================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES  EXCHANGE
     ACT OF 1934 [FEE REQUIRED]

     FOR THE FISCAL YEAR ENDED JUNE 30, 1997
                                       OR
[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15 (D)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

   FOR THE TRANSITION PERIOD FROM ______________________ TO __________________
     COMMISSION FILE NUMBER 0-18918

                               MAGNA BANCORP, INC.
             (Exact name of registrant as specified in its charter)

               DELAWARE                                     64-0793093
-----------------------------------                    -------------------
  (State or other jurisdiction of                       (I.R.S. Employer 
  incorporation or organization)                       Identification No.)
                                   
100 WEST FRONT STREET, HATTIESBURG, MISSISSIPPI                    39401
------------------------------------------------------ -------------------------
   (Address of principal executive offices)                       Zip Code

Registrant's telephone number, including area code: (601) 545-4700
                                                   ----------------

          Securities Registered Pursuant to Section 12 (b) of the Act:

                                      None

          Securities Registered Pursuant to Section 12 (g) of the Act:

                     Common Stock, par value $.01 per share
                                (Title of class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO .

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant,  computed by reference to the average of the high and low prices
of such  stock on the Nasdaq  Stock  Market as of August  29,  1997,  was $243.5
million. (The exclusion from such amount of the market value of the shares owned
by any  person  shall not be deemed an  admission  by the  registrant  that such
person is an affiliate of the registrant.)

     As of August 29, 1997, there were issued and outstanding  13,754,266 shares
of the Registrant's Common Stock.
================================================================================

<PAGE>



                              MAGNA BANCORP, INC..

                                      INDEX

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                     Numbers

PART I

<S>      <C>                                                                         <C>
Item 1.  Business  ................................................................    3
Item 2.  Properties  ..............................................................   47
Item 3.  Legal Proceedings  .......................................................   53
Item 4.  Submission of Matters to a Vote of Security Holders  .....................   53


PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters  ...   54
Item 6.  Selected Financial Data  .................................................   55
Item 7.  Management's Discussion and Analysis of Financial Condition and Results
           of Operations  .........................................................   57
Item 8.  Financial Statements and Supplementary Data  .............................   82
Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure  ..................................................  129


PART III

Item 10. Directors and Executive Officers of the Registrant  ......................  130
Item 11. Executive Compensation  ..................................................  133
Item 12. Security Ownership of Certain Beneficial Owners and Management  ..........  137
Item 13. Certain Relationships and Related Transactions  ..........................  138


PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K  .........  139


                                       2

<PAGE>



                                     PART I

ITEM 1. BUSINESS


GENERAL

Magna  Bancorp,  Inc.  (the  "Company")  is a  Delaware  corporation  formed  in
September  1990 for the purpose of becoming  the  holding  company for  Magnolia
Federal Bank for Savings ("Magnolia Federal" or the "Bank"). Magnolia Federal is
a federally  chartered savings bank  headquartered in Hattiesburg,  Mississippi.
The Bank's  deposits  are  insured up to the  applicable  limits by the  Federal
Deposit  Insurance  Corporation  (the "FDIC").  At June 30, 1997 the Company had
total  consolidated  assets of $1.4  billion,  deposits of $915.4  million,  and
stockholders'  equity of $138.4  million  (10.2%  of total  assets).  References
herein  to  the  Company  refer  to  the  Company  and  its  subsidiaries  on  a
consolidated basis.

Magnolia  Federal,  the primary  asset of the Company,  is a  community-oriented
financial institution offering a variety of financial services to meet the needs
of the  communities  it serves.  The principal  business of the Bank consists of
attracting  retail  deposits from the general  public and investing  those funds
primarily in one- to  four-family  residential  mortgage loans (and, to a lesser
extent,  multi-family,  commercial real estate and consumer loans) in the Bank's
market area. The Bank  originates a limited  number of residential  construction
loans,  but only  with the  intention  of  providing  permanent  financing  upon
completion of the construction.  The Bank has also made a limited number of land
acquisition  and  development  loans.  The Bank's one- to four-family  loans are
primarily  secured  by low-  and  moderately-priced  homes  in  Mississippi  and
Alabama.  The loans originated by the Company for its portfolio generally do not
conform to  secondary  market  standards  and  typically  have a higher  risk of
default than conforming loans. See "--Non-Performing Assets of the Company."

The Bank's  revenues are derived  principally  from interest on mortgage  loans,
interest and dividends on investment and other securities,  income from checking
account service charges,  and loan ancillary and servicing fee income.  The Bank
does not  originate  loans to fund  leveraged  buyouts,  has no loans to foreign
corporations  or  governments,   has  no  investments  in  non-investment  grade
corporate  debt  securities  (i.e.,   "junk  bonds")  or  high-risk   derivative
securities  and is not engaged in land  development or  construction  activities
through joint ventures.


Forward-Looking Statements

When  used in this  Form  10-K and in future  filings  by the  Company  with the
Securities and Exchange  Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications,  and in oral statements made with
the approval of an  authorized  executive  officer,  the words or phrases  "will
likely   result,"  "are  expected  to,"  "will   continue,"  "is   anticipated,"
"estimate,"   "project"  or  similar   expressions   are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995. Such statements are subject to certain risks and
uncertainties,  including, among other things, changes in economic conditions in
the  Company's  market  area,  changes  in  policies  by  regulatory   agencies,
fluctuations  in interest rates,  demand for loans in the Company's  market area
and  competition,  that could cause  actual  results to differ  materially  from
historical earnings and those presently anticipated or projected. The

                                       3

<PAGE>

Company  wishes to  caution  readers  not to place  undue  reliance  on any such
forward-looking  statements,  which speak only as of the date made.  The Company
wishes  to advise  readers  that the  factors  listed  above  could  affect  the
Company's financial performance and could cause the Company's actual results for
future periods to differ  materially  from any opinions or statements  expressed
with respect to future periods in any current statements.

The Company does not  undertake--and  specifically  declines any  obligation--to
publicly  release  the  result  of  any  revisions  which  may  be  made  to any
forward-looking  statements to reflect events or circumstances after the date of
such  statements or to reflect the occurrence of  anticipated  or  unanticipated
events.


Pending Merger

On May 8, 1997, the Company and Union Planters Corporation ("UPC"), entered into
an Agreement and Plan of Reorganization ("Merger Agreement"),  pursuant to which
UPC Merger Subsidiary, Inc., a corporation organized and existing under the laws
of the State of Delaware and a wholly owned  subsidiary  of UPC,  will be merged
with and into the Company. The Company will survive the merger as a wholly owned
subsidiary of UPC.

In  accordance  with  the  terms  of the  Merger  Agreement,  each  share of the
Company's common stock, par value $.01 per share,  outstanding immediately prior
to the effective  time of the merger will be converted into the right to receive
 .5165 shares of common stock,  par value $5.00 per share,  of UPC. The merger is
intended to constitute a tax-free reorganization under the Internal Revenue Code
of 1986, as amended, and to be accounted for as a pooling-of-interests.

A special  meeting of the  Company's  shareholders  was held August 20, 1997, at
which time the merger received shareholder approval.  Consummation of the merger
is subject to various conditions,  including approval by regulatory authorities,
and is expected to close on November 1, 1997.


MARKET AREA OF THE COMPANY

Based on total assets at June 30, 1997,  Magnolia  Federal is the largest thrift
institution   operating  in  Alabama  and  Mississippi  and  the  fifth  largest
depository institution headquartered in the state of Mississippi.  The executive
offices of the Company are located in the city of  Hattiesburg,  in southeastern
Mississippi.  Through its network of retail banking offices,  the Company serves
24 counties  in  Mississippi,  which  include the  communities  of  Hattiesburg,
Jackson, Gulfport, Biloxi, Grenada, Waynesboro,  Vicksburg, Natchez, Pascagoula,
Greenville,  McComb, Picayune,  Greenwood and other communities,  as well as the
Mobile  metropolitan  area in  Alabama.  The  Company  also  offers  residential
mortgage  loans  from  loan   origination   offices  located  in  Orange  Grove,
Hattiesburg  and Bay St.  Louis,  Mississippi,  and Daphne,  Alabama.  In recent
years, the Company has been  establishing  correspondent  loan arrangements with
other banks and loan brokers to originate loans  throughout the Southeast United
States.

                                       4

<PAGE>



The Company has  expanded its market area through a series of mergers and branch
and deposit  acquisitions.  These  acquisitions and the related market areas are
set forth below.


</TABLE>
<TABLE>
<CAPTION>
Acquisition or
 Merger Date                      Mississippi Institution                         Market
--------------                    -----------------------                         ------
<S>                  <C>                                                    <C>
     1972            First Federal Savings and Loan Association of          Picayune
                     Picayune
     1975            Stone County Savings and Loan Association              Wiggins
     1975            Magnolia Federal Savings and Loan Association          Jackson metro area
     1981            Coast Federal Savings and Loan Association             Gulf Coast metro area
     1982            Washington Federal Savings and Loan                    Greenville/Leland
     1982            Southwest Savings and Loan Association                 Natchez/Brookhaven
     1982            First Federal Savings and Loan Association of          Canton/Carthage/Ridgeland
                     Canton
     1982            First Federal Savings and Loan Association of          Grenada
                     Grenada
     1983            Pascagoula Building and Loan Association               Gulf Coast metro area
     1987            First Southern Savings and Loan of Jackson County      Gulf Coast metro area
     1987            Eastover Bank branch purchase                          Columbia/Tylertown/Vicksburg
     1987            First Federal Savings and Loan Association of          McComb
                     McComb
     1989            First Federal Savings and Loan Association of          Gulf Coast metro area
                     Biloxi
     1990            SouthBank branch purchase                              Jackson metro area
     1991            Greenwood Federal Savings and Loan Association         Greenwood
     1991            First Guaranty Bank for Savings                        Hattiesburg/Gulfport/Collins/
                        Picayune/McComb/Greenwood
     1991            Brookhaven Federal Savings and Loan Association        Brookhaven
     1991            First City Federal Savings Bank                        Lucedale/Escatawpa
     1991            Charter Savings Bank                                   Hattiesburg/Petal/Pascagoula/
                                                                            Long Beach
     1991            Southern Federal Savings Bank                          Gulfport/Pass Christian/
                                                                            D'Iberville/Gautier
     1993            Eagle Federal Bank for Savings                         Waynesboro/Brookhaven/
                                                                            Hattiesburg

                                    Alabama Institution
                                    -------------------
     1994            Altus Federal Savings Bank                             Mobile/Jackson
</TABLE>

                                       5

<PAGE>


Except for the acquisitions of Southwest  Savings and Loan Association and Eagle
Federal Bank for Savings,  which were  accounted for under the purchase  method,
the mergers were  accounted for under the  pooling-of-interests  method,  and no
goodwill or intangible assets resulted from the combinations.  The premiums paid
for core  deposits  acquired in branch  purchases  were  recorded as  intangible
assets.  At June 30,  1997,  $3.7  million  remained  unamortized  of premium on
purchased  deposits related to the assumption of deposit  liabilities from Eagle
Federal Bank for Savings in 1993 and the  assumption of deposit  liabilities  of
Altus Federal Savings Bank in 1994.

The Company's  resulting network of 62 offices as of June 30, 1997 is located in
central and southern  Mississippi  and southern  Alabama.  This area includes 11
offices in the Jackson  metropolitan area (the state capital) and 12 in the Gulf
Coast  metropolitan  area,  which  includes  the  cities  of  Gulfport,  Biloxi,
Pascagoula  and  other   communities.   The  economy  in  central  and  southern
Mississippi  is closely tied to the timber,  oil,  gaming,  port  facilities and
agricultural industries.  The Mississippi market area served by the Company also
includes significant employment in education and manufacturing, and Jackson, the
state's capital, is a center of government employment. The 11 offices located in
the Mobile,  Alabama metropolitan area complement the Mississippi Gulf Coast and
Hattiesburg markets. The Mobile economy is based on agriculture,  manufacturing,
retail and the Alabama port facilities.

The Company's primary  competition is from the large commercial banks located in
its primary market areas and, to a lesser degree,  from small  commercial  banks
and credit unions in the local communities in which it operates. The Company has
also  experienced  increased  competition  in the loan  origination  market from
several mortgage banking companies. See "--Competition."


LENDING ACTIVITIES OF THE COMPANY

General.  The Company  principally  originates  fixed-rate and  adjustable-rate,
single-family,  mortgage loans. Since 1982, however,  the Company has emphasized
the origination of  non-conforming  adjustable-rate  mortgage  ("ARM") loans and
short-term  consumer loans for retention in its  portfolio.  These loans reprice
more  frequently  or have  shorter  maturities,  and thus  reduce the  Company's
interest  rate  risk  and in most  cases  have  higher  yields  than  fixed-rate
conforming mortgage loans.

Virtually all conforming fixed-rate,  30-year mortgage loans originated are sold
in the  secondary  market,  through the  issuance of Federal  National  Mortgage
Association  ("FNMA"),  Federal Home Loan  Mortgage  Corporation  ("FHLMC")  and
Government National Mortgage  Association ("GNMA")  mortgage-backed  securities.
Loans that meet the  underwriting  and other standards of these secondary market
agencies are described as "conforming loans." Conventional  15-year,  fixed-rate
loans that qualify for sale to the  secondary  market may also be packaged  into
mortgage-backed  securities for credit and liquidity  enhancement  and to reduce
risk-based capital requirements.  A portion of the 15-year, fixed-rate loans and
mortgage-backed  securities  may be retained in the  Company's  portfolio if the
flow of  acceptable  adjustable-rate  loans is  inadequate  to maintain the loan
portfolio or if there are no other  desirable  investment  alternatives.  Of the
Company's  loans  at June  30,  1997,  50.9%  were  fixed-rate  and  49.1%  were
adjustable rate. All of the Company's loans and mortgage-backed  securities held
for sale or available for sale at June 30, 1997 were fixed-rate.  Loans held for
sale  accounted  for 5.4% of the total gross loan  portfolio  at June 30,  1997.
Mortgage-backed  securities  available for sale accounted for 92.1% of the total
gross  mortgage-backed  securities portfolio at June 30, 1997.

                                       6

<PAGE>

While  the  Company  has  focused  its  lending  activities   primarily  on  the
origination  of loans  secured  by first  mortgages  on  owner-occupied  one- to
four-family  residences,  the Company also  originates  small  multi-family  and
commercial  real estate loans and consumer loans in its market area. The Company
originates a limited number of residential construction loans (but only with the
intention of providing permanent financing upon completion of the construction),
and has on occasion made land  acquisition and development  loans. The Company's
one- to four-family  loans are primarily  secured by low- and  moderately-priced
homes in Mississippi  and Alabama.  At June 30, 1997,  the Company's  gross loan
portfolio totaled $966.1 million.

All  mortgage  loan  authority  is  centralized  and every loan  application  is
reviewed by a central underwriting department. Any loan that does not conform to
secondary-market  standards is reviewed by a loan committee of senior  officers.
All  single-family  real estate loans over $350,000 are approved by the Board of
Directors of Magnolia Federal.

The  following  table  reflects  the  principal  repayments   contractually  due
(assuming no  prepayments)  on the  Company's  loan  portfolio at June 30, 1997.
Management expects prepayments will cause actual maturities to be shorter.

<TABLE>
<CAPTION>
                                                 Real Estate Loans
                            --------------------------------------------------------
                                                   Multi-Family       Construction                     
                                                  and Commercial          and          Consumer      
                            One- to Four-Family    Real Estate         Development      Loans        Total
                            -------------------   --------------      ------------     --------      ------
Due During Years                                      (Dollars in Thousands)
<S>                            <C>                      <C>               <C>             <C>        <C>    
Ending June 30                                                                                       
     1998 (1) ............     $   47,764               6,684             16,094          57,320     127,862
     1999 ................         44,180               7,142                  -          14,851      66,173
     2000 ................         46,322               5,649                  -           9,661      61,632
     2001 to 2002 ........         97,588              11,594                  -           8,732     117,914
     2003 to 2007 ........        260,367              25,497                  -           4,149     290,013
     2008 to 2012 ........        191,311              10,329                  -             416     202,056
     2013 and following ..         97,698               2,798                  -               -     100,496
                                 ---------            ---------         -------------   -----------  --------
          Total ..........     $  785,230              69,693             16,094          95,129     966,146
                                 =========            =========         =============   ===========  ========

----------
<FN>
(1)  Includes  demand  loans,  loans having no stated  maturity and  outstanding
     balances under lines of credit.
</FN>
</TABLE>


As of June 30,  1997,  46.5% of the  $838.3  million of loans due after June 30,
1998 had fixed interest rates and 53.5% had adjustable interest rates.

                                       7


<PAGE>

Loan  Portfolio   Composition.   The  following  table  sets  forth  information
concerning the  composition of the Company's loan  portfolio,  in dollar amounts
and in percentages  (before  deductions for loans in process,  deferred fees and
discounts,  market  adjustments  and  allowance for possible loan losses) at the
dates indicated.
<TABLE>
<CAPTION>
                                                                                      At June 30
                                                   --------------------------------------------------------------------------------
                                                             1997                       1996                       1995            
                                                   ------------------------- -------------------------- ---------------------------
                                                      Amount      Percent       Amount       Percent       Amount        Percent   
                                                   ------------- ----------- -------------- ----------- -------------- ------------
                                                                                 (Dollars in Thousands)
<S>                                                <C>              <C>       <C>             <C>        <C>               <C>     
Real estate loans:
  One- to four-family ........................     $  785,230       81.28%    $  718,382      79.42%     $  670,315        79.80%  
  Multi-family and commercial real estate ....         69,693        7.21         78,280       8.65          80,793         9.62   
  Construction ...............................         16,094        1.66         17,007       1.88           7,715         0.92   
                                                    ----------    ---------    ----------    ---------   -----------     --------- 
    Total real estate loans, gross ...........        871,017       90.15        813,669      89.95         758,823        90.34   
                                                    ----------    ---------    ----------    ---------   -----------     --------- 

Consumer loans:
  Manufactured home ..........................         20,088        2.08         26,624       2.94          35,209         4.18   
  Savings account ............................         10,047        1.04         10,664       1.18          10,462         1.25   
  Personal property ..........................         38,355        3.97         34,519       3.82          20,911         2.49   
  Line of credit and other ...................         26,639        2.76         19,077       2.11          14,635         1.74   
                                                    ----------    ---------    ----------    ---------   -----------     --------- 
    Total consumer loans, gross ..............         95,129        9.85         90,884      10.05          81,217         9.66   
                                                    ----------    ---------    ----------    ---------   -----------     --------- 

    Total loans, gross .......................        966,146      100.00%       904,553     100.00%        840,040       100.00%  
                                                                  =========                  =========                   ========= 

Less:
  Loans in process ...........................         (9,939)                    (9,278)                    (5,088)               
  LOCOM adjustment for mortgage loans ........              -                       (148)                         -                
  Deferred fees and discounts ................        (17,690)                   (21,913)                   (27,153)               
  Allowance for possible loan losses .........        (10,424)                    (9,452)                    (9,213)               
                                                    ----------                 ----------                -----------
      Total loans, net .......................     $  928,093                 $  863,762                $   798,586                
                                                    ==========                 ==========                ===========
<CAPTION>
                                                                      At June 30
                                               -------------------------------------------------------
                                                          1994                         1993           
                                               ---------------------------- --------------------------
                                                   Amount        Percent       Amount        Percent  
                                               --------------- ------------ -------------- -----------
                                                                  (Dollars in Thousands)
<S>                                             <C>               <C>        <C>              <C>     
Real estate loans:                                                                                    
  One- to four-family ........................  $  595,168        78.85%     $  603,517       78.42%  
  Multi-family and commercial real estate ....      77,291        10.24          84,028       10.92   
  Construction ...............................       5,472         0.72           2,611        0.34   
                                               --------------- ------------ -------------- -----------
    Total real estate loans, gross ...........     677,931        89.81         690,156       89.68   
                                               --------------- ------------ -------------- -----------
                                                                                                      
Consumer loans:                                                                                       
  Manufactured home ..........................      41,836         5.54          46,789        6.08   
  Savings account ............................      10,445         1.38          11,621        1.51   
  Personal property ..........................      16,504         2.19          13,450        1.75   
  Line of credit and other ...................       8,116         1.08           7,579        0.98   
                                               --------------- ------------ -------------- -----------
    Total consumer loans, gross ..............      76,901        10.19          79,439       10.32   
                                               --------------- ------------ -------------- -----------
                                                                                                      
    Total loans, gross .......................     754,832       100.00%        769,595      100.00%  
                                                               ============                ===========
                                                                                                      
Less:                                                                                                 
  Loans in process ...........................      (3,665)                     (2,909)               
  LOCOM adjustment for mortgage loans ........        (123)                          -                
  Deferred fees and discounts ................     (26,306)                    (22,354)               
  Allowance for possible loan losses .........      (9,781)                     (9,661)               
                                               ---------------              --------------
      Total loans, net .......................  $  714,957                  $  734,671                
                                               ===============              ==============
</TABLE>

                                       8

<PAGE>

The following  table sets forth the  composition of the Company's loan portfolio
by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
                                                                                   At June 30
                                               -------------------------------------------------------------------------------------
                                                          1997                         1996                        1995             
                                               ---------------------------  ---------------------------  -------------------------- 
                                                  Amount        Percent         Amount       Percent        Amount       Percent    
                                               -------------  ------------  --------------- -----------  -------------- ----------- 
                                                                                (Dollars in Thousands)
<S>                                            <C>              <C>          <C>               <C>         <C>             <C>      
Fixed-rate loans:
Real estate:
  One- to four-family ......................   $  361,774       37.45%       $  344,422        38.08%      $  329,901      39.27%   
  Multi-family and commercial real estate ..       31,230        3.23            37,721         4.17           37,922       4.51    
  Construction .............................       16,094        1.66            17,007         1.88            7,715       0.92    
                                               -------------  ------------  --------------- -----------  -------------- ----------- 
    Total real estate loans ................      409,098       42.34           399,150        44.13          375,538      44.70    
Consumer ...................................       82,883        8.58            73,692         8.15           58,194       6.93    
                                               -------------  ------------  --------------- -----------  -------------- ----------- 
    Total fixed-rate loans, gross ..........      491,981       50.92           472,842        52.28          433,732      51.63    
                                               -------------  ------------  --------------- -----------  -------------- ----------- 

Adjustable-rate loans:
Real estate:
  One- to four-family ......................      423,456       43.83           373,960        41.34          340,414      40.53    
  Multi-family and commercial real estate ..       38,463        3.98            40,559         4.48           42,871       5.10    
                                               -------------  ------------  --------------- -----------  -------------- ----------- 
    Total real estate loans ................      461,919       47.81           414,519        45.82          383,285      45.63    
  Consumer .................................       12,246        1.27            17,192         1.90           23,023       2.74    
                                               -------------  ------------  --------------- -----------  -------------- ----------- 
    Total adjustable-rate loans, gross .....      474,165       49.08           431,711        47.72          406,308      48.37    
                                               -------------  ------------  --------------- -----------  -------------- ----------- 

      Total loans, gross ...................      966,146      100.00%          904,553       100.00%         840,040     100.00%   
                                                              ============                  ===========                 =========== 
Less:
  Loans in process .........................       (9,939)                       (9,278)                       (5,088)              
  LOCOM adjustment for mortgage loans ......            -                          (148)                            -               
  Deferred fees and discounts ..............      (17,690)                      (21,913)                      (27,153)              
  Allowance for possible loan losses .......      (10,424)                       (9,452)                       (9,213)              
                                               -------------                ---------------              --------------

        Total loans, net ...................   $  928,093                    $  863,762                    $  798,586               
                                               =============                ===============              ==============
<CAPTION>
                                                                     At June 30
                                               -----------------------------------------------------
                                                          1994                       1993           
                                                -------------------------  -------------------------
                                                   Amount      Percent       Amount        Percent  
                                                ------------- -----------  ------------  -----------
                                                               (Dollars in Thousands)
<S>                                             <C>             <C>         <C>             <C>     
Fixed-rate loans:                                                                                   
Real estate:                                                                                        
  One- to four-family ......................    $  294,334      38.99%      $  310,969      40.41%  
  Multi-family and commercial real estate ..        32,225       4.27           31,112       4.04   
  Construction .............................         5,472       0.73            2,611       0.34   
                                                ------------- -----------  ------------  -----------
    Total real estate loans ................       332,031      43.99          344,692      44.79   
Consumer ...................................        50,893       6.74           53,383       6.94   
                                                ------------- -----------  ------------  -----------
    Total fixed-rate loans, gross ..........       382,924      50.73          398,075      51.73   
                                                ------------- -----------  ------------  -----------
                                                                                                    
Adjustable-rate loans:                                                                              
Real estate:                                                                                        
  One- to four-family ......................       300,834      39.85          292,548      38.01   
  Multi-family and commercial real estate ..        45,066       5.97           52,916       6.88   
                                                ------------- -----------  ------------  -----------
    Total real estate loans ................       345,900      45.82          345,464      44.89   
  Consumer .................................        26,008       3.45           26,056       3.38   
                                                ------------- -----------  ------------  -----------
    Total adjustable-rate loans, gross .....       371,908      49.27          371,520      48.27   
                                                ------------- -----------  ------------  -----------
                                                                                                    
      Total loans, gross ...................       754,832     100.00%         769,595     100.00%  
                                                              ===========                ===========
Less:                                                                                               
  Loans in process .........................        (3,665)                     (2,909)             
  LOCOM adjustment for mortgage loans ......          (123)                          -              
  Deferred fees and discounts ..............       (26,306)                    (22,354)             
  Allowance for possible loan losses .......        (9,781)                     (9,661)             
                                                -------------              ------------
                                                                                                    
        Total loans, net ...................    $  714,957                  $  734,671               
                                                =============              ============
</TABLE>

                                       9

<PAGE>



One-  to  Four-Family  Residential  Mortgage  Lending.   Residential  loans  are
generated  by  the  Company's   marketing   efforts,   its  present   customers,
correspondent  network and referrals from real estate brokers and builders.  The
Company has focused its lending  efforts  primarily on the  origination of loans
secured by first mortgages on owner-occupied, one- to four-family residences. At
June 30, 1997,  the Company's  one- to  four-family  residential  mortgage loans
totaled $785.2 million, or 81.3% of the Company's total mortgage loan portfolio.
The  Company's  primary  target  market  for its one- to  four-family  portfolio
lending program is the low- and moderately-priced  sector of the housing market,
with an average purchase price between $30,000 and $90,000.  Management believes
that this market includes a majority of the homes in its lending area.

The Company emphasizes the origination of non-conforming, conventional ARM loans
for retention in its portfolio and conforming  fixed-rate  loans  qualifying for
sale in the secondary  market.  During the year ended June 30, 1997, the Company
originated  $138.6  million  of  one-  to  four-family  residential  ARM  loans,
representing  30.5% of the total  mortgage  loans  originated.  During  the same
period, the Company originated $307.9 million of fixed-rate, one- to four-family
residential  mortgage  loans,  representing  67.6% of the total  mortgage  loans
originated.  The volume of fixed-rate  loans  originated in the current year was
less than the  $378.2  million in the prior  fiscal  year  primarily  because of
higher long-term interest rates in effect during the current year.  Originations
of  multi-family  and  commercial  loans  accounted  for only  1.9% of the total
mortgage  loans  originated.  The  Company's  one-  to  four-family  residential
mortgage originations are predominantly in its market area.

The Company  generally makes one- to four-family  residential  mortgage loans in
amounts up to 80% of the appraised  value of the property  securing the loan and
only exceeds this loan-to-value ratio if the borrower has a superb credit rating
or in order to facilitate  the sale of foreclosed  property.  The Company's loan
programs  are  targeted  to  customers   who  either  do  not  meet  the  credit
requirements  of the  secondary  market to qualify for a fixed-rate  loan or who
prefer not to comply with the documentation requirements of the secondary market
or require a loan that exceed the lending agencies' limits.  The Company markets
a 15-year loan with a single rate adjustment at the Company's  option at the end
of the fifth year.  The initial rate charged for the loan is  determined  by the
Company on a  loan-by-loan  basis in  accordance  with  market  and  competitive
factors and by reference to the customer's empirically derived credit score. The
one-time rate adjustment  after five years is based on a 2% margin over the FNMA
required  net yield for  certain  15-year  fixed rate whole  loans  subject to a
60-day mandatory delivery,  with a 6% cap. Qualifying customers are also offered
a 20-year loan with similar rate adjustments at the Company's option every fifth
year.  Borrowers  under  this  program  are  subject  to more  stringent  credit
requirements thereby limiting the credit risk associated with longer-term loans.

The Company also offers a non-conforming  ARM loan with a negotiated margin that
is generally at least 500 basis points over the one-year Treasury bill rate. The
loan  provides for a 2% annual  interest  rate cap and a lifetime cap of 5% over
the fully-indexed  rate calculated at the date of origination.  As a consequence
of using caps,  the interest  rates on these loans are not  necessarily  as rate
sensitive  as is the  Company's  cost of  funds.  The loan also  provides  for a
floating  floor  rate of not less than 500  basis  points  above the  nationwide
average cost of funds for savings institutions. The initial rate charged for the
loan is typically  not below the  fully-indexed  rate and is  determined  by the
Company  on a  loan-by-loan  basis in  accordance  with  market  factors  and by
reference to an  empirically  derived credit score provided by an outside credit
bureau.  The loan  provides  for annual  rate  adjustments  and the loan term is
limited  to a  maximum  of 15  years.

                                       10

<PAGE>



Generally,  the Company's ARMs are not convertible  into fixed-rate loans and do
not permit negative  amortization  of principal.  By law, there is no prepayment
penalty. The Company has determined,  through experience,  that ARMs are subject
to increased risk of delinquency or default as  fully-indexed  rates of interest
are  increased  to  higher  levels.   As  a  result,   the  Company  varies  the
loan-to-value  ratios at the time of origination  from a low of 50% to a maximum
of 90%,  depending upon the borrower's credit score, and limits the loan term to
20 years or less in an effort to offset  the  additional  risk of  default  from
non-conforming  ARM loans.  Mortgage  insurance and the borrower's  down payment
facilitate the sharing of risk in the event of default. The Company, however, is
substantially  dependent upon the underlying collateral for recovery and special
emphasis is placed on the property appraisal in the underwriting process.  While
the  Company  evaluates  the  borrower's  ability to make  monthly  payments  in
underwriting ARM loans, the major emphasis is placed on the best estimate of the
distressed  liquidation  value of the property by the Company's loan  committee.
The Company  attempts not to lend more on its portfolio  loans than it estimates
the  property  securing  the loan will bring at a distress  sale as these  loans
typically do not meet the more stringent secondary market standards.

The Company  offers  fixed-rate  15- and 30-year  mortgage loans that conform to
secondary   market  standards  (i.e.,   FNMA,  GNMA,   FHLMC,   Federal  Housing
Administration ("FHA") and Veterans  Administration ("VA") standards).  Interest
rates  charged on these  fixed-rate  loans are  competitively  priced on a daily
basis  according  to  market  conditions.   By  law,  the  Company's  fixed-rate
residential  loans do not include  prepayment  penalties.  The 30-year loans are
generally  securitized into  mortgage-backed  securities and the mortgage-backed
securities are sold to generate liquidity for additional lending purposes and to
mitigate interest rate risk.  Depending on the volume of loan production and the
Company's liquidity requirements, the 15-year loans also may be securitized into
mortgage-backed securities to be sold or used as collateral for borrowings.

Upon the receipt of a completed loan  application  from a prospective  borrower,
the Company determines if the loan should be processed as a fixed-rate secondary
market loan or as an ARM loan.  All ARM loans are intended to be retained in the
Company's portfolio.  All fixed-rate secondary market loans follow standards and
procedures  specified  by the  federally-sponsored  agency.  The Company  and/or
selected  loan  underwriters  of  the  Company  have  been  approved  as  direct
underwriters for all  federally-sponsored  agencies (i.e.,  FNMA, FHLMC, the FHA
and the VA) and have been granted authority to approve qualified loans on behalf
of the  agencies  without  further  review,  provided  the loans meet all of the
required standards.  Requirements for title insurance, hazard insurance, escrow,
loan closing and other terms are all specified by the agencies in written policy
and must be followed by the Company in processing,  closing and servicing of the
loan.

An appraisal or value estimate of the property  securing the loan is obtained on
all loan  applications,  usually  from  Realty  Services  Inc.,  a  wholly-owned
appraisal  subsidiary of the Company.  The completed  loan  application  file is
submitted to the central underwriting  department for review. The Company's loan
committee,  which consists of senior officers,  reviews each non-conforming loan
application  and  establishes the conditions of each approved loan. The interest
rate  offered  on each  loan is  directly  related  to the  credit  score of the
borrower.  A pre-determined  matrix relating a credit score range to the type of
loan,  maximum  loan-to-value  ratio  and  interest  rate is  used  by the  loan
committee  on a  regular  basis in order to assure  consistency  in the rate and
terms  offered to  borrowers.  All loans are tracked and closed  using a central
on-line  tracking  and  closing  system.   Following  closing,  loan  files  and
disbursements  are  audited  by  Company  personnel   independent  of  the  loan
origination  and closing  functions.  Mortgagee  title  insurance  is  generally
obtained on all loans  originated by the Company.  Borrowers  must obtain hazard

                                       11

<PAGE>

insurance  prior to closing.  The  Company  also  requires  flood  insurance  on
property  located  in special  flood  hazard  areas.  Generally,  borrowers  are
required to advance  funds on a monthly  basis,  together  with each  payment of
principal and interest, through a mortgage escrow account from which the Company
makes  disbursements  for items such as real estate  taxes and hazard  insurance
premiums as they become due.

Beginning in 1990, the Company  initiated a strategy of purchasing  seasoned and
performing  fixed-rate and adjustable-rate  loans secured by single-family homes
from the Resolution Trust Corporation ("RTC") and others. The Company originally
purchased loans from the RTC to supplement its loan origination  volume,  due to
weak loan demand in the Company's market areas, and to facilitate the investment
of funds  received  from  the  acquisition  of  deposits  from RTC  institutions
liquidated in the  Company's  primary  market area.  The  availability  of loans
meeting the Company's purchase criteria has been substantially reduced in recent
years,  but the Company  continues  to evaluate  and bid on loan  packages  from
various entities as they become available. In fiscal 1997, the Company purchased
$15.4  million of mortgage  loans in order to  supplement  its loan  origination
volume.  Each loan purchase is on a bid basis after Company  personnel perform a
review of the  available  information  in the loan files and  selected  property
examinations as considered necessary. The Company does not order a new appraisal
of the collateral  property.  All bids for loan packages  exceeding $350,000 are
approved by the Board of  Directors of Magnolia  Federal.  Loan  purchases  have
generally   been  limited  to  loans  secured  by  properties   located  in  the
southeastern United States due to management's familiarity with the laws of such
states  and  to  promote  operating  efficiencies.   The  Company  purchases  an
occasional  loan  secured by property  outside  these  states if required by the
seller in order to purchase an entire loan package. The Company also purchases a
substantial  number  of  individual  loans  from  others  that  were  originated
primarily from owner-financed sales transactions. On these purchases the Company
obtains a value estimate of the property,  a title opinion,  verification of the
loan amount  with the  borrower  and  approval  of two loan  committee  members.
Acquisition  prices for all loans  purchased  depend upon market interest rates,
loan quality,  and  delinquency  status and are typically  discounted to a yield
commensurate with the associated interest rate risk and credit risk.

GNMA permits servicers of GNMA mortgage-backed  securities to purchase from GNMA
pools any FHA/VA  insured/guaranteed  mortgages  that are  delinquent 90 days or
more.  During the year,  the Company  purchased  approximately  $5.4  million of
delinquent FHA/VA insured/guaranteed loans from its GNMA mortgage loan servicing
portfolio  at par to  eliminate  the cost of  advancing  funds  to the  security
holders on these relatively  high-rate  loans.  With an average interest rate of
over 10.5%, these loans supplement the Bank's average  non-conforming  portfolio
rate with  virtually no increase in credit risk due to their  insured/guaranteed
status.

The weighted  average yield to maturity on all loans  purchased  during the year
ended June 30, 1997,  consisting  primarily of one- to  four-family  loans,  was
approximately 10.2%. See also "--Originations, Purchases, Sales and Servicing of
Mortgage Loans and Mortgage-Backed Securities of the Company."

The Company's residential mortgage loans customarily include due-on-sale clauses
giving the Company the right to declare the loan  immediately due and payable in
the event the borrower  sells or otherwise  disposes of the property  subject to
the  mortgage.  Loans  insured by the FHA prior to  December  1989 or  partially
guaranteed by the VA prior to March 1988 do not contain due-on-sale clauses. The
Company has  exercised  due-on-sale  clauses in its mortgage  contracts  for the
purpose of credit  evaluation  of the  purchaser  and also  increasing  its loan
portfolio yield. The yield increase is obtained through the

                                       12

<PAGE>



authorization  of  assumptions of existing loans at higher rates of interest and
the imposition of assumption fees. ARM loans may be assumed provided home buyers
meet the Company's underwriting standards and the applicable fees are paid.

Multi-Family  and  Commercial  Real Estate  Lending.  Prior to 1989, the Company
engaged in a limited amount of multi-family  and commercial real estate lending,
primarily in its market area in  Mississippi.  Because of market and  regulatory
conditions,  in 1989 the Company discontinued making multi-family and commercial
real estate loans in excess of $500,000, unless necessary to facilitate the sale
of Company assets, and imposed  additional  restrictions on borrowers with total
loans outstanding in excess of $1 million, regardless of security.

The Company has purchased  seasoned and performing  multi-family  and commercial
real  estate  loans.  The bid  and  underwriting  procedures  for  purchases  of
multi-family  and commercial real estate loans is  substantially  similar to the
procedures used for one- to four-family loans as described earlier,  except that
an  inspection  is performed by Company  personnel on each  property  securing a
multi-family  or  commercial  loan  with  a  significant  outstanding  principal
balance.  Large-dollar  loans  must be  secured  by  properties  located  in the
southeastern  United States before being  considered  for purchase.  The Company
purchased $1.1 million of  multi-family  and commercial real estate loans during
the year ended June 30, 1997.

Loans  secured  by  multi-family  and  commercial  real  estate  properties  are
generally  originated  for greater  amounts and involve a greater degree of risk
than one- to four-family  residential  mortgage loans. Because payments on loans
secured  by  multi-family  and  commercial  real  estate  properties  are  often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse  conditions in the real estate market or
the  economy.  If the cash flow from the  project is reduced  (for  example,  if
leases are not obtained or renewed),  the  borrower's  ability to repay the loan
may be  impaired.  The  Company  attempts  to  minimize  these  risks by lending
primarily on seasoned and occupied  income-producing  properties  and  generally
restricting such loans to property in Mississippi or Alabama.  At June 30, 1997,
only $354,000, or 0.5% of the Company's  multi-family and commercial real estate
portfolio,  was 90 days or more delinquent.  See "--Non-Performing Assets of the
Company."

The Company's  multi-family and commercial real estate loans are negotiated on a
case-by-case basis. The Company has a variety of rate adjustment features,  call
provisions and other terms in its  multi-family  and commercial real estate loan
portfolio.  The Company analyzes the financial condition of the borrower and the
reliability  and  predictability  of the net income  generated  by the  property
securing the loan in  determining  whether to extend  credit.  In addition,  the
Company generally requires a net operating  income-to-debt servicing ratio of at
least 1.15-to-1.  Appraisals on properties securing  multi-family and commercial
real estate loans  originated by the Company are performed or reviewed by Realty
Services, Inc.

                                       13

<PAGE>



The  following  table sets forth by type of collateral  the number,  outstanding
principal   balance  and  weighted   average  interest  rate  of  the  Company's
multi-family  and  commercial  real estate loans at June 30, 1997. At such date,
the Company had $69.7 million of multi-family  and commercial real estate loans,
which represented 7.2% of the Company's loan portfolio.  At June 30, 1997, 64.4%
of the Company's  multi-family  and  commercial  real estate loan  portfolio was
secured by properties located in Mississippi.

<TABLE>
<CAPTION>
                                        Number           Principal       Average
Type of Collateral                     of Loans           Balance         Rate
------------------                     --------       --------------    --------
                                               (Dollars in Thousands)
<S>                                           <C>      <C>                 <C>  
Apartments ..........................         78       $16,192,292         9.09%
Nursing homes .......................          3         4,318,868         9.41
Shopping center .....................         13         9,630,183         9.32
Office buildings ....................         49         5,607,599         9.36
Developed lots and unimproved land ..        445        10,375,107        10.56
Churches ............................         99         8,615,664         9.30
Warehouses ..........................         15         2,728,959         9.24
Motels and hotels ...................          2         1,092,286         9.53
Farms ...............................         72         4,233,643        10.05
Retail stores .......................         24         1,063,586        10.19
Trailer parks .......................          4           600,547        10.34
Restaurants .........................          6           342,292         9.46
Medical clinics and hospitals .......          3           615,042         8.97
Other ...............................         33         4,277,420         9.69
                                     -----------       -----------     --------
                                             846       $69,693,488         9.54%
                                     ===========       ===========     ========
</TABLE>

Limitation of the Bank's  non-residential real estate lending (i.e.,  commercial
real estate lending,  other than lending on certain multi-family  residences) is
not   expected   to   materially   affect   the   Company's   operations.    See
"--Regulation--Federal Regulation of Savings Associations".

At June 30, 1997, the largest amount outstanding to any one borrower or group of
affiliated  borrowers was $8.3  million.  This amount  represented  loans to ten
entities   with  common   principals,   secured  by   completed   and   occupied
single-family,  multi-family  and commercial real estate  properties  located in
Hattiesburg,  Jackson and Oxford, Mississippi. At June 30, 1997, the Company had
no other  loans in excess of $5.0  million to any  borrower  or group of related
borrowers.

Consumer  Lending.  Management  considers  consumer  lending to be an  important
component of its lending activities. Specifically, consumer loans generally have
shorter  terms to maturity  or demand  features  (thus  reducing  the  Company's
exposure to changes in interest  rates) and carry higher rates of interest  than
one- to four-family residential mortgage loans. In addition, management believes
that the offering of consumer loan products helps to expand and create  stronger
ties to its  existing  customer  base  by  increasing  the  number  of  customer
relationships and providing cross-marketing opportunities.

                                       14

<PAGE>



The Company offers a variety of secured consumer loans,  including loans secured
by savings deposits and direct automobile loans. In addition, the Company offers
home  improvement  loans and unsecured  consumer  loans.  The Company  currently
originates all of its consumer loans in Mississippi and Alabama.

The  Company's   consumer  loan  originations  are   predominantly   short-term,
fixed-rate, simple interest loans. At June 30, 1997, the Company's consumer loan
balances  totaled $95.1  million,  or 9.9% of its gross loan  portfolio.  Of the
consumer  loan  balance  at June 30,  1997,  87.1%  in  principal  balance  were
fixed-rate  loans and 12.9% were longer term  adjustable-rate  loans  secured by
manufactured homes.

Consumer loan terms vary according to the type of collateral, length of contract
and creditworthiness of the borrower. Terms to maturity range up to 15 years for
manufactured  home loans and 60 months for other secured and unsecured  consumer
loans. The Company offers both open- and closed-end  credit.  Open-end credit is
extended  through  lines  of  credit  that  are  tied to a  negotiable  order of
withdrawal ("NOW") or demand account. The credit lines bear interest rates up to
21% and may be approved up to $5,000.  Higher lines of credit may be approved in
special cases or if the borrower secures the loan with collateral.

Branch lending  officers of the Bank are authorized to approve consumer loans to
borrowers  with  credit  scores  above a  pre-established  level  and  have  the
authority to approve all loans secured by savings  deposits.  Loans to borrowers
with credit scores below the level  required for branch  approval  authority are
reviewed and approval is determined by a central  underwriting  department.  The
underwriting  standards  employed on loans to  borrowers  who do not qualify for
branch approval  include a determination  of the applicant's  payment history on
other debts and an assessment of the ability to meet  existing  obligations  and
payments on the proposed loan. Although creditworthiness of the applicant is the
primary  consideration,  the underwriting  process also includes a comparison of
the value of the security, if any, to the proposed loan amount.

The  Company's  manufactured  home loan  portfolio as of June 30, 1997 was $20.1
million, or 2.1% of the total loan portfolio.  Dealer participations or purchase
discounts  totaled $1.2 million at June 30, 1997. All  manufactured  home loans,
which  typically  have  a  higher  yield  and  shorter  maturity  than  one-  to
four-family  residential  mortgage  loans,  were  originated in  Mississippi  or
Alabama and  substantially  all were for terms of 15 years or less.  The Company
discontinued its indirect lending program in 1996 due to increased  competition.
Indirect  manufactured home loans had been made since 1980 with adjustable rates
of  interest  while  direct  loans were made with fixed  rates.  Generally,  the
maximum loan amount for manufactured  housing does not exceed 90% of the buyer's
cost that can include such items as freight,  itemized set-up charges,  physical
damage insurance, sales tax and filing and recording fees. Value estimates based
on  personal  inspection  and NADA book  values are  performed  to  substantiate
current market values on used manufactured homes.

Consumer  loans  may  entail  greater  risk  than  residential  mortgage  loans,
particularly  loans that are  unsecured  or are secured by rapidly  depreciating
assets,  such as automobiles.  In such cases,  any repossessed  collateral for a
defaulted  consumer loan may not provide an adequate  source of repayment of the
outstanding loan balance as a result of the greater  likelihood of damage,  loss
or  depreciation.  In addition,  consumer loan  collections are dependent on the
borrower's  continuing  financial  stability,  and thus are  more  likely  to be
affected by adverse  personal  circumstances.  Furthermore,  various federal and
state laws,  including bankruptcy and insolvency laws, may limit the amount that
can be  recovered  on such loans.  Recently  the level of  delinquencies  in the
Company's consumer loan portfolio has increased (at

                                       15

<PAGE>



June 30, 1997,  $1.0  million,  or  approximately  1.1%,  of the  consumer  loan
portfolio was 90 days or more delinquent) and has resulted in higher charge-offs
during  the   current   fiscal   year,   compared   to  the  prior   year.   See
"--Non-Performing Assets--".

Construction  Lending.  The  Company  originates  a  limited  number of loans to
finance the  construction  of one- to  four-family  residences  and, to a lesser
extent,  commercial real estate. Most construction loans are for individuals who
want a custom-built  home on property of their selection and require a permanent
loan on such home.  All  construction  and  development  lending  are limited to
properties  located in the states of Mississippi and Alabama.  At June 30, 1997,
the Company had loans to finance  construction  totaling  $16.1  million,  which
represented approximately 1.7% of the Company's loan portfolio.

Construction  loans  generally  have terms of up to 18 months at fixed  interest
rates. Loan proceeds are disbursed in increments as construction  progresses and
as inspections  warrant.  The Company  finances the  construction of individual,
owner-occupied  houses  on the  basis  of  underwriting  and  construction  loan
management  guidelines.  The  Company  engages  in some  tract  development  and
construction  lending for builders with underwriting  emphasis on the borrower's
capital and the  collateral's  value.  Construction  loans are  structured to be
converted to permanent loans at the end of the construction phase.

Construction and development  lending involve greater risk and expense than does
one- to four-family  residential lending,  principally because of the difficulty
in evaluating  accurately the total funds required to complete a project and the
post-completion  value of the project.  As a result, the Company places a strong
emphasis upon the borrower's ability to complete the project and repay principal
and interest.


ORIGINATIONS,   PURCHASES,   SALES  AND   SERVICING   OF   MORTGAGE   LOANS  AND
MORTGAGE-BACKED SECURITIES OF THE COMPANY

In January  1995,  Magnolia  Federal  transferred  all loan  servicing  and loan
origination  responsibilities to its subsidiary,  Magna Mortgage Company ("Magna
Mortgage"). Real estate loans are originated by Magnolia Federal's staff of loan
officers  working in 31 branch offices and four loan  origination  offices and a
network of approximately 99 correspondent  banks and brokers.  Loan applications
are taken in each office in the name of the Bank and then immediately  forwarded
to Hattiesburg for processing,  underwriting  and approval.  Walk-in and mail-in
customers  and  referrals  from real estate  brokers and builders are  important
sources of loan originations.

The Company originates both adjustable-rate and fixed-rate loans. Its ability to
originate loans is dependent upon the relative customer demand for fixed-rate or
ARM loans in the  origination  market,  which is affected by the term  structure
(short-term  compared to long-term) of interest rates as well as the current and
expected future level of interest  rates.  The Company pools most of its 30-year
fixed-rate  loan production  into  mortgage-backed  securities for sale to FNMA,
FHLMC  and GNMA to  generate  liquidity  for  further  lending  and to avoid the
interest  rate risk  attendant  to  long-term  fixed-rate  assets.  The  15-year
fixed-rate loans may be pooled into mortgage-backed  securities and sold or used
as collateral for  borrowings,  depending upon the volume of loan production and
liquidity requirements.

Occasionally,  the  Company  may also  pool  loans  from its  existing  seasoned
portfolio to create mortgage-backed securities to enhance liquidity. The Company
sells its  mortgage-backed  securities without recourse and subject to retention
of the loan  servicing  (i.e.,  handling  collection  of principal  and interest

                                       16

<PAGE>



payments),  for which it  generally  receives a fee of .25% to .44% per annum of
the unpaid balance of each loan. In fiscal 1997,  1996 and 1995 the Company sold
$205.7   million,   $207.1  million  and  $115.9   million,   respectively,   of
mortgage-backed  securities  that had been created  from pooling its  fixed-rate
loan production.

As of June 30,  1997,  the Company  held $10.5  million of  fixed-rate,  15-year
mortgage-backed  securities  that it  originated  and  designated  as  held  for
investment. As of such date, these securities had a fair value of $10.8 million.
These  mortgage-backed  securities can serve as collateral  for borrowings  and,
through  repayments,  as a  source  of  liquidity  and  will  also  qualify  for
regulatory  liquidity when the contractual maturity is five years or less. As of
June  30,  1997,  the  Company  also  held  $122.4  million  of  mortgage-backed
securities as available for sale that are carried at fair value.

From time to time,  the Company has purchased real estate and consumer loans and
mortgage-backed  securities  in  accordance  with  its  ongoing  asset/liability
management  objectives.  In fiscal 1997, 1996 and 1995 the Company  purchased or
pooled  $208.7  million,   $362.6  million  and  $236.7  million  of  loans  and
mortgage-backed  securities,  respectively.  The Company  purchases loans on the
basis similar to the underwriting standards it employs for ARM loans intended to
be retained in its portfolio.

In June 1986,  the Company  initiated a program of purchasing  loan servicing in
addition to its regular program of generating  servicing through the origination
and sale of secondary  market  loans.  At June 30,  1997,  the  Company's  total
portfolio of loans serviced for others contained 76,365 loans, with an aggregate
principal  balance of $3.1  billion  including  both  purchased  and  originated
mortgage  servicing.  The unamortized cost of mortgage servicing rights was $8.6
million at June 30, 1997.  The Company  amortizes  the cost of these rights over
terms of three to six years using an accelerated method and measures  impairment
quarterly in accordance  with  Statement of Financial  Accounting  Standards No.
122, "Accounting for Mortgage Servicing Rights."

                                       17

<PAGE>


The  following  table  sets  forth  the  loan  origination,  purchase,  sale and
repayment  activities of the Company for the periods  indicated.  Mortgage loans
that are pooled in  mortgage-backed  securities  are  included  as sales of real
estate loans.

<TABLE>
<CAPTION>
                                                                                     Years Ended June 30
                                                                      -------------------------------------------------
                                                                          1997             1996              1995
                                                                      -------------    --------------     ------------
                                                                                      (Dollars in Thousands)
<S>                                                                   <C>                 <C>                 <C>   
Loan originations:
     Adjustable-rate:
        Real estate:
           One- to four-family ...................................    $   138,590         114,491             98,581
           Multi-family and commercial ...........................          3,566           4,381              3,554
        Consumer .................................................              -             676              3,616
                                                                      -------------    --------------     ------------
             Total adjustable-rate ...............................        142,156         119,548            105,751
                                                                      -------------    --------------     ------------

     Fixed-rate:
        Real estate:
           One- to four-family ...................................        307,913         378,153            131,508
           Multi-family and commercial ...........................          5,158           5,665              4,714
        Consumer .................................................         94,702          87,333             60,741
                                                                      -------------    --------------     ------------
             Total fixed-rate ....................................        407,773         471,151            196,963
                                                                      -------------    --------------     ------------

                Total loans originated ...........................        549,929         590,699            302,714
                                                                      -------------    --------------     ------------

Purchases:
      Real estate loans ..........................................         15,425          45,517             89,310
      Consumer loans .............................................              -              15                818
                                                                      -------------    --------------     ------------
                Total purchased ..................................         15,425          45,532             90,128
                                                                      -------------    --------------     ------------

Real estate loan sales ...........................................        196,096         291,872             92,482
                                                                      -------------    --------------     ------------

Principal repayments .............................................        307,665         279,846            215,152
                                                                      -------------    --------------     ------------
                    Total reductions .............................        503,761         571,718            307,634
                                                                      -------------    --------------     ------------
                         Net increase ............................     $   61,593          64,513             85,208
                                                                      =============    ==============     ============
</TABLE>

                                       18

<PAGE>



The following table summarizes certain information  regarding the Company's loan
servicing portfolio at the dates shown.
<TABLE>
<CAPTION>
                                                                    At June 30
                    ------------------------------------------------------------------------------------------------------------
                                  1997                               1996                                1995
                    ------------------------------------ ---------------------------------- ------------------------------------
                                                 % of                              % of                                 % of
                     Number      Amount         Total    Number     Amount         Total    Number      Amount          Total
                    ---------- ------------    --------  -------- ------------   ---------- -------- -------------    ----------
                                                              (Dollars in Thousands)
<S>                    <C>      <C>              <C>      <C>       <C>              <C>       <C>     <C>                <C>   
Loans owned by
the Company  .....     27,300   $  871,017       22.01%   27,765    $   813,669      21.50%    27,864  $   758,823        18.08%
Loans serviced
for others  ......     76,365    3,087,072       77.99    79,440      2,970,445      78.50     89,652    3,438,445        81.92
                    ---------- ------------    --------  --------   ------------   ---------- -------- -------------    ----------

Total mortgage
loans serviced ..     103,665   $3,958,089      100.00%  107,205    $ 3,784,114     100.00%   117,516  $ 4,197,268       100.00%
                    ========== ============    ========  =========  ============   ========== ======== =============    ==========

Unamortized
mortgage
servicing rights..              $    8,548                          $     5,788                        $     9,380
                               ============                         ============                       =============

Percent of
unamortized
mortgage
servicing rights,
net, to loans
serviced for
others. .........                     0.28%                                0.19%                              0.27%
                               ============                         ============                       =============

Amortization of
mortgage
servicing rights
recognized for
the year ........               $    4,648                          $     4,823                        $     7,686
                               ============                         ============                       =============
</TABLE>


NON-PERFORMING ASSETS OF THE COMPANY


When a borrower fails to make a required  payment by the end of the loan's grace
period for the payment, the Company generally institutes collection  procedures.
In most cases,  delinquencies  are cured promptly;  however,  if a loan has been
delinquent for more than 30 days, the Company  contacts the borrower in order to
determine  the  reason  for the  delinquency  and to  effect a cure  and,  where
appropriate,   reviews  the   condition  of  the  property  and  the   financial
circumstances  of the borrower.  If the  delinquency is not cured after 90 days,
the Company will initiate  foreclosure  proceedings  in virtually all cases.  On
occasion,  however,  the Company  may:  (i) accept a  repayment  program for the
arrearage  from the  borrower  or (ii) seek  evidence,  in the form of a listing
contract,  of efforts by the  borrower to sell the  property if the borrower has
stated that he or she is attempting to sell.

After a conventional  one- to  four-family,  commercial,  or  multi-family  real
estate loan becomes 90 days  delinquent,  all unpaid  interest is fully reserved
and future interest  income is offset by an allowance for  uncollected  interest
until the loan is  returned  to current  status,  regardless  of the  collateral
value.  Loans are placed on  non-accrual  status  when it becomes  necessary  to
reserve for unpaid interest with respect to such loans.  In addition,  depending
upon the Company's  evaluation of the  probability of collecting all amounts due
according  to the  contractual  terms of the loan  agreement,  real estate loans
could be considered for partial charge-off or classified and a related allowance
for possible loan losses be established.  This  determination  is based upon the
following factors: (i) whether repayment of the loan

                                       19

<PAGE>

can be expected to come only from the operation or sale of the collateral;  (ii)
whether the borrower has effectively  abandoned  control of the collateral;  and
(iii) whether the borrower  appears to have the ability to rebuild the equity in
the collateral or can otherwise  repay the loan in the  foreseeable  future.  If
collection  of the funds due is not  probable,  the Company will  determine  the
required  valuation  allowance based on the difference between the fair value of
the collateral and the recorded investment in the loan.

GNMA allows the  servicer to purchase  FHA and VA loans out of the GNMA pools at
par value when loans become delinquent 90 days.  Interest continues to accrue as
the risk of loss is minimal since the loans are all insured or guaranteed by the
FHA or VA. A program of purchasing  selected  delinquent  loans was initiated by
the Company  during  fiscal 1993 to  eliminate  the cost of  advancing  funds to
holders of GNMA  securities  on  relatively  high-rate  delinquent  FHA/VA loans
serviced by the Company.

At June 30, 1997, 1996, 1995, 1994, and 1993 the amount established as a reserve
for uncollected  interest on non-accruing  loans amounted to $1.6 million,  $1.8
million, $1.8 million, $1.6 million, and $659,000, respectively.

The table below sets forth the amounts and categories of  non-performing  assets
and  accruing  loans  delinquent  90  days or more  in the  Company's  loan  and
foreclosed asset  portfolios at the dates indicated.  As permitted by the Bank's
regulatory  agency to achieve  conformity  with  delinquency  reporting of other
regulated  financial  institutions,  loan balances at June 30, 1997 and 1996 are
stated net of  discounts,  deferred  fees and loans in process.  All other prior
year loan balances are stated at outstanding principal balances.  Non-performing
assets include  non-accruing loans,  troubled debt restructurings  accounted for
under Statements of Financial  Accounting Standards No. 15, No. 114 and No. 118,
and foreclosed assets, which include assets acquired in settlement of loans.

<TABLE>
<CAPTION>
                                                                                           At June 30
                                                              ---------------------------------------------------------------------
                                                                    1997          1996          1995          1994          1993
                                                               -------------  ------------  ------------  ------------  ------------
                                                                                       (Dollars in Thousands)
<S>                                                             <C>             <C>            <C>            <C>             <C>  
Non-accruing loans:
   One- to four-family ..................................       $17,558         21,696         20,724         20,474          7,725
   Multi-family and commercial real estate ..............           354            265            328            442            787
   Construction .........................................             -            151             84              -              -
   Consumer .............................................           524            185             79             29             14
                                                                -------        -------        -------        -------        -------

        Total ...........................................        18,436         22,297         21,215         20,945          8,526
                                                                -------        -------        -------        -------        -------

Foreclosed assets:
   One- to four-family ..................................         8,923          9,630          6,325          3,414          4,300
   Multi-family and commercial real estate ..............           209            562             23          1,229          4,554
   Consumer .............................................           197             39            149            319             89
                                                                -------        -------        -------        -------        -------

        Total ...........................................         9,329         10,231          6,497          4,962          8,943
                                                                -------        -------        -------        -------        -------

Troubled debt restructurings ............................           332            428            683            569            904
                                                                -------        -------        -------        -------        -------

      Total non-performing assets .......................       $28,097         32,956         28,395         26,476         18,373
                                                                =======        =======        =======        =======        =======

Total non-performing assets as a percentage
   of total assets ......................................          2.08%          2.52%          2.45%          2.37%          1.76%
                                                                =======        =======        =======        =======        =======

Accruing loans delinquent 90 days or more:
   One- to four-family ..................................       $10,855         18,767         30,394         35,812         34,924
   Consumer .............................................           506            689          1,122          1,436          2,140
                                                                -------        -------        -------        -------        -------

      Total accruing loans delinquent
         90 days or more ................................       $11,361         19,456         31,516         37,248         37,064
                                                                =======        =======        =======        =======        =======
</TABLE>

                                       20

<PAGE>



Non-Accruing  Loans.  At June  30,  1997,  the  Company  had  $18.4  million  in
non-accruing  loans,  none of which  exceeded  $500,000 in carrying  value.  The
Company occasionally  purchases packages of one- to four-family delinquent loans
at  discounts   considered  to  be  sufficient  to  provide  an  adequate  yield
recognizing  the  additional  risk  incurred  on these  loans  and to allow  for
possible losses.  In October 1993, the Bank purchased a package of approximately
$32 million of such  delinquent  loans either  directly or  indirectly  from the
FDIC.  The  delinquency  status of this  package was the primary  reason for the
increase in  non-accruing  loans in fiscal 1994.  At June 30,  1997,  several of
these loans had been  foreclosed  and $2.8  million  were  non-accruing  one- to
four-family loans.

For the fiscal year ended June 30, 1997,  gross interest  income that would have
been recognized with respect to non-accruing  loans, had the non-accruing  loans
been current in accordance with their original terms, amounted to $820,000.  The
amount that was included in interest income and not offset on such loans for the
fiscal year ended June 30, 1997 was $603,000.

Foreclosed  Assets.  As of June  30,  1997,  the  Company  had $9.3  million  in
foreclosed assets. One- to four-family  properties in the foreclosure  inventory
consisted of 313 widely  scattered,  small,  affordable  homes. The inventory of
foreclosed  properties  at June 30, 1997 included 69 homes  foreclosed  from the
package of delinquent loans purchased at a substantial discount in fiscal 1994.

The sale of a 114,000 square foot shopping  center with a carrying value of $1.3
million located in Moss Point,  Mississippi,  during fiscal 1995 resulted in the
decrease in foreclosed  commercial  assets at June 30, 1995 compared to June 30,
1994.  Undeveloped  land  with a net  book  value of  $29,000  was  included  as
foreclosed  property  at June 30, 1997 and the  balance of  foreclosed  consumer
property at June 30, 1997 consisted of 16 manufactured  homes and a small amount
of other property held for sale.

Troubled Debt  Restructurings.  Troubled debt restructurings of $332,000 at June
30,  1997  were  related   primarily  to   indebtedness   of  $894,000  that  is
collateralized   by  a  first  mortgage  on  a  commercial   tract  in  Jackson,
Mississippi.  Repayment  of this loan is  expected  to come from the sale and/or
lease of the property.  The OTS in 1992  determined  that the estimated value of
the acreage was  $235,000 and the  remaining  balance was charged off. Two loans
secured by  single-family  residences  account for the  remaining  balance  and,
although the borrowers have been occasionally slow in payment,  the Company does
not anticipate foreclosure at this time.

Accruing  Loans  Delinquent 90 Days or More.  At June 30, 1997,  the Company had
$11.4  million  in  accruing  loans  delinquent  90 days or more,  none of which
exceeded  $500,000 in carrying  value.  Delinquent  one- to  four-family  FHA/VA
insured/guaranteed   loans  totaled  $10.9  million  and  were  primarily  loans
purchased from GNMA pools serviced by the Company that represent minimal risk of
loss due to the  government/government-agency  guarantees. For several years the
Company  engaged in the  practice of  purchasing  delinquent  loans from GNMA in
order to reduce the cost incurred in advancing interest to GNMA security holders
on high rate delinquent loans. During the prior fiscal year, the Company reduced
the  volume of these  delinquent  loans by  limiting  repurchases  to loans with
higher interest  rates.  The adjustment in strategy was due to the interest rate
risk of holding  long-term,  fixed-rate  loans in portfolio.  By purchasing only
high-yielding  loans,  the  interest  rate risk  associated  with such loans was
offset by above-market yields.  Non-accruing  consumer loans consisted primarily
of loans with recourse agreements to third parties.

                                       21

<PAGE>



Other Loans of Concern.  In addition to the  non-performing  assets set forth in
the table  presented,  as of June 30,  1997 there  were also eight  loans to one
borrower  with a  carrying  value of  $566,000  secured  by  residential  rental
properties   located  in  Hattiesburg,   Mississippi  that  were  classified  as
substandard at June 30, 1997.  The borrower has been slow in remitting  payments
and specific valuation  allowances of $50,000 have been established.  Due to the
borrower's  equity in the  property,  the Company  does not  anticipate  further
losses or expect foreclosure.





                                       22

<PAGE>



Delinquent  Loans.  The  following  table  sets  forth  information   concerning
delinquent  mortgage  and other loans at June 30,  1997.  The amounts  presented
represent  the total  carrying  balances of the related  loans,  rather than the
actual payment amounts which are overdue. The percentages represent the ratio of
the  carrying  balances in each  category to the total  carrying  value of loans
outstanding.  The table includes  delinquent  FHA/VA  insured/guaranteed  loans.
There were no delinquent construction loans at June 30, 1997.


<TABLE>
<CAPTION>
                                                              
                                   One- to Four-Family                 Multi-Family and                                         
                                                                    Commercial Real Estate                  Consumer            
                            ---------------------------------- --------------------------------- -------------------------------
                               Number       Amount       %       Number      Amount       %        Number      Amount      %    
                               ------       ------       -       ------      ------       -        ------      ------      -    
                                                                  (Dollars in Thousands)
<S>                            <C>         <C>         <C>          <C>     <C>         <C>         <C>       <C>        <C>  
Loans delinquent for:
  30-89 days ...............       687     $20,963     2.17%        25      $   828     0.09%       1,029     $ 1,878    0.19%
  90 days and over .........       774      28,413     2.94         10          354     0.04          466       1,030    0.11
                               -------     -------     ----      -----      -------     ----       ------     -------    ----
                                                                                                             
    Total delinquent                                                                                         
      loans ................     1,461     $49,376     5.11%        35      $ 1,182     0.13%       1,495     $ 2,908    0.30%
                               =======     =======     ====      =====      =======     ====       ======     =======    ====
<CAPTION>

                                       Total Loans          
                              ------------------------------
                               Number       Amount      %   
                               ------       ------      -   
                                  (Dollars in Thousands)
                               <C>         <C>         <C>  
Loans delinquent for:                                       
  30-89 days ...............   1,741       $ 23,669    2.45%
  90 days and over .........   1,250         29,797    3.09 
                              ------        -------    ---- 
                                                            
    Total delinquent                                        
      loans ................   2,991       $ 53,466    5.54%
                              ======         =======   ====
</TABLE>                                 

                                       23

<PAGE>



Classified Assets. Under the classification system of the OTS, problem assets of
insured  institutions are classified as "substandard,"  "doubtful" or "loss." An
asset is considered "substandard" if it is inadequately protected by the current
net worth and paying  capacity of the obligor or by the collateral  pledged,  if
any.   "Substandard"   assets  include  those  characterized  by  the  "distinct
possibility"  that the  insured  institution  will  sustain  "some  loss" if the
deficiencies are 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 and improbable."  Assets  classified as "loss" are those considered
"uncollectable"  and of such  little  value  that  their  continuance  as assets
without the establishment of a specific loss reserve is not warranted.

When an insured  institution  classifies problem assets as either substandard or
doubtful,  it may  establish  general  allowances  for loan  losses in an amount
deemed prudent by management.  General allowances represent loss allowances that
have been  established  to recognize the inherent risk  associated  with lending
activities,  but which, unlike specific  allowances,  have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required  either to establish a specific  allowance  for losses
equal to 100% of that portion of the asset so  classified  or to charge off such
amount.  An institution's  determination as to the  classification of its assets
and  the  amount  of its  valuation  allowances  is  subject  to  review  by the
institution's  principal  supervisory  agent, who may order the establishment of
additional general or specific loss allowances.

The Company  classifies  loans as substandard when known  information  about the
possible  credit  problems of the borrowers or the cash flows of the  collateral
properties cause management to have doubts as to the ability of the borrowers to
comply  with  present  loan  repayment  terms and which may result in the future
inclusion of such items in the non-performing asset categories.

In  connection  with the  filing  of its  periodic  reports  with the OTS and in
accordance with its  classification of assets policy, the Bank regularly reviews
the problem  loans in its  portfolio  to  determine  whether  any loans  require
classification  in accordance  with  applicable  regulations.  Total  classified
assets,  including foreclosed or repossessed assets, at June 30, 1997 were $28.1
million.

Allowance  for Possible  Loan Losses.  The allowance for possible loan losses is
established  through a provision for possible loan losses based on  management's
evaluation of the risk inherent in its loan  portfolio and changes in the nature
and volume of its loan  activity.  Such  evaluation,  which includes a review of
certain  loans of  which  full  collectibility  may not be  reasonably  assured,
considers among other matters, the estimated fair market value of the underlying
collateral,  economic  conditions,  historical  loan loss  experience  and other
factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.

In fiscal 1994,  valuation allowances were established for anticipated losses on
purchased  delinquent  loans. The subsequent  charge-offs  associated with these
loans partially  accounted for the increased one- to four-family  charge-offs in
the more current fiscal years. The Company's  increased consumer lending volume,
especially  in  unsecured  lines  of  credit  was a  significant  factor  in the
increased  consumer loan charge-offs  during the years presented in the analysis
of the Company's allowance for possible loan losses. Net charge-offs of lines of
credit tied to transaction deposit accounts were $1.1 million in fiscal 1997 due
to increased  outstanding  loan balances at June 30, 1997,  compared to June 30,
1996.  Yields on the line

                                       24

<PAGE>


of credit  portfolio  exceed the Company's other loan products and  sufficiently
cover  experienced  charge-offs  while  producing a  profitable  net  investment
return.

The  following  table sets forth an  analysis  of the  Company's  allowance  for
possible loan losses for the periods indicated.

<TABLE>
<CAPTION>
                                                                      Years Ended June 30
                                                   -----------------------------------------------------------
                                                      1997         1996        1995        1994        1993
                                                   -----------   ---------   ---------   ---------   ---------
                                                                     (Dollars in Thousands)
<S>                                                <C>              <C>        <C>         <C>         <C>  
Balance at beginning of year                       $   9,452        9,213      9,781       9,661       8,496
                                                   -----------   ---------   ---------   ---------   ---------

Charge-offs:
  One- to four-family ...........................        735          659        568         260         123
  Multi-family and commercial real estate .......          -            -          -           -          35
  Consumer ......................................      1,679          914        540         393         310
                                                   -----------   ---------   ---------   ---------   ---------
    Total .......................................      2,414        1,573      1,108         653         468
                                                   -----------   ---------   ---------   ---------   ---------

Recoveries:
  Consumer ......................................        250          179        122          85          60
                                                   -----------   ---------   ---------   ---------   ---------

    Net charge-offs .............................      2,164        1,394        986         568         408
                                                   -----------   ---------   ---------   ---------   ---------

Additions:
  Charged to operations .........................      3,136        1,633        418         688       1,573
                                                   -----------   ---------   ---------   ---------   ---------

Balance at end of year ..........................  $  10,424        9,452      9,213       9,781       9,661
                                                   ===========   =========   =========   =========   =========

Net charge-offs during the period as a
  percentage of average loans outstanding .......       0.24%        0.16%      0.13%       0.08%       0.05%
                                                   ===========   =========   =========   =========   =========

Allowance for possible loan losses as a
  percentage of loans receivable at the end
  of the year ...................................       1.11%        1.08%      1.14%       1.35%       1.30%
                                                   ===========   =========   =========   =========   =========
</TABLE>

The allowance  for possible loan losses by category and the  percentage to loans
receivable in each category at the dates indicated are summarized as follows:

<TABLE>
<CAPTION>
                                                                   At June 30
                -----------------------------------------------------------------------------------------------------------------
                        1997                  1996                   1995                  1994                    1993
                ---------------------- --------------------  --------------------- ---------------------  -----------------------
                              % of                  % of                   % of                  % of                    % of
                Allowance     Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans      Allowance     Loans
                ----------- ---------- ----------- --------  ----------- --------- ----------- ---------  ------------ ----------
                                                             (Dollars in Thousands)
<S>                <C>        <C>        <C>        <C>        <C>          <C>      <C>          <C>        <C>          <C>   
Real estate ....   $ 7,837    90.15%     $ 7,955    89.95%     $ 7,984      90.33%   $ 8,725      89.81%     $ 8,925      89.68%
Consumer .......     2,587     9.85        1,497    10.05        1,229       9.67      1,056      10.19          736      10.32
                   =======   ======      =======   ======      =======     ======    =======     ======      =======     ====== 
                                                                                                                        
Total ..........   $10,424   100.00%     $ 9,452   100.00%     $ 9,213     100.00%   $ 9,781     100.00%     $ 9,661     100.00%
                   =======   ======      =======   ======      =======     ======    =======     ======      =======     ====== 
</TABLE>

INVESTMENT ACTIVITIES

Magnolia  Federal must maintain  minimum levels of  investments  that qualify as
liquid  assets  under  OTS  regulations.  Liquidity  may  increase  or  decrease
depending upon the  availability of funds and comparative  yields on investments
in relation to the return on loans. Historically, the Bank has maintained liquid
assets at levels above the minimum  requirements  imposed by the OTS regulations
and at levels believed

                                       25

<PAGE>

adequate to meet the requirements of normal operations,  including repayments of
maturing  debt  and  potential  deposit  outflows.  Cash  flow  projections  are
regularly  reviewed and updated to assure that adequate liquidity is maintained.
As of June 30, 1997, the Bank's  liquidity  ratio (liquid assets as a percentage
of net  withdrawable  savings  deposits and current  borrowings)  was 9.3%.  See
"--Regulation--Liquidity."

Federally chartered savings institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal  agencies,  certain  certificates of deposit of insured banks
and savings institutions,  certain bankers'  acceptances,  repurchase agreements
and federal funds. Subject to various restrictions,  federally chartered savings
institutions may also invest their assets in commercial paper,  investment grade
corporate  debt  securities  and  mutual  funds  whose  assets  conform  to  the
investments  that  a  federally   chartered  savings  institution  is  otherwise
authorized to make directly.

Generally, the investment policy of the Company is to invest funds among various
categories   of   investments   and   maturities   based   upon  the   Company's
asset/liability  management  policies,  investment  quality  and  marketability,
liquidity needs and performance objectives.

At June 30, 1997, the Company's interest-earning deposits totaled $28.7 million,
or 2.1% of its total assets,  mortgage-backed securities totaled $132.9 million,
or 9.8% of its total  assets,  and other  securities,  including  FHLB of Dallas
stock,  totaled  $89.5  million,  or 6.6% of its total  assets.  Mortgage-backed
securities  are  primarily  securitization  of the Company's  loan  origination.
Purchases of these  securities are rare.  However,  it is the Company's  general
policy to purchase  other  securities  that are U.S.  government  securities  or
federal agency obligations and other investment-grade securities.


                                       26

<PAGE>



The  following  table sets forth the  composition  of the  Company's  securities
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                                      At June 30
                                                   -----------------------------------------------------------------------------
                                                             1997                      1996                      1995
                                                    ------------------------  ------------------------  ------------------------
                                                     Carrying       % of       Carrying       % of       Carrying       % of
                                                      Value        Total        Value        Total        Value        Total
                                                    -----------  -----------  -----------  -----------  -----------  -----------
                                                                                   (Dollars in Thousands)

<S>                                                  <C>            <C>        <C>            <C>        <C>            <C>    
Interest-bearing deposits with banks .............   $ 28,705       100.00%    $ 10,746       100.00%    $ 23,562       100.00%
                                                    ===========  ===========  ===========  ===========  ===========  ===========
Securities held to maturity:                                                                            
  U.S. government securities .....................   $    556         0.25%    $  3,609         1.43%    $ 10,492         6.07%
  Federal agency obligations .....................     52,061        23.41       62,645        24.78       71,924        41.61
  Federal agency mortgage-backed securities ......     10,526         4.73       12,727         5.03       52,243        30.23
  Corporate debt securities ......................      1,128         0.51        1,161         0.46        1,137         0.66
  Other ..........................................         47         0.02           71         0.03           95         0.05
                                                    -----------  -----------  -----------  -----------  -----------  -----------
                                                                                                        
          Total securities held to maturity ......     64,318        28.92       80,213        31.73      135,891        78.62
                                                    -----------  -----------  -----------  -----------  -----------  -----------
Securities available for sale:                                                                          
  U.S. government securities .....................      4,203         1.89        4,161         1.65            -            -
  Federal agency obligations .....................      2,936         1.32        2,888         1.14            -            -
  Federal agency mortgage-backed securities ......    122,385        55.03      118,873        47.02       18,567        10.74
  Equity securities ..............................      9,538         4.29          139         0.06            -            -
                                                    -----------  -----------  -----------  -----------  -----------  -----------
                                                                                                        
          Total securities available for sale ....    139,062        62.53      126,061        49.87       18,567        10.74
                                                    -----------  -----------  -----------  -----------  -----------  -----------
                                                                                                        
Securities held for trading:                                                                            
  Federal agency mortgage-backed securities ......          -            -       34,487        13.64       10,454         6.05
  Equity securities ..............................      3,386         1.52            -            -            -            -
                                                    -----------  -----------  -----------  -----------  -----------  -----------
                                                                                                        
          Total securities held for trading ......      3,386         1.52       34,487        13.64       10,454         6.05
                                                    -----------  -----------  -----------  -----------  -----------  -----------
                                                                                                        
FHLB of Dallas stock .............................     15,627         7.03       12,027         4.76        7,926         4.59
                                                    -----------  -----------  -----------  -----------  -----------  -----------
          Total investment securities and FHLB of                                                       
            Dallas stock .........................   $222,393       100.00%    $252,788       100.00%    $172,838       100.00%
                                                    ===========  ===========  ===========  ===========  ===========  ===========
</TABLE>

                                       27

<PAGE>



The  composition  and maturities of the  securities  portfolio at June 30, 1997,
excluding FHLB of Dallas stock and other equity securities, are indicated in the
following  table.  Maturities of  mortgage-backed  securities are also not shown
because such securities are not due at a single maturity date. Actual maturities
of mortgage-backed  securities would differ from contractual  maturities because
borrowers have the right to prepay obligations.
<TABLE>
<CAPTION>
                                               Less Than       1 to 5       Over 5 to        Over                  Total
                                                1 Year          Years       10 Years       10 Years             Securities
                                              ------------   ------------  ------------   ------------  -------------------------
                                                                                                                        Estimated
                                               Amortized      Amortized     Amortized      Amortized     Amortized        Fair
                                                 Cost           Cost          Cost           Cost           Cost          Value
                                              ------------   ------------  ------------   ------------  -------------  ----------
                                                                             (Dollars in Thousands)

<S>                                           <C>                <C>             <C>          <C>             <C>          <C>
Securities held to maturity:
  U.S. government securities ...............  $       -          182             373               -          555          595
  Federal agency obligations ...............          -        1,999          35,629          14,433       52,061       54,871
  Corporate debt securities ................         40          505             584               -        1,129        1,137
  Other ....................................         47            -               -               -           47           47
                                              ------------   ------------  ------------   ------------  -------------  ----------
     Total securities held to maturity .....         87        2,686          36,586          14,433       53,792       56,650
                                              ------------   ------------  ------------   ------------  -------------  ----------
Securities available for sale:                                                                                       
  U.S. government securities ...............          -          237           4,019               -        4,256        4,203
  Federal agency obligations ...............          -            -           3,000               -        3,000        2,936
                                              ------------   ------------  ------------   ------------  -------------  ----------
     Total securities available for sale ...          -          237           7,019               -        7,256        7,139
                                              ------------   ------------  ------------   ------------  -------------  ----------
                                                                                                                     
        Total securities ...................  $      87        2,922          43,606          14,433       61,048       63,789
                                              ============   ============  ============   ============  =============  ==========
                                                                                                                     
        Weighted average yield .............       5.03%        7.96%           7.22%           7.90%        7.41%
                                              ============   ============  ============   ============  =============
</TABLE>

The Company's securities portfolio at June 30, 1997 contained neither tax-exempt
securities  nor  securities of any issuer with an aggregate book value in excess
of 10% of the Company's retained earnings,  excluding those issued by the United
States government or its agencies. The Company's investment securities portfolio
has no non-investment  grade corporate debt securities  (i.e.,  "junk bonds") or
any high-risk derivative securities.

As of June 30, 1997, the Company's $64.3 million  securities  portfolio intended
to be held to maturity was  accounted  for at amortized  cost.  As of such date,
these securities had a fair value of $67.5 million.  The Company's  portfolio of
securities  available  for sale are carried at the fair value of $139.1  million
and have an amortized cost of $138.9 million.


SOURCES OF FUNDS

General.  The Company's primary sources of funds are deposits,  amortization and
prepayment of loan principal (including mortgage-backed securities), borrowings,
proceeds  from  sales of loans and  mortgage-backed  securities,  maturities  of
investment securities, and funds provided from operations.

Borrowings,  predominantly  from the FHLB of Dallas, may be used on a short-term
basis to compensate  for seasonal  reductions in deposits or deposit  inflows at
less than projected  levels,  and may be used on a

                                       28

<PAGE>

longer-term  basis to support expanded lending  activities.  The availability of
funds from sales and  prepayments  of loans and  mortgage-backed  securities  is
influenced by the general level of interest rates.

Deposits.  The Company offers a variety of deposit  accounts having a wide range
of  interest  rates and terms.  The  Company's  deposits  consist  of  passbook,
statement,  NOW, checking, money market and certificates of deposit. The Company
only  solicits  deposits from its market area and does not use brokers to obtain
deposits.   The  Company  relies  primarily  on  competitive  pricing  policies,
advertising, and customer service to attract and retain these deposits.

The flow of deposits is influenced significantly by general economic conditions,
changes in the money market and prevailing interest rates and competition.

The  following  table sets forth the dollar  amount of savings  deposits  in the
various types of deposit programs offered by the Company at the dates indicated.

<TABLE>
<CAPTION>
                                                                           At June 30
                                     ---------------------------------------------------------------------------------------
                                                1997                          1996                          1995
                                     ---------------------------  ------------------------------  --------------------------
                                                        %                              %                            %
                                       Amount        of Total        Amount         of Total        Amount      of Total
                                     ------------  -------------  -------------  ---------------  ------------ ------------
                                                                     (Dollars in Thousands)
<S>                                  <C>                 <C>        <C>                <C>         <C>             <C>  
Certificates of deposit:
  0.00%  -   3.99% ..............    $     1,549         0.17%      $    2,928         0.32%       $  16,460       1.79%
  4.00   -   5.99  ..............        440,438        48.11          383,101        41.53          369,196      40.23
  6.00   -   7.99  ..............         29,999         3.28           95,905        10.40           90,586       9.87
  8.00   -  11.99  ..............            342          .04              828         0.09            1,419       0.16
                                     ------------  -------------  -------------  ---------------  ------------ ------------
Total certificates of deposit ...        472,328        51.60          482,762        52.34          477,661      52.05
                                     ------------  -------------  -------------  ---------------  ------------ ------------
Other accounts:
Passbook and statement  .........        126,807        13.85          133,326        14.46          133,296      14.52
Money market  ...................         30,753         3.36           33,601         3.64           36,410       3.97
NOW   ...........................        121,705        13.30          112,360        12.18          112,966      12.31
Noninterest-bearing checking  ...        163,802        17.89          160,321        17.38          157,385      17.15
                                     ------------  -------------  -------------  ---------------  ------------ ------------
Total other accounts  ...........        443,067        48.40          439,608        47.66          440,057      47.95
                                     ------------  -------------  -------------  ---------------  ------------ ------------
                                                  
Total deposits  .................    $   915,395       100.00%      $  922,370       100.00%       $ 917,718     100.00%
                                     ============  =============  =============  ===============  ============ ============
</TABLE>
                                                 
The  variety of deposit  accounts  offered by the  Company  has allowed it to be
competitive  in obtaining  funds and to respond with  flexibility  to changes in
consumer demand.  Management believes the Company has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious.  The Company manages the pricing of its deposits in keeping with
its  asset/liability  management  and  profitability  objectives.  Based  on its
experience,  the Company believes that its statement savings,  money market, NOW
and checking  accounts are relatively stable sources of deposits.  However,  the
ability of the Company to attract and maintain  certificates of deposit, and the
rates paid on these  deposits,  have been and will continue to be  significantly
affected by market conditions.

                                       29

<PAGE>

The following  table sets forth the savings flows of the Company for the periods
indicated.  Net increase  (decrease)  refers to the amount of deposits  during a
period  less the amount of  withdrawals  during  the  period.  Deposit  flows at
savings  institutions  may be influenced by external  factors such as government
credit policies, depositors' perceptions of the adequacy of federal insurance of
accounts and,  particularly  in recent  periods,  the interest  rates offered on
deposits compared with other sources of investment  revenue.  During fiscal 1995
net decreases (before interest  credits)  included  decreases in certificates of
deposit  of  $37.3  million  as  customers  sought  higher-yielding   investment
alternatives,  as well as  declines  in  balances  of  custodial  funds of $13.1
million as the level of repayment  activity  subsided and the number of serviced
loans  decreased.  Further  declines  in balances  of  custodial  funds of $11.3
million  contributed to a net decrease (before  interest  credits) during fiscal
1996. During fiscal 1997, excluding the sale of $5.8 million in deposits related
to  an  Alabama  branch,  deposits  decreased  $27.0  million  (before  interest
credits),  primarily in  certificates  of deposit which continue to compete with
other investment alternatives.

                                                  Years Ended June 30
                                       -----------------------------------------
                                          1997          1996            1995
                                       ----------  ---------------  ------------
                                                (Dollars in Thousands)

Opening balance ...................    $ 922,370        917,718        972,644
Net decrease ......................      (32,789)       (20,412)       (76,968)
Interest credited .................       25,814         25,064         22,042
                                       ---------      ---------      ---------

Ending balance ....................    $ 915,395        922,370        917,718
                                       =========      =========      =========

Net increase (decrease) ...........    $  (6,975)         4,652        (54,926)
                                       =========      =========      =========

Percentage increase (decrease) ....        (0.76)%         0.51%         (5.65)%
                                       =========      =========      =========

The following  table sets forth rate and maturity  information for the Company's
certificates of deposit as of June 30, 1997.

<TABLE>
<CAPTION>
                                         0.00-        4.00-          6.00-        8.00-                     Percent
                                         3.99%        5.99%          7.99%        & Over        Total       of Total
                                         -----        -----          -----        ------        -----       --------
                                                                (Dollars in Thousands)
<S>                                    <C>           <C>             <C>              <C>      <C>             <C>   
Certificates of deposit
maturing in quarter ending:
      September 30, 1997 ...........   $   150       111,854         4,818            18       116,840         24.74%
      December 31, 1997 ............         -        96,094         4,886             6       100,986         21.38
      March 31, 1998 ...............        50        65,531         2,967             7        68,555         14.51
      June 30, 1998 ................        26        55,464         3,077            36        58,603         12.41
      September 30, 1998 ...........       305        35,208         4,148           200        39,861          8.44
      December 31, 1998 ............         -        16,973         1,778             -        18,751          3.97
      March 31, 1999 ...............        58         7,256           483            31         7,828          1.66
      June 30, 1999 ................         -        14,347         2,385             -        16,732          3.54
      September 30, 1999 ...........         -        19,876         1,974             -        21,850          4.62
      December 31, 1999 ............        14         4,928           438             -         5,380          1.14
      March 31, 2000 ...............         1         5,350           232             -         5,583          1.18
      June 30, 2000 ................        38         2,352           378             -         2,768          0.59
      Thereafter ...................       907         5,205         2,435            44         8,591          1.82
                                        -------      --------       -------       -------      --------       ------
              Total dollar amount ..   $ 1,549       440,438        29,999           342       472,328
                                        =======      ========       =======       =======      ========

              Total percentage .....      0.33%        93.25%         6.35%         0.07%       100.00%       100.00%
                                        =======      ========       =======       =======      ========      ========
</TABLE>

                                       30

<PAGE>



The following  table sets forth the amounts of  certificates  of deposit by time
remaining until maturity as of June 30, 1997.

<TABLE>
<CAPTION>
                                                                               Maturity
                                          ------------------------------------------------------------------------------------
                                            3 Months        Over 3 to 6      Over 6 to 12        Over 12
                                             or Less          Months            Months           Months             Total
                                          --------------   --------------    --------------   --------------    --------------
                                                                            (In Thousands)
<S>                                           <C>                <C>             <C>              <C>              <C>    
Certificates of deposit
less than $100,000   ................         $103,802           88,357          109,743          109,745          411,647
Certificates of deposit of                                                                                   
$ 100,000 or more (1) ................          12,938           12,495           17,213           17,599           60,245
Public funds (2) .....................             100              134              202                -              436
                                              --------         --------         --------         --------         --------
                                                                                                             
Total certificates of deposit ........        $116,840          100,986          127,158          127,344          472,328
                                              ========         ========         ========         ========         ========


----------
<FN>
(1)  Of the $60.2  million  total  certificates  of deposit of $100,000 or more,
     $5.7 million consisted of negotiated rate certificates.

(2)  Deposits from  governmental and other public entities of which $200,000 was
     in certificate accounts of $100,000 and more.
</FN>
</TABLE>


Borrowings.  Although  deposits are its primary  source of funds,  the Company's
policy  has been to utilize  borrowings  when they are a less  costly  source of
funds or can be invested at a positive rate of return. In addition,  the Company
has relied upon selective borrowings for short-term liquidity needs.

Magnolia  Federal  obtains  advances from the Federal Home Loan Bank ("FHLB") of
Dallas upon the security of certain of its  mortgage  loans.  Such  advances are
made pursuant to several  different credit  programs,  each of which has its own
interest rate and range of maturities. At June 30, 1997, the Bank had borrowings
outstanding  from the FHLB of Dallas  totaling  $258.4  million of which  $165.3
million was due within one year.

The Company  occasionally  enters into transactions in which securities are sold
under  agreements to repurchase the same securities  with nationally  recognized
primary  securities  dealers and financial  institutions.  These  agreements are
accounted for as borrowings by the Company and the carrying  value of securities
underlying the agreements  remains in the investment  accounts.  The proceeds of
these transactions are used to purchase  investments yielding a higher rate than
the  borrowed  funds and to meet cash flow  needs of the  Company.  The  Company
typically depends upon this borrowing capacity to fund short-term cash needs. At
June  30,  1997,  the  Company  had  no  securities  sold  under  agreements  to
repurchase.

                                       31

<PAGE>



The following  table sets forth the maximum  month-end  and average  balances of
borrowings  from  the  FHLB of  Dallas,  securities  sold  under  agreements  to
repurchase and other borrowings for the years indicated.

<TABLE>
<CAPTION>
                                                                            Years Ended June 30
                                                             ---------------------------------------------------
                                                                 1997               1996              1995
                                                             --------------     --------------    --------------
                                                                           (Dollars in Thousands)
<S>                                                             <C>               <C>                <C>    
Maximum month-end balance:
      Borrowings from the FHLB of Dallas .................      $296,734          221,961            150,000
      Securities sold under agreements to repurchase .....             -                -             50,000
      Other long-term borrowings .........................             -                -                591

Average balance:
      Borrowings from the FHLB of Dallas .................      $244,451          163,149             64,795
      Securities sold under agreements to repurchase .....             -                -             29,961
      Other long-term borrowings .........................             -                -                290

Weighted average interest rate of borrowings from the
  FHLB of Dallas .........................................          6.12%            6.38%              6.65%
Weighted average interest rate of securities sold                                            
  under agreements to repurchase .........................          N/A              N/A                5.41%
Weighted average interest rate of other long-term                                            
  borrowings .............................................          N/A              N/A               14.00%
</TABLE>

The following  table sets forth certain  information  as to borrowings  from the
FHLB of Dallas and other debt at the dates indicated.

<TABLE>
<CAPTION>
                                                                           At June 30
                                                   ------------------------------------------------------------
                                                          1997                1996                 1995
                                                   ------------------- -------------------- -------------------
                                                                     (Dollars in Thousands)
<S>                                                    <C>                   <C>                  <C>    
Borrowings from the FHLB of Dallas:
    Short-term ..................................      $165,299              125,000              100,000
    Long-term ...................................        93,150               96,961                    -
                                                       --------             --------             --------

    Total borrowings ............................      $258,449              221,961              100,000
                                                       ========             ========             ========

Weighted average interest rate of short-term
 borrowings from the FHLB of Dallas .............          5.84%                6.08%                6.87%
Weighted average interest rate of long-term
 borrowings from the FHLB of Dallas .............          6.42%                6.42%                 N/A
</TABLE>

SUBSIDIARY ACTIVITIES

Magna Insurance Company ("Magna Insurance"),  a majority-owned subsidiary of the
Company,  is a life insurance  company and writes a portfolio of the usual forms
of mortgage protection, credit life and accident and health coverage through its
agent,  Magnolia Federal.  It also offers  tax-deferred  annuities to the Bank's
depositors and the general  public.  In December  1994,  the Company  acquired a
small,  inactive

                                       32

<PAGE>



life  insurance  company  licensed  to do  business  in 13 states in which Magna
Insurance was not previously authorized. Magna Insurance was merged with the new
company  in June  1995  and the  surviving  entity  changed  its  name to  Magna
Insurance Company.  Magna Insurance is managed by Financial Insurance Management
Corporation  located in  Metairie,  Louisiana,  and operates  under  regulations
prescribed by the  Insurance  Department  of the State of  Mississippi.  In June
1996,  the Company sold a 21% interest in Magna  Insurance to a single  investor
and in so doing,  Magna  Insurance is allowed to take  advantage of a small life
insurance  company  deduction on its tax return,  thereby lowering its effective
tax rate.  During  fiscal  1996,  the  Company  also  acquired  100% of  another
insurance company that was subsequently merged with Magna Insurance. At June 30,
1997,  Magna  Insurance  had  total  consolidated  assets  of $9.1  million  and
stockholder's equity of $6.2 million.

Magna  Financial  Services,  Inc.  was  acquired by Magnolia  Federal in 1982 in
connection  with the merger of First  Federal  Savings and Loan  Association  of
Canton.  In May 1993, the Company  acquired this  subsidiary  through a non-cash
dividend from Magnolia  Federal.  This  subsidiary  owns three  income-producing
properties with an aggregate net book value at June 30, 1997 of $1.1 million.

Realty  Services,  Inc. is a  wholly-owned  subsidiary  of Magna  Bancorp,  Inc.
acquired from Magnolia  Federal through a non-cash  dividend in July 1993 and is
engaged in performing  real estate  appraisals  primarily for loan  customers of
Magnolia Federal.

Comserv,  Inc.,  a  wholly-owned  subsidiary  of Magna  Bancorp,  Inc.  that was
acquired  through a non-cash  dividend from Magnolia Federal in October 1993, is
an  insurance  agency  serving  as an agent for  hazard  insurance  coverage  on
property subject to Company liens.

The Bank's wholly-owned operating subsidiary, Magna Mortgage Company, was formed
as a  mortgage  banking  company  to  which  all  the  Bank's  loan  processing,
underwriting  and servicing  responsibilities  were transferred as of January 1,
1995. At June 30, 1997, Magna Mortgage  serviced $871.5 million of loans for the
Company and $3.1 billion of mortgage loans for others.  As of such date, the net
book value of Magnolia Federal's  investment in Magna Mortgage Company was $12.3
million.


COMPETITION

The Company faces strong competition,  both in originating real estate and other
loans and in attracting  deposits.  Competition in originating real estate loans
comes primarily from commercial  banks and mortgage bankers making loans secured
by real estate  located in the  Company's  market  areas.  Commercial  banks and
finance companies provide vigorous  competition in consumer lending. The Company
competes for ARM loans it intends to retain in its portfolio  principally on the
basis of the  types of  loans it  originates  and the  quality  of  services  it
provides to borrowers.  The Company  competes for fixed-rate loans it intends to
sell in the secondary market  principally on the basis of the interest rates and
loan fees it charges.

The Company attracts all of its deposits  through its branch offices,  primarily
from the  communities  in which those  branch  offices are  located;  therefore,
competition for those deposits is principally  from commercial  banks located in
the same  communities.  The Company  competes  for these  deposits by offering a
variety of deposit accounts and other services at competitive rates,  convenient
business hours,

                                       33

<PAGE>



and  convenient  branch  locations  with  interbranch   deposit  and  withdrawal
privileges at each. Automated teller machine ("ATM") facilities are available at
all retail branch locations.


EMPLOYEES

At June 30,  1997,  the Company had a total of 1,134  employees,  including  176
part-time employees.  The Bank's employees are not represented by any collective
bargaining group.  Management  considers its employee  relations to be good. The
Bank serves as the master employer of the Company and all subsidiaries. Employee
costs paid by the Bank are  allocated to the Company or  appropriate  subsidiary
and the  Bank  is  reimbursed  monthly.  Magna  Insurance  and  Magna  Financial
Services, Inc. do not have salaried employees.


REGULATION

General. Magnolia Federal is a federally chartered savings bank, the deposits of
which are insured  and backed by the full faith and credit of the United  States
government. Accordingly, Magnolia Federal is subject to broad federal regulation
and oversight extending to all its operations.  The Bank is a member of the FHLB
of Dallas and is subject to certain limited regulation by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding  company of Magnolia  Federal,  the  Company  also is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings  associations.  The Bank is a
member of the Savings  Association  Insurance  Fund ("SAIF") and the deposits of
the Bank are insured by the FDIC. As a result,  the FDIC has certain  regulatory
and examination authority over Magnolia Federal.

Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.

Federal Regulation of Savings Associations. The OTS has extensive authority over
the  operations of savings  associations.  As part of this  authority,  Magnolia
Federal is  required  to file  periodic  reports  with the OTS and is subject to
periodic  examinations  by the OTS and the FDIC. A limited  safety and soundness
examination  focused on asset  quality was  conducted  by the OTS as of June 30,
1997.  The Bank's  financial  statements  as of June 30, 1997 fully  reflect the
results  of this  examination  related  to asset  classifications  and loan loss
allowances.  The last regular  examination of Magnolia Federal by the FDIC was a
joint examination with the OTS conducted as of March 1993.

The OTS has  established a schedule for the  assessment of fees upon all savings
associations  to fund the operations of the OTS. The general  assessment,  to be
paid on a semi-annual  basis, is computed upon the savings  association's  total
assets as  reported  in the  association's  latest  quarterly  thrift  financial
report. Savings associations that (unlike the Bank) are classified as "troubled"
(i.e.,  having a  supervisory  rating of "4" or "5" or in  conservatorship)  are
required  to  pay a  50%  premium  over  the  standard  assessment.  The  Bank's
semi-annual OTS assessment for the six-month  period ended June 30, 1997,  based
upon its  September  30,  1996  total  assets  of $1.3  billion,  was  $122,000.
Subsequent  to June 30, 1997,  the Bank was assessed  $126,000 for the six-month
period ending December 31, 1997.

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The OTS also has extensive  enforcement  authority over all savings institutions
and their holding companies,  including  Magnolia Federal and the Company.  This
enforcement authority includes,  among other things, the ability to assess civil
money  penalties,  to issue  cease-and-desist  or removal orders and to initiate
injunctive actions.  In general,  these enforcement actions may be initiated for
violations  of laws and  regulations  and  unsafe or  unsound  practices.  Other
actions or inactions  may provide the basis for  enforcement  action,  including
misleading  or  untimely  reports  filed  with the  OTS.  Except  under  certain
circumstances,  public  disclosure  of final  enforcement  actions by the OTS is
required.

In addition,  the  investment,  lending and  branching  authority of the Bank is
prescribed by federal laws and  regulations,  and it is prohibited from engaging
in any activities not permitted by such laws and regulations.  For instance,  no
savings   institution  may  invest  in   non-investment   grade  corporate  debt
securities.  In  addition,  the  permissible  level  of  investment  by  federal
associations  in loans secured by  non-residential  real property may not exceed
400% of  total  capital,  except  with  approval  of the  OTS.  Federal  savings
associations  are also  generally  authorized  to  branch  nationwide.  Magnolia
Federal is in compliance with the noted restrictions.

The Bank's permissible lending limit for  loans-to-one-borrower  is equal to the
greater of $500,000 or 15% of unimpaired  capital and surplus  (except for loans
fully secured by certain readily marketable collateral, in which case this limit
is increased to 25% of unimpaired  capital and surplus).  At June 30, 1997,  the
Bank's lending limit under this restriction was $18.3 million.  Magnolia Federal
is in compliance with the loans-to-one-borrower limitation.

The OTS, as well as the other federal banking  agencies,  have issued safety and
soundness   standards   effective  August  9,  1995  on  matters  such  as  loan
underwriting and  documentation,  internal controls and audit systems,  interest
rate  risk  exposure,  asset  quality,  earnings  standards,  asset  growth  and
compensation and other employee benefits. These rules only apply to the Bank and
are not  applicable  to the holding  company or  affiliates.  The  standards are
general  and  flexible  in nature and are not  deemed to be overly  restrictive,
however,  any institution  that is determined to be out of compliance with these
standards  may be required to submit a  compliance  plan.  A failure to submit a
plan or to comply with an approved plan will subject the  institution to further
enforcement  action.  The  regulation  also  requires  savings and loan  holding
companies to ensure that  transactions and  relationships  with their subsidiary
savings  associations  do not have a  detrimental  effect  on the safe and sound
operation of the association.

Insurance of Accounts and Regulation by the FDIC.  Magnolia  Federal is a member
of the SAIF,  which is  administered  by the FDIC.  Deposits  are  insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States  government.  As insurer,  the FDIC imposes  deposit
insurance  premiums and is authorized to conduct  examinations of and to require
reporting by FDIC-insured  institutions.  It also may prohibit any  FDIC-insured
institution  from engaging in any activity the FDIC  determines by regulation or
order to pose a serious  risk to the FDIC.  The FDIC also has the  authority  to
initiate enforcement actions against savings associations,  after giving the OTS
an opportunity to take such action,  and may terminate the deposit  insurance if
it  determines  that the  institution  has  engaged or is  engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.

The FDIC's deposit  insurance  premiums are assessed through a risk-based system
under  which all  insured  depository  institutions  are placed into one of nine
categories and assessed insurance premiums, ranging from 0% to .27% of deposits,
based upon their level of capital and supervisory evaluation.  Under the

                                       35

<PAGE>



system,  institutions  classified as well capitalized  (i.e.,  those with a core
capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted
assets  ("Tier 1 risk-based  capital")  of at least 6% and a risk-based  capital
ratio of at least  10%) and  considered  healthy  pay the lowest  premium  while
institutions that are less than adequately  capitalized  (i.e.,  those with core
and Tier 1 risk-based  capital  ratios of less than 4% or a  risk-based  capital
ratio of less than 8%) and considered of substantial supervisory concern pay the
highest premium.  Risk classification of all insured institutions is made by the
FDIC semi-annually.  Assessments are paid quarterly.  For the three month period
ending  September  30,  1997,  the Bank was  assessed  .01575% of  deposits,  or
$142,000.

The FDIC is authorized to increase  assessment  rates, on a semiannual basis, if
it  determines  that  the  reserve  ratio  of the  SAIF  will be less  than  the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC. In addition, under FDICIA, the FDIC may impose special assessments on SAIF
members to repay amounts  borrowed  from the United  States  Treasury or for any
other reason deemed necessary by the FDIC.

The Bank Insurance Fund ("BIF") is also  administered  by the FDIC. On August 8,
1995, the FDIC revised the premium  schedule for BIF-insured  banks to provide a
range of 0.04% to 0.31% of deposits (as compared to the previous  range of 0.23%
to 0.31% of deposits for both BIF and SAIF-insured institutions) in anticipation
of the BIF achieving  its  statutory  reserve  ratio.  As a result,  BIF members
generally paid lower premiums than the SAIF members. It was anticipated that the
SAIF would not be  adequately  recapitalized  until 2002,  absent a  substantial
increase in premium  rates or the  imposition  of special  assessments  or other
significant developments,  such as a merger of the SAIF and the BIF. As a result
of this disparity,  SAIF members were at a significant competitive  disadvantage
to BIF members due to higher costs for deposit  insurance.  Legislation  adopted
September 30, 1996, provided for a one-time assessment of 0.68% to be imposed on
all deposits  insured by the SAIF as of March 31, 1995. This one time assessment
translated  to a $5.9 million  charge to the Company's  pre-tax  earnings in the
1997 fiscal year.  However,  subsequent periods reflected reduced annual deposit
insurance  premiums,  to as low as 0.06% from the 0.23% of  deposits  previously
paid by the Bank,  creating  a savings  to the  Company  of  approximately  $1.5
million before tax.

All  SAIF-insured  institutions  are  required  to pay  an  assessment  for  the
repayment of interest on obligations issued by a federally chartered corporation
to provide  financing  ("FICO") for resolving the thrift crisis in the 1980s, in
an amount  equal to 6.48 basis points for each $100 in domestic  deposits.  As a
result of the recent legislation discussed above,  BIF-insured  institutions are
also  required to pay an  assessment  for the  repayment of interest on the FICO
bonds,  in an  amount  equal to 1.52  basis  points  for each  $100 in  domestic
deposits. The assessment on SAIF-insured  institutions is expected to be reduced
to 2.43 basis points for each $100 in domestic deposits no later than January 1,
2000, by which point BIF-insured institutions will participate fully in the FICO
bond interest repayment. These assessments,  which may be revised based upon the
level of BIF and SAIF deposits, will continue until the bonds mature in 2017.

Regulatory Capital Requirements. Federally insured savings associations, such as
the Bank,  are required to maintain a minimum level of regulatory  capital.  The
OTS has established capital standards, including a tangible capital requirement,
a  leverage  ratio  (or  core  capital)  requirement  and a  risk-based  capital
requirement applicable to such savings associations.  These capital requirements
must be  generally  as  stringent as the  comparable  capital  requirements  for
national  banks.  The OTS is also  authorized to

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<PAGE>



impose  capital   requirements  in  excess  of  these  standards  on  individual
associations on a case-by-case basis.

The capital  regulations  require  tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation).  Tangible  capital  generally  includes
common  stockholders'  equity and  retained  income,  and certain  noncumulative
perpetual  preferred  stock and related  income.  In  addition,  all  intangible
assets,  other  than a  limited  amount  of  purchased  or  originated  mortgage
servicing rights,  must be deducted from tangible capital. At June 30, 1997, the
Bank had $3.7  million  in core  deposit  intangibles  that was  required  to be
deducted from equity capital in calculating  tangible capital.  At that date the
Bank had tangible capital of $113.3 million,  or 8.48% of adjusted total assets,
which is  approximately  $93.3 million above the minimum  requirement of 1.5% of
adjusted total assets in effect on that date. At June 30, 1997, Magnolia Federal
also had $8.5 million of unamortized  mortgage  servicing rights,  none of which
was required to be deducted from tangible capital.  The OTS limits the amount of
mortgage and non-mortgage servicing rights,  together with purchased credit card
receivables, includable as tangible and core capital to 50% of core capital.

Under SFAS No.  115,  which was  effective  for  fiscal  years  beginning  after
December 31, 1993, debt securities  available for sale and held for trading must
be reported at their fair value,  which may be more or less than amortized cost.
Such debt securities not held for trading will be considered  available for sale
unless the  institution  can  demonstrate  that it has the  positive  intent and
ability to hold the security until maturity.  The OTS issued a policy  statement
in November 1994  requiring that an  association  must value  available-for-sale
securities at amortized cost for regulatory capital purposes.  At June 30, 1997,
an  adjustment  was made to  regulatory  capital for the $678,000 in  unrealized
losses on securities  available for sale,  net of income taxes,  included in the
Bank's equity capital.

The OTS regulations  establish special  capitalization  requirements for savings
associations that own subsidiaries. Under these regulations certain subsidiaries
are  consolidated  for capital  purposes and others are excluded from assets and
capital.  In  determining   compliance  with  the  capital   requirements,   all
subsidiaries  engaged solely in activities  permissible  for national  banks, or
engaged  in  certain  other  activities  solely as agent for its  customers  are
"includable"   subsidiaries  that  are  consolidated  for  capital  purposes  in
proportion  to the  association's  level of  ownership,  including the assets of
includable subsidiaries in which the association has a minority interest that is
not  consolidated  for GAAP purposes.  For excludable  subsidiaries the debt and
equity  investments in such  subsidiaries  are deducted from assets and capital.
The only subsidiary of the Bank is an includable subsidiary.

The capital standards also require core capital equal to at least 3% of adjusted
total  assets (as defined by  regulation).  Core capital  generally  consists of
tangible  capital  plus  certain  intangible  assets  and a  limited  amount  of
purchased credit card relationships. As a result of the prompt corrective action
provisions  of FDICIA  discussed  below,  however,  a savings  association  must
maintain  a core  capital  ratio  of at  least  4% to be  considered  adequately
capitalized  unless its supervisory  condition is such to allow it to maintain a
3% ratio.  At June 30, 1997, the Bank's core deposit  intangible of $3.7 million
was not included in the calculation of core capital.  Mortgage  servicing rights
includable as core capital are limited to 50% of such capital.  At June 30, 1997
the Bank was not required to deduct any portion of its investment in this asset.

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<PAGE>



At June 30, 1997, the Bank had core capital equal to $113.3 million, or 8.48% of
adjusted total assets,  which is $73.3 million above the minimum  leverage ratio
requirement  of 3% as in effect on that date and $59.9 million above the minimum
leverage ratio of 4% required to be classified as adequately capitalized.

The OTS  risk-based  requirement  requires  savings  associations  to have total
capital of at least 8% of risk-weighted  assets.  Total capital consists of core
capital,  as defined above, and  supplementary  capital.  Supplementary  capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the  risk-based  requirement  only to the extent of core capital.  At
June 30, 1997,  Magnolia Federal had $9.7 million of general loan loss reserves,
which exceeded 1.25% of risk-weighted  assets and, therefore,  only $9.0 million
qualified as risk-based capital.  Certain exclusions from capital and assets are
required  to be  made  for  the  purpose  of  calculating  total  capital.  Such
exclusions  consist of equity  investments  (as defined by regulation)  and that
portion of land loans and nonresidential  construction loans in excess of an 80%
loan-to-value ratio and reciprocal  holdings of qualifying capital  instruments.
Magnolia  Federal had $75,000 of such exclusions from capital and assets at June
30, 1997.

In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risks inherent in the type of asset. For example, the OTS has
assigned  a risk  weight of 50% for  prudently  underwritten  permanent  one- to
four-family  first  lien  mortgage  loans not more than 90 days  delinquent  and
having a loan to value ratio of not more than 80% at origination  unless insured
to such ratio by an  insurer  approved  by FNMA or FHLMC,  or has been paid down
subsequent to origination to a loan-to-value ratio of less than 80%.

On June 30, 1997, the Bank had total capital of $122.3 million (including $113.3
million in core capital and $9.0 million in  qualifying  supplementary  capital)
and risk-weighted assets of $723.8 million (including $10.3 million in converted
off-balance sheet assets);  or total capital of 16.90% of risk-weighted  assets.
This amount was $64.4 million above the 8.0% requirement in effect on that date.

The OTS has adopted a final rule that requires  every savings  association  with
more  than  normal  interest  rate risk to deduct  from its total  capital,  for
purposes of determining compliance with such requirement, an amount equal to 50%
of its  interest  rate risk  exposure  multiplied  by the  present  value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings  association,  greater  than 2% of the  present  value of its
assets,  based upon a  hypothetical  200 basis  point  increase  or  decrease in
interest rates (whichever results in a greater decline).  Net portfolio value is
the  present  value  of  expected  cash  flows  from  assets,   liabilities  and
off-balance  sheet  contracts.  The rule  provides for a two quarter lag between
calculating  interest rate risk and recognizing any deduction from capital.  The
interest rate risk capital  deduction,  which was to go into effect on September
30,  1994 has been  delayed  until the OTS  evaluates  the  process  under which
institutions may appeal such capital deductions. It is uncertain as to when this
evaluation  will be  completed.  Any  savings  association  with  less than $300
million in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise. The Company does not anticipate
any significant  adjustments to the Bank's present capital  requirements  due to
the expected implementation of this interest rate risk rule.

The OTS and the FDIC are authorized and, under certain  circumstances,  required
to take certain  actions  against  associations  that fail to meet their capital
requirements.  The OTS is  generally  required to take

                                       38

<PAGE>



action  to  restrict  the  activities  of  an   "undercapitalized   association"
(generally defined to be one with less than either a 4% core capital ratio, a 4%
Tier 1 risked-based  capital ratio or an 8% risk-based  capital ratio). Any such
association  must  submit a capital  restoration  plan and,  until  such plan is
approved by the OTS, may not increase its assets,  acquire another  institution,
establish a branch or engage in any new  activities,  and generally may not make
capital   distributions.   The  OTS  is  authorized  to  impose  the  additional
restrictions,   discussed   below,   that  are   applicable   to   significantly
undercapitalized associations.

As a condition  to the  approval of the capital  restoration  plan,  any company
controlling an undercapitalized association must agree that it will enter into a
limited  capital  maintenance   guarantee  with  respect  to  the  institution's
achievement of its capital requirements.

Any  savings  association  that  fails to  comply  with its  capital  plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) will be subjected
to one or  more of  additional  specified  actions  and  operating  restrictions
mandated  by FDICIA.  These  actions  and  restrictions  include  requiring  the
issuance of additional voting securities;  limitations on asset growth; mandated
asset  reduction;   changes  in  senior  management;   divestiture,   merger  or
acquisition of the association;  restrictions on executive compensation; and any
other action the OTS deems appropriate.

An  association  that becomes  "critically  undercapitalized"  (i.e., a tangible
capital ratio of 2% or less) is subject to further mandatory restrictions on its
activities  in addition to those  applicable to  significantly  undercapitalized
associations.  In addition, the OTS must appoint a receiver (or conservator with
the  concurrence of the FDIC) for a savings  association,  with certain  limited
exceptions, within 90 days after it becomes critically undercapitalized.

If the OTS determines  that an association is in an unsafe or unsound  condition
or is engaged in an unsafe or unsound  practice it is authorized to reclassify a
well-capitalized association as an adequately capitalized association and if the
association is adequately capitalized,  to impose the restrictions applicable to
an undercapitalized association. If the association is undercapitalized, the OTS
is  authorized  to  impose  the  restrictions   applicable  to  a  significantly
undercapitalized association.

Any  undercapitalized  association is also subject to other possible enforcement
actions by the OTS or the FDIC. Such actions could include a capital  directive,
a  cease-and-desist   order,   civil  money  penalties,   the  establishment  of
restrictions on all aspects of the  association's  operations or the appointment
of a receiver or conservator or a forced merger into another institution.

The  imposition by the OTS or the FDIC of any of these  measures on the Bank may
have a substantial adverse effect on the Bank's operations and profitability. If
the OTS or the FDIC require the Company to raise additional  capital through the
issuance of common stock or other  instruments,  such issuance may result in the
dilution of the Company's shareholders' ownership interest since shareholders do
not have preemptive rights.

Limitations  on  Dividends  and Other  Capital  Distributions  of the Bank.  OTS
regulations  impose various  restrictions or  requirements on associations  with
respect  to their  ability  to pay  dividends  or make  other  distributions  of
capital.  OTS regulations  prohibit an association  from declaring or paying any
dividends or from repurchasing any of its stock if, as a result,  the regulatory
capital of the  association  would be

                                       39

<PAGE>



reduced below the amount required to be maintained for the  liquidation  account
established in connection with its mutual to stock conversion.

The OTS utilizes a three-tiered approach to permit associations,  based on their
capital level and  supervisory  condition,  to make capital  distributions  that
include dividends, stock redemptions or repurchases,  cash-out mergers and other
transactions  charged  to  the  capital  account.   See  "--Regulatory   Capital
Requirements."

Generally, Tier 1 associations, which are associations that before and after the
proposed  distribution  meet  their  capital  requirements,   may  make  capital
distributions  during  any  calendar  year  equal to the  greater of 100% of net
income  for the  year-to-date  plus 50% of the amount by which the lesser of the
association's  tangible,  core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component,  as measured at the beginning of
the calendar year, or the amount authorized for a Tier 2 association. However, a
Tier 1 association  deemed to be in need of more than normal  supervision by the
OTS may be downgraded  to a Tier 2 or Tier 3  association  as a result of such a
determination.  The Bank meets the requirements for a Tier 1 association and has
not  been  notified  of  a  need  for  more  than  normal  supervision.  Tier  2
associations may make capital  distributions of up to 75% of net income over the
most recent four quarter periods.

Tier 3 associations  (which are  associations  that do not meet current  minimum
capital  requirements) that propose to make any capital  distribution and Tier 2
associations that propose to make a capital  distribution in excess of the noted
safe harbor  level must obtain OTS approval  prior to making such  distribution.
Tier 2  associations  proposing to make a capital  distribution  within the safe
harbor  provisions  and  Tier 1  associations  proposing  to  make  any  capital
distribution  need only submit  written  notice to the OTS 30 days prior to such
distribution.  As a subsidiary of the Company, the Bank will also be required to
give the OTS 30 days' notice prior to declaring  any dividend on its stock.  The
OTS may object to the distribution during that 30-day period based on safety and
soundness concerns.

The  OTS  has  proposed  regulations  that  would  revise  the  current  capital
distribution restrictions.  The proposal eliminates the current tiered structure
and the  safe-harbor  percentage  limitations.  Under  the  proposal  a  savings
association may make a capital distribution without notice to the OTS (unless it
is a  subsidiary  of a  holding  company)  provided  that  it has a CAMEL 1 or 2
rating, is not in troubled condition (as defined by regulation) and would remain
adequately   capitalized  (as  defined  in  the  OTS  prompt  corrective  action
regulations)  following the proposed  distribution.  Savings  associations  that
would remain adequately  capitalized  following the proposed distribution but do
not meet the other  noted  requirements  must  notify  the OTS 30 days  prior to
declaring a capital  distribution.  The OTS stated it will  generally  regard as
permissible that amount of capital  distributions  that do not exceed 50% of the
institution's  excess  regulatory  capital  plus net  income to date  during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. As under the current rule, the OTS may object to
a capital distribution if it would constitute an unsafe or unsound practice.  No
assurance  may be given as to  whether  or in what form the  regulations  may be
adopted.

Liquidity. All savings associations, including Magnolia Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings  payable in one year or less. This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending  upon economic  conditions

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<PAGE>



and savings flows of all savings associations.  At the present time, the minimum
liquid  asset ratio is 5.0%,  but there has been some  discussion  by the OTS of
lowering this rate to 4.0%.

In addition,  short-term  liquid  assets  (e.g.,  cash,  certain time  deposits,
certain bankers  acceptances and short-term United States Treasury  obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable  deposit accounts and current  borrowings.  Penalties may be
imposed  upon   associations   for  violations  of  either  liquid  asset  ratio
requirement.   At  June  30,  1997,  the  Bank  was  in  compliance   with  both
requirements,  with an  overall  liquid  asset  ratio of 9.31% and a  short-term
liquid assets ratio of 9.13%.

Accounting.  An OTS policy  statement  applicable  to all  savings  associations
clarifies  and  re-emphasizes  that  the  investment  activities  of  a  savings
association  must be in  compliance  with  approved  and  documented  investment
policies and  strategies,  and must be accounted  for in  accordance  with GAAP.
Under the policy  statement,  management must support its  classification of and
accounting for loans and securities (i.e., whether held for investment,  sale or
trading) with  appropriate  documentation.  The Bank is in compliance with these
amended rules.

The OTS has adopted an amendment  to its  accounting  regulations,  which may be
made more  stringent  than GAAP by the OTS,  to  require  that  transactions  be
reported in a manner that best reflects their underlying  economic substance and
inherent risk and that financial  reports must  incorporate any other accounting
regulations or orders  prescribed by the OTS.

Qualified Thrift Lender Test. All savings associations,  including the Bank, are
required  to meet a  qualified  thrift  lender  ("QTL")  test to  avoid  certain
restrictions on their  operations.  This test requires a savings  association to
have at least 65% of its portfolio  assets as defined by regulation in qualified
thrift  investments  on a monthly  average  for nine out of every 12 months on a
rolling basis. As an alternative,  a savings association may maintain 60% of its
assets in those assets specified in Section  7701(a)(19) of the Internal Revenue
Code of 1986, as amended (the "Code").  Under either test, such assets primarily
consist of residential  housing  related loans and  investments.  As of June 30,
1997, the Bank met the QTL test,  and it has always been in compliance  with the
QTL requirement.

Any  savings  association  that  fails to meet the QTL test  must  convert  to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain SAIF  insured  until the FDIC permits it to transfer to
the BIF. If an association  that fails the test has not yet  requalified and has
not converted to a national bank, its new investments and activities are limited
to those permissible for both a savings  association and a national bank, and it
is limited to national bank branching rights in its home state. In addition, the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  becomes  subject  to all  restrictions  on  bank  holding
companies. See "--Holding Company Regulation."

Community  Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every
FDIC insured institution has a continuing and affirmative  obligation consistent
with safe and sound  banking  practices  to

                                       41

<PAGE>



help meet the credit needs of its entire  community,  including low and moderate
income  neighborhoods.  The CRA does not establish specific lending requirements
or  programs  for  financial  institutions  nor does it  limit an  institution's
discretion  to develop the types of products and  services  that it believes are
best suited to its particular community. The CRA requires the OTS, in connection
with the examination of Magnolia Federal, to assess the institution's  record of
meeting the credit needs of its  community  and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch,  by Magnolia Federal.  An unsatisfactory  rating may be used as the
basis for the denial of an application by the OTS.

The federal banking  agencies,  including the OTS, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened  attention being given to the CRA in the past few
years,  the Bank may be required to devote  additional  funds for investment and
lending in its local  community.  The Bank was examined for CRA compliance as of
March 31, 1995 and received a rating of outstanding.

Transactions  with  Affiliates.   Generally,   transactions  between  a  savings
association or its  subsidiaries  and its affiliates are required to be on terms
as  favorable  to  the  association  as  transactions  with  non-affiliates.  In
addition,  certain of these  transactions  are restricted to a percentage of the
association's  capital.  Affiliates of Magnolia  Federal include the Company and
any company that is under common  control with the Bank. In addition,  a savings
association may not lend to any affiliate  engaged in activities not permissible
for a bank  holding  company  or  acquire  the  securities  of most  affiliates.
Magnolia Federal's  subsidiary is not deemed an affiliate;  however, the OTS has
the discretion to treat subsidiaries of savings  associations as affiliates on a
case by case basis.

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

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

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

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

                                       42

<PAGE>



are the activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."

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

Federal  Securities  Law.  The  stock  of the  Company  is  registered  with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934,  as  amended  (the  "Exchange  Act").  The  Company  is  subject to the
information,   proxy  solicitation,   insider  trading  restrictions  and  other
requirements of the SEC under the Exchange Act.

Company stock held by persons who are affiliates (generally officers,  directors
and  principal   stockholders)   of  the  Company  may  not  be  resold  without
registration or unless sold in accordance with certain resale  restrictions.  If
the Company  meets  specified  current  public  information  requirements,  each
affiliate  of the  Company  is  able  to  sell  in the  public  market,  without
registration, a limited number of shares in any three-month period.

Federal  Reserve  System.  The Federal  Reserve  Board  requires all  depository
institutions  to  maintain  non-interest-bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts).  At June 30, 1997,  the Bank was in  compliance  with these
reserve  requirements.  The balances maintained to meet the reserve requirements
imposed  by  the  Federal  Reserve  Board  may  be  used  to  satisfy  liquidity
requirements that may be imposed by the OTS. See "--Liquidity."

Savings  associations  are  authorized  to borrow from the Federal  Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust  other  reasonable   alternative   sources  of  funds,   including  FHLB
borrowings, before borrowing from the Federal Reserve Bank.

Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas, which
is one of 12 regional FHLBs that  administers the home financing credit function
of savings  associations.  Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated  obligations of the FHLB System. It makes loans to
members (i.e.,  advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the  regulation  and  oversight of the Federal  Housing  Finance  Board.  All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition,  all long-term  advances are required to
provide funds for residential home financing.

As a member,  Magnolia Federal is required to purchase and maintain stock in the
FHLB of Dallas.  At June 30, 1997,  Magnolia  Federal had $15.6  million in FHLB
stock,  which was in compliance with this  requirement.  In past years, the Bank
has  received  substantial  dividends  on its FHLB  stock.  Over  the past  five
calendar  years such  dividends  have averaged 4.98% and were 6.15% for calendar
year 1996.

Under federal law, the FHLBs are required to provide funds for the resolution of
troubled savings  associations  and to contribute to low- and  moderately-priced
housing programs through direct loans or

                                       43

<PAGE>



interest  subsidies on advances  targeted for community  investment and low- and
moderate-income  housing projects.  These  contributions have affected adversely
the level of FHLB  dividends  paid and could  continue  to do so in the  future.
These contributions could also have an adverse effect on the value of FHLB stock
in the  future.  A  reduction  in value of the Bank's FHLB stock may result in a
corresponding reduction in Magnolia Federal's capital.

For the year ended  December  31, 1996  dividends  paid by the FHLB of Dallas to
Magnolia  Federal totaled  $636,800 which constitute a $87,600 increase over the
amount of dividends  received in calendar year 1995. The $229,100 stock dividend
received for the quarter  ended June 30, 1997  reflected an  annualized  rate of
6.0%, compared to a rate of 6.15% for calendar 1996.

Federal  and State  Taxation.  Prior to the  enactment  of  recent  legislation,
savings  associations  such as the Bank  that  met  certain  definitional  tests
relating to the  composition  of assets and other  conditions  prescribed by the
Code were  permitted  to  establish  reserves  for bad debts and to make  annual
additions  thereto which could,  within specified  formula limits, be taken as a
deduction in  computing  taxable  income for federal  income tax  purposes.  The
amount  of this  bad debt  reserve  deduction  for  "non-qualifying  loans"  was
computed  under  the  experience  method.  The  amount  of the bad debt  reserve
deduction for  "qualifying  real  property  loans"  (generally  loans secured by
improved  real estate) was computed  under either the  experience  method or the
percentage of taxable income method (based on an annual  election).  Legislation
signed into law in August  1996  eliminated  the  percentage  of taxable  income
method in future years and will require recapture of approximately $10.4 million
post-1987 bad debt reserves  over a six-year  period.  The Bank has provided for
the related taxes as a deferred tax liability and payment of income taxes on the
recapture  of post-1987  bad debt  reserves  will not have a material  effect on
future earnings.  The Bank delayed the recapture of bad debt reserves for fiscal
1997, and may delay recapture  another year if it meets certain loan origination
tests. The amount of bad debt deduction claimed pre-1988 of approximately  $13.5
million will not be subject to tax recapture  unless the Bank or its'  successor
is liquidated at some future date.

In addition to the regular  income tax,  corporations,  including  the  Company,
generally are subject to a minimum tax. An alternative minimum tax is imposed at
a minimum tax rate of 20% on alternative  minimum taxable  income,  which is the
sum of a corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available  exemption.  The alternative minimum tax is
imposed to the extent it exceeds the  corporation's  regular  income tax and net
operating  losses can  offset no more than 90% of  alternative  minimum  taxable
income.  For taxable years beginning  after 1986 and before 1996,  corporations,
including the Company,  are also subject to an environmental  tax equal to 0.12%
of the  excess of  alternative  minimum  taxable  income  for the  taxable  year
(determined  without  regard to net  operating  losses and the deduction for the
environmental tax) over $2 million.

To the extent earnings appropriated to a savings association's bad debt reserves
for  "qualifying  real  property  loans" and  deducted  for  federal  income tax
purposes  exceed the allowable  amount of such reserves based on loss experience
and to the extent of the association's supplemental reserves for losses on loans
("Excess"),  such Excess may not, without adverse tax consequences,  be utilized
for the  payment  of cash  dividends  or other  distributions  to a  shareholder
(including  distributions on redemption,  dissolution or liquidation) or for any
other  purpose  (except to absorb bad debt  losses).  As of June 30,  1997,  the
Bank's Excess for tax purposes totaled approximately $23.4 million.

                                       44

<PAGE>



The Company and its subsidiaries file consolidated federal income tax returns on
a  fiscal  year  basis  using  the  accrual   method  of   accounting.   Savings
associations,  such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable  Treasury  regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings  association members of
the consolidated  group that are  functionally  related to the activities of the
savings association member.

The  Company  and its  consolidated  subsidiaries  were  audited by the IRS with
respect to  consolidated  federal  income tax  returns for the three years ended
June 30, 1993.  With respect to the years  examined and concluded by the IRS all
deficiencies have been satisfied.

Mississippi Taxation.  The Company and the Bank and its subsidiaries are subject
to the  Mississippi  corporate  income tax and  franchise tax to the extent that
such  corporations  are engaged in business in the state of  Mississippi or have
income that is generated in the state. The franchise tax is imposed at a rate of
$2.50 per $1,000,  or fractional part thereof,  of capital,  surplus,  undivided
profits and  reserves  employed in  Mississippi.  The income tax is imposed at a
rate of 3% on the  first  $5,000 of  taxable  income,  4% on the next  $5,000 of
taxable  income and 5% on taxable  income in excess of  $10,000.  A  Mississippi
combination return of corporate income tax must be filed annually.

Alabama Taxation.  The Bank is subject to Alabama financial  institution  excise
tax  to the  extent  of  income  generated  by  the  retail  branches  and  loan
origination offices located in the state. The excise tax is imposed at a rate of
6%.

Delaware Taxation.  As a Delaware holding company,  the Company is exempted from
Delaware  corporate income tax but is required to file an annual report with and
pay an annual fee to the State of  Delaware.  The Company is also  subject to an
annual franchise tax imposed by the State of Delaware.


EXECUTIVE OFFICERS OF THE COMPANY

The following paragraphs set forth the name, age and biographical sketch of each
of the executive officers of the Company as of June 30, 1997.

Robert S. Duncan, age 61, served as President of the Company from 1991 until his
selection  in 1993 as  Chairman of the Board of the  Company.  Since 1991 he has
served as the Company's Chief Executive  Officer.  Mr. Duncan joined the Bank in
1968 as an Assistant Secretary,  became an Executive Vice President in 1972, and
President in 1977.  He was Chief  Executive  Officer of the Bank from 1983 until
March 1996,  and has served as Chairman of the Board since 1984. For eight years
prior to  joining  Magnolia  Federal,  Mr.  Duncan  served as a manager  for the
accounting  firm of KPMG Peat Marwick LLP. Mr.  Duncan is a past Director of the
FHLB of Dallas and former State Director of the Savings and Loan  Foundation and
the Institute of Financial  Education.  He is past President of the  Mississippi
League of Savings  Institutions and the Mississippi  Financial  Managers Society
and  currently  serves  on the Board of  Directors  of the  Mississippi  Bankers
Association.   He  has  been  active  with  the  America's   Community   Bankers
organization,  serving  several  years  on  the  Executive  Committee,  and as a
Co-Chairman of the Governmental Affairs Committee.  Mr. Duncan has served on the
Thrift  Institutions  Advisory Council of the Federal Reserve Board, the SAIF of
the FDIC and the Federal  Reserve  Board of  Atlanta.  Mr.  Duncan  holds a B.S.
degree from Auburn  University.  He has attended the Graduate  School of Savings

                                       45

<PAGE>



and Loans at Indiana  University  and the Savings and Loan School for  Executive
Development at the University of Georgia.

Lou Ann Poynter,  age 51, served as the Treasurer of the Company from 1991 until
June 30, 1993, and  previously  served as Executive Vice President and Treasurer
of Magnolia Federal.  As of July 1, 1993, Ms. Poynter became President and Chief
Operating  Officer of the Company  and of Magnolia  Federal.  She  accepted  the
position of the Bank's Chief  Executive  Officer  effective  March 20, 1996. She
joined the Bank in 1972,  became Treasurer in 1975, and Senior Vice President in
1985.  She was promoted to Executive  Vice  President  and Treasurer in 1988 and
served in that capacity until she became  President on July 1, 1993. Ms. Poynter
has  served  on the  Thrift  Industry  Accounting  Committee  and as a  National
Director of the Financial  Managers  Society,  Inc. She is past President of the
Mississippi  Financial  Managers Society and has served on the Mississippi State
Board of Public Accountancy.  She currently serves on the Board of Directors and
the Government Affairs Council of America's  Community Bankers.  She is a member
of the  Mississippi  Society of Certified  Public  Accountants  and the American
Institute of Certified Public Accountants.  Ms. Poynter received her B.S. degree
in Business  Administration and M.S. degree in Accounting from the University of
Southern Mississippi.

H. A. Moore,  III, age 48, has been the  Secretary of the Company since 1991 and
served as outside General Counsel to the Bank from 1976 until February 1997 when
he became  Executive  Vice-President  and General Counsel to the Bank. Mr. Moore
was the  managing  partner  of the law firm of  Moore  and  Jones,  Hattiesburg,
Mississippi prior to coming to Magnolia Federal,  and has practiced law with the
firm beginning in 1972. He received his B.A. and J.D. degree from the University
of Mississippi in 1970 and 1972,  respectively.  He is a member of Omicron Delta
Kappa honorary  fraternity and Phi Alpha Delta legal  fraternity.  Mr. Moore has
actively  participated as a member and officer of the South Central  Mississippi
Bar Association and as a member and director of the Mississippi Bar Association.
He has served as President of the Young Lawyers  Division of the Mississippi Bar
Association  and has  served  on  several  committees  of the  Mississippi  Bar,
including the Ethics Committee. He is a member of the Mississippi Bar Foundation
and has  served  as one of its  directors.  Mr.  Moore is also a  member  of the
American College of Mortgage Attorneys,  the American  Judicature  Society,  the
American Bar Association and the South Mississippi Estate Planning  Association.
Mr.  Moore has been an active  member of the  Attorney's  Committee of America's
Community Bankers.

Karen K. Griffis, age 38, has served as Treasurer of the Company since 1993. Ms.
Griffis  joined  the Bank in 1982 and has been  Treasurer  and  Chief  Financial
Officer of the Bank  since  1993 and  Senior  Vice  President  since  1994.  She
presently  serves on the  Financial  Institutions  Accounting  Committee  of the
Financial  Managers Society,  Inc. and on the Taxation Committee of the American
Bankers  Association.  She is a member of the  Mississippi  Society of Certified
Public Accountants and the American  Institute of Certified Public  Accountants.
Ms. Griffis  received her B.S. degree in Business  Administration  and Master of
Business Administration degree from the University of Southern Mississippi.

                                       46

<PAGE>



ITEM 2. PROPERTIES

The Company  conducts its business  through 62 retail  banking  offices and four
loan origination  offices located throughout  Mississippi and Alabama,  with the
executive and administrative  offices located in Hattiesburg,  Mississippi and a
data processing center in Jackson,  Mississippi. The total net book value of the
Company's  premises  and  equipment  at June 30,  1997 was  $44.0  million.  The
following table sets forth information relating to each of the Bank's offices as
of June 30, 1997.

<TABLE>
<CAPTION>
                                                  DATE LEASED    NET BOOK VALUE
                         LOCATION                 OR ACQUIRED   AT JUNE 30, 1997
                         --------                 -----------   ----------------

<S>                                                   <C>          <C>        
Magnolia Plaza Office Building                        1981         $ 1,091,594
100 West Front Street
Hattiesburg, MS  39401
(Administrative offices)

Forrest Tower Office Building                         1992           6,377,781
Forrest Street
Hattiesburg, MS  39401
(Executive offices)

Kress Office Building                                 1994           2,059,243
101 West Front Street
Hattiesburg, MS  39401

Parking (corner Main & Pine Streets)                  1993             264,436
Hattiesburg, MS  39401

Office Building                                       1993             238,671
213 West Pine Street
Hattiesburg, MS  39401   (Parking/Purchasing)

Office Building                                       1985             994,784
480 Yazoo Street
Jackson, MS  39201   (Data Center offices)


                                    Branches
                                    --------
                                Southern Division
                                -----------------
130 West Front Street                                 1957             625,271
Hattiesburg, MS  39401

                                       47

<PAGE>
<CAPTION>
                                                  DATE LEASED    NET BOOK VALUE
                         LOCATION                 OR ACQUIRED   AT JUNE 30, 1997
                         --------                 -----------   ----------------


<C>                                                   <C>              <C>    
949 Broadway Drive                                    1971             397,408
Hattiesburg, MS  39401 (16th section ground
lease to 2046)

3318 Hardy Street                                     1983             364,566
Hattiesburg, MS  39401

4800 Hardy Street                                     1992             603,861
Hattiesburg, MS  39401

Highway 98 West, Wal-Mart Supercenter                 1994              37,200
Hattiesburg, MS  39401  (Leased with options
to 2009)

120 South Main Street                                 1976              34,495
Petal, MS  39465

704 Main Street                                       1983             211,301
Collins, MS  39428

11283 Highway 63 South                                1991             322,212
Lucedale, MS  39452

125 West College Avenue                               1976              71,257
Wiggins, MS  39577

407 Highway 11 South                                  1991             292,679
Picayune, MS  39466

801 Spring Street                                     1993             317,631
Waynesboro, MS  39360


                                 Coast Division
                                 --------------
2200 14th Street                                      1969             370,937
Gulfport, MS  39501

15380 at Dedeaux Road                                 1974             201,546
Gulfport, MS  39503

602 Courthouse Road                                   1990             307,781
Gulfport, MS  39501

110 West Beach Boulevard                              1975             239,466
Long Beach, MS  39560

                                       48

<PAGE>
<CAPTION>

                                                  DATE LEASED    NET BOOK VALUE
                         LOCATION                 OR ACQUIRED   AT JUNE 30, 1997
                         --------                 -----------   ----------------


<C>                                                   <C>              <C>    
1201 Jackson Avenue                                   1972             242,382
Pascagoula, MS  39567

125 Lameuse Street                                    1962             226,108
Biloxi, MS  39530

210 Eisenhower Drive                                  1986             239,200
Biloxi, MS  39530

10359 D'Iberville Boulevard                           1992             265,958
D'Iberville, MS  39531

811 Bienville Boulevard                               1974             353,661
Ocean Springs, MS  39564

4303 Gautier-Vancleave Road                           1988             142,656
Gautier, MS  39553

3436 Main Street                                      1992             230,175
Moss Point, MS  39563  (Leased with options
to 2010)

113 Davis Avenue                                      1991              93,707
Pass Christian, MS  39571


                                Capital Division
                                ----------------
200 North Congress Street                             1960           1,791,723
Jackson, MS  39205
   (Property  consists of one block near the
    Capitol in  downtown  Jackson  with
    six-story office building and other building.)

2925 Terry Road                                       1980             183,196
Jackson, MS  39212

4270 Robinson Road                                    1980             449,155
Jackson, MS  39209

4325 North State Street                               1985             744,860
Jackson, MS  39206

                                       49

<PAGE>
<CAPTION>

                                                  DATE LEASED    NET BOOK VALUE
                         LOCATION                 OR ACQUIRED   AT JUNE 30, 1997
                         --------                 -----------   ----------------


<C>                                                   <C>               <C>   
5260 I-55 North                                       1974              21,595
Jackson, MS  39211  (Leased to May 1999)

1280 East County Line Road                            1991             833,550
Ridgeland, MS  39157

1520 West Government Street                           1985             430,081
Brandon, MS  39042

609 Highway 80 East                                   1989             242,952
Clinton, MS  39056  (Leased with options to 2049)

147 East Peace Street                                 1974              77,102
Canton, MS  39046

Highway 51 North, Kroger Marketplace                  1994              37,135
Madison, MS  39130  (Leased with options to 2009)

3101 Highway 80 East                                  1994             335,363
Pearl, MS  39208  (Leased with options to 2013)

1050 Parkway Boulevard                                1995             628,619
Flowood, MS 39208


                                 Delta Division
                                 --------------
536 Washington Avenue                                 1966             382,946
Greenville, MS  38701

1531 Highway 1 South                                  1992             620,949
Greenville, MS  38701

104 North Broad Street                                1988             332,041
Leland, MS  38756

215 Highway 82 West                                   1987             307,439
Indianola, MS  38751

254 South Main Street                                 1964             202,410
Grenada, MS  38901

606 West Park                                         1991             276,962
Greenwood, MS  38930

                                       50

<PAGE>
<CAPTION>

                                                  DATE LEASED    NET BOOK VALUE
                         LOCATION                 OR ACQUIRED   AT JUNE 30, 1997
                         --------                 -----------   ----------------


                               Southwest Division
                               ------------------
<C>                                                   <C>              <C>    
210 State Street                                      1965             297,864
McComb, MS  39648

1324 Delaware Ave                                     1996             452,438
McComb, MS  39648

1000 Highway 13 North                                 1993             393,456
Columbia, MS  39429

513 State Street                                      1982             134,441
Natchez, MS  39120

148 North Shields Lane                                1997             731,099
Natchez, MS 39120

2000 Drummond Street                                  1987             269,724
Vicksburg, MS  39180

2150 South Frontage Road                              1996             684,187
Vicksburg, MS  39180

714A Halbert Heights Road                             1987             402,327
Brookhaven, MS  39601


                             South Alabama Division
                             ----------------------
851 South Beltline Highway                            1994           5,125,666
Mobile, AL  36606  (Also includes a 10-story
office building and parking)

4546 St. Stephens Road                                1994              98,322
Mobile, AL  36613

1950 Government Boulevard                             1994             555,762
Mobile, AL  36606

3960 Government Boulevard                             1994              41,581
Mobile, AL  36609

103 South Highway 43                                  1994             199,667
Mobile, AL  36571

                                       51

<PAGE>
<CAPTION>

                                                  DATE LEASED    NET BOOK VALUE
                         LOCATION                 OR ACQUIRED   AT JUNE 30, 1997
                         --------                 -----------   ----------------


<C>                                                   <C>              <C>    
5416 Highway 90 West                                  1994             507,480
Mobile, AL   36619

5127 Moffat Road                                      1994             111,042
Mobile, AL  36618

7690 Airport Boulevard                                1994             117,711
Mobile, AL  36608

701 Hillcrest Road                                    1994             296,719
Mobile, AL  36609

2861 Springhill Avenue                                1994             292,371
Mobile, AL  36607

1808 South Craft Highway                              1994               5,349
Chickasaw, AL  36611  (Leased with options
to 2005)

1190 S. McKenzie Street                               1994              85,000
Foley, AL  36535  (Leased with options
to 1997)

Highway 98, Wal-Mart Supercenter                      1995              46,154
Daphne, AL  36526  (Leased with options
to 2010)


                            Loan Origination Offices
                            ------------------------
110 S. 37th Avenue                                    1990             283,186
Hattiesburg, MS  39401

11477 Highway 49 North                                1995                   -
Gulfport, MS  39503  (Monthly lease)

28186 Highway 98                                      1993                   -
Daphne, AL  36526  (Leased with options to 2000)

837A Highway 90                                       1995                   -
Bay St. Louis, MS  39520  (Leased with options
to 2001)
</TABLE>

                                       52

<PAGE>



The Company  owns the  majority of its branch  offices.  At June 30,  1997,  the
Company had completed the process of renovating a ten-story  office  building in
downtown Hattiesburg,  Mississippi,  that was purchased in 1992 for expansion of
its  administrative  offices.  Approximately  $5.8  million was  invested in the
building  renovation and  restoration.  The Company also completed an upgrade to
its  automated  teller and  platform  systems  during  fiscal  1997 at a cost of
approximately  $3.6 million for  customized  software,  related  hardware and an
enhanced data communications network.

The Company  maintains an on-line data base of depositor  and borrower  customer
information.  The net book value of the data  processing and computer  equipment
utilized by the Company at June 30, 1997 was $3.4 million.


ITEM 3. LEGAL PROCEEDINGS

The Company and its  subsidiaries  are  involved as  plaintiff  or  defendant in
various legal actions  arising in the normal course of their  businesses.  While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management,  after consultation with counsel  representing the
Company in the  proceedings,  that the resolution of these  proceedings will not
have a material effect on the Company's consolidated financial statements.


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

(a)  A Special Meeting of Stockholders was held on August 20, 1997.

(b)  At this Special  Meeting of  Stockholders,  the  Stockholders  considered a
     proposal to adopt the Agreement and Plan of reorganization, dated as of May
     8, 1997, by and between Magna and Union Planters  Corporation,  a Tennessee
     corporation ("UPC"), and the related Plan of Merger (the "Plan of Merger"),
     by and  between  Magna and UPC  Merger  Subsidiary,  Inc.,  a  wholly-owned
     subsidiary  of UPC ("UPC Merger  Subsidiary"),  pursuant to which (i) Magna
     will merge (the "Merger") with UPC Merger Subsidiary,  with the effect that
     Magna will be the surviving  corporation  resulting  from the Merger,  (ii)
     each  share  of the $.01  par  value  common  stock  of  Magna  issued  and
     outstanding  at the  effective  time of the Merger will be  converted  into
     0.5165  of a share of the  $5.00 par  value  common  stock of UPC,  and the
     associated  "Preferred Share Rights" (as defined in the accompanying  Proxy
     Statement/Prospectus),  subject to possible adjustment, and cash in lieu of
     any fractional  share,  and (iii) UPC will assume the  obligations of Magna
     under various stock plans and adopt substitute plans where appropriate.

                The vote on the proposed merger was as follows:

         FOR              AGAINST           ABSTAIN          BROKER NON-VOTES
         ---              -------           -------          ----------------
      10,483,958          84,993             6,561                   0


                                       53

<PAGE>



                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Stock Information

The Company's  common stock is traded  over-the-counter  via the Nasdaq National
Market  under the symbol  MGNL.  At June 30, 1997,  its  13,754,266  outstanding
shares were owned by 1,240 shareholders of record. The table below indicates the
high and low common stock prices as reported on the Nasdaq  National Market each
quarter for the past two fiscal years, adjusted for stock dividends.

<TABLE>
<CAPTION>
                                                    Prices*
                                            ------------------------
          Quarter Ended                         High         Low
          --------------------              ------------  ----------
          <S>                               <C>            <C>     
          September 30, 1995                $ 15.500       $ 12.375
          December 31, 1995                   15.000         14.250
          March 31, 1996                      15.875         14.375
          June 30, 1996                       18.625         14.500
          September 30, 1996                  22.500         17.500
          December 31, 1996                   20.750         17.000
          March 31, 1997                      20.250         17.000
          June 30, 1997                       27.500         16.750
</TABLE>

          *Adjusted  for  two-for-one  stock  split in the form of a 100%  stock
          dividend declared on July 17, 1996 and paid on August 15, 1996.


Cash Dividends

The Company paid quarterly cash dividends (without  restatement for stock splits
and stock dividend) of $0.085 per share from June 30, 1991, the end of the first
quarter after completing its initial public offering through September 30, 1994;
it paid $0.10 per share each  quarter from  December 31, 1994 through  September
30, 1995,  and it has paid $0.15 per share each quarter since December 31, 1995.
The Board of  Directors  intends  to  continue  the  payment of  quarterly  cash
dividends,  dependent  on the future  earnings  and  financial  condition of the
Company until the merger with Union Planters Corporation becomes effective.  The
Company's  ability to pay  dividends is  dependent  on the dividend  payments it
receives  from its  subsidiary,  Magnolia  Federal Bank for  Savings,  which are
subject to  regulations  and the Bank's  continued  compliance  with  regulatory
capital requirements.

                                       54

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

Magna Bancorp, Inc.
Selected Consolidated Financial and Other Data

<TABLE>
<CAPTION>
                                                                                  At June 30
                                                -------------------------------------------------------------------------------
                                                      1997            1996            1995          1994            1993
                                                -------------------------------------------------------------------------------
                                                                                (In Thousands)
Selected Consolidated Financial Data
<S>                                               <C>              <C>             <C>             <C>             <C>      
Total assets .............................        $1,353,242       1,308,658       1,159,423       1,115,169       1,046,099
Loans receivable, net ....................           928,093         863,762         798,586         714,957         734,671
Mortgage-backed securities ...............           132,912         166,087          81,264         114,068          72,105
Other securities .........................            73,854          74,675          83,648          90,695          51,882
Deposits .................................           915,395         922,370         917,718         972,644         926,918
Borrowings from FHLB of Dallas
  and others:
     Short-term ..........................           165,299         125,000         100,000               -               -
     Long-term ...........................            93,150          96,961               -             571             498
Stockholders' equity .....................           138,372         125,819         115,319          96,238          78,771
</TABLE>


<TABLE>
<CAPTION>
                                                                             Years Ended June 30
                                                -------------------------------------------------------------------------------
                                                      1997            1996            1995          1994            1993
                                                -------------------------------------------------------------------------------
                                                                                (In Thousands)
Selected Consolidated Operations Data
<S>                                                <C>               <C>              <C>            <C>            <C>   
Total interest income .........................    $ 111,924         106,747          96,844         85,767         85,919
Total interest expense ........................       46,246          41,653          34,136         25,019         29,035
                                                   ---------       ---------       ---------      ---------      ---------
    Net interest income .......................       65,678          65,094          62,708         60,748         56,884
Provision for possible loan losses ............        3,136           1,633             418            688          1,573
                                                   ---------       ---------       ---------      ---------      ---------
    Net interest income after provision for
     possible loan losses .....................       62,542          63,461          62,290         60,060         55,311
Loan servicing income, net ....................       12,128          12,424          12,080          4,357          1,903
Service fees on deposits ......................       18,738          16,407          13,362         10,875          9,494
Unrealized holding gains(losses) on trading
 securities and loans held for sale, net ......        2,412          (1,293)            864           (881)             -
Gains on sales of loans and securities ........          521           1,537             843            752          4,931
Other noninterest income ......................        5,338           8,541           8,097          8,928          2,343
Special SAIF deposit insurance assessment .....       (5,917)              -               -              -              -
Noninterest expense ...........................      (65,738)        (68,026)        (66,310)       (58,527)       (48,566)
                                                   ---------       ---------       ---------      ---------      ---------
    Earnings before income taxes ..............       30,024          33,051          31,226         25,564         25,416
Income tax expense ............................       11,465          11,942          12,201          9,930          9,415
                                                   ---------       ---------       ---------      ---------      ---------
   Earnings before cumulative effect of
    accounting changes ........................       18,559          21,109          19,025         15,634         16,001
Cumulative effect of accounting changes .......           -                -               -          3,868              -
                                                   ---------       ---------       ---------      ---------      ---------
   Net earnings ...............................    $  18,559          21,109          19,025         19,502         16,001
                                                   =========       =========       =========      =========      =========
</TABLE>

                                       55

<PAGE>



SELECTED FINANCIAL DATA, CONTINUED


<TABLE>
<CAPTION>
                                                                      At and For the Years Ended June 30
                                                 -----------------------------------------------------------------------------
                                                     1997            1996            1995          1994             1993
                                                 -----------------------------------------------------------------------------
<S>                                                <C>                 <C>            <C>           <C>             <C> 
Per Share Data (1)
Book value (end of year) .......................   $    10.06          9.18           8.20          6.85            5.61
Earnings per share before cumulative
  effect of accounting changes .................         1.34          1.50           1.33          1.10            1.15
Cumulative effect of accounting changes ........            -             -              -          0.27               -
Earnings per share after cumulative
  effect of accounting changes .................         1.34          1.50           1.33          1.37            1.15
Cash dividends .................................         0.60          0.25           0.18          0.08            0.04

Other Data

Net interest margin (2) ........................         5.64%         6.02%          6.21%         6.47%           6.53%
Return on average assets .......................         1.40%         1.72%          1.66%         1.83%           1.65%
Return on average assets, excluding
  cumulative effect of accounting changes ......         1.40%         1.72%          1.66%         1.47%           1.65%
Return on average equity .......................        14.27%        17.34%         18.28%        21.88%          22.69%
Return on average equity, excluding
  cumulative effect of accounting changes ......        14.27%        17.34%         18.28%        17.54%          22.69%
Average stockholders' equity as a
  percentage of average total assets ...........         9.83%         9.93%          9.07%         8.39%           7.27%
Stockholders' equity as a percentage
  of total assets (end of year) ................        10.23%         9.61%          9.95%         8.63%           7.53%
Non-performing assets as a percentage
  of total assets (end of year) (3) ............         2.08%         2.52%          2.45%         2.37%           1.76%
Net charge-offs as a  percentage
  of average loans .............................         0.24%         0.16%          0.13%         0.08%           0.06%
Allowance for possible loan losses
  as a percentage of loans (end of year) .......         1.11%         1.08%          1.14%         1.35%           1.30%
Dividend payout percentage .....................        44.78%        16.67%         13.86%         6.20%           3.41%
Number of full-service offices .................           62            61             60            57              45
Number of NOW and checking accounts ............      160,804       154,704        139,100       126,943         107,680
Number of other deposit accounts ...............      113,448       112,157        108,494       110,646          94,553
Number of mortgage loans serviced
  for others ...................................       76,365        79,440         89,652        96,052          86,099

<FN>
(1)  Per share data has been adjusted for a two-for-one  stock split in the form
     of a 100% dividend declared in July 1996.

(2)  Net interest income divided by interest-earning assets.

(3)  Non-performing  assets, net of unearned  discounts,  deferred loan fees and
     undisbursed  loan funds,  consist of non-  accruing  loans,  troubled  debt
     restructurings  and foreclosed  real estate.  Non-performing  assets do not
     include accruing loans that are in a delinquent status.
</FN>
</TABLE>

                                       56

<PAGE>



ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


GENERAL

Magna Bancorp, Inc. (the "Company") was incorporated on September 10, 1990 under
the laws of the State of  Delaware  and became the  holding  company of Magnolia
Federal Bank for Savings ("Magnolia  Federal" or the "Bank") on March 8, 1991 in
connection  with the  conversion  of the Bank from a mutual  to a stock  savings
bank. The Company's other operations  consist of Magna Insurance Company ("Magna
Insurance"),  a life  insurance  company;  Realty  Services,  Inc., an appraisal
company; Comserv, Inc., a title and hazard insurance agency; and Magna Financial
Services, Inc., an investment company. Each company's operations are designed to
cohesively serve and enhance the  profitability and operations of Magna Bancorp,
Inc.

Magnolia  Federal  is  a  federally  chartered,  stock  savings  bank  with  its
headquarters  in Hattiesburg,  Mississippi.  Founded in 1934,  Magnolia  Federal
serves  its  Mississippi  and  Alabama  markets  through a network  of 62 retail
banking  offices and four home loan  origination  offices  that stretch from the
northern Mississippi Delta and Jackson metropolitan area to the Mississippi Gulf
Coast and Mobile, Alabama.

As the Company's primary source of revenue, Magnolia Federal meets the financial
requirements of the communities it serves by offering a variety of competitively
priced  products and services to meet the needs of its various market  segments.
Its  deposits  are  insured  up to  applicable  limits  by the  Federal  Deposit
Insurance  Corporation  ("FDIC").  For over 60  years,  the  Bank has  attracted
deposits from the general public that serve as the primary source of funding for
the  origination of one- to four-family  residential  loans and consumer  loans.
Through several  successful  mergers and deposit  acquisitions  over the past 25
years,  the Bank has expanded its operations and enhanced its market  stability,
diversity and opportunity for profitability.

Magna Mortgage  Company ("Magna  Mortgage"),  a subsidiary of Magnolia  Federal,
provides mortgage loan processing,  closing and servicing  functions to the Bank
and also  services  approximately  $3.1  billion of loans for others.  Through a
broker/correspondent  network,  Magna Mortgage has extended the Bank's  mortgage
lending capability throughout the southeastern United States.

Mortgage protection,  credit life and disability insurance coverage are provided
to Magnolia Federal's loan customers through Magna Insurance,  which also offers
tax-deferred  annuities  and final  expense  (burial)  insurance  to the  Bank's
depositors  and the general  public.  Appraisal  services  are offered by Realty
Services,  Inc. to loan customers of Magnolia Federal.  Comserv, Inc. is a title
and hazard insurance agency that represents  several title insurance  companies,
and offers limited, specialized hazard insurance coverage.

The following discussion of the results of operations and financial condition of
the Company's  consolidated  organization should be read in conjunction with the
Consolidated  Financial  Statements  and related  Notes  included in this Annual
Report on Form 10-K.

                                       57

<PAGE>



COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996


General

Consolidated  net earnings  were $18.6 million for the year ended June 30, 1997,
representing  a return on average assets of 1.40% and a return on average equity
of 14.27%.  Net  earnings for the current year  included  recognition  of a $5.9
million  pretax expense for a one-time,  special  deposit  insurance  assessment
required of SAIF-insured  savings  institutions,  such as Magnolia  Federal,  of
0.657% of  deposits.  Excluding  the  effect of the  expense  for the  one-time,
special  assessment,  net  earnings  for the year ended June 30, 1997 were $22.2
million,  or $1.60 per share, and annualized return on average assets and return
on average equity were 1.68% and 17.08%,  respectively.  For the year ended June
30, 1996,  net earnings were $21.1  million,  return on average assets was 1.72%
and return on average  equity was 17.34%.  Although  the Company  experienced  a
decline in net  interest  margin to 5.64%,  compared  to 6.02% the prior  fiscal
year, net interest income increased  slightly due to increased  interest-earning
assets. The provision for possible loan losses increased in the current year due
to increased consumer loan and credit line charge-offs. Service fees on deposits
increased from fiscal 1996, and net realized and unrealized  gains on securities
and loans were also higher in the current  year.  Declines in loan  originations
resulted in lower fees and other income related to loan  originations.  Expenses
related to the Company's  pending  merger were  incurred  during the fiscal year
that  partially  offset the decrease in  compensation,  advertising  and deposit
premium amortization  experienced during fiscal 1997, compared to the prior year
period.


Interest Income

Interest  income  totaled  $111.9  million  for the year  ended  June 30,  1997,
reflecting increased balances in average  interest-earning  assets. The yield on
interest-earning  assets declined to 9.61% in fiscal 1997,  compared to 9.87% in
fiscal 1996, due to higher average  balances in  lower-yielding  mortgage-backed
securities and an overall decline in the Company's loan yields.  The increase in
average interest-earning assets to $1.2 billion in fiscal 1997 from $1.1 billion
in fiscal 1996 was primarily  due to growth in the Company's  portfolio of loans
to $889.9  million in fiscal 1997,  compared to $851.7 million in fiscal 1996. A
decline in the average loan yield to 10.47% in fiscal 1997 from 10.63% in fiscal
1996 reflected the impact of holding $226.2 million of secondary-market mortgage
loans  originated at an average interest rate of 7.67% in the portfolio prior to
packaging these loans into mortgage-backed  securities. The lower yield on these
fixed-rate  loans,  which were  retained on a short-term  basis,  was  partially
offset by the  repricing  of the  Company's  adjustable-rate  loans at  slightly
higher short-term interest rates. Average balances of mortgage-backed securities
also  increased in the current year,  compared to the prior year, as investments
were  made  in  mortgage-backed   securities  originated  by  the  Company.  The
investment  in other  securities  declined  during  fiscal  1997,  as funds from
maturing   securities  were  partially   reinvested  in  lower-yielding   equity
securities.


Interest Expense

For the year ended June 30, 1997,  interest expense  increased to $46.2 million,
compared  to $41.7  million in fiscal  1996,  as a result of  increased  average
balances in interest-bearing,  non-deposit  liabilities that carry comparatively
higher  interest rates than insured deposit  accounts.  The higher rates paid on
and  greater  volume of  borrowings  from the  Federal  Home Loan Bank of Dallas
("FHLB of Dallas")  increased

                                       58

<PAGE>



the weighted  average cost of  interest-bearing  liabilities  to 4.64% in fiscal
1997  from  4.52% in fiscal  1996.  Funding  for the  Company's  expanding  loan
portfolio   was   primarily   provided  by  an  average   balance   increase  in
interest-bearing  liabilities to $997.2 million in the current year, compared to
$921.4 million in the prior year. FHLB of Dallas  borrowings,  the major funding
source for new loan originations,  increased to $244.5 million during 1997 at an
average  rate of 6.12%,  compared to $163.1  million at an average rate of 6.38%
during fiscal 1996.


Net Interest Income

Net  interest  income,  the  fundamental  source  of a  financial  institution's
earnings,  represents the difference between income on  interest-earning  assets
and expense on interest-bearing  liabilities. Net interest income is impacted by
changes  in  the  volume  of   interest-earning   assets  and   interest-bearing
liabilities and by changes in the corresponding interest rates.

During fiscal 1997, net interest income  increased  $600,000,  or 0.9%, to $65.7
million,  compared to $65.1  million in fiscal  1996,  due to  increases  in the
Company's  average  loan and  mortgage-backed  securities  portfolios  that were
offset  by  a  decrease   in  the   average   net   yield.   Growth  in  average
interest-earning  assets  was $82.3  million,  or 7.6%,  in fiscal  1997,  while
average balances of  interest-bearing  liabilities  increased $75.7 million,  or
8.2%,  from the  prior  year.  Funding  for the asset  growth  was  provided  by
non-deposit borrowings,  which increased $81.3 million, or 49.8%, from the prior
year average. The Company's net interest margin decreased to 5.64% during fiscal
1997 from 6.02% in the prior year,  primarily  due to a decline in the Company's
net interest  rate spread to 4.98% for fiscal 1997 from 5.35% for the prior year
from the combined impact of a decrease in the average yield on  interest-earning
assets of 25 basis points and a 12-basis-point increase in the average rate paid
on interest-bearing liabilities.

                                       59

<PAGE>



The  following  table sets forth,  for the periods  indicated,  the total dollar
amount of interest income from average interest-earning assets and the resultant
yields,   together  with  the  interest  expense  on  average   interest-bearing
liabilities,  expressed both in dollars and rates,  and the net interest margin.
The table does not  reflect any effect of income  taxes.  Average  balances  are
daily average balances.  Interest-earning  assets include  nonaccruing loans and
assets  held for  sale,  available  for sale and held for  trading  and  exclude
allowances for possible loan losses and fair value  adjustments on certain loans
and securities.  Interest earned includes the accretion of loan origination fees
and purchase discounts.

TABLE 1. ANALYSIS OF YIELD/RATE ON INTEREST-EARNING  ASSETS AND INTEREST-BEARING
LIABILITIES


<TABLE>
<CAPTION>
                                                                            Years Ended June 30
                                       ---------------------------------------------------------------------------------------------
                                                    1997                            1996                            1995
                                       ------------------------------- ------------------------------- -----------------------------
                               At        
                             June        Average    Interest            Average     Interest             Average     Interest
                               30,     Outstanding   Earned/   Yield/   Outstanding Earned/   Yield/   Outstanding   Earned/  Yield/
                              1997       Balance      Paid     Rate     Balance      Paid      Rate      Balance      Paid    Rate  
                             --------  ------------------------------- ------------------------------- -----------------------------
                                                                          (Dollars in Thousands)
<S>                            <C>    <C>          <C>          <C>       <C>          <C>      <C>     <C>          <C>       <C>  
ASSETS                                
  Interest-earning assets:            
    Loans receivable .......   9.82%  $ 889,878   $  93,147    10.47%    $  851,749   90,540   10.63%  $   769,397  $ 79,631  10.35%
    Mortgage-backed                                                                                                
      securities ...........   6.87     177,665      12,130     6.83        109,859    7,845    7.14       121,697     8,788   7.22
    Other securities and                                                                                           
  interest-earning assets ..   6.04      96,222       6,647     6.91        119,861    8,362    6.98       119,125     8,425   7.07
                                      ---------   ---------   ---------   ---------  -------  --------   ---------   -------- ------
                                                                                                                   
        Total interest-                                                                                            
         earning assets (1)    9.13   1,163,765     111,924     9.62      1,081,469  106,747    9.87     1,010,219    96,844   9.59
                                      ---------   ---------   ---------   ---------  -------  --------   ---------   -------- ------
      Noninterest-earning                                                                                          
      assets ...............            159,478                             144,172                        136,731 
                                      ----------                          ---------                      --------- 
        Total assets .......        $ 1,323,243                          $1,225,641                    $ 1,146,950 
                                      ==========                          =========                    ===========
                                      
LIABILITIES AND STOCKHOLDERS'         
 EQUITY                               
  Interest-bearing                    
  liabilities:                        
    NOW accounts ...........   2.08%  $ 116,388       2,171     1.87     $  111,484    1,943    1.74   $   114,572     1,979   1.73
    Money market accounts ..   2.99      32,734       1,055     3.22         34,328      891    2.60        44,208     1,108   2.51
    Passbook and statement            
      accounts .............   2.52     127,872       3,350     2.62        131,269    3,407    2.60       134,501     3,257   2.42
    Certificates of deposit.   5.31     475,722      24,708     5.19        481,213   25,008    5.20       489,127    21,817   4.46
    Borrowings from the FHLB          
     of Dallas and other ...   6.05     244,451      14,962     6.12        163,149   10,403    6.38        95,046     5,975   6.29
                                       ---------   ---------   ---------   ---------  -------  --------   ---------   -------- -----
        Total interest-               
         bearing liabilities   4.69     997,167      46,246     4.64        921,443   41,652    4.52       877,454    34,136   3.89
                                       ---------   ---------   ---------   ---------  -------  --------   ---------   -------- -----
   Noninterest-bearing                
    liabilities:                      
      Deposits .............            147,384                             170,536                        137,471
      Other liabilities.....             48,605                              11,900                         27,943
                                      ----------                          ---------                      --------- 
        Total liabilities....         1,193,156                           1,103,879                      1,042,868
  Stockholders' equity ......           130,087                             121,762                        104,082
                                      ----------                          ---------                      --------- 
        Total liabilities and         
          stockholders' equity      $ 1,323,243                          $1,225,641                    $ 1,146,950
                                      ==========                          =========                    ===========
  Net interest income/               
    Net interest rate spread (2)                  $  65,678     4.98%                $65,095    5.35%                $62,708   5.70%
                                                  =========     =====                =======    =====                =======   =====
  Net interest margin (3) ......                                5.64%                           6.02%                          6.21%
                                                                =====                           =====                          =====
  Ratio of average interest-
      earning assets to
      average interest-
      bearing liabilities ......                                1.17x                           1.17x                          1.15x

<FN>
(1)  Does not  include  mark-to-market  adjustments  on  assets  held for  sale,
     available  for sale or held for trading and  allowance  for  possible  loan
     losses.
(2)  Net interest  rate spread is the  difference  between the average  yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(3)  Net   interest   margin  is  net   interest   income   divided  by  average
     interest-earning assets.
</FN>
</TABLE>

                                       60

<PAGE>



The table below  illustrates  the extent to which changes in interest  rates and
changes in volumes of interest-earning  assets and interest-bearing  liabilities
have  affected the Company's  interest  income and interest  expense  during the
periods indicated.  It distinguishes  between differences in interest income and
expense  related to changes in  outstanding  balances and the  variation  due to
movements in interest rates.  For each category of  interest-earning  assets and
interest-bearing  liabilities,  information  is  provided  with  respect  to (i)
changes  in rate  (multiplied  by prior  volume)  and  (ii)  changes  in  volume
(multiplied by prior rate).  Differences  attributable to the combined impact of
rate and volume have been  allocated  proportionately  to the change due to rate
and the change due to volume.


Table 2. Analysis of Changes in Net Interest Income

<TABLE>
<CAPTION>
                                                                               Years Ended June 30
                                             ---------------------------------------------------------------------------------------
                                                            1997 vs. 1996                               1996 vs. 1995
                                             -------------------------------------------- ------------------------------------------
                                                 Increase (Decrease)           Total         Increase (Decrease)          Total
                                                        Due to               Increase               Due to               Increase
                                             -----------------------------                ---------------------------
                                                 Volume          Rate       (Decrease)       Volume         Rate        (Decrease)
                                             --------------- ------------- -------------- -------------  ------------ --------------
                                                                                 (In Thousands)
<S>                                              <C>           <C>               <C>          <C>              <C>         <C>   
Interest-earning assets:
  Loans receivable .........................     $ 3,991       (1,384)           2,607        8,708            2,201       10,909
  Mortgage-backed securities ...............       4,640         (355)           4,285         (847)             (96)        (943)
  Other securities and interest-earning                                                                    
    assets .................................      (1,632)         (83)          (1,715)          49             (112)         (63)
                                                 -------      -------          -------      -------          -------      -------
                                                                                                           
      Total interest-earning assets ........       6,999       (1,822)           5,177        7,910            1,993        9,903
                                                 -------      -------          -------      -------          -------      -------
                                                                                                           
Interest-bearing liabilities:                                                                              
  NOW accounts .............................          84          144              228          (48)              12          (36)
  Money market accounts ....................         (43)         207              164         (256)              39         (217)
  Passbook and statement accounts ..........         (84)          27              (57)         (82)             232          150
  Certificates of deposit ..................        (257)         (43)            (300)        (360)           3,551        3,191
  Borrowings from the FHLB of                                                                              
    Dallas .................................       4,999         (440)           4,559        4,341               87        4,428
                                                 -------      -------          -------      -------          -------      -------
                                                                                                           
      Total interest-bearing liabilities ...       4,699         (105)           4,594        3,595            3,921        7,516
                                                 -------      -------          -------      -------          -------      -------
                                                                                                           
Increase (decrease) in net interest                                                                        
  income ...................................     $ 2,300       (1,717)             583        4,315           (1,928)       2,387
                                                 =======      =======          =======      =======          =======      =======
</TABLE>

Provision for Possible Loan Losses

The  provision  for possible loan losses was increased to $3.1 million in fiscal
1997,  compared to $1.6  million in fiscal 1996,  resulting in an allowance  for
possible loan losses at June 30, 1997 of $10.4 million,  or 1.11% of total loans
receivable.  The increase in the current  year's  provision was primarily due to
increased  consumer loan charge-offs and increases in the allowance for possible
losses  attributable  to  such  loans.   Management  continually  evaluates  the
allowance  for  possible  loan  losses and adjusts  the  provision  based on the
growth, composition and performance of the loan portfolio,  giving consideration
to loss  experience,  current  economic  conditions and other factors.  Although
management uses available  information to recognize  possible loan losses and to
determine  that the  carrying  value of real  estate  owned does not exceed fair
value,  future  additions to the  allowance  for possible  loan losses or future
writedowns to real estate owned may be necessary based on changes in economic or
market conditions.

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As discussed more fully under "Asset Quality," nonperforming assets decreased to
$28.1 million at June 30, 1997,  compared to $33.0 million at June 30, 1996. The
decrease was primarily in one- to  four-family  residential  mortgage  loans and
foreclosed  properties.  In  previous  periods,  a  substantial  portion  of the
foreclosed properties and delinquent one- to four-family  residential loans were
related to a portfolio  of  high-yielding,  delinquent,  single-family  mortgage
loans purchased by the Bank in fiscal 1994 at a substantial  discount.  The Bank
continues to aggressively  service these loans to improve the delinquent  status
or foreclose on the property and does not anticipate any significant  losses.  A
substantial  portion  of the  increased  provision  for loan  losses  was due to
increased  charge-offs in the consumer loan portfolio.  Net consumer charge-offs
during fiscal 1997 nearly  doubled to $1.4 million,  compared to the prior year,
and additional  provisions were made to cover possible  future losses.  Accruing
loans   delinquent   90  days  or   more,   consisting   primarily   of   FHA/VA
insured/guaranteed  loans  that have  limited  risk of loss,  declined  to $11.4
million  at June 30,  1997 from  $19.5  million at June 30,  1996.  The  Company
curtailed the repurchase of delinquent FHA/VA  insured/guaranteed loans from its
servicing portfolio in fiscal 1997, by limiting repurchases to loans with higher
interest rates, as discussed more fully under "Asset  Quality." The portfolio of
FHA/VA loans  serviced  declined  significantly  due to a sale in fiscal 1996 of
$168.4 million of servicing  rights on such loans which limited the availability
of loans for repurchase. During the course of a limited scope examination of the
Bank as of June 30, 1997, that focused primarily on asset quality, the Office of
Thrift  Supervision  ("OTS")  reviewed the Bank's  allowance  for possible  loan
losses and determined it adequate to absorb  foreseeable loan losses considering
present and expected future economic conditions.


Noninterest Income

Noninterest  income is  comprised  of  ancillary  income  and fees from  deposit
accounts, loan originations,  loan servicing,  real estate and investment sales.
Total noninterest  income increased $1.5 million,  or 4.0%, to $39.1 million for
fiscal 1997,  from $37.6 million for fiscal 1996,  primarily  from  increases in
service fees on deposits and the net gains,  realized and unrealized,  on assets
held for sale or held for trading.

Service fees on deposits  increased  14.2% to $18.7  million in fiscal 1997 from
$16.4 million in fiscal 1996.  The average  number of NOW and checking  accounts
increased to  approximately  160,000  accounts for the year ended June 30, 1997,
compared to 150,000 the prior year, with an average annual service fee collected
per account of $117 during fiscal 1997, compared to $110 during fiscal 1996. The
increased  average number of deposit  customers also contributed to the increase
in other service fees and commissions on non-deposit products and services.

Unrealized  holding  gains were $2.4  million in fiscal  1997,  compared to $1.3
million of net losses in fiscal 1996. Included in unrealized holding gains was a
$1.3 million gain on equity  securities  the Company  purchased  and held in the
trading  portfolio.  The  sale of the  Company's  portfolio  of  mortgage-backed
securities held for trading in the current fiscal year resulted in a reversal of
a prior year net unrealized loss of $920,000 on such securities.  Realized gains
on sales of assets  held for sale or trading  decreased  to  $520,000  in fiscal
1997, compared to $1.5 million in fiscal 1996, primarily due to increased direct
deferred costs of  originating  loans that increased the carrying value of newly
originated  mortgage-backed  securities.  The  volume of sales  remained  fairly
steady between the two fiscal periods.

Other income,  net, decreased $2.5 million, or 61.2%, during fiscal 1997 to $1.6
million,  compared to $4.1  million in the prior  fiscal  year.  Other income in
fiscal 1996 included a net gain of $1.0 million on the sale of $168.4 million of
FHA/VA  mortgage loan servicing  rights.  The decline in the Company's

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<PAGE>



mortgage loan  origination  volume to $455.3  million in fiscal 1997 from $502.7
million in fiscal  1996  resulted  in a decline  in  appraisal  fees,  insurance
commissions and other loan-related  income.  Increased  originations through the
Company's  broker/correspondent network were partially offset by a 22.4% decline
in the origination volume from the Bank's internal network of originators in the
current year, compared to fiscal 1996.

Net loan  servicing  income  decreased  $295,000,  or 2.4%,  to $12.1 million in
fiscal 1997, compared to $12.4 million in fiscal 1996.  Amortization of the cost
of purchased  mortgage  servicing  rights  ("PMSR") in the current year was $3.7
million,  compared to $4.5 million in fiscal 1996.  Amortization  of  originated
mortgage servicing rights ("OMSR") was $1.0 million in fiscal 1997,  compared to
$349,000 the prior year. The decline in servicing  fees collected  resulted from
the  combined  impact of a  two-basis-point  decrease in the  Company's  average
servicing fee rate and a reduction in the average  balance of loans  serviced to
$3.1 billion in fiscal 1997 from $3.2 billion in the prior year. The unamortized
cost of PMSR and  OMSR at June 30,  1997  was  $5.7  million  and $2.9  million,
respectively,  representing  a combined  0.28% of the $3.1 billion  portfolio of
mortgage loans serviced for others.

The net losses on sales and operations of foreclosed  assets increased  $432,000
in fiscal 1997 to $1.9  million  from $1.4 million in the prior year as a result
of the increased number of foreclosures during the year and the related expenses
incurred  to  repair  the  properties.   Immediately  upon  acquiring  title  to
foreclosed property,  the Company incurs the expense of making necessary repairs
to the property and restoring it to a salable  condition.  The Company generally
does not sell  foreclosed  property in "as is"  condition  at  distressed  sales
prices. By making the necessary expenditures to repair the property, the Company
is able to minimize  its losses on the  ultimate  sale of the property at market
prices. Approximately 270 foreclosed, single-family properties were repaired and
sold during fiscal 1997, and an additional 170 properties were repaired and made
available for sale.


Noninterest Expense

The deposits of savings associations such as Magnolia Federal are insured by the
Savings  Association  Insurance  Fund  ("SAIF"),  which  together  with the Bank
Insurance Fund ("BIF"),  are the two insurance funds administered by the Federal
Deposit Insurance  Corporation  ("FDIC").  In 1995, the FDIC recognized that the
BIF was fully capitalized at its statutory reserve ratio and reduced the premium
schedule  for BIF insured  banks to a rate as low as zero  percent in 1996.  The
SAIF rates, however, were not adjusted because the SAIF had not yet attained its
required reserve ratio. To eliminate the disparity  between premiums paid by BIF
and  SAIF  member  institutions  and  any  resulting  competitive  advantage  of
BIF-insured institutions over SAIF-insured institutions, federal legislation was
enacted on September 30, 1996  providing for a one-time,  special  assessment of
0.657%  imposed  on all  SAIF  deposits  held as of March  31,  1995 in order to
recapitalize  the SAIF. The legislation  also provides for the merger of the BIF
and the SAIF on January  1, 1999 if no savings  associations  then  exist.  This
one-time  assessment  resulted in a $5.9 million charge to the Company's  pretax
earnings for the fiscal year ended June 30, 1997. The SAIF recapitalization plan
also provides for a reduction in annual SAIF assessment  rates in future periods
that will result in an estimated  annual  benefit to the Company of $1.5 million
before income taxes.

Noninterest  expense,  exclusive  of the FDIC's  special  insurance  assessment,
decreased  $2.3  million,  or 3.4%,  to $65.7 million for fiscal 1997 from $68.0
million for fiscal 1996.  Compensation and related expenses decreased  $396,000,
or 1.3%, to $30.3 million  during fiscal 1997,  compared to the prior year.  The
Company's  focus on  efficiency  was  reflected  by  declines  in the  number of
employees and overtime

                                       63

<PAGE>



hours worked.  Cost savings in  compensation  were offset by the higher costs of
enhanced  employee benefit plans of $2.3 million compared to $1.8 million in the
prior year.  Expenditures for advertising decreased $1.0 million to $1.5 million
for the year ended June 30,  1997,  compared  to $2.5  million  the prior  year.
Subsequent to January 1, 1997, the Company was assessed lower deposit  insurance
premiums by the FDIC due to the special, one-time premium paid in September 1996
which  resulted  in a lower cost for  deposit  insurance  in fiscal 1997 of $1.3
million  compared to $2.1 million in the prior year. The amortization of premium
on purchased  deposits  related to the acquisition of Altus Federal Savings Bank
("Altus")  from  the  Resolution  Trust  Corporation  ("RTC")  in 1995  declined
$888,000 to $2.9  million in fiscal 1997 from $3.8  million the prior year.  The
Company experienced reductions in mortgage servicing costs, partially due to the
Company's decreased portfolio of FHA/VA loans serviced for others.  Professional
fees  increased  to $3.8  million in fiscal  1997,  compared to $2.9  million in
fiscal 1996,  primarily due to expenses related to the Company's  pending merger
with Union Planters  Corporation.  Rent and other  occupancy  expense  increased
during the  current  fiscal  year due to  utilization  of a  recently  renovated
ten-story  corporate office building.  Equipment and fixtures expense  reflected
increased  costs due to the  installation of a new teller platform system during
fiscal 1997.

The Company  continued  its efforts in fiscal 1997 to  streamline  operations to
reduce expenses and generate earnings at lower costs without sacrificing quality
or  customer  service.  The  Company's  efficiency  ratio,  which  measures  the
percentage  of  operating  income,  net of interest  expense,  required to cover
operating  expenses  decreased  to 57.97% for fiscal 1997 from 59.64% for fiscal
1996. The  percentage of  noninterest  expense,  excluding the  amortization  of
intangibles and the special FDIC insurance  assessment,  to total average assets
declined  to 4.75% for  fiscal  1997,  compared  to 5.24% for fiscal  1996.  The
relatively  high level of the  Company's  expenses  results  from (i) its retail
deposit  strategy  and costs  related to  maintaining  a large  number of retail
offices and  servicing a  significant  base of checking  accounts and (ii) costs
related to loans serviced for others. While loan servicing expenses are included
in  noninterest  expense,  the  balances of serviced  loans are not  included in
average  assets.  Both its retail deposit  strategy and loan servicing  activity
generate a  substantial  amount of  non-rate-sensitive  fee income to offset the
higher costs  attendant  to these  operations.  The  percentage  of  noninterest
expense, net of noninterest income, to average interest-earning assets was 1.73%
and 2.00% for fiscal years 1997 and 1996, respectively.  The ratio is calculated
net of  non-recurring  income and  amortization  of  purchased  deposit cost and
mortgage servicing rights.


Income Tax Expense

Federal and state income taxes totaled $11.5 million and $11.9 million in fiscal
1997 and 1996,  respectively.  Settlement  of pending tax issues in  conjunction
with an  examination  of the  Company's  income tax  returns  for the years 1991
through  1993  resulted  in a decrease in the prior  year's  ratio of income tax
expense to earnings before such taxes, compared to the current fiscal year.


CHANGES IN ACCOUNTING PRINCIPLES

Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of"
("SFAS  No.  121")  was  adopted  by the  Company  July 1,  1996.  SFAS No.  121
prescribes  the  accounting  for  the  impairment  of  certain  assets,  such as

                                       64

<PAGE>



property, plant and equipment;  identifiable intangibles and goodwill related to
those  assets.  It does not apply to  deferred  tax assets,  mortgage  servicing
rights  ("MSR") and financial  instruments.  The Company did not have a material
impact on its  financial  statements  due to the  adoption of SFAS No. 121 since
similar policies for determining impairment of such assets already existed.

During fiscal 1996 and 1997, the Company did not grant any employee  stock-based
compensation  and,  therefore,  was not affected by the adoption of Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation." The statement  encourages the adoption of a new fair value method
of accounting for stock plans in place of the intrinsic value method required by
previous  guidance.  Disclosures  of the impact on net income and  earnings  per
share as if the fair value  method of  accounting  was  adopted is  required  of
companies that do not follow the new valuation procedure.

In June of 1996, the FASB issued Statement of Financial Accounting Standards No.
125,   "Accounting   for  Transfers  and  Servicing  of  Financial   Assets  and
Extinguishments  of  Liabilities"  ("SFAS No.  125").  SFAS No. 125  established
accounting and reporting standards for transfers and pledges of financial assets
and  measurement of servicing  assets and  liabilities.  The statement  provides
consistent standards for distinguishing financial asset transfers that are sales
from transfers that are secured borrowings. It also addresses the recognition of
servicing assets and liabilities.  The impact of the adoption of this statement,
which was effective for transactions  occurring after December 31, 1996, was not
material to the financial statements of the Company.


COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995

General

Consolidated  net earnings  were $21.1 million for the year ended June 30, 1996,
representing a return on average assets of 1.72% and return on average equity of
17.34%.  For the year ended June 30,  1995,  net  earnings  were $19.0  million,
return on average assets was 1.66% and return on average equity was 18.28%.  The
$2.1 million, or 11.0%,  increase in earnings was influenced by several factors,
including   an   increase  in  the   average   yield  on  a  higher   volume  of
interest-earning assets, a sizable gain on the sale of mortgage servicing rights
and an increase in deposit service fees. Current net earnings were also impacted
by the  adoption  of  Statement  of  Financial  Accounting  Standards  No.  122,
"Accounting  for  Mortgage  Servicing  Rights"  ("SFAS  No.  122"),  which had a
favorable  effect on gains and  losses on sales of  mortgage-backed  securities.
Income  gains  were  partially  offset  by  the  higher  level  of  general  and
administrative  expenses  required to service a larger volume of portfolio  loan
and  deposit  customers  and the decline in the market  values of the  Company's
interest-earning assets intended for sale.


Interest Income

Interest  income  totaled  $106.7  million  for the year  ended  June 30,  1996,
reflecting the combined  impact of an increase in yields and higher  balances of
average interest-earning assets. An increase in average loan yields to 10.63% in
fiscal 1996 from 10.35% in fiscal 1995,  was primarily a result of the repricing
of the  Company's  adjustable-rate  loans  at  comparatively  higher  short-term
interest rates and the origination of $119.5 million in portfolio mortgage loans
at an average rate of 9.83%. The increase in average

                                       65

<PAGE>



interest-earning  assets to $1.1  billion  in fiscal  1996 from $1.0  billion in
fiscal  1995  was  primarily  due  to  growth  in  the  Company's  portfolio  of
non-conforming  loans and was  reflected  by an increase in average  balances of
loans to $851.7  million in fiscal  1996 from  $769.4  million  in fiscal  1995.
Average balances of mortgage-backed  securities declined slightly in the current
period,  compared to the prior year as minimal  investments were made to replace
repayments  of  the  portfolio  during  the  first  half  of  fiscal  1996.  New
investments in long-term United States Government  securities were nominal,  and
yields declined  slightly on average balances of investment and other securities
of $119.9 million during fiscal 1996.


Interest Expense

For the year ended June 30, 1996,  interest expense  increased to $41.7 million,
compared  to $34.1  million in fiscal  1995,  as a result of  increased  average
balances of interest-bearing  liabilities and higher levels of short-term market
interest rates.  The higher rates paid on certificate of deposit  accounts and a
greater volume of borrowings from other sources  increased the weighted  average
cost of  interest-bearing  liabilities  to 4.52% in fiscal  1996  from  3.89% in
fiscal 1995.  Funding for the Company's  expanding  loan portfolio was partially
provided by an increase in the average balance of  interest-bearing  liabilities
to $921.4  million in the current year,  compared to $877.5 million in the prior
year.  FHLB of Dallas  borrowings  also served as a major funding source for new
loan originations,  increasing 71.7% to $163.1 million during 1996 at an average
rate of 6.38%.


Net Interest Income

During fiscal 1996,  net interest  income  increased  $2.4 million,  or 3.8%, to
$65.1  million,  compared to $62.7 million in fiscal 1995, due to an increase in
the Company's  loan portfolio and a  corresponding  increase in the average loan
yield. Growth in average  interest-earning assets was $71.3 million, or 7.1%, in
fiscal 1996, while average balances of  interest-bearing  liabilities  increased
only $44.0  million,  or 5.0%,  from the prior  year.  Funding for the growth in
loans was provided, in part, by  noninterest-bearing  deposits,  which increased
$33.1 million as the Company  aggressively  marketed and pursued these  low-cost
accounts.  The  Company's net interest  margin  decreased to 6.02% during fiscal
1996  from  6.21%  in the  prior  year,  primarily  from  higher  rates  paid on
certificates of deposit and FHLB of Dallas funding. Over the last several years,
short-term  interest rates have increased  more than long-term  interest  rates,
which has led to a tightening  of the  Company's  net interest  margin.  The net
interest rate spread decreased to 5.35% for fiscal 1996 from 5.70% for the prior
year as the average yield on interest-earning  assets increased 28 basis points,
compared  to  a   63-basis-point   increase   in  the   average   rate  paid  on
interest-bearing liabilities.


Provision for Possible Loan Losses

The  provision  for possible loan losses was increased to $1.6 million in fiscal
1996,  compared  to $418,000  in fiscal  1995,  resulting  in an  allowance  for
possible loan losses at June 30, 1996 of $9.5  million,  or 1.08% of total loans
receivable.  Nonperforming  assets  increased to $33.0 million at June 30, 1996,
compared to $28.4  million at June 30, 1995.  The increase was primarily in one-
to  four-family  residential  mortgage  loans  and  foreclosed  properties  that
individually  expose the Bank to minimal  risk of loss.  Many of the  foreclosed
properties and delinquent,  one- to four-family residential loans are related to
a portfolio of high-yielding, delinquent, single-family mortgage loans purchased
by the Bank in fiscal  1994 at a

                                       66

<PAGE>



substantial discount.  The status of a loan's contractual  delinquency,  not its
bankruptcy status,  affects the provisions for possible loan loss and the timing
of the loan's nonaccrual status.  While a large number of these borrowers are in
bankruptcy,  the Bank is  aggressively  servicing  the  non-bankruptcy  loans to
improve the delinquent  status or foreclose the property and does not anticipate
any  significant  losses.  Loans of  borrowers  in  bankruptcy  are  continually
monitored for compliance with the bankruptcy court's payment  requirements.  The
Company  takes  legal  action for relief from the  court's  restrictions  if the
borrower  deviates from the  requirements  set forth in the bankruptcy  plan. In
fiscal   1996,   the   Company   reduced   the  volume  of   delinquent   FHA/VA
insured/guaranteed  loans repurchased from GNMA pools by limiting repurchases to
loans with higher interest rates.  See "Asset Quality".  Consequently,  accruing
loans delinquent 90 days or more declined to $19.5 million at June 30, 1996 from
$31.5 million at June 30, 1995. During the course of its regular  examination of
the Bank as of March 31, 1996, the Office of Thrift Supervision ("OTS") reviewed
the Bank's  allowance  for possible  loan losses and  determined  it adequate to
absorb  reasonably  foreseeable  loan losses  considering  current and  expected
future economic conditions.


Noninterest Income

Total noninterest  income increased $2.4 million,  or 6.7%, to $37.6 million for
fiscal 1996 from $35.2  million for fiscal  1995,  primarily  from  increases in
service fees on deposits and the gain recognized on the sale of loan servicing.

Service fees on deposits  increased to $16.4 million,  or 22.8%,  in fiscal 1996
from $13.4 million in fiscal 1995. Through an aggressive marketing campaign, the
Company's number of NOW and checking accounts  increased by 16,000 to a total of
approximately  155,000 accounts at June 30, 1996. The average annual service fee
collected  per  account  was $110 during  fiscal  1996,  compared to $100 during
fiscal 1995. The increased  number of deposit  customers also contributed to the
increase in other  service  fees and  commissions  on  non-deposit  products and
services.

The substantial increase in the Company's loan origination volume in fiscal 1996
resulted  in an increase  in  appraisal  fees of  $663,000,  or 101.7%,  to $1.3
million  compared  to  the  prior  year.  Net  insurance  commissions  decreased
$485,000, or 14.1%, to $3.0 million in fiscal 1996, compared to fiscal 1995, due
to the increased costs of attaining new business.  Other income,  net, which was
also favorably impacted by the Company's loan origination volume, increased $1.1
million, or 40.3%, during fiscal 1996 to $4.0 million,  compared to $2.9 million
in the prior fiscal year. Included in other income in fiscal 1995 was a net gain
of $510,000  from the sale of branch  deposits and  properties.  Other income in
fiscal 1996 included a net gain of $1.0 million on the sale of $168.4 million of
mortgage loan servicing  rights.  In recent years, the Company acquired numerous
packages  of  mortgage  loan  servicing  rights  concentrated  primarily  in the
southeastern  United States;  however,  an  accumulation of GNMA pools of FHA/VA
loans  with high  levels of  delinquency  in other  states  also  resulted.  The
servicing  rights to these  FHA/VA  loans were sold to reduce  costs and improve
efficiency of the Company's overall servicing operation.

Net loan  servicing  income  increased  $343,000,  or 2.8%,  to $12.4 million in
fiscal 1996, compared to $12.1 million in fiscal 1995.  Amortization of the cost
of PMSR in the current year was $4.5 million,  compared to  amortization of $7.7
million in fiscal 1995.  As of July 1, 1995,  the Company  adopted SFAS No. 122,
which requires that the value of mortgage  servicing  rights on loans originated
and intended for sale be capitalized  and amortized in future  periods.  OMSR of
$2.1 million was  capitalized  during fiscal 1996 with  amortization of $349,000
recorded during the year. The unamortized cost of PMSR and

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<PAGE>



OMSR at  June  30,  1996  was  $4.1  million  and  $1.7  million,  respectively,
representing  a combined  0.19% of the $3.0 billion  portfolio of mortgage loans
serviced for others.

Capitalization  of OMSR in  accordance  with SFAS No. 122 reduced the  Company's
basis  in  originated   mortgage-backed   securities  by  the  $2.1  million  of
capitalized rights and contributed to net gains on sales of loans and securities
of $1.5 million recognized in fiscal 1996,  compared to net gains of $843,000 in
the prior year.  Mortgage-backed securities were sold from the Company's trading
portfolio  to fund new loan  originations  and to limit the  interest  rate risk
attendant  to  holding  long-term,  fixed-rate  loans.  The  Company  limits the
interest  rate risk of  fixed-rate  loans in its  mortgage  pipeline  by selling
forward the majority of long-term  qualifying secondary market loans at the time
of the Company's  commitment to originate such loans.  Unrealized holding losses
on trading securities and loans intended for sale were $1.3 million, compared to
unrealized  gains of  $864,000  recorded  in fiscal  1995,  representing  a $2.2
million reduction in noninterest  income in fiscal 1996. The net losses on sales
and  operations of foreclosed  assets  increased  $1.3 million in fiscal 1996 to
$1.4  million  from  $146,000  in  the  prior  year  as a  result  of  increased
foreclosures  during the year.  Fiscal 1996 expenses included the cost to repair
151 more foreclosed single-family properties than in fiscal 1995.


Noninterest Expense

Noninterest expense increased $1.7 million, or 2.6%, to $68.0 million for fiscal
1996 from $66.3  million for fiscal  1995.  Compensation  and  related  expenses
increased $2.7 million, or 9.6%, to $30.7 million during fiscal 1996,  partially
as a result of changes in employee  benefit  plans and  additional  compensation
cost  incurred  during the  conversion  of mortgage  loan data  processing to an
outside  service  provider on December 31, 1995.  Data  processing  costs in the
current fiscal year increased $709,000,  or 29.7%,  compared to the prior fiscal
year, primarily due to conversion-related  expenses. The amortization of premium
on purchased  deposits  related to the acquisition from the RTC in 1994 declined
$844,000 to $3.8  million in fiscal 1996 from $4.6  million the prior year.  The
Company realized  reductions in equipment and fixtures  expense;  communication,
postage, printing and office supplies;  professional fees and mortgage servicing
costs  during the 1996  fiscal  year.  Other  noninterest  expenses  were fairly
stable,  with slight increases in the current fiscal year, compared to the prior
period.

The  Company's  efficiency  ratio,  which  measures the  percentage of operating
income, net of interest expense,  required to cover operating expenses increased
slightly  to 59.64% for fiscal 1996 from  59.27% for fiscal  1995.  The ratio is
calculated net of  non-recurring  income and  amortization of purchased  deposit
cost and mortgage  servicing  rights.  The  percentage of  noninterest  expense,
excluding the  amortization of intangibles,  to total average assets declined to
5.24% for fiscal 1996,  compared to 5.38% for fiscal 1995. The  relatively  high
level of the  Company's  expenses  results from costs  related to  maintaining a
large  number  of retail  offices,  servicing  a  significant  base of  checking
accounts  and  servicing  a number of loans for  others.  While  loan  servicing
expenses are included in noninterest expense, the balances of serviced loans are
not  included  in average  assets.  Both its retail  deposit  strategy  and loan
servicing  activity  generate a  substantial  amount of  non-rate-sensitive  fee
income to offset the higher costs attendant to these operations.  The percentage
of recurring  noninterest  expense,  net of  recurring  noninterest  income,  to
interest-earning   assets  was  2.00%  and  2.01%  for  fiscal  1996  and  1995,
respectively.

                                       68

<PAGE>



Income Tax Expense

Federal and state income taxes totaled $11.9 million and $12.2 million in fiscal
1996 and 1995,  respectively.  Settlement  of pending tax issues in  conjunction
with an  examination  of the  Company's  income tax  returns  for the years 1991
through  1993  resulted in a decrease in the current  year's ratio of income tax
expense to earnings before such taxes, compared to the prior fiscal year.


FINANCIAL CONDITION

The  Company's  consolidated  assets  were $1.4  billion  at June 30,  1997,  an
increase of $44.6 million,  or 3.4%, from June 30, 1996.  Enhanced  marketing of
its  non-conforming  loan products  resulted in the growth of the Company's loan
portfolio. The asset growth was primarily funded by increases in borrowings from
the FHLB of Dallas.


Loans

As a result of the increased demand for the Bank's  non-conforming loan products
in the fiscal year, loans held for investment  increased $40.2 million, or 4.8%,
to $876.5  million at June 30, 1997 from $836.3  million at June 30,  1996.  The
Company's  portfolio of loans held for sale  increased to $51.6  million at June
30,  1997,  compared  to $27.5  million at June 30,  1996,  and  investments  in
adjustable-rate  loans increased to $474.2 million at June 30, 1997, compared to
$431.7  million at June 30,  1996.  Fixed- and  adjustable-rate  mortgage  loans
originated   during  fiscal  1997  were  $313.1  million  and  $142.2   million,
respectively,  and totaled $455.3 million.  Mortgage loan  originations  totaled
$502.7 million in fiscal 1996, of which $383.8 million were fixed-rate loans and
$118.9  million were  adjustable-rate  loans.  To provide  funds for  additional
lending  and limit  interest-rate  risk,  $193.3  million  of  fixed-rate  loans
originated during fiscal 1997 were packaged into mortgage-backed  securities and
sold. See "Mortgage-Backed Securities."

The portfolio of multi-family and commercial loans decreased to $69.7 million in
fiscal 1997, compared to $78.3 million in fiscal 1996. The Company restricts the
originations of such loans to principal  amounts of $500,000 or less, except for
loans made to finance sales of previously foreclosed multi-family and commercial
properties. Consumer loan originations during the current fiscal year were $94.7
million,  compared  to $88.0  million  in the prior  year,  and  resulted  in an
increase of $4.2  million,  or 4.7%,  in the  consumer  loan  portfolio to $95.1
million at June 30, 1997.


Mortgage-Backed Securities

The Company's total  investment in  mortgage-backed  securities  decreased $33.2
million,  or 20.0%, to $132.9 million at June 30, 1997. No new investments  were
made during the current  fiscal year.  As a result,  mortgage-backed  securities
that the  Company  plans to hold to  maturity  decreased  $2.2  million to $10.5
million.   As  of  June  30,  1997,   the   Company's   investment   in  15-year
mortgage-backed securities held in the available-for-sale portfolio was slightly
higher than the prior year, and there were no mortgage-backed  securities in its
trading  portfolio.  Facilitated  by the  Company's  loan  originations,

                                       69

<PAGE>



$193.3 million in loans were packaged into mortgage-backed securities during the
current fiscal year. Sales of $206.2 million of these  securities  during fiscal
1997  provided  cash to fund  additional  loans and served to limit the interest
rate risk attendant to holding  long-term,  fixed-rate  investments.  Unrealized
gains and losses on  securities  that are  available  for sale are  recorded  in
stockholders'  equity,  and unrealized fair value adjustments on securities held
for trading are reflected in net earnings.


Other Securities

The Company's  portfolio of other  securities  totaled $73.9 million at June 30,
1997,  reflecting a slight decrease of $820,000,  or 1.1%, from $74.7 million at
June 30, 1996. The Company's investment portfolio is comprised primarily of U.S.
Treasury and government-agency  securities with staggered maturities that do not
extend beyond 15 years.  Maturities of these  government  and  government-agency
securities were replaced with investments in equity securities.

The Company's  investment in FHLB of Dallas stock  increased to $15.6 million at
June 30,  1997,  compared to $12.0  million at June 30,  1996,  due to increased
borrowings from the FHLB of Dallas. Minimum required stock ownership in the FHLB
of Dallas is  determined  annually  based  upon  total  outstanding  residential
mortgages  and  mortgage-backed  securities  held by the Bank and the  amount of
outstanding FHLB borrowings.


Mortgage Servicing Rights, Net

Mortgage  servicing  rights,  net,  increased  $2.8 million,  or 47.7%,  to $8.5
million  at June 30,  1997 from  $5.8  million  at June 30,  1996.  The  Company
recognizes the value of originated  servicing rights in its financial statements
along with servicing  rights  acquired in purchase  transactions.  The Company's
portfolio of serviced loans increased to $3.1 billion at June 30, 1997, compared
to $3.0 billion at June 30, 1996.  During the current fiscal year,  $5.3 million
in  mortgage  servicing  was  purchased  and  $2.1  million  was  recognized  as
originated  servicing  rights.  The Company  amortizes  the cost of MSR using an
accelerated method over management's  estimate of the periods to be benefited by
the servicing rights.  The Company  determines the fair value of capitalized MSR
by estimating  the present value of net future  servicing  income on these loans
using a discounted  cash flow analysis on a  disaggregated  basis.  No valuation
allowances were necessary at fiscal year end 1997 or 1996.


Deposits

The Company's deposits decreased $7.0 million, or 0.8%, to $915.4 million during
fiscal  1997,  compared  to the prior  year,  primarily  due to the sale of $5.8
million in deposits of a branch  located  outside the Company's  primary  market
area.  Adjusting  for the sale,  transaction  account  balances  increased  $4.7
million,  and  certificates  of deposits  decreased  $5.9 million.  Decreases in
deposits are primarily attributable to increased competition for certificates of
deposit.  Balances of custodial  funds held in trust for  investors and borrower
escrow  deposits on loans  serviced by the Company  declined $5.7 million due to
normal  fluctuations  in  prepayments  of principal  and interest  unremitted to
investors.

                                       70

<PAGE>



Borrowings from the FHLB of Dallas

Borrowings  outstanding  from the FHLB of Dallas  totaled $258.4 million at June
30, 1997, an increase from the $222.0  million  balance at June 30, 1996.  Funds
with an average outstanding balance of $244.4 million were borrowed periodically
during  the  current  fiscal  year  for  additional  investments  in  loans  and
mortgage-backed  securities.  With the sale of its portfolio of  mortgage-backed
securities  held for trading late in the current  fiscal  year,  the Company was
able to liquidate  approximately $38.0 million of short-term borrowings from the
FHLB of  Dallas.  Subsequent  to the 1997  fiscal  year end,  $97.0  million  of
lower-yielding  securities from the available-for-sale  portfolio were sold, and
the outstanding balances of borrowed funds were further reduced.


ASSET QUALITY

The Company  specializes  in the  origination  and  servicing of  non-conforming
mortgage loans. The Company's  non-conforming lending program has evolved over a
number of years and reflects  necessary  modifications to appropriately  account
for changing credit patterns and demographics in the Company's lending area. The
Company  offers a variety of loan  products to consumers  who either cannot meet
the credit  quality  standards of agencies  such as FHA, VA or Federal  National
Mortgage  Association,  or who  prefer  not to  comply  with  the  documentation
requirements of the agencies.  These loans, intended for the Company's portfolio
of loans  held for  investment,  contain  a greater  degree of credit  risk than
conforming loan products, and the Company has included appropriate safeguards in
its various loan programs to limit the risk of default and loss.  Portfolio loan
terms are normally  limited to 15 years which,  along with initial  minimum down
payments,  allow the borrower to rapidly build equity in the  property.  Limited
loan-to-value  ("LTV")  ratios and careful  monitoring  of  appraised  values of
property used as collateral  are essential to minimize the risk of default.  The
percentage of the Company's  annual net  charge-offs  to average loans was 0.24%
for fiscal 1997 and 0.16% for fiscal 1996. The increase in net  charge-offs  was
primarily in consumer loans,  which increased to $1.4 million in 1997,  compared
to $735,000 in 1996. Investments in the consumer loan portfolio account for only
9.9% of the Company's loan portfolio;  however, losses experienced on such loans
accounted for 66.0% of the Company's 1997 net charge-offs.  Since June 30, 1995,
the Company has increased the portfolio of unsecured  lines of credit from $12.1
million to $20.9  million at June 30, 1997.  The average yield  associated  with
such loans of 19.0% in fiscal 1997  compensates  for the higher costs to service
these  loans and the  increased  charge-offs.  Net losses on lines of credit for
fiscal 1997 were $1.1 million, compared to $547,000 for fiscal 1996 and $249,000
for fiscal 1995.

Nonperforming  assets include  nonaccruing  loans,  real estate acquired through
foreclosure  and  restructured  loans  whose  terms  were  modified  due  to the
borrowers'  inability to pay under the original  contract  terms  (troubled debt
restructurings).  The Company's  nonperforming assets decreased to $28.1 million
at June 30, 1997,  compared to $33.0 million at June 30, 1996. The percentage of
nonperforming assets to total assets was 2.08% at 1997 fiscal year end, compared
to 2.52% at 1996  fiscal  year  end,  primarily  as a result  of a $4.1  million
decrease in nonaccruing,  one- to four-family home loans and a $707,000 decrease
in foreclosed,  one- to four-family  homes during the year. The delinquent loans
and foreclosed properties are geographically  dispersed throughout the Company's
lending area and individually present only minimal risk of loss to the Company.

                                       71

<PAGE>



Accruing  loans  delinquent 90 days or more were $11.4 million at June 30, 1997,
compared  to $19.5  million at June 30,  1996.  Beginning  in 1993,  the Company
implemented  a program of  purchasing  FHA/VA  loans from GNMA pools it services
when the loans become over 90 days delinquent to eliminate the cost of advancing
funds to holders of GNMA securities.  The Company benefits from the net interest
rate  differential  between the coupon rate payable to the GNMA security  holder
and the  Company's  cost of  funds.  While the risk of  credit  loss is  minimal
because the loans are insured or guaranteed by the government agencies, there is
an interest  rate risk involved in holding these  long-term,  fixed-rate  loans.
Therefore,  the Company  modified this program in fiscal 1996 to only repurchase
delinquent  FHA/VA loans with high coupon  rates.  If the FHA/VA loan later pays
current,  the  company  has a  high-yielding  asset  that  compensates  for  the
attendant  interest-rate  risk.  During fiscal 1997,  $5.4 million in such loans
were  repurchased,  and at June 30,  1997,  $10.9  million of FHA/VA  loans were
delinquent 90 days or more. Other accruing,  delinquent loans are collateralized
consumer loans for which  valuation  allowances  have been  established  and the
possible  impact on earnings is  considered  minimal,  primarily due to recourse
agreements.

Conventional  real  estate  loans,  including   residential,   multi-family  and
commercial  loans,  are placed on  nonaccrual  status  when they  become 90 days
delinquent,  regardless  of  collateral  value.  Although  a loan may be current
within a plan dictated by the  bankruptcy  court,  if the loan is  contractually
delinquent  90  days  or  more,  it  will  be  placed  on a  nonaccrual  status.
Nonaccruing  loans in bankruptcy  totaled  $10.9  million at June 30, 1997.  All
consumer loans more than 90 days  delinquent  are charged  against the allowance
for  possible  loan  losses  unless the loan is insured  or  otherwise  secured.
Currently,  consumer  loans  that do not have  recourse  agreements  with  third
parties are placed on nonaccrual status when they become 90 days delinquent. The
following table sets forth the carrying  amounts and categories of nonperforming
and  delinquent  assets on the  dates  indicated.  Balances  are  stated  net of
discounts, deferred fees and loans in process.

                                       72

<PAGE>



Table 3. Nonperforming Assets


<TABLE>
<CAPTION>
                                                                             At June 30
                                            ------------------------------------------------------------------------------
                                                 1997            1996             1995            1994           1993
                                            --------------- ---------------- --------------- --------------- -------------
                                                                       (Dollars in Thousands)
<S>                                               <C>             <C>            <C>            <C>             <C>  
Nonaccruing loans:
  One- to four-family .....................       $17,558         21,696         20,724         20,474          7,725
  Multi-family and
    commercial real estate ................           354            265            328            442            787
  Construction ............................             -            151             84              -              -
  Consumer ................................           524            185             79             29             14
                                                  -------        -------        -------        -------        -------

    Total .................................        18,436         22,297         21,215         20,945          8,526
                                                  -------        -------        -------        -------        -------

Foreclosed assets:
  One- to four-family .....................         8,923          9,630          6,325          3,414          4,300
  Multi-family and
    commercial real estate ................           209            562             23          1,229          4,554
  Consumer ................................           197             39            149            319             89
                                                  -------        -------        -------        -------        -------

    Total .................................         9,329         10,231          6,497          4,962          8,943
                                                  -------        -------        -------        -------        -------

Troubled debt restructurings ..............           332            428            683            569            904
                                                  -------        -------        -------        -------        -------

Total nonperforming assets ................       $28,097         32,956         28,395         26,476         18,373
                                                  =======        =======        =======        =======        =======
  Total nonperforming assets as a
    percentage of total assets ............          2.08%          2.52%          2.45%          2.37%          1.76%
                                                  =======        =======        =======        =======        =======

Accruing loans delinquent 90 days or more:
  One- to four-family .....................       $10,855         18,767         30,394         35,812         34,924
  Consumer ................................           506            689          1,122          1,436          2,140
                                                  -------        -------        -------        -------        -------

  Total accruing loans
    delinquent 90 days or more ............       $11,361         19,456         31,516         37,248         37,064
                                                  =======        =======        =======        =======        =======
</TABLE>

Nonaccruing,  one- to four-family  loans  decreased to $17.6 million at June 30,
1997,  compared to $21.7 million at June 30, 1996. The Company has  aggressively
sought to reduce  recent  trends in  mortgage  delinquencies  through  tightened
credit requirements at loan origination, more stringent loan terms, consistently
administered  collection  procedures and earlier intervention in the first stage
of delinquency.

Foreclosed assets also decreased during the current fiscal year to $9.3 million,
compared to $10.2  million the prior  year.  During the current  fiscal year the
Company  made a  concerted  effort to either  have  chronic  delinquencies  paid
current  or take legal  action  for  collateral  foreclosure.  As a result,  the
Company  has  recently  experienced  decreased  delinquencies  and  foreclosures
associated with problem accounts.

The Company  evaluates the loan  portfolio  quarterly to identify loss potential
and  determine  the  adequacy of the  allowance  for possible  loan  losses.  In
addition to its  nonperforming  assets at June 30,  1997,  the Bank had loans of
approximately $1.7 million that were performing, but which management determined
need to be closely  monitored due to potential  credit problems of the borrowers
or  inadequate  cash  flows  of the  underlying  properties.  These  loans  were
considered in determining the adequacy of the allowance

                                       73

<PAGE>

for possible loan losses that is established based on management's evaluation of
the risk inherent in the loan  portfolio  and overall  changes in the nature and
volume of loan activity.  Such evaluation includes a review of certain loans for
which full  collection may not be reasonably  assured and considers the value of
the underlying collateral, economic conditions,  historical loan loss experience
and other  factors that warrant  recognition  in providing  for an adequate loan
loss  allowance.  The  allowance  for  possible  loan losses  increased to $10.4
million, or 1.11% of total loans receivable, at June 30, 1997 from $9.5 million,
or 1.08% of total loans  receivable,  at June 30,  1996.  Management  intends to
maintain  the  allowance  at  approximately   this  level  to  provide  adequate
protection against any possible losses in the loan portfolio.  The allowance for
possible  loan losses by category at the dates  indicated is  summarized  in the
following table.


Table 4. Allowance for Possible Loan Losses


<TABLE>
<CAPTION>
                                                                  At June 30
               -----------------------------------------------------------------------------------------------------------------
                       1997                  1996                   1995                  1994                    1993
               ---------------------- --------------------  --------------------- ---------------------  ---------------------
                             % of                  % of                   % of                  % of                  % of
               Allowance     Loans    Allowance   Loans     Allowance    Loans    Allowance    Loans     Allowance    Loans
               ----------- ---------- ---------- ---------  ----------- --------- ----------- --------- ----------- ----------
                                                            (Dollars in Thousands)
<S>              <C>           <C>     <C>           <C>     <C>           <C>     <C>           <C>     <C>         <C>   
Real estate ..   $ 7,837       90.15%  $ 7,955       89.95%  $ 7,984       90.33%  $ 8,725       89.81%  $ 8,925     89.68%
Consumer .....     2,587        9.85     1,497       10.05     1,229        9.67     1,056       10.19       736     10.32
               ----------- ---------- ---------- ---------  ----------- --------- ----------- --------- ----------- ----------
                                                                                                         
Total ........   $10,424      100.00%  $ 9,452      100.00%  $ 9,213      100.00%  $ 9,781      100.00%  $ 9,661    100.00%
               =========== ========== ========== ========== ==========  ========= ==========  ========= ==========  ==========
</TABLE>


ASSET/LIABILITY MANAGEMENT

Magnolia  Federal's  asset/liability  management  strategy  is  directed  toward
structuring its balance sheet to reduce exposure to interest rate  fluctuations.
The  Bank's   policy  is  to  maintain   the   cumulative   difference   between
interest-earning  assets anticipated to mature or reprice within one year, based
on certain assumptions,  and interest-bearing  liabilities anticipated to mature
or reprice  within  one year,  based on certain  assumptions,  ("one-year  gap")
within a range of negative 15.0% to positive 15.0% of total assets.  At June 30,
1997, Magnolia Federal's cumulative one-year gap was negative 4.52%, compared to
a cumulative one-year gap of negative 3.43% at June 30, 1996.

Operating with a negative gap means the amount of  interest-bearing  liabilities
maturing  or  repricing  within  a given  period  is more  than  the  amount  of
interest-earning  assets  maturing or  repricing  within the same  period.  In a
declining interest rate environment,  net interest income will generally tend to
improve  because  the  costs of  liabilities  decline  faster  than the yield on
assets.  Conversely,  rising  interest  rates will  generally  result in reduced
earnings  because the cost of funds will generally  increase to a greater degree
than the yield on assets.  Changes in interest rates generally have the opposite
effect  on an  institution  with a  positive  gap.  A  declining  interest  rate
environment  imposes  risks on an  institution  with a positive  gap because the
decrease  in the yield of its  assets  will  generally  exceed the  decrease  in
interest cost on its liabilities.

                                       74

<PAGE>



Rather than depending on external hedging products to manage interest rate risk,
the Bank emphasizes the origination of adjustable-rate loans with terms up to 20
years and other loans that have  shorter  terms to maturity or that reprice more
frequently than longer term,  fixed-rate  mortgage loans. This strategy has been
instrumental  in  minimizing  earnings  sensitivity  to  interest  rates,  while
providing  a  positive  margin  over  the  cost  of  funds.  At June  30,  1997,
adjustable-rate loans totaled $474.2 million, or 49.1%, of the Bank's total loan
portfolio.  The Bank offers  fixed-rate  mortgages in response to market demand,
but sells the  majority of these loans in the  secondary  market to maintain its
interest  rate   sensitivity   within  targeted   ranges.   If  the  demand  for
adjustable-rate loans is not adequate for the Bank's portfolio  requirements,  a
portion of the 15-year  mortgage-backed  securities originated from current loan
production may be held in the Bank's available-for-sale portfolio. Substantially
all new 30-year,  fixed-rate  loans  originated are immediately  securitized and
sold.

Critical  to the  Company's  asset/liability  program is a  strategy  to build a
retail  base of  checking  and other  transaction  accounts to lower its cost of
funds  and  reduce  the  interest  rate  risk of  funding  its  operations  with
certificates  of  deposit.  The retail  deposit  base was  comprised  of NOW and
noninterest-bearing checking accounts totaling $222.2 million, or 24.3% of total
deposits,  at June 30,  1997,  compared  to  $203.6  million,  or 22.1% of total
deposits, at June 30, 1996. The Company's portfolio of loans serviced for others
requires  that  funds be  deposited  to  custodial  accounts  that  are  pending
remittance to investors or being held in escrow pending  disbursement  for taxes
or insurance.  These deposits  totaled $63.3 million and represented 6.9% of the
Company's total deposit balances at June 30, 1997, compared to $69.0 million, or
7.5%, at June 30, 1996.

The next table sets forth the  scheduled  repricing or maturity of the Company's
assets  and  liabilities  at June 30,  1997.  The  assumed  prepayment  rates of
fixed-rate  mortgages and mortgage-backed  securities are based on the Company's
assessment of market  conditions on that date. The withdrawal  rates assumed for
passbook,  statement and other transaction accounts are determined from analyses
of actual  withdrawal  experience  with these accounts.  Actual  prepayments and
withdrawals  may differ from  assumptions  because  they are subject to changing
economic  circumstances and consumer  behavior.  Assets and liabilities may have
similar repricing periods or maturity dates and still react in different degrees
to interest rate changes.  Certain assets and liabilities may have interest-rate
features that restrict  changes in response to  fluctuations  in market interest
rates or that change subsequent to fluctuations in market interest rates.

                                       75

<PAGE>



Table 5. Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>

                                                                                 Maturing or Repricing
                                              ----------------------------------------------------------------------------------
                                                    0-3             4-12          13-36         37-60      61 Months/
                                                   Months          Months         Months        Months        Over     Total
                                                 ---------       ---------       ---------     ---------   ---------  ---------
                                                                                (Dollars in Thousands)
<S>                                              <C>             <C>           <C>           <C>           <C>          <C>    
Interest-earning assets, gross:

  Mortgage loans .............................   $  91,175       249,247       216,436       227,605       86,554       871,017
  Consumer loans .............................      17,455        47,113        26,027         2,355        2,179        95,129
  Mortgage-backed securities .................       5,760        16,329        37,253        29,697       44,859       133,898
  Other assets(1) ............................      28,704            87         2,814           111       61,315        93,031
                                                 ---------     ---------     ---------     ---------    ---------     ---------

Total interest-earning assets, gross .........     143,094       312,776       282,530       259,768      194,907     1,193,075
                                                 ---------     ---------     ---------     ---------    ---------     ---------

Interest-bearing liabilities:
  NOW accounts ...............................       1,515         4,433        11,038         9,985       94,734       121,705
  Money market accounts ......................         913         2,581         5,842         4,590       16,827        30,753
  Passbook and statement accounts ............       2,519         7,261        17,356        14,782       84,889       126,807
  Certificates of deposit (2) ................     121,529       232,943       114,618         1,785        1,453       472,328
  Borrowings from the FHLB of Dallas .........      66,307       103,124        59,174        10,381       19,463       258,449
                                                 ---------     ---------     ---------     ---------    ---------     ---------

Total interest-bearing liabilities ...........     192,783       350,342       208,028        41,523      217,366     1,010,042
                                                 ---------     ---------     ---------     ---------    ---------     ---------
Interest-earning assets less interest-
  bearing liabilities ........................   $ (49,689)      (37,566)       74,502       218,245      (22,459)      183,033
                                                 =========     =========     =========     =========    =========     =========

Cumulative interest rate sensitivity gap .....   $ (49,689)      (87,255)      (12,753)      205,492      183,033
                                                 =========     =========     =========    =========     =========

Cumulative interest rate sensitivity gap
  as a percentage of total assets ............       (3.67)%       (6.45)%       (0.94)%      15.19%        13.53%
                                                 =========     =========     =========    =========     =========

<FN>
(1)  Does not include equity securities.

(2)  Includes retirement accounts which reprice every three months.
</FN>
</TABLE>


MARKET RISK INHERENT IN FINANCIAL INSTRUMENTS


Market  risk is the risk of loss due to  adverse  changes  in market  prices and
rates.  The  management of this risk,  coupled with  directives to build Company
value and profitability,  is an integral part of the Company's overall operating
strategy.  The Company's  approach to risk management,  primarily  interest rate
risk management,  is quite basic and  concentrates on fundamental  strategies to
restructure  the  balance  sheet  and  composition  of assets  and  liabilities.
Inherent  in this  strategy is  recognition  of the value of  non-interest  rate
sensitive  fee income in  mitigating  the impact on the  income  statement  from
unfavorable  swings in  interest  rates.  Since  the  Company  does not  utilize
interest  rate  futures,  swaps or  options  transactions,  its  asset/liability
profile is not complex.  It reflects a simple  approach to managing risk through
the use of three basic strategies:  (i)  adjustable-rate  lending,  (ii) shorter
loan terms and (iii) encouraging checking accounts to generate  rate-insensitive
liabilities  that  produce  substantial  fee  income.  Company  policy  includes
required  limits on the  sensitivity  of net interest  income and net  portfolio
value under various interest rate scenarios.

The assets and  liabilities of the Company are comprised  primarily of financial
instruments  which give rise to cash flows.  By projecting the timing and amount
of future net cash flows of such  instruments  and by

                                       76

<PAGE>



using  appropriate  market  discount  rates to  discount  those cash  flows,  an
estimated  value of that asset or liability can be determined.  Market values of
the Company's  investment in loans and debt securities  fluctuate with movements
in market interest rates.  Prepayments of principal are closely  correlated with
interest rates and affect expected future cash flows of the Company's  financial
instruments.  Certain  deposits  and other  borrowings  of the  Company are also
sensitive to interest rate changes.

The following table sets forth an analysis of the Company's assumed market value
risk  inherent  in its  interest-rate-sensitive  instruments  as it  relates  to
interest-rate  swings of 200 basis points,  both above and below current levels.
Fair value  estimates  are  subjective in nature and involve  uncertainties  and
matters of  significant  judgment  and,  therefore,  cannot be  determined  with
precision.  Assumptions  have  been  made  as  to  appropriate  discount  rates,
prepayment  speeds,  expected  cash  flows  and  other  variables.   Changes  in
assumptions  significantly  affect the estimates  and, as such, the derived fair
value  may not be  indicative  of the  value  negotiated  in an  actual  sale or
comparable to that reported by other financial  institutions.  In addition,  the
fair  value  estimates  are  based on  existing  financial  instruments  without
attempting  to  estimate  the  value of  anticipated  future  business.  The tax
ramifications  related to the realization of the unrealized gains and losses can
have a significant  effect on fair value  estimates and have not been considered
in the estimates.

The current fair value of loans held for investment is calculated by discounting
the  expected  future cash flows.  Loans are  segregated  by type of loan and by
interest  type,  such  as  variable  or  fixed.  Fixed-rate  loans  are  further
categorized by original term to maturity and stratified by interest rate ranges.
Loans are  discounted  using the current new loan rate  applicable to each type.
Adjustable-rate  loans are valued based on scheduled  repricing  and  discounted
using the current rate at which  similar  loans would be made to borrowers  with
similar credit ratings.  Future cash flows are estimated by using OTS nationwide
average  prepayment speeds applicable to each type. The fair value of loans held
for sale is based on quoted market  prices,  assuming the loans will be packaged
and sold in the secondary market.  The fair value of  mortgage-backed  and other
debt securities is based on quoted market prices,  where available.  If a quoted
market  price is not  available,  fair value is estimated  using  quoted  market
values of similar securities.

For deposit liabilities with no defined  maturities,  expected future cash flows
have been estimated  based on decay rates.  It is assumed that decay rates would
be applied to the  account  balance  in the  current  rate model as well as rate
shocks up and down. The decay rate assumptions  reflect that some customers will
withdraw  their  funds  when  faced  with  higher-rate   alternatives  and  also
recognizes  normal non-rate  related  movement of funds.  The use of decay rates
reflects  the  long-term  nature of  transaction  accounts and results in theses
funds being  discounted  at comparable  maturity  borrowing  rates.  An in-house
analysis  of the  Company's  average  attrition  rate  was used to  support  the
applications  of decay factors.  The fair value of  certificates  of deposit and
borrowings  from the FHLB of Dallas are calculated by  discounting  the expected
future cash flows using the FHLB advance rate for comparable  terms to maturity.
Expected future cash flows for certificates of deposit are based on the maturity
dates of the certificates, assuming no withdrawals prior to maturity.

The Company determines the fair value of mortgage servicing rights by estimating
the present value of net future  servicing  income using a discounted  cash flow
analysis on a disaggregated basis.  Average prepayment  assumptions based on the
consensus view of a network of major broker/dealers  available in the market are
used, taking into consideration loan type, original and remaining maturity,  and
weighted  average  interest  rate.  Discount  rates are used to  approximate  an
acceptable  rate of return  based in

                                       77

<PAGE>



investor  type.  The  current  fair  value  of  forward  sales   commitments  of
mortgage-backed securities is based on quoted market prices.

The market value of financial  instruments  under an immediate rate shock of 200
basis points up and down is calculated  utilizing vendor modeling software which
calculates  expected  cash  flows  under  each rate  environment  at  applicable
discount rates.

Projected net interest income of a twelve-month period is also calculated by the
model assuming customers will reinvest maturing deposit accounts and the Company
will  originate  a certain  amount of new  loans.  Excess  cash is  invested  in
overnight  deposit  accounts  with  other  banks  or  utilized  to pay  maturing
advances. Cash shortfalls are covered through additional borrowing from the FHLB
of Dallas.

Table 6. Market Risk Inherent in Financial Instruments

<TABLE>
<CAPTION>
                                                                                                  Fair Value
                                                                           ---------------------------------------------------------
                                                         Carrying Value       No Change     -200 Basis Points    +200 Basis Points
                                                                                  (Dollars in Thousands)
<S>                                                         <C>                 <C>               <C>              <C>    
Rate sensitive assets and liabilities:
  Interest-earning assets:
    Loans receivable, fixed rate ....................       $  467,726          492,221           505,178          460,743
    Loans receivable, adjustable rate ...............          460,367          485,524           496,533          470,091
    Mortgage-backed securities ......................          132,912          133,206           135,017          132,672
    Other debt securities ...........................           60,931           63,788            73,043           58,053
    Interest-bearing deposits with banks ............           28,705           28,705            28,705           28,705
                                                            ----------       ----------        ----------       ----------
      Total interest-earning assets .................        1,150,641        1,203,444         1,238,476        1,150,264
                                                            ----------       ----------        ----------       ----------
  Interest-bearing liabilities:
    NOW accounts ....................................          121,705           71,641            85,199           61,562
    Passbook, statement and money market
      accounts ......................................          157,560          133,498           138,013          130,125
    Certificates of deposit .........................          472,328          470,175           477,987          462,882
    Borrowings from the FHLB of Dallas ..............          258,449          257,921           263,561          252,718
                                                            ----------       ----------        ----------       ----------
      Total interest-bearing liabilities ............        1,010,042          933,235           964,760          907,287
                                                            ----------       ----------        ----------       ----------

  Mortgage servicing rights .........................            8,548           37,943            43,478           27,241
  Off-balance sheet items ...........................                -              (68)             (849)             162
                                                            ----------       ----------        ----------       ----------

    Net rate sensitive assets and liabilities .......       $  149,147          308,084           316,345          270,380
                                                            ==========       ==========        ==========       ==========


   Projected net interest income ....................                        $   63,193           69,412            59,964
                                                                             ==========        ==========       ==========
</TABLE>


The Company's  strategy to limit  interest rate risk has been,  and continues to
be, an emphasis on core deposit  transaction  accounts as a funding source for a
repricable   portfolio  of  loans  because  such  accounts   generally  are  not
interest-rate  sensitive  or  exhibit  limited  interest-rate  sensitivity.  The
Company does not invest in third-party  hedging products,  but relies on natural
hedges within its balance sheet  composition  to limit  interest rate risks to a
level acceptable to management.  As a fixed-rate  lender,  however,  the Company
does engage in the practice of selling  forward  securitized  loans  anticipated
from  its  pipeline  of  loan   applications  and  commitments.   Virtually  all
anticipated  30-year loan originations are sold forward to limit the risk of any
sudden change in market interest rates.

                                       78

<PAGE>



LIQUIDITY AND CAPITAL RESOURCES


Liquidity

The Company's  primary  sources of funds are  deposits,  repayments on loans and
mortgage-backed securities,  maturities of investment securities,  proceeds from
the  sale of  mortgage-backed  securities  and  funds  provided  by  operations.
Scheduled loan and mortgage-backed  security repayments and maturing investments
are  relatively  predictable  sources of funds;  however,  the general  level of
interest rates,  economic conditions and competition influence deposit flows and
loan  prepayments.   Pricing  of  deposits,   consistent  with   asset/liability
objectives,  is  determined  primarily by local  competition  and the  Company's
funding  requirements.  When  excess  cash is  available,  funds  are  generally
invested overnight in interest-bearing deposits at the FHLB of Dallas.

The Bank is required by regulation to maintain specific minimum levels of liquid
assets.  The required  percentage is currently  5.0% of the  preceding  calendar
month's net withdrawable savings deposits and borrowings payable on demand or in
one year or less. Liquid assets for purposes of this ratio include cash, certain
time  deposits,  United States  Government  and corporate  securities  and other
obligations  generally  having  maturities of less than five years. The Bank has
historically  maintained  its  liquidity  ratio at  levels  in  excess  of those
required. At June 30, 1997, the Bank's liquidity ratio was 9.3%.

The Company's  liquidity is a product of its operating,  investing and financing
activities.   During  fiscal  1997,  cash  provided  by  operations,   sales  of
mortgage-backed  securities  and  advances  from the FHLB of Dallas were used to
fund the  origination  of  mortgage  loans  and  investment  in  mortgage-backed
securities.  Due to the Company's loan servicing  operations,  monthly  cyclical
fluctuations  of  cash  flows  necessitated   short-term  borrowings  that  were
generally made and repaid within the same month.

Managing  liquidity is a daily and long-term  responsibility of management.  The
Bank adjusts its  investments  in liquid  assets based on an  assessment  of (i)
expected  loan  demand,  (ii)  projected  sales  of  loans  and  mortgage-backed
securities,   (iii)   expected   deposit   flows,   (iv)  yields   available  on
interest-bearing   deposits  and  (v)  the  objectives  of  its  asset/liability
management program.  Excess liquidity is generally invested in interest-earning,
overnight deposits and other short-term  government and agency  obligations.  If
the Bank requires funds beyond its ability to generate them  internally,  it has
additional  borrowing  capacity with the FHLB of Dallas and collateral  eligible
for reverse repurchase agreements.

The Company  anticipates  that it will have  sufficient  funds available to meet
current loan  commitments  and fund capital  investments.  At June 30, 1997, the
Company had  outstanding  commitments  to originate  loans of $52.2  million and
commitments  to purchase  loans of $720,000.  Forward sale  commitments of $57.4
million in  mortgage-backed  securities  were  outstanding  at June 30, 1997. No
significant  capital  expenditures  are expected in the near term and sufficient
funds are available to cover anticipated cash flows.

Certificates  of deposit  scheduled  to mature  within one year at June 30, 1997
totaled $345.0 million. Because certificates of deposit are priced competitively
with other investment alternatives,  management anticipates that the majority of
these maturing  deposits will be reinvested with the Bank.  Management  plans to
continue its strategy of replacing  withdrawn  deposits with retail checking and
other transaction accounts.

                                       79

<PAGE>



Capital

Magnolia  Federal's  current  capital  position is well in excess of the minimum
regulatory  requirements.  The regulations require  institutions to have minimum
regulatory  tangible  capital  equal to 1.5% of total  assets and a minimum 3.0%
core capital ratio. At June 30, 1997, the Bank's tangible and core capital ratio
was 8.48%. Additionally,  institutions are required to meet a risk-based capital
requirement  equaling 8.0% of the amount of  risk-weighted  assets.  At June 30,
1997, the Bank's risk-based  capital was 16.90% of risk-weighted  assets. Due to
implementation  issues and  measurement  consistency,  the effective  date of an
interest rate risk component to the risk-based capital  calculation has not been
finalized.  Interest rate risk is measured as the change in an institution's net
portfolio  value as a result of a  hypothetical  200  basis  point  increase  or
decrease in market interest rates. A "normal level" of interest rate risk is any
decline  in net  portfolio  value  of up to  2.0% of the  institution's  assets.
Institutions  with a risk  profile  in excess of such level may be  required  to
deduct from their risk-based  capital an amount equal to one-half the difference
between  the  institution's  measured  risk  and  2.0% of  assets.  Based on the
Company's current asset/liability structure,  management does not anticipate any
material impact on its risk-based capital levels.



ACCOUNTING DEVELOPMENTS


Recently issued  Statement of Financial  Accounting  Standards No. 128 "Earnings
per Share" ("SFAS No. 128") supersedes  Accounting  Principles Board Opinion No.
15,  "Earnings  per Share," and  specifies  the  computation,  presentation  and
disclosure  requirements  for  earnings  per share  ("EPS")  for  entities  with
publicly held common stock or potential  common stock.  It replaces  Primary EPS
and Fully Diluted EPS with Basic EPS and Diluted EPS. Dual presentation of Basic
EPS and Diluted EPS on the face of the income  statement  for all entities  with
complex  capital  structures  is  required.  Reconciliation  of  the  Basic  EPS
computation to the Diluted EPS  computation  is also  required.  SFAS No. 128 is
effective for financial  statements  for both interim and annual  periods ending
after  December  15,  1997.  Earlier  application  is  not  permitted.   Further
disclosures of an entity's capital structure are required for years ending after
December  15,  1997 by  Statement  of  Financial  Accounting  Standards  No. 129
"Disclosure  of  Information  about Capital  Structure"  ("SFAS No.  129").  The
disclosure of pertinent  information  concerning the rights and privileges of an
entity's  outstanding  securities is required for entities with complex  capital
structures. Because the Company's capital structure is not complex, the adoption
of these Statements would not be of significance.

Standards for reporting and display of comprehensive income, or the total of net
income and all other  non-owner  equity  changes,  was addressed in Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income." Changes
in the  Company's  unrealized  holding  gains and  losses on  available-for-sale
securities  would be a  component  of  comprehensive  income  for which  greater
disclosures would be required in years beginning after December 15, 1997.

The  Statement of  Financial  Accounting  Standards  No. 131  "Disclosure  about
Segments of an Enterprise and Related  Information"  ("SFAS No. 131") was issued
on June  30,  1997  and  requires  specific  disclosures  about  segments  of an
enterprise.  Effective for fiscal years  beginning after December 15, 1997, SFAS
No. 131 introduces a "management approach" for segment reporting. The management

                                       80

<PAGE>



approach is based on how the chief operating  decision maker organizes  segments
within a company for making operating decisions and assessing performance.



IMPACT OF INFLATION AND CHANGING PRICES


The Consolidated  Financial  Statements and Notes thereto  presented herein have
been prepared in accordance with generally accepted  accounting  principles that
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 due to inflation.  The impact of inflation is reflected
in the  increased  cost of the  Company's  operations.  Unlike  most  industrial
companies, nearly all the assets and liabilities of the Company are monetary. As
a result, interest rates have a greater impact on the Company's performance than
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.



                                       81

<PAGE>



ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA






                                       82

<PAGE>





                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Index to Consolidated Financial Statements





Independent Auditors' Report ...................................   84


Consolidated Financial Statements:

     Consolidated Statements of Financial Condition
        as of June 30, 1997 and 1996  ..........................   85

     Consolidated Statements of Earnings for the
        Years Ended June 30, 1997, 1996 and 1995  ..............   86

     Consolidated Statements of Stockholders' Equity for
        the Years Ended June 30, 1997, 1996 and 1995  ..........   88

     Consolidated Statements of Cash Flows for the
        Years Ended June 30, 1997, 1996 and 1995  ..............   89



Notes to Consolidated Financial Statements  ....................   92



                                       83

<PAGE>




                          Independent Auditors' Report



The Board of Directors and Stockholders
Magna Bancorp, Inc.:


We have audited the accompanying  consolidated statements of financial condition
of Magna Bancorp,  Inc. and  subsidiaries  as of June 30, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the  years in the  three-year  period  ended  June 30,  1997.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Magna Bancorp, Inc.
and  subsidiaries  as of June  30,  1997  and  1996,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  June  30,  1997,  in  conformity  with  generally   accepted   accounting
principles.

As discussed in note 1 to the  consolidated  financial  statements,  the Company
changed its method of accounting for mortgage  servicing rights in 1996 to adopt
the  provisions  of  Statement  of  Financial   Accounting  Standards  No.  122,
"Accounting for Mortgage Servicing Rights."


/s/ KPMG PEAT MARWICK LLP

August 29, 1997
Jackson, Mississippi


                                       84

<PAGE>

                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                 Consolidated Statements of Financial Condition
                             June 30, 1997 and 1996
<TABLE>
<CAPTION>
                    Assets                                                         1997                  1996
                    ------                                                 -----------------    ----------------
<S>                                                                     <C>                     <C>
Cash and due from banks                                                 $         69,504,187          70,548,661
Interest-bearing deposits with banks                                              28,704,668          10,745,849
Mortgage-backed securities held for trading                                                -          34,486,798
Other securities held for trading                                                  3,386,250                   -
Mortgage-backed securities available for sale                                    122,385,386         118,872,676
Other securities available for sale                                               16,676,744           7,188,768
Mortgage-backed securities held to maturity                                       10,526,158          12,727,245
Other securities held to maturity                                                 53,791,261          67,485,783
Stock in Federal Home Loan Bank of Dallas                                         15,627,418          12,027,000
Loans held for sale, net of unrealized losses of $148,201 in 1996                 51,556,780          27,475,284
Loans receivable, net of allowance for possible loan losses of
     $10,423,693 in 1997 and $9,451,693 in 1996                                  876,536,687         836,286,838
Accrued interest receivable                                                        9,911,115          11,059,971
Premises and equipment, net                                                       44,049,820          43,160,425
Foreclosed assets                                                                  9,328,501          10,230,943
Mortgage servicing rights, net                                                     8,547,688           5,788,245
Premium on purchased deposits, net                                                 3,702,731           6,778,400
Prepaid expenses and other assets                                                 29,007,066          33,794,935
                                                                           -----------------    ----------------
                                                                        $      1,353,242,460       1,308,657,821
                                                                           =================    ================
        Liabilities and Stockholders' Equity
        ------------------------------------
Liabilities:
     Deposits                                                           $        915,394,878         922,370,122
     Borrowings from Federal Home Loan Bank of Dallas:
        Short-term                                                               165,298,412         125,000,000
        Long-term                                                                 93,150,183          96,961,222
     Advance by borrowers for property taxes, insurance and other                 10,612,972          11,219,490
     Interest payable on deposits                                                  5,352,575           5,320,261
     Accrued expenses and other liabilities (including
        clearing balances of collections on serviced loans
        of $10,795,604 in 1997 and $7,386,427 in 1996)                            25,061,714          21,968,146
                                                                           -----------------    ----------------
                    Total liabilities                                          1,214,870,734       1,182,839,241
                                                                           -----------------    ----------------
Stockholders' equity:
     Serial preferred stock, $.01 par value, 500,000
        authorized shares, none issued and outstanding                                     -                   -
     Common stock, $.01 par value.  Authorized 14,500,000; issued and
        outstanding 13,754,266 in 1997 and 13,702,656 in 1996                        137,543              68,514
     Additional paid-in capital                                                   18,735,227          18,373,306
     Retained earnings, substantially restricted                                 119,340,749         109,096,579
     Unrealized gains (losses) on securities available for sale,
        net of deferred income taxes                                                 158,207          (1,719,819)
                                                                           -----------------    ----------------
                    Total stockholders' equity                                   138,371,726         125,818,580
                                                                           -----------------    ----------------

                                                                        $      1,353,242,460       1,308,657,821
                                                                           =================    ================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       85

<PAGE>




                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                       Consolidated Statements of Earnings

                    Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                                     1997                1996            1995
                                                                   -----------       -----------   -----------
<S>                                                            <C>                   <C>           <C>
Interest income:
     Loans                                                     $    93,147,812        90,540,068    79,630,506
     Mortgage-backed securities:
        Held to maturity                                               927,065         2,400,797     4,125,469
        Available for sale                                           8,199,053         3,565,094     4,077,283
        Held for trading                                             3,003,799         1,879,477       585,278
     Other securities:
        Held to maturity                                             4,993,934         5,882,877     6,766,160
        Available for sale                                             332,578           227,834             -
        Held for trading                                                31,501                 -             -
     Interest-bearing deposits with banks                              491,592         1,704,272     1,151,540
     Other investments                                                 796,924           546,544       507,597
                                                                    ----------       -----------   -----------
                    Total interest income                          111,924,258       106,746,963    96,843,833
                                                                   -----------       -----------   -----------
Interest expense:
     Deposits                                                       31,284,154        31,249,387    28,161,097
     Borrowings from Federal Home Loan Bank of Dallas:
        Short-term                                                   8,876,459         1,445,723     1,664,159
        Long-term                                                    6,085,760         8,957,741     4,310,755
                                                                  ------------       -----------   -----------
                    Total interest expense                          46,246,373        41,652,851    34,136,011
                                                                  ------------       -----------   -----------
                    Net interest income                             65,677,885        65,094,112    62,707,822
Provision for possible loan losses                                   3,135,643         1,633,241       418,169
                                                                  ------------       -----------    ----------
                    Net interest income after provision
                         for possible loan losses                   62,542,242        63,460,871    62,289,653
                                                                  ------------       -----------    ----------
Noninterest income (loss):
     Loan servicing income, net                                     12,128,395        12,423,681    12,080,316
     Service fees on deposits                                       18,737,746        16,406,674    13,361,644
     Other service fees and commissions                              1,956,534         1,671,424     1,265,354
     Unrealized holding gains (losses) on trading securities
        and loans held for sale, net                                 2,412,242        (1,293,133)      864,262
     Gains on sales of assets held for sale, available
        for sale or held for trading, net                              521,176         1,536,637       842,746
     Losses on sales and operations of
        foreclosed assets, net                                      (1,881,785)       (1,449,500)     (146,481)
     Insurance fees, commissions and premiums, net                   2,732,607         2,956,356     3,441,493
     Appraisal fees, net                                               959,285         1,315,326       651,960
     Other income, net                                               1,570,504         4,048,725     2,885,039
                                                                  ------------       -----------   -----------
                    Total noninterest income, net                   39,136,704        37,616,190    35,246,333
                                                                  ------------       -----------   -----------
</TABLE>

                                                                     (Continued)

                                       86

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                       Consolidated Statements of Earnings


<TABLE>
<CAPTION>
                                                                              1997               1996              1995
                                                                        ---------------     -------------       -----------
<S>                                                                    <C>                  <C>                 <C>
Noninterest expense:
     Compensation, payroll taxes and fringe benefits                        30,289,765         30,685,273        27,997,306
     Rent and other occupancy expense                                        6,274,486          6,147,413         6,007,513
     Equipment and fixtures expense                                          4,793,930          4,585,444         4,815,490
     Communication, postage, printing and office supplies                    6,531,208          6,523,050         6,825,888
     Deposit and other insurance premiums                                    1,696,881          2,542,993         2,702,475
     Special SAIF deposit insurance assessment                               5,917,174                  -                 -
     Advertising                                                             1,485,678          2,523,988         2,363,588
     Expenses of officers, directors and employees,
        including directors' fees                                            1,619,701          1,530,392         1,548,613
     Data processing expense                                                 3,063,105          3,091,750         2,383,221
     Amortization of premium on purchased deposits                           2,889,644          3,777,427         4,621,236
     Professional fees                                                       3,769,341          2,886,827         3,079,351
     Other loan servicing costs                                              2,239,665          2,503,874         2,791,324
     Other expenses                                                          1,084,147          1,227,471         1,174,141
                                                                          ------------      -------------       -----------
                    Total noninterest expense                               71,654,725         68,025,902        66,310,146
                                                                          ------------      -------------       -----------

                    Earnings before income taxes                            30,024,221         33,051,159        31,225,840

Income tax expense                                                          11,464,747         11,941,810        12,200,817
                                                                         -------------      -------------       -----------

               Net earnings                                            $    18,559,474         21,109,349        19,025,023
                                                                         =============      =============       ===========

               Earnings per common share                               $          1.34               1.50              1.33
                                                                         =============      =============       ===========
</TABLE>


See accompanying notes to consolidated financial statements.



                                       87


<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

                    Years Ended June 30, 1997, 1996 and 1995


<TABLE>
<CAPTION>

                                                                              1997              1996               1995
                                                                        --------------   ----------------    --------------
<S>                                                                  <C>                  <C>                <C>
Common stock:
     Balance at beginning of year                                    $          68,514             70,280            70,298
     Purchase and retirement of 134 shares in 1997,
        372,634 shares in 1996 and 14,902 shares in 1995                            (1)            (1,863)              (74)
     Stock issued upon exercise of stock options                                   324                 97                56
     Two-for-one stock split                                                    68,706                  -                 -
                                                                        --------------    ---------------    --------------
     Balance at end of year                                          $         137,543             68,514            70,280
                                                                        ==============    ===============    ==============
Additional paid-in capital:
     Balance at beginning of year                                    $      18,373,306         23,546,336        23,176,296
     Purchase and retirement of 134 shares in 1997,
        372,634 shares in 1996 and 14,902 shares in 1995                        (2,181)        (5,764,021)         (182,816)
     Stock issued upon exercise of stock options                                45,492             16,989             9,861
     Tax benefit of restricted stock awards
        and stock options                                                      318,610            574,002           542,995
                                                                        --------------    ---------------    --------------
     Balance at end of year                                          $      18,735,227         18,373,306        23,546,336
                                                                        ==============    ===============    ==============
Retained earnings, substantially restricted:
     Balance at beginning of year                                    $     109,096,579         91,466,279        75,042,859
     Net earnings                                                           18,559,474         21,109,349        19,025,023
     Cash dividends paid at $0.60 per share for 1997,
        $0.25 per share for 1996 and $0.19 per share
        for 1995                                                            (8,246,598)        (3,479,049)       (2,601,603)
     Two-for-one stock split                                                   (68,706)                 -                 -
                                                                        --------------    ---------------    --------------
     Balance at end of year                                          $     119,340,749        109,096,579        91,466,279
                                                                        ==============    ===============    ==============
Unrealized gains (losses) on securities available for sale:
     Balance at beginning of year                                    $      (1,719,819)           319,186        (1,712,462)
     Change in unrealized gains (losses) on securities
        available for sale, net of deferred income taxes                     1,878,026         (2,039,005)        2,031,648
                                                                        --------------    ---------------    --------------
     Balance at end of year                                          $         158,207         (1,719,819)          319,186
                                                                        ==============    ===============    ==============
Unearned compensation - restricted stock awards:
     Balance at beginning of year                                    $               -            (82,842)         (338,786)
     Amortization of unearned compensation                                           -             82,842           255,944
                                                                        --------------    ---------------    --------------
     Balance at end of year                                          $               -                  -           (82,842)
                                                                        ==============    ===============    ==============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       88

<PAGE>




                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                    Years Ended June 30, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                            1997               1996               1995
                                                                      ---------------    ---------------    ----------
<S>                                                                    <C>                   <C>                <C>
Cash flows from operating activities:
     Net earnings                                                      $  18,559,474          21,109,349         19,025,023
     Adjustments to reconcile net earnings to net
        cash provided (used) by operating activities:
           Provision for possible loan losses                              3,135,643           1,633,241            418,169
           Depreciation and amortization                                   9,520,636           9,440,623         12,483,411
           Amortization of premium on purchased deposits                   2,889,644           3,777,427          4,621,236
           Decrease (increase) in prepaid expenses
               and other assets                                            3,723,421          (2,816,675)         1,464,276
           Increase (decrease) in accrued expenses
               and other liabilities                                       3,125,882           7,755,326        (20,128,552)
           Unrealized holding (gains) losses on trading
               securities and loans held for sale, net                    (2,412,242)          1,293,133           (864,262)
           Gains on sales of assets held for sale, available
               for sale or held for trading, net                            (521,176)         (1,536,637)          (842,746)
           Gains on sales of premises and equipment,                        (119,413)             (6,247)          (276,940)
           Gains on sales of foreclosed assets,  net                      (2,272,882)           (816,094)          (858,523)
           Accretion of deferred fees, discounts and
               premiums, net                                              (5,004,491)         (6,021,473)        (1,778,933)
           Other, net                                                      1,083,109             409,706           (379,032)
     Proceeds from sales of assets held for sale
        or held for trading                                              209,005,673         209,383,921         69,481,016
     Principal payments on mortgage-backed securities
        held for trading                                                   3,576,806           1,891,226            342,308
     Purchases of mortgage-backed and other securities
        held for trading                                                  (2,042,145)         (6,987,813)        (2,011,288)
     Origination of loans held for sale                                 (223,105,837)       (244,445,656)       (88,764,420)
                                                                         -----------         -----------        -----------
                    Net cash provided (used) by
                         operating activities                             19,142,102          (5,936,643)        (8,069,257)
                                                                         -----------         -----------        ----------- 
</TABLE>


                                                                     (Continued)


                                       89

<PAGE>




                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                            1997                 1996               1995
                                                                      ---------------      ---------------   ---------------
<S>                                                                   <C>                  <C>               <C>
Cash flows from investing activities:
     Net decrease (increase) in interest-bearing
        deposits with banks                                              (17,958,819)         12,816,429         (3,604,017)
     Net increase in loans                                               (20,577,400)        (69,786,564)        (2,474,568)
     Purchases of loans                                                  (15,454,517)        (44,663,350)       (88,016,776)
     Proceeds from sales of mortgage-backed securities
        available for sale                                                         -           2,155,965         99,949,098
     Proceeds from maturities of other securities                         14,284,400           9,157,500         11,000,000
     Principal payments on mortgage-backed
        and other securities                                              16,716,028          12,910,043         14,227,606
     Purchases of mortgage-backed and other securities
        available for sale                                                (8,423,860)        (20,961,852)       (50,294,800)
     Purchases of mortgage-backed and other securities
        held to maturity                                                           -            (722,278)        (5,530,443)
     Proceeds from sales of foreclosed assets                              4,737,067           4,486,670          4,105,093
     Purchases of mortgage servicing rights                               (5,287,479)            (12,087)        (1,016,946)
     Redemption (purchase) of stock in Federal
        Home Loan Bank of Dallas                                          (3,600,418)         (4,101,500)           164,200
     Proceeds from sales of premises and equipment                           572,247              67,333            740,610
     Additions to premises and equipment                                  (6,215,083)         (9,110,395)        (7,581,989)
                                                                      --------------       -------------     --------------
                    Net cash used by investing activities                (41,207,834)       (107,764,086)       (28,332,932)
                                                                      --------------       -------------     --------------
Cash flows from financing activities:
     Net increase (decrease) in deposits                                  (6,975,244)          4,652,137        (54,925,771)
     Net increase in borrowings from Federal Home
        Loan Bank of Dallas                                               36,487,373         121,961,222        100,000,000
     Issuance of common stock                                                 45,816              17,085              9,917
     Repurchase of common stock                                               (2,181)         (5,765,883)          (182,890)
     Tax benefit of restricted stock
        awards and stock options                                             318,610             574,002            542,995
     Cash dividends paid                                                  (8,246,598)         (3,479,049)        (2,601,603)
     Increase (decrease) in advance payments by
        borrowers for property taxes, insurance
        and other                                                           (606,518)          4,460,699            226,983
                                                                      --------------       -------------     --------------
                    Net cash provided by financing activities             21,021,258         122,420,213         43,069,631
                                                                      --------------       -------------     --------------
</TABLE>


                                                                     (Continued)

                                       90

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                     1997               1996               1995
                                                              ---------------    ---------------     ---------------

<S>                                                       <C>                    <C>                 <C>
                    Net increase (decrease) in cash
                         and due from banks                        (1,044,474)          8,719,484          6,667,442
Cash and due from banks at beginning of year                       70,548,661          61,829,177         55,161,735
                                                              ---------------    ----------------    ---------------

Cash and due from banks at end of year                    $        69,504,187          70,548,661         61,829,177
                                                              ===============    ================    ===============

Supplemental  disclosures  of cash flow  information:
   Cash paid during the year for:
     Interest on deposits, advances and
        other borrowings                                  $        45,942,763          40,718,840         33,399,339
                                                              ===============    ================    ===============

     Income taxes                                                  12,488,884          11,190,000         12,211,893
                                                               ==============    ================    ===============

   Noncash investing and financing activities
     during the year for:
       Foreclosures                                                15,031,391          13,688,286          8,864,995
                                                               ==============    ================    ===============

       Securitization of mortgage loans                    $      193,294,179         289,707,302         89,231,963
                                                               ==============    ================    ===============

       Loans originated to facilitate sales of
         foreclosed assets                                 $       12,270,777           5,414,831          3,901,912
                                                               ==============    ================    ===============
</TABLE>



See accompanying notes to consolidated financial statements.


                                       91

<PAGE>


                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                          June 30, 1997, 1996 and 1995



(1)  Summary of Significant Accounting Policies

     The  accounting  and  reporting  policies  of  Magna  Bancorp,  Inc.   (the
         "Company") and subsidiaries  conform to generally  accepted  accounting
         principles and to general  practices  within the thrift  industry.  The
         following is a description  of the more  significant  of those policies
         that the Company  follows in preparing and presenting its  consolidated
         financial statements.

     (a)  Principles of Consolidation

          The  accompanying  consolidated   financial   statements  include  the
            accounts  of  the  Company,   its  wholly-owned  or   majority-owned
            subsidiaries,  Magna Financial Services, Inc.; Comserv, Inc.; Realty
            Services,  Inc.; Magnolia Federal Bank for Savings (the "Bank"); and
            Magna Insurance Company. All significant  intercompany  transactions
            and balances have been eliminated in consolidation.

     (b)  Basis of Financial Statement Presentation

          The  financial  statements  have  been  prepared  in  conformity  with
            generally accepted accounting principles. In preparing the financial
            statements, management is required to make estimates and assumptions
            that  affect the  reported  amounts of assets  and  liabilities  and
            revenues and expenses.  Actual  results  could differ  significantly
            from those estimates.  Significant estimates that are susceptible to
            change  relate to the  determination  of the  allowance for possible
            loan losses,  the  valuation of real estate  acquired in  connection
            with  foreclosures  or in satisfaction of loans and the valuation of
            capitalized mortgage servicing rights.

          Management  believes  that  the  allowance for possible loan losses is
            adequate and the carrying value of real estate owned is recoverable.
            While  management uses available  information to recognize  possible
            loan losses and to determine  that the carrying value of real estate
            owned does not exceed its fair value less  estimated  selling costs,
            future  additions  to the  allowance  or future  writedowns  to real
            estate owned may be necessary based on changes in economic or market
            conditions.

          Management  also  believes  the carrying value of capitalized mortgage
            servicing  rights is  recoverable.  While  management uses available
            information  to estimate  the fair value,  future  additions  to the
            valuation allowance may be necessary based on changes in economic or
            market conditions.


                                                                     (Continued)

                                       92

<PAGE>




                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



          In addition, various regulatory agencies, as an integral part of their
            examination process, periodically review the Company's allowance for
            possible  loan losses,  the carrying  value of real estate owned and
            the  valuation  of  capitalized   mortgage  servicing  rights.  Such
            agencies  may require the Company to  recognize  adjustments  to the
            allowance  for possible  loan  losses,  allowance  for  valuation of
            capitalized  servicing rights or carrying value of real estate owned
            based on their judgments about information  available to them at the
            time of their examination.

     (c)  Mortgage-backed Securities and Other Securities

          Securities  are  classified  as  either  held  to  maturity,  held for
            trading or available for sale. Securities held to maturity are those
            which the Company has the ability and positive  intent to hold until
            maturity.  Trading  securities  are  bought or  originated  and held
            principally  for the purpose of selling  them in the near term.  All
            other  securities are  classified as available for sale.  Securities
            held to maturity are reported at amortized cost. Securities held for
            trading are reported at fair value with unrealized  gains and losses
            included in earnings.  Securities available for sale are reported at
            fair value with  unrealized  gains and losses excluded from earnings
            and reported, net of the related tax effect, as a separate component
            of stockholders' equity.

          Securities  transferred  from  held  for  trading  to  either  held to
            maturity or available for sale are  transferred at fair value at the
            date of transfer.

          Premiums  and  discounts  are amortized using the interest method over
            the remaining  period of contractual  maturity,  adjusted for actual
            prepayments.  Gains and  losses on the sale of debt  securities  are
            determined using the specific identification method.

     (d)  Stock in Federal Home Loan Bank of Dallas

          Investment in stock of a Federal Home Loan Bank ("FHLB")  is  required
            by law of every savings and loan association or savings bank insured
            by the Savings  Association  Insurance  Fund ("SAIF") of the Federal
            Deposit Insurance Corporation ("FDIC"). The investment is carried at
            cost.  No ready  market  exists for the stock,  and it has no quoted
            market value.




                                                                     (Continued)

                                       93

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



     (e)  Loans

          Loans  held  for  investment  are  stated at unpaid principal balances
            less  unearned  discounts,  net deferred loan  origination  fees and
            allowance  for  possible  loan  losses,  because the Company has the
            intent and ability to hold such loans for the foreseeable  future or
            until maturity. Loans held for sale are carried at the lower of cost
            or  estimated  fair value.  Estimated  fair value is based on quoted
            market  prices,  assuming the loans will be packaged and sold in the
            secondary market.

          If,  at  the  time  of  origination, a 15-year term loan qualifies for
            sale in the  secondary  market and has a stated  interest  rate that
            falls within a designated  range,  it is usually  classified as held
            for sale. All loans  originated with a 30-year term that qualify for
            sale in the secondary  market are classified as held for sale. Loans
            transferred    from    the    held-for-sale    category    to    the
            held-for-investment category are transferred at the lower of cost or
            estimated fair value at the date of transfer.

          Loans purchased are recorded at the  unpaid  principal  balance, and a
            discount is recorded for the difference between the unpaid principal
            balance and the net purchase price.

          The  Company  provides  a  valuation  allowance for possible losses on
            loans. The allowance includes specific amounts for identified losses
            and  general  amounts  for  unidentified  losses  as  determined  by
            management through an evaluation of the loan portfolio,  a review of
            historical  loss  experience  and  consideration  of other  factors.
            Additions  to the  allowance  are charged to  operations.  Unsecured
            consumer loans which are 120 days delinquent are charged against the
            valuation allowance.

          While  management  uses  available  information  in  establishing  the
            allowance  for  possible  loan  losses,  future  adjustments  to the
            allowance may be necessary if economic and other  conditions  differ
            substantially from assumptions used in making evaluations. Should it
            become   necessary  for  the  Company  to  convert  the   underlying
            collateral  to cash,  the amounts  received may differ from carrying
            values indicated depending on market conditions at the time.

          Impaired  and  restructured  loans  are  measured at the present value
            of expected  future cash flows,  discounted at the loan's  effective
            rate or, as a practical  expedient,  at the loan's observable market
            price or the fair value of the underlying  collateral if the loan is
            collateral  dependent.  A loan  is  considered  impaired  when it is
            probable  that the Company will be unable to collect all amounts due
            according to the contractual terms of the loan.

                                                                     (Continued)

                                       94

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



          Interest is accrued only if it is deemed  collectible.  The  Company's
            policy is not to accrue  interest on mortgage or consumer loans that
            are  delinquent  more  than 90 days  and  that  are not  insured  or
            guaranteed  by  government  agencies  or are not  covered for losses
            under recourse  agreements.  Payments received on non-accruing loans
            are  recorded  as  if  received   timely  in  accordance   with  the
            contractual provisions of the loans.

     (f)  Premises and Equipment

          Premises  and   equipment   are   stated  at  cost  less   accumulated
            depreciation.

          Depreciation  is  provided  over  the  estimated  useful  lives of the
            respective assets. Buildings and improvements are depreciated on the
            straight-line method.  Furniture and equipment are depreciated using
            the declining balance method.

     (g)  Foreclosed Assets

          Real estate  properties  acquired in settlement of loans are initially
            recorded at the lower of the related loan balance, less any specific
            allowance  for loss, or fair value less  estimated  selling costs at
            the date of  acquisition.  When a reduction  from carrying  value to
            fair value is required at the time of foreclosure, the difference is
            charged to the allowance for possible loan losses.  Costs associated
            with the acquisition and repair of real estate  properties  acquired
            in settlement of loans are expensed when incurred.

          Valuations are  performed  periodically  by  qualified  appraisers. If
            the carrying  value of a property  exceeds its estimated fair value,
            less  estimated   costs  to  sell,  the  difference  is  charged  to
            operations.

     (h)  Mortgage Servicing Rights

          Statement  of  Financial Accounting Standards No. 122, "Accounting for
            Mortgage  Servicing  Rights"  ("SFAS  No.  122") was  adopted by the
            Company as of July 1, 1995.  This  statement  requires that the cost
            basis of a loan be allocated  between the loan and the related right
            to service the loan based on their relative fair values.  Impairment
            provisions  of the statement  require that a valuation  allowance be
            established at the time the recorded  value of the servicing  rights
            exceeds  the fair  value.  Prior to  fiscal  1996,  only the cost of
            purchased rights to service mortgage loans was recorded as an asset.
            Effective January 1, 1997, the Company adopted


                                                                     (Continued)

                                       95

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



            Statement of Financial  Accounting Standard No. 125, "Accounting for
            Transfers and Servicing of Financial  Assets and  Extingushments  of
            Liabilities"  ("SFAS No. 125"),  which addresses the recognition and
            measurement  of servicing  assets and  liabilities.  The adoption of
            SFAS No.  125 did not  materially  impact  the  Company's  financial
            statements.

          The   Company  determines  the  fair  value  of  capitalized  mortgage
            servicing  rights by  estimating  the  present  value of net  future
            servicing  income  using  a  discounted  cash  flow  analysis  on  a
            disaggregated  basis.  Average  prepayment  assumptions based on the
            consensus view of a network of major broker/dealers available in the
            market are used, taking into consideration  loan type,  original and
            remaining  maturity,  and weighted average  interest rate.  Discount
            rates are used to approximate an acceptable  rate of return based on
            investor type.  Ancillary  income and servicing costs were estimated
            based on industry  average data.  For the purpose of evaluating  and
            measuring  impairment of capitalized  mortgage servicing rights, the
            Company stratifies the rights by loan type, original term and coupon
            rate.

          Capitalized    servicing    rights    are    amortized    using    the
            sum-of-the-months-digits  method  generally  over  six  years.  This
            method does not differ  materially  from  amortization in proportion
            to, and over the period of, the estimated  net  servicing  income as
            required by SFAS No. 125.

     (i)  Premium on Purchased Deposits

          Premium on purchased deposits is amortized using the sum-of-the-months
            digits method over six years.

     (j)  Income Taxes

          Deferred  tax   assets   and  liabilities   are  established  for  the
            temporary  differences between the financial reporting basis and the
            tax basis of the  Company's  assets and  liabilities  at enacted tax
            rates  expected  to be in effect when such  amounts are  realized or
            settled. Under the statement, the effect of a change in tax rates on
            deferred  tax  assets and  liabilities  is  recognized  as income or
            expense in the period that includes the enactment date.

     (k)  Loan Fees and Discounts

          The Company  defers loan  origination  and commitment  fees,  discount
            points and direct loan  origination  costs and recognizes these over
            the life of the loan as an adjustment to the yield.



                                                                     (Continued)

                                       96

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



          Deferred fees and costs on loans pooled as mortgage-backed  securities
            are  recorded  as an  adjustment  to the  basis  in the  securities.
            Unamortized  fees and costs  related to loans sold in the  secondary
            market are recognized in income at the date of sale.

          Discounts on loans purchased include price adjustments related to  the
            the  yield on  purchased  loans  and  impairment  of the  underlying
            collateral  and are  accreted  using the  interest  method  over the
            contractual terms of the loans.

          Unearned discounts on property improvement, consumer and  mobile  home
            loans are  amortized  using the interest  method over the  remaining
            contractual maturity of the loans.

     (l)  Reclassifications

          Certain prior year amounts have been  reclassified to conform with the
            1997 presentation.

     (m)  Accounting Developments

          Recently  issued  Statement  of Financial Accounting Standards No. 128
            "Earnings  per  Share"  ("SFAS  No.  128")   supersedes   Accounting
            Principles Board Opinion No. 15, "Earnings per Share," and specifies
            the  computation,   presentation  and  disclosure  requirements  for
            earnings per share  ("EPS") for entities  with  publicly held common
            stock or potential  common stock. It replaces  Primary EPS and Fully
            Diluted EPS with Basic EPS and Diluted  EPS.  Dual  presentation  of
            Basic EPS and  Diluted EPS on the face of the income  statement  for
            all  entities   with  complex   capital   structures   is  required.
            Reconciliation  of the  Basic EPS  computation  to the  Diluted  EPS
            computation  is  also  required.  SFAS  No.  128  is  effective  for
            financial  statements  for both  interim and annual  periods  ending
            after  December  15, 1997.  Earlier  application  is not  permitted.
            Further  disclosures of an entity's  capital  structure are required
            for years ending  after  December 15, 1997 by Statement of Financial
            Accounting  Standards  No.  129  "Disclosure  of  Information  about
            Capital Structure."  Disclosures of pertinent information concerning
            the rights and privileges of an entity's outstanding  securities are
            required.  Because the Company's  capital  structure is not complex,
            the  adoption  of  these   Statements  is  not  expected  to  be  of
            significance.



                                                                     (Continued)


                                       97

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



          Standards for reporting and displaying  comprehensive  income,  or the
            total of net  income and all other  non-owner  equity  changes,  was
            addressed in Statement of  Financial  Accounting  Standards  No. 130
            "Reporting   Comprehensive   Income."   Changes  in  the   Company's
            unrealized holding gains and losses on available-for-sale securities
            would be a  component  of  comprehensive  income  for which  greater
            disclosures  would be required in years beginning after December 15,
            1997.

          Statement  of  Financial Accounting Standards No. 131 ("SFAS No. 131")
            was issued on June 30, 1997 and requires specific  disclosures about
            segments of an  enterprise.  Effective  for fiscal  years  beginning
            after  December 15,  1997,  SFAS No. 131  introduces  a  "management
            approach" for segment reporting. The management approach is based on
            how the chief operating  decision maker organizes  segments within a
            company for making operating decisions and assessing performance.

(2)  Merger

     On May 8, 1997,  the  Company  and   Union  Planters  Corporation  ("UPC"),
          entered  into  an  Agreement  and  Plan  of  Reorganization   ("Merger
          Agreement"),   pursuant  to  which  UPC  Merger  Subsidiary,   Inc.  a
          corporation  organized  and  existing  under  the laws of the State of
          Delaware and a wholly owned subsidiary of UPC, will be merged with and
          into the Company.

     In  accordance  with  the  terms of the Merger Agreement, each share of the
          Company's  common  stock,  par  value  $.01  per  share,   outstanding
          immediately  prior  to the  effective  time  of  the  Merger  will  be
          converted into the right to receive .5165 shares of common stock,  par
          value $5.00 per share,  of UPC. The merger is intended to constitute a
          tax-free  reorganization  under the Internal  Revenue Code of 1986, as
          amended, and to be accounted for as a pooling-of-interests.

     A special meeting of the Company's shareholders was  held  August 20, 1997,
          at which time the merger received shareholder  approval.  Consummation
          of the  Merger is  subject  to various  conditions,  and  approval  by
          regulatory authorities and is expected to close on November 1, 1997.

(3)  Cash and Due From Banks

     The Company is required to set aside specified amounts of cash as  reserves
          against  transaction  account  deposits.  The reserve is  satisfied by
          vault cash and a reserve  balance  maintained with the Federal Reserve
          Bank. The average amount of the reserve  balance  maintained  with the
          Federal   Reserve   Bank  for  the  year  ended  June  30,   1997  was
          approximately $52,000.

                                                                     (Continued)

                                       98

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



     The Company also maintains a clearing account  balance  of  $1,000,000 with
          the Federal  Reserve  Bank in order to purchase  Federal  Reserve Bank
          services.

(4)  Mortgage-backed Securities

     The  amortized cost and estimated fair value of mortgage-backed  securities
          follow:

<TABLE>
<CAPTION>

                                                                     Gross           Gross
                                                Amortized         Unrealized      Unrealized         Estimated
                                                   Cost             Gains           Losses          Fair Value
                                               -----------        ----------     ------------     ---------------
<S>                                          <C>                 <C>            <C>              <C>
     June 30, 1997:
         Held to maturity, by issuer:
            GNMA                             $  2,758,980           120,600                -           2,879,580
            FNMA                                2,226,271            99,082                -           2,325,353
            FHLMC                               5,540,907            74,360                -           5,615,267
                                              -----------        ----------     ------------     ---------------
                                             $ 10,526,158           294,042                -          10,820,200
                                              ===========        ==========     ============     ===============
         Available for sale, by issuer:
            GNMA                             $  6,134,013            89,053          (63,754)          6,159,312
            FNMA                              110,574,107           635,054       (1,627,341)        109,581,820
            FHLMC                               6,660,421            43,372          (59,539)          6,644,254
                                             ------------        ----------     ------------     ---------------
                                             $123,368,541           767,479       (1,750,634)        122,385,386
                                             ============        ==========     ============     ===============

     June 30, 1996:
         Held to maturity, by issuer:
            GNMA                             $  3,460,946           144,313                -           3,605,259
            FNMA                                2,898,094           108,637                -           3,006,731
            FHLMC                               6,368,205            63,692          (20,626)          6,411,271
                                             ------------      ------------     ------------     ---------------
                                             $ 12,727,245           316,642          (20,626)         13,023,261
                                            ============      ============      ============      ===============
         Available for sale, by issuer:                      
            GNMA                             $  7,153,516            82,665         (135,904)          7,100,277
            FNMA                              107,006,418           578,139       (3,010,876)        104,573,681
            FHLMC                               7,288,816            44,920         (135,018)          7,198,718
                                             ------------      ------------     -------------    ---------------
                                             $121,448,750           705,724       (3,281,798)        118,872,676
                                             ============      ============     ============     ===============
         Held for trading, by issuer:                        
            GNMA                             $  2,107,593            27,411                -           2,135,004
            FNMA                               33,299,141            87,871       (1,035,218)         32,351,794
                                             ------------      ------------     ------------     ---------------
                                             $ 35,406,734           115,282       (1,035,218)         34,486,798
                                             ============      ============     ============     ===============
</TABLE>                                                    


                                                                     (Continued)

                                       99

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       The  average rate on the total  mortgage-backed  securities  portfolio at
            June 30, 1997 and 1996 was 6.87% and 6.86%, respectively.

       During  1996,   mortgage-backed  securities  with  a  carrying  value  of
            $34,098,258  and  an  estimated  fair  value  of  $34,671,819   were
            transferred    from   the    held-to-maturity    category   to   the
            available-for-sale  category,  as provided  for under the  Financial
            Accounting  Standards Board's ("FASB's") Special Report, "A Guide to
            Implementation   of  Statement   115  on   Accounting   for  Certain
            Investments  in Debt  and  Equity  Securities."  The  adjustment  to
            estimated  fair value of $573,561,  net of related  deferred  income
            taxes, was recorded as a separate component of stockholders' equity.

       Gross gains  of  $36,331  were  realized  on  sales  of   mortgage-backed
            securities   available  for  sale  during  1996.   Gross  losses  of
            $1,020,569  were  realized  on sales of  mortgage-backed  securities
            available  for  sale  during  1995.  No  sales  of   mortgage-backed
            securities  available  for sale  occurred  during 1997.  No sales of
            mortgage-backed  securities  held to maturity  occurred during 1997,
            1996 or 1995.

       The  net unrealized holding loss on  mortgage-backed  securities held for
            trading was $1,144,932 during 1996. The net unrealized  holding gain
            was $919,936 and $740,745 during 1997 and 1995, respectively.

       Maturities of mortgage-backed securities held to maturity,  available for
            sale or held for trading are not shown because such  securities  are
            not due at a single maturity date.  Actual  maturities  would differ
            from  contractual  maturities  because  borrowers  have the right to
            prepay obligations with or without prepayment penalties.

       At   June 30, 1997  mortgage-backed  securities  with a carrying value of
            $35,725,746 were pledged to FHLB of Dallas as security on borrowings
            from the FHLB of Dallas.



                                                                     (Continued)


                                      100

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(5)  Other Securities

     The amortized cost and estimated fair value of other securities follow:
<TABLE>
<CAPTION>

                                                                       Gross           Gross          Estimated
                                                    Amortized        Unrealized      Unrealized         Fair
                                                       Cost           Gains            Losses           Value
                                                 --------------    ------------      ----------    --------------
<S>                                         <C>                   <C>               <C>           <C>
     June 30, 1997:
        Held to maturity:
            United States government
               and agency obligations       $       52,615,616       2,855,344          (4,977)       55,465,983
            Corporate debt securities                1,128,444          25,148         (17,054)        1,136,538
            Other                                       47,201               -               -            47,201
                                                --------------    ------------      ----------    --------------
                                            $       53,791,261       2,880,492         (22,031)       56,649,722
                                                ==============    ============      ==========    ==============
        Available for sale:
            United States government
               and agency obligations       $        7,256,408               -        (117,151)        7,139,257
            Equity securities                        8,277,809       1,306,473         (46,795)        9,537,487
                                                --------------    ------------      ----------    --------------
                                            $       15,534,217       1,306,473        (163,946)       16,676,744
                                                ==============    ============         =======    ==============
        Held for trading:
            Equity securities               $        2,042,145       1,344,105               -         3,386,250
                                                ==============    ============      ==========    ==============

     June 30, 1996:
        Held to maturity:
            United States government
               and agency obligations       $       66,253,859       2,321,733            (527)       68,575,065
            Corporate debt securities                1,161,023          53,306          (7,307)        1,207,022
            Other                                       70,901               -               -            70,901
                                                --------------    ------------      ----------    --------------
                                            $       67,485,783       2,375,039          (7,834)       69,852,988
                                                ==============    ============      ==========    ==============
        Available for sale:
            United States government
               and agency obligations       $        7,259,166               -        (209,437)        7,049,729
            Equity securities                          136,631           6,691          (4,283)          139,039
                                                --------------    ------------      ----------    --------------
                                            $        7,395,797           6,691        (213,720)        7,188,768
                                                ==============    ============         =======    ==============
</TABLE>



                                                                     (Continued)


                                      101

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The  amortized  cost and  estimated  fair value at June 30, 1997 of other
            securities, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
                                                                                     Amortized         Estimated
                                                                                        Cost          Fair Value
<S>                                                                           <C>                   <C>
            Held to maturity:
                Within 12 months                                              $           86,751             86,463
                Beyond 12 months but within 5 years                                    2,685,681          2,785,063
                Beyond 5 years but within 10 years                                    36,586,151         38,157,437
                Beyond 10 years                                                       14,432,678         15,620,759
                                                                                  --------------    ---------------

                                                                              $       53,791,261         56,649,722
                                                                                  ==============    ===============
            Available for sale:
                Beyond 12 months but within 5 years                           $          236,916            234,258
                Beyond 5 years but within 10 years                                     7,019,492          6,905,000
                Equity securities                                                      8,277,809          9,537,486
                                                                                  --------------    ---------------

                                                                              $       15,534,217         16,676,744
                                                                                  ==============    ===============
             Held for trading:
                Equity securities                                             $        2,042,145          3,386,250
                                                                                  ==============    ===============
</TABLE>


       During 1996,  other securities with a carrying value of $7,323,431 and an
            estimated  fair  value  of  $7,527,528  were  transferred  from  the
            held-to-maturity  category to the  available-for-sale  category,  as
            provided  for  under  the  FASB's  Special   Report,   "A  Guide  to
            Implementation   of  Statement   115  on   Accounting   for  Certain
            Investments  in Debt  and  Equity  Securities."  The  adjustment  to
            estimated  fair value of $204,097,  net of related  deferred  income
            taxes, was recorded as a separate component of stockholders' equity.
            No sales of other  securities held to maturity or available for sale
            occurred during 1997, 1996 or 1995.

       At   June 30, 1997, other securities with a carrying value of $31,688,718
            were  pledged  to  various  parties  as  security  in the  event  of
            contractual default.





                                                                     (Continued)



                                      102

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(6)  Loans

     Loans held for investment and held for sale consist of the following:
<TABLE>
<CAPTION>

                                                                                       June 30
                                                                            -----------------------------------
                                                                                  1997                 1996
                                                                            ----------------   ----------------
<S>                                                                         <C>                <C>
        Loans held for investment:
            Real estate loans:
               Conventional loans and participations                        $   729,386,695         684,221,707
               Construction loans                                                16,093,955          17,007,191
               Loans and participations insured, guaranteed
                  or partially guaranteed by an agency or
                  instrumentality of the United States                           73,706,020          84,777,075
                                                                            ---------------    ----------------
                                                                                819,186,670         786,005,973
               Undisbursed loan funds                                            (9,009,100)         (9,017,466)
               Unearned discounts on purchased loans                            (14,437,704)        (18,400,347)
               Deferred loan fees, net                                           (2,620,598)         (2,792,679)
                                                                            ---------------    ----------------
                                                                                793,119,268         755,795,481
            Other loans:
               Manufactured home loans                                           20,087,473          26,623,976
               Personal property loans                                           38,355,428          34,518,725
               Savings account loans                                             10,047,300          10,663,653
               Other loans                                                       26,639,028          19,077,902
                                                                            ---------------    ----------------
                                                                                 95,129,229          90,884,256
               Undisbursed loan funds                                              (930,047)           (260,219)
               Unearned discounts on purchased loans                               (358,070)           (680,987)
                                                                            ---------------    ----------------
                                                                                 93,841,112          89,943,050
                                                                                886,960,380         845,738,531
            Allowance for possible loan losses                                  (10,423,693)         (9,451,693)
                                                                            ---------------    ----------------
                  Total loans held for investment                       $       876,536,687         836,286,838
                                                                            ===============    ================

        Loans held for sale:
            Single-family real estate loans                             $        51,830,013          27,662,294
            Deferred loan fees, net                                                (273,233)            (38,809)
            Adjustment to lower of cost or fair value                                     -            (148,201)
                                                                            ---------------    ----------------
                  Total loans held for sale                             $        51,556,780          27,475,284
                                                                            ===============    ================
</TABLE>



                                                                     (Continued)


                                      103

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Included in the loans held for investment  portfolio are  adjustable-rate
            loans with principal  balances of $474,165,000  and  $431,711,000 at
            June 30, 1997 and 1996, respectively.

       Net  gains and  losses  realized  on the sale of loans held for sale were
            immaterial during 1997, 1996 and 1995.

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

<TABLE>
<CAPTION>

                                                                                  Years Ended June 30
                                                                       --------------------------------------------
                                                                          1997            1996             1995
                                                                      ------------    ------------     ------------

<S>                                                             <C>                   <C>             <C>
             Balance at beginning of year                       $        9,451,693       9,213,496        9,780,887
             Loans charged off, net of recoveries of
                $250,092 in 1997, $177,727 in 1996
                and $122,175 in 1995                                    (2,163,643)     (1,395,044)        (985,560)
             Provision charged to operations                             3,135,643       1,633,241          418,169
                                                                   ---------------    ------------    -------------

             Balance at end of year                             $       10,423,693       9,451,693        9,213,496
                                                                   ===============    ============    =============
</TABLE>


       Loans at June 30, 1997 and 1996  include  approximately  $18,436,000  and
            $22,297,000,  respectively,  of mortgage loans for which the accrual
            of interest has been ceased or reduced.  In such cases, an allowance
            for possible loan losses has generally been  established  based upon
            the  fair  value of the  underlying  collateral.  For a  substantial
            portion of these  mortgage  loans,  the  Company  has  initiated  or
            intends to initiate foreclosure  proceedings in order to acquire the
            related  collateral.  During 1997, 1996 and 1995, interest income of
            $816,000,  $1,066,000  and $932,000,  respectively,  would have been
            recognized on loans  accounted  for on a non-accrual  basis had such
            loans been current in accordance with their original terms. Included
            in interest income for 1997, 1996 and 1995 was $603,000,  $1,370,000
            and,  $1,267,000,  respectively,  related to such loans. At June 30,
            1997, no commitments  were  outstanding to lend additional  funds to
            such borrowers.

       The  aggregate  outstanding balance for mortgage loans on which the terms
            have been  modified  by reducing  interest  rates  and/or  modifying
            payment terms under troubled debt  restructurings was immaterial for
            each period  presented.  Interest income forfeited on modified loans
            was  also  immaterial.   At  June  30,  1997,  no  commitments  were
            outstanding to lend additional funds to borrowers with such loans.



                                                                     (Continued)


                                      104

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       The  net investment  balance of impaired loans at June 30, 1997 and 1996,
            totaled approximately $19,433,000 and $23,217,000,  respectively. Of
            this  balance,  individually  evaluated  impaired  loans  aggregated
            approximately $997,000 and $1,015,000,  with a related allowance for
            possible loan losses of $109,200 and $131,600,  at June 30, 1997 and
            1996, respectively. The remaining $18,436,000 and $22,202,000 of the
            impaired,  non-accrual,  smaller-balance  loans at June 30, 1997 and
            1996,  respectively,  were  categorized  in  homogenous  groups  and
            collectively  evaluated.  An allowance  for possible loan losses was
            available to absorb anticipated losses on these and other loans. The
            average  recorded  investment in impaired  loans for the years ended
            June  30,   1997  and  1996  was   approximately   $21,500,000   and
            $25,200,000, respectively.

(7)    Accrued Interest Receivable

       A summary of accrued interest receivable follows:
<TABLE>
<CAPTION>
                                                                                        June 30
                                                                        ---------------------------------
                                                                              1997              1996
                                                                        ---------------   ---------------
<S>                                                                 <C>                   <C>      
            Loans                                                   $        8,200,590          8,791,705
            Mortgage-backed securities                                         776,087            983,925
            Other securities and interest-bearing cash balances                934,438          1,284,341
                                                                        --------------    ---------------

                                                                    $        9,911,115         11,059,971
                                                                        ==============    ===============
</TABLE>


(8)    Premises and Equipment, Net

       A summary of premises and equipment follows:

<TABLE>
<CAPTION>
                                                                                        June 30
                                                                        ---------------------------------
                                                                              1997              1996
                                                                        ---------------   ---------------

<S>                                                                 <C>                  <C>
            Land                                                    $        9,656,987          9,756,591
            Office buildings and improvements                               42,325,533         40,934,955
            Furniture and equipment                                         26,128,898         24,843,848
            Construction in progress                                           292,602            305,240
                                                                        --------------    ---------------
                                                                            78,404,020         75,840,634
            Accumulated depreciation                                       (34,354,200)       (32,680,209)
                                                                        --------------    ---------------

                                                                    $       44,049,820         43,160,425
                                                                        ==============    ===============
</TABLE>



                                                                     (Continued)


                                      105

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(9)    Foreclosed Assets

       A summary of foreclosed assets follows:
<TABLE>
<CAPTION>
                                                                                    June 30
                                                                    ----------------------------------
                                                                          1997              1996
                                                                    ---------------   ----------------

<S>                                                                 <C>                  <C>

            Single-family residential                               $     8,922,401          9,763,265
            Commercial buildings and land                                   209,000            428,387
            Mobile homes                                                    148,420             29,192
            Other personal property                                          48,680             10,099
                                                                       ------------    ---------------

                                                                    $     9,328,501         10,230,943
                                                                       ============    ===============
</TABLE>


       Writedowns of foreclosed  assets totaled  $743,286,  $413,573 and $31,693
            for 1997, 1996 and 1995, respectively.

(10)   Mortgage Servicing Rights, Net

       Mortgage servicing  rights  represent the right to service mortgage loans
            owned by  others.  These  rights  entitle  the  Company  to  collect
            mortgage  payments,  maintain  escrow  accounts  and  provide  other
            services in exchange for service fees,  ancillary  income and access
            to a low cost  financing  source.  For years prior to 1996, the cost
            associated with mortgage  servicing  rights on originated  loans was
            not capitalized.

       The  unamortized  cost of  mortgage  servicing  rights is  summarized  as
            follows:
<TABLE>
<CAPTION>

                                                                                  Years Ended June 30
                                                                 --------------------------------------------------
                                                                      1997              1996              1995
                                                                  ------------     -------------    ---------------

<S>                                                            <C>                 <C>              <C>
             Balance at beginning of year                      $     5,788,245         9,379,877         16,048,946
             Mortgage servicing rights originated                    2,119,746         2,060,971                  -
             Mortgage servicing rights acquired                      5,287,479            12,087          1,016,946
             Sale of mortgage servicing rights                               -          (841,552)                 -
             Amortization                                           (4,647,782)       (4,823,138)        (7,686,015)
                                                                  ------------     -------------    ---------------

             Balance at end of year                            $     8,547,688         5,788,245          9,379,877
                                                                  ============     =============    ===============
</TABLE>

       During 1996, a gain of  $1,014,000  was recorded on the sale of servicing
            rights.



                                                                     (Continued)


                                      106

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       The   fair value of  capitalized  mortgage  servicing  rights at June 30,
             1997  was  approximately   $30,000,000.   There  was  no  valuation
             allowance for impairment of capitalized  mortgage  servicing rights
             during the years ended June 30, 1997 and 1996.

       The  Company was  servicing  loans for others  aggregating  approximately
            $3,087,072,000,  $2,970,445,000 and $3,438,445,000 at June 30, 1997,
            1996 and 1995, respectively.  Loan servicing purchased with recourse
            provisions totaled $20,662,000 at June 30, 1997.

(11)   Deposits

       A summary of deposits by category is presented below:

<TABLE>
<CAPTION>

                                                 June 30, 1997                  June 30, 1996
                                          --------------------------    ----------------------------
                                           Weighted                     Weighted
                                            Average                      Average
                                             Rate            Balance      Rate             Balance
                                          ---------          -------      ----             -------
<S>                                         <C>       <C>                 <C>         <C>           
            Transaction accounts:
                Passbook and statement      2.52%     $   126,806,722     2.57%       $  133,326,307
                Money market                2.99           30,753,190     3.25            33,600,664
                NOW                         2.08          121,704,953     1.77           112,359,800
                Noninterest-bearing            -          163,802,277        -           160,321,101
                                                          -----------                  -------------
                                                          443,067,142                    439,607,872
                                                          -----------                  -------------
            Certificates of deposit:
                3 month                     4.14           13,453,272     4.12            15,220,975
                6 month                     4.84           73,367,250     4.77            91,775,052
                9 month                     5.40           35,110,551     4.79             1,249,855
                1 year                      5.08           67,965,107     5.13            82,194,236
                16 month                    5.01            4,622,177     5.14             5,955,527
                1-1/2 year                  5.74           78,795,443     5.17            18,369,705
                20 month                    5.24           32,669,124     6.13            77,186,569
                2 year                      5.51           13,456,583     5.31            12,221,971
                28 month                    5.97           16,462,681     5.49             1,241,348
                2-1/2 year                  5.35           14,708,879     5.04            17,014,437
                3 year                      5.56           55,629,910     5.51            77,467,395
                3-1/2 year                  5.45            4,529,210     4.96             4,133,081
                4 year and over             5.54           16,085,863     5.64            25,397,368
</TABLE>



                                                                     (Continued)


                                      107

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(11), Continued
<TABLE>
<CAPTION>

                                                            June 30, 1997                           June 30, 1996
                                                      --------------------------              -------------------------
                                                       Weighted                               Weighted
                                                        Average                                Average
                                                         Rate            Balance                Rate        Balance
                                                       --------          -------              --------      -------
<S>                                                     <C>         <C>                        <C>      <C>
            Certificates of deposit, cont.:
                Retirement (3 month)                     5.03          28,259,944               4.88        29,524,142
                Negotiated                               5.30           5,723,632               5.29         7,567,652
                Other                                    6.04          11,488,110               6.25        16,242,937
                                                                    -------------                        -------------
                                                                      472,327,736                          482,762,250
                                                                    -------------                        -------------

                                                         3.47%      $ 915,394,878               3.47%   $  922,370,122
                                                                    =============                        =============
</TABLE>

       A summary of certificates of deposit by interest rate follows:

<TABLE>
<CAPTION>

                                                 June 30, 1997                               June 30, 1996
                                    ----------------------------------------      -----------------------------------------
           Interest                                                  Average                                        Average
             Rate                   Number             Balance       Balance       Number             Balance       Balance
          ----------                ------             -------       -------       ------             -------       -------
<S>                              <C>         <C>                      <C>         <C>        <C>                     <C>
       Less than 3.00%                  87   $         1,399,358       16,085          247   $        1,408,072       5,701
       3.00 - 3.99%                      1               150,000      150,000          150            1,520,212      10,135
       4.00 - 4.99%                  7,981            89,200,652       11,177       14,977          168,169,037      11,228
       5.00 - 5.99%                 24,255           351,237,156       14,481       14,313          214,931,867      15,017
       6.00 - 6.99%                  1,078            28,562,512       26,496        3,565           74,864,628      21,000
       7.00 - 7.99%                     85             1,436,039       16,895          955           21,039,894      22,031
       8.00 - over                      18               342,019       19,001           39              828,540      21,245
                                 ---------       ---------------                  --------      ---------------
                                    33,505   $       472,327,736       14,097       34,246   $      482,762,250      14,097
                                 =========       ===============                  ========      ===============
</TABLE>


       Scheduled maturities of certificates of deposit follow:
<TABLE>
<CAPTION>
                                                                                                June 30
                                                                                -----------------------------------
                                                                                      1997               1996
                                                                                ----------------   ----------------

<S>                                                                         <C>                    <C>        
            Within 12 months                                                $       344,984,271         371,588,122
            12 months to 24 months                                                   83,171,446          79,271,045
            24 months to 36 months                                                   35,581,089          22,410,246
            36 months to 48 months                                                    6,375,397           6,625,013
            Over 48 months                                                            2,215,533           2,867,824
                                                                                ---------------    ----------------

                                                                            $       472,327,736         482,762,250
                                                                                ===============    ================
</TABLE>

       Certificates  of deposit in excess of  $100,000  outstanding  at June 30,
            1997 and  1996,  were  approximately  $30,345,100  and  $30,948,664,
            respectively.

                                                                     (Continued)


                                       108

<PAGE>


                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       A summary of interest expense by category is presented below:
<TABLE>
<CAPTION>

                                                                     Years Ended June 30
                                                    ----------------------------------------------------
                                                         1997               1996                 1995
                                                    -------------      --------------    ---------------

<S>                                              <C>                   <C>               <C>      
            Passbook and statement accounts      $       3,349,811          3,406,730          3,256,914
            Money market accounts                        1,054,820            891,697          1,108,031
            NOW accounts                                 2,171,407          1,943,116          1,978,955
            Certificates of deposit                     24,708,116         25,007,844         21,817,197
                                                    --------------     --------------    ---------------

                                                 $      31,284,154         31,249,387         28,161,097
                                                    ==============     ==============    ===============
</TABLE>

       Deposits of the Bank are insured by the SAIF, a fund of the FDIC. Because
            the SAIF was substantially undercapitalized, legislation was enacted
            that required thrifts to make a contribution to fully capitalize the
            SAIF.  This  special  assessment  of $5.9  million  was  paid by the
            Company during the year ended June 30, 1997.

(12)   Borrowings from FHLB of Dallas

       A summary of borrowings from FHLB of Dallas follows:
<TABLE>
<CAPTION>
<S>                                                                             <C>           
         June 30, 1997:
            Short-term:
                5.48%, Short-term financing repaid July 1997                    $   65,000,000
                6.13%, Advances due September 1997                                     298,412
                6.00%, Advance due October 1997                                     50,000,000
                6.15%, Advance due March 1998                                       50,000,000
            Long-term:
                6.33%, Advance due July 1998                                        50,000,000
                6.36%, Advance due September 1998                                       59,803
                6.52%, Advance due in monthly installments through August 2005      43,090,380
                                                                                   -----------

                                                                                $  258,448,595
                                                                                   ===========
</TABLE>




                                                                     (Continued)



                                      109

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(12), Continued
<TABLE>
<CAPTION>

<S>                                                                             <C>             
         June 30, 1996:
            Short-term:
                5.38%, Short-term financing repaid July 1996                    $     25,000,000
                6.26%, Advance repaid March 1997                                     100,000,000
            Long-term:
                6.33%, Advance due July 1998                                          50,000,000
                6.52%, Advance due in monthly installments through August 2005        46,961,222
                                                                                   -------------

                                                                                $    221,961,222
                                                                                   =============
</TABLE>


       To secure  the  short-term  financing  at June 30, 1997,  the Company has
            pledged  mortgage-backed  securities  and  other  securities  with a
            carrying value of $64,675,000. To secure the outstanding advances at
            June 30, 1997, the Company has pledged approximately $297,700,000 of
            unencumbered  one- to  four-family  mortgage  loans  to the  FHLB of
            Dallas.  The FHLB will advance 65% of the pledged  unencumbered one-
            to four-family mortgage loans.

(13)   Income Taxes
<TABLE>
<CAPTION>

       Components of income tax expense (benefit) follow:
                                                                                  Years Ended June 30
                                                                ---------------------------------------------------
                                                                      1997               1996              1995
                                                                ---------------    ---------------     ------------
<S>                                                          <C>                   <C>                <C>
            Current:
                Federal                                      $      10,764,659          9,641,900        11,761,599
                State                                                1,445,088          1,449,910         1,405,218
            Deferred:
                Federal                                               (648,000)           739,000          (840,000)
                State                                                  (97,000)           111,000          (126,000)
                                                                --------------     --------------     -------------
                                                             $      11,464,747         11,941,810        12,200,817
                                                                ==============     ==============     =============
</TABLE>

       Deferred income tax expense (benefit)  allocated to stockholders'  equity
            for the change in unrealized gains (losses) on securities  available
            for sale aggregated $1,064,450, $(1,260,997) and $1,258,470 in 1997,
            1996  and  1995,  respectively.  As  of  June  30,  1997  and  1996,
            unrealized gains (losses) on securities  available for sale included
            in  stockholders'  equity are net of a deferred  income tax  expense
            (benefit) of $1,167 and ($1,063,283), respectively.



                                                                     (Continued)



                                      110

<PAGE>




                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       The differences  between the expected federal  corporate tax rate and the
           effective tax rate follow:
<TABLE>
<CAPTION>

                                                                                 Years Ended June 30
                                          --------------------------------------------------------------------------------
                                                      1997                         1996                       1995
                                          ----------------------------  --------------------------   ---------------------
                                                            % of                        % of                         % of
                                                           Pretax                      Pretax                       Pretax
                                              Amount       Income          Amount      Income          Amount       Income
                                              ------       ------          ------      ------          ------       ------
<S>                                    <C>                  <C>      <C>                <C>       <C>               <C>  
       Expected tax rate               $     10,508,477     35.0%    $     11,567,906   35.0%     $ 10,929,044       35.0%
       Increase (decrease)
          resulting from:
              State income taxes,
                 net of federal
                 income tax
                 benefit                        876,257      2.9            1,014,592    3.0           831,492       2.7
              Other, net                         80,013       .3             (640,688)  (1.9)          440,281       1.4
                                         --------------     ----          -----------   ----       -----------      ----
                                                                                                                         
                                       $     11,464,747     38.2%    $     11,941,810   36.1%     $ 12,200,817      39.1%
                                         ==============     ====          ===========   ====       ===========      ====
</TABLE>


       The  tax effects of temporary  differences  that give rise to significant
            portions of the deferred tax assets and the deferred tax liabilities
            follow:
<TABLE>
<CAPTION>
                                                                                                   June 30
                                                                                    -------------------------------
                                                                                         1997              1996
                                                                                    --------------     ------------
<S>                                                                              <C>                 <C>    
                Deferred tax assets:
                   Allowance for possible loan losses                            $         172,262                -
                   Deferred loan fees and unearned discount
                      on mortgage-backed securities                                        608,038          682,616
                   Fair value adjustment on assets held for sale,
                      available for sale or held for trading, net                                -          632,611
                   Premium on purchased deposits                                         3,181,257        2,639,000
                   Interest on nonaccrual loans                                            618,089          684,979
                   Mortgage servicing rights                                             3,236,229        3,544,618
                   Accumulated depreciation                                              1,457,518        1,242,166
                   Accrued retirement benefits                                              66,288          405,111
                   Foreclosed assets                                                       227,757                -
                   Vacation accrual                                                        269,780          185,361
                   Other                                                                   367,241          310,002
                                                                                    --------------   --------------
                                    Total gross deferred tax assets                     10,204,459       10,326,464
                                                                                    --------------   --------------
</TABLE>



                                                                     (Continued)


                                      111

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(13), Continued

<TABLE>
<CAPTION>
                                                                 June 30
                                                          ----------------------
                                                             1997         1996
                                                          -----------    -------
<S>                                                            <C>       <C>    
      Deferred tax liabilities:
         Fair value adjustment on assets held for
            sale or available for sale, net                    66,282          -
         FHLB of Dallas stock dividends                       957,668    798,567
         Allowance for possible loan losses                         -    255,322
         Prepaid retirement contributions                     217,002     72,045
         Other                                                 82,086          -
                                                          -----------  ---------
                   Total gross deferred tax liabilities     1,323,038  1,125,934
                                                          -----------  ---------

                   Net deferred tax asset                $  8,881,421  9,200,530
                                                          ===========  =========
</TABLE>

       The  ultimate  realization  of deferred tax assets is dependent  upon the
            generation  of future  taxable  income  during the  periods in which
            those temporary differences become deductible.  Management considers
            the  scheduled  reversal of deferred tax  liabilities  and projected
            future taxable income in making this  assessment.  In order to fully
            realize  the net  deferred  tax  asset,  the  Company  will  need to
            generate  future  taxable  income of  approximately  $23.0  million,
            principally through the year ended June 30, 2036. Taxable income for
            the years  ended  June 30,  1997,  1996 and 1995 was $31.0  million,
            $28.0 million and $31.7 million, respectively.  Based upon the level
            of historical  taxable income and anticipated  future taxable income
            over the  periods  which the  deferred  tax assets  are  deductible,
            management believes it is more likely than not that the Company will
            realize the benefits of these deductible  differences.  There can be
            no assurance,  however,  that the Company will generate any earnings
            or any specific level of continued earnings in future years.

       Legislation enacted  effective for taxable years beginning after December
            31,  1995,  requires  a  thrift  to  recapture   "applicable  excess
            reserves,"   defined   as  the   excess   of  its   qualifying   and
            non-qualifying  bad debt  reserves  as of the close of the  thrift's
            last taxable year beginning  before January 1, 1996, over the lesser
            of (1) the base year  reserves as of the thrift's  last taxable year
            beginning  before  January 1, 1988;  or (2) the  balance of pre-1988
            reserves. The amount of the applicable excess reserves must be taken
            into income ratably over a six-taxable  year period,  beginning with
            the first taxable year after 1995,  subject to a  "residential  loan
            requirement  delay." The time of the  recapture may be delayed for a
            one-  or  two-year  period  to  the  extent  the  residential   loan
            requirement is met. The Company met the residential loan requirement
            for 1997.



                                                                     (Continued)


                                      112

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Cumulative  allocations of income to bad debt  deductions,  or applicable
            excess  reserves,   for  tax  purposes   subsequent  to  1987  total
            approximately   $9,973,000,   which  will  result  in  approximately
            $3,815,000  of additional  taxes,  payable in the years the reserves
            are  recaptured.  The Company has provided for the income tax effect
            of recapturing these reserves since 1987.

       No   provision  for  federal  income  tax has  been  made  for a  portion
            (approximately  $13,500,000)  of retained  earnings at June 30, 1997
            that are the result of cumulative  allocations of income to bad debt
            deductions for tax purposes only, prior to 1988. Under the provision
            of the legislation  described  above,  these reserves are frozen and
            are  not  subject  to   recapture,   except   under   certain   rare
            circumstances to be determined by regulation.

(14)   Stock Conversion

       In   1991, the Bank completed a conversion  from a federal mutual savings
            bank to a federal stock savings bank. At the time of conversion, the
            Bank   established   a   liquidation   account   in  the  amount  of
            approximately  $36,958,000.  The liquidation account was established
            to  provide a limited  priority  claim to the  assets of the Bank to
            qualifying depositors ("Eligible Account Holders") at March 31, 1990
            who continue to maintain deposits at the Bank after  conversion.  In
            the unlikely  event of a complete  liquidation of the Bank, and only
            in such event,  each Eligible  Account Holder would receive from the
            liquidation  account a liquidation  distribution based on his or her
            proportionate share of the then remaining qualifying deposits.

       Undercurrent  regulations,  the Bank is not permitted to pay dividends on
            its stock  after the  conversion  if its  regulatory  capital  would
            thereby  be  reduced   below  the  amount  then   required  for  the
            aforementioned liquidation account.

(15)   Stock Dividend and Stock Splits

       On July 17, 1996,  the  Company declared a two-for-one stock split in the
            form of a 100% stock dividend payable on August 15, 1996. This split
            increased  the  number  of  shares  outstanding  from  6,870,509  to
            13,741,018.  All  references  to per  common  share  amounts  in the
            accompanying  financial  statements,  as  well as  weighted  average
            number and number of common shares, have been adjusted for the stock
            split.



                                                                     (Continued)


                                      113

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(16)   Earnings Per Share

       Earnings per share  amounts  have  been  computed  based on the  weighted
            average number of common shares  outstanding.  The weighted  average
            number of common shares  outstanding was 13,881,494,  14,098,509 and
            14,260,984  for the  years  ended  June 30,  1997,  1996  and  1995,
            respectively.

(17)   Regulatory Capital

       Current Office of Thrift Supervision  ("OTS")  regulations require thrift
             institutions to have a minimum regulatory tangible capital equal to
             1.5% of  adjusted  total  assets and a minimum 3%  leverage  (core)
             capital ratio.  Additionally,  institutions  must meet a risk-based
             capital requirement  consisting of 8% of risk-weighted  assets. The
             OTS and the FDIC are authorized  and, under certain  circumstances,
             required to take certain actions against  associations that fail to
             meet their  capital  requirements.  As of March 31,  1996,  the OTS
             categorized  the  Bank as well  capitalized  under  the  regulatory
             framework  for  prompt  corrective   action.   Subsequent  to  this
             notification,  management  is not aware of any  circumstances  that
             would have changed the Bank's category.

       As   a  "well-capitalized"   institution,   the  Bank  may  make  capital
            distributions  without prior OTS approval in any calendar year up to
            the greater (i) 100% of its net earnings  during such  calendar year
            plus the amount that would  reduce by  one-half  the amount by which
            its  capital  exceeds  its  requirements  at the  beginning  of such
            calendar  year or (ii) 75% of its net  income  over the most  recent
            four-quarter  period.  Cash and stock  dividends paid by the Bank to
            the  Company  during the years  ended June 30,  1997,  1996 and 1995
            amounted to $8,525,368, $8,852,402 and $4,855,205, respectively.

       The  following table summarizes the Bank's regulatory capital and minimum
            capital requirements (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                                   To be Well
                                                                                                Capitalized Under
                                                                         For Capital            Prompt Corrective
                                                  Actual              Adequacy Purposes         Action Provisions
                                           -------------------        -----------------         ------------------
                                           Amount        Ratio        Amount       Ratio        Amount       Ratio
                                           -----         -----        ------       -----        ------       -----
<S>                                  <C>                 <C>          <C>          <C>          <C>          <C>
June 30, 1997:
      Bank capital, and ratio
         to total assets             $       116,363     8.69%                -        -                -       -
      Unrealized losses on
         certain available-for-
         sale securities                         678         -                -        -                -       -
</TABLE>


                                                                     (Continued)


                                      114

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(17), Continued
<TABLE>
<CAPTION>
                                                                                                       To be Well
                                                                                                    Capitalized Under
                                                                             For Capital            Prompt Corrective
                                                     Actual               Adequacy Purposes         Action Provisions
                                              ------------------          ------------------        ------------------
                                              Amount        Ratio         Amount       Ratio        Amount       Ratio
                                              ------        -----         ------       -----        ------       -----
       June 30, 1997, cont:
       -------------------
<S>                                       <C>                 <C>        <C>             <C>       <C>            <C>  
           Premium on purchased
              deposits                             (3,703)       -                 -        -                -       -
                                             ------------
           Tangible capital, and
              ratio to adjusted
              total assets                $       113,338     8.48%      $    20,044     1.50%               -       -
                                             ============                  =========
           Core (Tier 1) capital,
              and ratio to adjusted
              total assets                $       113,338     8.48%      $    40,088     3.00%     $    66,813    5.00%
                                             ============                  =========                  ========
           Core (Tier 1) capital,
              and ratio to risk-
              weighted assets             $       113,338    15.66%                -        -      $    43,425     6.00%
                                                                                                      ========
           Allowance for loan
              losses                                9,047        -                 -        -                -        -
           Other                                      (75)       -                 -        -                -        -
                                             ------------
           Risk based capital,
              and ratio to risk-
              weighted assets             $       122,310    16.90%      $    57,900     8.00%     $    72,375    10.00%
                                             ============                  =========                  ========
           Total assets                   $     1,339,279
                                             ============
           Adjusted total assets          $     1,336,254
                                             ============
           Risk-weighted assets           $       723,750
                                             ============

     June 30, 1996:
           Bank capital, and ratio
              to total assets             $       106,247     8.14%                -        -                -        -
           Unrealized losses on
              certain available-for-
              sale securities                       1,717         -                -        -                -        -
           Premium on purchased
              deposits                             (6,778)        -                -        -                -        -
                                             ------------
           Tangible capital, and
              ratio to adjusted
              total assets                $       101,186     7.78%      $    19,508     1.50%               -        -
                                             ============                  =========
           Core (Tier 1) capital,
              and ratio to adjusted
              total assets                $       101,186     7.78%      $    39,017     3.00%     $    65,028     5.00%
                                             ============                  =========                  ========
</TABLE>

                                                                     (Continued)


                                      115

<PAGE>


                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(17), Continued
<TABLE>
<CAPTION>
                                                                                                  To be Well
                                                                                               Capitalized Under
                                                                        For Capital            Prompt Corrective
                                                Actual               Adequacy Purposes         Action Provisions
                                         -------------------         ------------------        ------------------
                                         Amount        Ratio         Amount       Ratio        Amount       Ratio
                                         -----         -----         ------       -----        ------       -----
       June 30, 1996, cont:                   
       -------------------
<S>                                  <C>               <C>         <C>           <C>       <C>            <C>   
          Core (Tier 1) capital,
             and ratio to risk-
             weighted assets         $      101,186    14.73%              -        -      $    41,204     6.00%
                                                                                              ========
          Allowance for loan
             losses                           8,589        -               -        -                -        -
          Other                                 (65)       -               -        -                -        -
                                       ------------
          Risk based capital,
             and ratio to risk-
             weighted assets         $      109,710    15.98%      $  54,939     8.00%     $    68,674    10.00%
                                       ============                 ========                  ========
          Total assets               $    1,305,625
                                       ============
          Adjusted total assets      $    1,300,564
                                       ============
          Risk-weighted assets       $      686,737
                                       ============
</TABLE>


 (18)  Employee Benefit Plans

       (a)  Pension Plan

            The Company  maintained a defined  benefit  pension  plan  ("Pension
                Plan")  covering all full-time  employees of the Company who had
                attained age 21 and completed  one year of service  during which
                they worked at least 1,000 hours.  Benefits were based on salary
                and  years  of  service.   The  Company's   funding  policy  was
                consistent  with the  funding  requirements  of federal  law and
                regulations. Contributions were intended to provide for benefits
                attributed  to  service  to-date  and for those  expected  to be
                earned in the future.  No contributions  were made in 1997, 1996
                or 1995.

             Subject to regulatory approval, the Pension Plan will be terminated
                effective July 31, 1997 and all benefits and vesting were frozen
                June 30, 1997. In accordance  with the provisions of the Pension
                Plan,  all excess assets of the Pension Plan will be distributed
                to the Pension Plan's active  participants  as of July 31, 1997.
                Accordingly,  an estimated curtailment gain of $4.1 million will
                not be recognized by the Company.



                                                                     (Continued)


                                      116

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



          Net pension cost (credit) includes the following components:
<TABLE>
<CAPTION>

                                                                                             Years Ended June 30
                                                                              ---------------------------------------------
                                                                                  1997            1996              1995
                                                                              ------------     ------------      ----------
<S>                                                                           <C>             <C>                <C>    
                Service cost - benefits earned during the year                $    770,886          705,542         699,049
                Interest cost on projected benefit obligation                      987,023          908,012         917,289
                Actual return on plan assets                                    (6,901,170)      (4,634,747)     (2,530,714)
                Net amortization and deferral                                    4,764,289        3,042,248       1,070,087
                                                                              ------------     ------------      ----------

                             Net periodic pension cost (credit)               $   (378,972)          21,055         155,711
                                                                              ============     ============      ==========
</TABLE>

          The following  table  sets forth  the Pension Plan's funded status and
                amount  recognized in the Company's  consolidated  statements of
                financial condition:
<TABLE>
<CAPTION>

                                                                                                        June 30
                                                                                          -------------------------------
                                                                                                 1997            1996
                                                                                          ---------------    ------------
<S>                                                                                     <C>                  <C>
                Actuarial present value of benefit obligations:
                   Accumulated benefit obligation, including vested benefits of
                      $9,894,806 in 1997 and $9,679,913 in 1996 and a $4,082,724
                      curtailment gain allocated to participants in 1997
                                                                                        $      13,977,530      11,061,867
                                                                                          ===============    ============
                   Projected benefit  obligation  for service  rendered to date,
                      including   $4,082,724   curtailment   gain  allocated  to
                      participants in 1997                                              $     (13,977,530)    (13,127,430)
                Plan assets at fair value                                                      26,109,794      20,428,167
                                                                                          ---------------    ------------
                Plan assets in excess of projected benefit obligation                          12,132,264       7,300,737
                Unrecognized net gain from past experience
                   different from that assumed                                                (11,190,836)     (6,280,189)
                Unrecognized prior service cost                                                         -        (395,742)
                Unrecognized net transitional cost                                               (374,100)       (436,450)
                                                                                          ---------------    ------------
                                    Prepaid pension cost included
                                        in other assets                                 $         567,328         188,356
                                                                                          ===============    ============
</TABLE>


          The weighted  average discount rate  used in determining the actuarial
                present value of the projected benefit  obligation was 7.75% and
                7.50% in 1997 and 1996,  respectively.  The rate of  increase in
                future  compensation  levels  was  4.5% in 1997  and  1996.  The
                expected long-term rate of return on assets was 8.5% in 1997 and
                1996.

          Plan  assets  consist  primarily  of  U.  S.  government   securities,
                mortgage-backed  securities,  common  stock of the  Company  and
                certificates of deposit.  At June 30, 1997 and 1996, plan assets
                included  $18,488,418 and $12,578,879,  respectively,  of common
                stock of the Company and $866,841 and $813,594, respectively, of
                interest-earning deposits in the Bank.

                                                                     (Continued)


                                      117

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       (b)  Salary Continuation Plan

            The Company  established a salary  continuation plan ("Salary Plan")
                for  thirteen  of its  executives  effective  July 1,  1994  and
                purchased  life insurance  contracts  which the Bank owns and is
                the named  beneficiary.  In June,  1997 the  executives  and the
                Company agreed to terminate the Salary Plan and funds related to
                the accrued  liability at the date of termination were disbursed
                to  participants.  The  life  insurance  contracts  with  a cash
                surrender  value of  $3,987,210  were  included in the Company's
                assets on June 30, 1997.

       (c)  401(k) Profit Sharing Plan

            The Company established a 401(k) Profit Sharing Plan ("401(k) Plan")
                effective  January 1, 1996 covering all full-time  employees who
                have attained age 21 and  completed  one year of service  during
                which they worked at least 1,000 hours.  Participants  may elect
                to defer a percentage  of their  compensation  each year,  in an
                amount  that  does  not  exceed  a dollar  limit  set by law.  A
                matching contribution equal to a percentage amount of the salary
                reduction deferred by participants,  not to exceed 6.0% of total
                eligible compensation,  is determined annually at the discretion
                of the Board of Directors. Contributions of $470,557 and $91,800
                were made to the 401(k) Plan in 1997 and 1996, respectively.

       (d)  Employee Stock Ownership Plan

            The Company  maintained an employee  stock  ownership  plan ("ESOP")
                covering all full-time employees of the Company who had attained
                age 21 and  completed  one year of  service  during  which  they
                worked at least 1,000 hours.  Annual  contributions were limited
                to the maximum  tax-deductible  amount and amounts  necessary to
                ensure continued  compliance with the Bank's regulatory  capital
                requirements.  Contributions of $25,000 and $1,181,430 were made
                to the ESOP for 1996 and 1995,  respectively.  No  contributions
                were  made  for  1997.  Contributions  were  determined  at  the
                discretion of the Board of Directors.

            The ESOP  was  amended  in  April  1996 to  provide  for  in-service
                distributions  of plan assets to vested  participants and merger
                of the ESOP with the 401(k)  Plan.  During  1997 all of the plan
                assets were  distributed to participants or were merged into the
                401(k) Plan.



                                                                     (Continued)


                                      118

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       (e)  Stock Option and Incentive Plan

            The Board of  Directors  of the Company  adopted a stock  option and
                incentive   plan   ("Option   Plan")   that  was   approved   by
                stockholders.  Pursuant to the Option  Plan,  stock  options and
                restricted  stock awards covering  1,257,868 shares were granted
                to  directors  and  officers  of the  Company  in 1991.  Options
                granted  under the Option Plan were either  options that qualify
                as Incentive Stock Options,  as defined in the Internal  Revenue
                Code of 1986, as amended, or options that do not qualify.

             Upon  conversion  of the  Bank to a  stock  savings  bank in  1991,
                restricted stock awards were made totaling  911,404 shares.  All
                of these  shares were  vested by June 30,  1996.  The  aggregate
                purchase  price of these shares was  reflected as a reduction of
                the  Company's  stockholders'  equity and was  amortized  as the
                Company's  directors  and officers  became vested in their stock
                awards.  During  1995,  $90,248 was  amortized  as  compensation
                expense.  The Company received an income tax benefit as a result
                of the taxable income reported by the directors and officers for
                the restricted  stock awards and passed the tax benefit  through
                to the directors and officers. During 1995, the tax pass-through
                recorded as compensation expense was $384,114.

            Also,  non-qualified  stock options were granted for the purchase of
                346,464   shares  in  1991.   Such  options   were   immediately
                exercisable  at the market  price of $0.89 per share at the date
                of grant.  The options  expire in 2001.  During  1997,  1996 and
                1995, stock options of 51,744, 19,296 and 11,200 were exercised,
                respectively.  At June 30, 1997,  options were  outstanding  for
                119,136 shares.

       (f)  Recognition and Retention Plan

             The Board of  Directors  of the Company  adopted a recognition  and
                retention   plan   ("Retention   Plan")  that  was  approved  by
                stockholders.  Pursuant to the Retention Plan, 378,730 shares of
                restricted  stock were granted to directors  and officers of the
                Company  during  1992.  All shares were vested by June 30, 1996.
                The aggregate  purchase price of these shares was reflected as a
                reduction  of  the  Company's   stockholders'   equity  and  was
                amortized as the Company's  directors and officers became vested
                in their  stock  awards.  During  1996  and  1995,  $82,842  and
                $165,696 was amortized as compensation expense, respectively.



                                                                     (Continued)


                                      119

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(19)   Off-Balance-Sheet Risk

       The  Company focuses its lending activities  primarily on the origination
            of loans secured by first mortgages on owner-occupied, single-family
            residences  located within  Mississippi and Alabama and the purchase
            of performing  loans secured by  single-family  homes located in the
            southeastern  United States.  A limited volume of  multi-family  and
            commercial real estate loans is originated and is secured  primarily
            by  properties  located  in  Mississippi.  Seasoned  and  performing
            commercial  loans  secured by  properties  located in the  Company's
            market area are also considered for purchase. Occasionally, the Bank
            will also purchase at a discount limited amounts of  non-performing,
            single-family loans in the southeastern United States.

       In   the normal course of business,  the Company enters into  commitments
            with  off-balance-sheet  risk to meet  the  financing  needs  of its
            customers and to reduce its own exposure to fluctuations in interest
            rates.  Commitments to extend credit,  to purchase loans and to sell
            mortgage-backed  securities  involve elements of credit and interest
            rate risk in excess of the  amount  recognized  in the  consolidated
            statement of financial condition.

       The  Company's  exposure to credit loss for  commitments  in the event of
            nonperformance  by the other party to the  financial  instrument  is
            represented by the contractual notional amount of those instruments.
            The Company uses the same credit policies in making  commitments and
            conditional obligations as it does for on-balance-sheet instruments.

       Commitments to extend credit, generally mortgage loan commitments,  lines
            of credit or overdraft lines of credit,  are agreements to lend to a
            customer  as  long  as  there  is  no  violation  of  any  condition
            established  in  the  contract.  Commitments  generally  have  fixed
            expiration  dates  or  other  termination  clauses  and may  require
            payment of a fee. Since some of the  commitments  may expire without
            being drawn upon, the total  commitment  amounts do not  necessarily
            represent  future  cash  requirements.  The Company  evaluates  each
            customer's  creditworthiness  on a case-by-case basis. The amount of
            collateral  obtained by the Company is  determined  by the amount of
            credit extended and management's  credit evaluation of the customer.
            Generally,  single-family  residential  real  estate is  obtained as
            collateral upon extension of credit under loan commitments and lines
            of credit. Lines of credit are generally unsecured.

       Commitments to purchase loans generally have fixed expiration  dates. The
            Company  evaluates such loan portfolios on a case-by-case  basis and
            determines  the purchase  price by reviewing  the credit  histories,
            collateral and loan documentation.


                                                                     (Continued)


                                      120

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Forward sales  commitments for  mortgage-backed  securities are contracts
            for delayed  delivery of securities  in which the Company  agrees to
            make delivery at a specified future date of a specified  instrument,
            at a  specified  price or  yield.  Risks  arise  from  the  possible
            inability of the counterparties to meet the terms of their contracts
            and from movements in securities values and interest rates.

       Outstanding  mortgage  loan  commitments  at  June  30,  1997  aggregated
            approximately  $31,804,000 for fixed-rate  loans (rates ranging from
            7.00% to 14.50%) and  $20,439,000  for  variable-rate  loans  (rates
            ranging from 7.13% to 14.25%).  Commitments  outstanding at June 30,
            1997 under  unsecured  lines of credit were  $63,313,000,  and other
            lines of credit were $2,495,000.  Also at June 30, 1997, the Company
            was committed to purchase  approximately  $793,000 of loans. Forward
            sales commitments of $57,350,000 in mortgage-backed  securities were
            outstanding at June 30, 1997.

(20)   Fair Value of Financial Instruments

       Estimates of fair value of financial instruments are subjective in nature
            and involve  uncertainties and matters of significant  judgment and,
            therefore,   cannot  be  determined  with   precision.   Changes  in
            assumptions  significantly  affect the estimates  and, as such,  the
            derived fair value may not be indicative of the value  negotiated in
            an actual sale and may not be  comparable  to that reported by other
            financial  institutions.  Because no market exists for a significant
            portion of the Company's financial instruments, fair value estimates
            are based on judgments  regarding  future expected loss  experience,
            current economic conditions and other factors.

       In   addition,  the fair value estimates are based on existing  financial
            instruments  without attempting to estimate the value of anticipated
            future business and the value of assets and liabilities that are not
            considered  financial  instruments.  For  example,  the  Company has
            significant  fee  generation  businesses  that  are  not  considered
            financial instruments and their value has not been incorporated into
            the fair value estimates. Significant assets that are not considered
            financial assets include  mortgage  servicing  rights,  deferred tax
            assets,  premises and equipment,  and core deposit  intangibles.  In
            addition,  the tax  ramifications  related to the realization of the
            unrealized  gains and losses can have a  significant  effect on fair
            value estimates and have not been considered in the estimates.



                                                                     (Continued)



                                      121

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



  The  following table sets forth the estimated fair value of the Company's
       financial instruments at June 30, 1997 and 1996:

<TABLE>
<CAPTION>

                                                             Carrying            Estimated
                                                              Value             Fair Value
                                                            ---------           ----------
       June 30, 1997:
       -------------
<S>                                                   <C>                        <C>
       Assets:
           Loans receivable                           $       928,093,467         977,745,000
           Mortgage-backed securities                         132,911,544         133,205,586
           Other securities                                    73,854,255          76,712,716
           Stock in FHLB of Dallas                             15,627,418          15,627,418
           Cash and due from banks                             69,504,187          69,504,187
           Interest-bearing deposits with banks                28,704,668          28,704,668
       Liabilities:
           Deposits                                          (915,394,878)       (913,242,000)
           Borrowings from FHLB of Dallas                    (258,448,595)       (257,921,000)
       Off-balance-sheet activities:
           Commitments to sell mortgage-backed
              securities                                                -             (68,328)

       June 30, 1996:
       -------------
       Assets:
           Loans receivable                           $       863,762,122         902,339,000
           Mortgage-backed securities                         166,086,719         166,382,735
           Other securities                                    74,674,551          77,041,756
           Stock in FHLB of Dallas                             12,027,000          12,027,000
           Cash and due from banks                             70,548,661          70,548,661
           Interest-bearing deposits with banks                10,745,849          10,745,849
       Liabilities:
           Deposits                                          (922,370,122)       (920,275,000)
           Borrowings from FHLB of Dallas                    (221,961,222)       (221,439,000)
       Off-balance-sheet activities:
           Commitments to sell mortgage-backed
              securities                                                -             176,475

</TABLE>



                                                                     (Continued)


                                      122

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       (a)  Loans Receivable

            The fair  value  of loans  held  for  investment  is  calculated  by
                discounting the expected future cash flows. Loans are segregated
                by type of loan and by interest type, such as variable or fixed.
                Fixed-rate  loans are further  categorized  by original  term to
                maturity  and  stratified  by interest  rate  ranges.  Loans are
                discounted  using the current new loan rate  applicable  to each
                type.  Adjustable-rate  loans  are  valued  based  on  scheduled
                repricing and discounted using the current rate at which similar
                loans would be made to borrowers  with similar  credit  ratings.
                Future cash flows are estimated by using OTS nationwide  average
                prepayment speeds applicable to each type.

            The fair  value of loans  held  for sale is based on  quoted  market
                prices,  assuming  the loans  will be  packaged  and sold in the
                secondary market.

        (b) Mortgage-backed Securities

            The fair  value of  mortgage-backed  securities  is based on  quoted
                market prices, where available.  If a quoted market price is not
                available, fair value is estimated using quoted market values of
                similar securities.

       (c)  Other Securities

            The fair value of other securities is based on quoted market prices,
                where available. If a quoted market price is not available, fair
                value  is  estimated  using  quoted  market  values  of  similar
                securities.

       (d)  Stock in FHLB

            The fair value is the carrying  value.  The investment in FHLB stock
                is a  requirement  of membership in the FHLB system and can only
                be redeemed by the FHLB at face value.

       (e)  Cash and Interest-Bearing Deposits

            The carrying  amount is the  reasonable  estimate  of fair value for
                cash and interest-bearing bank balances.



                                                                     (Continued)


                                      123

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       (f)  Deposits

            For deposit liabilities with no defined  maturities,  the fair value
                is reported at the amount  payable on demand in accordance  with
                the relevant accounting standards.

            The fair  value  of   certificates   of  deposit  is  calculated  by
                discounting  the  expected  future  cash  flows  using  the FHLB
                advance rate for comparable  terms to maturity.  Expected future
                cash flows for certificates of deposit are based on the maturity
                dates of the  certificates,  assuming  no  withdrawals  prior to
                maturity.

       (g)  Borrowings from FHLB of Dallas

            The fair value of  borrowings  from FHLB of Dallas is  calculated by
                discounting the expected future cash flows at maturity using the
                FHLB advance rate for comparable terms to maturity.

       (h)  Off-Balance-Sheet Activities

            The Company's  off-balance-sheet  commitments  consist  primarily of
                mortgage origination and securitization activities.  Commitments
                to  originate  loans and  commitments  under lines of credit are
                obligations  of the Company,  but not of the  customer,  and may
                expire  without  being  drawn  upon.  Therefore,   no  value  is
                attributed to those instruments. The fair value of forward sales
                commitments  of  mortgage-backed  securities  is based on quoted
                market prices. Commitments to purchase mortgage servicing rights
                are at market rates and have various termination clauses.  These
                commitments  are  not  considered  to have a  determinable  fair
                value.

(21)   Contingencies

       The  Company is involved in various  claims and legal actions  arising in
            the ordinary course of business. In the opinion of management, based
            upon  consultation with legal counsel,  the ultimate  disposition of
            these  matters  will  not  have a  material  adverse  effect  on the
            Company's consolidated financial statements.

(22)   Subsequent Events

       During July  1997,  the  Company  entered  into  agreements  to sell four
            branches  with  deposits  totaling  $42,021,362  at June 30, 1997 to
            other  banks for a gain of  approximately  $4  million.  Such branch
            sales are anticipated to close during October 1997.



                                                                     (Continued)


                                      124

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(23)   Segment Information

       The  Company's   primary   business   segments  are  retail  banking  and
            originating and servicing one- to four-family  mortgage  loans.  The
            following   table  provides   summarized   information  by  business
            segments:
<TABLE>
<CAPTION>

                                                                                       Years Ended June 30
                                                              -------------------------------------------------------------
                                                                      1997                  1996                  1995
                                                              -------------------   -------------------   -----------------
                Total revenue:
<S>                                                        <C>                      <C>                   <C>
                   Mortgage banking                        $          28,108,243           28,132,126            25,164,903
                   Retail banking and other                          137,606,848          130,484,851           120,001,088
                                                              ------------------    -----------------     -----------------
                                                                     165,715,091          158,616,977           145,165,991
                   Elimination of intersegment
                      revenue                                        (10,983,457)          (9,430,685)           (5,389,810)
                                                              ------------------    -----------------     -----------------

                   Consolidated                            $         154,731,634          149,186,292           139,776,181
                                                              ==================    =================     =================

                Operating profit (loss):
                   Mortgage banking                        $           3,059,760            3,014,550              (509,143)
                   Retail banking and other                           26,964,461           30,036,609            31,734,983
                                                              ------------------    -----------------     -----------------

                   Consolidated                            $          30,024,221           33,051,159            31,225,840
                                                              ==================    =================     =================


                                                                                              At June 30
                                                              -------------------------------------------------------------
                                                                      1997                  1996                  1995
                                                              ------------------    -----------------     -----------------
                Identifiable assets:
                   Mortgage banking                        $          41,083,682           41,363,849            24,548,720
                   Retail banking and other                        1,315,013,398        1,269,446,369         1,134,874,184
                                                              ------------------    -----------------     -----------------
                                                                   1,356,097,080        1,310,810,218         1,159,422,904
                   Elimination of intersegment assets                 (2,854,620)          (2,152,397)                    -
                                                              ------------------    -----------------     -----------------

                   Consolidated                            $       1,353,242,460        1,308,657,821         1,159,422,904
                                                              ==================    =================     =================
</TABLE>


       Revenues are comprised of interest income, loan fees and service charges,
            loan servicing revenues,  net gains on  interest-earning  assets and
            real estate activities, deposit account operations and other income.
            Intersegment   revenue   consists  of  loan  servicing  income  from
            servicing Company-owned loans, gains related to originated servicing
            rights  of loans  transferred  to the  retail  banking  segment  and
            interest  income on custodial  funds on deposit with the Bank.  This
            revenue is eliminated in consolidation.


                                                                     (Continued)


                                      125

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Operating profit (loss) is revenue less interest expense,  provisions for
            losses,  amortization  of purchased  mortgage  servicing  rights and
            operating expenses. General corporate overhead expenses not directly
            attributable to a segment are allocated to both segments.

       Identifiable assets by segment are those assets that are used exclusively
            by such segment.

(24)   Financial Information of Magna Bancorp, Inc. (Parent Only)

       MagnaBancorp, Inc.'s unconsolidated  statements of financial condition as
            of June 30, 1997 and 1996 and  related  statements  of earnings  and
            cash flows for the years ended June 30, 1997, 1996 and 1995 follow:

<TABLE>
<CAPTION>
                        Statements of Financial Condition
                               Assets                                           1997               1996
                               ------                                 ----------------   -------------------
<S>                                                                   <C>                    <C>
            Cash on deposit with bank subsidiary                      $         3,006,823          9,516,843
            Investment in bank subsidiary                                     116,363,478        106,247,207
            Investment in and advances to other subsidiaries                    5,934,805          6,844,414
            Other securities held for trading                                   3,386,250                  -
            Other securities available for sale                                 9,037,878                  -
            Other assets                                                        1,271,650          3,305,196
                                                                      -------------------    ---------------

                                                                      $       139,000,884        125,913,660
                                                                         ================    ===============
                   Liabilities and Stockholders' Equity
                   ------------------------------------
            Liabilities                                               $           629,158             95,080
                                                                         ----------------    ---------------
            Stockholders' equity:
                Common stock                                                      137,543             68,514
                Additional paid-in capital                                     18,735,227         18,373,306
                Retained earnings                                             119,340,749        109,096,579
                Unrealized gains (losses) on securities available
                   for sale, net of deferred income taxes                         158,207         (1,719,819)
                                                                         ----------------    ---------------
                                                                              138,371,726        125,818,580

                                                                      $       139,000,884        125,913,660
                                                                         ================    ===============
</TABLE>



                                                                     (Continued)


                                      126

<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(24), Continued
<TABLE>
<CAPTION>

                             Statements of Earnings

                                                                  1997              1996              1995
                                                           ---------------   ---------------    --------------
<S>                                                     <C>                  <C>                <C>
      Cash dividends from subsidiaries                  $       9,275,368          9,802,402         4,855,205
      Equity in undistributed earnings of
          bank subsidiary                                       9,077,527         10,758,247        13,171,226
      Equity in undistributed earnings
          of other subsidiaries                                   146,650            543,293         1,074,834
      Interest income                                             430,225            446,145           683,730
      Unrealized holding gain on trading securities             1,344,105                  -                 -
      Compensation expense                                       (494,632)          (202,842)         (854,829)
      Other expenses                                             (766,383)          (234,546)          (58,933)
      Income tax benefit (expense)                               (453,386)            (3,350)          153,790
                                                           --------------    ---------------    --------------

                         Net earnings                   $      18,559,474         21,109,349        19,025,023
                                                           ==============    ===============    ==============
</TABLE>





                                                                     (Continued)


                                      127


<PAGE>



                      MAGNA BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(24), Continued

                            Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                        1997              1996              1995
                                                                  ---------------   ---------------    --------------
      Cash flows from operating activities:
<S>                                                            <C>                  <C>                <C>
          Net earnings                                         $      18,559,474         21,109,349        19,025,023
          Adjustments to reconcile net earnings to
             cash provided by operations:
                Amortization of unearned compensation                          -             82,842           255,944
                Equity in undistributed earnings
                    of subsidiaries                                   (9,224,177)       (11,301,540)      (14,246,060)
                Increase (decrease) in liabilities                       534,078             60,720          (217,611)
                Decrease (increase) in other assets                    2,033,546         (2,595,592)           40,530
                Unrealized holding gain on trading
                    securities                                        (1,344,105)                 -                 -
                Tax benefit of deductible restricted stock
                    awards and stock options over cost                   318,610            574,002           542,995
                Purchase of equity securities held
                    for trading                                       (2,042,145)                 -                 -
                Other, net                                              (420,158)                 -                 -
                                                                  --------------    ---------------    --------------
                         Net cash provided by
                              operating activities                     8,415,123          7,929,781         5,400,821
                                                                  --------------    ---------------    --------------
      Cash flows from investing activities:
          Advances to subsidiaries                                     1,215,000           (285,000)         (570,000)
          Investments in subsidiaries                                          -          1,100,000        (4,722,328)
          Repayment of subordinated debentures
             from bank subsidiary                                              -          4,000,000                 -
          Return of capital from subsidiary                                    -                  -         2,500,000
          Purchase of equity securities available for sale            (7,937,180)                 -                 -
                                                                  --------------    ---------------    --------------
                         Net cash provided (used) by
                              investing  activities                   (6,722,180)         4,815,000        (2,792,328)
                                                                  --------------    ---------------    --------------
      Cash flows from financing activities:
          Proceeds from sale of common stock                              45,816             17,085             9,917
          Purchase and retirement of common stock                         (2,181)        (5,765,883)         (182,890)
          Cash dividends paid                                         (8,246,598)        (3,479,049)       (2,601,603)
                                                                  --------------     --------------    --------------
                         Net cash used by financing
                              activities                              (8,202,963)        (9,227,847)       (2,774,576)
                                                                  --------------    ---------------    --------------
                         Net increase (decrease) in cash              (6,510,020)         3,516,934          (166,083)
      Cash at beginning of year                                        9,516,843          5,999,909         6,165,992
                                                                  --------------    ---------------    --------------

      Cash at end of year                                      $       3,006,823          9,516,843         5,999,909
                                                                  ==============    ===============    ==============
</TABLE>

                                      128

<PAGE>



ITEM 9. CHANGES  IN  AND  DISAGREEMENTS   WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE

There has been no Current Report on Form 8-K filed within 24 months prior to the
date of the most recent financial  statements  reporting a change of accountants
and/or  reporting  disagreements  on  any  matter  of  accounting  principle  or
financial statement disclosure.





                                      129

<PAGE>



                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Company's Board of Directors  currently consists of five members.  The Board
is divided into three classes, each of which contains approximately one-third of
the Board.  Approximately  one-third  of the  directors  are  elected  annually.
Directors of the Company are generally  elected to serve for three-year terms or
until their respective successors are elected and qualified.

The table below sets forth certain information, as of August 29, 1997, regarding
the composition of the Company's Board of Directors,  including terms of office.
There are no arrangements or  understandings  between any director and any other
person pursuant to which such director was selected.

<TABLE>
<CAPTION>
                                                                               TERM       SHARES OF COMMON       PERCENT
                                         POSITION(S) HELD        DIRECTOR       TO       STOCK BENEFICIALLY        OF
          NAME               AGE          IN THE COMPANY         SINCE (1)    EXPIRE            OWNED             CLASS
          ----               ---          --------------         ---------    ------     ------------------       -----
<S>                          <C>                                   <C>         <C>         <C>                    <C>  
Robert S. Duncan             61     Director and Chairman          1974        1999        779,273  (2)           5.67%
                                                                                                              
Zach T. Hederman, Jr.        49     Director                       1983        1999        371,726  (3)           2.70
                                                                                                              
H. A. Moore, III             48     Director and Secretary         1990        1997        428,884  (4)           3.12
                                                                                                              
Lou Ann Poynter              51     Director and President         1990        1998        569,927  (5)           4.14
                                                                                                              
George P. Hopkins, Jr.       71     Director                       1981        1998        148,966  (6)           1.08
</TABLE>

----------
(1)  Includes service as a director of the Bank.

(2)  Mr. Duncan shares voting and investment  power over 334,080 shares with his
     wife and shares with the 401(k) Trustee  investment power over 1,278 shares
     allocated to his account  under the 401(k).  The number of shares  reported
     for Mr. Duncan includes 68,000 shares held by the Irrevocable Trust for Lou
     Ann and Louis G.  Poynter,  a family  trust for which he serves as Trustee,
     which,  under applicable  securities laws, may be deemed to be beneficially
     owned by Mr. Duncan.

(3)  Mr.  Hederman  shares voting and investment  power over 266,648 shares with
     Trustmark National Bank, custodian for the ZTH Trust for Zach Hederman, Jr.

(4)  Mr. Moore shares voting and investment power over 11,520 shares with one of
     his  sons,  and  he is  deemed  to  beneficially  own  44,672  shares  held
     collectively by his three children. As a partner in the law firm of Moore &
     Jones, Mr. Moore has a beneficial  interest in 57,030 of the 126,895 shares
     held by Legg Mason Wood Walker,  Inc. as fund manager for the Trust for the
     Moore & Jones Profit Sharing Plan, a self-directed plan for which Mr. Moore
     serves as one of three trustees and as designated administrator;  he has no
     ownership  interest in or  investment  control or voting  power over 69,865
     shares held for other participants in the plan.

                                      130

<PAGE>



(5)  Ms. Poynter shares voting and investment power over 138,936 shares with her
     husband  and 960  shares  with her  daughter.  She  shares  with the 401(k)
     Trustee investment power over 741 shares allocated to her account under the
     401(k).  Ms. Poynter is also deemed to beneficially  own 61,976 shares held
     in her  husband's  IRA and 39,998  shares for which she serves as custodian
     for her daughter's trust established under the Mississippi  Uniform Gift to
     Minor's Act. The number of shares reported for Ms. Poynter  includes 90,400
     shares held by the  Irrevocable  Trust for Robert S. and Judy W. Duncan,  a
     family  trust for which she  serves as  Trustee,  which,  under  applicable
     securities laws, may be deemed to be beneficially owned by Ms. Poynter.

(6)  Includes  38,496 shares subject to a presently  exercisable  option granted
     under the Company's Stock Option Plan and 5,200 shares held by his wife.

The business  experience of each director of the Company is set forth below. All
directors  have held their  present  position  for at least seven  years  unless
otherwise indicated.

Robert S.  Duncan is Chairman  of the Board and Chief  Executive  Officer of the
Company and Chairman of the Board of Magnolia  Federal.  Mr.  Duncan  joined the
Bank in 1968 as an Assistant Secretary, became Executive Vice President in 1972,
and  President  in 1977.  He was Chief  Executive  Officer of the Bank from 1983
until  March,  1996,  and has served as  Chairman of the Board of the Bank since
1984. For eight years prior to joining Magnolia Federal,  Mr. Duncan served as a
manager for the  accounting  firm of KPMG Peat Marwick LLP. Mr. Duncan is a past
Director  of the FHLB of Dallas,  and former  State  Director of the Savings and
Loan Foundation and the Institute of Financial  Education.  He is past President
of the Mississippi League of Savings Institutions and the Mississippi  Financial
Managers  Society  and  currently  serves  on  the  Board  of  Directors  of the
Mississippi Bankers Association. He has been active with the America's Community
Bankers organization,  serving several years on the Executive Committee,  and as
Co-Chairman of the Governmental Affairs Committee.  Mr. Duncan has served on the
Thrift  Institutions  Advisory Council of the Federal Reserve Board, the SAIF of
the FDIC and the Federal  Reserve  Board of  Atlanta.  Mr.  Duncan  holds a B.S.
degree from Auburn  University.  He has attended the Graduate  School of Savings
and Loan at Indiana  University  and the Savings  and Loan School for  Executive
Development at the University of Georgia.

Zach T. Hederman,  Jr. is President of Zach T. Hederman,  Jr. Properties,  Inc.,
which engages in land  development  and utilities.  He is the General Partner of
Baycastle  Properties,   L.P.,  Annandale  Properties,  L.P.  and  Cypress  Lake
Properties,  L.P. He received a Bachelor of Arts degree from the  University  of
Mississippi,  an M.B.A.  from  Mississippi  College  and a P.M.D.  (Program  for
Management Development) from the Harvard University Graduate School of Business.

H. A. Moore,  III is  Secretary  of the  Company  and served as outside  General
Counsel to the Bank from 1976 until  February,  1997,  when he became  Executive
Vice President and General Counsel for the Bank. Mr. Moore received his B.A. and
J.D. degrees from the University of Mississippi in 1970 and 1972,  respectively.
He is a member of Omicron Delta Kappa  honorary  fraternity  and Phi Alpha Delta
legal  fraternity.  Mr. Moore began  practicing law in 1972 with the law firm of
Moore and Jones in Hattiesburg,  Mississippi.  He served as managing  partner of
the firm until February  1997. Mr. Moore's legal practice has been  concentrated
in real  estate,  mortgage,  business,  commercial,  estate,  probate  and civil
litigation. Mr. Moore has actively participated as a member and President of the
South Central  Mississippi  Bar  Association and as a member and director of the
Mississippi  Bar  Association.  He has served as President of the Young  Lawyers
division of the Mississippi Bar Association and has served on several committees

                                      131

<PAGE>



of the Mississippi Bar. He is a member of the Mississippi Bar Foundation and has
served  as one of its  directors.  Mr.  Moore is also a member  of the  American
College of Mortgage Attorneys, the American Judicature Society, the American Bar
Association and the South Mississippi Estate Planning Association. Mr. Moore has
been an active member of the  Attorney's  Committee of the  America's  Community
Bankers.

Lou Ann  Poynter is  President  and Chief  Operating  Officer of the Company and
President and Chief Executive Officer of Magnolia  Federal.  She joined the Bank
in 1972, became Treasurer in 1975, and Senior Vice President in 1985. She became
Executive Vice President and Treasurer in 1988 and served in that capacity until
she became  President on July 1, 1993. Ms. Poynter was appointed Chief Executive
Officer  of the Bank in  March,  1996.  She has  served on the  Thrift  Industry
Accounting  Committee  and as a  National  Director  of the  Financial  Managers
Society,  Inc.  She is past  President  of the  Mississippi  Financial  Managers
Society and has served on the Mississippi State Board of Public Accountancy. She
currently serves on the Board of Directors of the Government  Affairs Council of
the America's Community Bankers.  She serves as Chairman of the Mortgage Lending
Committee and as a member of the Federal and State Legislative Committees of the
Mississippi Bankers Association. She also is a member of the Mississippi Society
of Certified Public  Accountants and the American  Institute of Certified Public
Accountants. Ms. Poynter received her B.S. degree in Business Administration and
M.S. degree in Accounting from the University of Southern Mississippi.

George P.  Hopkins,  Jr.  is owner and  President  of  George P.  Hopkins,  Inc.
Contractors-Engineers,  a general  contractor.  He holds a B.S.  degree in Civil
Engineering from the University of Mississippi. He served as a Director of Coast
Federal  Savings and Loan  Association  from 1961 until 1981, when it was merged
into Magnolia Federal Bank for Savings. He is a past Director of the New Orleans
Branch of the Federal  Reserve  Bank of Atlanta and has served as a Director and
Member of the Executive  Committee of the former Gulf National  Bank,  Gulfport,
Mississippi.  He is  currently  President  and a Director of  Mississippi  Coast
Marine, Inc., Gulfport, Mississippi.

The Board of Directors of the Bank currently consists of 12 directors, including
five of the  directors of the Company.  The Board is divided into three  classes
and approximately  one-third of the directors are elected annually.  Because the
Company owns all of the issued and  outstanding  shares of capital  stock of the
Bank, the Company elects the directors of the Bank.

Information  concerning the executive  officers of the Company is provided under
Item 1 of Part I of this report and is incorporated by reference herein.

                                      132

<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION

During  fiscal 1997,  R. S. Duncan  received  compensation  from the Company for
services   performed.   The  Company's   other  officers  did  not  receive  any
compensation  from the Company in fiscal 1997 for  services  performed  in their
capacities as officers of the Company.

The following table sets forth  information  concerning the  compensation of the
Chief Executive Officer and the four other highest paid executive officers whose
salary and bonus for fiscal 1997 exceeded  $100,000 (the "named  officers")  for
services in all  capacities  to the Company and  Magnolia  Federal for the years
ended June 30, 1997, 1996, and 1995.

<TABLE>
<CAPTION>
                                                 Summary Compensation Table
                                                     Annual Compensation
------------------------------------------------------------------------------------------------------------------------------

                                                                                       Other Annual            All Other
            Name                  Year            Salary            Bonus (1)        Compensation (2)       Compensation (3)
-----------------------------    --------    -----------------    --------------    -------------------    -------------------
<S>                              <C>         <C>                  <C>               <C>                    <C>     
Robert S. Duncan                 1997        $ 199,000            $ 160,000         $ 120,368              $ 12,662
                                 1996          199,000               97,000                 -                30,197
                                 1995          199,000              130,000           171,542                71,050

Lou Ann Poynter                  1997          225,000              200,000           223,319                27,232
                                 1996          190,385               90,000                 -                29,002
                                 1995          156,199               80,000            86,251                50,141

J. Hershel Parker                1997          136,502               65,000            82,577                 6,975
                                 1996          130,003               38,000                 -                 3,360
                                 1995          124,499               36,000            64,245                27,342

Thomas  L. Cousins               1997          126,000               65,000           224,225                 6,007
                                 1996          120,000               38,000                 -                 2,761
                                 1995          108,499               36,000            21,105                22,422

Barbara  S. Ellender             1997           86,000               40,000           143,270                 3,922
                                 1996           81,000               26,000                 -                 1,615
                                 1995           73,000               25,000            21,105                11,769
</TABLE>

(1)  Paid pursuant to the Bank's incentive  compensation  plan, with 100% of the
     bonus accrual paid in 1997.

(2)  Amounts for fiscal 1997  represent lump sum payment under the Bank's Salary
     Continuation  Plan upon  termination  of the Plan  effective June 30, 1997,
     which was based upon the present  value of  benefits  the  participant  was
     entitled  to under the Plan  using a 60%  accelerated  vesting  rate due to
     pending change of control of the Company.

     Amounts for fiscal 1995  represent  cash bonuses paid to the named officers
     in  accordance  with the terms of the Stock  Option  Plan  approved  by the
     stockholders  on November 13, 1991,  which provided for a  pass-through  to
     plan participants of the tax benefit received by the Company as a result of
     the  ordinary  income  recognized  and tax  paid by the  recipients  as the
     restricted   stock  granted  under  the  Stock  Option  Plan  vested.   All
     participants  elected each year to have the cash bonus paid directly to the
     state and federal  governments as partial  satisfaction of income taxes due
     and, accordingly, no cash was paid directly to the named officers.

                                      133

<PAGE>



(3)  Amounts for fiscal 1997 include $5,422,  $5,512, $5,850, $5,287, and $3,462
     contributed by Magnolia  Federal Bank to the 401(k) Plan for fiscal 1997 on
     behalf  of Mr.  Duncan,  Ms.  Poynter,  Mr.  Parker,  Mr.  Cousins  and Ms.
     Ellender, plus the imputed value of employee life insurance reported to the
     IRS as  income  in the  amount  of $240,  $720,  $1,125,  $720,  and  $460,
     respectively.  The amount also  includes  director fees paid by the Company
     and the Bank in the  amount of  $7,000 to Mr.  Duncan  and  $21,000  to Ms.
     Poynter.

     Amounts for fiscal 1996 include $744, $329, $494, $387 and $235 contributed
     by Magnolia  Federal to the Employee Stock Option Plan ("ESOP") and $3,828,
     $3,738,  $1,740, $1,694 and $1,154 contributed to the 401(k) Plan on behalf
     of Mr. Duncan, Ms. Poynter, Mr. Parker, Mr. Cousins and Ms. Ellender,  plus
     the imputed value of employee life insurance  reported to the IRS as income
     in the amount of $1,125,  $435, $1,125,  $680 and $226,  respectively.  The
     amount also includes  director fees paid by the Company and the Bank in the
     amount of $24,500 each to Mr. Duncan and Ms. Poynter.

     Amounts for fiscal 1995  include  $27,925,  $17,706,  $26,622,  $21,788 and
     $11,568  contributed  by  Magnolia  Federal  to the ESOP on  behalf  of Mr.
     Duncan, Ms. Poynter,  Mr. Parker, Mr. Cousins and Ms. Ellender,  as well as
     director  fees paid by the  Company  and the Bank in the  amount of $42,000
     each to Mr. Duncan and Ms. Poynter.


RETIREMENT PLANS

Defined  Benefit  Pension  Plan.  The Bank  sponsors the Pension Plan, a defined
benefit  pension plan.  Eligible  employees  participate  in the Plan after they
attain age 21 and following the completion of 12 months of service, provided the
employee has completed as least 1,000 hours of work during such 12-month period.
The  Pension  Plan is  funded  solely  through  contributions  made by  Magnolia
Federal.

                            Annual Pension Benefit Based on Years of Service
                       ---------------------------------------------------------
    Average Annual
     Compensation          10            20              30              40
---------------------  -----------  ------------    ------------    ------------

$ 100,000              $ 20,595       $ 41,190       $ 46,190        $ 51,190
  150,000                31,845         63,690         71,190          78,690
  200,000                34,095         68,190         76,190          84,190
  250,000                34,095         68,190         76,190          84,190
  300,000                34,095         68,190         76,190          84,190
  350,000                34,095         68,190         76,190          84,190

The preceding  table sets forth, as of June 30, 1997,  estimated  annual pension
benefits for  individuals  at age 65 payable in the form of a life annuity under
the most  advantageous  plan provisions for various levels of  compensation  and
years of service.  The figures in this table are based upon the assumption  that
the Pension Plan  continues in its present form and reflects  offsets for Social
Security benefits.  At June 30, 1997, the estimated credited years of service of
Robert S. Duncan, Lou Ann Poynter, Hershel Parker, Thomas L. Cousins and Barbara
S. Ellender were 28, 25, 24, 13, and 11, respectively.

Compensation  covered by the Pension  Plan  includes  base salary and bonus paid
pursuant to the Bank's incentive compensation plan and excludes the value of any
restricted  stock  awards and the related  income tax benefit  pass-through  and
Salary  Continuation Plan payments paid as other annual  compensation.

                                      134

<PAGE>



Based on the amounts  reported  as salary and bonus in the Summary  Compensation
Table for each of the named officers,  the benefits payable at normal retirement
at age 65 determined in accordance with the plan benefit  formula  applicable to
each would be as follows: Robert S. Duncan,  $87,536; Lou Ann Poynter,  $54,621;
Hershel Parker,  $71,034;  Thomas L. Cousins,  $43,866; and Barbara S. Ellender,
$35,531.  The defined benefit pension plan will be terminated effective July 31,
1997 and assets of the Plan will be distributed to active participants  employed
as of July 31, 1997. The amount of  distribution  is undetermined at the time of
this writing.

Salary  Continuation  Plan.  Effective  June 30, 1997,  the Bank  terminated its
Salary Continuation Plan (the "Salary Plan"), a non-qualified, executive benefit
plan  adopted by the Board of  Directors  of the Bank on July 1, 1994.  The Bank
executed a  non-qualified  deferred  compensation  agreement with each of the 14
executives  designated by the Board of Directors of the Bank to  participate  in
the Salary Plan.  Supplemental retirement benefits payable under the Salary Plan
were to range from 40% to 60% of final base  salary,  less  benefits  payable to
each executive under the Pension Plan. Upon termination of the Salary Plan, each
executive  received  a lump  sum cash  payment  based  on the  present  value of
benefits  the  executive  was  entitled to receive  under the Salary  Plan.  The
amounts paid to the named officers as a result of the  termination of the Salary
Plan are provided in the Summary  Compensation  Table under the column captioned
"Other Annual Compensation."


EMPLOYMENT AGREEMENTS

Employment  Agreements (the  "Agreements") were entered into between the Company
and its two senior executives,  Robert S. Duncan and Lou Ann Poynter,  effective
December 20, 1995.  The  Agreements  provide for salaries as  determined  by the
Board of Directors, but in no event shall the salaries be less than the salaries
as  of  the   Agreements'   commencement   date.  The  Agreements   provide  for
participation  in benefit plans to the same extent as executive  officers of the
Company generally. In the event of involuntary  termination,  Mr. Duncan and Ms.
Poynter would be entitled to receive  liquidated  damages on a monthly basis for
the remaining  term of the Agreement  equal to one-twelfth of the average annual
amount of salary, bonus and incentive  compensation earned during the two fiscal
years prior to the date of termination.  In the event of involuntary termination
within 24 months following a change in control, Mr. Duncan and Ms. Poynter would
be entitled  to, in  addition  to any  liquidated  damages  due,  (i) a lump sum
payment equal to 299% of the  executive's  "base amount" for purposes of Section
280G of the Internal  Revenue  Code of 1986 and (ii) in the event Mr.  Duncan or
Ms.  Poynter  would  receive any "excess  parachute  payments"  for  purposes of
Section 280G, a "gross-up"  payment to compensate  the executive for the cost of
any excise  taxes and taxes  attributable  to the  gross-up.  In  addition,  the
Agreements provide for lifetime life insurance and medical benefits in the event
of any  separation  of service  from the Company  (other  than for  cause).  The
Agreements currently have an expiration date of December 19, 1999.


KEY EMPLOYEE SEVERANCE PLAN

In  December  1995,  the  Company  and the Bank  adopted a  severance  plan (the
"Severance  Plan") for selected key  employees as  designated  by the Board from
time to time.  The Plan was amended on March 19, 1997 to include all officers of
the Company and its subsidiaries and to limit the total amount payable under the
Plan to a  total  of $1.8  million.  The  amount  to be  paid  in the  event  of
termination  with 18 months  following  a 25% or more  change in  control of the
Company is based on a formula that  includes  base salary,  years of service and
corporate  title. A severance amount equal to one year's salary is to be paid to
officers at the level of Senior Vice  President and above.  Other benefits under
the Severance  Plan

                                      135

<PAGE>



include an  extension  of health and welfare  benefits  for one and a half years
after  termination.  Mr. Duncan and Ms.  Poynter are excluded from the Severance
Plan. Termination benefits payable to Mr. Parker, Mr. Cousins, and Ms. Ellender,
based on  calculations  as of June 30,  1997,  would be  $136,500,  $126,000 and
$86,000 respectively.


DIRECTOR COMPENSATION

Directors'  Fees.  Each  director  of the  Company is paid  $2,000 per month for
service as a director  of the  Company.  Members of the Audit  committee  of the
Board of  Directors  of the  Company  are each  paid an annual  retainer  fee of
$18,000  for their  service as members of such  committee,  in addition to their
monthly fees for service as directors of the Company.  Each director of the Bank
is paid $1,500 for service as a director of the Bank. In addition, an annual fee
of $6,000  is paid to each  non-employee  director  of the Bank for  service  on
committees of the Board of Directors of the Bank.

Stock in Lieu of Cash  Compensation  Plan.  In 1996,  the  Company  and the Bank
adopted the Stock in Lieu of Cash Compensation Plan for Directors (the "Stock in
Lieu of Cash Plan"). The Stock in Lieu of Cash Plan provides for the deferral of
compensation  earned by  directors  of the  Company  and the Bank (for  services
performed as directors)  in the form of Stock Units  ("Stock  Units") in a Stock
Unit account ("Stock Unit  Account").  Directors may elect to have up to 100% of
their fees deferred and converted into Stock Units.

For dividends paid with respect to the Company's common stock, each director has
credited to his or her Stock Unit Account an additional number of Stock Units in
an amount determined under the Stock in Lieu of Cash Plan. Each director's Stock
Unit Account shall be settled by delivering to the director (or his beneficiary)
the number of shares of Company  common stock equal to the number of whole Stock
Units then credited to the non-employee director's Stock Unit Account, in either
(i) a lump sum or (ii) substantially equal annual installments over a period not
to exceed ten years.


                                      136

<PAGE>



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of August 29, 1997, the Company had 13,754,266  shares of Common Stock issued
and outstanding.

The following table sets forth, as of August 29, 1997, certain information as to
(i) those persons who were known by  management to be beneficial  owners of more
than 5% of the Company's  outstanding shares of Common Stock, (ii) the shares of
Common  Stock  beneficially  owned by the Chief  Executive  Officer and the four
other highest paid  executive  officers who earned in excess of $100,000  during
fiscal  1997  (the  "named  officers")  and  (iii) all  executive  officers  and
directors of the Company and the Bank as a group.  Information  regarding  share
ownership of the  directors  of the Company is  contained  under Item 10 of this
report.

<TABLE>
<CAPTION>
                                                                    SHARES OF
                                                                   COMMON STOCK
                                                                   BENEFICIALLY         PERCENT OF
BENEFICIAL OWNER (1)                                                   OWNED              CLASS
--------------------                                               ------------         ---------
<S>                                                                  <C>                  <C>  
Robert S. Duncan ...........................................         779,273              5.67%

Lou Ann Poynter ............................................         569,927              4.14

Hershel Parker .............................................         199,815 (2)          1.45

Thomas L. Cousins ..........................................          29,413 (3)          0.21

Barbara S. Ellender ........................................          75,627 (4)          0.55

All directors and executive officers as a group (24 persons)(5)    4,204,845 (6)         30.57
</TABLE>

----------

(1)  The  address of each of the  beneficial  owners is 100 West  Front  Street,
     Hattiesburg, Mississippi 39401.

(2)  Mr. Parker shares voting and  investment  power over 48,480 shares with his
     wife and shares with the 401(k) Trustee  investment power over 1,029 shares
     allocated  to his  account  under  the  401(k).  Mr.  Parker  is  deemed to
     beneficially  own 19,883 shares held in his wife's IRA.

(3)  Mr. Cousins shares with the 401(k) Trustee investment power over 709 shares
     allocated to his account under the 401(k).

(4)  Ms. Ellender shares voting and investment power over 29,016 shares with her
     husband and shares with the 401(k) Trustee investment power over 637 shares
     allocated  to her  account  under the  401(k).  Ms.  Ellender  is deemed to
     beneficially  own 7,243 shares held in her  husband's  IRA and 1,920 shares
     held collectively by her two children.

(5)  Includes directors and executive officers of the Company and the Bank.

(6)  Includes shares held directly, as well as 105,888 shares subject to options
     which are  exercisable  within 60 days of August 29, 1997 granted under the
     1990 Stock Option and Incentive Plan ("the Stock Option Plan"),  as well as
     shares held in retirement  accounts,  held by certain  members of the named
     individuals' families, or held by trusts of which the named individual is a
     trustee  or  substantial  beneficiary,  with  respect  to which  shares the
     respective  directors  and  officers  may be  deemed to have sole or shared
     voting or investment  power. The number of shares reported includes 675,376
     shares held by the Defined  Benefit  Pension Plan for Employees of Magnolia
     Federal Bank for Savings Trust (the "Pension Plan") which, under applicable
     securities  laws, may be deemed to be beneficially  owned by those officers
     who serve as Trustees for the Trust.

                                      137

<PAGE>



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


The Bank has followed a policy of granting to officers,  directors and employees
only  loans that are  secured by the  borrower's  personal  residence  and small
consumer  loans.  Loans to senior officers and directors must be approved by the
Board of Directors and loans to other  employees  must be approved by the Bank's
Chief Executive Officer, President or Executive Vice President. All loans to the
Bank's officers, directors and employees have been in the past and will continue
to be made in the  future in the  ordinary  course of  business  and on the same
terms and conditions as those of comparable transactions prevailing at the time,
and do not involve more than the normal risk of  collectibility or present other
unfavorable  features.  All  loans by the Bank to its  directors  and  executive
officers  are  subject  to  regulations  of the  Office  of  Thrift  Supervision
restricting loans and other transactions with affiliated persons of the Bank.

H. A. Moore,  III,  Secretary and Director of the Company,  was a partner in the
law firm of Moore and Jones, which was comprised of six practicing lawyers until
February 1997 when he became Executive Vice President and General Counsel of the
Bank. During the period from July 1, 1996 to February 1, 1997, the firm received
total fees of $203,032 for general legal  services to the Company,  the Bank and
their  affiliates.  In  addition,  the firm also  received  fees in an amount in
excess  of 5% of  the  firm's  gross  revenues  for  title  work,  bankruptcies,
foreclosures and repossessions that pass through the Bank or a subsidiary of the
Company and which fees are substantially collected from Bank customers.

David K. Hemeter, Director of the Bank, has performed architectural services for
the Bank for several  years and received  $61,787 in  architectural  fees during
fiscal  1997.  Payments  to  Mr.  Hemeter  were  based  on a  percentage  of the
construction  cost at the standard rates suggested by the American  Institute of
Architects.



                                      138

<PAGE>



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a) (1)  Financial Statements

Financial   statements  filed  on  this  Form  10-K  under  Item  8  are  hereby
incorporated for reference.

         (a) (2)  Financial Statement Schedules

All financial statement schedules have been omitted as the required  information
is  inapplicable  or has been  included in the Notes to  Consolidated  Financial
Statements filed under Item 8 of this Form 10-K.

         (a) (3)  Exhibits

<TABLE>
<CAPTION>
Regulation S-K                                                                               Reference to Prior Filing or
Exhibit Number                                     Document                                 Exhibit Number Attached Hereto
--------------                                     --------                                 ------------------------------
<S>                 <C>                                                                              <C>  
       2            Plan of acquisition, reorganization, arrangement, liquidation or                      *
                    succession

     3(a)           Articles of Incorporation                                                            ****

     3(b)           By-laws                                                                               **

       4            Instruments defining the rights of security holders, including                        **
                    indentures

       9            Voting trust agreement                                                               None

      10            Material contracts:

                    (a)  Stock Option and Incentive Plan                                                  **
                    (b)  Incentive Compensation Plan                                                      **
                    (c)  Form of Salary Continuation Agreement                                           ***
                    (d)  Employment Agreement with Robert S. Duncan                                      ****
                    (e)  Employment Agreement with Lou Ann Poynter                                       ****
                    (g)  Change in Control Severance Plan                                                ****
                    (h)  Amendment to Change in Control Severance Plan                                  10(h)

      11            Statement re computation of per share earnings                                        11

      12            Statements re computation of ratios                                              Not required

      13            Annual report to security holders                                                    None

      16            Letter re change in certifying accountant                                            None

      18            Letter re change in accounting principles                                            None

      21            Subsidiaries of the registrant                                                        21

      22            Published report regarding matters submitted to vote of security                     None
                    holders

      23            Consents of experts and counsel                                                       23

      24            Power of attorney                                                                Not required

      27            Financial Data Schedule                                                               27

      99            Additional exhibits                                                                  None
</TABLE>

----------

                                      139

<PAGE>

*    Filed as an exhibit to the Company's  Form 8-K current  report filed on May
     14, 1997 (File No.  0-18918)  pursuant to the  Securities  Exchange  Act of
     1934. Such previously filed document is hereby incorporated by reference in
     accordance with Item 601 of Regulation S-K.

**   Filed as exhibits to the Company's Form S-1 registration statement filed on
     October 1, 1990 (File No. 33-37016) pursuant to Section 5 of the Securities
     Act of 1933. All of such previously filed documents are hereby incorporated
     herein by reference in accordance with Item 601 of Regulation S-K.

***  Filed as Exhibit  10(c) to the  Company's  Form 10-K annual report filed on
     September 25, 1995 (File No. 0-18918)  pursuant to the Securities  Exchange
     Act of 1934.  Such  previously  filed  document is hereby  incorporated  by
     reference in accordance with Item 601 of Regulation S-K.

**** Filed as  exhibits  to the  Company's  Form  10-K  Annual  Report  filed on
     September 27, 1996 (File No. 0-18918)  pursuant to the Securities  Exchange
     Act of 1934.  Such previously  filed  documents are hereby  incorporated by
     reference in accordance with Item 601 of Regulation S-K.

     (b)  Reports on Form 8-K

During the three month period ended June 30, 1997, the Company did file a report
on Form 8-K on May 14, 1997 (File No. 0-18918).



                                      140

<PAGE>



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

                               MAGNA BANCORP, INC.


Date:    September 26, 1997                 By: /s/ Lou Ann Poynter
     -------------------------------           --------------------
                                                Lou Ann Poynter
                                                President and Director
                                                (Duly Authorized Representative)


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has been  signed  below by the  following  persons  on  behalf  of Magna
Bancorp, Inc. and in the capacities and on the dates indicated below.


By:  /s/ Robert S. Duncan                   By: /s/ Karen K. Griffis
   -------------------------------             ----------------------------
     Robert S. Duncan                               Karen K. Griffis
     Chairman of the Board                          Treasurer
          and Director                             (Principal Financial and
     (Principal Executive Officer)                  Accounting Officer)


Date:    September 26, 1997                 Date:    September 26, 1997
     -------------------------------             ----------------------


By:  /s/ Lou Ann Poynter                    By: /s/ Zach T. Hederman, Jr.
   -------------------------------             ----------------------------
     Lou Ann Poynter                                Zach T. Hederman, Jr.
     President and Director                         Director


Date:    September 26, 1997                 Date:    September 26, 1997
     -------------------------------             ----------------------


By:  /s/ H.A. Moore, III                    By: /s/ George P. Hopkins, Jr.
   -------------------------------              ----------------------------
     H. A. Moore, III                           George P. Hopkins, Jr.
     Secretary and Director                     Director


Date:    September 26, 1997                 Date:    September 26, 1997
     -------------------------------             ----------------------

                                      141

<PAGE>



                                INDEX TO EXHIBITS



Exhibit Number

     10(h)                        Amendment to Change in Control Severance Plan

       11                         Statement re Computation of per Share Earnings

       21                         Subsidiaries of the Registrant

       23                         Consents of Experts and Counsel

       27                         Financial Data Schedule