<PAGE>

                    U. S. Securities and Exchange Commission
                             Washington, DC  20549

                                  Form 10-KSB

(Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934


     For the fiscal year ended September 30, 2000
                               ------------------


[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT
       For the transition period from  __________  to ___________


                        Commission file number 000-25179
                                               ---------


                       INNES STREET FINANCIAL CORPORATION
                       ----------------------------------
              (Exact name of small business issuer in its charter)

        NORTH CAROLINA                                   56-2101799
     (State or other jurisdiction            (IRS Employer Identification No.)
   of incorporation or organization)



                             401 WEST INNES STREET
                              SALISBURY, NC 28144
                              -------------------
                    (Address of principal executive offices)

                                 (704) 633-2341
                                 --------------
                          (Issuer's telephone number)

         Securities registered under Section 12(b) of the Exchange Act:
                                      None
         -------------------------------------------------------------

         Securities registered under Section 12(g) of the Exchange Act:
                        Common shares, without par value
         -------------------------------------------------------------
                                (Title of Class)

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

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

     The issuer's revenues for its most recent fiscal year were $15,116,971.

     Based upon information regarding the average of the bid and asked price
provided by The NASDAQ Small-Cap Market, the aggregate market value of the
voting shares held by nonaffiliates of the registrant on November 30, 2000, was
$17,429,409.

     As of November 30, 2000, there were 1,974,325 shares of the Registrant's
common stock outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held February 5, 2001 are incorporated by reference into Part III.

                                       2
<PAGE>

                                     Part I
                                     ------

Item 1.  Description of Business

General

     Innes Street Financial Corporation.  Innes Street Financial Corporation
(the "Company") was incorporated on July 6, 1998 to serve as the holding company
for Citizens Bank, FSB ("Citizens Bank" or the "Bank") upon the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank ("Conversion").  The Company completed the
Conversion on December 28, 1998 through the sale and issuance of 2,248,250
shares of common stock.  Since the Conversion, the Company has had no
significant assets other than the outstanding capital stock of Citizens Bank, a
portion of the net proceeds of the Conversion, investment securities and a note
payable from the Bank's employee stock ownership plan ("ESOP").  The Company's
principal business has been the business of Citizens Bank. Information set forth
in this report relating to periods prior to the Conversion, including financial
statements and related data relates to the Bank.

     The Company is classified as a unitary savings institution by the Office
of Thrift Supervision ("OTS").  As long as the Company remains a unitary savings
institution holding company, the Company currently may diversify its activities
in such a manner as to include any activities allowed by law or regulation to a
unitary savings institution holding company.  For additional information, see
"Regulation of the Company."

     The Company's executive offices are located at 401 West Innes Street,
Salisbury, North Carolina 28144; the telephone number is (704) 633-2341.

     Citizens Bank, FSB.  The Bank has served the Salisbury, North Carolina
area for over ninety years.  The deposits of the Bank are insured up to
applicable limits by the Federal Deposit Insurance Corporation (the "FDIC") in
the Savings Association Insurance Fund (the "SAIF").  The Bank is a member of
the Federal Home Loan Bank (the "FHLB") of Atlanta and is subject to regulation
and supervision by the OTS.

     The Bank is engaged primarily in the business of attracting deposits from
the general public and using such deposits to make mortgage loans secured by
real estate.  The Bank makes one-to-four family residential real estate loans
and, to a lesser extent, multi-family residential loans, nonresidential loans,
construction and development loans, home equity loans, commercial and consumer
loans.  However, in the past year the Bank has increased its production of
multi-family residential loans, nonresidential loans, construction and
development loans and home equity loans. The Bank's primary source of revenue is
interest income from its lending activities.  The Bank's other major sources of
revenue are interest and dividend income from investments, interest income from
its interest-earning deposit balances in other depository institutions, and
transaction and fee income from its lending and deposit activities.  The major
expenses of the Bank are interest on deposits and general and administrative
expenses such as employee compensation and benefits, federal deposit insurance
premiums, data processing, advertising expenses and occupancy expenses.

Market Area

     The Bank's primary market area consists of the communities in
approximately a 10-mile radius around its offices in Salisbury, Rockwell, and
Statesville, North Carolina.  These areas are located within Rowan and Iredell
Counties.  All three offices are in proximity of Charlotte, North Carolina and
the market area has been and will continue to be affected by this major
metropolitan area.

     Based on 1999 FDIC comparative data, the Bank had approximately 11.1%
of the deposits in Salisbury and approximately 10.4% of the deposits in Rowan
County.  The Bank had approximately 7.4% of the deposits in Statesville and
approximately 4.2% in Iredell County at the same date.

                                       3
<PAGE>

Lending Activities

     General.  The Bank's primary source of revenue is interest income from
its lending activities, consisting primarily of mortgage loans for the purchase
or refinance of one-to-four family residential real property located in its
primary market area.  The Bank also makes home equity loans, multi-family
residential loans, nonresidential loans, construction and development loans,
commercial and consumer loans.  Over 99% of the Bank's loan portfolio, before
net items, is secured by real estate.  In addition to interest earned on loans,
the Bank receives fees in connection with loan originations, loan servicing,
loan modifications, late payments, loan assumptions and other miscellaneous
services.

     Adjustable rate loans are generally originated with the intention that
they will be held in the Bank's loan portfolio.  Fixed rate one-to-four family
residential loans are generally originated to conform with secondary market
purchase requirements and sold in the secondary market.  During fiscal 2000,
1999, and 1998, the Bank sold $2.4 million, $8.2 million, and $5.6 million,
respectively, of fixed rate loans in order to better manage its interest rate
risk.

     Loan Portfolio Composition.  The Bank's net loan portfolio totaled
$186.9 million on September 30, 2000, which represented 89.8% of the Bank's
total assets.  One-to-four family residential mortgage loans comprised 70.6% of
the Bank's loan portfolio, before net items.  Home equity loans represented
13.4% of the loan portfolio, before net items, and loans secured by construction
and development property, multi-family residential property, nonresidential
property, secured commercial loans, and personal loans comprised the remaining
16.0%. As of September 30, 2000, 52.0% of the loans in the Bank's loan portfolio
had adjustable interest rates.  The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the date indicated.

                                       4
<PAGE>

<TABLE>
<CAPTION>

                                                                               At September 30,
                                         -----------------------------------------------------------------------------------------
                                                       2000                         1999                          1998
                                         --------------------------------  -------------------------- ----------------------------
                                              Amount         % of Total      Amount      % of Total      Amount       % of Total
                                         ---------------   --------------  ----------- -------------- -------------  -------------
                                              (Dollars in Thousands)
<S>     <C>
Type of loan:
  Real estate loans:
    1-4 family                              $ 136,288           72.91%    $ 134,823         80.31%     $ 136,279           85.58%
    Home equity                                25,948           13.88%       20,705         12.33%        17,171           10.78%
    Construction and development               16,620            8.89%       13,211          7.87%         4,118            2.59%
    Nonresidential                              6,403            3.43%        2,387          1.42%         1,618            1.02%
    Multi-family                                6,125            3.28%        3,652          2.18%         1,312            0.82%
                                       ---------------   --------------  ----------- -------------- -------------  ---------------

       Total real estate loans                191,384          102.39%      174,778        104.11%       160,498          100.79%
                                       ---------------   --------------  ----------- -------------- -------------  ---------------

  Other loans:
    Commercial                                  1,020            0.55%           23          0.01%         1,422            0.89%
    Consumer                                      613            0.33%          216          0.13%           245            0.15%
                                       ---------------   --------------  ----------- -------------- -------------  ---------------

       Total other loans                        1,633            0.88%          239          0.14%         1,667            1.04%
                                       ---------------   --------------  ----------- -------------- -------------  ---------------

          Total gross loans                   193,017          103.27%      175,017        104.25%       162,165          101.83%
                                         ---------------   --------------  ----------- -------------- -------------  ---------------

  Less:
    Construction loans in process               4,741            2.55%        5,714          3.40%         1,540            0.96%
    Deferred loan origination fees                137            0.07%          205          0.12%            93            0.06%
    Unearned income                                 -                -            -              -            60            0.04%
    Allowance for loan losses                   1,224            0.65%        1,224          0.73%         1,224            0.77%
                                       ---------------   --------------  ----------- -------------- -------------  ---------------

       Total reductions                         6,102            3.27%        7,143          4.25%         2,917            1.83%
                                       ---------------   --------------  ----------- -------------- -------------  ---------------


           Total loans receivable, net      $ 186,915          100.00%    $ 167,874        100.00%     $ 159,248          100.00%
                                       ===============   ==============  =========== ============== =============  ===============
</TABLE>

     The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at September 30, 2000.  Loans which have adjustable rates
are shown as being due in the period during which rates are next subject to
change, while fixed rate and other loans are shown as due in the period of
contractual maturity.  Overdrafts on checking accounts are reported as due in
one year or less.  The table does not include prepayments or scheduled principal
repayments.  Amounts in the table are net of loans in process and are net of
unamortized loan fees.

                                       5
<PAGE>

<TABLE>
<CAPTION>

                                                                            At September 30, 2000
                                                         -----------------------------------------------------------
                                                                             More than 1
                                                             1 Year or        Year to 5     More than
                                                                Less            Years        5 Years         Total
                                                         --------------     -------------   ----------     ---------
                                                                               (In Thousands)
<S>     <C>
Real estate loans:
    1-4 family - fixed                                       $     73        $    834        $ 71,304      $ 72,211
    1-4 family - adjustable                                    25,840          37,531             214        63,585
    Home Equity - fixed                                             9             366           2,376         2,751
    Home Equity - adjustable                                   23,591               -               -        23,591
    Construction and Development - fixed                        1,694             522           2,935         5,151
    Construction and Development - adjustable                   3,561           3,193             (69)        6,685
    Nonresidential - fixed                                          -           1,754           2,669         4,423
    Nonresidential - adjustable                                 1,525             378              79         1,982
    Residential multi-family - fixed                                -               -           4,481         4,481
    Residential multi-family - adjustable                          97           1,166             383         1,646

Commercial - fixed                                                955               -              18           973
Commercial - adjustable                                            47               -               -            47
Consumer loans - fixed                                            125               6             234           365
Consumer loans - adjustable                                         -             248               -           248

Less:
    Allowance for loan losses                                  (1,224)              -               -        (1,224)
                                                         ------------- ---------------   ---------------------------

              Totals                                         $ 56,293        $ 45,998        $ 84,624     $ 186,915
                                                         ============= ===============   ===========================
</TABLE>


          The following table sets forth the dollar amount at September 30, 2000
of all loans maturing or repricing on or after September 30, 2001, which have
fixed or adjustable interest rates.


                          Fixed Rates  Adjustable Rates
                         ------------  ----------------
                                (In Thousands)


Real estate loans         $   87,241      $      42,875
Commercial loans                  18                  -
Other loans                      240                248
                         ------------    --------------
          Totals          $   87,499      $      43,123
                         ============    ==============


          Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets.  The average life of a loan is substantially less
than its contractual terms because of prepayments.  In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid.  The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,

                                       6
<PAGE>

conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.  Furthermore, management
believes that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.

     Origination, Purchase, and Sale of Loans.  The Bank generally has
originated loans in Rowan and Iredell Counties.  Some loans have been originated
in Cabarrus and Mecklenburg Counties, which are contiguous with the Bank's
primary market area of Rowan and Iredell Counties.

     The Bank originates fixed rate conventional, conforming single-family
loans with the intent of selling those loans in the secondary market to reduce
interest rate risk exposure.

     The following table sets forth the Bank's loan origination, purchase and
sale activity and loan portfolio repayment experience during the periods
indicated.

<TABLE>
<CAPTION>
                                                                   Year Ended September 30,
                                                    --------------------------------------------------------
                                                          2000               1999                1998
                                                    -----------------  -----------------   -----------------
                                                                        (In Thousands)
<S>     <C>
Loans receivable, net, beginning of period                 $ 167,874          $ 159,248           $ 159,458
                                                    -----------------  -----------------   -----------------

Loan originations(1):
    1-4 family                                                19,506             35,706              39,040
    Home equity                                               16,056             13,846               8,416
    Construction and development                              12,928             11,000               5,259
    Nonresidential                                             4,601              1,608                   -
    Multi-family                                               2,485              5,322                   -
    Commercial                                                   955                  -                   -
    Consumer                                                     876                182                 193
                                                    -----------------  -----------------   -----------------

        Total loan originations                               57,407             67,664              52,908
                                                    -----------------  -----------------   -----------------

Loans purchased (1)                                                -              7,748                   -

Loan sales                                                    (2,410)            (8,190)             (5,594)

Principal repayments                                         (36,024)           (58,544)            (47,531)

Other changes, net (2)                                            68                (52)                  7
                                                    -----------------  -----------------   -----------------

Loans receivable, net, end of period                       $ 186,915          $ 167,874           $ 159,248
                                                    =================  =================   =================
</TABLE>

(1)  Loan originations and purchased loans are shown at commited amount.
(2)  Includes changes in deferred loan fees and the allowance for loan losses.

     One-to-Four Family Residential Real Estate Lending.  The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of fixed and adjustable rate first mortgage loans to enable borrowers to
purchase or refinance one-to-four family residential real property.  Consistent

                                       7
<PAGE>

with the Bank's emphasis on being a community-oriented financial institution, it
is and has been the Bank's strategy to focus its lending efforts in its primary
market.  On September 30, 2000, 70.6% of the Bank's real estate loan portfolio,
before net items, consisted of one-to-four family residential real estate loans.
These include both loans secured by detached single-family residences and
condominiums and loans secured by housing containing not more than four separate
dwelling units.  Of such loan amounts, 46.8% had adjustable interest rates.

     The Bank originates conventional mortgage loans secured by owner-
occupied property having terms of up to 30 years in amounts of up to 95% of the
value of the property. Bank policy requires private mortgage insurance on the
amount of the loan which exceeds 80% of the value of the property.  The loans
have both fixed and adjustable rates.  The fixed rate loans are generally
originated for sale.  Some of such loans are sold "servicing retained" and
others are sold "servicing released."  The interest rates on adjustable rate
loans are generally adjustable every year after a period of one, three, or five
years and are tied to the average weekly yield on United States Treasury
securities adjusted to a constant maturity or the 11th District Cost of Funds.
The loans have rate caps which limit the amount of change at the time of each
adjustment and over the life of each loan.

     The Bank generally requires title insurance for its one-to-four family
residential loans and requires that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the loan amount or replacement cost of the improvements on the
property securing the loans, whichever is greater.

     Home Equity Lending.  At September 30, 2000, the Bank had
approximately $23.2 million in home equity line of credit loans, representing
approximately 12.0% of its portfolio, before net items.  In addition, at such
date, the Bank had unfunded home equity lines of credit totaling $19.2 million.
The Bank's home equity lines of credit have adjustable interest rates tied to
the Wall Street Journal Prime plus a margin.  The home equity lines of credit
require the payment of interest monthly, and all outstanding amounts must be
paid in full at the end of 15 years.  Home equity lines of credit are generally
secured by subordinate liens against residential real property.  The Bank
requires that fire and extended coverage casualty insurance (and, if
appropriate, flood insurance) be maintained in an amount at least sufficient to
cover its loan.  Home equity lines are generally limited so that the amount of
such loans, along with any senior indebtedness, does not exceed 90% of the value
of the real estate security to borrowers with excellent credit history.  Under
certain circumstances, the Bank will provide lines of credit up to 100% of the
value of the real estate security to borrowers with excellent credit history.

     The Bank had approximately $2.7 million in closed-end home equity
loans on September 30, 2000.  These loans have maximum terms of 15 years and are
usually made for home improvements.  These loans represent 1.4% of the Bank's
loan portfolio, before net items.

     Construction Lending.  The Bank makes construction loans for the
construction of single-family dwellings.  The aggregate outstanding balance of
such loans on September 30, 2000 was approximately $7.3 million, representing
approximately 3.8% of the Bank's loan portfolio, before net items.  Some of
these loans were made to persons who are constructing properties for the purpose
of occupying them; others were made to builders who were constructing properties
for sale.  Loans made to builders are generally "pure construction" loans which
require the payment of interest during the construction period of generally one
year or less and the payment of the principal in full at the end of the
construction period.  Loans made to individual property owners are both pure
construction loans and "construction-permanent" loans which generally provide
for the payment of interest only during a construction period, after which the
loans convert to a permanent loan at fixed or adjustable interest rates having
terms similar to one-to-four family residential loans.

     Construction loans for one-to-four family real estate to be occupied by the
borrower generally have a maximum loan-to-value ratio of 80% of the appraised
value of the property.  Title insurance is generally required for construction
loans.  In addition, the Bank generally requires builders risk or casualty
insurance (and, if appropriate, flood insurance) on such loans.

     The Bank also makes or purchases loans for the development of land in
preparation for the construction of single-family properties.  The aggregate
outstanding balance of such loans on September 30, 2000 was $3.0 million,
representing 1.6% of the Bank's loan portfolio, before net items.  The maximum
loan-to-value for this type of loan is 65%.  Full Board approval is required for
all loans exceeding 65% loan-to-value.


                                      8
<PAGE>

     The Bank also has originated loans for the construction of
nonresidential property. The aggregate outstanding balance of such loans on
September 30, 2000 was $5.3 million, representing 2.7% of the Bank's loan
portfolio, before net items.

     Nonresidential Lending.  On September 30, 2000, the Bank had $6.4
million outstanding in loans secured by nonresidential properties, comprising
approximately 3.3% of its loan portfolio, before net items.  These loans are
secured by office, retail, and other commercial real estate and by church
properties in the Bank's primary market area and have either fixed or adjustable
interest rates.  These loans generally do not exceed 75% of the appraised value
of the real estate securing the loans.  These loans have terms of up to 15
years.  The adjustable rate loans generally use the index and rate change
limitations as are used in one-to-four family residential lending.  See "One-to-
Four Family Residential Lending."

     The Bank generally requires title insurance in connection with its
nonresidential real estate loans.  The Bank also requires that fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be maintained
in an amount at least equal to the loan amount or the replacement cost of the
improvements on the property securing the loans, whichever is greater.

     The Board of Directors is currently evaluating the opportunities
available in the market area for nonresidential lending.  The Board may increase
efforts in this area to diversify the loan portfolio.  Because of competition
from other financial institutions and economic conditions in the Bank's market
area, there can be no assurance that the Board's efforts to diversify will be
successful.

     Multi-family Residential Lending.  On September 30, 2000, the Bank had
$6.1 million outstanding in loans secured by multi-family residential
properties, comprising approximately 3.2% of its loan portfolio, before net
items.  These loans are secured by apartments and have fixed and adjustable
interest rates.  These loans generally do not exceed 75% of the appraised value
of the real estate securing the loans.  Multi-family residential loans have
terms of up to 15 years.  The loans generally use the same index and rate change
limitations as are used in one-to-four family residential lending.  See "One-to-
Four Family Residential Real Estate Lending."

     The Bank generally requires title insurance in connection with its
multi-family residential real estate loans.  The Bank also requires that fire
and extended coverage casualty insurance (and, if appropriate, flood insurance)
be maintained in an amount at least equal to the loan amount or the replacement
cost of the improvements on the property securing the loans, whichever is
greater.

     The Board of Directors is currently evaluating the opportunities
available in the market area for multi-family residential lending.  The Board
may increase efforts in this area to diversify the loan portfolio.  Because of
competition from other financial institutions and economic conditions in the
Bank's market area, there can be no assurance that the Board's efforts to
diversify will be successful.

     Commercial Lending.  Although infrequent, the Bank has made commercial
loans.  Those loans generally require publicly-traded common stock as security
and are limited to a margin of 60%. At September 30, 2000, the Bank had $1.0
million outstanding in commercial loans, comprising approximately 0.5% of its
loan portfolio, before net items.  The Board of Directors is currently
evaluating the opportunities available in the market area for commercial
lending.  The Board may increase efforts in this area to diversify the loan
portfolio. Because of competition from other financial institutions and economic
conditions in the Bank's market area, there can be no assurance that the Board's
efforts to diversify will be successful.

     Consumer Lending.  At September 30, 2000, the Bank's consumer loan
portfolio amounted to $613,000, or 0.3% of gross loans outstanding, before net
items.  The Board of Directors is currently evaluating the opportunities
available in the market area for consumer lending.  The Board may increase
efforts in this area to diversify the loan portfolio.  Because of competition
from other financial institutions and economic conditions in the Bank's market
area, there can be no assurance that the Board's efforts to diversify will be
successful.

     Loan Solicitation, Processing and Underwriting.  Loan originations are
derived from a number of sources such as referrals from real estate brokers, the
Bank's depositors and borrowers, builders, attorneys, walk-in customers and, in
some instances, other lenders.

                                       9
<PAGE>

     During its loan approval process, the Bank assesses the applicant's
ability to make principal and interest payments on the loan and the value of the
property securing the loan.  The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations.  The Bank also obtains information concerning the income,
financial condition, employment and the credit history of the applicant.  Under
current practice, the responsible officer or loan officer of the Bank analyzes
the loan application and the property involved, and an appraiser inspects and
appraises the property.  The Bank generally requires an independent fee
appraisal on loans secured by a first mortgage on real estate.  In some
instances, tax value is used for second lien position loans.

     All real estate loans, except certain home equity loans, must be
approved by a Bank underwriter.  All loans and lending relationships in excess
of $250,000 must receive full Board approval.  All loan originations for the
month are reported monthly to the Board of Directors.

     Normally, upon approval of a residential mortgage loan application,
the Bank gives a commitment to the applicant that it will make the approved loan
at a stipulated rate any time within 45 days of the commitment date.  The loan
is typically funded at such rate of interest and on other terms which are based
on market conditions existing as of the date of the commitment.   No points are
charged unless the loan is actually closed.  Approximately 15 percent of
commitments that are issued expire without the loan being closed.

     Interest Rates, Terms, Points and Fees.  Interest rates and fees
charged on the Bank's loans are affected primarily by the market demand for
loans, competition, the supply of money available for lending purposes and the
Bank's cost of funds.  These factors are affected by, among other things,
general economic conditions and the policy of the federal government, including
the Federal Reserve, tax policies and governmental budgetary matters.  In
addition to earning interest on loans, the Bank receives fees in connection with
originating loans.  The Bank also charges fees for loan modifications, late
payments, loan assumptions and other miscellaneous services in connection with
loans.

     Nonperforming Assets and Asset Classification.  When a borrower fails
to make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent.  In this event, the normal procedure
followed by the Bank is to make contact with the borrower at prescribed
intervals in an effort to bring the loan to a current status, and late charges
are assessed as allowed by law.  Interest on loans is recorded as borrowers'
monthly payments become due.  Accrual of interest on loans is suspended when
interest becomes 90 days past due or earlier and when, in management's judgment,
doubts exist as to the collectibility of additional interest.  Interest is
reserved by establishing an allowance for uncollected interest when a loan
becomes delinquent 90 days or more or earlier.  Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought
current or future payments are reasonably assured.  In most cases, delinquencies
based on management's judgment regarding collectibility are cured promptly.  If
a delinquency is not cured, the Bank normally, subject to any required prior
notice to the borrower, commences foreclosure proceedings.  If the loan is not
reinstated within the time permitted for reinstatement, or the property is not
redeemed prior to sale, the property may be sold at a foreclosure sale.  In
foreclosure sales, the Bank may acquire title to the property through
foreclosure, in which case the property so acquired is offered for sale and may
be financed by the Bank at prevailing market terms.  Any property acquired as a
result of foreclosure, or by deed in lieu of foreclosure, is classified as real
estate owned until such time as it is sold or otherwise disposed of by the Bank
to recover its investment.  As of September 30, 2000, the Bank had $170,682 in
real estate acquired in settlement of loans.  Real estate acquired through, or
in lieu of, loan foreclosure is initially recorded at the lower of cost or fair
value at the date of foreclosure, establishing a new cost basis.  After
foreclosure, valuations are periodically performed by an independent appraiser,
and the real estate is carried at the lower of cost or fair value minus costs to
sell.  Costs relating to the development and improvement of the property are
capitalized, and costs relating to holding the property are charged to expenses.

                                       10
<PAGE>

     The following table sets forth information with respect to
nonperforming assets by the Bank, including nonaccrual loans and foreclosed real
estate at the dates indicated.

<TABLE>
<CAPTION>
                                                                At September 30,
                                                -------------------------------------------------
                                                    2000             1999             1998
                                                --------------  ---------------  ----------------
                                                             (Dollars in Thousands)
<S>     <C>
 Nonaccrual loans                                   $   2,089        $     492         $     200

 Accruing loans past due 90 days or more                    -                -                 -

 Foreclosed real estate                                   171              107                 -

                                                --------------  ---------------  ----------------
Total nonperforming assets                          $   2,260        $     599         $     200
                                                ==============  ===============  ================

                                                --------------  ---------------  ----------------
Nonperforming loans to total gross loans                1.08%            0.28%             0.12%
                                                ==============  ===============  ================

                                                --------------  ---------------  ----------------
Nonperforming assets to total assets                    1.09%            0.30%             0.11%
                                                ==============  ===============  ================

 Total assets                                       $ 208,048        $ 198,001         $ 190,058

 Total gross loans                                  $ 193,017        $ 175,017         $ 162,165
</TABLE>

     During the years ended September 30, 2000 and 1999, gross interest
income of  $169,616 and $45,958, respectively, would have been recorded on these
loans accounted for on a nonaccrual basis if the loans had been current
throughout the year.  The amount of gross interest income actually recorded on
such nonperforming assets during the periods was $118,190 and $16,911,
respectively.

     Applicable regulations require the Bank to "classify" its own assets
on a regular basis.  In addition, in connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
and, if appropriate, classify them.  Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.  The Bank also identifies assets which
possess credit deficiencies or potential weaknesses deserving close attention by
management.  These assets are listed as "special mention" and do not warrant
adverse classification.  At September 30, 2000, the Bank had four loans with an
aggregate outstanding balance of $1,760,380 classified as "special mention."

     An asset is considered "substandard" if not adequately protected by
the current net worth and paying capacity of the obligor or the collateral
pledged, if any.  "Substandard" assets include those characterized by a well-
defined weakness with possible risk of loss if the deficiency is not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard" with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable."  Assets
classified "loss" are those considered "uncollectible" and of such little value
that their continuance as assets without the establishment of a loss reserve is
not warranted.

    As of September 30, 2000, the Bank had $499,479 loans internally
classified as "substandard," no loans classified as "doubtful" and no loans
classified as "loss."  Total classified loans as of September 30, 1999 and 1998
were approximately $613,085 and $376,000, respectively.

                                       11
<PAGE>

     The following table sets forth at September 30, 2000, the Bank's aggregate
carrying value of the assets classified as "substandard," "doubtful," "loss," or
criticized as "special mention."

<TABLE>
<CAPTION>
                                      Special Mention List         Substandard                Doubtful                 Loss
                                    ------------------------  ---------------------  -----------------------  ----------------------
                                       Number      Amount      Number       Amount       Number      Amount       Number     Amount
                                    ----------   --------     --------  -----------  -----------  ----------  -----------  ---------
                                                                    (Dollars in Thousands)
<S>     <C>
Real estate loans:
   1-4 family                              2     $   155          7        $ 494            -         $ -            -         $ -
   Home equity                             1          17          1            6            -           -            -           -
   Construction and development            -           -          -            -            -           -            -           -
   Nonresidential                          1       1,588          -            -            -           -            -           -
   Multi-family                            -           -          -            -            -           -            -           -
                                    ---------    -------      -------    ---------    ---------   ---------   ----------   ---------

        Total real estate loans            4       1,760          8          500            -           -            -           -
                                    ---------    -------      -------    ---------    ---------   ---------   ----------   ---------

Other loans:
   Commercial                              -           -          -            -            -           -            -           -
   Consumer                                -           -          -            -            -           -            -           -
                                    ---------    -------      -------    ---------    ---------   ---------   ----------   ---------

        Total other loans                  -           -          -            -            -           -            -           -
                                    ---------    -------      -------    ---------    ---------   ---------   ----------   ---------

   Total                                   4     $ 1,760          8        $ 500            -         $ -            -         $ -
                                    =========    =======      =======    =========    =========   =========   ==========   =========
</TABLE>


     Allowance for Loan Losses.  In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan as well as general economic conditions.  It
is management's policy to maintain an allowance for loan losses based on, among
other things, the Bank's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the security for the loans.

  Management continues to actively monitor the Bank's asset quality, to charge
off loans against the allowance for loan losses when appropriate and to provide
specific loss reserves when necessary.  Although management believes it uses the
best information available to make determinations with respect to the allowance
for loan losses, future adjustments may be necessary if economic conditions
differ substantially from the economic conditions in the assumptions used in
making the initial determinations.

                                       12
<PAGE>

     The following table describes the activity related to the Bank's allowance
for loan losses for the periods indicated.

                                           Year Ended September 30,
                                 ----------------------------------------------
                                     2000             1999            1998
                                 -------------     ------------    ------------
                                                  (In Thousands)

Balance, beginning of period          $ 1,224          $ 1,224         $ 1,223

Charge-offs                                 -                -               -

Provision                                   -                -               -

Recoveries                                  -                -               1
                                 -------------     ------------    ------------

Balance, end of period                $ 1,224          $ 1,224         $ 1,224
                                 =============     ============    ============



     The following table sets forth the composition of the allowance for loan
losses by type of loan at the dates indicated.  The allowance is allocated to
specific categories of loans for statistical purposes only, and may be applied
to loan losses incurred in any loan category.

                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                                                           At September 30,
                                      -------------------------------------------------------------------------------------
                                                       2000                                       1999
                                      ----------------------------------------   ----------------------------------------
                                                      Percent of     Amount of                   Percent of
                                                     Allowance to     Loans to                  Allowance to   Amount of
                                        Amount of        Total         Gross       Amount of      Total        Loans to
                                        Allowance      Allowance       Loans       Allowance     Allowance    Gross Loans
                                      ------------   ------------   ----------   ------------  -------------  -----------
                                                                                               (Dollars in Thousands)
<S>     <C>
Type of loan:
    Real estate loans:
      1-4 family                          $    84          6.86%       70.61%        $   135         11.03%       77.04%
      Home equity                             440         35.95%       13.44%            621         50.74%       11.83%
      Construction and development            422         34.48%        8.61%            312         25.49%        7.55%
      Nonresidential                          197         16.09%        3.32%             24          1.96%        1.36%
      Multi-family                             22          1.80%        3.17%             15          1.23%        2.09%

                                      ------------   ------------   ----------   ------------  -------------  -----------
           Total real estate loans          1,165         95.18%       99.15%          1,107         90.45%       99.87%
                                      ------------   ------------   ----------   ------------  -------------  -----------

    Other loans:
      Commercial                               12          0.98%        0.53%              1          0.08%        0.01%
      Consumer                                 11          0.90%        0.32%              1          0.08%        0.12%
                                      ------------   ------------   ----------   ------------  -------------  -----------

           Total other loans                   23          1.88%        0.85%              2          0.16%        0.13%
                                      ------------   ------------   ----------   ------------  -------------  -----------

      Unallocated                              36          2.94%            -            115          9.39%            -
                                      ------------   ------------   ----------   ------------  -------------  -----------

      Total allowance for loan losses     $ 1,224        100.00%      100.00%        $ 1,224        100.00%      100.00%
                                      ============   ============   ==========   ============  =============  ===========
</TABLE>


<TABLE>
<CAPTION>

                                             -------------------------------------
                                                             1998
                                             -------------------------------------
                                                            Percent of   Amount of
                                                           Allowance to   Loans to
                                               Amount of       Total        Gross
                                               Allowance     Allowance      Loans
                                             -------------  -----------  ----------

<S>     <C>
Type of loan:
    Real estate loans:
      1-4 family                                    $ 135       11.03%      84.03%
      Home equity                                     514       41.99%      10.59%
      Construction and development                    103        8.42%       2.54%
      Nonresidential                                   47        3.84%       1.00%
      Multi-family                                     40        3.27%       0.81%
                                             -------------  -----------  ----------
           Total real estate loans                    839       68.55%      98.97%
                                             -------------  -----------  ----------

    Other loans:
      Commercial                                       43        3.51%       0.88%
      Consumer                                          1        0.08%       0.15%
                                             -------------  -----------  ----------

           Total other loans                           44        3.59%       1.03%
                                             -------------  -----------  ----------

      Unallocated                                     341       27.86%           -
                                             -------------  -----------  ----------

      Total allowance for loan losses             $ 1,224      100.00%     100.00%
                                             =============  ===========  ==========
</TABLE>


                                       14
<PAGE>

Investment Securities

     Interest and dividend income from investment securities generally provides
the second largest source of income to the Company and the Bank, on a
consolidated basis (the "Consolidated Entity") after interest on loans.  In
addition, the Consolidated Entity receives interest income from deposits in
other financial institutions.  At September 30, 2000 the Consolidated Entity's
investment portfolio totaled $13.2 million and consisted of U.S. government and
agency securities, interest-earning deposits in other financial institutions and
stock of the FHLB of Atlanta.

     Investments are classified in three categories and accounted for as
follows: (1) debt securities that the entity has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at amortized
cost; (2) debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with net unrealized gains and losses
included in earnings; and (3) debt and equity securities not classified as
either held-to-maturity or trading securities are classified as securities
available-for-sale and reported at fair value, with unrealized gains and losses,
net of taxes, reported as a separate component of equity.  Net unrealized
securities gains on the securities available-for-sale of $37,603, net of related
deferred tax assets of $23,660, are reported as a separate component of equity
in the Consolidated Entity's financial statements at September 30, 2000.  The
Bank established a trading account to satisfy the investment requirements of a
rabbi trust related to a deferred compensation plan.  These amounts are
classified as other assets in the statement of condition.

     The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity.  Such amortization or accretion is accounted for as an
adjustment to interest income from investments.  Interest and dividends are
included in interest income from investments.  Realized gains and losses, and
declines in value judged to be other than temporary are included in net
securities gains (losses).  The cost of securities sold is based on the specific
identification method.

     As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding residential mortgage loans and similar obligations or 5% of
its outstanding advances from the FHLB of Atlanta.  No ready market exists for
such stock; accordingly, the stock is carried at cost.  As of September 30,
2000, the Bank was in compliance with this requirement with an investment in
stock of the FHLB of Atlanta of $1.6 million.

     OTS regulations require the Bank to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus short-
term borrowings.  The Bank's average liquidity ratio for the quarter ended
September 30, 2000 was 7.12% which exceeded the applicable requirements.

     The Bank's current investment policy provides that investment decisions
will be made jointly by Ronald E. Bostian, President and Chief Executive
Officer, and Dianne Hawkins, Vice President, Controller and Treasurer, and
reviewed monthly by the Board of Directors.  The investment policy provides that
the objectives of the investment portfolio are to:  (i) establish an acceptable
level of interest rate and credit risk for all investments; (ii) generate an
acceptable rate of return on investments; (iii) provide for adequate levels of
liquidity for the Bank; and (iv) provide guidance from the Board of Directors to
management on the investments desired for the Bank.

     Permitted investments include FHLB daily time deposits, FHLB term deposits,
insured certificates of deposit, government securities and government agency
securities.

                                       15
<PAGE>

     The following table sets forth certain information regarding the
Consolidated Entity's investment portfolio at the dates indicated.

                                                At September 30,
                                      ----------------------------------
                                          2000        1999         1998
                                      -----------   ----------  --------
                                                  (In Thousands)

Securities available-for-sale:
     U.S. government and agencies        $ 3,099    $ 16,024    $ 7,228


Securities held-to-maturity:
    U.S. government and agencies             630         715      1,565

Other:
    Interest-earning deposits              7,809       4,268     11,637
    Term Federal Funds                         -           -      2,000
    Federal Home Loan Bank stock           1,628       1,607      1,825
                                      ----------- ----------- ----------

                Total                   $ 13,166    $ 22,614   $ 24,255
                                      =========== =========== ==========



     The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Consolidated
Entity's investment portfolio as of September 30, 2000.  Mortgage-backed
securities are not due at a single maturity date; therefore, the table does not
consider prepayment of the underlying loans.

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                            After One Year Through   After Five Years Through
                                       One Year or Less           Five Years                Ten Years             After Ten Years
                                   -----------------------  -----------------------  ------------------------  ---------------------
                                                 Weighted                 Weighted                 Weighted                Weighted
                                    Carrying      Average     Carrying     Average      Carrying    Average    Carrying     Average
                                      Value        Yield        Value       Yield         Value      Yield       Value       Yield
                                   -----------  ----------  -----------  ----------   ----------   ---------  ---------    ---------
                                                                                    (Dollars in Thousands)
<S>     <C>
Securities available-for-sale:
    U.S. government and agencies      $     -          -        $  46        6.34%         $ 78       9.00%     $ 2,975       8.07%


Securities held-to-maturity:
    U.S. government and agencies            -           -         239        6.96%            -           -         391       7.38%

Other:
    Interest-earning deposits           7,809       6.64%           -            -            -           -           -           -
    Term Federal Funds                      -           -           -            -            -           -           -           -
    Federal Home Loan Bank stock            -           -           -            -            -           -       1,628       7.75%
                                   -----------  ----------  ----------   ----------   ---------- -----------  ----------  ----------

                Total                 $ 7,809       6.64%       $ 285        6.86%         $ 78       9.00%     $ 4,994       7.91%
                                   ===========  ==========  ==========   ==========   ========== ===========  ==========  ==========
</TABLE>


<TABLE>
<CAPTION>

                                                      Total
                                            ------------------------
                                                           Weighted
                                              Carrying      Average
                                                Value        Yield
                                            -----------    ---------

<S>     <C>
Securities available-for-sale:
    U.S. government and agencies               $ 3,099        8.07%


Securities held-to-maturity:
    U.S. government and agencies                   630        7.22%

Other:
    Interest-earning deposits                    7,809        6.64%
    Term Federal Funds                               -            -
    Federal Home Loan Bank stock                 1,628        7.75%
                                            -----------  -----------

                Total                          $13,166        7.14%
                                            ===========  ===========
</TABLE>

                                       17
<PAGE>

Deposits and Borrowings

     General.  Deposits are one of the primary sources of the Bank's funds for
lending and other investment purposes.  In addition to deposits, the Bank
derives funds from loan principal payments and prepayments, interest payments,
investment income and principal payments and prepayments, interest from its own
interest-earning deposits, interest income and advances from the FHLB of Atlanta
and otherwise from its operations.  Loan repayments are a relatively stable
source of funds while deposit inflows and outflows may be significantly
influenced by general interest rates and money market conditions.  Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources.  They may also be used on a longer
term basis for general business purposes.

     Deposits. The Bank attracts both short-term and long-term deposits from the
general public by offering a variety of accounts and rates.  The Bank offers
passbook savings accounts, negotiable order of withdrawal accounts, money market
demand accounts, non-interest-bearing accounts, and fixed interest rate
certificates with varying maturities.  At September 30, 2000, 77.2% of the
Bank's deposits consisted of certificate accounts, 16.6% consisted of savings
accounts, 5.6% consisted of interest-bearing transaction accounts and 0.6%
consisted of noninterest-bearing transaction accounts.  Deposit flows are
greatly influenced by economic conditions, the general level of interest rates,
competition, and other factors.  The Bank utilizes traditional marketing methods
to attract new customers and savings deposits, including print, television
advertising and direct mailings.  The Bank plans to emphasize savings and
checking accounts as a source of lower cost funds.  The Bank recently began
issuing ATM cards to its customers as a way of increasing the number and
balances of such accounts.

     The following table sets forth information relating to the Bank's deposit
flows and total deposits as follows:



                                                    At or for the Year
                                                   Ended September 30,
                                           -----------------------------------
                                              2000         1999        1998
                                           ----------  -------------- --------

                                                      (In Thousands)

Total deposits at beginning of year        $ 160,810     $ 161,549   $160,493

Net decrease before interest credited           (663)       (6,520)    (4,998)

Interest credited                              6,260         5,781      6,054
                                           ----------  ------------ ----------

Total deposits at end of year              $ 166,407     $ 160,810   $161,549
                                           ==========  ============ ==========


                                       18
<PAGE>

  The following table sets forth certain other information regarding the Bank's
savings deposits at the dates indicated.


<TABLE>
<CAPTION>
                                                                                At September 30,
                                   ---------------------------------------------------------------------------
                                                   2000                                  1999
                                   ---------------------------------------------------------------------------
                                                 Weighted                             Weighted
                                                 Average        % of                   Average       % of
                                     Amount       Rate       Deposits      Amount        Rate      Deposits
                                   ----------- -----------  ----------  -----------  -----------  ----------
                                                                              (Dollars in Thousands)
<S>     <C>
Deposit accounts:
   Savings accounts                  $ 27,589       4.56%      16.58%     $ 36,126        4.16%      22.47%
   NOW accounts                         5,914       0.94%       3.55%        6,572        0.96%       4.09%
   Money market deposit accounts        3,480       5.20%       2.09%        2,014        2.34%       1.25%
   Non-interest bearing accounts          989           -       0.59%        1,086            -       0.68%
                                   ----------- -----------  ----------  -----------  -----------  ----------

     Total demand deposits             37,972       3.94%      22.81%       45,798        3.52%      28.49%
                                   ----------- -----------  ----------  -----------  -----------  ----------

Certificates of deposit               128,435       6.26%      77.19%      115,012        5.22%      71.51%
                                   ----------- -----------  ----------  -----------  -----------  ----------


     Total deposits                  $166,407       5.73%     100.00%     $160,810        4.74%     100.00%
                                   =========== ===========  ==========  ===========  ===========  ==========
</TABLE>


<TABLE>
<CAPTION>

                                         ------------------------------------
                                                         1998
                                         ------------------------------------
                                                        Weighted
                                                         Average      % of
                                             Amount        Rate     Deposits
                                          -----------  ----------  ----------

<S>     <C>
Deposit accounts:
   Savings accounts                         $ 40,131       4.53%      24.84%
   NOW accounts                                5,893       1.43%       3.65%
   Money market deposit accounts               2,454       2.50%       1.52%
   Non-interest bearing accounts               1,331           -       0.82%
                                          -----------  ----------  ----------

     Total demand deposits                    49,809       3.94%      30.83%
                                          -----------  ----------  ----------

Certificates of deposit                      111,740       5.52%      69.17%
                                          -----------  ----------  ----------


     Total deposits                         $161,549       5.03%     100.00%
                                          ===========  ==========  ==========
</TABLE>


                                       19
<PAGE>

     The following table presents the maturities by rates paid on all
certificates of deposit as of September 30, 2000.

<TABLE>
<CAPTION>
                                                 Amount Due During The Year Ending September 30,
                       ----------------------------------------------------------------------------------------------
                                                                                            2005 and
                              2001            2002              2003              2004     thereafter         Total
                       -------------- ---------------  ----------------  --------------------------------------------
                                                           (Dollars in Thousands)
<S>     <C>
Certificates of deposit

   2.00% to 3.99%           $    957        $      -           $     -            $  -        $   -              957
   4.00% to 5.99%             36,920           3,124               821              44           36           40,945
   6.00% to 7.99%             73,381          11,495             1,342               -          122           86,340
   8.00% to 9.99%                193               -                 -               -            -              193
                       -------------- ---------------  ----------------  ---------------------------  ---------------

    Total                   $111,451        $ 14,619           $ 2,163            $ 44        $ 158        $ 128,435
                       ============== ===============  ================  ===========================  ===============
</TABLE>


     As of September 30, 2000, the aggregate amount of time certificates of
deposit in amounts greater than or equal to $100,000 outstanding was
approximately $26.05 million, representing 20.28% of all certificates of deposit
on such date.  Management believes that most of these deposits are held by long-
time, local customers of the Bank.  The Bank also holds deposits of state and
local governments which are subject to rebidding from time to time and to
securitization requirements.  The following table presents the maturity of these
time certificates of deposit greater than or equal to $100,000 at such date.


                                            At September 30, 2000
                                          -----------------------
                                              (In Thousands)

 3 Months or less                                        $ 6,615
 Over 3 months through 6 months                            7,138
 Over 6 months through 12 months                           8,328
 Over 12 months                                            3,968
                                          -----------------------
           Total                                        $ 26,049
                                          =======================


  Borrowings.  The Bank's principal source of long-term borrowings are advances
from the FHLB of Atlanta.  The FHLB system functions in a reserve credit
capacity for savings institutions.  As a member, the Bank is required to own
capital stock in the FHLB of Atlanta and is authorized to apply for advances
from the FHLB of Atlanta on the security of that stock and a floating lien on
certain of its real estate secured loans and other assets.  Each credit program
has its own interest rate and range of maturities.  Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness.   In addition to the FHLB borrowings the Company
had $3.6 million in borrowings due The Bankers Bank in Atlanta, Georgia.  This
borrowing was used to help fund the special cash distribution classified as a
return of capital of $4.00 for each share of the Company's issued and
outstanding common stock paid on June 30, 2000.  The note is due and payable on
June 15, 2001.  All of the Bank's stock was pledged as collateral on the loan.
This loan was repaid in October 2000.  The following tables summarize the
borrowings of the Company.

                                       20
<PAGE>

<TABLE>
<CAPTION>
                              At September 30, 2000
                   ------------------------------------------
                             (Dollars in Thousands)

                                                              Weighted average           Average YTD
                                                                 remaining           --------------------
 Type of Borrowing                 Balance         Rate          maturity             Balance        Rate
-------------------------------------------   ---------    ---------------------     --------------------
<S>          <C>
FHLB Advances                       $10,000        6.98%             3.25 months      $3,873         6.76%
Note from Bankers' Bank               3,600        9.00%             8.50 months         993         9.00%
                               ------------   ---------    ---------------------     --------------------
Total                               $13,600        7.51%             4.64 months      $4,866         7.22%
                               ============   =========    =====================     ====================
</TABLE>


<TABLE>
<CAPTION>
                              At September 30, 1999
                   ------------------------------------------
                             (Dollars in Thousands)


                                                               Weighted average           Average YTD
                                                                  remaining          ---------------------
Type of Borrowing                   Balance        Rate            maturity            Balance       Rate
---------------------------------------------   ---------    ---------------------   ---------------------
<S>     <C>
FHLB Advances                               -$          -%             N/A              $6,249        6.90%
</TABLE>


     The maximum outstanding month-end balance of FHLB advances during the
fiscal years ended September 30, 2000 and 1999 was $10.0 million and $ 10.0
million, respectively. The maximum outstanding month-end balance of the note
from Bankers' Bank during the fiscal year ended September 30, 2000 was $3.6
million.

Return on Equity and Assets

     The following table presents the return on equity and assets for the
Company.


                                           For the Year Ended September 30,
                                        ---------------------------------------
                                           2000          1999          1998
                                        ------------  -----------   -----------

Return on average assets                      0.66%        0.84%         0.69%
Return on average equity                      4.12%        5.34%         8.50%
Average equity to average assets             15.97%       15.73%         8.11%
Dividend payout ratio                        27.78%       18.07%           N/A



Competition

   The Bank has operated in the Salisbury community for more than 90 years.  It
faces strong competition both in attracting deposits and making real estate and
other loans.  Its most direct competition for deposits has historically come
from other savings institutions, credit unions, brokerage firms and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them.

   The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities.  While the Bank's market share of deposits has decreased in recent
years, its deposit base has grown principally due to economic growth in the
Bank's market area.  The ability of the Bank to attract and retain savings
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.

   The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies.  The
Bank competes for loans primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.

                                       21
<PAGE>

Employees

     As of September 30, 2000, the Bank had 38 full-time employees and 4
part-time employees.  Employees are not represented by any union or collective
bargaining group.  The Bank considers its employee relations to be good.

Taxation

Federal Income Taxation

     General.  The Company and the Bank are subject to the taxing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), for corporations and
will file separate federal income tax returns on a September 30 fiscal year
basis. The maximum corporate federal income tax rate is 35%.  The Company and
the Bank will report their income using the accrual method of accounting and
will be subject to federal income taxation on a basis consistent with the Bank's
prior years. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Company and the Bank.

     Tax Bad Debt Reserves.  For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Code were permitted certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve.  A reserve could be established for bad debts on qualifying real
property loans (generally loans secured by interests in real property improved
or to be improved) under (i) a method based on a percentage of the institution's
taxable income, as adjusted (the "percentage of taxable income method") or (ii)
a method based on actual loss experience (the "experience method").  The reserve
for nonqualifying loans was computed using the experience method.

     The addition to the bad debt reserve under the percentage of taxable income
method was limited to 8% of the institution's taxable income.  This method could
not raise the reserve for losses on qualifying real property loans to exceed 6%
of qualifying real property loans at the end of the year.  Moreover, the current
year addition to the reserve for losses on qualifying loans, when added to the
experience method deduction for nonqualifying loans, could not exceed the amount
by which 12% of total deposits and withdrawable accounts at the close of the tax
year exceeded the sum of surplus, undivided profits and reserves at the
beginning of the year.  The experience method amount was the amount necessary to
increase the balance of the reserve at the close of the year to the greater of
(i) the amount which bore the same ratio to loans outstanding at the close of
the year as the total net bad debts sustained during the current and five
preceding years bore to the sum of the loans outstanding at the close of such
six years or (ii) the balance in the reserve account at the close of the last
taxable year beginning before 1988 (assuming that the loans outstanding have not
declined since such date).

     In order to qualify for the percentage of taxable income method, an
institution had to have at least 60% of its assets as "qualifying assets," which
generally included, cash, obligations of the United States government or certain
agencies or instrumentalities thereof or of a state or political subdivision,
residential real estate-related loans, or loans secured by savings accounts and
property used in the conduct of its business.  In addition, it had to meet
certain other supervisory tests and operate principally for the purpose of
acquiring savings and investing in loans.

     Institutions which became ineligible to use the percentage of taxable
income method had to change to either the reserve method or the specific
charge-off method that applied to banks.  Large thrift institutions, those
generally exceeding $500 million in assets, had to convert to the specific
charge-off method.  In computing its bad debt reserve for federal income taxes,
the Bank used the reserve method in fiscal years 1997, 1998, 1999 and 2000.

     Bad debt reserve balances as of the close of the last taxable year
beginning before January 1, 1988 or amounts maintained in a supplemental reserve
built up prior to 1962 ("excess bad debt reserve") must be included in taxable
income upon certain distributions to shareholders.  Distributions in redemption
of stock or in partial or complete liquidation or distributions with respect to
its stock in excess of earnings and profits accumulated in years beginning after
December 31, 1951, are treated as a distribution from the excess bad debt
reserve. When such a distribution takes place, the thrift is required to reduce
its reserve by such distribution plus the income tax resulting from
simultaneously recognizing the distribution as an item of taxable income
increased by the amount of income tax imposed on the inclusion.  Dividends not
in excess of earnings and profits accumulated since December 31, 1951 will not
require inclusion of part or all of the bad debt reserve in taxable income.  The
Bank has accumulated earnings and profits since December 31, 1951 and has an
excess bad debt reserve.  Distributions in excess of current and accumulated
earnings and profits will increase taxable income.  Net retained earnings at
September 30, 2000 includes approximately $3.7 million for which no provision
for federal income tax has been made.

                                       22
<PAGE>

     Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repealed the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995.  The legislation requires bad debt reserve recapture for
post-1987 excess reserves over a six-year period.  At September 30, 1996, the
Bank's post-1987 excess reserves amounted to approximately $567,000.  A special
provision suspended recapture of post-1987 excess reserves for up to two years,
the two tax years beginning after December 31, 1995, if, during one or both of
those years, the institution satisfied a "residential loan requirement."  This
requirement was met if the principal amount of the institution's residential
loans originated during the year exceeded a base year amount, which was
determined by reference to the average of the institution's residential loans
originated during the six most recent taxable years beginning on or before
December 31, 1995.  The Bank did not meet the residential loan requirement for
its 1996 or 1997 tax year and recaptured one-sixth of the excess reserves in
each of those years.  However, notwithstanding this special provision, recapture
was required to begin no later than the first taxable year beginning after
December 31, 1997. At September 30, 2000, the Bank's post-1987 excess reserves
amounted to approximately $189,000.

     Corporate Alternative Minimum Tax.  The Company and the Bank may also be
subject to the corporate alternative minimum tax ("AMT").  This tax is
applicable only to the extent it exceeds the regular corporate income tax.  The
AMT is imposed at the rate of 20% of the corporation's alternative minimum
taxable income ("AMTI") subject to applicable statutory exemptions.  AMTI is
calculated by adding certain tax preference items and making certain adjustments
to the corporation's regular taxable income.  Preference items and adjustments
generally applicable to financial institutions include, but are not limited to,
the following:  (i) the excess of the bad debt deduction for reasonable bad debt
reserves over the amount that would have been allowed had the institution
maintained a reserve for all tax years on the basis of actual experience; (ii)
interest on certain tax-exempt bonds issued after August 7, 1986; and (iii) 75%
of the excess, if any, of a corporation's adjusted current earnings over its
AMTI (as otherwise determined with certain adjustments).  Net operating loss
carryovers, subject to certain adjustments, may be utilized to offset up to 90%
of the AMTI.  Credit for AMT paid may be available in future years to reduce
future regular federal income tax liability to the extent it exceeds the year's
AMT.  The Bank has not been subject to the AMT in recent years.

     Dividends Received Deduction.  The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of
corporations.

     Audits.  The Bank's federal income tax returns were audited by the IRS for
the 1994 tax year.  There were no findings.

State and Local Taxation

     Under North Carolina law, the corporate income tax for tax years beginning
in 1997 is 7.5% of federal taxable income as computed under the Code, subject to
certain prescribed adjustments.  Prior to 1997, the corporate income tax rate
was 7.75%.  In addition, for tax years beginning in 1991, 1992, 1993 and 1994,
corporate taxpayers were required to pay a surtax equal to 4%, 3%, 2% and 1%,
respectively, of the state income tax otherwise payable by it.  An annual state
franchise tax is imposed at a rate of 0.15% applied to the greatest of the
institutions (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) appraised valuation of property
in North Carolina.

     The North Carolina corporate tax rate will drop to 7.25% for tax years
beginning in 1998, 7.0% in 1999, and 6.9% thereafter.

Supervision and Regulation-Bank

General

     The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer.  The
Bank is a member of the FHLB System.  The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC.  The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions.  There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements.  This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors.  The regulatory structure also gives the

                                       23
<PAGE>

regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.  Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. The Company, as a savings and loan
holding company, is also required to file certain reports with, and otherwise
comply with the rules and regulations of the OTS and of the SEC under the
federal securities laws.

Federal Regulation of the Bank

     Business Activities.  The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes.  These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage.  In particular, many types of lending authority for federal
associations, e.g., commercial, nonresidential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.

     Loans-to-One Borrower.  Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower.  Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion.  At September 30, 2000, the Bank's general limit on loans-to-one
borrower was $3.6 million.  At September 30, 2000, the Bank's largest aggregate
amount of loans-to-one borrower was $2.3 million.

     Qualified Thrift Lender Test ("QTL"). The HOLA requires savings
institutions to meet a QTL test.  Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" (total assets less:
(i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least 9 months out of each 12-month period.  A savings association that
fails the QTL test must either convert to a bank charter or operate under
certain restrictions.  As of September 30, 2000, the Bank maintained 93.81% of
its portfolio assets in qualified thrift investments and, therefore, met the QTL
test.  Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered as "qualified
thrift investments."

     Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital.  The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level.  An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of:  (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters.  Any additional capital distributions would require prior OTS
approval.  In the event the Bank's capital fell below its capital requirements
or the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted.  In addition,
the OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.

     Liquidity.  The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus short-
term borrowings.  Monetary penalties may be imposed for failure to meet these
liquidity requirements.  The Bank's average liquidity ratio for the quarter
ended September 30, 2000 was 7.12%, which exceeded the applicable requirements.
The Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements.

     Assessments.  Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations.  The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report.  The assessment paid to the OTS for the
fiscal year ended September 30, 2000 was $49,583.

     Branching.  OTS regulations permit federally-chartered savings associations
to branch nationwide under certain conditions.  Generally, federal savings

                                       24
<PAGE>

associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business.  The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.

     Transactions with Related Parties.  The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").  Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus.  Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited.  Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.

     Enforcement.  Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance.  Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases.  Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution.  If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances.  Federal and state law also establishes criminal penalties for
certain violations.

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

     Capital Requirements.  The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard.  Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank.  In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leveraged capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions.

     The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%.  In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard.  The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.

                                       25
<PAGE>

     The OTS has adopted an interest rate risk component into its regulatory
capital requirements; however, the OTS has postponed indefinitely any adjustment
to capital which would be required by such an interest rate risk component.  The
OTS interest rate risk rule as written would also adjust the risk-weighting for
certain mortgage derivative securities.  Under the rule as written, savings
associations with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements.  A savings association's interest rate risk would be
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the Bank's assets, as calculated in
accordance with guidelines set forth by the OTS.  A savings association whose
measured interest rate risk exposure exceeds 2% would be required to deduct an
interest rate component in calculating its total risk-based capital.  The
interest rate risk component would be an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the Bank's assets.  That dollar
amount would be deducted from an association's total capital in calculating
compliance with its risk-based capital requirement.  Under the rule as written,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data.  A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% would not be subject to the interest
rate risk component, unless the OTS determined otherwise.  The rule also
provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis.  No prediction can be made
when such an interest rate risk component requirement will be implemented, or if
it ever will be implemented.

     At September 30, 2000, the Bank met each of its capital requirements, in
each case on a fully phased-in basis.  The table below presents certain
information relating to the Bank's regulatory capital compliance at September
30, 2000.

                                                    Percent of
                                     Amount         Assets (1)
                                   ----------     ------------
                                     (Dollars in Thousands)
Tier 1                               $ 24,245          11.6%
Tier 1 Capital Requirement             (8,390)         (4.0)%
                                   ----------     ------------
     Excess                          $ 15,855           7.6%
                                   ==========     ============

Total Capital                        $ 25,469          19.8%
Risk-Based Capital Requirement        (10,307)         (8.0)%
     Excess                          $ 15,162          11.8%
                                   ==========     ============


(1) Adjusted total assets were used for the Tier 1 calculation and risk-weighted
assets were used for the Risk-Based Capital calculation.

Prompt Corrective Regulatory Action

      Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized.  A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized."  Subject to a narrow exception, the Banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized.  The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized."  Compliance with the plan
must be guaranteed by any parent holding company.  In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion.  The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.

                                       26
<PAGE>

Insurance of Deposit Accounts

      The FDIC has adopted a risk-based insurance assessment system.  The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group.  The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds.  An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned.  Assessment rates for SAIF member institutions currently range from 0
basis points to 27 basis points.  The FDIC is authorized to raise the assessment
rates in certain circumstances.  The FDIC has exercised this authority several
times in the past and may raise insurance premiums in the future.  If such
action is taken by the FDIC, it could have an adverse effect on the earnings of
the Bank.  The Bank's assessment rate for the years ended September 30, 2000,
1999 and 1998 was 0.021%, 0.059% and 0.061% of assessable deposits,
respectively.

      Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS.  The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.

Federal Home Loan Bank System

      The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs.  The FHLB provides a central credit facility primarily for member
institutions.  The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater.  The Bank was in compliance
with this requirement with an investment in FHLB stock at September 30, 2000 of
$1.6 million.  FHLB advances must be secured by specified types of collateral
and all long-term advances may only be obtained for the purpose of providing
funds for residential housing finance.  At September 30, 2000, the Bank had
$10.0 million in FHLB advances.

      The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs.  These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.  For the fiscal years ended September 30, 2000, 1999
and 1998, cash dividends from the FHLB to the Bank amounted to $125,433,
$129,507 and $134,585, respectively.  If dividends were reduced, the Bank's net
interest income would likely also be reduced.  Further, there can be no
assurance that the impact of recent or future legislation on the FHLBs will not
also cause a decrease in the value of the FHLB stock held by the Bank.

Federal Reserve System

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts.  The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$42.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $42.8 million, the
reserve requirement is 10%.  The first $5.5 million of otherwise reservable
balances (subject to adjustment by the Federal Reserve Board) are exempted from
the reserve requirements.  The Bank is in compliance with the foregoing
requirements.  Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of this
reserve requirement is to reduce the Bank's interest-earning assets.  FHLB
System members are also authorized to borrow from the Federal Reserve "discount
window," but Federal Reserve Board regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.

                                       27
<PAGE>
Supervision and Regulation of the Company

      The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA.  As such, the Company is subject to OTS
regulations, examinations, supervision and reporting requirements.  In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries.  Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution.  The Bank must notify the OTS 30 days before
declaring any dividend to the Company.

      As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL.  See "--
Federal Regulation of the Bank--QTL Test" for a discussion of the QTL
requirements.  Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage.  The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation.

      The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association.  The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA, or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.

      The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, except:  (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.  The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.

Federal Securities Laws

      The Company filed with the SEC a registration statement under the
Securities Act for the registration of the common stock to be issued pursuant to
the Conversion and has registered the Company's  common stock with the SEC under
Section 12(g) of the Exchange Act.  Consequently, the Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.

      The registration under the Securities Act of shares of the common stock
issued in the Conversion does not cover the resale of such shares.  Shares of
the common stock purchased by persons who are not affiliates of the Company may
be resold without registration.  Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.

                                       28
<PAGE>

Item 2.  Description of Property

      The following table sets forth the location of the Bank's headquarters
office in Salisbury, and branch offices in Statesville and Rockwell, North
Carolina, as well as certain other real property owned or leased by the Bank and
information relating to such real estate as of September 30, 2000:


                                                Net Book
                                                Value of
                                              Property or          Owned or
                                              Improvements          Leased
                                           ------------------  ----------------
401 West Innes Street                           $301,931            Owned
Salisbury, North Carolina 28144-4232

427 West Innes Street                            276,528            Owned
Salisbury, North Carolina 28144

307 North Center Street                          383,728            Owned
Statesville, North Carolina 28677

106 West Main Street                              35,484            Owned
Rockwell, North Carolina 28138

Highway 29                                       377,377            Owned
Kannapolis, North Carolina 28081

649 Brawley School Road                          435,471            Owned
Mooresville, North Carolina 28117



     The total net book value of the Company's furniture, fixtures and equipment
and automobile at September 30, 2000 was $564,959.  The properties are
considered by the Company's management to be in good condition and to be
adequately covered by insurance.

     Any property acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until such time as it is disposed
of by the Bank in an effort to recover its investment.  As of September 30,
2000, the Bank had $170,682 in real estate acquired in settlement of loans.

Item 3.  Legal Proceedings

     From time to time, the Bank and the Company are parties to legal
proceedings which arise in the ordinary course of its business.  Most commonly,
such proceedings are commenced by the Bank to enforce obligations owed to it.
From time to time, claims are asserted against the Bank directly or as defenses
and counterclaims in actions filed by the Bank.  At this time, the Bank is not a
party to any legal proceeding which is expected to have a material effect on its
financial condition or results of operations.

Item 4.  Submission of Matters to a Vote of Security Holders

     Not Applicable.






                                    Part II
                                    -------

Item 5.  Market for Common Equity and Related Stockholders Matters

      Price information with respect to the Company's common shares is listed on
The NASDAQ Small-Cap Market ("NASDAQ") under the symbol of ISFC.  The following
table sets forth the range of high and low bid information for the common shares
of the Company, as quoted by NASDAQ, together with the dividends declared per
common share for each quarter ended during the fiscal years ended September 30,
2000 and 1999.  The bids have been restated to give retroactive recognition to
the $4.00 per share capital distribution paid on June 30, 2000. This $4.00
distribution is not reflected in dividends declared in the following tables.

                                       29
<PAGE>

<TABLE>
<CAPTION>
                                         9/00               6/00               3/00              12/99
                              ------------------------------------------------------------------------
<S>     <C>
Dividend Declared                    $   0.05           $   0.05          $    0.05           $   0.05
High Bid During Quarter               11.8750            12.0000           10.25000             9.5625
Low Bid During Quarter                10.5938             8.0000            7.75000             8.5000

<CAPTION>
                                         9/99               6/99               3/99              12/98
                              ------------------------------------------------------------------------
<S>     <C>
Dividend Declared                    $   0.05           $   0.05          $    0.05           $   0.00
High Bid During Quarter                9.7500             9.2500             9.6250            10.0000
Low Bid During Quarter                 8.1875             7.2500             7.1250             8.6250
</TABLE>


     At December 1, 2000 there were approximately 518 shareholders of record,
not including the number of persons or entities for which stock is held in
nominee or "street" name through various brokerage firms or banks.

Item 6.  Management's Discussion and Analysis

General

     Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
changes therein and results of operations of the Consolidated Entity.

    The Company was incorporated under North Carolina law on July 6, 1998 at the
direction of the Bank for the purpose of acquiring and holding all of the
outstanding stock of the Bank to be issued in the Conversion has been.  The
Company's principal business activities since the Conversion have been conducted
mainly through the Bank.

    The Consolidated Entity's results of operations depend primarily on net
interest income, which is the difference between interest income from interest-
earning assets and interest expense on interest-bearing liabilities.  The
Consolidated Entity's operations are affected to a much lesser degree by non-
interest income, such as transaction and other service fee income, and other
sources of income.  The Consolidated Entity's principal operating expenses,
aside from interest expense, consist of compensation and employee benefits,
office occupancy costs, data processing, advertising expenses and federal
deposit insurance premiums.


Net Interest Income

    Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities.  Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance").  The following table sets forth information relating to
average balances of the Consolidated Entity's assets and liabilities for the
years ended September 30, 2000, 1999, and 1998.  For the periods indicated, the
table reflects the average yield on interest-earning assets and the average cost
of interest-bearing liabilities (derived by dividing income or expense by the
monthly average balance of interest-earning assets or interest-bearing
liabilities, respectively) as well as the net yield on interest-earning assets
(which reflects the impact of the net earning balance).  Monthly average
balances are derived from daily balances.

                                       30
<PAGE>

<TABLE>
<CAPTION>


                                             At                                    For the Year Ended September 30,
                                        September 30, ------------------------------------------------------------------------------
                                           2000                          2000                                      1999
                                        -----------   --------------------------------------    -----------------------------------
                                          Average                                   Average                                 Average
                                          Rate(5)     Average Balance  Interest   Yield/Rate    Average Balance  Interest Yield/Rate
                                       -----------    ---------------  --------   ----------    ---------------  -------- ----------
                                                                                (Dollars in Thousands)
<S>     <C>
Assets:
Interest-earning assets
  Interest-earning deposits               6.64%         $   7,964      $   552      6.93%         $ 22,004       $ 1,159      5.27%
  Investments (1)                         7.87%            10,783          683      6.33%           15,839           952      6.01%
  Loans receivable, net (4)               8.00%           175,876       13,644      7.76%          158,005        11,876      7.52%
                                                      -----------      -------                    --------       -------

Total interest-earning assets             7.94%           194,623      $14,879      7.65%          195,848       $13,987      7.14%
                                                                       -------                                   -------

Non-interest-earning assets                                 7,573                                    6,999
                                                      -----------                                 --------

   Total                                                $ 202,196                                 $202,847
                                                      ===========                                 ========

Liabilities and equity
Interest-bearing liabilities:
  NOW and Money
    market accounts                       2.52%         $   8,667      $   125      1.44%         $  8,924       $   119      1.33%
  Savings accounts                        4.56%            32,227        1,459      4.53%           37,852         1,519      4.01%
  Certificates of deposit                 6.26%           120,282        6,684      5.56%          113,742         6,098      5.36%
                                                      -----------      -------                    --------       -------

Total deposits                            5.76%           161,176        8,268      5.13%          160,518         7,736      4.82%

  Borrowings                              7.51%             4,866          353      7.25%            6,249           431      6.90%
                                                      -----------      -------                    --------       -------

Total interest-bearing liabilities        5.90%           166,042      $ 8,621      5.19%          166,767       $ 8,167      4.90%
                                                                       -------                                   -------

Non-interest-bearing liabilities                            3,862                                    4,163

Equity                                                     32,292                                   31,917
                                                      -----------                                 --------

   Total                                                $ 202,196                                 $202,847
                                                      ===========                                 ========

Net interest income and interest
  rate spread  (2)                                                     $ 6,258      2.46%                        $ 5,820      2.24%
                                                                       =======                                   =======

Net yield on interest-earning assets (3)                                            3.22%                                     2.97%

Ratio of interest-earning assets to
  interest-bearing liabilities                                                    117.21%                                   117.44%
</TABLE>


<TABLE>
<CAPTION>

                                                  -----------------------------------------
                                                                       1998
                                                  -----------------------------------------
                                                                                    Average
                                                  Average Balance    Interest    Yield/Rate
                                                  ---------------    --------    ----------

<S>     <C>
Assets:
Interest-earning assets
  Interest-earning deposits                            $ 10,676       $   664        6.22%
  Investments (1)                                        18,791         1,182        6.29%
  Loans receivable, net (4)                             158,013        12,068        7.64%
                                                       --------       -------

Total interest-earning assets                           187,480       $13,914        7.42%
                                                       --------       -------

Non-interest-earning assets                               6,056
                                                       --------

   Total                                               $193,536
                                                       ========

Liabilities and equity
Interest-bearing liabilities:
  NOW and Money
    market accounts                                    $  8,531       $   152        1.78%
  Savings accounts                                       35,522         1,625        4.57%
  Certificates of deposit                               113,730         6,341        5.58%
                                                       --------       -------

Total deposits                                          157,783         8,118        5.15%

  Borrowings                                             15,518         1,069        6.89%
                                                       --------       -------

Total interest-bearing liabilities                      173,301       $ 9,187        5.30%
                                                                      -------

Non-interest-bearing liabilities                          4,545

Equity                                                   15,690
                                                       --------

   Total                                               $193,536
                                                       ========

Net interest income and interest
  rate spread  (2)                                                    $ 4,727        2.12%
                                                                      =======

Net yield on interest-earning assets (3)                                             2.52%

Ratio of interest-earning assets to
  interest-bearing liabilities                                                     108.18%
</TABLE>

--------------------------------------------------------------------------------
(1)  Includes investment securities, term fed funds and FHLB of Atlanta stock.
(2)  Interest rate spread represents the difference between the average yield on
     interest-earning assets and the average cost of interest-bearing
     liabilities.
(3)  Net yield on interest-earning assets represents net interest income divided
     by average interest-earning assets.
(4)  Loans placed on nonperforming status have been included in the computation
     of average balances.
(5)  The weighted average rate represents the coupon associated with each asset
     and liability, weighted by the principal balance associated with each asset
     and liability.

                                       31
<PAGE>

Rate/Volume Analysis
--------------------

    The following table analyzes the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities.  The table distinguishes between (i) changes
attributable to rate (changes in rate multiplied by the prior period's volume),
(ii) changes attributable to volume (changes in volume multiplied by the prior
period's rate), and (iii) net change (the sum of the previous columns).  The
change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.


                                       32
<PAGE>

<TABLE>
<CAPTION>
                                              Year Ended September 30,            Year Ended September 30,
                                                   2000 vs. 1999                       1999 vs. 1998
                                          ---------------------------------   ---------------------------------
                                          Increase(Decrease) Attributable to  Increase(Decrease) Attributable to
                                          ---------------------------------   ---------------------------------

                                            Rate       Volume       Net         Rate       Volume       Net
                                          ----------  ---------  ----------   ----------  ---------   ---------
                                             (In Thousands)
<S>     <C>
Interest income
     Interest-earning deposits                $ 289      $(896)     $ (607)       $(115)     $ 610       $ 495
     Investments                                 49       (318)       (269)         (51)      (179)       (230)
     Loans receivable, net                      391      1,377       1,768         (191)        (1)       (192)
                                                                 ----------                           ---------

          Total interest income on
            interest-earning assets                                    892                                  73
                                                                 ----------                           ---------


Interest expense
     NOW and Money Market accounts                9         (3)          6          (40)         7         (33)
     Savings accounts                           181       (241)        (60)        (208)       102        (106)
     Certificates of deposit                    228        358         586         (244)         1        (243)
     Borrowings                                  21        (99)        (78)           2       (640)       (638)
                                                                 ----------                           ---------

          Total interest expense on
            interest-bearing liabilities                               454                              (1,020)
                                                                 ----------                           ---------


Increase(decrease) in net interest income                            $ 438                              $1,093
                                                                 ==========                           =========
</TABLE>

<TABLE>
<CAPTION>
                                                  Year Ended September 30,
                                                        1998 vs. 1997
                                             ------------------------------------
                                             Increase(Decrease) Attributable to
                                             ------------------------------------

                                               Rate       Volume         Net
                                             ----------  ----------  ------------

<S>     <C>
Interest income
     Interest-earning deposits                    $ 34        $ 93         $ 127
     Investments                                    10        (266)         (256)
     Loans receivable, net                         335        (194)          141
                                                                     ------------

          Total interest income on
            interest-earning assets                                           12
                                                                     ------------


Interest expense
     NOW and Money Market accounts                 (13)          8            (5)
     Savings accounts                               21         285           306
     Certificates of deposit                      (147)       (135)         (282)
     Borrowings                                      -        (704)         (704)
                                                                     ------------

          Total interest expense on
            interest-bearing liabilities                                    (685)
                                                                     ------------


Increase(decrease) in net interest income                                  $ 697
                                                                     ============
</TABLE>


                                       33
<PAGE>

Financial condition

     Total assets increased $10.0 million from $198.0 million at September 30,
1999 to $208.0 million at September 30, 2000.

     Cash and cash equivalents increased to $9.7 million at September 30, 2000
from $6.8 million at September 30, 1999, an increase of $2.9 million, or 42.6%.
This increase was a result of an increase in borrowings and deposits of $19.2
million, offset by a net increase in loans receivable, net, and investment
securities of $6.0 million.  Also the Company used $11.8 million of its funds to
repurchase stock and to pay dividends to its shareholders during the year.

     Investment securities available-for-sale decreased $12.9 million, or 80.6%,
from September 30, 1999 to September 30, 2000.  This decrease was primarily due
to the maturity and sale of $10.0 million in Federal Home Loan Bank ("FHLB")
notes during February 2000.  Also, during the quarter ended June 30, 2000, $2.0
million in FHLB notes were sold.  The proceeds from this sale were used to help
fund a return of capital of $4.00 for each share of the Company's issued and
outstanding common stock during the quarter ended June 30, 2000.

     Loans receivable, net, increased $19.0 million from $167.9 million at
September 30, 1999 to $186.9 million at September 30, 2000, or 11.3%.  This
increase was a result of an increase in the Bank's production of loans and a
decrease in loans sold during the year.  During the year, the Bank has increased
its production of nonresidential, home equity, and multi-family loans in an
effort to increase loan yield.

     Deposit accounts increased from $160.8 million at September 30, 1999 to
$166.4 million at September 30, 2000, an increase of 3.5%.  This increase was
mainly in certificates of deposits, which have increased as a result of the
higher interest rate environment.

     Borrowings increased by $13.6 million from September 30, 1999.  These
borrowings consist of $10.0 million six-month FHLB advances and a $3.6 million
note due The Bankers Bank in Atlanta, Georgia.  The FHLB advances were used to
fund loan growth.  It is anticipated that these advances will be renewed as they
mature.  The $3.6 million borrowed from The Bankers Bank was used to help fund
the special cash distribution of $4.00 for each share of the Company's issued
and outstanding common stock paid on June 30, 2000.  The note is due on June 15,
2001.  All of the Bank's stock was pledged as collateral on the loan.  This loan
was repaid in October 2000.

     Paid in capital decreased $9.6 million from $20.1 million at September 30,
1999 to $10.5 million at September 30, 2000.  During the year, the Company
repurchased 251,443 shares of its own stock for a total cost of $3.3 million.
These shares were retired from issued and outstanding.  Also, at the February 1,
2000 annual meeting, the shareholders approved a Management Recognition Plan
("MRP") for key employees and directors.  The granting of the MRP stock, 89,930
shares, resulted in an increase of paid in capital of $1.2 million, representing
the fair market value of the stock on the date it was granted, which was offset
by an entry to a contra capital account, unearned compensation MRP.  On June 30,
2000, the Company paid a special cash distribution in the amount of $4.00 for
each share of the Company's issued and outstanding common stock.  The Company
anticipates that the majority of the dividend will be a return of capital to its
shareholders.  This distribution resulted in a $7.5 million decrease in paid in
capital.  On July 3, 2000, the Company adjusted the price of the stock options
granted to directors and key employees on February 1, 2000 from $13.00 a share
to $9.28 a share to reflect the effect of the return of capital on the fair
market value of a share of the Company's common stock.

     Retained earnings increased from $17.3 million at September 30, 1999 to
$18.2 million at September 30, 2000, a $0.9 million increase, or 5.2%.  This
increase was a result of $1.3 million in earnings offset by $0.4 million paid to
stockholders in the form of cash dividends.

     Unallocated ESOP stock increased by $479,669.  The receipt of the $4.00
return of capital on unallocated ESOP shares resulted in an increase of $657,088
which was used to purchase 59,333 additional shares of the Company's common
stock to be allocated to ESOP participants.  Using dividends that it had
received in the calendar year 1999, the ESOP trust made an additional loan
repayment of $35,972, which resulted in a release of an additional 3,597.20
shares which were allocated to eligible employees in January 2000.  Also, 17,514
shares were allocated to eligible employees as part of the normal repayment of
the ESOP loan, which resulted in a decline of $177,419.  Unallocated ESOP stock
decreases every month due to the Bank's recording of the shares earned for that
month that will be allocated in the future to eligible employees.

                                       34
<PAGE>

     On February 1, 2000, 89,930 shares of MRP stock were granted to key
employees and directors.  The fair market value of these shares, $1,169,090, was
recorded as a reduction to shareholder's equity.  Twenty percent of these shares
vested immediately.  The unvested shares, 71,939, will vest over a 48-month
period.  Each month the Company records compensation and benefits expense and
reduces the unearned compensation MRP by $19,483.

Results of Operations

     Net Income.  Net income was $1,330,889 for the year ended September 30,
2000 compared to $1,705,254 for the year ended September 30, 1999, a 22.0%
decrease. This decrease was primarily a result of an increase in net interest
income offset by an increase in non-interest expense.

     Net Interest Income.  Net interest income was $6.26 million for the year
ended September 30, 2000 compared to $5.82 million for the year ended September
30, 1999, an increase of $0.44 million, or 7.6%.  An increase of $1.76 million
in interest income from loans receivable was the primary cause for the improved
net interest margin.  This increase was a result of an average increase in loans
of $17.9 million along with an increase in yield on loans due to the improvement
in loan composition.  This increase in interest income from loans was offset by
a decline in other interest income of $0.87 million due to a decrease in
outstandings.  This net increase of $0.89 million in interest income was offset
by an increase of $0.45 million in interest expense.  Interest expense increased
due to an increase in interest rates paid on deposits and borrowings during the
past year.

     Provision for Loan Losses.  No provision for loan losses was made in either
the year ended September 30, 2000 or the year ended September 30, 1999.

     Non-interest income.  Non-interest income decreased from $333,593 for the
year ended September 30, 1999 to $238,386 for the year ended September 30, 2000,
due to a decrease in gains on sales of loans and a decrease in loan servicing
fees.

     Non-interest expense. Non-interest expense increased from $3.44 million for
the year ended September 30, 1999 to $4.38 million for the year ended September
30, 2000.  Increases in compensation and benefits, occupancy and equipment, and
advertising and promotion account for the majority of this increase.  The
increase in compensation and benefits was a result of an increase in the number
of employees, normal annual increases in salaries of existing employees, ESOP
expenses, and MRP expenses.  The implementation of the MRP resulted in $389,751
of expense during the year ended September 30, 2000.  Occupancy and equipment
expenses increased because of an increase in depreciation of fixed assets, due
to the installation of a local area network and an upgrade of the Company's
computer hardware to accommodate the requirements of its service bureau's
software since March 31, 1999.  Advertising and promotion increased due to the
Bank's home equity marketing campaign.  Home equity loans have increased
approximately $5.2 million during the year ended September 30, 2000.

     Income Taxes.  The provision for income taxes decreased from $1,011,841 for
the year ended September 30, 1999 to $789,318 for the year ended September 30,
2000 as a result of a decrease in pre-tax income.

Impact of Inflation and Changing Prices

    The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation.  The impact of inflation is
reflected in the increased cost of the Bank's operations.  Unlike most
industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature.  As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation.  Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.


                                       35
<PAGE>

Impact of New Reporting and Accounting Standards

    Disclosures about Segments of an Enterprise and Related Information.  In
June 1997, Statements of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued and
established new standards for public companies to report information about
operating segments in annual and interim financial statements.  The standard
also requires descriptive information about the way the operating segments are
determined, the products and services provided by the segments and the nature of
differences between reportable segment measurements and those used for the
consolidated enterprise.  The Consolidated Entity adopted the standard, as
required on December 28, 1998.  Management has determined that the Consolidated
Entity has only one segment, Consumer Banking.

    Accounting for Derivative Instruments and Hedging Activities. In June 1998,
the FASB issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities".  This statement established new accounting and reporting
requirements for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities.  Currently, the
Company has no derivative instruments that fall within the definition of a
derivative as defined by the statement.  The Company does not anticipate that
the adoption of this statement on October 1, 2000 will significantly impact the
financial results of the Company.

     Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.  In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" (FASB 140)
that replaces FASB Statement No. 125.  FASB 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain additional disclosures regarding these
activities. The statement is effective for transfers and servicing of financial
assets or extinguishments of liabilities that occur after March 31, 2001. The
statement is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The Company is in the process of
assessing the impact and plans to adopt the standard in accordance with the
effective dates. Adoption is not expected to result in a material financial
impact.

Item 7.  Financial Statements

Consolidated Financial Statements

Innes Street Financial Corporation

  Years ended September 30, 2000 and 1999 with Report of Independent Auditors


                                       36
<PAGE>

                         Report of Independent Auditors


The Board of Directors
Innes Street Financial Corporation


We have audited the accompanying consolidated balance sheets of Innes Street
Financial Corporation as of September 30, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years then ended.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innes Street
Financial Corporation at September 30, 2000 and 1999, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.

                                        /s/ Ernst & Young LLP

November 17, 2000

                                       37
<PAGE>

                       Innes Street Financial Corporation

                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                              September 30
                                                                             --------------------------------------------
                                                                                             2000                    1999
                                                                             --------------------    --------------------
<S>     <C>
Assets
Cash and due from banks                                                              $  2,987,315            $  3,667,346
Federal funds sold-overnight                                                            6,686,000               3,122,000
                                                                             --------------------    --------------------
Cash and cash equivalents                                                               9,673,315               6,789,346

Investment securities available-for-sale                                                3,099,380              16,023,687
Investment securities held-to-maturity (fair value of $635,344 and $727,555
 at September 30, 2000 and 1999, respectively)                                            630,476                 715,216

Loans receivable, net                                                                 186,915,054             167,874,234
Premises and equipment, net                                                             2,375,478               2,173,006
Other                                                                                   5,354,619               4,425,138
                                                                             --------------------    --------------------
Total assets                                                                         $208,048,322            $198,000,627
                                                                             ====================    ====================
Liabilities and equity
Deposit accounts                                                                     $166,406,701            $160,809,797
Borrowings                                                                             13,600,000                       -
Other                                                                                   2,240,173               1,509,048
                                                                             --------------------    --------------------
Total liabilities                                                                     182,246,874             162,318,845

Commitments and contingencies

Preferred Stock, no par value:
   Authorized - 5,000,000 shares; none issued and outstanding                                                           -
Common stock, no par value:
   Authorized - 20,000,000 shares; issued and outstanding - 1,974,325 and
    2,135,838 shares at September 30, 2000 and  1999, respectively                                                      -
Paid in capital                                                                        10,522,958              20,106,106
Retained earnings (substantially restricted)                                           18,208,565              17,251,509
Unearned compensation - ESOP stock                                                     (2,188,339)             (1,708,670)
Unearned compensation - Management Recognition Plan (MRP)                                (779,339)                      -

Accumulated other comprehensive income                                                     37,603                  32,837
                                                                             --------------------    --------------------
Total equity                                                                           25,801,448              35,681,782
                                                                             --------------------    --------------------
Total liabilities and equity                                                         $208,048,322            $198,000,627
                                                                             ====================    ====================
</TABLE>

See accompanying notes.

                                       38
<PAGE>

                       Innes Street Financial Corporation

                       Consolidated Statements of Income


<TABLE>
<CAPTION>
                                                              Year ended September 30
                                                   -----------------------------------------
                                                               2000                  1999
                                                   -------------------   -------------------
<S>     <C>
Interest and fee income:
 Loans receivable                                          $13,643,611           $11,876,172
 Investments                                                   557,611               789,316
 Other interest-earning assets                                 677,363             1,321,198
                                                   -------------------   -------------------
Total interest income                                       14,878,585            13,986,686

Interest expense:
 Deposits                                                    8,267,742             7,736,427
 Borrowings                                                    352,884               430,878
                                                   -------------------   -------------------
Total interest expense                                       8,620,626             8,167,305
                                                   -------------------   -------------------
Net interest income                                          6,257,959             5,819,381

Provision for loan losses                                                                  -
                                                   -------------------   -------------------
Net interest income after provision for loan losses
                                                             6,257,959             5,819,381

Non-interest income:
 Loan servicing fees                                            77,798               138,422
 Gain on sales of loans, net                                    20,278                98,271
 Other                                                         140,310                96,900
                                                   -------------------   -------------------

Total non-interest income                                      238,386               333,593

Non-interest expense:
 Compensation and benefits                                   2,499,832             1,727,259
 Occupancy and equipment                                       555,999               465,301
 Advertising and promotion                                     220,223               133,871
 Data processing                                               231,907               216,797
 Deposit insurance premium                                      48,654                94,835
 Other                                                         819,523               797,816
                                                   -------------------   -------------------
Total non-interest expense                                   4,376,138             3,435,879
                                                   -------------------   -------------------
Income before income taxes                                   2,120,207             2,717,095
Provision for income taxes                                     789,318             1,011,841
                                                   -------------------   -------------------
Net income                                                 $ 1,330,889           $ 1,705,254
                                                   ===================   ===================

Basic and diluted earnings per share                       $      0.72           $      0.83
Basic weighted average shares outstanding                    1,838,692             2,066,326
Diluted weighted average shares outstanding                  1,847,085             2,066,326
</TABLE>

See accompanying notes.

                                       39
<PAGE>

                       Innes Street Financial Corporation

                Consolidated Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                                                                      Unearned
                                                                                                   Deferred         Compensation
                                               Shares of          Paid in        Retained        Compensation        Relating to
                                              Common Stock        Capital        Earnings           Plans             the ESOP
                                            ---------------------------------------------------------------------------------------
<S>               <C>
Balance at September 30, 1998                                                    $15,856,214
Net income                                                                         1,705,254
Change in unrealized appreciation on
 securities available for sale, net of
 taxes of ($53,307)

Comprehensive income
Dividends paid ($.15 per share)                                                     (309,959)
Net proceeds from Initial Public Offering         2,248,250     $21,598,347                                            $(1,798,600)
Shares purchased and held in rabbi trusts                                                          $ 1,238,118
Deferred compensation obligation                                                                    (1,238,118)
Commitment of ESOP shares (8,993 shares)                             25,321                                                 89,930
Repurchase of common stock                         (112,412)     (1,517,562)
                                            ---------------     -----------      -----------       -----------         -----------

Balance at September 30, 1999                     2,135,838      20,106,106       17,251,509                 -          (1,708,670)
Net income                                                                         1,330,889
Change in unrealized appreciation on
 securities available for sale, net of
 taxes of ($2,854)

Comprehensive income
Dividends paid ($0.20 per share)                                                    (373,833)
Return of Capital ($4.00 per share)                              (7,489,984)                                              (657,088)
Shares purchased and held in rabbi trusts                                                              231,656
Deferred compensation obligation                                                                      (231,656)
Commitment of ESOP shares (17,514 shares)
                                                                     33,723                                                177,419
Repurchase of common stock                         (251,443)     (3,295,977)
Issuance of MRP stock                                89,930       1,169,090
Prorata vesting of MRP stock
                                            ---------------     -----------      -----------       -----------         -----------
Balance at September 30, 2000                     1,974,325     $10,522,958      $18,208,565       $         -         $(2,188,339)
                                            ===============     ===========      ===========       ===========         ===========
</TABLE>


<TABLE>
<CAPTION>
                                                        Unearned           Accumulated
                                                      Compensation            Other               Total
                                                    Relating to the       Comprehensive       Shareholders'
                                                          MRP                 Income              Equity
                                                ------------------------------------------------------------
<S>               <C>
Balance at September 30, 1998                                                 $116,162           $15,972,376
Net income                                                                                         1,705,254
Change in unrealized appreciation on
 securities available for sale, net of
 taxes of ($53,307)                                                            (83,325)              (83,325)
                                                                                                 -----------
Comprehensive income                                                                               1,621,929
Dividends paid ($.15 per share)                                                                     (309,959)
Net proceeds from Initial Public Offering                                                          19,799,747
Shares purchased and held in rabbi trusts                                                          1,238,118
Deferred compensation obligation                                                                  (1,238,118)
Commitment of ESOP shares (8,993 shares)                                                             115,251
Repurchase of common stock                                                                        (1,517,562)
                                                         ------------         --------           -----------

Balance at September 30, 1999                                      -            32,837            35,681,782
Net income                                                                                         1,330,889
Change in unrealized appreciation on
 securities available for sale, net of
 taxes of ($2,854)                                                               4,766                 4,766
                                                                                                 -----------
Comprehensive income                                                                               1,335,655
Dividends paid ($0.20 per share)                                                                    (373,833)
Return of Capital ($4.00 per share)                                                               (8,147,072)
Shares purchased and held in rabbi trusts                                                            231,656
Deferred compensation obligation                                                                    (231,656)
Commitment of ESOP shares (17,514 shares)

Repurchase of common stock                                                                        (3,295,977)
Issuance of MRP stock                                    $(1,169,090)
Prorata vesting of MRP stock                                 389,751                                 389,751
                                                         -----------          --------           -----------
Balance at September 30, 2000                              $(779,339)         $ 37,603           $25,801,448
                                                         ===========          ========           ===========
</TABLE>

See accompanying notes.

                                       40
<PAGE>

                       Innes Street Financial Corporation

                     Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                  Year ended September 30
                                                                  2000                  1999
                                                        -----------------    ------------------
<S>     <C>
Operating activities
Net income                                                   $  1,330,889          $  1,705,254
Adjustments to reconcile net income to net
 cash provided by operating activities:
  Depreciation                                                    286,950               203,923
  Amortization of discount on investments                          (1,677)               (1,771)
  Amortization of deferred loan fees                             (139,984)               47,005
  Commitment of ESOP shares                                       211,142               115,251
  Prorata vesting of MRP stock                                    389,751
  Deferred income taxes                                           (83,966)             (128,934)
  Gain on sales of loans, net                                     (20,278)              (98,271)
  Loss on sale of investments                                      24,066
  Other, net                                                     (115,255)              984,700
                                                        -----------------    ------------------

Net cash provided by operating activities                       1,881,638             2,827,157

Investing activities
Proceeds from maturity of federal funds sold-term                                     2,000,000
Purchases of investments available-for-sale                                         (11,989,500)
Proceeds from sale of available-for-sale securities            11,975,125
Principal repayment of mortgage-backed securities               1,019,152             3,908,310
Net increase in loans                                         (20,621,834)          (10,190,843)
Purchases of loans                                               (855,846)           (6,572,367)
Proceeds from sales of loans                                    2,449,319             8,188,286
Purchase of FHLB stock                                            (21,000)
Proceeds from redemption of FHLB stock                                                  218,200
Proceeds from sales of foreclosed real estate                     147,803               110,516
Purchases of premises and equipment                              (489,555)           (1,198,005)
Proceeds from sales of premises and equipment                         133
                                                        -----------------    ------------------

Net cash used in investing activities                          (6,396,703)          (15,525,403)

Financing activities
Net increase (decrease) in deposit accounts                     5,596,904              (738,705)
Proceeds from borrowings                                       20,600,000
Repayment of borrowings                                        (7,000,000)          (10,000,000)
Net increase (decrease) in mortgage escrow funds                   19,012            (1,028,309)
Net proceeds from issuance of common stock                                           19,799,747
Repurchase of common stock                                     (3,295,977)           (1,517,562)
Dividends paid                                                 (8,520,905)             (309,959)
                                                        -----------------    ------------------
Net cash provided by financing activities                       7,399,034             6,205,212
                                                        -----------------    ------------------

Net increase (decrease) in cash and cash equivalents            2,883,969            (6,493,034)
Cash and cash equivalents at beginning of year                  6,789,346            13,282,380
Cash and cash equivalents at end of year                     $  9,673,315          $  6,789,346
                                                        =================    ==================

Supplemental disclosure of cash flow data:
 Cash paid during the year for:
  Interest                                                   $  8,651,145          $  8,222,055
  Taxes                                                      $  1,005,289          $  1,189,524
   Transfers from loans to foreclosed real estate            $    107,450          $    214,356
</TABLE>
See accompanying notes.

                                       41
<PAGE>

                       Innes Street Financial Corporation

                   Notes to Consolidated Financial Statements

                               September 30, 2000


1. Accounting Policies

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of Innes Street
Financial Corporation and its wholly owned subsidiary, Citizens Bank, FSB
(together "the Company").  All significant intercompany balances and
transactions have been eliminated in consolidation.

Business

Innes Street Financial Corporation was incorporated on July 6, 1998 to serve as
the holding company for Citizens Bank, FSB (the "Bank") upon the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion").  Innes Street Financial
Corporation completed the Conversion on December 28, 1998 through the sale and
issuance of 2,248,250 shares of common stock.  The Bank offers full service
banking to those within Salisbury, North Carolina and the surrounding
communities. The Office of Thrift Supervision is the Company's primary
regulator.

Use of Estimates

In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period.  Actual results could differ from those estimates.  The
material estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for loan losses.

Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, and
overnight federal funds sold.  The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.

                                       42
<PAGE>

1. Accounting Policies (continued)

Investment Securities

Management determines the appropriate classification of securities at the time
of purchase.  Securities are classified as held to maturity when the Company has
the positive intent and ability to hold the securities to maturity.  Held to
maturity securities are stated at amortized cost.

Securities not classified as held to maturity are classified as available for
sale.  Available for sale securities are stated at fair value, with the
unrealized gains and losses, net of tax, included in comprehensive income, a
separate component of shareholders' equity.

The amortized cost of investment securities is adjusted for amortization of
premiums and accretion of discounts over the estimated life of the security.
Such amortization is included in interest income from investments.  The cost of
securities sold is based on the specific identification method.

Loans Receivable

The Company primarily grants mortgage loans to its customers.  A substantial
portion of the loan portfolio is represented by mortgage loans in Salisbury and
the surrounding communities. The loans typically do not exceed 80% of the
appraised value of the security property.  Pursuant to underwriting guidelines
adopted by the Board of Directors, the Company can lend up to 95% of the
appraised value of the property securing a one-to-four family residential loan;
however, the Company generally obtains private mortgage insurance on the portion
of the principal amount that exceeds 80% of the appraised value of the security
property.  The ability of the Company's debtors to honor their contracts is
dependent upon the real estate and general economic conditions of this area.

Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans.  Interest income is
accrued on the unpaid principal balance.  Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment of the
related loan yield using the interest method.

The accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent.  In all cases, loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful.

                                       43
<PAGE>

1. Accounting Policies (continued)

Loans Receivable (continued)

The Company provides a reserve for uncollected interest on all nonaccrual loans.
Interest income is subsequently recognized on impaired loans only to the extent
cash payments in excess of past due principal amounts are received.  The
interest reserve is a reduction of accrued interest receivable for financial
reporting purposes.  Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current or future payments
are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings.  Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to
the allowance.

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions.  This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.

Management considers the Company's loan portfolio to be homogeneous in nature;
accordingly, the Company does not separately identify individual consumer and
residential loans for impairment disclosures.

Foreclosed Real Estate

Foreclosed real estate acquired in settlement of loans is carried at the lower
of cost or the fair value less estimated costs to sell.  Costs relating to the
development and improvement of property are capitalized to the extent of the
property's net realizable value, whereas those relating to holding the property
are charged to expense.  Real estate owned is included in Other Assets on the
consolidated balance sheets.

Premises and Equipment

Premises and equipment is stated at cost.  Depreciation is computed by the
straight-line method over the assets' estimated useful lives, which range from
three to thirty years, for financial reporting purposes.

                                       44
<PAGE>

1. Accounting Policies (continued)

Income Taxes

The Company accounts for income taxes using the liability method in accordance
with Financial Accounting Standards Board ("FASB") Statement No. 109, Accounting
for Income Taxes, which requires an asset and liability approach to accounting
for income taxes.  Under Statement No. 109, deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes.

Stock Compensation Plan

The Company applies Accounting Principles Board Opinion No.25, Accounting for
Stock Issued to Employees.  Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock (i.e., by intrinsic value).  Stock options issued under the Company's
plan have no intrinsic value, and therefore under Opinion No. 25, no
compensation cost is recognized.  Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (FASB 123), encourages, but
does not require, adoption of a fair value method of accounting for employee
stock-based compensation plans.  The Company follows the pro forma disclosure
provisions of FASB 123.

Earnings Per Share

For purposes of calculating earnings per share for the year ended September 30,
1999, the shares issued on December 28, 1998 have been assumed to be outstanding
as of October 1, 1998.

Segment Reporting

In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information.  This statement establishes new standards
for reporting information about operating segments in annual and interim
financial statements.  The Company adopted this statement effective December 28,
1998, as the requirement is applicable only to publicly held corporations.
Management has determined that as of September 30, 2000, it operates in only one
segment, Consumer Banking.  Accordingly, the financial results of the Company
consist only of this one segment.

                                       45
<PAGE>

1.  Accounting Policies (continued)

Derivatives

In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities.  This statement establishes new accounting
and reporting requirements for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities.
Currently, the Company has no derivative instruments that fall within the
definition of a derivative as defined by the statement.  The Company does not
anticipate that the adoption of this statement on October 1, 2000 will
significantly impact the financial results of the Company.

In June 1999, the FASB issues Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133.  This statement deferred the effective date of Statement 133
to become effective for all fiscal quarters of all years beginning after June
15, 2000.  As such, the Company will adopt FAS 133 on October 1, 2000.

In June 2000, the FASB issued Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment to FASB
Statement No. 133.  Statement 138 amends the accounting and reporting standards
of Statement 133 for certain derivative instruments and certain hedging
activities that caused implementation difficulties for numerous entities.
Certain FASB decisions based on the recommendations of the FASB's Derivatives
Implementation Group also have been incorporated into the amendment.

Transfers and Servicing of Financial Assets and Extinguishment of Liabilities

In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities (FASB 140) that replaces
FASB Statement No. 125. FASB 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain additional disclosures regarding these activities. The
statement is effective for transfers and servicing of financial assets or
extinguishments of liabilities that occur after March 31, 2001. The statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The Company is in the process of assessing the impact
and plans to adopt the standard in accordance with the effective dates. Adoption
is not expected to result in a material financial impact.

Reclassifications

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

                                       46
<PAGE>

2. Investment Securities

The amortized cost, gross unrealized gains, gross unrealized losses and market
values of investment securities are as follows:

<TABLE>
<CAPTION>
                                                                           September 30, 2000
                                         -------------------------------------------------------------------------------------
                                                                       Gross                 Gross
                                               Amortized            Unrealized            Unrealized               Fair
                                                 Cost                  Gains                Losses                 Value
                                         -------------------   -------------------   -------------------   -------------------
<S>                    <C>
Securities Available-for Sale
Mortgage-backed securities                        $3,038,118               $61,262     $               -            $3,099,380
                                         -------------------   -------------------   -------------------   -------------------
Total securities available-for-sale               $3,038,118               $61,262     $               -            $3,099,380
                                         ===================   ===================   ===================   ===================

Securities Held-to-Maturity
Mortgage-backed securities                        $  630,476               $ 4,868     $               -            $  635,344
                                         -------------------   -------------------   -------------------   -------------------
Total securities held-to-maturity                 $  630,476               $ 4,868     $               -            $  635,344
                                         ===================   ===================   ===================   ===================
</TABLE>


<TABLE>
<CAPTION>
                                                                            September 30, 1999
                                         --------------------------------------------------------------------------------------
                                                                       Gross                 Gross
                                               Amortized            Unrealized             Unrealized               Fair
                                                 Cost                  Gains                 Losses                 Value
                                         -------------------   -------------------   -------------------    -------------------
<S>     <C>
Securities Available-for Sale
FHLB bonds and notes                             $11,995,180               $     -     $         (38,523)           $11,956,657
Mortgage-backed securities                         3,974,865                92,165                     -              4,067,030
                                         -------------------   -------------------   -------------------    -------------------
Total securities available-for-sale              $15,970,045               $92,165     $         (38,523)           $16,023,687
                                         ===================   ===================   ===================    ===================

Securities Held-to-Maturity
Mortgage-backed securities                       $   715,216               $12,339     $               -            $   727,555
                                         -------------------   -------------------   -------------------    -------------------
Total securities held-to-maturity                $   715,216               $12,339     $               -            $   727,555
                                         ===================   ===================   ===================    ===================
</TABLE>

                                       47
<PAGE>

2.  Investment Securities (continued)


The amortized cost and fair value of debt securities by contractual maturity at
September 30, 2000 follows:


                                               Available-for-Sale
                                       Amortized Cost          Fair
                                                               Value
                                    --------------------------------------

Within 1 year                                 $       -          $       -
Over 1 year through 5 years                      47,058             46,469
After 5 years through 10 years                   75,235             77,743
Over 10 years                                 2,915,825          2,975,168
                                             $3,038,118         $3,099,380
                                    ======================================

                                                Held-to-Maturity
                                       Amortized Cost          Fair
                                                               Value
                                    --------------------------------------

Within 1 year                                 $       -          $       -
Over 1 year through 5 years                     239,450            239,482
After 5 years through 10 years                        -                  -
Over 10 years                                   391,026            395,862
                                               $630,476           $635,344
                                    ======================================


Mortgage-backed securities are not due at a single maturity date.  Hence, there
is no contractual maturity for mortgage-backed securities as of September 30,
2000. All mortgage-backed securities are backed by FNMA, GNMA, or FHLMC.

Securities carried at $1,813,309 and $1,769,854 at September 30, 2000 and 1999,
respectively, were designated as security for deposits and public funds.

                                       48
<PAGE>

3. Loans Receivable, Net

Loans receivable, net consisted of the following:


                                              September 30
                                    ------------------------------
                                              2000            1999
                                    --------------   -------------

1-4 family                            $136,287,936    $134,822,329
Home equity                             25,947,411      20,704,877
Construction and development            16,619,778      13,211,376
Nonresidential                           6,402,796       2,386,697
Multi-family                             6,125,331       3,652,435
                                    --------------   -------------
Mortgage loans                         191,383,252     174,777,714
Other loans                              1,633,229         239,493
                                    --------------   -------------
                                       193,016,481     175,017,207
Less:
 Allowance for loan losses               1,223,627       1,223,627
 Loans in process                        4,740,693       5,713,721
 Deferred fees, net                        137,107         205,625
                                    --------------   -------------
                                         6,101,427       7,142,973
                                    --------------   -------------
                                      $186,915,054    $167,874,234
                                    ==============   =============


Mortgage loans at September 30, 2000 and 1999, are net of participations and
whole loans serviced for others, in the amounts of $40,302,397 and $48,386,833,
respectively.  Custodial escrow balances maintained in connection with loans
serviced for others were $239,285 and $292,513, at September 30, 2000 and 1999,
respectively.

Changes in the allowance for loan losses are summarized as follows:


                                             Year ended September 30
                                      ------------------------------------
                                                  2000                1999
                                      ----------------    ----------------
Balance at beginning of year                $1,223,627          $1,223,627
Provision for loan losses                            -                   -
Charge-offs                                          -                   -
Recoveries                                           -                   -
Balance at end of year                      $1,223,627          $1,223,627
                                      ================    ================

                                       49
<PAGE>

4. Deposit Accounts


                                     September 30
                                     2000            1999
                            -------------   -------------

Demand                       $    988,796    $  1,086,097
NOW                             5,913,759       6,572,501
Money market                    3,480,141       2,014,150
Passbook savings               27,588,677      36,125,534
Certificates of deposit       128,435,328     115,011,515
                            -------------   -------------
Total deposits               $166,406,701    $160,809,797
                            =============   =============


Demand deposits are non-interest bearing.  All other deposit types bear
interest.

The aggregate amount of certificates of deposit with a minimum denomination in
excess of $100,000 was $20,348,983 and $15,407,874 at September 30, 2000 and
1999, respectively.  Deposits that exceed $100,000 are not federally insured.

At September 30, 2000, scheduled maturities of certificates of deposit are as
follows:


Year ending September 30:
 2001                              $111,450,820
 2002                                14,619,070
 2003                                 2,163,359
 2004                                    44,026
 2005                                   158,053
 Thereafter                                   -
                            -------------------
                                   $128,435,328
                            ===================


Interest expense on deposits is summarized as follows:

                                      Year ended September 30
                              -------------------------------------
                                           2000                1999
                              -----------------   -----------------

NOW                                  $   62,197          $   61,182
Money market                             63,234              58,251
Passbook savings                      1,458,629           1,519,230
Certificates of deposit               6,683,682           6,097,764
                                     $8,267,742          $7,736,427
                              =================   =================


The Company had on deposit amounts from certain directors and executive officers
of $1,007,035 and $933,070 as of September 30, 2000 and 1999, respectively.

                                       50
<PAGE>

5. Borrowings

At September 30, 2000, the Company had outstanding borrowings of $10,000,000
with the Federal Home Loan Bank (FHLB).  Pursuant to collateral agreements with
FHLB, advances are secured by stock in the FHLB and qualifying first mortgage
loans.  The carrying value of qualifying first mortgage loans was $141,034,772
as of September 30, 2000.  Interest rates on FHLB advances are fixed, and the
weighted average interest rate was 6.98% at September 30, 2000.

The Company had available credit with the FHLB of $40,637,400 and $39,356,000 as
of September 30, 2000 and 1999, respectively.

The Company also had $3,600,000 outstanding in borrowings from The Bankers Bank
at September 30, 2000.  The debt is collateralized by 1,000 shares (100%) of
Citizens Bank stock owned by the Company.  It will mature on June 15, 2001.  The
interest rate is prime less 50 basis points; at September 30, 2000, this was
9.00%.

6. Employee Benefit and Deferred Compensation Plans

On March 31, 1998, the Board of Directors of the Company terminated its non-
contributory defined benefit pension plan effective July 31, 1998.  At the time
the pension plan was terminated, it was fully funded.  The benefits accrued by
employees under the plan have been transferred, at the election of each
employee, to the Company's new 401(k) retirement plan.

The Company implemented a 401(k) retirement plan effective July 1, 1998.  All
eligible employees may elect to contribute a percentage of their compensation to
the plan each year, subject to certain maximums imposed by federal law.  The
Company will match 50% of each participant's contribution, up to 3% of
participant's compensation.  The Company will also make a contribution on behalf
of the participants equal to 3% of their compensation.  Participants are fully
vested in the amounts they contribute to the plan.  Participants will be fully
vested in employer matching contributions after one year of service.
Contribution expense related to this plan was $77,457 and $76,987 for the years
ended September 30, 2000 and 1999, respectively.

                                       51
<PAGE>

6. Employee Benefit and Deferred Compensation Plans (continued)

On December 28, 1998, the Company established an employee stock ownership plan
(ESOP) for the benefit of all eligible employees based upon years of service
with the Company.  In conjunction with the establishment of the ESOP, an off-
balance sheet ESOP trust was established and funded by the Company, by way of a
loan to the trust, in order to purchase 179,860 shares of the Company's stock.
The trust expects to pay down the loan over the fifteen-year term principally
from discretionary contributions and dividends on allocated shares.  An equal
amount of unallocated ESOP stock was recorded as a reduction of shareholders'
equity.  As the ESOP trust pays down the loan, shares are allocated to
participants, on the basis of relative compensation in the year of allocation,
reducing the unallocated shares amount recorded in shareholders' equity. The
expense associated with the ESOP, in the form of discretionary contributions and
dividends on unallocated shares, was $211,771 and $142,231 for the years ended
September 30, 2000 and 1999, respectively.  Unallocated shares are not included
in weighted average outstanding shares for purposes of computing earnings per
share.  As of September 30, 2000 and 1999, there were 176,808 and 176,832
weighted average uncommitted shares related to the ESOP plan.

The Company maintains non-qualified deferred compensation plans for key
employees and directors: a diversified and a non-diversified plan.  The eligible
employees may defer a portion of their compensation and the directors may defer
a portion of their directors' fees.  The deferred assets are maintained in rabbi
trusts, which are included in Other Assets of the Company.  The deferred
compensation amounts directed to the diversified plans are included in Other
Liabilities in the consolidated balance sheets.  The assets are accounted for at
market value in accordance with FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, with the resulting gains or losses in
value recorded as an adjustment to the fair value of the deferred compensation
obligation.  The assets of the non-diversified rabbi trusts consist only of
Company stock; therefore the value of the stock, at cost, and the corresponding
deferred compensation have been recorded in shareholders' equity.

The fair value of the assets in the rabbi trusts established for the diversified
plans and the deferred compensation obligation associated with the diversified
plans was $972,800 and $231,269 at September 30, 2000 and 1999, respectively.

On February 2, 2000, the Company granted 89,930 shares of stock for use in a
Management Recognition Plan (MRP).  These shares were granted to key employees
and directors.  Twenty percent of these shares vested immediately and were
charged to compensation expense.  The remaining fair market value of the shares
not vested was recorded as a reduction to shareholder's equity.  This non-vested
portion will vest over a 48-month period.  Each month the Company records
compensation expense and reduces the unearned compensation MRP.

                                       52
<PAGE>

7. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  Significant components
of the Company's deferred tax assets and liabilities are summarized as follows.
<TABLE>
<CAPTION>
                                                                      September 30
                                                                      2000          1999
                                                                ----------   -----------
<S>     <C>
Deferred tax assets:
 Deferred compensation                                          $  653,357    $  525,935
 Allowance for loan losses                                         396,367       361,049
 ESOP expense                                                       10,662        45,343
 Depreciation                                                       10,660        32,611
 Loans to facilitate sales of foreclosed real estate                28,989        30,167
 Other                                                              19,861        11,253
                                                                ----------   -----------
Total deferred tax assets                                        1,119,896     1,006,358

Deferred tax liabilities:
 Deferred fees                                                     303,014       260,609
 FHLB stock dividends                                              172,798       173,536
 Mortgage loan servicing rights                                     32,089        44,754
 Net unrealized appreciation on securities available-for-sale       23,659        20,805
 Other                                                                 852           281
                                                                ----------   -----------
Total deferred tax liabilities                                     532,412       499,985
                                                                ----------   -----------
Net deferred tax asset                                          $  587,484    $  506,373
                                                                ==========   ===========
</TABLE>

                                       53
<PAGE>

7. Income Taxes (continued)

The following is a summary of provision for income taxes:


                              Year ended September 30
                          ----------------------------
                                  2000            1999
                          ------------   -------------
Current:
 Federal                      $731,560      $  999,925
 State                         141,721         140,850
                          ------------   -------------
Total current                  873,281       1,140,775

Deferred:
 Federal                       (71,737)       (107,073)
 State                         (12,226)        (21,861)
                          ------------   -------------
Total deferred                 (83,963)       (128,934)
                          ------------   -------------
                              $789,318      $1,011,841
                          ============   =============


The Company's effective tax rate differs from that computed at the statutory
federal income tax rate, as follows:

<TABLE>
<CAPTION>
                                                             Year ended September 30
                                                        ------------------------------
                                                                  2000            1999
                                                        --------------   -------------
<S>     <C>
Tax at statutory rate                                         $720,870      $  923,812
State income tax, net of federal income tax benefit             81,278          80,778
Other                                                          (12,830)          7,251
                                                        --------------      ----------
                                                              $789,318      $1,011,841
                                                        ==============      ==========

Statutory federal tax rate                                        34%             34%
                                                            ========        ========

Effective tax rate                                                37%             37%
                                                            ========        ========
</TABLE>

Savings and loan associations which met certain definitional tests and operating
requirements prescribed by the Internal Revenue Code were allowed a special bad
debt deduction, extended expiration dates for net operating loss carryforwards
and other special tax provisions.

                                       54
<PAGE>

7. Income Taxes (continued)

The special bad debt deduction was based on either specified experience formulas
or a specified percentage of taxable income before such deduction.  The
deduction was subject to certain limitations based on the aggregate loans,
savings account balances and retained earnings at year end.  Gains and losses on
sales of repossessed property and provisions for losses on loans and real estate
foreclosed were generally adjustments to the tax bad debt reserve and not
included in the computation of taxable income before this deduction.  Effective
October 1, 1996 this deduction was no longer allowed.  In addition, a portion of
the tax bad debt reserve is required to be recaptured over six years.  The Bank
recaptured $94,488 and $93,548 into income for income tax purposes for the years
ended September 30, 2000 and 1999, respectively.

Retained earnings at year end include tax bad debt reserves of approximately
$3,735,000, for which no provision for federal income tax has been made.  If, in
the future, these amounts are used for any purpose other than to absorb bad debt
losses, or the Company ceases to be qualified as a savings bank, they may be
subject to federal income tax at the then prevailing corporate tax rate.  If
federal income taxes had been provided the deferred tax liability would have
been approximately $1,270,000.

8. Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier 1 capital (as defined) to adjusted
assets (as defined).  Management believes, as of September 30, 2000, that the
Bank meets all capital adequacy requirements to which it is subject.

                                       55
<PAGE>

8. Regulatory Matters (continued)

As of September 30, 2000, the most recent notification from the Office of Thrift
Supervision (OTS) categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.  To be categorized as well capitalized
the Bank must maintain minimum Tier 1 and total capital ratios as set forth in
the table.  The amounts and ratios as of September 30, 2000 and 1999 were set
forth under the criteria established by the OTS.  There are no conditions or
events since that notification that management believes have changed the
institution's category.


                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                                          To Be Well Capitalized
                                                                           Minimum For Capital            Under Prompt Corrective
                                                Actual                      Adequacy Purposes                Action Provisions
                                    ---------------------------      -----------------------------     ---------------------------
                                         Ratio        Amount              Ratio         Amount              Ratio        Amount
                                    ---------------------------      -----------------------------     ---------------------------
<S>                                   <C>
As of September 30, 2000:

Equity and ratio to total assets        11.57%      $ 24,283

Unrealized appreciation of
 securities available for sale                           (38)
                                                  -----------

Tier 1 (Core) and ratio to adjusted
 total assets                           11.56%      $ 24,245               4.00%        $ 8,390              5.00%      $10,488
                                                  ===========                       ============                      ==========

Tier 1 (Core) and ratio to
 risk-weighted assets                   18.82%      $ 24,245               4.00%        $ 5,154              6.00%      $ 7,731
                                                                                    ============                      ==========

Allowance for loan losses                              1,224
                                                 -----------

Total Risk-Based Capital and ratio
 to risk-weighted assets                19.77%      $ 25,469               8.00%        $10,307             10.00%      $12,884
                                                 ===========                        ===========                       ==========

Total assets                                        $209,816
                                                 ===========

Adjusted total assets                               $209,755
                                                 ===========

Risk-weighted assets                                $128,843
                                                 ===========
</TABLE>

                                       56
<PAGE>

8. Regulatory Matters (continued)

                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                                         To Be Well Capitalized
                                                                          Minimum For Capital            Under Prompt Corrective
                                                Actual                     Adequacy Purposes                Action Provisions
                                    ---------------------------      ----------------------------     ---------------------------
                                         Ratio        Amount              Ratio         Amount             Ratio        Amount
                                    ---------------------------      ----------------------------     ---------------------------
<S>          <C>
As of September 30, 1999:

Equity and ratio to total assets        14.01%      $ 26,956

Unrealized appreciation of
 securities available for sale                           (49)
                                                   ----------

Tier 1 (Core) and ratio to adjusted
 total assets                           13.99%      $ 26,907               4.00%        $7,694              5.00%      $ 9,618
                                                    ==========                         =========                       =========

Tier 1 (Core) and ratio to
 risk-weighted assets                   24.32%      $ 26,907               4.00%        $4,426              6.00%      $ 6,639
                                                                                       =========                       =========

Allowance for loan losses                              1,224
                                                   ----------

Total Risk-Based Capital and ratio
 to risk-weighted assets                25.42%      $ 28,131               8.00%        $8,852             10.00%      $11,065
                                                    ==========                         =========                       =========

Total assets                                        $192,436
                                                   ==========

Adjusted total assets                               $192,355
                                                   ==========

Risk-weighted assets                                $110,647
                                                   ==========
</TABLE>


The OTS places certain restrictions on dividends paid by the Bank to the
Company.  The total amount of dividends, which may be paid at any date, is
generally limited to the retained earnings of the Bank.  In addition, dividends
paid by the Bank to the Company would be prohibited if the effect thereof would
cause the Bank's capital to be reduced below applicable minimum capital
requirements.

                                       57
<PAGE>

9. Other Non-interest Expense

Other non-interest expense amounts are summarized as follows:


                                       Year ended September 30
                                     ----------------------------
                                              2000           1999
                                     -------------   ------------

Printing, postage and supplies            $165,381       $156,113
Professional and legal fees                282,718        245,115
Insurance premiums                          37,681         35,131
Telephone                                   52,881         60,142
Other                                      280,862        301,315
                                          $819,523       $797,816
                                     =============   ============


10. Commitments and Contingencies

In conjunction with its lending activities, the Company enters into various
commitments to extend credit.  Loan commitments (unfunded loans and unused lines
of credit) are issued to accommodate the financing needs of the Bank's
customers.  Loan commitments are agreements by the Company to lend at a future
date, so long as there are no violations of any conditions established in the
agreement.

Financial instruments (primarily equity lines), where the contract amount
represents the Company's credit risk included unused lines of credit of
$20,242,938 and $17,499,579 at September 30, 2000 and 1999, respectively.

These loan commitments are subject to the same credit policies and reviews as
loans on the balance sheets.  Collateral, both the amount and nature, is
obtained based upon management's assessment of the credit risk.  Since many of
the extensions of credit are expected to expire without being drawn, the total
commitment amounts do not necessarily represent future cash requirements.

Outstanding commitments on mortgage loans not yet closed amounted to $2,828,225
and $3,374,375 at September 30, 2000 and 1999, respectively.  Approximately 23%
and 47% of these commitments were at fixed interest rates as of September 30,
2000 and 1999, respectively.  The fixed rates ranged from 7.625% to 10.00% and
6.597% to 9.00% at September 30, 2000 and 1999, respectively.  Such commitments,
which are funded subject to certain limitations, extend over varying periods of
time with the majority being funded within a six-month period.

                                       58
<PAGE>

11. Fair Value of Financial Instruments

FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value.  In cases where quoted market prices are not available,
fair values are based on estimates using present value of expected cash flows or
other valuation techniques.  Those techniques are significantly affected by the
assumptions used, including the discount rates and estimates of future cash
flows.  In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.  The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.  The fair value estimates presented herein are
based on pertinent information available to management.  Such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

     Investment Securities
     ---------------------

     Fair values for investment securities are based on quoted market prices.
     For purposes of determining the fair value of Federal Home Loan Bank stock,
     for which quoted market prices are not available, the carrying amount of
     the stock has been considered the fair value.

     Loans Receivable
     ----------------

     The fair value of all categories of loans is estimated by discounting their
     expected future cash flows using interest rates currently being offered for
     loans with similar terms, reduced by an estimate of credit losses inherent
     in the portfolio.

     Deposit Accounts
     ----------------

     The fair value of demand deposits (e.g., interest and non-interest bearing
     and money market accounts) is assumed to be their carrying amount.  The
     fair value of savings certificates is estimated using a discounted cash
     flow calculation that applies rates currently being offered on instruments
     with similar remaining maturities.

                                       59
<PAGE>

11. Fair Value of Financial Instruments (continued)

     Borrowings
     ----------

     The fair value of advances from the Federal Home Loan Bank and the Banker's
     Bank are estimated using discounted cash flow analysis based upon rates
     currently available to the Company on similar instruments.

     Off-Balance Sheet Instruments
     -----------------------------

     Fair values of the Company's commitments to extend credit and stand-by
     letters of credit are nominal since they have short maturities, and the
     committed rates approximate current rates offered for commitments with
     similar rate and maturity characteristics.

Many of the Company's assets and liabilities are short-term financial
instruments whose carrying amounts reported in the balance sheets approximate
fair value.  These items include cash and due from banks, accrued interest
receivable and the financial instruments included in other assets and
liabilities.  The estimated fair values of the Company's remaining on-balance
sheet financial instruments are summarized as follows:


                                                       September 30, 2000
                                             -----------------------------------
                                                  Carrying          Estimated
                                                   Value            Fair Value
                                             ------------------   --------------

Financial assets:
 Investment securities available-for-sale      $  3,099,380       $  3,099,380
 Investment securities held-to-maturity             630,476            635,344
 Loans receivable                               186,915,054        187,560,000
 Federal Home Loan Bank stock                     1,627,600          1,627,600

Financial liabilities:
 Deposit accounts                               166,406,701        164,409,000
 Borrowings                                      13,600,000         13,603,000

                                       60
<PAGE>

11. Fair Value of Financial Instruments (continued)


                                                       September 30, 1999
                                              ----------------------------------
                                                 Carrying             Estimated
                                                   Value             Fair Value
                                              ----------------   ---------------

Financial assets:
 Investment securities available-for-sale     $ 16,023,687          $ 16,023,687
 Investment securities held-to-maturity            715,216               727,555
 Loans receivable                              167,874,234           165,405,414
 Federal Home Loan Bank stock                    1,606,600             1,606,600

Financial liabilities:
 Deposit accounts                             $160,809,797          $157,735,000


Statement No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements.  Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

12. Stock Incentive Plan

On February 1, 2000, the Company began an active stock option plan (the "Plan").
The Company's Plan provides for the granting of options or awards for the
purchase or issuance of 224,825 shares at 100% of the fair market value of the
stock at the date of the grant.  This amount was based on 10% of the number of
shares issued during the Conversion.  The Company can also, at its discretion,
purchase shares on the open market for issuance in the Plan.  The shares granted
in the Plan vest after a period of four years, but not to exceed 10 years from
the original grant date.  At September 30, 2000, the Company had 152,881 shares
granted at a weighted average price of $9.28.  No shares had vested; therefore
no shares have been exercised, forfeited, or expired.

The following table reflects pro forma net income and earnings per share had the
Company elected to adopt the fair value approach of FAS 123.


                                        2000
                                 --------------

Net income:
 As reported                         $1,330,889
 Pro forma                           $1,283,329

Basic earnings per share:
 As reported                         $     0.72
 Pro forma                           $     0.70


The weighted average fair value of options at their grant date during 2000 was
$3.06.  The fair value was estimated at grant date using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2000: risk-
free interest rate of 6.30%; volatility factor of the expected market price of
the stock of 19.8%; and an expected life of the options before exercise of 4.00
years.  The dividend yield was assumed to be 2.00%.

                                       61
<PAGE>

13.  Condensed Financial Statements of Parent Company

The following condensed financial information pertains only to Innes Street
Financial Corporation.  The parent company commenced operations December 28,
1998.

Condensed Balance Sheets

                                                      September 30
                                            -------------------------------
                                                      2000             1999
                                            --------------   --------------
Assets
Cash and cash equivalents                      $   763,900      $ 1,502,728
Investment securities available-for-sale                 -        6,970,717
Investment in subsidiary                        29,311,736       28,194,721
Other                                            1,920,308        1,953,906
                                            --------------   --------------
Total assets                                   $31,995,944      $38,622,072
                                            ==============   ==============


Liabilities and equity
Accrued liabilities                                 92,546          160,202
Borrowings                                       3,600,000                -
Other                                            2,501,950        2,780,088
Shareholders' equity                            25,801,448       35,681,782
                                            --------------   --------------
Total liabilities and equity                   $31,995,944      $38,622,072
                                            ==============   ==============

                                       62
<PAGE>

13.   Condensed Financial Statements of Parent Company (continued)

Condensed Statements of Income

<TABLE>
<CAPTION>
                                                                                                 Period from
                                                                             Year Ended          December 28,
                                                                           September 30,           1998, to
                                                                               2000           September 30, 1999
                                                                       ------------------   --------------------
<S>     <C>
Income:
 Dividends from subsidiary                                                    $  315,423             $  337,238
 Investments                                                                     158,451                208,352
 Other                                                                           280,149                249,056
                                                                       -----------------   --------------------

Total income                                                                     754,023                794,646

Operating expenses                                                               274,046                103,017
                                                                       -----------------   --------------------


Income before income taxes and equity in
  undistributed net income of subsidiary                                         479,977                691,629
Provision for income taxes                                                        46,281                137,450
                                                                       -----------------   --------------------


Equity in undistributed net income of
 subsidiary                                                                      897,193              1,151,075
                                                                       -----------------   --------------------


Net income                                                                    $1,330,889             $1,705,254
                                                                       =================   ====================
</TABLE>

                                       63
<PAGE>

13.  Condensed Financial Statements of Parent Company (continued)

Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                                      Period from
                                                                                                   December 28, 1998
                                                                              Year Ended           to September 30,
                                                                          September 30, 2000             1999
                                                                         --------------------   ---------------------
<S>     <C>
Operating activities
Net income                                                                       $ 1,330,889            $  1,705,254
Adjustments to reconcile net income to net
 cash  provided by (used in) operating activities:
   Equity in undistributed net income of subsidiary                                 (897,193)             (1,151,075)
   Commitment of ESOP shares                                                         211,142                 115,251
   Prorata vesting of MRP stock                                                      389,751                       -
   Decrease (increase) in other assets                                                35,407              (1,946,475)
   (Decrease) increase in accrued liabilities                                        (67,656)                160,202
   (Decrease) increase in other liabilities                                         (278,138)                981,487
   Loss on sale of investments                                                        24,066                       -
   Other, net                                                                         18,210                       -
                                                                        --------------------    --------------------

Net cash provided by (used in) operating activities                                  766,478                (135,356)
                                                                        --------------------    --------------------

Investing activities
Purchase of Bank common stock                                                              -              (9,899,874)
Purchases of investment securities                                                         -              (6,994,750)
Sale of investment securities                                                      6,943,232                       -
                                                                        --------------------    --------------------

Net cash provided by (used in) investing activities                                6,943,232             (16,894,624)
                                                                        --------------------    --------------------

Financing activities
Net proceeds from issuance of common stock                                                 -              21,598,347
Proceeds from borrowings                                                           3,600,000                       -
Return of capital dividend                                                        (8,147,072)                      -
Repurchase of common stock                                                        (3,295,977)             (1,517,562)
Purchase of common stock held by rabbi trust                                        (231,656)             (1,238,118)
Dividends paid                                                                      (373,833)               (309,959)
                                                                        --------------------    --------------------
Net cash (used in) provided by financing activities                               (8,448,538)             18,532,708
                                                                        --------------------    --------------------


Net (decrease) increase in cash and cash equivalents                                (738,828)              1,502,728
Cash and cash equivalents at beginning of period                                   1,502,728                       -
                                                                        --------------------    --------------------
Cash and cash equivalents at end of period                                       $   763,900            $  1,502,728
                                                                        ====================    ====================
</TABLE>

                                       64
<PAGE>

Item 8.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

     Not Applicable

                                    Part III
                                    --------

Item 9.  Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act

         The information required by this Item regarding directors and executive
officers of the Company and the Bank is set forth under the sections captioned
"Proposal 1 - Election of Directors" on pages 5 through 6 of the Proxy Statement
and "-Executive Officers" on page 9 of the Proxy Statement, which sections are
incorporated herein by reference.

         The information required by this Item regarding compliance with Section
16 (a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16 (a) Beneficial Ownership Reporting Compliance" set forth
on page 5 of the Proxy Statement, which is incorporated herein by reference.

Item 10.  Executive Compensation

         The information required by this Item is set forth under the sections
captioned "Proposal 1 -Election of Directors-Director Compensation" on page 8
and "-Executive Compensation" on pages 10 through 12 of the Proxy Statement,
which sections are incorporated herein by reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

         The information required by this Item is incorporated by reference from
the section captioned "Security Ownership of Certain Beneficial Owners" on pages
3 through 5 of the Proxy Statement.

Item 12.  Certain Relationships and Related Transactions

         There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-KSB.

Item 13.  Exhibits and Reports on Form 8-K

13(a)  Exhibits

     (3)(i)  Articles of Incorporation, incorporated herein by reference to
             Exhibit (3)(i) to the Registration Statement on Form S-1,
             Registration No. 333-63363, dated September 14, 1998, as amended by
             Pre-Effective Amendment No. 1, dated November 2, 1998,
             Pre-Effective Amendment No. 2, dated November 10, 1998 and
             Pre-Effective Amendment No. 3, dated November 12, 1998.

     (3)(ii) Bylaws, incorporated herein by reference to Exhibit (3)(ii) to the
             Registration Statement on Form S-1, Registration No. 333-63363,
             dated September 14, 1998, as amended by Pre-Effective Amendment
             No. 1, dated November 2, 1998, Pre-Effective Amendment No. 2, dated
             November 10, 1998 and Pre-Effective Amendment No. 3, dated
             November 12, 1998.

     (4)     Specimen Stock Certificate, incorporated herein by reference to
             Exhibit (4) to the Registration Statement on Form S-1, Registration
             No. 333-63363, dated September 14, 1998, as amended by
             Pre-Effective Amendment No. 1, dated November 2, 1998,
             Pre-Effective Amendment No. 2, dated November 10, 1998 and
             Pre-Effective Amendment No. 3, dated November 12, 1998.

     10(a)   Employment agreement between Citizen Bank, FSB and Ronald E.
             Bostian, incorporated herein by reference to Exhibit 10(a) to the
             Form 10-KSB dated December 20, 1999.

                                       65
<PAGE>

     10(b)   Innes Street Financial Corporation Stock Option Plan, incorporated
             herein by reference to Exhibit 10(c) to the Form 10-KSB dated
             December 20, 1999.

     10(c)   Citizens Bank, FSB Management Recognition Plan and Trust,
             incorporated herein by reference to Exhibit 10(d) to the Form
             10-KSB dated December 20, 1999.

     10(d)   Severance Agreement, incorporated herein by reference to Exhibit
             10(e) to the Registration Statement on Form S-1, Registration No.
             333-63363, dated September 14, 1998, as amended by Pre-Effective
             Amendment No. 1, dated November 2, 1998, Pre-Effective Amendment
             No. 2, dated November 10, 1998 and Pre-Effective Amendment No. 3,
             dated November 12, 1998.

     10(e)   Amended and Restated Nonqualified Deferred Compensation Plan,
             incorporated herein by reference to Exhibit 10(f) to the
             Registration Statement on Form S-1, Registration No. 333-63363,
             dated September 14, 1998, as amended by Pre-Effective Amendment No.
             1, dated November 2, 1998, Pre-Effective Amendment No. 2, dated
             November 10, 1998 and Pre-Effective Amendment No. 3, dated
             November 12, 1998.

     10(f)   Amended and Restated Directors Deferred Compensation Plan,
             incorporated herein by reference to Exhibit 10(g) to the
             Registration Statement on Form S-1, Registration No. 333-63363,
             dated September 14, 1998, as amended by Pre-Effective Amendment No.
             1, dated November 2, 1998, Pre-Effective Amendment No. 2, dated
             November 10, 1998 and Pre-Effective Amendment No. 3, dated
             November 12, 1998.

     10(g)   Second Directors' Deferred Compensation Plan of Citizens Bank, FSB,
             incorporated by reference to Exhibit 10(i) to the Form 10-QSB dated
             May 13, 1999.

     10(h)   Second Nonqualified Deferred Compensation Plan for Key Employees of
             Citizens Bank, FSB, incorporated by reference to Exhibit 10(ii) to
             the Form 10-QSB dated May 13, 1999.

     (11)    Statement Regarding Computation of Per Share Earnings.

     (21)    See Item 1. Description of Business for discussion of subsidiaries.

     (27)    Financial Data Schedule

13(b)  The Company filed no reports on Form 8-K during the last quarter of the
fiscal year covered by this report.

                                       66
<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.

                              INNES STREET FINANCIAL CORPORATION


Date:                         By:  /s/Ronald E. Bostian
                                 --------------------------------------
                                  Ronald E. Bostian
                                  President and Chief Executive Officer


          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 and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>

Signature                                       Title                      Date
---------                                       -----                      ----
<S>     <C>
/s/ Ronald E. Bostian              President,Chief Executive          December 29, 2000
-------------------------------    Officer and Chairman of the Board
Ronald E. Bostian


/s/ Dianne E. Hawkins              Treasurer and Controller           December 29, 2000
-------------------------------
Dianne E. Hawkins

/s/ Malcolm B. Blankenship, Jr.    Director                           December 29, 2000
-------------------------------
Malcolm B. Blankenship, Jr.

/s/ James W. Duke                  Director                           December 29 2000
-------------------------------
James W. Duke.

/s/ Harold C. Earnhardt            Vice Chairman                      December 29, 2000
-------------------------------
Harold C. Earnhardt

/s/ K.V. Epting, Jr.               Director                           December 29, 2000
-------------------------------
K.V. Epting, Jr.

/s/ Gordon P. Hurley               Director                           December 29, 2000
-------------------------------
Gordon P. Hurley

/s/ Bobby A. Lomax                 Director                           December 29, 2000
-------------------------------
Bobby A. Lomax
</TABLE>

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