
30, 1997 included adjustable rate loans with an aggregate principal balance of
$3.8 million, substantially all of which were purchased during fiscal 1996.  The
rates at which interest accrues on these loans are adjustable annually,
generally with limitations on adjustments of 2.0% per adjustment period and 6.0%
- 6.5% over the life of the loan.  While such loans may include initial
discounted rates, they were underwritten and borrowers were qualified based on
the fully indexed interest rate.  The Association's adjustable rate loans do not
permit negative amortization.

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

          The retention of adjustable and graduated rate loans in the
Association's portfolio helps reduce the Association's exposure to increases in
prevailing market interest rates.  However, there are unquantifiable credit
risks resulting from potential increases in costs to borrowers in the event of
upward repricing of adjustable rate loans.  It is possible that during periods
of rising interest rates, the risk of default on adjustable and graduated rate
loans may increase due to increases in interest costs to borrowers.  Further,
adjustable and graduated rate loans which provide for initial rates of interest
below the fully indexed rates may be subject to increased risk of delinquency or
default as the higher, fully indexed rate of interest subsequently replaces the
lower, initial rate. Further, although adjustable rate loans allow the
Association to increase the sensitivity of its interest-earning assets to
changes in interest rates, the extent of this interest sensitivity is limited by
the initial fixed rate period before the first adjustment and the periodic and
lifetime interest rate

                                       5
<PAGE>
 
adjustment limitations and the ability of borrowers to convert the loans to
fixed rates. Accordingly, there can be no assurance that yields on the
Association's adjustable rate loans will fully adjust to compensate for
increases in the Association's cost of funds. Finally, adjustable rate loans
increase the Association's exposure to decreases in prevailing market interest
rates, although decreases in the Association's cost of funds tend to offset this
effect.

          Consumer Lending.  The Association's consumer loans consist of home
equity lines of credit secured by first or second mortgages on single-family
residences in the Association's market area, new and used automobile loans and
demand loans secured by savings accounts at the Association.  These loans
totaled approximately $664,000, $1.3 million and $609,000, respectively, at June
30, 1997.  Management plans to continue the Association's expansion of these
programs as part of the Association's plan to provide a wider range of financial
services to the Association's customers while increasing the Association's
portfolio yields.

          The Association makes home equity lines of credit secured by the
borrower's residence.  These loans, combined with the first mortgage loan, which
usually is from the Association, generally are limited to 75% of the appraised
value of the residence as long as the first mortgage is held by the Association
and 65% if the first mortgage is held by another lender.  Home equity lines of
credit are open-end with the rate on such loans adjusting monthly based on the
Prime Rate as published in the Wall Street Journal as of the first day of the
month plus 1.5%.

          The Association's new and used automobile loans generally are
underwritten in amounts up to 85% of the purchase price, dealer cost or the loan
value as published by the National Automobile Dealers Association or the "Black
Book."  The terms of such loans generally do not exceed 60 months with loans for
older used cars underwritten for shorter terms.  The Association requires that
the vehicles be insured and that the Association be listed as loss payee on the
insurance policy.  The Association originates a portion of its automobile loans
on an indirect basis through various dealerships located in its market area.
See " -- Loan Solicitation and Processing."

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

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

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

          Upon receipt of a loan application from a prospective borrower, the
Association's staff preliminarily reviews the information provided and makes an
initial determination regarding the qualification of the borrower.  If not

                                       6
<PAGE>
 
disapproved, the application then is placed in processing, and a credit report,
verifications and other information is generally gathered relating to the loan
applicant's employment, income and credit standing.  It is the Association's
policy to obtain an appraisal of the real estate intended to secure a proposed
mortgage loan from an Association-approved appraiser.  The Association requires
that all borrowers complete an environmental questionnaire.  Except when the
Association becomes aware of a particular risk of environmental contamination,
the Association generally does not obtain a formal environmental report on the
real estate at the time a loan is made.

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

          The Board of Directors has the overall responsibility and authority
for general supervision of the Association's loan policies.  The Board has
established written lending policies for the Association.  All mortgage loans
are approved by a loan committee consisting of three members of the Board of
Directors.  Consumer loans up to $15,000 may be approved by individual loan
officers.   Consumer loans of $15,000 or greater must be approved by at least
two members of the Association's consumer loan committee which is comprised of
all of the Association's loan officers.  Loan applicants are promptly notified
of the decision of the Association.  It has been management's experience that
substantially all approved loans are funded.

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

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

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

          Asset Classification, Allowances for Losses and Non-performing Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis.  An asset is classified as substandard if
it is determined to be inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.  An asset
is classified as doubtful if full collection is highly questionable or
improbable.  An asset is classified as loss if it is considered uncollectible,
even if a partial recovery could be expected in the future.  The regulations
also provide for a special mention designation, described as assets which do not
currently expose an institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention.  Assets classified as substandard or
doubtful require an institution to establish general allowances for loan losses.
If an asset or portion thereof is classified loss, an institution must either
establish a specific allowance for loss in the amount of the portion of the
asset classified loss, or charge off such amount.  

                                       7
<PAGE>
 
Federal examiners may disagree with an institution's classifications. If an
institution does not agree with an examiner's classification of an asset, it may
appeal this determination to the OTS Regional Director. The Association
regularly reviews its assets to determine whether any assets require
classification or re-classification. The Board of Directors reviews and approves
all classifications on a monthly basis. At June 30, 1997, the Association had no
assets classified as loss, no assets classified as doubtful, no assets
classified as substandard and $772,000 of assets designated as special mention.

          In extending credit, the Association recognizes that losses will occur
and that the risk of loss will vary with, among other things, the type of credit
being extended, the creditworthiness of the obligor over the term of the
obligation, general economic conditions and, in the case of a secured
obligation, the quality of the security.  It is management's policy to maintain
allowances for losses based on, among other things, regular reviews of
delinquencies and credit portfolio quality, character and size, the
Association's and the industry's historical and projected loss experience and
current and forecasted economic conditions.  The Association increases its
allowance for loan losses by charging provisions for losses against the
Association's income.  Federal examiners may disagree with an institution's
allowance for loan losses.

          Management actively monitors the Association's asset quality and
charges off loans against the allowance for losses on such loans and makes
additional loss provisions in its discretion. Although management believes it
uses the best information available to make determinations with respect to the
allowance for losses, future adjustments may be necessary if economic conditions
differ substantially from the economic conditions in the assumptions used in
making the initial determinations.

          The Association's methodology for maintaining the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific assets as well as losses that have not yet been
identified.  Management conducts regular reviews of the Association's assets and
evaluates the adequacy of its allowance for loan losses based on an assessment
of risk in the Association's assets taking into consideration the composition
and quality of the portfolio, delinquency trends, current charge-off and loss
experience, the state of the real estate market, regulatory reviews conducted in
the regulatory examination process and economic conditions generally.
Allowances are provided for individual assets, or portions of assets, when
ultimate collection is considered improbable by management based on the current
payment status of the assets and the fair value or net realizable value of the
security.

          At the date of foreclosure or other repossession, the Association
transfers the property to real estate acquired in settlement of loans at the
lower of recorded investment in the loan or fair value, net of estimated cost of
disposition.  Fair value is defined as the amount in cash or cash-equivalent
value of other consideration that a property would yield in a current sale
between a willing buyer and a willing seller.  Fair value is measured by market
transactions.  If a market does not exist, fair value of the property is
estimated based on selling prices of similar properties in active markets or, if
there are no active markets for similar properties, by discounting a forecast of
expected cash flows at a rate commensurate with the risk involved.  Fair value
generally is determined through an appraisal at the time of foreclosure.  Any
amount of the recorded investment in the loan in excess of fair value is
charged-off against the allowance for loan losses.  Subsequent to foreclosure,
the property is periodically evaluated by management and an allowance is
established if the estimated fair value of the property, less estimated costs to
sell, declines.  If, upon ultimate disposition of the property, net sales
proceeds exceed the net carrying value of the property, a gain on sale of real
estate may be recorded if certain conditions are met.  At June 30, 1997, the
Association had no properties acquired in settlement of loans.

                                       8
<PAGE>
 
          The following table sets forth an analysis of the Association's
allowance for loan losses for the periods indicated.

<TABLE>
<CAPTION>
 
                                               Year Ended June 30,
                                        -------------------------------
                                         1997         1996         1995
                                        ------       -----         ----
                                                    (In thousands)
<S>                                     <C>          <C>         <C> 
Balance at beginning of period......... $  78        $  80       $  40
 
Charge-offs............................    (2)          (2)         --
 
Recoveries.............................    --           --          --
 
Provision for loan losses..............    --           --          40
                                        -----        -----       -----
 
Balance at end of period............... $  76        $  78       $  80
</TABLE>


          The following table allocates the allowance for loan losses by asset
category at the dates indicated.  The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.

<TABLE>
<CAPTION>
 
                                                              At June 30,
                                       --------------------------------------------------------------
                                            1997                 1996                     1995
                                       ------------          ---------------      -----------------
                                                                                                  
                                                         Percent                 Percent             Percent  
                                                        of Loans                 of Loans            of Loans          
                                                       in Category             in Category         in Category
                                                         to Total               to Total             to Total
                                         Amount          Loans       Amount     Loans       Amount     Loans
                                       -----------    ------------  --------  ---------    -------   -------
                                                             (Dollars in thousands)
<S>                                    <C>            <C>           <C>       <C>          <C>       <C>    
Real estate loans:
  One- to four-family residential....        $  24        90.27%     $  24      92.11%    $  24      90.05% 
  Non-residential....................           --         0.77         --       0.54        --       0.79  
Consumer and savings account loans...           28         8.36         30       7.28        32       9.05  
Other loans..........................           24         0.60         24       0.07        24       0.11  
                                             -----       ------      -----     ------     -----     ------  
                                                                                                           
    Total allowance for loan losses..        $  76       100.00%     $  78     100.00%    $  80    100.00% 
                                             =====       ======      =====     ======     =====    ======   
 </TABLE>

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

                                       9
<PAGE>
 
          The following table sets forth information with respect to the
Association's non-performing assets at the dates indicated.

<TABLE>
<CAPTION>
 
                                                                          At June 30, 
                                                            -------------------------------------

                                                                1997         1996        1995
                                                            -----------    ---------   ----------
                                                                      (Dollars in thousands)
<S>........................................................ <C>            <C>         <C>
Loans accounted for on a non-accrual basis: (1)
  Real estate loans:
   One- to four-family residential.........................    $  --        $   --        $  48
   Non-residential.........................................       --            --           --
  Consumer and savings account loans.......................       --            --           --
  Other loans..............................................       --            --           --
                                                               -----        ------        -----
   Total....................................................   $  --        $   --        $  48
                                                               =====        ======        =====

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

   Total of non-accrual and accruing
    loans 90 days past due loans...........................    $  --        $   --        $  48
                                                               =====        ======        =====

Percentage of total loans..................................       --%           --%        0.18%
                                                               =====        ======        =====

Other non-performing assets (2)............................    $  --        $   --        $  --
                                                               =====        ======        =====

Percentage of total assets.................................       --%           --%        0.05%
                                                               =====        ======        =====
</TABLE> 

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

(2)       Other non-performing assets may include real estate or other assets
          acquired by the Association through foreclosure or repossession. Real
          estate owned is recorded at the lower of the recorded investment in
          the loan or fair value of the property, less estimated costs of
          disposition.

          Interest income foregone on non-accrual loans was considered
insignificant for the year ended June 30, 1997.

          At June 30, 1997, management had identified no loans which were not
reflected in the preceding table but as to which known information about
possible credit problems of borrowers caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms.

INVESTMENT ACTIVITIES

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

                                       10
<PAGE>
 
adjusts the percentage of liquid assets which savings institutions are required
to maintain. For additional information, see "Regulation -- Regulation of the
Association -- Liquidity Requirements."

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

          The Association adopted SFAS No. 115 as of June 30, 1993.  Upon
implementation of SFAS No. 115, certain investment and mortgage-backed
securities were transferred to a portfolio of securities designated as available
for sale.  The remaining securities are considered to be held to maturity.
Securities designated as "available for sale" are carried at their fair value
with unrealized gains or losses, net of tax effect, recognized in equity.
Securities designated as held to maturity are carried at amortized cost.  At
June 30, 1997, investment securities with an aggregate amortized cost of $17.7
million and an aggregate fair value of $17.6 million were included in the
portfolio of securities designated as available for sale.  The aggregate impact
on equity was an decrease of $100,000 at June 30, 1997.  Securities designated
as "held to maturity" are those assets which the Association has the ability and
management has the intent to hold to maturity.  Upon acquisition, securities are
classified as to the Association's intent.  For additional information, see
Notes 7 and 8 of Notes to Consolidated Financial Statements in the Annual Report
filed as Exhibit 13 of this report.

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

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

          The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages.  Prepayments of
the underlying mortgages may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security.  The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security.  Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated life of the securities using a
level yield method.  Prepayments of the underlying mortgages depend on many
factors, including the type of mortgage, the coupon rate, the age of the
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates.  The
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of

                                       11
<PAGE>
 
prepayments. During periods of falling mortgage interest rates, prepayments
generally increase, and, conversely, during periods of rising mortgage interest
rates, prepayments generally decrease. If the coupon rate of the underlying
mortgage significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable-rate mortgage-backed securities.

          The Association's mortgage-backed securities portfolio consists
primarily of seasoned fixed-rate and adjustable rate mortgage-backed securities.
At June 30, 1997, the Association had $40.4 million in mortgage-backed
securities (representing 38.3% total assets) which are considered to be held to
maturity and which are insured or guaranteed by FNMA, FHLMC or GNMA.

          Agency Notes.  The Association has also invested in notes issued by
the FHLB, FHLMC, FNMA and the Student Loan Marketing Association ("SLMA").  Such
notes had an aggregate balance of $8.5 million at June 30, 1997 and are neither
insured nor guaranteed by the United States.

          These notes provide for interest rates to increase at specified
intervals to pre-established rates.  The issuing agency has the right to prepay
such notes at face value at certain pre-established dates.  The weighted average
maturity and coupon rate of the Association's agency notes were 53 months and
6.57%, respectively, at June 30, 1997.

          The following table sets forth the carrying value of the Association's
investment portfolio at the dates indicated.

<TABLE>
<CAPTION>
 
                                                      At June 30,
                                                 --------------------
                                                 1997            1996
                                                 ----            ----
                                                     (In thousands)  
<S>                                              <C>           <C> 
Securities available for sale: (1)
 U.S. Treasury and U.S. government agencies....  $12,389       $11,314    
 Mortgage-backed securities....................    4,437         1,425      
 Federal Home Loan Bank stock..................      795           765      
                                                 -------       -------      
  Total securities available for sale..........  $17,621       $13,504      
                                                 =======       =======      
Securities held to maturity: (2)                                            
 U.S. Treasury and U.S. government agencies....  $ 3,736       $ 4,514      
 Mortgage-backed securities....................   40,421        48,308      
                                                 -------       -------      
  Total securities held to maturity............  $44,157       $52,822      
                                                 =======       =======      
Total securities...............................  $61,778       $66,326      
                                                 =======       =======       
</TABLE> 

__________

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

                                       12
<PAGE>
 
          The following table sets forth information regarding the scheduled
maturities, amortized costs, fair values and weighted average yields for the
Association's investment securities at June 30, 1997.

<TABLE>
<CAPTION>
                                               One Year or Less    One to Five Years    Five to Ten Years        Other
                                             --------------------  ------------------  ------------------  ------------------
                                              Carrying   Average   Carrying  Average   Carrying  Average   Carrying   Average
                                               Value      Yield     Value     Yield     Value     Yield      Value    Yield
                                             ----------  --------  --------  --------  --------  --------  --------  --------
                                                                                      (Dollars in thousands)
<S>                                          <C>         <C>       <C>       <C>       <C>       <C>       <C>       <C>
Securities available for sale: (1)
  U.S. treasury and government
    obligations.........................         $1,500      6.6%   $ 9,367      6.7%   $ 1,497      6.6%  $    --       --%
  Mortgage-backed securities............            293      6.0      3,313      6.0        911      7.3        --       --
  Federal Home Loan Bank stock..........            795      7.2         --       --         --       --        --       --

                                                 ------             -------             -------            -------
Total securities available
  for sale..............................         $2,588      6.4%   $12,680      6.4%   $ 2,408      6.9%  $    --       --%
                                                 ======             =======             =======            =======

Securities held to maturity: (2)
  U.S. treasury and government
   obligations..........................         $1,500      6.8%   $   500      6.9%   $ 1,736      7.1%  $    --       --%
  Mortgage-backed securities............          1,132      9.4      3,325      7.5      9,977      7.7    25,987      7.6
                                                 ------             -------             -------            -------
Total securities held
  to maturity...........................          2,632      8.2      3,825      7.3     11,713      7.5    25,987      7.6
                                                 ------             -------             -------            -------

Total securities........................         $5,220      7.3%   $16,505      6.8%   $14,121      7.3%  $25,987      7.6%
                                                 ======             =======             =======            =======
 
<CAPTION> 
                                             Total Investment Portfolio 
                                             ----------------------------
                                             Amortized   Fair     Average 
                                               Cost      Value    Yield  
                                             ---------  --------  --------
<S>                                          <C>        <C>       <C> 
Securities available for sale: (1) 
  U.S. treasury and government
    obligations.........................      $12,364    $12,389     6.6%       
  Mortgage-backed securities............        4,517      4,437     6.2                                 
  Federal Home Loan Bank stock..........          795        795     7.2                            
<S>        <C>      <C>                       -------    -------                                
                                                                             
Total securities available                    $17,676    $17,621     6.5%
  for sale..............................      =======    =======                      
                                                       
Securities held to maturity: (2)        
  U.S. treasury and government  
   obligations..........................     $  3,736    $ 3,729     6.9%
  Mortgage-backed securities............       40,421     40,521     7.9
                                             --------    -------
Total securities held                   
  to maturity...........................       44,157     44,250     7.6
                                             --------    -------
                                       
Total securities........................     $ 61,833    $61,871     7.2%
                                             ========    =======
</TABLE> 
------------------
(1)  Carrying values of securities available for sale is their approximate fair
     value at the reporting date. Average yield on securities available for sale
     is based on their amortized historical costs at the reporting date.

(2)  Carrying values of securities held to maturity is their amortized
     historical cost at their reporting date. Average yield on securities held
     to maturity is based on their amortized historical cost at the reporting
     date.


                                      13

<PAGE>
 
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS

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

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

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

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

                                       14
<PAGE>
 
             Deposits in the Association as of June 30, 1997 were
             represented by the various programs described below.

<TABLE> 
<CAPTION> 
Interest      Minimum                                              Minimum                              Percentage of
  Rate          Term             Category                          Amount           Balances            Total Savings
---------      -------           --------                          ------           --------            -------------
                                                                                  (In thousands)
<S>           <C>             <C>                                <C>               <C>                 <C> 
1.867%          None           NOW Accounts                       $    100          $    744                0.86%
2.748%          None           Passbook Statement Accounts             100             4,637                5.35
4.000%          None           Gold Star Savings Account               100               576                0.66
4.028%          None           Money Market Deposit Account          1,500               461                0.53
4.028%          None           High Yield Account                      100             3,283                3.78
2.249%          None           Best Checking Account                    50               334                0.39
1.917%          None           Merit Checking                           50               662                0.76
2.250%          None           Classic 55 Checking                      50             1,774                2.05
0.000%          None           Free Checking                            --               149                0.17
0.000%          None           Business checking                        50                19                0.02

                               Certificates of Deposit
                               -----------------------
 
2.750%          91 Days        3-Month Money Market                  1,000                22                0.03          
2.750%          5 Month        Fixed Term, Fixed Rate                1,000               131                0.15 
5.100%          182 Days       6-Month Money Market                  1,000             3,156                3.64 
5.500%          7 Month        Fixed Term, Fixed Rate                1,000               662                0.76 
4.600%          8 Month        Fixed Term, Fixed Rate                1,000                93                0.11 
5.000%          9 Month        Fixed Term, Fixed Rate                1,000               919                1.06 
5.554%          10 Month       Fixed Term, Fixed Rate                1,000             1,971                2.27 
5.056%          12 Month       Fixed Term, Fixed Rate                1,000             2,563                2.95 
5.525%          14 Month       Fixed Term, Fixed Rate                1,000            20,392               23.51 
5.327%          18 Month       Fixed Term, Fixed Rate                1,000             1,204                1.39 
5.638%          18 Month       Fixed Term, Fixed Rate - IRA            250             3,794                4.37 
5.083%          20 Month       Fixed Term, Fixed Rate                1,000             4,514                5.20 
5.508%          24 Month       Fixed Term, Fixed Rate                1,000             5,192                5.98 
5.012%          30 Month       Fixed Term, Fixed Rate                1,000             4,029                4.64 
6.186%          36 Month       Fixed Term, Fixed Rate                1,000            12,034               13.87 
5.827%          48 Month       Fixed Term, Fixed Rate                1,000             3,704                4.27 
5.995%          60 Month       Fixed Term, Fixed Rate                1,000             5,705                6.58 
6.347%          72 Month       Fixed Term, Fixed Rate                1,000             1,641                1.89 
5.839%          96 Month       Fixed Term, Fixed Rate                1,000                84                0.10 
5.782%          120 Month      Fixed Term, Fixed Rate                1,000               735                0.85 
5.080%          3-Month-State  Fixed Term, Fixed Rate                1,000             1,425                1.64 
5.467%          Negotiated     Negotiated Jumbo                    100,000               150                0.17 
                                                                                    --------              ------
 
                               Total                                                $ 86,758              100.00%
                                                                                    ========              ======
</TABLE> 
 

                                       15
<PAGE>
 
        The following tables set forth the average balances and average interest
rates paid based on month-end balances for deposits as of the dates indicated.

<TABLE>
<CAPTION>
                                                                               Year Ended June 30,
                                            ----------------------------------------------------------------------------------------
                                                            1997                                                1996                
                                            ----------------------------------------       -----------------------------------------
                                                          Interest-                                      Interest-               
                                                          Bearing      Certificates                      Bearing     Certificates
                                            Passbook      Demand         of                Passbook      Demand         of       
                                            Savings       Deposits      Deposit            Savings       Deposits     Deposit    
                                            -------       --------    -----------          -------       --------    ----------  
                                                              (Dollars in thousands)                 
<S>                                         <C>           <C>         <C>                  <C>           <C>         <C>      
Average balance........................     $8,102        $ 7,612        $73,494           $7,199         $7,523     $  73,710
Average interest rate..................       2.88%          3.20%          5.72%            2.69%          3.39%         5.78% 

<CAPTION> 
                                            -------------------------------------       
                                                           1995                   
                                            -------------------------------------       
                                                         Interest-                      
                                                         Bearing     Certificates
                                            Passbook     Demand        of        
                                            Savings      Deposits     Deposit    
                                            -------      --------    ----------  
                                                                                 
<S>                                         <C>          <C>         <C>                                                 
Average balance........................     $7,032       $6,738      $  75,382                                          
Average interest rate..................       2.89%        2.89%          5.14%                                          
</TABLE> 

                                       16
<PAGE>
 
         The following tables set forth the change in dollar amount of deposits
in the various types of accounts offered by the Association between the dates
indicated.

<TABLE>
<CAPTION>  
                                                                                    Increase                             
                                                    Balance at                     (Decrease)       Balance at                
                                                     June 30,       % of            from June        June 30,        % of 
                                                     1997          Deposit          30, 1996          1996          Deposits    
                                                   ----------      -------         ----------      -----------      --------    
                                                                                                        (Dollars in thousands)
<S>                                                <C>             <C>             <C>             <C>              <C> 
Interest-bearing and non-interest-bearing
 demand deposits...........................        $  7,425          8.56%          $   (5)         $ 7,430           8.65% 
Passbook savings...........................           5,213          6.01             (200)           5,413           6.31  
Certificates of deposit....................          74,120         85.43            1,116           73,004          85.04 
                                                    -------        ------           ------          -------         ------ 
  Total....................................         $86,758        100.00%          $  911          $85,847         100.00%
                                                    =======        ======           ======          =======         ====== 

<CAPTION>                                  
                                                     Increase                       
                                                    (Decrease)     Balance at             
                                                     from June      June 30,        % of  
                                                     30, 1995        1995         Deposits
                                                    -----------    ----------     -------- 
<S>                                                 <C>            <C>            <C>   
Interest-bearing and non-interest-bearing                                                                                
 demand deposits...........................         $    232       $   7,198         7.88%
Passbook savings...........................             (870)          6,283         6.87
Certificates of deposit....................           (4,922)         77,926        85.25
                                                    --------       ---------      -------
  Total....................................         $ (5,560)      $  91,407       100.00%
                                                    ========       =========      ======= 
</TABLE>

                                       17
<PAGE>
 
     The following table sets forth the certificates of deposit in the
Association classified by rates at the dates indicated.

<TABLE>
<CAPTION> 
                                             At June 30,
                                        --------------------
                                           1997       1996
                                        ----------  --------
                                            (In thousands)
         <S>                            <C>         <C> 
         2.00 -  4.00%...............   $   326     $   576
         4.01 -  6.00%...............    62,271      47,238
         6.01 -  8.00%...............    11,404      24,749
         8.01 - 10.00%...............       119         441
                                        -------     -------
                                         74,120     $73,004
                                        =======     =======      
</TABLE>
     The following table sets forth the amount and maturities of certificates of
deposit in the Association at June 30, 1997.

<TABLE>
<CAPTION>
                                                   Amount  Due
                              --------------------------------------------------
                              Less Than                         After
Rate                          One Year   1-2 Years  2-3 Years   3 Years   Total
----                          ---------  ---------  ---------  -------  -------
                                                  (In thousands)
<S>                           <C>        <C>        <C>        <C>      <C>  
2.00 -  4.00%..............   $   263    $    63    $    --    $  --    $   326
4.01 -  6.00%..............    42,849     14,132      5,290       --     62,271
6.01 -  8.00%..............     8,880      2,255        269       --     11,404
8.01 - 10.00%..............        --          4        115       --        119
                              -------    -------    -------    -----    -------
                              $51,992    $16,454    $ 5,674    $  --    $74,120
                              =======    =======    =======    =====    =======
</TABLE> 


     The following table indicates the amount of the certificates of deposit of
$100,000 or more in the Association by time remaining until maturity at June 30,
1997.

<TABLE>
<CAPTION>
 
 
                                                        Certificates
                Maturity Period                         of Deposit
                ---------------                         --------------
                                                        (In thousands)
                <S>                                     <C>   
                Three months or less..................  $     1,031
                Over three through six months.........        1,279
                Over six through 12 months............        2,127
                Over 12 months........................        3,590
                                                        -----------
                   Total..............................  $     8,027
                                                        =========== 
</TABLE>

                                       18
<PAGE>
 
          The following table sets forth the deposit activities of the
Association for the periods indicated.

<TABLE>
<CAPTION>
                                                                     Year Ended June 30,
                                                                 ---------------------------
                                                                   1997      1996      1995
                                                                 -------   --------   ------
<S>                                                              <C>       <C>        <C>
(In thousands)
Net increase (decrease) in deposits before interest credited..   $(3,262)  $(8,519)   $  229
Interest credited.............................................     4,174     2,959     2,506
Savings deposits assumed in acquisition.......................        --        --        --
                                                                 -------   -------    ------
 Net increase (decrease) in savings deposits..................   $   912   $(5,560)   $2,735
                                                                 =======   =======    ======
</TABLE>

          Borrowings.  Savings deposits historically have been the primary
source of funds for the Association's lending, investment and general operating
activities.  The Association is authorized, however, to use advances from the
FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements.  The FHLB of Atlanta functions as a central reserve
bank providing credit for savings institutions and certain other member
financial institutions.  As a member of the FHLB system, the Association is
required to own stock in the FHLB of Atlanta and is authorized to apply for
advances.  Advances are made pursuant to several different programs, each of
which has its own interest rate and range of maturities.  The Association does
not have any borrowings from the FHLB, and management currently does not expect
to borrow from the FHLB in the future.

SUBSIDIARY ACTIVITIES

          Federally chartered savings institutions are permitted to invest up to
2% of their assets in subsidiary service corporations, plus an additional 1% in
subsidiaries engaged in specific community purposes.  Under such limitation, as
of June 30, 1997, the Association was authorized to invest approximately $2.1
million in the stock of or loans to subsidiaries.  The Association has one
wholly owned subsidiary, First Service Corporation of Gadsden, Alabama, Inc.
("First Service"), an Alabama corporation, which holds the Association's
investment in data processing operations.  At June 30, 1997, the Association's
total investment in the subsidiary was $36,128.

REGULATION OF THE ASSOCIATION

          General.  As a federally chartered savings institution, the
Association is subject to extensive regulation by the OTS.  The lending
activities and other investments of the Association must comply with various
federal regulatory requirements, and the OTS periodically examines the
Association for compliance with various regulatory requirements.  The FDIC also
has the authority to conduct special examinations.  The Association must file
reports with OTS describing its activities and financial condition and is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board.  This supervision and regulation is intended primarily for the protection
of depositors.  See "Proposed Regulatory Changes" above.

          Federal Home Loan Bank System.  The Association is a member of the
FHLB System, which consists of 12 district FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB").  The FHLBs provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Atlanta, the Association is required to acquire and hold shares of
capital stock in the FHLB of Atlanta in an amount at least equal to a percentage
of the aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or a fraction
of its advances (borrowings) from the FHLB of Atlanta, whichever is greater. The
Association was in compliance with this requirement with an investment in FHLB
of Atlanta stock at June 30, 1997 of $795,200.

          The FHLB of Atlanta serves as a reserve or central bank for its member
institutions within its assigned district.  It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System.  It makes

                                       19
<PAGE>
 
advances to members in accordance with policies and procedures established by
the OTS and the Board of Directors of the FHLB of Atlanta.  Long-term advances
may only be made for the purpose of providing funds for residential housing
finance.  At June 30, 1997, the Association had no advances outstanding with the
FHLB of Atlanta.  See "Deposit Activity and Other Sources of Funds --
Borrowings."

          Liquidity Requirements.  The Association is required to maintain
average daily balances of liquid assets (cash, deposits maintained pursuant to
Federal Reserve Board requirements, time and savings deposits in certain
institutions, obligations of the United States and states and political
subdivisions thereof, shares in mutual funds with certain restricted investment
policies, highly rated corporate debt and mortgage loans and mortgage-related
securities with less that one year to maturity or subject to pre-arranged sale
within one year) equal to the monthly average of not less than a percentage of
its net withdrawable savings deposits plus short-term borrowings.  The
Association is also required to maintain average daily balances of short-term
liquid assets at a percentage of the total of its net withdrawable savings
accounts and borrowings payable in one year or less.  Monetary penalties may be
imposed for failure to meet liquidity requirements.  The average daily liquidity
ratio of the Association for the month of June 1997 was 25.88%.

          Qualified Thrift Lender Test. The Association is currently subject to
OTS regulations which use the concept of a qualified thrift lender ("QTL") to
determine eligibility for FHLB advances and for certain other purposes.  A
savings institution that does not meet the QTL test must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank.  Upon the expiration of three years from the date the institution
ceases to be a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).

          To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
an institution in its business and liquidity investments in an amount not
exceeding 20% of assets.   All of the following may be included as Qualified
Thrift Investments: investments in residential mortgages, home equity loans,
loans made for educational purposes, small business loans and credit card loans
and shares of stock issued by the FHLB.  Subject to a 20% of portfolio assets
limit, savings institutions are also able to treat the following as Qualified
Thrift Investments: (i) 50% of the dollar amount of residential mortgage loans
subject to sale under certain conditions, (ii) investments, both debt and
equity, in the capital stock or obligations of any other security issued by a
service corporation or operating subsidiary, provided that such subsidiary
derives at least 80% of its annual gross revenues from activities directly
related to purchasing, financing, constructing or improving, repairing domestic
residential housing or manufactured housing, (iii) 200% of their investments in
loans to finance "starter homes" and loans for construction, development or
improvement of housing and community service facilities or for financing small
businesses in "credit-needy" areas, and (iv) loans for personal, family,
household or educational purposes, provided that the dollar amount treated as
Qualified Thrift Investments may not exceed 10% of the savings institution's
portfolio assets.

          A savings institution shall be deemed a Qualified Thrift Lender as
long as its percentage of Qualified Thrift Investments continues to equal or
exceed 65% in at least nine out of each 12 months.  An institution will cease to
be a Qualified Thrift Lender if its percentage of Qualified Thrift Investments
as measured by monthly averages over the immediately preceding 12-month period
falls below 65% for four or more months.  An institution that fails to maintain
QTL status will be permitted to requalify once, and if it fails the QTL test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired.

          At June 30, 1997, approximately substantially more than 65% of the
Association's portfolio assets were invested in Qualified Thrift Investments as
currently defined.

                                       20
<PAGE>
 
          Regulatory Capital Requirements.  Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8% of "risk-weighted" assets.  In addition, the OTS has adopted
regulations which impose certain restrictions on institutions that have a total
risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted
total assets of less than 4.0% (or 3.0% if the institution is rated CAMELS 1
under the OTS examination rating system).  For purposes of these regulations,
Tier 1 capital has the same definition as core capital.  See "Prompt Corrective
Regulatory Action."  Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill."  Core capital is generally reduced by the
amount of an institution's intangible assets for which no market exists.
Limited exceptions to the deduction of intangible assets are provided for
purchased mortgage servicing rights, purchased credit card relationships and
qualifying supervisory goodwill held by an eligible institution.  Tangible
capital is given the same definition as core capital but does not include an
exception for qualifying supervisory goodwill and is reduced by the amount of
all the savings institution's intangible assets with only a limited exception
for purchased mortgage servicing rights and purchased credit card relationships.

          Core and tangible capital generally are required to be reduced by an
amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks.  As of
June 30, 1997, the Association had no material investments in, or extensions of
credit to, non-includible subsidiaries.

          OTS regulations further provide that core and tangible capital need
not be reduced by the amount of core deposit intangibles resulting from branch
purchase transactions consummated (or under firm contract) prior to March 4,
1994, to the extent permitted by OTS, provided that such core deposit
intangibles are valued in accordance with generally accepted accounting
principles, supported by credible assumptions, and have their amortization
adjusted at least annually to reflect decay rates (past and present) in the
acquired customer base. As of June 30, 1997, the Association had $176,082 of
core deposit intangibles resulting from the acquisition of its Centre, Alabama
branch.

          Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts, and increased by a pro rated portion of the assets of
subsidiaries in which the institution holds a minority interest and which are
not engaged in activities for which the capital rules require the institution to
net its debt and equity investments against capital, as well as a pro rated
portion of the assets of other subsidiaries for which netting is not fully
required under phase-in rules.  Adjusted total assets are reduced by the amount
of assets that have been deducted from capital, the portion of the institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill.  At June 30, 1997, the Association's adjusted total assets
for purposes of the core and tangible capital requirements were $105.3 million.

          In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
institution's core capital.  Supplementary capital is defined to include certain
preferred stock issues, nonwithdrawable accounts and pledged deposits that do
not qualify as core capital, certain approved subordinated debt, certain other
capital instruments and a portion of the institution's general loss allowances.
Total core and supplementary capital are reduced by the amount of capital
instruments held by other depository institutions pursuant to reciprocal
arrangements and, after July 1, 1990, by an increasing percentage of the
institution's high loan-to-value ratio land loans, non-residential construction
loans and equity investments other than those deducted from core and tangible
capital.  As of June 30, 1997, the Association had no high ratio land or non-
residential construction loans and no equity investments for which OTS
regulations require a deduction from total capital.

          The risk-based capital requirement is measured against risk-weighted
assets which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.

                                       21
<PAGE>
 
Under the OTS risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with original loan-to-value ratios under 80% are
assigned a risk weight of 50%.  Consumer and residential construction loans are
assigned a risk weight of 100%.  Mortgage-backed securities issued, or fully
guaranteed as to principal and interest, by the FNMA or FHLMC are assigned a 20%
risk weight.  Cash and U.S. Government securities backed by the full faith and
credit of the U.S. Government are given a 0% risk weight.  As of June 30, 1997,
the Association's risk-weighted assets were approximately $24.5 million.

          At June 30, 1997, the Association exceeded all regulatory minimum
capital requirements.  The table below presents certain information relating to
the Association's regulatory capital compliance at June 30, 1997.

<TABLE>
<CAPTION>
                                                                                        To Be Well   
                                                                                      Capitalized for 
                                                                  For Capital        Prompt Corrective        
                                               Actual          Adequacy Purposes     Action Provisions  
                                           ---------------     -----------------     -----------------     
                                           Amount    Ratio     Amount      Ratio     Amount      Ratio     
                                           ------    -----     ------      -----     ------      -----     
                                                            (Dollars in thousands)      
<S>                                        <C>       <C>       <C>         <C>       <C>         <C>             
June 30, 1997:                                                                                              
                                                                                                            
Total capital (to risk-weighted                                                                             
  assets).............................     $14,857   60.7%     $1,956      8.0%      $2,446      10.0%     
Tier 1 (core) capital (to risk-                                                                             
  weighted assets)....................      14,781   60.4         N/A      N/A        1,467       6.0       
Tier 1 (core) capital (to adjusted                                                                          
  total assets).......................      14,781   14.0       3,165      3.0        5,275       5.0       
Tangible capital (to adjusted                                                                               
  total assets).......................      14,781   14.0       1,580      1.5          N/A       N/A        
 
June 30, 1996:
 
Total capital (to risk-weighted
  assets).............................      15,333   70.8       1,732      8.0        2,166      10.0    
Tier 1 (core) capital (to risk-                                                                          
  weighted assets)....................      15,255   70.4         N/A      N/A        1,299       6.0    
Tier 1 (core) capital (to adjusted                                                                       
  total assets).......................      15,255   14.3       3,205      3.0        5,342       5.0    
Tangible capital (to adjusted                                                                            
  total assets).......................      15,255   14.3       1,603      1.5          N/A       N/A    
</TABLE>

          The OTS' risk-based capital requirements require that savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital.  An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates.  Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities.  An
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets.  An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.

                                       22
<PAGE>
 
          The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS.  The amount of the interest rate risk component, if
any, to be deducted from an institution's total capital will be based on the
institution's Thrift Financial Report filed two quarters earlier.  Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%
are generally exempt from filing the interest rate risk schedule with their
Thrift Financial Reports.  However, the OTS requires any exempt institution that
it determines may have a high level of interest rate risk exposure to file such
schedule on a quarterly basis and may be subject to an additional capital
requirement based upon its level of interest rate risk as compared to its peers.
The Association has been informed by the OTS that it is expected to become
required to file such reports on a quarterly basis at some time in the future
although implementation of this requirement has been indefinitely delayed by the
OTS.  Based on the Association's substantial capital level, management does not
expect that implementation of this requirement will have a material effect on
the Association.

          In addition to requiring generally applicable capital standards for
savings institutions, the Director of the OTS is authorized to establish the
minimum level of capital for a savings institution at such amount or at such
ratio of capital-to-assets as the Director determines to be necessary or
appropriate for such institution in light of the particular circumstances of the
institution.  Such circumstances would include a high degree of exposure of
interest rate risk, prepayment risk, credit risk and concentration of credit
risk and certain risks arising from non-traditional activities.  The Director of
the OTS may treat the failure of any institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any institution which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.

          Deposit Insurance.  The Association is required to pay assessments
based on a percent of its insured deposits to the FDIC for insurance of its
deposits by the SAIF.  Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.

          The FDIC has established a risk-based assessment system for insured
depository institutions.  Under the system, the assessment rate for an insured
depository institution depends on the assessment risk classification assigned to
the institution by the FDIC which will be determined by the institution's
capital level and supervisory evaluations.  Based on the data reported to
regulators for the date closest to the last day of the seventh month preceding
the semi-annual assessment period, institutions are assigned to one of three
capital groups --well capitalized, adequately capitalized or undercapitalized --
using the same percentage criteria as under the prompt corrective action
regulations.  See "Prompt Corrective Regulatory Action."  Within each capital
group, institutions are assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund.  Subgroup A consists of financially sound institutions with only a few
minor weaknesses.  Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.

          For the past several semi-annual periods, savings institutions with
SAIF-assessable deposits, like the Association, have been required to pay higher
deposit insurance premiums than institutions with deposits insured by the BIF.
In order to recapitalize the SAIF and address the premium disparity, the
recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be necessary to increase
the reserve levels of the SAIF to the designated reserve ratio of 1.25% of
insured deposits. Institutions were assessed at the rate of 65.7 basis points
based

                                       23
<PAGE>
 
on the amount of their SAIF-assessable deposits as of March 31, 1995. As a
result of the special assessment, the Association incurrred a pre-tax expense of
$591,000 during the quarter ended September 30, 1996.

          The FDIC has proposed a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings would be reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.31% of insured deposits.  Until December 31, 1999, however, SAIF-
insured institutions, will be required to pay assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts.  During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.  Since the SAIF now meets its designated reserve ratio
as a result of the special assessment, SAIF members are permitted to convert to
the status of members of the BIF and may merge with or transfer assets to a BIF
member. However, substantial entrance and exit fees apply to conversions from
SAIF to BIF insurance and such fees may make a SAIF to BIF conversion
prohibitively expensive.

          The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings.  The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate.  Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries.  Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level.  The regulation further provides that in
considering applications that must be submitted to it by savings institutions,
the FDIC will take into account whether the institution is meeting the Tier 1
capital requirement for state non-member banks of 4% of total assets for all but
the most highly rated state non-member banks.

          Federal Reserve System.  Pursuant to regulations of the Federal
Reserve Board, a savings institution must maintain average daily reserves equal
to various percentages of its accounts.  The percentages are subject to
adjustment by the Federal Reserve Board.  Because required reserves must be
maintained in the form of vault cash or in a non-interest bearing account at a
Federal Reserve Association, the effect of the reserve requirement is to reduce
the amount of the institution's interest-earning assets.  As of June 30, 1997,
the Association met its reserve requirements.

          Dividend Restrictions.  Under OTS regulations, the Association would
not be permitted to pay dividends on its capital stock if its regulatory capital
would thereby be reduced below the remaining balance of the liquidation account
established for the benefit of certain depositors of the Association at the time
of the Conversion.  In addition, the Association is required by OTS regulations
to give the OTS 30 days' prior notice of any proposed declaration of dividends
to the Company.

          OTS regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Association.  Under these regulations, an institution that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Association") is generally permitted, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of: (a) 75% of its net income for the previous four quarter; or (b) 100%
of its net income to date during the calendar year plus an amount that would
reduce by one-half the amount by which its ratio of total capital to assets
exceeded its fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year.  An institution with total capital in excess of
current minimum capital ratio requirements but not in excess of the fully

                                       24
<PAGE>
 
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period.  An
institution that fails to meet current minimum capital requirements (a "Tier 3
Association") is prohibited from making any capital distributions without the
prior approval of the OTS. A Tier 1 Association that has been notified by the
OTS that its is in need of more than normal supervision will be treated as
either a Tier 2 or Tier 3 Association. The Association is a Tier 1 Association.
Despite the above authority, the OTS may prohibit any institution from making a
capital distribution that would otherwise be permitted by the regulation, if the
OTS were to determine that the distribution constituted an unsafe or unsound
practice.

          Under the OTS prompt corrective action regulations, the Association
would be prohibited from making any capital distributions if, after making the
distribution, it would have: (i) a total risk-based capital ratio of less than
8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%.  See "Prompt Corrective Regulatory Action."

          In addition to the foregoing, earnings of the Association appropriated
to bad debt reserves and deducted for federal income tax purposes are not
available for payment of cash dividends or other distributions to the Company
without payment of taxes at the then current tax rate on the amount of earnings
removed from the reserves for such distributions.  See "Taxation."  The Company
intends to make full use of this favorable tax treatment afforded to the
Association and the Company and does not contemplate use of any post-Conversion
earnings of the Association in a manner which would limit either company's bad
debt deduction or create federal tax liabilities.

          Limits on Loans to One Borrower.  Savings institutions generally are
subject to the lending limits applicable to national banks.  With certain
limited exceptions, an institution's loans and extensions of credit outstanding
to a person at one time shall not exceed 15% of the unimpaired capital and
surplus of the institution.  An institution may lend an additional amount, equal
to 10% of unimpaired capital and surplus, if such loan is fully secured by
readily marketable collateral.  Savings institutions are additionally authorized
to make loans to one borrower, for any purpose, in an amount not to exceed
$500,000 or, by order of the Director of the OTS, in an amount not to exceed the
lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided:  (i) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (ii) the institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 150% of unimpaired capital and
surplus.  The lending limits generally do not apply to purchase money mortgage
notes taken from the purchaser of real property acquired by the institution in
satisfaction of debts previously contracted if no new funds are advanced to the
borrower and the institution is not placed in a more detrimental position as a
result of the sale.  Certain types of loans are excepted from the lending
limits, including loans secured by savings deposits.

          At June 30, 1997, the maximum amount that the Association could have
lent to any one borrower under the 15% limit was approximately $4.5 million.  At
such date, the largest aggregate amount of loans that the Association had
outstanding to any one borrower was approximately $200,000.

          Transactions with Related Parties.  Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act.  An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution.  In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution.  Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus, and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no

                                       25
<PAGE>
 
savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution.  Section 106 of the Bank
Holding Company Act of 1956, as amended ("BHCA") which also applies to the
Association, prohibits the Association from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.

          Further, savings institutions are subject to the restrictions
contained in Section 22(h) and Section 22(g) of the Federal Reserve Act and the
Federal Reserve Board's Regulation O thereunder on loans to executive officers,
directors and principal stockholders.  Under Section 22(h), loans to a director,
executive officer and to a greater than 10% stockholder of a savings institution
and certain affiliated interests of such persons, may not exceed, together with
all other outstanding loans to such person and affiliated interests, the
institution's loans-to-one-borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral).  Section 22(h) also prohibits the making of loans above amounts
prescribed by the appropriate federal banking agency, to directors, executive
officers and greater than 10% stockholders of a savings institution, and their
respective affiliates, unless such loan is approved in advance by a majority of
the board of directors of the institution with any "interested" director not
participating in the voting.  Regulation O prescribes the loan amount (which
includes all other outstanding loans to such person) as to which such prior
board of director approval is required as being the greater of $25,000 or 5% of
capital and surplus (up to $500,000).  Further, Section 22(h) requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons.  Section 22(h) also generally prohibits a depository institution from
paying the overdrafts of any of its executive officers or directors.

          Section 22(g) of the Federal Reserve Act and Regulation O requires
that loans to executive officers of a depository institution requires that loans
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers.   In addition,
Section 106 of the BHCA prohibits extensions of credit to executive officers,
directors, and greater than 10% stockholders of a depository institution by any
other institution which has a correspondent banking relationship with the
institution, unless such extension of credit is on substantially the same terms
as those prevailing at the time for comparable transactions with other persons
and does not involve more than the normal risk of repayment or present other
unfavorable features.

          Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an institution fails
to satisfy certain minimum capital requirements, including a leverage limit, a
risk-based capital requirement, and any other measure deemed appropriate by the
federal banking regulators for measuring the capital adequacy of an insured
depository institution. All institutions, regardless of their capital levels,
are restricted from making any capital distribution or paying any management
fees that would cause the institution to become undercapitalized. An institution
that fails to meet the minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on

                                       26
<PAGE>
 
deposits, asset growth and other activities, possible replacement of directors
and officers, and restrictions on capital distributions by any bank holding
company controlling the institution. Any company controlling the institution may
also be required to divest the institution or the institution could be required
to divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt, with certain
exceptions. If an institution's ratio of tangible capital to total assets falls
below the "critical capital level" established by the appropriate federal
banking regulator, the institution is subject to conservatorship or receivership
within 90 days unless periodic determinations are made that forbearance from
such action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized.

          Under the OTS regulation implementing the prompt corrective action
provisions of FDICIA, the OTS measures an institution's capital adequacy on the
basis of its total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets).   An institution that is not subject to an
order or written directive to meet or maintain a specific capital level is
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater.  An "adequately capitalized"
savings institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
regulatory composite rating of 1).  An "undercapitalized institution" is an
institution that has (i) a total risk-based capital ratio less than 8.0%; (ii) a
Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of
less than 4.0% (or 3.0% if the institution has a regulatory composite rating of
1).  A "significantly undercapitalized" institution is defined as an institution
that has: (i) a total risk-based capital ratio of less than 6.0%; (ii) a Tier 1
risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less
than 3.0%.  A "critically undercapitalized" savings institution is defined as an
institution that has a ratio of tangible equity (core capital, subject to
certain adjustments) to total assets of 2.0% or less. The OTS may reclassify a
well capitalized savings institution as adequately capitalized and may require
an adequately capitalized or undercapitalized institution to comply with the
supervisory actions applicable to institutions in the next lower capital
category if the OTS determines, after notice and an opportunity for a hearing,
that the savings institution is in an unsafe or unsound condition or that the
institution has received and not corrected a less-than-satisfactory rating for
any regulatory composite rating category.

          Standards for Safety and Soundness.  FDICIA requires each federal bank
regulatory agency to prescribe, by regulation, safety and soundness standards
for institutions under its authority.  In 1995, these agencies, including the
OTS, released interagency guidelines establishing such standards and adopted
rules with respect to safety and soundness compliance plans.  The OTS guidelines
require savings institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature and
scope of the institution's business.  The guidelines also establish certain
basic standards for loan documentation, credit underwriting, interest rate risk
exposure and asset growth.  The guidelines further provide that savings
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss and should take into account factors such as comparable compensation
practices at comparable institutions.  If the OTS determines that a savings
institution is not in compliance with the safety and soundness guidelines, it
may require the institution to submit an acceptable plan to achieve compliance
with the guidelines.  A savings institution must submit an acceptable compliance
plan to the OTS within 30 days of receipt of a request for such a plan.  Failure
to submit or implement a compliance plan may subject the institution to
regulatory sanctions.  Management believes that the Association meets
substantially all the standards adopted in the interagency guidelines and,
therefore, does not believe that the implementation of these regulatory
standards will materially affect its operations.

                                       27
<PAGE>
 
          Additionally, each federal banking agency is required to establish
standards relating to the adequacy of asset and earnings quality.  In 1995,
these agencies, including the OTS, issued proposed guidelines relating to asset
and earnings quality.  Under the proposed guidelines, a savings institution
should maintain systems, commensurate with its size and the nature and scope of
its operations, to identify problem assets and prevent deterioration in those
assets as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves.  Management does not
believe that the asset and earnings standards, in the form proposed by the OTS,
would have a material effect on the Association.

REGULATION OF THE COMPANY

          General.  The Company is a savings institution holding company and, as
such, subject to OTS registration, regulation, examination, supervision and
reporting requirements.  As a subsidiary of a savings institution holding
company, the Association is subject to certain restrictions in its dealings with
the Company and affiliates thereof.  See "Proposed Regulatory Changes" above.
The Company also is required to file certain reports with, and otherwise comply
with the rules and regulations of, the Securities and Exchange Commission
("SEC") under the federal securities laws.

          Activities Restrictions.  The Board of Directors of the Company
presently intends to operate the Company as a unitary savings institution
holding company.  There are generally no restrictions on the activities of a
unitary savings institution holding company.  However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by an institution holding company of an activity constitutes a serious risk to
the financial safety, soundness or stability of its subsidiary savings
institution, the Director of the OTS may impose such restrictions as deemed
necessary to address such risk including limiting: (i) payment of dividends by
the savings institution; (ii) transactions between the savings institution and
its affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings institution
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the QTL test, then such unitary holding company shall also
presently become subject to the activities restrictions applicable to multiple
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, register as, and become subject to, the restrictions
applicable to a bank holding company. See "Regulation of the Association --
Qualified Thrift Lender Test." Legislative initiatives have been introduced in
the U.S. Congress which could result in the imposition of restrictions on the
activities of unitary savings institution holding companies in the future.

          If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Association,
the Company would thereupon become a multiple savings institution holding
company.  Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings institution
meets the QTL test, the activities of the Company and any of its subsidiaries
(other than the Association or other subsidiary savings institutions) would
thereafter be subject to further restrictions.  Among other things, no multiple
savings institution holding company or subsidiary thereof which is not an
institution shall commence or continue for a limited period of time after
becoming a multiple savings institution holding company or subsidiary thereof,
any business activity, upon prior notice to, and no objection by, the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings institution holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies.  A multiple savings institution holding
company must obtain the approval of the OTS prior to engaging in the activities
described in (vii) above.

          Restrictions on Acquisitions.  Savings institution holding companies
may not acquire, without prior approval of the Director of the OTS, (i) control
of any other savings institution or savings institution holding company or

                                       28
<PAGE>
 
substantially all the assets thereof or (ii) more than 5% of the voting shares
of an institution or holding company thereof which is not a subsidiary.  Under
certain circumstances, a registered savings institution holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting shares of an under-capitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company.  In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings institution holding company's other subsidiaries must have tangible
capital of at least 6-1/2% of total assets, there must not be more than one
common director or officer between the savings institution holding company and
the issuing savings institution, and transactions between the savings
institution and the savings institution holding company and any of its
affiliates must conform to Sections 23A and 23B of the Federal Reserve Act.
Except with the prior approval of the Director of the OTS, no director or
officer of a savings institution holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings institution holding company.

          The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings institution holding company which controls
savings institutions in more than one state if:  (i) the multiple savings
institution holding company involved controls an institution which operated a
home or branch office in the state of the institution to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the FDIC Act; or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings institution holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).

          OTS regulations permit federal savings institutions to branch in any
state or states of the United States and its territories.  Except in supervisory
cases or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal institution may not establish an out-of-state
branch unless (i) the federal institution qualifies as a QTL or as a "domestic
building and loan association" under (S)7701(a)(19) of the Internal Revenue Code
and the total assets attributable to all branches of the institution in the
state would qualify such branches taken as a whole for treatment as a QTL or as
a domestic building and loan association and (ii) such branch would not result
in (a) formation of a prohibited multi-state multiple savings holding company or
(b) a violation of certain statutory restrictions on branching by savings
institution subsidiaries of banking holding companies.  Federal savings
institutions generally may not establish new branches unless the institution
meets or exceeds minimum regulatory capital requirements.  The OTS will also
consider the institution's record of compliance with the Community Reinvestment
Act of 1977 in connection with any branch application.

          Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings institution.  Pursuant to rules promulgated by
the Federal Reserve Board, owning, controlling or operating an institution is a
permissible activity for bank holding companies, if the savings institution
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies.  A bank holding company that
controls a savings institution may merge or consolidate the assets and
liabilities of the savings institution with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the BIF with the approval of the
appropriate federal banking agency and the Federal Reserve Board.  The resulting
bank will be required to continue to pay assessments to the SAIF at the rates
prescribed for SAIF members on the deposits attributable to the merged savings
institution plus an annual growth increment.  In addition, the transaction must
comply with the restrictions on interstate acquisitions of commercial banks
under the BHCA.

          Federal Securities Law.  The Common Stock is registered with the SEC
under the Securities Exchange Act of 1934, as amended ("Securities Exchange
Act"), and under OTS regulations, generally may not be deregistered for at least
three years after the Conversion.  The Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
Securities Exchange Act.

                                       29
<PAGE>
 
TAXATION

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

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

          Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve.  Savings institutions, like
the Association, which have previously used that method are required to
recapture into taxable income post-1987 reserves in excess of the reserves
calculated under the experience method over a six-year period beginning with the
first taxable year beginning after December 31, 1995.  The start of such
recapture may be delayed until the third taxable year beginning after December
31, 1995 if the dollar amount of the institution's residential loan originations
in each year is not less than the average dollar amount of residential loan
originated in each of the six most recent years disregarding the years with the
highest and lowest originations during such period.  For purposes of this test,
residential loan originations would not include refinancings and home equity
loans.

          Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Association, will be treated the same as
commercial banks.  Institutions with $500 million or more in assets will be able
to take a tax deduction only when a loan is actually charged off.  Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.  As a
result, thrifts must recapture into taxable income the amount of their post-1987
tax bad debt reserves over a six-year period beginning after 1995.  This
recapture can be deferred for up to two years if the thrift satisfies a
residential loan portfolio test.  At June 30, 1997, the Association's post-1987
tax bad debt reserve subject to recapture was approximately $288,000.  The
Association recaptured approximately $58,000 of this reserve into taxable income
in the current year.  The recapture did not have any effect on the Association's
net income because the related tax expense had already been accrued.

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

          The bad debt deduction under the percentage of taxable income method
was limited to the extent that the amount accumulated in the reserve for losses
on qualifying real property loans exceeded 6% of such loans outstanding at the
end of the taxable year.  In addition, the amount claimed as a bad debt
deduction when added to accumulated loss 

                                       30
<PAGE>
 
reserves was limited to the excess, if any, of 12% of total deposits or
withdrawable accounts of depositors at year-end in excess of the sum of surplus,
undivided profits and reserves at the beginning of the year. The percentage bad
debt deduction was reduced by the deduction for losses on nonqualifying loans.

          Earnings appropriated to the Association's tax bad debt reserves and
claimed as tax deductions will not be available for the payment of cash
dividends or other distributions to the Company (including distributions made
upon dissolution or liquidation), unless the Association includes the amounts
distributed in taxable income, along with the amounts deemed necessary to pay
the resulting federal income tax.  At June 30, 1997, the Association had
approximately $2.8 million of pre-1988 accumulated bad debt reserves for which
federal income taxes have not been provided.

          For taxable years beginning after June 30, 1986, the Internal Revenue
Code imposes an alternative minimum tax at a rate of 20%.  The alternative
minimum tax generally applies to a base of regular taxable income plus certain
tax preferences ("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI exceeds an exemption amount.  The Internal Revenue Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method.  The other items of tax
preference that constitute AMTI include (a) tax-exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable  years including 1987 through 1989,
50% of the excess of (i) the taxpayer's pre-tax adjusted net book income over
(ii) AMTI (determined without regard to this latter preference and prior to
reduction by net operating losses).  For taxable years beginning after 1989,
this latter preference has been replaced by 75% of the excess (if any) of (i)
adjusted current earnings as defined in the Internal Revenue Code, over (ii)
AMTI (determined without regard to this preference and prior to reduction by net
operating losses).  For any taxable year beginning after 1986, net operating
losses can offset no more than 90% of AMTI.  Certain payments of alternative
minimum taxes may be used as credits against regular tax liabilities in future
years.  In addition, for taxable years after 1986 and before 1992, corporations,
including savings institutions, are also subject to an environmental tax equal
to 0.12% of the excess of AMTI for the taxable year (determined without regard
to net operating losses and the deduction for the environmental tax) over $2.0
million.  The Association is not currently paying any amount of alternative
minimum tax but may, depending on future results of operations, be subject to
this tax.

          The Association's federal income tax returns have not been examined by
the regulatory authorities within the past five years.  For additional
information, see Note 12 of Notes to Consolidated Financial Statements contained
elsewhere herein.

          State Taxation.  The state of Alabama imposes a 6.0% excise tax on the
earnings of financial institutions such as the Association and the Company.  In
addition to the excise taxes, the state of Alabama imposes an annual state
franchise tax for domestic and foreign corporations.  A domestic corporation,
including a federally chartered stock savings bank domiciled in Alabama, is
assessed a domestic franchise tax of approximately 1.0% based on the aggregate
par value of its issued and outstanding common stock.  Foreign corporations,
such as the Company which is incorporated in Delaware, are assessed a foreign
franchise tax of 0.3% based on a total of capital (as defined by statute) deemed
to be employed in the state of Alabama.  The foreign corporation's investment in
the capital of an Alabama corporation is excluded from the taxable base.  The
Company also is subject to the Delaware franchise tax.

                                       31
<PAGE>
 
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

          The following table sets forth information regarding the executive
officers of the Company and/or the Association during fiscal 1997 who do not
serve on the Board of Directors.

<TABLE>
<CAPTION>
                         Age at
                        June 30,
Name                      1997            Principal Title
----                      ----            ---------------
<S>                     <C>               <C> 
Rodney Rich                45             Vice President of the Association
Margaret Stewart           67             Secretary of the Association
Peggy Smith                41             Treasurer of the Association
</TABLE>

          RODNEY RICH serves as Vice President and the Association's chief
lending officer.  He joined the Association in 1984 as Assistant Vice President.
He was promoted to Vice President in 1989.

          MARGARET STEWART serves as Secretary of the Association.  She joined
the Association in 1960 as teller.  She was appointed Secretary in 1966.

          PEGGY SMITH serves as Treasurer of the Association. She joined the
Association in 1980.

EMPLOYEES

          As of June 30, 1997, the Association had 28 full-time and one part-
time employees, none of whom was represented by a collective bargaining
agreement.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

          The following table sets forth information regarding the Association's
offices at June 30, 1997.

<TABLE>
<CAPTION>
                                        Net Book Value                   Owned
                                 Year    at June 30,     Approximate      or
                                Opened      1997        Square Footage  Leased
                                ------   -----------    --------------  ------
<S>                             <C>     <C>             <C>             <C>
MAIN OFFICE:
221 South 6th Street             1968     $201,537           6,500      Owned
Gadsden, Alabama  35901                                                      
                                                                             
BRANCH OFFICES:                                                              
202 Sand Mountain Drive          1965          567           1,405      Leased
Albertville, Alabama  35950                                                  
                                                                             
395 Gunter Avenue                1971          151           1,000      Leased
Guntersville, Alabama 35976                                                  
                                                                             
390 W. Main Street               1994        5,257           2,263      Leased
Centre, Alabama  35960
</TABLE>

    The net book value of the Association's investment in furnishings and
equipment totaled $59,225 at June 30, 1997.

                                       32
<PAGE>
 
ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     From time to time, the Association is a party to various legal proceedings
incident to its business. At June 30, 1997, there were no legal proceedings to
which the Company, the Association or its subsidiary was a party, or to which
any of their property was subject, which were expected by management to result
in a material loss.

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

    No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.


                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------

    The information required by this item is incorporated by reference to "Item
1.  Business -- Regulation -- Dividend Limitations" herein and "Market
Information," "Market Price of Common Stock and Dividend Information" and Note 4
of the Notes to Consolidated Financial Statements in the portions of the Annual
Report filed as Exhibit 13 to this report.

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

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

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

    The financial statements required by this item are incorporated by reference
to the consolidated financial statements, notes to consolidated financial
statements and independent auditors' report in the portions of the Annual Report
filed as Exhibit 13 to this report.

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

    Not applicable.


                                    PART III

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

    Information concerning the directors and executive officers of the Company
is incorporated herein by reference to the sections captioned "Executive
Officers Who Are Not Directors" in Item 1 of this report and "Proposal I --
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

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

                                       33
<PAGE>
 
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

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


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

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

                                    PART IV

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

     (a) The following exhibits are filed as part of this report.

<TABLE> 
<CAPTION> 
     No.             Description
     ---             -----------
     <S>       <C> 
     3.1*      Certificate of Incorporation of The Southern Banc Company, Inc.
     
     3.2*      Bylaws of The Southern Banc Company, Inc.
     
     4*        Specimen Common Stock Certificate of The Southern Banc Company, Inc.
          
     10.1**    Employment Agreements between The Southern Banc Company, Inc. and
               First Federal Savings and Loan Association of Gadsden and James B.
               Little, Jr.
     
     10.2**    First Federal Savings and Loan Association of Gadsden Supplemental
               Executive Retirement Agreement
     
     10.3***   The Southern Banc Company, Inc. 1996 Stock Option and Incentive
               Plan and trust
     
     10.4***   First Federal Savings and Loan Association of Gadsden Management
               Recognition Plan and trust
     
     13        Portions of Annual Report
     
     21****    Subsidiaries
     
     23        Consent of Arthur Andersen LLP
     
     27        Financial Data Schedule
</TABLE> 

________________
*    Incorporated by reference to Registration Statement on Form 8-A (No. 1-
     13964).
**   Incorporated by reference to Registration Statement on Form S-1 (No. 33-
     93218).
***  Incorporated by reference to Registration Statement on Form S-8 (No. 333-
     3546).
**** Incorporated by reference to "Subsidiary Activities" in Item 1 of this
     report.

                                       34
<PAGE>
 
                                   SIGNATURES


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

                                   THE SOUTHERN BANC COMPANY, INC.


Date: September 29, 1997           By:/s/ James B. Little, Jr.
                                      ------------------------------------------
                                      James B. Little, Jr.
                                      Chairman, President and Chief Executive 
                                      Officer (Duly Authorized Representative)


          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated below as of the date indicated above.


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


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


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


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

                                       35