<PAGE>   1
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549
                           ----------------------

                                  FORM 10-K
                                ANNUAL REPORT
                                -------------
                       PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

    For the Fiscal Year Ended December 31, 1996  Commission File No: 0-17703

                             FIRST AMERICAN BANCORP
             ------------------------------------------------------

             (Exact name of registrant as specified in its charter)



                 ALABAMA                         63-0879472
         ------------------------  ------------------------------------
         (State of Incorporation)  (I.R.S. Employer Identification No.)


                          251 JOHNSTON STREET, S.E.
                            DECATUR, ALABAMA 35601
                   ----------------------------------------
                   (Address of principal executive offices)
                                (205) 340-7000
                       -------------------------------
                       (Registrant's telephone number)

         SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


                                                 Name of each exchange
      Title of each class                         on which registered
      -------------------                        ---------------------
           None                                         None


         SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         Common Stock, $.01 Par Value
                         ----------------------------
                               (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 shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
                          Yes X              No
                             ----              ----
Indicate by checkmark if disclosure of delinquent filers pursuant to Rule 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. [ ]

The aggregate market value of Common Stock held by non-affiliates (based upon
limited quotations of $17.00 per share during the past 60 days since there are
no other reliable estimates of high and low bid quotations) was approximately
$38,486,028 on March 21, 1997.

Indicate the number of shares outstanding of the registrant's class of common
stock, as of the last practicable date.


            Class                           Outstanding at February 28, 1997
----------------------------                --------------------------------
Common Stock, $.01 par value                             2,263,884

 Documents Incorporated by Reference       Part of 10-K in which Incorporated
---------------------------------------    ----------------------------------
Proxy Statement for 1997 Annual Meeting                  Part III

The Exhibit Index is located on page 63.

<PAGE>   2



                                    PART I
                              ITEM 1 - BUSINESS


GENERAL

     First American Bancorp (the "Company") was incorporated under the laws of
the State of Alabama on   June 7, 1984 for purposes of becoming a bank holding
company and acquiring First American Bank (the "Bank"). The Company's
acquisition of the Bank was completed as of August 9, 1985. The Company offers
a broad range of bank and bank-related services through the Bank, its wholly
owned subsidiary.  The Bank is currently one of  two locally owned banks in
Decatur, Alabama that are insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation, as a second locally owned bank in Decatur opened
in 1995.  The Bank performs banking services customary for full-service banks
of similar size for customers in Decatur and Morgan County, in Athens, Ardmore
and Limestone County, and the city of Madison and Madison County, Alabama.
These services include the making of personal and commercial loans, the
furnishing of personal and commercial checking accounts, the receipt of demand
and time deposit accounts and a credit card program.  The Bank originates
residential mortgages for immediate resale through its mortgage division.  The
Bank does not provide trust and fiduciary services. It offers discount
securities brokerage through an unaffiliated broker.  The Bank has three full
service banking offices in Decatur, two full service offices in Athens, and a
full service office in Madison and Ardmore.  The Company operates a private
banking program through its Private Banking Department. The purpose of the
Private Banking Department is to enhance the core services that the Bank offers
by focusing on a certain type of customer and offering an account which
includes a variety of banking services.  In August 1995, the Bank created two
subsidiaries, First Allegiance Mortgage, Inc. ("FAM") and Corporate Billing,
Inc. ("CBI"). FAM  purchases sub-prime residential mortgages from brokers in
northern and central Alabama. CBI purchases and collects accounts receivable
for its customers.  Management believes the subsidiaries will provide the
Company with very attractive additional sources of income which will further
enhance shareholder value.

BUSINESS STRATEGY

     The Company's business strategy is to continue to grow while maintaining
high asset quality, and includes the following components:

     Increase Market Share in Existing Markets.  Management will continue to
take advantage of the marketing and business advantages that it perceives
result from being a locally owned, FDlC-insured bank in its market area.
Management believes that as a locally owned bank, the Bank and its officers are
better able to understand and respond effectively and quickly to its
communities' needs for credit and financial services.

     Expand Markets Served.  The Company intends to expand its market area in
North Alabama, with emphasis on areas adjacent to the Bank's current market
area.  This expansion may be achieved by opening new branches and/or through
carefully selected acquisitions.  Management believes the Bank's emphasis on
business banking for small to medium sized customers in its market area has
been well received and that this same approach will be well received in these
areas.

     Increase Non-Interest Income.  Non-interest income helps stabilize
earnings throughout changing interest rate environments. Non-Interest income
increased 16.4% from 1995 to 1996, compared with an increase of 16.2% from 1994
to 1995, Management continues to focus on improving non-interest income.
Management intends to continue to grow the Bank's non-interest income by
expanding its Mortgage Division and to expand its credit card operations to
include private label billing.

     Prudently Manage Credit Quality and Interest Rate Risk.  The Bank's loan
policies establish stringent loan underwriting and credit administration
standards.  Adherence to these policies is closely monitored by management and
is carefully reviewed by the Bank's Board of Directors.  In addition, the Bank
manages its interest rate risk by originating short-term or variable rate loans
in order to match, to the extent practicable, the average maturities of the
Bank's interest-bearing liabilities and interest-earning assets.  See "BUSINESS
-- LENDING POLICY."

     Emphasize Customer Service.  The Company distinguishes itself in its
market by making its customers the highest priority in all aspects of the
Company's operations.  Ongoing employee training focuses on customer needs,
responsiveness, and courtesy to customers.  The Bank emphasizes the development
of long-term relationships with its customers.  Management believes that the
size of the Bank and the relationship it has with its customers enables

<PAGE>   3



the Bank to develop and offer products that meet its customers' needs.  The
Company's marketing efforts and operating practices emphasize the institution's
ties to the local community and its commitment to providing the highest level of
personalized service.

LOAN PORTFOLIO

     The Bank provides a broad range of commercial and retail lending services
to corporations, partnerships and individuals, including commercial business
loans, commercial and residential real estate construction and mortgage loans,
consumer loans, revolving lines of credit and letters of credit.  Management
believes that the Bank's loan portfolio is adequately diversified and contains
no significant concentrations of loans in any one industry, to any one
individual or to related groups of borrowers.  The Bank's loan portfolio
contains no foreign loans or energy related loans, and agricultural loans
comprise a very small portion of the portfolio.  The following is a discussion
of the primary types of loans made by the Bank.

     Commercial and Industrial Loans.  As of December 31,1996, the Bank had
general commercial and industrial loans of $32.7 million, comprising 18.6% of
its total loan portfolio.  Commercial and industrial loans consisted primarily
of operating loans made to manufacturers, wholesalers and retailers of goods,
service companies and other industries.  The Bank concentrates on making loans
to small to medium size companies.  Management believes that making such loans
helps the local economy and provides the Bank with a reliable source of income
and produces strong deposit and lending relationships.  The primary repayment
risk for commercial loans is the failure of the borrower due to economic or
financial factors.  Although the Bank typically looks to a commercial
borrower's cash flow as the principal source of repayment, many commercial
loans are secured by inventory, equipment, accounts receivable and other
assets.  The Bank's commercial and industrial loan portfolio has no significant
concentration of credit to any one industry or business segment, which is a
reflection of the diversified economy in the Bank's market area.

     Real Estate Loans.  Of the Bank's loan portfolio at December 31, 1996,
$96.2 million, or 54.8%, was secured by real estate.  The Bank's real estate
loan portfolio consists of loans for construction and land development, the
purchase of farmland, all types of loans secured by residential real estate,
and nonfarm-nonresidential loans.  The Bank seeks to minimize the risks of loss
in its real estate loan portfolio by adhering to strict loan to value ratio
guidelines, following regulatory appraisal guidelines, maintaining a
diversified real estate loan portfolio, and by closely monitoring the local
real estate market and real estate values.

     Agricultural Loans.  As of December 31, 1996, approximately $0.9 million,
or 0.5%, of the Bank's loan portfolio was comprised of loans to finance
agricultural production, loans to farmers, and loans secured by farmland
(including residential and other improvements).  With agricultural loans making
up such a small percentage of the Bank's total loan portfolio, the Bank is able
to manage the risks inherent in these types of loans.

     Consumer Loans.  As of December 31, 1996, loans to individuals for
personal expenditures totaled $41.2 million, comprising 23.4% of the Bank's
loan portfolio.  Of these consumer loans, $2.3 million or 5.6%, were credit
card loans and other revolving plans.  The Bank's other consumer loans include
loans to purchase automobiles and boats.  The Bank purchases automobile loans
from several local automobile dealers.  As of December 31, 1996, these indirect
loans were $20.1 million, or 49.0%, of the consumer loan portfolio.  With the
large number and diversity of consumers, potential losses in the consumer loan
portfolio do not represent a significant risk to the Bank.

     Municipal Loans.  The Bank had loans to local political subdivisions and
industrial development loans of $0.4 million, representing 0.2% of the Bank's
loan portfolio at December 31, 1996.  These loans were generated to support the
local community and to provide tax exempt income for the Bank.


LENDING POLICY

     The Bank maintains a comprehensive lending policy which is intended to
enable it to meet the credit needs of the communities that it serves, including
low and moderate income customers, and to employ lending procedures and
policies consistent with this approach.  The underlying goal of this policy is
to initiate and maintain sound and profitable loans.  All loans are subject to
the Bank's written loan policy, which is updated annually and which gives
lending officers the authority to approve loans of various maximum amounts
depending upon their seniority and experience.  An internal loan committee,
comprised of the Bank's Chief Executive Officer, Chief Operating Officer,
the Decatur City President, the Limestone/Madison Regional President, the
Executive Vice President, a Senior Vice


<PAGE>   4


President and a Vice President, reviews and approves loans that exceed
an individual loan officer's lending authority and, in certain instances, other
types of loans.  Larger credits and in many instances the loans that are
submitted to the internal loan committee are also submitted to the Loan
Committee of the Board of Directors for review and approval.  All credit
extensions are reviewed daily by the Bank's senior management and at least
monthly by its Board of Directors.

     The entire loan portfolio undergoes close scrutiny to maintain its quality
and diversity and to assure proper documentation.  The Bank's lending policy
requires analysis of each borrower's projected cash flow and ability to service
its debt.  This policy also requires that each loan has an agreed upon
repayment schedule and gives individual lending officers the responsibility of
obtaining, keeping and analyzing current credit information.  Maximum loan to
value ratios and terms are established in the policy for the various types of
loans.  The criteria outlined in the Bank's loan policy is more strict than the
guidelines provided by the regulators in terms of loan to value ratios, etc.
Through the Bank's credit policy and credit review procedures, Management
believes that it is able to identify areas of concern in the loan portfolio and
to take corrective action when necessary.

COMPETITION

     The banking business in Alabama, including the areas of North Alabama
serviced by the Company, is highly competitive with respect to loans, deposits
and other services, and is dominated by a number of major banks and bank
holding companies which have numerous offices and affiliates operating over
wide geographic areas.  The Bank competes for deposits, loans and other
business with these institutions, as well as with savings and loan
associations, finance companies, mutual funds, credit unions, brokerage firms,
mortgage companies, insurance companies and other local and non-local financial
institutions.  Areas of competition include prices, interest rates, services
and availability of products.  Among the advantages certain of these
institutions may have compared to the Company are the ability to finance
extensive advertising campaigns, and to allocate and diversify their assets
among loans and securities of the highest yield and in locations with the
greatest demand.

     Many of the major commercial banks in the Bank's service area or their
affiliates offer services such as international banking and investment and
trust services which are not offered directly by the Bank.  Such competitors,
because of their greater capitalization, also have substantially higher lending
limits than the Bank.

     The Alabama Banking Code permits unsecured loans to any person up to 10%
of a bank's capital, and secured loans up to 20% of capital.  At December 31,
the bank's maximum amount of an unsecured loan was $2,268,000, and the maximum
amount of a secured loan was $4,536,000.  The Bank may make larger loans
through sales of loan participations to others.  See " Supervision and
Regulation".

     The risk of nonpayment or deferred payment of loans is inherent in
commercial banking.  Loans to smaller or medium-sized businesses served by the
Bank may, however, involve certain lending risks not inherent in loans to
larger companies.  Smaller companies may have shorter operating histories, less
sophisticated internal record keeping and financial controls, and greater
debt-to-equity ratios.  Management of the Bank evaluates all loan applicants
and attempts to minimize its credit risks by using appropriate loan
application, approval and administrative procedures.  However, there can be no
assurance that these procedures will significantly reduce such lending risks.

     The Bank believes that intense competition for banking business in Decatur
and Morgan County will continue and possibly increase as a result of the
formation in 1995 of a new locally owned bank in Decatur.  However, the Bank
also believes that the marketing and business advantages of being locally owned
will continue.  The economic activity in Athens/ Ardmore/Limestone County and
Madison/Madison County provides excellent opportunities for the Bank as a
community bank.  Management believes that as a locally owned bank, the Bank and
its officers are better able to understand and respond effectively and quickly
to its communities' needs for credit and financial services.

EMPLOYEES

     As of December 31, 1996,  the Company and the Bank had 142 full-time
equivalent employees.  The Company provides a variety of benefit programs
including group life, health and accident insurance, and a
retirement plan.  The Company maintains ongoing educational and training
programs for its employees designed to prepare them for positions of increasing
responsibility in both management and operations positions.


<PAGE>   5


                          SUPERVISION AND REGULATION

     Bank holding companies and banks are regulated extensively under both
Federal and State law.  To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions.  Any change in
applicable law or regulation may have a material effect on the business of the
Company and the Bank.

THE COMPANY

     The Company is a bank holding company which is registered with, and
subject to supervision by the Federal Reserve under the Bank Holding Company
Act, ("BHC Act").  As a bank holding company, the Company is required to file
periodic reports and such additional information as the Federal Reserve may
require pursuant to the BHC Act.  The Federal Reserve may examine the Company
and the Bank.

     The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company.  With certain exceptions, the BHC
Act prohibits a bank holding company from acquiring direct or indirect
ownership or control of any voting shares of any company which is not a bank or
bank holding company and from engaging directly or indirectly in any activity
other than banking or managing or controlling banks or performing services for
its authorized subsidiaries.  A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined, by regulation or order, to be so closely related to
banking or managing or controlling banks as to be properly incident thereto.

     The Company and the Bank are subject to the Federal Reserve Act, Section
23A, as amended by the Banking Affiliates Act of 1982.  Section 23A defines
"covered transactions" to include extensions of credit and limits a bank's
covered transactions with any single affiliate to no more than 10% of a bank's
capital and surplus. Covered transactions with all affiliates combined are
limited to no more than 20% of a bank's capital and surplus.  All covered and
exempt transactions between a bank and its affiliates must be on terms and
conditions consistent with safe and sound banking practices and a bank and its
subsidiaries are prohibited from purchasing low quality assets from the bank's
affiliates.  Finally, Section 23A requires that all of a bank's extensions of
credit to an affiliate be appropriately secured by collateral.  The Company and
the Bank are also subject to Federal Reserve Act, Section 23B, which further
limits transactions among affiliates.

     The BHC Act requires a bank holding company to obtain the prior approval
of the Federal Reserve before it may acquire substantially all of the assets of
any bank or ownership or control of any voting shares of any bank if, after
such acquisition, it would own or control, directly or indirectly, more than
five percent of the voting shares of any such bank. Congress enacted and the
President recently signed into law the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act"), which permits, commencing
one year after enactment, bank holding companies to acquire banks in any state
without regard to whether the transaction is prohibited under any state law,
except that states may establish the minimum age of their local banks subject
to interstate acquisition of out-of-state bank holding companies. The minimum
age of local banks subject to interstate acquisition is limited to a maximum of
five years.

     On July 1, 1987, the Alabama Regional Reciprocal Banking Act of 1986
became effective. This act permits Alabama banks and bank holding companies to
acquire or be acquired on a regional reciprocal basis by banks and bank holding
companies located in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana,
Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Texas,
Virginia, West Virginia, and the District of Columbia. Upon effectiveness of
the Interstate Act, the restrictions imposed by this and other state laws with
respect to acquisitions by out-of-state bank holding companies will no longer
be effective. Accordingly, following the effective date of the Interstate Act's
bank holding company acquisition provisions, the Company and all other bank
holding companies will be permitted to undertake interstate acquisitions of
banks consistent with those provisions, notwithstanding the limitations
currently imposed by the interstate banking laws of any state. The effect of
these laws on the Company and the Bank cannot be predicted.


THE BANK

<PAGE>   6


     The Bank is a state bank organized under the laws of the State of Alabama
and its deposits are insured by the FDIC up to the maximum amount permitted by
law.  The Bank is subject to regulation, supervision and regular examination by
the Alabama Superintendent of Banks (the "Superintendent") and the FDIC.
Federal and state banking laws and regulations regulate, among other things,
the scope of the banking business conducted by the Bank, its loans and
investments, reserves against deposits, payment of interest on certain
deposits, mergers and acquisitions, borrowings, dividends, minimum capital
requirements, and the locations of branch offices and certain facilities.

     In August 1989, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was enacted.  FIRREA contains major
regulatory reforms, stronger capital standards for savings and loans and
stronger civil and criminal enforcement provisions.  FIRREA allows the
acquisition of healthy and failed savings and loans by bank holding companies
and imposes no interstate barriers on such bank holding company acquisitions.
With certain qualifications, FIRREA also allows bank holding companies to merge
acquired savings and loans into their existing commercial bank subsidiaries.
FIRREA also provides that a depository institution insured by the FDIC can be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC after August 9,1989, in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured depository institution in
danger of default.

     In December 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") into law.  This act
recapitalizes the Bank Insurance Fund ("BIF"), of which the Bank is a member,
substantially revises bank regulations, including capital standards, restricts
certain powers of state banks, gives regulators the authority to limit officer
and director compensation and requires holding companies to guarantee the
capital compliance of their banks.  In addition, the act grants to the FDIC
authority to impose several assessments on insured depository institutions, to
repay FDIC borrowings from the Treasury or BIF members or "for any other
purpose the FDIC may deem necessary" and to assess risk-based insurance
premiums upon banks. The FDIC has introduced a risk-based assessment schedule
with assessments to be paid by each BIF member based on the institution's
assessment risk classification, which is determined based on whether the
institution is considered "well capitalized," "adequately capitalized," or
"undercapitalized," as those terms have been defined in applicable Federal
regulations adopted to implement the prompt corrective action provision of
FDICIA, and whether such institution is considered by its supervising agency to
be financially sound or to have supervisory concerns.  The Bank is currently
classified as "well-capitalized" under the FDIC risk based assessment system.
There can be no assurance that future regulations required by this act and
adjustments on deposit insurance assessments will not adversely affect the
banking industry or operations of the Company or the Bank.

     The various Federal bank regulators, including the Federal Reserve, have
adopted a risk-based capital requirement for assessing bank and bank holding
company capital adequacy.  These standards significantly revise the current
definition of capital and establish minimum capital standards in relation to
the relative credit risk of assets and off-balance sheet exposures.  Capital is
classified into two tiers.  Tier I capital consists of common shareholders'
equity and perpetual preferred stock (subject to certain limitations) and is
reduced by goodwill and minority interests in the common equity accounts of
consolidated subsidiaries.  Tier II capital consists of the allowance for
possible loan losses (subject to certain limitations), and certain subordinated
debt.  The risk-based capital guidelines require financial institutions to
maintain specific defined credit risk factors (risk-adjusted assets). The
minimum Tier I and the combined Tier I and Tier II capital to risk-weighted
assets ratios are 4.0% and 8.0%, respectively.  The Federal Reserve also has
adopted regulations which supplement the risk-based capital guidelines to
include a minimum leverage ratio of Tier I Capital to total assets of 3.0% to
5.0%.

     The Federal Reserve's risk-based capital guidelines are applied to the
Company and the Bank on a consolidated basis.  This will limit the Company's
ability to engage in acquisitions financed by debt.  The FDIC has adopted
similar risk-based capital requirements that are applicable to the Bank.  The
Federal Reserve, the FDIC and the Superintendent have imposed absolute minimum
capital (leverage) requirements.  The Company's management believes that, in
view of the composition of the Company's assets and its present capital, such
capital rules do not have a material effect on the Company.  However, those
rules may affect the future development of the Company's long-term business and
capital plans, and may affect its ability to acquire additional financial
institutions and other companies.

     The Community Reinvestment Act of 1977 (the "CRA") and the Regulations of
the Federal Deposit Insurance Corporation and the Federal Reserve System
implementing that Act are intended to encourage regulated financial
institutions to help meet the credit needs of their local community or
communities, including low and


<PAGE>   7


moderate income neighborhoods, consistent with the safe and sound
operation of such financial institutions.  Such regulations provide that the
appropriate regulatory authority will assess the records of regulated financial
institutions in satisfying their continuing and affirmative obligations to help
meet the credit needs of their local communities.  The results of such
examinations are made public and are taken into consideration upon the filing of
any application to establish a branch, to merge or to acquire the assets or
assume the liabilities of a bank.  Effective on July 1, 1995, the bank
regulators amended the CRA regulations to strengthen federal enforcement of the
CRA.  The new regulations replaced the subjective factors formerly used to
assess an institution's CRA performance with three "tests" using objective,
performance based standards.  The tests would apply differently to different
types of institutions, depending on their size or specialties.  It cannot be
predicted whether such proposal will be adopted, and if adopted, how the
regulation will affect the Company or the Bank.

     Banking is a business which depends on interest rate differentials.  In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings and the interest received by a bank on its loans to
customers and its securities holdings, constitutes the major portion of a
bank's earnings.  Thus, the earnings and growth of the Company and the Bank
will be subject to the influence of economic conditions generally, both
domestic and foreign, and also to the monetary and fiscal policies of the
United States and its agencies, particularly the Federal Reserve.  The Federal
Reserve regulates the supply of money through various means, including open-
market dealings in United States government securities, the discount rate at
which members may borrow, and reserve requirements on deposits and funds
availability regulations.  These instruments are used in varying combinations
to influence the overall growth of bank loans, investments and deposits and
also affect interest rates charged on loans or paid on deposits.  The policies
of the Federal Reserve have had a significant effect on the operating results
of commercial banks in the past and will continue to do so in the future.  The
nature and timing of any future changes in Federal Reserve policies and their
impact on the Company cannot be predicted.


                             ITEM 2 - PROPERTIES

     The Bank owns or leases buildings that are used in the normal course of
its business.  During 1996, the Bank conducted business from its main office,
six full service branches, and an operations location.

     The main office is located at 251 Johnston Street, S.E., in the center of
Decatur in a 40,000 square foot building.  The main building houses the Bank's
retail division, the mortgage division and some banking operations, enabling
the Bank to better serve its customers and the community.  The Operations
Center is located at 239 Johnston Street, S.E.  The main building and the annex
together should provide adequate space for present needs as well as for
projected growth over the next ten years.

     The Sixth Avenue branch office is located in southeast Decatur in a 1,400
square foot building.  The Bank owns the building and the approximately
one-half acre on which this branch office is located.

     The Beltline branch office is located in southwest Decatur in a 3,200
square foot building that was built in August 1990.  The Bank owns the building
and the one and one half acres upon which this branch office is located.  A
portion of the lot that is not occupied by the Bank is leased to Sexton's,
Inc., for use as a laundry and dry cleaning facility.

     The Athens Highway 72 office is located at 1044 Highway 72 East in Athens
in a 3,400 square foot office that opened in April 1991.   The Bank owns the
building and the approximately one acre of land on which it is located.

     The Downtown Athens office, which opened in January, 1994, is located at
309 West Washington Street in Athens in a new 3,208 square foot facility.  The
Bank owns the facility and the approximately one-half acre of land on which it
is located.

     The Madison office, which opened December 18, 1995, is located at 8018
Highway 72 West in Madison.  The Bank owns the 4,041 square foot facility and
the approximately one acre of land on which it is located.

     The Ardmore office, which the Bank acquired March 16, 1996, is located at
30010 Ardmore Avenue in Ardmore. The Bank owns the 3,852 square foot facility
and the approximately one and one-quarter acre of land on which it is located.

<PAGE>   8



                          ITEM 3 - LEGAL PROCEEDINGS

     While the Company and the Bank are from time to time parties to various
legal proceedings arising from the ordinary course of business, management
believes after consultation with legal counsel that there are currently no
proceedings threatened or pending against the Company or the Bank that will,
individually or in the aggregate, have a material adverse effect on the
business or consolidated financial condition of the Company.



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

     No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1996.


                                   PART II
    ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
                                   MATTERS

     No active trading market exists for the common stock of the Company and no
assurance is given that an active trading market will develop in the
foreseeable future. The Company does not presently intend to qualify or list
the common stock on any securities market or exchange to facilitate such
trading.  Currently two local broker-dealers are making a market in the
Company's stock.

     The Company and the Bank, prior to its acquisition by the Company, have
paid no cash dividends. The Company does not anticipate paying cash dividends
on shares in the foreseeable future, but may distribute additional stock
dividends. Management anticipates retaining all Company earnings to finance the
Company's growth. The declaration and payment of dividends upon Bank common
stock for use by the Company are limited by law and by the need to maintain
adequate capital in the Bank. Any funds held by the Company available for
payment of dividends on its shares are subject to prior payment of principal
of, and interest on Company indebtedness, to restrictions imposed by Federal
Reserve policy and to restrictions upon dividends payable by the Bank to the
Company and the Bank's need to maintain adequate capital. See "Supervision and
Regulation".

     As of February 28, 1997, there were 773 shareholders of record of the
Company's common stock, of which 743 were residents of Alabama.

[THE REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK.]



<PAGE>   9



                       ITEM 6 - SELECTED FINANCIAL DATA

     The following table sets forth selected financial data for the last five
years. All averages are daily averages.


<TABLE>
<CAPTION>
                                                        1996        1995        1994        1993        1992
---------------------------------------------------------------------------------------------------------------
Income Statement Data

<S>                                                  <C>         <C>         <C>         <C>         <C>
 Interest income                                     $  18,055   $  15,100   $  11,626   $   9,441   $   8,645
 Interest expense                                        7,881       7,383       5,150       3,918       3,803
 Net interest income                                    10,174       7,717       6,476       5,523       4,842
 Provision for loan losses                                 646         607         317         470         461
 Net interest income after provision for loan loss       9,528       7,110       6,159       5,053       4,381
 Noninterest income                                      1,681       1,444       1,243       1,312       1,067
 Noninterest expense                                     7,666       5,951       5,473       4,453       3,797
 Income before taxes                                     3,543       2,603       1,929       1,912       1,651
 Income tax expense                                      1,140         547         461         578         456
 Net income                                              2,402       2,056       1,468       1,334       1,195
---------------------------------------------------------------------------------------------------------------
Balance Sheet Data - Averages
 Net loans                                           $ 154,721   $ 131,109   $ 104,620   $  84,031   $  74,078
 Total assets                                          207,775     189,950     165,207     131,988     109,601
 Earning assets                                        190,434     174,169     150,725     122,218     101,356
 Demand deposits                                        19,756      17,376      15,917      14,305      12,154
 Total deposits                                        173,692     160,419     141,916     120,140      98,318
 Shareholders' equity                                   21,287      18,320      11,691      10,556       9,287
 Average equity to average assets                        10.25%       9.64%       7.08%       8.00%       8.47%
---------------------------------------------------------------------------------------------------------------
Per Common Share Data
 Net income                                          $    1.06   $    0.92   $    0.84   $    0.78   $    0.69
 Shareholders' equity (book value) at period end
   adjusted for stock splits                         $   10.02   $    8.86   $    7.56   $    6.50   $    5.72
---------------------------------------------------------------------------------------------------------------
Share Data
 Average shares outstanding adjusted for stock
 splits                                              2,256,577   2,232,271   1,753,516   1,720,630   1,720,630
 Shares outstanding at end of year                   2,263,884   2,047,083   1,286,868     948,192     862,215
---------------------------------------------------------------------------------------------------------------
Earning Ratios
 Net income as a percentage of:
   Average total assets                                   1.16%       1.08%       0.89%       1.01%       1.09%
   Average shareholders' equity                          11.28%      11.22%      12.55%      12.64%      12.86%
---------------------------------------------------------------------------------------------------------------
Asset Quality Ratios
 Allowance for loan losses to total loans                 0.98%       1.19%       1.03%       1.21%       1.02%
 Allowance for loan losses to non-accrual loans         123.37%     162.45%     529.79%    3848.15%     275.96%
 Non-performing assets to total loans                     1.05%       0.91%       0.20%       0.03%       0.37%
 Non-performing assets to total assets                    0.81%       0.61%       0.19%       0.23%       0.59%
 Net charge-offs to average loans                         0.27%       0.27%       0.11%       0.27%       0.45%
---------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios
 Loans to deposits                                       94.30%      76.80%      76.30%      62.84%      69.51%
 Equity to assets                                        10.17%      10.65%       8.86%       7.49%       8.04%
 Tier I risk-based capital                               12.72%      14.38%      12.59%      10.95%      11.12%
 Total risk-based capital                                13.68%      15.45%      13.52%      11.97%      12.02%
 Leverage capital                                        10.89%      10.89%       9.71%       7.59%       8.49%
---------------------------------------------------------------------------------------------------------------
</TABLE>

Notes: Net income per share is based on the weighted average number of shares
outstanding. Restatements have been made to reflect stock splits effected in
the form of stock dividends. Shareholders' equity per share is based on the
number of Shares outstanding at the end of the period restated to reflect stock
splits effected in the form of stock dividends. See Consolidated Financial
Statements and related notes.




<PAGE>   10



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

OVERVIEW AND STRATEGY

     The Company has experienced significant growth over the past five years.
Since December 31, 1992, three full service branches have been added, and the
Company's assets have grown from $122.6 million to $223.0 million as of
December 31, 1996, a compound growth rate of 16.1%. Net loans have grown from
$77.0 million to $171.3 million and deposits have grown from $112.0 million to
$183.4 million over the same period.  This growth has been achieved through the
Company's success in solidifying its presence in the Decatur market and
continuing its growth in the Athens, Alabama market. The Company anticipates
that its new branches in the Madison, Alabama and Ardmore, Alabama markets will
help the Company continue its growth trend. The Company's income has continued
to increase during this period, with net income increasing from $1,194,699 for
the year ended December 31, 1992, to $2,402,171 as of December 31, 1996, and
asset quality has remained good, with non-performing assets as of December 31,
1996, representing only 0.27% of total assets.

     The Bank's business strategy is to continue to grow assets and earnings
while maintaining high asset quality. The key components of the Bank's strategy
include: (1) increase market share in the Bank's existing markets; (2) continue
to expand markets served in North Alabama with emphasis on areas adjacent to
the Bank's current market area; (3) increase non-interest income; (4) prudently
manage credit quality and interest rate risk; and (5) continue to emphasize
customer service.

     The success of the Company is dependent to a certain extent upon the
general economic conditions in the geographic market served.  The economy in
the Bank's geographic area, (Decatur, Morgan County, Athens, Ardmore, Limestone
County, and Madison, Madison County), which is generally classified as
industrial and agricultural, historically has been strong. Beginning in 1933
when the Tennessee Valley Authority instituted its program of waterway
improvements, dam construction and the production of inexpensive electricity,
this area has attracted a wide variety of industries. This area has experienced
steady population growth and employment growth and continues to benefit from
the rapid expansion of the Huntsville, Madison County area. Although the
Company expects that economic conditions will continue to be favorable in the
geographic market served, no assurance can be given that these economic
conditions will continue. Adverse changes in economic conditions in the
geographic markets that the Bank serves would likely impair the ability of the
Bank to collect loans and could otherwise have a negative effect on the
financial condition of the Company.

NET INCOME

     The Company reported net income in 1996 of $2,402,171, a 16.9% increase
from $2,055,531 in 1995. Net income per common share for 1996 was $1.06
compared to $0.92 for 1995, an increase of  15.2%. The increase in net income in
1996 over 1995 was primarily attributable to growth in average earning assets,
which increased 9.3% in 1996 over 1995. The increase in net income for 1996 was
generated by a $2,418,000, or 34.0% increase in net interest income after
provision for loan loss from 1995.  This 34.0% increase in net interest income
reflected the interest rate environment in 1996 and the Bank's goal to improve
its interest spread. Non-interest income increased $237,000 or 16.4%, while
non-interest expenses increased $1,715,000, or 28.8% in 1996.  Net losses on the
sales of securities in 1996 of $51,000, compared to net gains on the sales of
securities in 1995 of $23,000, offset some of the increase in non-interest
income. Service charges on deposits increased $223,000 to $1,091,000 in 1996
compared to $868,000 in 1995. Non-interest expenses are comprised primarily of:
(1) employee compensation and benefits expense; (2) occupancy expense; and (3)
furniture and equipment expense.  Non-interest expense increased primarily due
to employee compensation and benefits expense ($4.2 million in 1996 compared to
$3.3 million in 1995).  Income tax increased 108.5% from 1996 to 1995.  The
increase in income tax expense was attributable primarily to increased earnings
before taxes and decreased interest income on tax exempt investments held by the
Bank.

     The Company reported net income in 1995 of $2,055,531, a 40.1% increase
from $1,467,643 in 1994.  Net income per common share for 1995 was $0.92, a
9.5% increase compared to $.84 in 1994.  The increase in net income in 1995
over 1994 was primarily attributable to growth in average earning assets, which
increased 15.6% in 1995 over 1994.  The increase in net income for 1995 was
generated by a $951,000, or 15.4% increase in net interest income after
provision for loan loss from 1994.  This 15.4% increase in net interest income
reflected the interest rate environment in 1995 and the Bank's goal to improve
its interest spread. Non-interest income increased $201,000 or 16.2%, while
non-interest expenses increased $478,000, or 8.7% in 1995.  Net gains on the
sales of

<PAGE>   11


securities in 1995 of $23,000, compared to net losses on the sales of
securities in 1994 of $35,000, contributed to the increase in non-interest
income.  Servicing release fees increased $44,000 to $179,000 in 1995 compared
to $135,000 in 1994.  The increase in total non-interest income in 1995 was due
to the increase in servicing release fees.  Non-interest expenses are comprised
primarily of:  (1) employee compensation and benefits expense; (2) occupancy
expense; and (3) furniture and equipment expense.  Non-interest expense
increased primarily due to employee compensation and benefits expense ($3.3
million in 1995 compared to $2.9 million in 1994).  Income tax  expense
increased 18.6% in 1995 from 1994.  The increase in income tax expense was
attributable primarily to a  decrease in interest income on tax exempt
investments held by the Bank.

     A significant portion of the Company's net income in recent years has been
contributed by the Mortgage Division of the Bank, which originates long term
first mortgage residential loans with the intention of immediately selling
these loans on an individual basis.  The Bank also sells the mortgage loan
servicing associated with these loans to the investor.  The servicing release
fee paid by the purchaser of these mortgage loans increases the Bank's yield on
the originations of these loans.

     The Mortgage Division, which is comprised of mortgage loan origination
offices in Decatur and Madison, Alabama reported combined net income of $69,000
in 1996 compared to $149,000 in 1995. This decrease in earnings in 1996 was
primarily due to increased competition in the Huntsville market which decreased
the Huntsville office's income.  In November 1996, the Mortgage Division
relocated its Huntsville office to the Company's Madison branch. The Company
believes the relocation will reduce the overhead of the  Mortgage Division's
Madison office allowing it to be more competitive, which should improve its
profitability. The Mortgage Division reported net income for the year ended
December 31, 1995 of $149,000, an increase of 52.0 % from $98,000 in 1994.
Mortgage income increased in 1995 due to the decrease in interest rates during
the year which resulted in increased mortgage refinancing activity. The
Mortgage Division's primary sources of income are interest, loan originations,
and servicing release fees.  During 1996, the Mortgage Division sold $30.4
million in long term first mortgage residential loans, an increase of 10.9%
compared to $27.4 million during 1995.  In 1995, the Mortgage Division sold
$27.4 million in long term first mortgage residential loans, an increase of
160.9%  from $10.5 million in 1994.

     The Mortgage Division continues to be a profitable department of the bank.
Since the Bank's loan portfolio does not generally include long-term fixed
rate loans, the Bank's mortgage operations enable it to provide a very
important product to its customers through the origination and sale of mortgage
loans.  Management will continue to emphasize this aspect of its business.

     The following table summarizes other key financial ratios for each of the
last three years ended December 31, 1996.

                              ANALYSIS OF RETURN
                       For the Years Ended December 31,


<TABLE>
<CAPTION>
                                                            1996    1995   1994
--------------------------------------------------------------------------------
<S>                                                       <C>     <C>     <C>
Net income as a percentage of average assets               1.16%   1.08%   0.89%
--------------------------------------------------------------------------------
Net income as a percentage of average interest earning
assets                                                     1.26%   1.18%   0.97%
-------------------------------------------------------------------------------
Net income as a percentage of average equity              11.28%  11.22%  12.55%
-------------------------------------------------------------------------------
Average equity as a percentage of average assets          10.25%   9.64%   7.08%
-------------------------------------------------------------------------------
</TABLE>

     The Company continues to emphasize sound lending and investment decisions,
quality customer service and improvement in the interest margin. Management is
committed to maximizing earnings and will continue to focus on increasing yield
on earning assets while maintaining asset quality, managing non-interest costs,
developing alternative sources of income and gaining market share by providing
superior customer service.

GROSS INTEREST INCOME

     Gross interest income is the principal source of the Company's earnings
stream and is defined as total interest and fee income from earning assets less
total interest expense paid on deposits and borrowed funds.  In managing the
gross interest income, management's goal is to maintain a satisfactory spread
between the yields on earning assets and the related cost of interest bearing
funds.  The incremental interest spread compares the difference between the
yields on earning assets and the costs of interest bearing funds.  The gross
interest spread includes the benefit derived from having earning assets which
are funded by non-interest bearing sources of funds.

<PAGE>   12


     In 1996, the Company's gross interest income was $10.2 million, a 32.5%
increase from $7.7 million in 1995.  The increase in gross interest income was
the result of the growth in average earning assets to $190.4 million in 1996
from $174.2 million in 1995, a 9.3% increase, and the increase in the Company's
incremental interest spread of 62 basis points to 4.72% in 1996 from 4.10% in
1995.  The taxable equivalent gross interest income for 1996 was 5.34% compared
to 4.67% in 1995, a 67 basis point increase. The increase in the incremental
interest spread was reflective of the improvement in the Company's yield on
earning assets and the Company's decrease in the interest rate paid on interest
bearing liabilities. The incremental interest spread increased due to an
increase in the Bank's average  interest earning assets of $16.2 million or
9.3% in 1996 which was only partially offset by the Bank's increase in average
interest earning assets of $23.4 million or 15.6% in 1995.

     In 1995, the Company's gross interest income was $7.7 million, a 18.5%
increase from $6.5 million in 1994.  The increase in gross interest income was
the result of the growth in average earning assets to $174.2 million in 1995
from $150.7 million in 1994, a 15.6% increase.  The taxable equivalent gross
interest income for 1995 was 4.67% compared to 4.63% in 1994, a 4 basis point
increase.  The incremental interest spread decreased 19 basis points to 4.10%
from 4.29% in 1994.  The decrease in the incremental interest spread was
reflective of changes in the economy during a falling interest rate
environment.  In 1995, the Federal Reserve decreased the discount rate charged
to institutions on overnight borrowings on two occasions.  The incremental
interest spread decreased due to an increase in the Bank's average  interest
bearing liabilities of $16.2 million or 11.8% in 1995 which was only partially
offset by the Bank's increase in average interest bearing liabilities of $12.2
million or 8.0% in 1994.

     Interest income for 1996 increased $3.0 million, or 19.9%, to $18.1
million from $15.1 million in 1995.  The increase in interest income was
attributable to an increase of 9.3% in the volume of average interest-earning
assets to $190.4 million in 1996.  The yield on interest earning assets was
9.48% in 1996 and 8.91% in 1995, respectively.  In 1996, interest and fees on
loans increased $3.4 million, or 26.9%, from 1995 as a result of increased
volumes and increased rates.  Interest on investment securities decreased $0.4
million, or 15.0%, from 1995 as a result of the Company selling various
securities while repositioning the portfolio to improve liquidity and interest
rate risk.

     Interest income for 1995 increased $3.5 million, or 30.2%, to $15.1
million from $11.6 million in 1994.  The increase in interest income was
attributable to an increase of 15.6% in the volume of average interest-earning
assets to $174.2 million in 1995.  The yield on interest earning assets was
8.91% in 1995 and 8.05% in 1994, respectively.  In 1995, interest and fees on
loans increased $3.6 million, or 39.6%, from 1994 as a result of increased
volumes and increased rates. Interest on investment securities decreased $0.2
million, or 6.7%, from 1994 as a result of the Company selling various
securities while repositioning the portfolio to improve liquidity and interest
rate risk.

     The following table illustrates by major categories of assets and
liabilities, the average balances, the components of the net interest income on
taxable equivalent basis, the yield or rate, and the incremental and gross
interest spread.


<PAGE>   13




                     YIELDS ON AVERAGE EARNING ASSETS AND
                RATES ON AVERAGE INTEREST-BEARING LIABILITIES


<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                             1996                       1995                         1994
                                 --------------------------------------------------------------------------------
Taxable equivalent basis -       Average   Income/  Yield    Average   Income/  Yield    Average   Income/  Yield
(Dollars in thousands)           Balance   Expense  /Rate    Balance   Expense  /Rate    Balance   Expense  /Rate
Assets
------
<S>                             <C>        <C>      <C>     <C>        <C>      <C>     <C>        <C>      <C>
Earning Assets
 Loans net of unearned income   $154,721   $15,950  10.31%  $131,109   $12,580   9.60%  $104,620   $ 9,013   8.62%
  Investment securities
   Taxable                        24,014     1,483   6.18%    14,590     1,633  11.19%    28,864     1,654   5.73%
   Tax exempt                     10,886       580   5.33%    26,798     1,212   4.52%    16,918     1,447   8.55%
                                ------------------          ------------------          ------------------
    Total securities              34,900     2,063   5.91%    41,388     2,845   6.87%    45,782     3,101   6.77%
Interest bearing deposits in
    other banks                      134         7   5.22%       123         9   7.32%        80         8  10.00%
Federal funds sold                   679        34   5.01%     1,549        90   5.81%       243         8   3.29%
                                ------------------          ------------------          ------------------
    Total earning assets         190,434    18,054   9.48%   174,169    15,524   8.91%   150,725    12,130   8.05%
Cash and due from banks            7,832                       7,781                       7,508
Premises and equipment             7,747                       6,847                       6,358
Accrued interest                   1,270                       1,187                       1,054
Other assets                       2,036                       1,290                         704
Allowance for loan losses         (1,544)                     (1,324)                     (1,142)
                                --------                    --------                    --------
    Total Assets                $207,775                    $189,950                    $165,207
                                ========                    ========                    ========
Liabilities and Shareholders'
    Equity
Interest-bearing liabilities :
Interest-bearing demand
deposits                        $ 66,752   $ 2,421   3.63%  $ 68,380   $ 2,766   4.05%  $ 76,142   $ 2,528   3.32%
Savings deposits                   3,969       107   2.70%     3,206        86   2.68%     2,724        74   2.72%
Certificates of deposit of
$100,000 or more                  22,540     1,294   5.74%    20,232     1,225   6.05%    11,161       617   5.53%
Certificates of deposit less
    than $100,000                 55,850     3,189   5.71%    46,930     2,775   5.91%    33,975      1475   4.34%
State time deposits                4,826       244   5.06%     4,295       237   5.52%     1,997        88   4.40%
Federal funds purchased &
    other short term
    borrowings                     4,463       282   6.32%    10,042       274   2.73%    10,679       298   2.79%
Long term debt                     7,172       344   4.80%       278        21   7.55%       497        69  13.88%
    Total interest-bearing      ------------------          ------------------          ------------------
        liabilities              165,572     7,881   4.76%   153,363     7,384   4.81%   137,175     5,149   3.76%
Incremental interest spread                          4.72%                        4.10%                       4.29%
                                                     =====                       =====                       =====
Non-interest-bearing demand
    deposits :                    19,756                      17,376                      15,917
Accrued interest                     592                         549                         327
Other liabilities                    568                         342                          97
Shareholders' equity              21,287                      18,320                      11,691
    Total Liabilities and
    shareholders' equity        $207,775                    $189,950                    $165,207
                                ========                    ========                    ========
Net interest margin/spread on
a taxable equivalent basis                 $10,173   5.34%             $ 8,140   4.67%             $ 6,979   4.63%
                                           ==============              ==============              ==============
Taxable equivalent adjustment:
-----------------------------
Loans                                            6                          12                          13
Investment securities                          197                         412                         490
                                           -------                     -------                     -------
    Total taxable equivalent
       adjustment                              203                         424                         503
                                           -------                     -------                     -------
    Net interest margin                    $ 9,970                     $ 7,721                     $ 6,476
                                           =======                     =======                     =======
</TABLE>

Note: The taxable equivalent adjustment has been computed based on a 34%
Federal income tax rate and does not give effect to the disallowance for
Federal income tax purposes of interest expense related to certain tax exempt


<PAGE>   14


assets. Average loans net of unearned income includes non-accrual loans for all
years presented. All loans and deposits are domestic. Income for loans net of
unearned income contains fees of $740,000, $576,000 and $296,000 for 1996, 1995
and 1994, respectively.

                       VOLUME AND YIELD/RATE VARIANCES



<TABLE>

                                        1996                                  1995
                      -----------------------------------------------------------------------
(Taxable equivalent
basis -
Dollars in                     Yield                                 Yield               Net
thousands)            Volume   /Rate    Mix    Net Change  Volume    /Rate     Mix     Change
                      -----------------------------------------------------------------------
Income earned on:
<S>                   <C>      <C>     <C>     <C>         <C>      <C>      <C>       <C>
 Loans net of
 unearned income      $2,267   $ 931   $ 172      $3,370   $2,283   $1,025   $   259   $3,567
 Investment
 securities
  Taxable securities   1,054    (731)   (473)       (150)    (818)   7,615      (779)     (21)
  Tax-exempt
  securities            (719)    217    (130)       (632)     845     (682)     (398)    (235)
                      -----------------------------------------------------------------------
 Total investment
 securities              335    (514)   (603)       (782)      27      894    (1,177)    (256)
                      -----------------------------------------------------------------------
Time deposits in
other banks                1      22       2          25        4       (2)       (1)       1
Federal funds sold       (51)    (74)     42         (83)      45        6        31       82
                      -----------------------------------------------------------------------
 Total earning assets  2,552     365    (387)      2,530    2,359    1,923      (888)   3,394
                      -----------------------------------------------------------------------
Interest paid on:
 Interest-bearing
 demand deposits         (66)   (287)      8        (345)    (258)     556       (60)     238
 Savings deposits         20       1                  21       13       (1)                12
 Time certificates
 of deposit              668    (157)    (28)        483    1,064      591       253    1,908
State time deposits       29     (20)     (2)          7      101       22        25      148
                      -----------------------------------------------------------------------
   Total
   interest-bearing
   deposits              651    (463)    (22)        166      920    1,168       218    2,306
                      -----------------------------------------------------------------------
Federal funds
purchased and other
short -term
borrowings              (152)    361    (201)          8      (19)     (20)       15      (24)
Long term debt           520      (8)   (189)        323      (16)       1       (34)     (49)
                      -----------------------------------------------------------------------
   Total
   interest-bearing
   liabilities         1,019    (110)   (412)        497      885    1,149       199    2,233
                      -----------------------------------------------------------------------
Net interest income
on taxable
equivalent basis      $1,533   $ 475   $  25      $2,033   $ 1474   $  774   $(1,087)  $ 1161
                      =======================================================================
</TABLE>

NONINTEREST INCOME


     As the banking industry becomes more competitive and pressure on the net
interest margin continues, banks are placing more emphasis on income from
non-interest related sources.  The Company is focusing on the importance of
generating earnings from non-interest bearing sources.  The Company's
non-interest income consists of service fees on deposits, other fees and
commissions and the sale of investment securities.

     Non-interest income for 1996 increased 16.4% to $1,681,000 from $1,444,000
in 1995.  The growth of non-interest income was attributable to an increase in
service charges on deposits  to $1,091,000 in 1996 from $868,000 in 1995, or
25.7%. The increase in service charge income was primarily attributable to
income from checks returned for insufficient funds which increased $169,000 in
1996 from 1995.

     Non-interest income for 1995 increased 16.2% to $1,444,000 from $1,243,000
in 1994.  The growth of non-interest income was attributable to an increase in
mortgage origination and servicing release fees produced by the company's two
mortgage origination offices.  Mortgage origination and release fee income
increased $69,000 or 46.3% to $218,000 in 1995 from $149,000 in 1994.
Non-interest income also increased due to gains on sale of securities of
$23,000 in 1995 compared with losses on sale of securities of $35,000 in 1994.


<PAGE>   15


     The following table presents an analysis of noninterest income for the
years ended December 31, 1996, 1995 and 1994.

                             NON-INTEREST INCOME



<TABLE>
<CAPTION>
                                                    For the Years Ended December 31,
(Dollars in thousands)                                    1996     1995    1994
                                                    -------------------------------
<S>                                                     <C>      <C>     <C>
Service charges on deposits                             $1,091   $  868  $  843
Mortgage origination and servicing release fees            198      218     149
Credit card fees                                           172      148     146
Automated teller machine foreign user transaction
charge                                                      40       35       2
Check handling fees                                         51       38      26
Safe deposit box rental                                     43       35      32
Securities gains (losses)                                  (51)      23     (35)
Other                                                      137       79      80
                                                    -------------------------------
     Total                                              $1,681   $1,444  $1,243
                                                    ===============================
</TABLE>

NON-INTEREST EXPENSES

     Total non-interest expenses for 1996 were $7,666,000, an increase of
$1,715,000 or 28.8% over $5,951,000 in 1995.  Almost all categories of
non-interest expense increased during 1996, with the most significant
components of the increase in non-interest expense being salaries and employee
benefits, occupancy, furniture and equipment, communications and professional
services.  Salaries and employee benefits increased $898,000, or 27.3%, from
1995 to 1996.  The increase was due primarily to merit and promotional raises,
staff increases to accommodate the Bank's growth, including the Company's
Madison branch, which opened December 1995, and the addition of the Ardmore
branch in March 1996.  The number of full-time equivalent employees increased
6.8% in 1996 to approximately 142 full-time equivalent employees at December
31, 1996.  FDIC insurance expense decreased to $3,000 in 1996 from $178,000 in
1995.

     Total non-interest expenses for 1995 were $5,951,000, an increase of
$478,000 or 8.7% over $5,473,000 in 1994.  Almost all categories of
non-interest expense increased during 1995, with the most significant
components of the increase in non-interest expense being salaries and employee
benefits, occupancy, furniture and equipment, communications and professional
services.  Salaries and employee benefits increased $372,000, or 12.7%, from
1994 to 1995.  The increase was due primarily to merit and promotional raises,
staff increases to accommodate the Bank's growth, and introduction into the
Madison market with the construction of a full-service banking office during
1995.  The number of full-time equivalent employees increased 21% in 1995 to
approximately 133 full-time equivalent employees at December 31, 1995.  FDIC
insurance expense decreased to $178,000 in 1995 from $304,000 in 1994.

     During 1996, FDIC insurance expense decreased $175,000 or 98.3% as a
result of the reduction of the rates paid for deposit insurance enacted by the
FDIC during 1995.  Occupancy expense increased $180,000 or 41.1% and furniture
and equipment expense increased $111,000 or 25.2% during 1996 primarily due to
the addition of the Madison and Ardmore branches. During 1996, communication
expense increased $128,000, or 51.6% from $248,000 in 1995 to $376,000 in 1996.
The increase in communications expense resulted primarily from the addition of
the Ardmore branch and  improvements in Company's data transfer communications
between the branches and the Company's operations center. Professional services
expenses increased $179,000, or 64.9%, from $276,000 in 1995 to $455,000 in
1996. The increase in professional services was primarily attributable to
increased volume of originations in the Company's Mortgage Division, services
related to the repossession of collateral, and investigation of potential new
clients by CBI. The increase in other non-interest expense categories primarily
resulted from growth in the Company's level of business during 1996.
Management continues to place emphasis on the control of non-interest expense
in its plans for the future.


     During 1995, FDIC insurance expense decreased $126,000 or 41.4% as a
result of the reduction of the rates paid for deposit insurance enacted by the
FDIC during 1995.  Occupancy expense increased $15,000 or 3.5% during 1995.
Furniture and equipment expense increased $17,000 or 4.01% during 1995.  During
1995, communication expense increased $36,000, or 17.0% from $212,000 in 1994
to $248,000 in 1995.  The increase in communications expense resulted primarily
from the creation of the Huntsville mortgage origination office and the
construction of the branch at Madison.   Professional services expenses
increased $57,000, or 26.0%, from $219,000 in 1994 to $276,000 in 1995.  The
increase in other non-interest expense categories primarily resulted from
growth in the company's level of business during 1995.


<PAGE>   16


     The following table presents an analysis of non-interest expenses for the
years ended December 31, 1996, 1995 and 1994.

                            NON-INTEREST EXPENSES

<TABLE>
<CAPTION>
(Dollars in thousands)                                      1996    1995    1994
                                                          ----------------------
<S>                                                       <C>     <C>     <C>
Salaries and employee benefits                            $4,189  $3,291  $2,919
Occupancy expense                                            618     438     423
Furniture and equipment expense                              552     441     424
FDIC insurance                                                 3     178     304
Communications                                               376     248     212
Professional services                                        455     276     219
Other insurance                                               45      52      48
Business development                                         388     324     266
Supplies                                                     200     127     109
Data processing                                              289     197     164
Other                                                        551     379     385
                                                          ----------------------
     Total                                                $7,666  $5,951  $5,473
                                                          ======================
</TABLE>

INCOME TAXES

     The amount of income tax expense is directly related to the amount of
income before income taxes.  Income tax expense includes Federal income
tax as well as the State of Alabama excise tax.  Even though changes in recent
years to the Federal income tax laws have limited opportunities for reducing
taxes, the Company attempts to maximize its net income through active tax
planning.

     Income tax expense for 1996 increased $593,000, or 108.4%, to $1,140,000
in 1996 from $547,000 in 1995.  Income tax expense for 1995 increased $86,000
or 18.7% to $547,000 from $461,000 in 1994. Tax expense during 1996 increased
primarily due to increased earnings before taxes caused by an improved net
interest margin and a higher loan to deposit ratio in 1996 than in 1995,
coupled with a decrease in tax exempt income earned by the Company during 1996
when compared to 1995. The effective tax rate as a percentage of pre-tax income
was 32.2% in 1996 compared to 21.0% in 1995 and 23.9% in 1994.   These tax
rates are lower than the statutory Federal tax rate of 34% during all three
years.  A reconciliation of the difference between income tax expense and
income taxes calculated by applying the statutory Federal tax rate is provided
in Note 7 of the Consolidated Financial Statements.  The largest component of
this difference during all three years is attributable to tax-exempt interest
income.

EARNING ASSETS

     Earning assets include loans, mortgage loans held for sale, investment
securities, interest-bearing deposits in other financial institutions, and
Federal funds.  Earning assets are vital to the profitability of the Company
because income from earning assets are the Bank's primary source of income.

     Average earning assets in 1996 increased 9.3% to $190.4 million from
$174.2 million during 1995.  Average earning assets  in 1995 increased $23.5
million or 15.6% to $174.2 million from $150.7 million as of December 31, 1994.
Average earning assets in 1996 and 1995 were 91.7% of average total assets
compared with 91.2% in 1994.  As a percentage of total average interest earning
assets, loans averaged 81.2% in 1996 compared with 72.3% in 1995 and 66.7% in
1994.  Investment securities averaged 18.3% of average earning assets in 1996
compared with 23.8% in 1995 and 30.4% in 1994.  Federal funds sold averaged
0.4% of average earning assets during 1996 compared with 0.9% in 1995 and 0.2%
in 1994.


<PAGE>   17



     The following table shows the composition of average earning assets by
category  for each of the following years, 1996, 1995, and 1994.

                    COMPOSITION OF AVERAGE EARNING ASSETS



<TABLE>
<CAPTION>

(Dollars in thousands)             1996               1995            1994
                            ---------------------------------------------------
<S>                         <C>       <C>      <C>       <C>     <C>      <C>
Loans net of unearned
income                      $153,771   80.75%  $126,004   72.3%  100,665   66.7%
Investment securities         34,900   18.33%    41,388   23.8%   45,782   30.4%
Mortgage loans held for
sale, net                        950    0.50%     5,105    2.9%    3,955    2.6%
Federal funds sold               679    0.36%     1,548    0.9%      243    0.2%
Interest-bearing deposits
in other banks                   134    0.07%       123    0.1%       80    0.1%
                            ---------------------------------------------------
Total                       $190,434  100.00%  $174,168  100.0%  150,725  100.0%
                            ===================================================
</TABLE>

LOAN PORTFOLIO

     The loan portfolio is the largest component of the Bank's earning assets,
and therefore generates the largest amount of income.  A sound credit policy
and careful, consistent credit review is vital to support the level of loan
growth experienced by the Bank in recent years.  All loans are made based upon
the borrower's financial strength, performance record, earnings potential and
other factors, including guarantees and collateral.  The Bank does not
sacrifice quality to achieve loan growth.  The loan portfolio undergoes close
scrutiny to maintain its quality and diversity and to assure proper
documentation.

     At December 31, 1996, the loan portfolio accounted for 85.9% of earning
assets, compared with 75.9% at December 31, 1995. Average loans increased 18.0%
in 1996 compared to 1995. Loans, net of unearned income, outstanding at year
end 1996 were $173.0 million, up $45.9 million, or 36.1%, compared with year
end 1995.  Loans secured by real estate continue to be the largest category,
constituting 54.8% of the loan portfolio at year end 1996, compared with 49.1%
of the loan portfolio at year end 1995. The largest increase in 1996 was in the
real estate-mortgage category which increased $25.7 million, or 42.7%, to
$85.7 million.

     At December 31, 1995, the loan portfolio accounted for 75.9% of earning
assets, compared with 73.8% at December 31, 1994. Average loans increased 25.2%
in 1995 compared to 1994. Loans, net of unearned income, outstanding at year
end 1995 were $127.1 million, up $6.6 million, or 5.5%, compared with year end
1994.  Loans secured by real estate continue to be the largest category,
constituting 49.1% of the loan portfolio at year end 1995, compared with 47.9%
of the loan portfolio at year end 1994. The largest increase in 1995 was in the
real estate-mortgage category which increased $6.6 million, or 12.3%, to $60.0
million.

     The Company has no significant concentrations of loans exceeding 10% of
total loans which are not otherwise disclosed as a category.  The Company has
no foreign loans, and, therefore, it has no loans to lesser developed
countries.  The Company has also avoided involvement in loans relating to
transactions described as highly leveraged transactions which are generally
closely monitored by bank regulators.  A highly leveraged transaction would
include loans that involve a buyout, acquisition or recapitalization of an
existing business accomplished with a significant debt increase and a high
level of financial leverage.


<PAGE>   18


     The following presents the classification of loans by major category and
percent of total at December  31, 1996,  and for each of the preceding two
years.

                        COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
                                                                   Years Ended December 31,

                                                      1996                   1995                 1994
                                                      ----                   ----                 ----
                                                               % of                  % of              % of
(Dollars in thousands)                          Amount        Total   Amount        Total   Amount   Total
                                                -----------------------------------------------------------
<S>                                             <C>           <C>     <C>           <C>     <C>       <C>
Commercial, industrial and agricultural          $32,658       18.6%  $ 28,043       21.6%  $ 26,374   21.5%
Real estate - construction                        10,537        6.0%     3,866        2.9%     5,415    4.4%
Real estate - mortgage                            85,686       48.8%    60,035       46.2%    53,470   43.5%
Loans to individuals for personal expenditures    41,153       23.4%    37,651       28.9%    37,029   30.2%
All other loans (including overdrafts)             5,729        3.3%       474        0.4%       516    0.4%
                                                --------              --------              --------
Total                                            175,763      100.0%   130,069      100.0%   122,804  100.0%
Unearned income                                   (2,789)               (3,016)               (2,373)
                                                --------              --------              --------
Loans, net of unearned income                    172,974               127,053               120,431
Allowance for loan losses                         (1,689)               (1,512)               (1,245)
                                                --------              --------              --------
Net loans                                       $171,285              $125,541              $119,186
                                                ========              ========              ========
</TABLE>

     As of December 31, 1996, maturities of loans in the indicated
classifications and sensitivity to change in interest rates on certain of these
loans are shown in the following table.

             SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

<TABLE>
<CAPTION>

                                                     Maturity                      Maturing After One Year
                                                     --------                      -----------------------
                                                 Over 1
                                                  Year
(Dollars in                                     through
thousands)                  1 Year or Less      5 Years  Over 5 Years   Total    Fixed Rate  Adjustable Rate
                            --------------      -------  ------------  --------  ----------  ---------------
<S>                          <C>                <C>           <C>      <C>          <C>              <C>
Commercial,
industrial,
agricultural and
all other                    $62,473            $81,997       $17,967  $162,437     $62,246          $37,718
Real estate -
construction                  10,022                515                  10,537                          515
                             -------------------------------------------------------------------------------
                             $72,495            $82,512       $17,967  $172,974     $62,246          $38,233
                             ===============================================================================
</TABLE>

RISK ELEMENTS

     Lending officers are responsible for the ongoing review and administration
of each particular loan.  As such, they make the initial identification of
loans which present some difficulty in collection, or where circumstances
indicate that the probability of loss exists.  Senior Management is informed
weekly of the status of delinquent and problem loans.  The performance of loans
other than real estate and installment loans is evaluated primarily on the
basis of a review of each customer relationship over a period of time and the
judgment of senior lending officers as to the ability of borrowers to continue
in business and to meet the repayment terms of loans.  If there is reasonable
doubt as to the repayment of a loan in accordance with the agreed terms, even
though the financial condition of the borrower or the collateral ultimately may
be sufficient to reduce or satisfy the obligation, the loan may be placed on a
non-accrual basis pending the sale of any of the collateral or the
determination that other sources of repayment exist.  Interest on loans is
normally accrued from the date an advance is made.  Generally, when a loan is
placed on a non-accrual basis all previously accrued but unpaid interest is
reversed and charged against current income.  Interest income is thereafter
recognized only when payments are received.

     The Company's lending is concentrated throughout Morgan and Limestone
counties in Alabama and repayment of these loans is, in part, dependent
upon the economic conditions in this region of the state. Management does not
believe the loan portfolio contains concentrations of credits,` either
geographically or by borrower, which would expose the Company to unacceptable
amounts of risk.

     As of December 31, 1996, total non-performing assets were $1,817,000, a
$665,000, or 57.7%, increase from $1,152,000 at December 31, 1995.
Non-performing assets at December 31, 1996 included $1,369,000 in loans

<PAGE>   19


on non-accrual status, $80,000 in other real estate owned, which
represents real estate acquired through foreclosure and insubstance foreclosure,
and $368,000 in repossessed collateral. Non-performing loans increased by
$438,000, or 47.0%, in 1996 to $1,369,000, or 0.79% of net loans, from
$931,000, or 0.73%, of net loans, in 1995. During 1995, non-performing loans
increased $696,000, or 296.2%, to $931,000, or 0.73% of net loans from $235,000,
or 0.20% of net loans in 1994. The primary reason for the fluctuation in
non-performing loans from December 31, 1994 to December 31, 1996 is due to the
volume of loans with balances that were on non-accrual status at year end. The
increase in non-performing loans at December 31, 1996 primarily resulted from
loans being placed on non-accrual status because the collection of interest was
doubtful. A loan is placed on non-accrual status when the collection of interest
is deemed doubtful by Management after Management's review of the loan and the
ability of the borrower to meet the repayment terms of the loan.

     As of December 31, 1995, total non-performing assets were $1,152,000, a
$832,000, or 260%, increase from $320,000 at December 31, 1994. Non-performing
assets at December 31, 1995 included $931,000  in loans on non-accrual status,
$36,000 in other real estate owned, which represents real estate acquired
through foreclosure and insubstance foreclosure, and $185,000 in repossessed
collateral. Non-performing loans increased by $696,000, or 296.2%, in 1995 to
$931,000, or .73% of net loans, from $235,000, or 0.20% of net loans, in 1994.
During 1994, non-performing loans increased $208,000, or 770.4%, to $235,000,
or 0.20%, of net loans from $27,000, or 0.03% of net loans in 1993. The primary
reason for the fluctuation in non-performing loans from December 31, 1993 to
December 31, 1995 is due to the volume of loans with balances that were on
non-accrual status at year end. The increase in non-performing loans at
December 31, 1995 primarily resulted from loans being placed on non-accrual
status because the collection of interest was doubtful. A loan is placed on
non-accrual status when the collection of interest is deemed doubtful by
Management after Management's review of the loan and the ability of the
borrower to meet the repayment terms of the loan.

     Non-performing assets as of December 31, 1996 and the preceding four years
are summarized in the following table.  For each period shown, the gross
interest income that would have been recorded in such period if the loans had
been current in accordance with their original terms, and the amount of
interest income on those loans that was included in such period's net income
was not material.

                            NON-PERFORMING ASSETS



<TABLE>
<CAPTION>

                                                  Years Ended December 31,

(dollars in thousands)                    1996     1995    1994    1993    1992
                                        ------   ------   -----   -----   -----
<S>                                     <C>      <C>      <C>     <C>     <C>
Nonaccrual loans                        $1,369   $  931   $ 235   $  27   $ 287
Restructured loans
                                        ---------------------------------------
   Total non-performing loans            1,369      931     235      27     287
Other real estate owned                     80       36      53     216     344
Repossessions                              368      185      32      32      35
Non-accrual debt securities                                                  60
                                        ---------------------------------------
   Total non-performing assets           1,817    1,152     320     275     726
Potential problem loans                    232      100      18      63       3
                                        ---------------------------------------
   Total non-performing assets and
     potential problem loans            $2,049   $1,252   $ 338   $ 338   $ 729
                                        =======================================
RATIOS:
Non-performing loans to loans net of
unearned income                           0.79%    0.73%   0.20%   0.03%   0.37%
Non-performing assets and potential
problem loans to loans net of
unearned income                           1.18%    0.98%   0.28%   0.39%   0.37%
</TABLE>

The following table sets forth the Company's non-performing loans by type as of
the dates indicated:



<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                    -----------------------
(Dollars in thousands)                           1996   1995   1994  1993   1992
                                               ------  -----  -----  ----  -----
<S>                                            <C>     <C>    <C>    <C>   <C>
Real estate loans                              $  208  $ 149  $  30        $ 173
Loans to individuals for personal
expenditures                                    1,108    753    141    21     39
Commercial loans                                   53     29     64     6     75
                                               ---------------------------------
   Total non-performing loans                  $1,369  $ 931  $ 235  $ 27  $ 287
                                               =================================
</TABLE>

     The Company continues its efforts to expedite the disposition and
collection of non-performing and other lower quality assets.  Management is not
aware of any specifically identified loans, except for those reported above,


<PAGE>   20


that represent significant potential problems.  The responsibilities of the
lending officers include the initial collection effort on a delinquent loan.
In addition to the weekly monitoring by senior management, the Loan Committee
of the Board of Directors reviews monthly delinquent and non-performing loans.
When it is determined that a loan is deficient and will not be paid as agreed,
the Loan Committee recommends to the Board of Directors that the loan be
charged off.  The Loan Committee and the Board of Directors also review the
allowance for loan losses on a monthly basis.

     On January 1, 1995, the Company adopted SFAS No. 114, Accounting By
Creditors for Impairment of a Loan, as ammended by SFAS No. 118, Accounting By
Creditors for Impairment of a Loan - Income Recognition Disclosure.  As a
result, the following loans were considered impaired as of December 31, 1996.
See Notes 1 and 4 to the consolidated financial statements for further
discussion.


<TABLE>
<CAPTION>
(In thousands)        Balance  Reserve  Carrying Value
--------------        -------  -------  --------------
<S>                   <C>      <C>      <C>
Total Impaired Loans   $1,369  $98      $1,271
</TABLE>

ALLOWANCE FOR LOAN LOSSES

     Loan growth and expansion are important to the Company, but equally
important is loan quality.  Management stresses high credit quality in its
lending policies and philosophy.  However, credit risk is inherent in lending
activities, and the Company maintains an allowance for loan losses to absorb
credit losses that occur.

     The provision for loan losses represents Management's determination as to
the amount necessary to be transferred to the allowance for loan losses to
bring it to a level which is considered adequate in relation to the risk of
future losses inherent in the loan portfolio.  While it is the Company's policy
to charge off in the current period those loans in which a loss is considered
probable, there also exists the risk of future losses which cannot be
quantified precisely or attributed to particular loans or classes of loans.
Because this risk is continually changing in response to factors beyond the
control of the Company, such as the state of the economy, Management's judgment
as to the adequacy of the provision for loan losses is necessarily approximate
and imprecise.

     In assessing adequacy of the allowance for loan losses, Management relies
predominantly on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged off
and to assess the risk characteristics of the portfolio in the aggregate.  This
review takes into consideration the judgments of the responsible lending
officers and senior management, and also those of bank regulatory agencies that
review the loan portfolio as part of the regular bank examination process.

     In evaluating the allowance, Management also considers the Bank's loan
loss experience, the amount of past due and non-performing loans,
current and anticipated economic conditions, lender requirements, and other
relevant information.  The provision for loan losses, which is charged to
operations, is based on the growth of the loan portfolio, the amount of net
losses incurred, and management's estimation of potential future losses based on
an evaluation of the risk in the loan portfolio.

     Management believes that the $1,688,940  in the allowance for loan losses
at December 31, 1996 is adequate to absorb known risks in the portfolio based
upon the Company's historical experience at lower loan volumes.  No assurance
can be given, however, that increased loan volume, adverse economic conditions
or other circumstances will not result in increased losses in the Company's
loan portfolio.

     As of December 31, 1996, the allowance for loan losses was $1,689,000,
compared to $1,512,000 as of December 31, 1995, and $1,245,000 as of December
31, 1994. The allowance for loan losses has increased through the provision for
loan losses charged to expense to maintain a level sufficient to keep up with
loan growth. The ratio of the allowance for loan losses to loans, net of
unearned income, at December 31, 1996 was 0.98% compared to 1.19% at December
31, 1995. Allowance for loan losses at the end of the period to average loans,
net of unearned income, was 1.09% in 1996, compared to 1.20% in 1995. The
provision for loan losses increased 6.4% in 1996 to $646,000 from $607,000 in
1995. The average loan portfolio grew 22.8% to $154.7  million in 1996 from
$126.0 million in 1995. After evaluating the risk in the loan portfolio,
current economic conditions, and the impact of increased recoveries and
decreased charge-offs, Management has determined the allowance for loan loss is
adequate, even with the Bank's significant loan growth.

     As of December 31, 1995, the allowance for loan losses was $1,512,000,
compared to $1,245,000 as of December 31, 1994, and $1,039,000 as of December
31, 1993. The allowance for loan losses has increased through

<PAGE>   21


the provision for loan losses charged to expense to maintain a level
sufficient to keep up with loan growth. The ratio of the allowance for loan
losses to loans, net of unearned income, at December 31, 1995 was 1.19%,
compared to 1.03% at December 31, 1994. Allowance for loan losses at the end of
the period to average loans, net of unearned income, was 1.20% in 1995, compared
to 1.24% in 1994. The provision for loan losses increased 91.5% in 1995 to
$607,000 from $317,000 in 1994. The average loan portfolio grew 25.1% to $126.0
million in 1995 from $100.7 million in 1994.

     In 1996, charge-offs to the allowance for loan loss increased $98,000, or
21.7%, to $550,000 from $452,000 in 1995. Recoveries decreased $31,000, or
27.7%, from $112,000 in 1995 to $81,000 in 1996. Net loans charged-off during
1996 were $469,000 compared to $339,000 during 1995, an increase of $130,000,
or 38.3%. Net loans charged-off during 1996 were 0.30% of average loans, which
is consistent with the Bank's historically low rate of charge-offs. With only
0.79% of loans classified as non-performing, Management believes the allowance
for loan loss at December 31, 1996 is adequate.

     In 1995, charge-offs to the allowance for loan loss increased $257,000, or
131.8%, to $452,000 from $195,000 in 1994. Recoveries increased $28,000, or
33.3%, from $84,000 in 1994 to $112,000 in 1995. Net loans charged-off during
1995 were $339,000 compared to $111,000 during 1994, an increase of $228,000,
or 205.4%. Net loans charged-off during 1995 were 0.27% of average loans, which
is consistent with the Bank's historically low rate of charge-offs.

     Management allocated the allowance for loan losses to specific loan
classes as of December 31, 1996 and the end of the previous four fiscal years
as follows:




<TABLE>
<CAPTION>

                            1996           1995             1994           1993           1992
(Dollars in                 ----           ----             ----           ----           ----
thousands)             Amt.     %      Amt.     %      Amt.     %      Amt.     %     Amt.    %
                      ------  ------  ------  ------  ------  ------  ------  ------  ----  ------
<S>                   <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>   <C>
Domestic Loans
Commercial,
industrial and
agricultural          $  296   17.5%  $  386   25.5%  $  434   34.9%  $  226   21.8%  $173   21.8%
Real estate -
construction              20    1.2%       5    0.3%      77    6.2%      51    4.9%    53    6.7%
Real estate -
mortgage                 358   21.2%     314   20.8%     208   16.7%     527   50.7%   415   52.4%
Loans to
individuals for
personal
expenditures           1,012   59.9%     806   53.3%     522   41.9%     230   22.1%   151   19.1%
All other loans
(including
overdrafts)                3    0.2%       1    0.1%       4    0.3%       5    0.5%
                      ---------------------------------------------------------------------------
Total                 $1,689  100.0%  $1,512  100.0%  $1,245  100.0%  $1,039  100.0%  $792  100.0%
                      ============================================================================
</TABLE>

<PAGE>   22


     The following table summarizes the Company's loan loss experience for the
five years ended December 31, 1996:

                       SUMMARY OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>

(Dollars in thousands)                              1996       1995       1994       1993      1992
                                                    ----       ----       ----       ----      ----
<S>                                             <C>        <C>        <C>        <C>        <C>
Allowance for loan losses at beginning of year  $  1,512   $  1,245   $  1,039   $    792   $   659
Loans charged off:
  Commercial, industrial and agricultural             63         32
  Real estate                                                    48          6         65        83
  Loans to individuals for personal expenditures     487        371        189        215       287
                                                ---------------------------------------------------
    Total charge-offs                                550        452        195        280       370
Recoveries on loans previously charged off:
  Commercial, industrial and agricultural              6          4
  Real estate                                          5
  Loans to individuals for personal expenditures      70        108         84         57        42
                                                ---------------------------------------------------
    Total recoveries                                  81        112         84         57        42
                                                ---------------------------------------------------
Net loans charged off                                469        339        111        223       328
Provision for loan losses                            646        607        317        470       461
                                                ---------------------------------------------------
Allowance for loan losses at end of period      $  1,689   $  1,512   $  1,245   $  1,039   $   792
                                                ===================================================
Loans, net of unearned income, outstanding at
end of period                                   $172,974   $127,053   $120,431   $ 86,025   $77,827
                                                ===================================================
Average loans, net of unearned income,
outstanding for the period                      $154,721   $126,004   $100,665   $ 82,859   $73,090
                                                ===================================================
RATIOS:
Allowance at end of period to loans, net of
unearned income                                     0.98%      1.19%      1.03%      1.21%     1.02%
Allowance at end of period to average loans,
net of unearned income                              1.09%      1.20%      1.24%      1.25%     1.08%
Allowance at end of period to non-performing
loans                                             123.37%    162.40%    529.79%   3848.15%   275.96%
Net charge-offs to average loans, net of
unearned income                                     0.30%      0.27%      0.11%      0.27%     0.45%
Net charge-offs to allowance at end of period      27.77%     22.40%      8.92%     21.46%    41.41%
Recoveries to prior year charge-offs               17.92%     57.40%     30.00%     15.41%    22.34%
</TABLE>

Note: Loans, net of unearned income and average loans net of unearned income
exclude mortgage loans held for sale, net of discount.

INVESTMENT PORTFOLIO

     The Company maintains an investment portfolio that consists primarily of
U.S. Treasury securities, Federal agency and Federally sponsored corporation
securities, marketable bonds of states, counties, and municipalities, corporate
securities and marketable equity securities.  The securities portfolio
generates substantial income, assists in rate sensitivity and liquidity
management, and provides alternative investments at attractive yields as well
as an inventory of securities to pledge as collateral for public fund deposits.
The decision to purchase securities is based upon the current assessment of
economic and financial conditions, including the interest rate environment and
other balance sheet positions.

     The Company adopted FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," as of January 1, 1994.  Debt and
equity securities are classified in one of three categories and are accounted
for accordingly.  Securities are classified as securities held to maturity
based on management's intent and the Company's ability to hold them to
maturity.  Such securities are stated at cost, adjusted for amortized purchased
premiums and discounts.  Securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities, which are carried at market value.  Realized gains and losses and
gains and losses from marking the portfolio to market value are included in
trading income.  Securities not classified as securities held to maturity or
trading securities are classified as securities available for sale, and are
stated at fair

<PAGE>   23


value.  Unrealized gains and losses on securities available for sale are
excluded from results of operations, and are reported as a separate component of
shareholders' equity, net of taxes.  Securities classified as available for sale
include securities that may be sold in response to changes in interest rates,
changes in prepayment risks, the need to increase regulatory capital or other
similar requirements.  At December 31, 1996, tax-effected net unrealized losses
in the Company's available for sale portfolio totaled $343,000, a decrease of
$137,000 from net unrealized losses of $480,000 at December 31, 1995.  This
improvement in the market value of the Company's available for sale portfolio
was reflected as an addition to shareholders' equity at December 31, 1996 in
accordance with FAS 115.

     As of December 31, 1996, the Company held the following types of
structured notes and derivatives in its investment portfolio: Step-up bonds,
dual index notes, and collateralized mortgage obligations. Liquidity, interest
rate risk, yield, and extension risk are all considerations in holding these
types of securities. The Company periodically evaluates these securities to
determine the effect that various interest rate changes have on the market
value of these securities. The Company understands that changing interest rates
impact the market value and average life of each security. The duration of
these securities are monitored in relation to the overall portfolio. This
evaluation also addresses the possible impact on the Company's earnings and
capital resulting from rate changes. The potential carrying amount
recoverability is also reviewed on a regular basis. The Company holds no
securities whose ultimate principal redemption is expected to be less than par
value.

     The prepayment of mortgage-backed securities can affect the length and
interest rate sensitivity of the investment portfolio.  Management reviews the
prepayment activity of mortgage-backed securities held by the Bank on a monthly
basis in order to manage its extension risk and the effects that such
prepayment would have on the Bank's level yield method of securities
accounting.  Management performs rate shock scenarios (stress tests) of the
mortgage-backed portfolio to determine the effect that various interest rate
changes have on the value of the mortgage-backed securities.  Management
monitors the current market price of the mortgage-backed securities and sets
expectations of how the market prices and cash flows will change as interest
rates change.  This analysis is incorporated in the overall risk management of
the investment portfolio.  The market value and the potential carrying amount
recoverability are reviewed on a regular basis.  All securities in the
available for sale portfolio are stated at fair market value on a monthly basis
with the tax effected unrealized gains and losses shown as a component of
shareholders' equity.  All securities in the held to maturity portfolio are
reviewed monthly to determine the Bank's continued ability and intent to hold
each security until maturity to ensure the recoverability of the carrying
amount (1994 only).  Liquidity, interest rate, risk yield and recoverability of
the carrying amount are balanced against the held to maturity portfolio to
determine the Bank's ability to hold each security to maturity.

     Management determines the appropriate classification of securities at the
time of purchase.  At December 31, 1996, the securities portfolio consisted of
$29.2 million, all of which were classified as securities available for sale.
The Company has no securities designated as securities held to maturity or as
trading securities.

     At December 31, 1996 total securities were $29.2 million, a decrease of
$12.4 million or 29.8%,  from $41.6 million at December 31, 1995. The decrease
of the  securities portfolio was an element in the Company's strategic plan to
divest higher cost public funds during 1996. Proceeds from the sale of
securities were used as a liquidity source to replace higher cost public funds
withdrawn from the Company during 1996. The carrying value of securities
available for sale was reduced by $572,000 in accordance with Financial
Accounting Standards Board ("FASB") Statement Number 115 at December 31, 1996.

     Total securities decreased $0.1 million or .22% from $41.7 million at
December 31, 1994 to $41.6 million as of December, 31, 1995.  There were no
investment securities as of December 31, 1995, a  decrease of $24.4 million or
100% from $24.4 million at December 31, 1994.  Securities available for sale as
of December 31, 1995 were $41.6 million, an increase of $24.3 million or 140.5%
from $17.3 million at December 31, 1994.  During 1995, the Company transferred
securities with an estimated fair value of $23.2 million from the
held-to-maturity classification to the available for sale classification.  The
transfer was made to provide the Company with additional options in managing
liquidity and interest rate risks. The carrying value of securities available
for sale was reduced by $800,000 in accordance with FASB Statement Number 115
at December 31, 1995.

     There was no concentration of securities held by the Company whose
aggregate value as of December 31, 1996, exceeded 10% of the Company's
consolidated shareholders' equity at that date.

     The maturities and weighted average yields of the securities in the
Company's securities portfolio at December 31, 1996 are shown below.  Taxable
equivalent adjustments, using a 34% tax rate, have been made in calculating
yields on tax-exempt obligations.  This adjustment does not give effect to the
disallowance for federal


<PAGE>   24


income tax purposes of certain interest expense related to certain
tax-exempt earning assets.  The amounts and yields disclosed reflect the
amortized cost rather than the net carrying value, i.e. the fair value of these
securities.




                         SECURITIES MATURITY SCHEDULE
<TABLE>
<CAPTION>

                             Within 1 year       1-5 Years         5-10 Years        Over 10 Years
                          -------------------------------------------------------------------------
                          Amount  Yield       Amount  Yield       Amount  Yield      Amount  Yield

(Dollars in
thousands)
<S>                   <C>         <C>    <C>          <C>    <C>          <C>    <C>         <C>
U.S. Treasury
Securities
U.S. Government
Agencies               2,129,648  5.67%    7,768,680  5.63%    5,975,377  6.16%   1,772,201  6.19%
State, county and
municipal
securities               309,384  8.14%    2,439,611  7.65%    5,229,820  7.49%   2,571,112  7.77%
Other                                                                             1,624,512  6.08%
                      ----------         -----------         -----------         ----------
Total                 $2,439,032         $10,280,291         $11,205,197         $5,967,825
                      ==========         ===========         ===========         ==========
</TABLE>

     The following table sets forth the amortized cost of investment securities
by type at the end of each of the last three years:

        HELD TO MATURITY SECURITIES AND SECURITIES AVAILABLE FOR SALE


<TABLE>
<CAPTION>

(Dollars in thousands)                                  1996     1995     1994
                                                       -------------------------
<S>                                                    <C>      <C>      <C>
HELD TO MATURITY SECURITIES
U.S. Treasury securities
U.S. Government agencies and corporations securities                     $ 7,733
State, county, and municipal securities                                   16,629
Other securities
                                                       -------------------------
   Total investment securities                                            24,362
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities                                        $ 3,581
U.S. Government agencies and corporations securities   $17,646   15,349   17,773
State, county, and municipal securities                 10,550   21,605      235
Other securities                                         1,624      824      923
                                                       -------------------------
   Total securities available for sale                  29,820   42,363   18,931
                                                       -------------------------
     Total securities                                  $29,820  $42,363  $43,293
                                                       =========================
</TABLE>

Note: See the Consolidated Financial Statements and the related notes for
additional information related to the Investment Portfolio.

DEPOSITS

     The principal source of funds for the Company is deposits.  As the
financial services industry has become less regulated it has also become more
competitive.  In Decatur and Morgan County and in Athens and Limestone County,
the Bank competes for deposits with finance companies, mutual funds, credit
unions, savings and loan associations, brokerage firms, mortgage companies,
insurance companies, investment banking firms as well as other banks.  The
increased competition has resulted in innovative deposit products and
competitive interest rates.  Management will continue to study the market,
modifying existing products and introducing new products.  To maintain a strong
deposit base, the Bank is committed to customer satisfaction through superior
service, competitive interest rates and innovative products.  As of December
31, 1996, the Company did not have any brokered deposits and neither solicited
nor offered premiums for such deposits.

<PAGE>   25


     The Bank's deposits consist of non-interest bearing demand deposits,
interest-bearing demand deposits (NOW accounts and insured money market, "First
Rate" accounts), savings deposits, certificates of deposit and other time
deposits.

     During 1996, average total deposits increased to $174.0 million, an 8.5%
increase from $160.4 million at December 31, 1995.  This increase represents
growth in several deposit classifications during the period ended December 31,
1996.  The most significant growth was in average certificates of deposit,
which increased 16.7% to $78.4 million from $67.2 million in 1995.  Average
savings deposits increased 25.0% to $4.0 million.  Average non-interest bearing
deposits increased 13.8% to $19.8 million.  Average interest bearing demand
deposits decreased $1.4 million or 2.0% from $68.4 million in 1995 to $67.0
million during 1996. Average State of Alabama deposits increased 11.6% to $4.8
million.  Average interest bearing demand deposits decreased due to the
transfer of funds to higher interest bearing certificates of deposits in 1996.

     During 1995, average total deposits increased to $160.4 million, a 13.0%
increase from $141.9 million at December 31, 1994.  This increase represents
growth in several deposit classifications during the period ended December 31,
1995.  A significant portion of the deposit growth resulted from certificates
of deposit. The most significant growth was in average certificates of deposit,
which increased 49.0% to $67.2 million from $45.1 million in 1994.  Average
savings deposits increased 17.7% to $3.2 million.  Average non-interest bearing
deposits increased 9.2% to $17.4 million.  Average interest bearing demand
deposits decreased $7.6 million or 10.0% from $76.1 million in 1994 to $68.4
million during 1995. Average State of Alabama deposits increased 115.1% to $4.3
million.  Average interest bearing demand deposits decreased due to the falling
rate environment in which the Bank operated in 1995, as more funds were moved
into certificates of deposits.

     The following table sets forth the average daily balances of deposits,
rates paid on such deposits, and the percentage of total deposits by category
for the periods indicated.



<TABLE>
<CAPTION>
                                     1996                                 1995                               1994
(Dollars in                   Average        % of                 Average        % of                 Average        % of
thousands)                    Balance       Total   Rate          Balance       Total   Rate          Balance       Total   Rate
                      ----------------------------------------------------------------------------------------------------------
<S>                          <C>           <C>      <C>          <C>          <C>      <C>           <C>          <C>      <C>
Non-interest
bearing demand
deposits                     $ 19,755      11.35%                $ 17,376      10.80%                $ 15,917      11.20%
Interest bearing
demand deposits                67,041      38.53%  3.63%           68,380      42.70%  4.05%           76,142      53.70%  3.32%
Savings deposits                3,969       2.28%  2.70%            3,206       2.00%  2.69%            2,724       1.90%  2.72%
Certificates of
deposit                        78,390      45.06%  5.72%           67,163      41.80%  6.00%           45,136      31.80%  4.63%
State time deposits             4,826       2.77%  5.04%            4,295       2.70%  5.50%            1,997       1.40%  4.40%
                             -------------------                 -------------------                 -------------------
Total                        $173,981     100.00%                $160,420     100.00%                $141,916     100.00%
                             ===================                 ===================                 ===================
</TABLE>



     The maturities of time deposits of $100,000 or more at December 31, 1996
are summarized in the following table:

<TABLE>
<CAPTION>

                                 Time Certificates        Other Time
(Dollars in thousands)               of Deposit            Deposits   Total
                                 -----------------------------------------------
<S>                                         <C>           <C>            <C>
Three months or less                        $5,238        $1,000         $ 6,238
Over three months
through six months                           6,053         4,290          10,343
Over six months through
twelve months                                7,689                         7,689
Over twelve months                           7,035                         7,035
</TABLE>

SHORT-TERM BORROWINGS

     The Company's short-term borrowings historically have consisted of Federal
funds purchased.  The Company purchases Federal funds from correspondent banks
which provide a restricted borrowing line up to 50% of the Bank's capital.
Currently, Federal funds borrowing lines of $23.5 million have been extended to
the Company by seven correspondent banks.  In most cases, these are one year
commitments.  The terms vary but all are short-term, overnight lines.
Additionally, the Bank has $5.5 million of available credit with the Federal
Home Loan Bank.


<PAGE>   26


     The following table summarizes the Bank's short-term borrowings as of
December 31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
Federal Funds Purchased                       1996         1995          1994
-----------------------                  -----------   ----------   -----------
<S>                                      <C>           <C>          <C>
Amount outstanding at end of reporting
period                                   $ 1,325,000   $  825,000
Maximum amount borrowed at any month
end during the period                    $12,525,000   $5,425,000   $10,175,000
Average amount outstanding during each
reporting period                         $ 5,338,000   $2,664,000   $ 6,189,000
Weighted average interest rate                  5.41%        5.96%         4.44%
Line of Credit
--------------
Amount outstanding at end of reporting
period                                   $ 1,000,000
Maximum amount borrowed at any month
end during the period                    $ 1,000,000
Average amount outstanding during each
reporting period                         $   254,000
Weighted average interest rate                 7.112%
</TABLE>

ASSET AND LIABILITY MANAGEMENT, LIQUIDITY AND INTEREST RATE SENSITIVITY

     To maintain the level of profitability desired by the Company, the
financial environment must be monitored closely, and the impact of interest
rate changes must be anticipated.  The asset and liability program of the
Company acts as a center for profit, liquidity and capital planning, asset mix
and volume planning, loan pricing policies and deposit pricing policies.  An
asset liability management model is used to project changes in each category of
assets and liabilities.  The purpose of the model is to test the Company's
balance sheet and current rate structure and to plan against various
investment, loan and deposit strategies and against the estimated impact of
various interest rate environments.

     The objective of the Company's asset and liability management program is
to maintain stability in the net interest margin despite changes in interest
rates and product mix and spread relationships among interest rates.

     Interest rate sensitivity is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities.  These repricing
characteristics are the time frames within which the interest-bearing assets
and liabilities are subject to change in interest rates, either through
replacement at maturity or through repricing during the life of the instrument.
Sensitivity is measured as the difference between the volume of assets and the
volume of liabilities in the Company's current portfolio that are subject to
repricing in future time periods.  The differences are known as interest rate
sensitivity gaps. Effective interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates
within an acceptable time frame, thereby minimizing the effect of interest rate
movements on net interest income.

     Liquidity management is a function of managing asset and liability
maturities to maximize net yields without compromising the Company's ability to
meet cash flow requirements, operating needs, and withdrawal requirements of
customers on a timely basis. Liquidity on the asset side of the balance sheet
is provided through repayment of loans and scheduled maturities of loans,
maturities and cash flows of investments, and cash flows from funds invested in
short-term marketable instruments.  Liquidity on the liability side is attained
through core deposit growth and the ability to borrow additional funds from
available markets such as through Federal funds purchased and the ability to
raise capital in the market by issuing the Company's common stock. At December
31, 1996, the Company's ratio of liquid assets to total loans was 22.2%,
compared to 40.7% at December 31, 1995 and 23.2% at December 31, 1994.  The
Company believes that its liquidity position is sufficient to provide funds to
meet future loan demand or the possible outflow of deposits in addition to
being able to adapt to changing interest rate conditions.

     Sources of liquidity at December 31, 1996 totaled $38.4 million,
consisting of investment securities available for sale of $29.2 million, $8.3
million in cash and due from banks, and $0.9 million in mortgage loans held for
sale. For additional sources of liquidity, see " Short Term Borrowings"  above.
Sources of liquidity at December 31, 1995 totaled $52.0 million, consisting of
investment securities available for sale of $41.6 million, $9.4 million in cash
and due from banks and Federal funds sold and $1.0 million in mortgage loans
held for sale.



<PAGE>   27




     The following table reflects as of December 31, 1996, the interest
sensitivity gap position of the Company and the repricing of interest-earning
assets and interest-bearing liabilities in accordance with their contractual
terms in given time periods:

                      INTEREST RATE SENSITIVITY ANALYSIS



<TABLE>
<CAPTION>
                                                             December 31, 1996
                           --------------------------------------------------------------------------------
                           0-30      31-90        91-180     181-365        1-5         Over 5
                           Days      Days          Days       Days         Years         Years        Total
                           ----      ----          ----       ----         -----         -----        -----
<S>                       <C>        <C>         <C>          <C>             <C>        <C>           <C>
(Dollars in
thousands)
Assets
------
Earning Assets:
 Federal funds sold
 Interest bearing
 deposits in other
 banks                      49                                                                           49
 Securities
 available for sale      3,481       3,206          718      2,040           8,139        11,664     29,248
 Mortgage loans held
 for sale                  867                                                                          867
 Loans, net of
 unearned income        70,637       7,904       10,985     15,082          67,820           546    172,974
                        -----------------------------------------------------------------------------------
   Total earning assets 75,034      11,110       11,703     17,122          75,959        32,090    223,018
Liabilities and
Shareholders Equity
--------------------
Interest bearing
liabilities:
 Interest bearing
 demand deposits        45,002                                              21,049                   66,051
 Savings deposits                                                            4,240                    4,240
 Other certificates
 of deposit             11,621       4,259       13,776     20,901          15,006                   65,563
 Time deposits -
 $100,000 or more        1,299       3,942        6,053      7,488           6,744                   25,526
 Federal funds
 purchased               1,325                                                                        1,325
 Other borrowed money    1,105                                              12,500                   13,605
 Capital lease
 obligation                139                                                                          139
                        -----------------------------------------------------------------------------------
   Total interest
   bearing liabilities $60,491     $ 8,201      $19,829   $ 28,389         $59,539                 $176,449
                       ====================================================================================
Interest rate
sensitivity gap        $14,509     $ 2,909      $(8,126)  $(11,267)        $16,420      $(14,445)
                       ====================================================================================
Cumulative interest
rate sensitivity
gap                    $14,509     $17,418      $ 9,292   $ (1,975)        $14,445
                       ====================================================================================
Rate sensitive
assets vs. rate
sensitive
liabilities            $14,543     $ 2,909      $(8,126)  $(11,267)        $16,420       $12,210   $ 26,689
                       ====================================================================================
Cumulative gap as a
percentage of total
earning assets at
December 31, 1996         7.14%       8.57%        4.57%     -0.97%           7.11%         0.00%
</TABLE>

Note: In the Company's experience, certain deposit accounts, such as savings
      and NOW accounts, are generally not sensitive to changes in interest
      rates.  In the Company's experience, money market demand deposits reprice
      between three months to one year, on average.

SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES

      A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth.  Management is committed to maintaining
shareholders' equity at a sufficient level to assure shareholders, customers
and regulators that the Company is financially sound.

      Shareholders' equity increased 13.5 %, or $2.7 million, to  $22.7 million
at December 31, 1996 from $20.0 million at December 31, 1995. At December 31,
1996, shareholders' equity, as a percentage of total assets, was 10.2% compared
with 10.6% at December 31, 1995. The increase in shareholders' equity was due
to net income for the year and the mark-to-market adjustment for specific
securities designated as available for sale of $343,000 at December 31, 1996, a
net decrease of $137,000 from $480,000 at December 31, 1995.

      Shareholders' equity increased to $20.0 million at December 31, 1995 from
$16.1 million at December 31, 1994, an increase of $3.9 million or 24.2%.  At
December 31, 1995, Shareholders' equity, as a percentage of total assets, was
10.6% compared to 8.9% at December 31, 1994.  The increase was  due to
contributed capital of $1.3

<PAGE>   28


million resulting from the Company's stock offering and net income for
the year.  Shareholders' equity also increased due to the mark-to-market
adjustment for specific securities designated as available for sale of $480,000
at December 31, 1995, a net decrease of $507,000 from $987,000 at December 31,
1994. See "Investment Portfolio".

     The Federal Reserve Board has issued guidelines classifying and defining
bank holding company capital into the following components: (1) Tier I Capital,
which includes tangible shareholders' equity for common stock and certain
qualifying perpetual preferred stock, and (2) Tier II Capital, which includes a
portion of the allowance for loan losses, certain qualifying long-term debt and
preferred stock that does not qualify for Tier I Capital.  The risk-based
capital guidelines require financial institutions to maintain specific defined
credit risk factors (risk-adjusted assets). The minimum Tier I and the combined
Tier I and Tier II capital to risk-weighted assets ratios are 4.0% and 8.0%,
respectively.  The Federal Reserve Board also has adopted regulations which
supplement the risk-based capital guidelines to include a minimum leverage
ratio of Tier I Capital to total assets of 3.0% to 5.0%.  Regulations have also
been issued by the Bank's primary regulator, the OCC, establishing similar
capital ratios.  See "Supervision and Regulation".

     The Company's capital ratios are well above the minimum regulatory
requirements.  Management has reviewed and will continue to monitor the
Company's asset mix, product pricing and the allowance for loan losses which
are the areas most affected by the new requirements.

     The following table summarizes the risk-based and leverage capital ratios
for the Company at December 31, 1996, as well as the required minimum
regulatory capital ratios:

<TABLE>
<CAPTION>
                        December 31, 1996  Minimum Regulatory Requirements
                        -----------------  -------------------------------
<S>                          <C>                    <C>
Risk-based Capital:
 Tier I capital ratio        12.72%                     4.00%
 Total capital ratio         13.68%                     8.00%
Leverage ratio               10.89%                 3.00% - 5.00%
</TABLE>


IMPACT OF INFLATION AND CHANGING PRICES

     The Company's asset and liability structure is substantially different
from that of an industrial or other commercial company since the majority of
its assets and liabilities are monetary in nature.  Management believes that
the impact of inflation on financial results depends on the Company's ability
to react to interest rate changes and by such reaction to reduce the
inflationary impact on performance.  Interest rates do not necessarily move in
the same direction or at the same magnitude. Management attempts to manage the
relationship between interest-sensitive assets and liabilities to protect
against wide interest rate fluctuations, including those resulting from
inflation.

     Various information shown elsewhere in this report will assist in the
understanding of how well the Company is positioned to react to changing
interest rate and inflationary trends.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Any statement contained in this report which is not a historical fact, or
which might be otherwise considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
upon assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, the
supply and demand for investable funds, interest rates, increased competition,
changes in governmental regulations, and national and local economic conditions
generally, as well as other risks more completely described in the Company's
filings with the Securities and Exchange Commission, including this Annual
Report Form 10K.  If any of these assumptions or opinions prove incorrect, any
forward-looking statements made on the basis of such assumptions or opinions
may also prove materially incorrect in one or more respects.



<PAGE>   29


             ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and the Bank for the year
ended December 31, 1996, consisting of the following are contained herein:



<TABLE>
<CAPTION>
<S>                                                                               <C>
INDEPENDENT AUDITOR'S REPORT                                                      Pages(s)
                                                                                  --------
       Consolidated Financial Statements:
       Statements of Condition as of December 31, 1996 and 1995                     F-2
       Statements of Income for years ended December 31, 1996, 1995, and 1994       F-3
       Statements of Changes in Stockholders' Equity for years ended
        December 31, 1996, 1995, and 1994.                                          F-4
       Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994    F-5
       Notes to the Financial Statements                                            F-6
</TABLE>

           [THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY]
<PAGE>   30




                           FIRST AMERICAN BANCORP

                      CONSOLIDATED FINANCIAL STATEMENTS
               FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995





<PAGE>   31



REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders
First American Bancorp
Decatur, Alabama

We have audited the accompanying consolidated statement of condition of First
American Bancorp and subsidiary as of December 31, 1996 and the related
consolidated statement of income, changes in shareholders' equity and cash
flows for the year ended December 31, 1996.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audit.  The financial
statements of First American Bancorp and subsidiary as of December 31, 1995 and
1994, were audited by other auditors whose reports dated January 12, 1996 and
January 12, 1995, respectively, expressed an unqualified opinion on these
statements.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First American Bancorp and
subsidiary as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.





Birmingham, Alabama
February 17, 1997




                                      1
<PAGE>   32



FIRST AMERICAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                           1996            1995
 <S>                                                                                <C>             <C>
                                    ASSETS

 Cash and due from banks                                                            $    8,270,560    $     9,434,479
 Interest bearing deposits in other banks                                                   49,270            123,362
 Securities available for sale                                                          29,248,060         41,564,283
 Mortgage loans held for sale, net of discount                                             866,700            563,749
 Loans, net of unearned income                                                         172,973,942        127,053,081
 Less:  Allowance for loan losses                                                        1,688,940          1,512,454
                                                                                    --------------    ---------------
            Net loans                                                                  171,285,002        125,540,627
                                                                                    --------------    ---------------
 Bank premises and equipment, net                                                        7,832,296          7,219,571
 Other real estate                                                                          80,199             36,000
 Accrued interest receivable                                                             1,383,178          1,180,255
 Deferred tax benefit                                                                      759,300            852,384
 Other assets                                                                            3,243,142            861,750
                                                                                    --------------    ---------------
            Total assets                                                            $  223,017,707    $   187,376,460
                                                                                    ==============    ===============
                                   LIABILITIES

 Deposits
    Noninterest bearing demand                                                      $   22,043,303    $    18,152,331
    Interest bearing demand                                                             66,050,592         69,491,765
    Certificates of deposit, $100,000 and over                                          25,525,456         19,479,736
    Other time and savings                                                              69,803,186         58,238,886
                                                                                    --------------    ---------------
            Total deposits                                                             183,422,537        165,362,718
 Federal funds purchased                                                                 1,325,000            825,000
 Other current borrowings                                                                1,105,000
 Long-term debt                                                                         12,500,000            105,000
 Capital lease obligation                                                                  138,900            163,030
 Accrued expenses and other liabilities                                                  1,843,908            965,364
                                                                                    --------------    ---------------
            Total liabilities                                                          200,335,345        167,421,112
                                                                                    --------------    ---------------
 Commitments and contingencies (Note 8)

                              SHAREHOLDERS' EQUITY

 Preferred stock - par value $.01 per share:  authorized 400,000 shares; none issued
 Common stock - par value $.01 per share:  authorized 10,000,000 shares at
    December 31, 1996 and 2,500,000 shares at December 31, 1995; issued and
    outstanding 2,263,884 shares at December 31, 1996 and 2,047,083 shares at
    December 31, 1995                                                                       22,639             20,471
 Additional paid in capital                                                             15,166,195         12,010,615
 Retained earnings                                                                       7,836,899          8,404,001
 Unrealized loss on securities available for sale, net of deferred tax benefit            (343,371)          (479,739)
                                                                                    --------------    ---------------
            Total shareholders' equity                                                  22,682,362         19,955,348
                                                                                    --------------    ---------------
            Total liabilities and shareholders' equity                              $  223,017,707    $   187,376,460
                                                                                    ==============    ===============
</TABLE>




 See notes to consolidated financial statements.




                                      2
<PAGE>   33





FIRST AMERICAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1996, 1995, and 1994


<TABLE>
<CAPTION>
                                                                       1996               1995                1994
 <S>                                                             <C>                 <C>                <C>

 Interest income
    Interest and fees on loans                                   $    15,950,427     $   12,568,103     $     9,001,013
    Interest on investment securities
       Taxable                                                         1,482,974          1,633,334           1,654,176
       Exempt from federal income tax                                    580,766            799,608             954,724
    Interest on federal funds sold and interest bearing
       deposits in other banks                                            40,972             99,380              16,175
                                                                 ---------------     --------------     ---------------
            Total interest income                                     18,055,139         15,100,425          11,626,088
                                                                 ---------------     --------------     ---------------
 Interest expense
    Interest on deposits
       Interest bearing demand                                         2,420,966          2,766,080           2,526,984
       Certificates of deposit, $100,000 and over                      1,294,484          1,224,534             617,114
       Other time and savings                                          3,539,354          3,098,335           1,636,721
    Interest on federal funds purchased and other debt                   626,147            294,955             369,309
                                                                 ---------------     --------------     ---------------
            Total interest expense                                     7,880,951          7,383,904           5,150,128
                                                                 ---------------     --------------     ---------------
            Net interest income                                       10,174,188          7,716,521           6,475,960
 Provision for loan losses                                               646,130            606,919             317,000
                                                                 ---------------     --------------     ---------------
            Net interest income after provision for loan
              losses                                                   9,528,058          7,109,602           6,158,960
                                                                 ---------------     --------------     ---------------

 Noninterest income
    Service charges on deposits                                        1,091,056            867,624             843,231
    Servicing release fees                                               153,197            179,307             134,726
    Other operating revenues                                             487,905            374,498             299,748
    Net investment securities gains (losses)                             (51,291)            22,867             (34,683)
                                                                 ---------------     --------------     ---------------
            Total noninterest income                                   1,680,867          1,444,296           1,243,022
                                                                 ---------------     --------------     ---------------
 Noninterest expenses
    Salaries and employee benefits                                     4,189,315          3,290,870           2,919,037
    Occupancy, furniture and equipment expense                         1,169,612            879,630             846,768
    Other operating expenses                                           2,307,491          1,780,874           1,707,217
                                                                 ---------------     --------------     ---------------
            Total noninterest expenses                                 7,666,418          5,951,374           5,473,022
                                                                 ---------------     --------------     ---------------
            Income before income taxes                                 3,542,507          2,602,524           1,928,960
 Income tax expense                                                    1,140,336            546,993             461,317
                                                                 ---------------     --------------     ---------------
            Net income                                           $     2,402,171     $    2,055,531     $     1,467,643
                                                                 ===============     ==============     ===============
 Net income per share*                                           $          1.06     $         0.92     $          0.84

</TABLE>



 *Restated to reflect effect of stock splits effected in the form of a dividend
(see Note 10).





 See notes to consolidated financial statements.




                                      3
<PAGE>   34





FIRST AMERICAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1996, 1995, and 1994



<TABLE>
<CAPTION>

                                                          ADDITIONAL                    UNREALIZED
                                             COMMON        PAID IN         RETAINED       LOSS ON     SHAREHOLDERS'
                                             STOCK         CAPITAL         EARNINGS     SECURITIES       EQUITY
                                             -----         -------         --------     ----------       ------
<S>                                       <C>            <C>             <C>           <C>            <C>
Balance, January 1, 1994                  $    9,482     $ 5,009,904     $ 6,169,523   $   (6,054)    $ 11,182,855
Effect of adopting SFAS No. 115, net
   of taxes                                                                                49,793           49,793
Net income                                                                 1,467,643                     1,467,643
Shares issued under 11 for 10 stock split        946       1,276,343      (1,277,289)
Distribution for fractional shares                                            (3,078)                      (3,078)
Issuance of 244,062 common shares in
   public offering, net of expenses            2,441       4,376,915                                     4,379,356
Net change in unrealized losses on
   securities available for sale                                                       (1,030,391)      (1,030,391)
                                          ----------     -----------     -----------   ----------     ------------
Balance, December 31, 1994                    12,869      10,663,162       6,356,799     (986,652)      16,046,178
Net income                                                                 2,055,531                     2,055,531
Shares issued under 3 for 2 stock
   split                                       6,823                          (6,823)
Distribution for fractional shares                                            (1,506)                       (1,506)
Issuance of 77,938 common shares in
   public offering, net of expenses              779       1,347,453                                     1,348,232
Net change in unrealized losses on
   securities available for sale                                                          506,913          506,913
                                          ----------     -----------     -----------   ----------     ------------
Balance, December 31, 1995                    20,471      12,010,615       8,404,001     (479,739)      19,955,348
Net income                                                                 2,402,171                     2,402,171
11 for 10 stock split                          2,046       2,963,901      (2,965,947)
Distribution for fractional shares                                            (3,326)                       (3,326)
Issuance of 12,254 shares restricted
   stock                                         122         191,679                                       191,801
Net change in unrealized losses on
   securities available for sale                                                          136,368          136,368
                                          ----------     -----------     -----------   ----------     ------------
Balance, December 31, 1996                $   22,639     $15,166,195     $ 7,836,899   $ (343,371)    $ 22,682,362
                                          ==========     ===========     ===========   ==========     ============
</TABLE>




See Note 10 for information on the effect of stock split effected in the form
of a dividend.


 See notes to consolidated financial statements.





                                      4
<PAGE>   35





FIRST AMERICAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995, and 1994

<TABLE>
<CAPTION>
                                                                      1996              1995             1994
 <S>                                                             <C>               <C>              <C>
 Cash flows from operating activities:
    Net income                                                   $    240,2171     $  2,055,531     $   1,467,643
    Adjustments to reconcile net income to net cash
      provided by
       operating activities:
         Depreciation and amortization                                 555,907          472,026           416,960
         Provision for loan losses                                     646,130          606,919           317,000
         Deferred tax benefit                                           (2,172)        (273,812)          (40,085)
         (Gain) loss on sale of assets                                 (35,354)         (11,746)            2,265
         Net securities (gains) losses                                  51,291          (22,867)           34,683
         Proceeds from sale of mortgage loans                       30,080,538       28,058,719        12,000,870
         Mortgage loans originated during year                     (30,383,489)     (27,401,131)      (10,520,864)
         Increase in accrued interest receivable                      (202,923)         (12,692)         (208,232)
         Increase in other assets                                   (2,357,973)          (3,418)         (646,246)
         Increase in accrued interest payable                           23,166          169,691           139,356
         Increase (decrease) in other liabilities                      951,534          279,101          (619,009)
                                                                 -------------     ------------     -------------
                 Net cash provided by operating activities           1,728,826        3,916,321         2,344,341
                                                                 -------------     ------------     -------------
 Cash flows from investing activities:
    Proceeds from sale of securities available for sale             18,235,849       19,329,574        10,494,687
    Proceeds from the maturity of securities available for           3,323,520        1,264,721         2,560,832
      sale
    Purchase of securities available for sale                       (9,295,337)     (20,182,857)       (6,990,696)
    Proceeds from sale of investment securities                                         500,000         2,765,670
    Purchase of investment securities                                                                  (5,310,525)
    Net increase in loans                                          (46,825,829)      (6,901,046)      (34,516,980)
    Capital expenditures                                            (1,153,718)      (1,023,135)         (937,949)
    Proceeds from the sale of assets                                   540,047            2,286             1,254
    Proceeds from the sale of other real estate                         33,767           12,000           153,959
                                                                 -------------     ------------     -------------

                 Net cash used in investing activities             (35,141,701)      (6,998,457)      (31,779,748)
                                                                 -------------     ------------     -------------

 Cash flows from financing activities:
    Net increase (decrease) in demand deposit accounts                 449,799       (7,354,758)        (1,650,208)
    Net increase in certificates of deposit and other time          17,610,020       14,880,567         22,597,086
      deposits
    Proceeds from issuance of common stock                             142,501        1,348,232          4,379,356
    Proceeds from issuance of debt                                  12,500,000                           6,700,000
    Proceeds from other current borrowings                           1,000,000
    Net increase in federal funds purchased                            500,000          825,000
    Repayment of debt                                                                (6,463,889)         (236,111)
    Payment on capital lease obligations                               (24,130)         (22,280)          (20,573)
    Distribution for fractional shares                                  (3,326)          (1,506)           (3,078)
                                                                 -------------     ------------     -------------
                 Net cash provided by financing activities          32,174,864        3,211,366        31,766,472
                                                                 -------------     ------------     -------------
                 Net (decrease) increase in cash and cash
                   equivalents                                      (1,238,011)         129,230         2,331,065
 Cash and cash equivalents at beginning of year                      9,557,841        9,428,611         7,097,546
                                                                 -------------     ------------     -------------
 Cash and cash equivalents at end of year                        $   8,319,830     $  9,557,841     $   9,428,611
                                                                 =============     ============     =============

</TABLE>


 See notes to consolidated financial statements.




                                      5
<PAGE>   36





FIRST AMERICAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies followed by First American Bancorp and subsidiary (the
"Company") and the method of applying those policies which affect the
determination of financial position, results of operations, and cash flows are
summarized below.

CONSOLIDATION - The consolidated financial statements of the
Company include the accounts of the following wholly-owned subsidiaries:

<TABLE>
<CAPTION>
            COMPANY                           PARENT COMPANY
 --------------------------------       ----------------------
 <S>                                    <C>
 First American Bank (the "Bank")       First American Bancorp
 Corporate Billing, Inc.                First American Bank
 First Allegiance Finance, Inc.         First American Bank
</TABLE>


All significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.  CASH AND

CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, balances due from banks, interest bearing
deposits in other banks, and federal funds sold.  Generally, federal funds are
purchased and sold for one-day periods.

INVESTMENT SECURITIES - The Company's investments in securities may be
in one of three categories:  held to maturity, available for sale, or trading.
The Company has no trading securities or held to maturity securities.
Securities available for sale consist of bonds, notes, debentures, and certain
equity securities not classified as securities held to maturity.  Securities
available for sale represent those securities intended to be held for an
indefinite period of time, including securities that management intends to use
as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors.  Securities available for sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.

Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.




                                      6
<PAGE>   37

Notes to Consolidated Financial Statements, Continued


MORTGAGE LOANS HELD FOR SALE - First mortgage loans held for sale are valued on
an individual basis at the lower of cost or market, as determined by
outstanding purchase commitments from investors (Note 8).  Interest and other
carrying costs are recognized currently. Revenue from the origination and sale
of first mortgage loans is recognized at the date the loan is closed.  At such
time, substantially all the terms of the outstanding purchase commitments have
been met and the collection of proceeds is reasonably assured.

LOANS - Loans are stated at face value, net of unearned income and an
allowance for possible loan losses.  Interest income on loans is recognized
under the "interest" method except for certain installment loans where interest
income is recognized under the "Rule of 78's" (sum-of-the-months digits) method,
which does not produce results significantly different from the "interest"
method. Nonrefundable fees and costs associated with originating or acquiring
loans are recognized under the interest method as a yield adjustment over the
life of the corresponding loan.

ALLOWANCES FOR POSSIBLE LOAN LOSSES - The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition Disclosure, on January 1, 1995. Under
the new standards, a loan is considered impaired, based on current information
and events, if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows discounted
at the historical effective interest rate, while all collateral-dependent loans
are measured for impairment based on the fair value of the collateral. The
adoption of SFAS 114 and 118 did not have a material impact on the Company's
financial statements.

The Company uses several factors in determining if a loan is impaired
under SFAS No. 114. The internal asset classification procedures include a
thorough review of significant loans and lending relationships and include the
accumulation of related data. This data includes loan payment status, borrower's
financial data, and borrower's operating factors such as cash flows, operating
income or loss, etc.

At December 31, 1996,  the recorded investment in loans for which
impairment has been recognized in accordance with SFAS 114 totaled $1,369,000
and these loans had a corresponding valuation allowance of $98,000. The impaired
loans at December 31, 1996, were measured for impairment based primarily on the
value of the underlying collateral. For the year ended December 31, 1996, the
average recorded investment in impaired loans was approximately $1,369,000. The
Company recognized no interest on impaired loans during the portion of the year
that they were impaired.

The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses.  Increases or decreases in the allowance
due to changes in the




                                      7
<PAGE>   38

Notes to Consolidated Financial Statements, Continued


measurement of the impaired loans are included in the provision for loan
losses. Loans continue to be classified as impaired unless they are brought
fully current and the collection of scheduled interest and principal is
considered probable. When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.

Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and current economic conditions. While
management believes that it has established the allowance in accordance with
generally accepted accounting principles and has taken into account the views
of its regulators and the current economic environment, there can be no
assurance that in the future the Company's regulators or its economic
environment will not require further increases in the allowance.

INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS - Loans, including
impaired loans, are generally classified as nonaccrual if there is reasonable
doubt as to the repayment of the loan in accordance with the agreed terms, even
though the financial condition of the borrower or the collateral ultimately may
be sufficient to reduce or satisfy the obligation.

Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.

While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and principal
are generally applied as a reduction to principal outstanding except in the case
of loans with scheduled amortizations where the payment is generally applied to
the oldest payment due. When the future collectibility of the recorded loan
balance is expected, interest income may be recognized on a cash basis.  In the
case where a nonaccrual loan has been partially charged off, recognition of
interest on a cash basis is limited to that which would have been recognized on
the recorded loan balance at the contractual interest rate.  Receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered.

BANK PREMISES AND EQUIPMENT - Bank premises, equipment and leasehold
improvements are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed over the estimated useful lives of
the assets using the straight-line method.  The estimated useful lives are as
follows:

<TABLE>
<CAPTION>
 Description                    Estimated Useful Life
 -----------------------        ---------------------
 <S>                                 <C>
 Bank premises                       5 to 40 years
 Furniture and equipment             3 to 10 years
 Leasehold improvements              5 to 10 years
</TABLE>




                                      8
<PAGE>   39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



Expenditures for maintenance and repairs are charged to operations as incurred;
expenditures for renewals and improvements are capitalized and written off by
depreciation and amortization charges.  Property retired or sold is removed
from the asset and related accumulated depreciation accounts and any profit or
loss resulting therefrom is reflected in the statement of income.

OTHER REAL ESTATE - Other real estate includes real estate acquired through
foreclosure or deed taken in lieu of foreclosure.  These amounts are recorded
at the lower of cost or fair value and are included in other assets.  Any
write-down from the carrying value to fair value required at the time of
foreclosure is charged to the allowance for possible loan losses.  Subsequent
write-downs and gains or losses recognized on the sale of these properties are
included in non-interest income or expense.

INCOME TAXES - The Company uses an asset and liability method for financial
accounting and reporting for income taxes.  Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.

NET INCOME PER SHARE - Net income per share amounts for 1996, 1995, and 1994
are based on the weighted average number of shares of 2,256,577, 2,232,271 and
1,753,516, respectively (Note 10).  The assumed conversion of outstanding
debentures (Note 6) and exercise of stock options (Note 11) do not result in
material dilution.

OFF BALANCE SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Company has entered into off balance sheet financial instruments consisting
of commitments to extend credit, commitments under credit card arrangements,
commitments under home equity lines of credit, commercial letters of credit,
and standby letters of credit.  Such financial instruments are recorded in the
financial statements when the commitments are funded.

RECLASSIFICATIONS - Certain amounts were reclassified in the 1995 and 1994
financial statements in order to conform with the 1996 presentation.

LONG LIVED ASSETS - Effective January 1, 1996, the Company adopted SFAS No.
121, Accounting for the Impairment of Long Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121).   This statement requires that
long-lived assets and certain identifiable intangibles to be held and used by
the entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable.  If the future undiscounted cash flows expected to result from the
use of the asset and its eventual disposition are less than the carrying amount
of the asset, an impairment loss is recognized.  This statement also requires
that long-lived assets and certain intangibles to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell.  The adoption of
SFAS No. 121 did not have a material impact on the Company's financial
statements.


                                      9
<PAGE>   40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


STOCK-BASED COMPENSATION - The Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, on January 1, 1996.  This statement defines a fair
value based method of accounting for an employee stock option or similar equity
instrument.  However, SFAS No. 123 allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees.  Entities electing to remain with the accounting in APB Opinion No.
25 must make pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting defined in SFAS No. 123 had been
applied.  Under the fair value based method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period.  Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock.  The Company has elected to continue
to measure compensation cost for their stock option plan under the provisions
in APB Opinion No. 25.

RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1996, the Financial
Accounting Standards Board (FASB) issued SFAS No.  125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No.
125).  SFAS No. 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable.  This statement also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interests, if any, based on their relative fair values at the
date of transfer.  SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively.  However, in December 1996, the FASB
issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125.  This statement defers for one year the effective date
of certain provisions of SFAS No. 125 relating to repurchase agreements,
dollar-roll transactions, deferred securities lending and similar transactions.
The effective date for all other transactions addressed by SFAS No. 125 is
unchanged.  Management does not believe that the adoption of SFAS No. 125 will
have a material impact on the Company's financial statements.

In February 1997, the FASB issued SFAS No. 128, Earnings Per Share (SFAS
No. 128).  SFAS No. 128 specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS).  SFAS No. 128 is designed to improve
the EPS information provided in financial statements by simplifying the existing
computational guidelines and revising the disclosure requirements. Management
does not believe that the adoption of SFAS No. 128 will have a material impact
on the Company's financial statements.




                                      10
<PAGE>   41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


2.      INVESTMENT SECURITIES

The amortized cost and estimated fair value of securities available for sale as
of December 31 are as follows:

<TABLE>
<CAPTION>
                                                                          GROSS            GROSS
                                                        AMORTIZED       UNREALIZED       UNREALIZED      ESTIMATED
                                                          COST            GAINS            LOSSES        FAIR VALUE
                                                        ---------       ----------       ----------      ----------
       <S>                                              <C>            <C>              <C>             <C>
       DECEMBER 31, 1996
       U.S. Treasury securities and obligations of
          U.S. Government corporations and
          agencies                                      $ 7,015,980                     $    170,625    $  6,845,355
       Obligations of states and political
       subdivisions                                      10,549,927    $     76,810           90,509      10,536,228
       Mortgage-backed securities                        10,629,926           1,085          389,046      10,241,965
                                                        -----------    ------------     ------------    ------------
       Equity securities                                  1,624,512                                        1,624,512
                                                        ===========    ============     ============    ============

       DECEMBER 31, 1995                                $29,820,345    $     77,895     $    650,180    $ 29,248,060
       U.S. Treasury securities and obligations of
          U.S. Government corporations and
          agencies                                      $13,577,523    $     18,038     $    133,473    $ 13,462,088
       Obligations of states and political
       subdivisions                                      10,678,606          67,998          411,150      10,335,454
       Mortgage-backed securities                        17,283,744          39,821          380,800      16,942,765
       Equity securities                                    823,976                                          823,976
                                                        -----------    ------------     ------------    ------------
                                                        $42,363,849    $    125,857     $    925,423    $ 41,564,283
                                                        ===========    ============     ============    ============
</TABLE>


The Company transferred securities with an amortized cost of $23,643,726 from
the held to maturity classification to the securities available for sale
classification during 1995.  The transferred securities had an estimated fair
value of $23,152,276 at the date of the transfer, resulting in a net increase
in the unrealized loss on securities available for sale of $294,870.  The
Company transferred the securities from the held to maturity classification to
the available for sale classification to provide the Company with additional
options in managing liquidity and interest rate risk.  Currently, the Company
has no securities in the held to maturity classification.

Securities with a book value of $22,494,329 and $36,917,613  at December 31,
1996 and 1995, respectively, were pledged as collateral for United States
Government deposits and other public funds and for other purposes as required
or permitted by law.




                                      11
<PAGE>   42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


Gross realized gains and losses on sales of securities were as follows:
<TABLE>
<CAPTION>
                                                                      1996             1995             1994
         <S>                                                     <C>               <C>              <C>
         Gross realized gains                                    $      52,362     $    477,128     $      76,255
         Gross realized losses                                        (103,653)        (454,261)         (110,938)
                                                                 -------------     ------------     -------------
              Net (loss) gain                                    $     (51,291)    $     22,867     $     (34,683)
                                                                 =============     ============     =============
</TABLE>

The amortized cost and estimated fair value of securities at December 31, 1996,
by contractual maturity, are shown below.  Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                                   SECURITIES AVAILABLE FOR SALE
                                                                                   -----------------------------
                                                                                    AMORTIZED         ESTIMATED
                                                                                       COST           FAIR VALUE
                                                                                   ------------     -------------
         <S>                                                                       <C>              <C>
         Due in one year or less                                                   $ 1,897,307      $   1,895,733
         Due after one year through five years                                       4,739,611          4,673,787
         Due after five years through ten years                                      8,107,877          8,049,509
         Due after ten years                                                         2,821,112          2,762,554
                                                                                   -----------      -------------
                                                                                    17,565,907         17,381,583
         Mortgage-backed securities                                                 10,629,926         10,241,965
                                                                                   -----------      -------------
            Total debt securities                                                   28,195,833         27,623,548
         Equity securities having no contractual due date                            1,624,512          1,624,512
                                                                                   -----------      -------------
                                                                                   $29,820,345      $  29,248,060
                                                                                   ===========      =============
</TABLE>

3.      LOANS

The major categories of loans at December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                                                        1996                1995
         <S>                                                                       <C>                <C>
         Commercial, industrial, and agricultural                                  $   32,657,388     $    28,042,877
         Real estate - construction                                                    10,536,885           3,865,433
         Real estate - mortgage                                                        85,685,933          60,035,298
         Loans to individuals for personal expenditures                                41,153,324          37,651,082
         All other loans (including overdrafts)                                         5,729,261             474,385
                                                                                   --------------     ---------------
            Total loans                                                               175,762,791         130,069,075
         Unearned interest and fees                                                    (2,788,849)         (3,015,994)
                                                                                   --------------     ---------------
            Loans, net of unearned income                                             172,973,942         127,053,081
         Allowance for loan losses                                                     (1,688,940)         (1,512,454)
                                                                                   --------------     ---------------
            Net loans                                                              $  171,285,002     $   125,540,627
                                                                                   ==============     ===============
</TABLE>


                                      12
<PAGE>   43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


The Company's lending is concentrated throughout Morgan and Limestone counties
in Alabama and repayment of these loans is, in part, dependent upon the
economic conditions in this region of the state. Management does not believe
the loan portfolio contains concentrations of credits either geographically or
by borrower, which would expose the Company to unacceptable amounts of risk.

Management continually evaluates the potential risk in all segments of the
portfolio in determining the allowance for possible loan losses.  Other than
concentration of credit risk in the above mentioned counties and commercial and
real estate loans in general, management is not aware of any significant
concentrations.

The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
customer.  Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, residential real estate, and
income-producing commercial properties. No additional credit risk exposure
relating to outstanding loan balances exists beyond the amounts shown in the
consolidated statement of condition as of December 31, 1996. Loans on which the
accrual of interest has been discontinued or reduced amounted to approximately
$1,369,000 and $931,000 at December 31, 1996 and 1995, respectively.  For the
years ended December 31, 1996, 1995 and 1994, the difference between gross
interest income that would have been recorded in such period if nonaccruing
loans had been current in accordance with their original terms and the amount
of interest income on those loans that was included in such period's net income
was not material.

4.      Allowance for Loan Losses A summary of the allowance
for loan losses for the years ended December 31, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
                                                                      1996             1995              1994
         <S>                                                     <C>               <C>              <C>
         Balance at beginning of year                            $    1,512,454    $  1,244,550     $   1,039,011
         Provision charged to operations                                646,130         606,919           317,000
         Loans charged off                                             (550,289)       (450,808)         (194,669)
         Recoveries                                                      80,645         111,793            83,208
                                                                 --------------    ------------     -------------
                                                                 $    1,688,940    $  1,512,454     $   1,244,550
                                                                 ==============    ============     =============
</TABLE>




                                      13
<PAGE>   44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


5.      BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
                                                                                       1996              1995
         <S>                                                                       <C>              <C>
         Land                                                                      $  1,421,756     $   1,362,757
         Bank premises                                                                5,847,212         5,407,016
         Furniture and equipment                                                      3,193,793         2,614,090
         Leasehold improvements                                                          13,780            11,285
                                                                                   ------------     -------------
                                                                                     10,476,541         9,395,148
         Less accumulated depreciation and amortization                               2,644,245         2,175,577
                                                                                   ------------     -------------
         Net carrying amount                                                       $  7,832,296     $   7,219,571
                                                                                   ============     =============
</TABLE>


Depreciation and amortization expense for the years ended December 31, 1996,
1995 and 1994 was $555,907, $472,026, and $416,960, respectively.

Bank premises include the following amount for a lease (Note 13) that has been
capitalized:

<TABLE>
<CAPTION>
                                                                                       1996              1995
         <S>                                                                       <C>              <C>
         Bank premises                                                             $    250,380     $     250,380
         Less accumulated depreciation                                                  111,480           110,584
                                                                                   ------------     -------------
                                                                                   $    138,900     $     139,796
                                                                                   ============     =============
</TABLE>

A summary of the commitment under the capitalized lease follows:
<TABLE>
<CAPTION>
         Year ending December 31:
            <S>                                                                                     <C>
            1997                                                                                    $      36,300
            1998                                                                                           36,300
            1999                                                                                           36,300
            2000                                                                                           36,300
            2001                                                                                           21,175
                                                                                                    -------------
              Total minimum lease payments                                                                166,375
              Less amounts representing interest                                                           27,475
                                                                                                    -------------
              Present value of minimum lease payments at December 31, 1996                          $     138,900
                                                                                                    =============
</TABLE>





                                      14
<PAGE>   45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


6.      DEBT

Total debt consisted of the following at December 31:
<TABLE>
<CAPTION>
                                                                                1996            1995
         <S>                                                                <C>             <C>
         Federal Home Loan Bank (FHLB) debt due June 5, 1998, interest
         at one month LIBOR (London interbank offered rate) less 3
         basis points, 5.5325%, at December 31, 1996, collateralized by
         Federal Home Loan Bank stock and certain first mortgage loans
                                                                            $ 12,500,000

         Short-term borrowings with a large regional financial
         institution due September 26, 1997, interest at one month
         LIBOR plus 165 basis points, 7.275% at December 31, 1996,
         collateralized by accounts receivable of Corporate Billing,
         Inc. and guaranteed by the Bank and the Company
                                                                               1,000,000

         Convertible debentures payable to the President of the
         Company, due February 18, 1997, 8.25% at December 31, 1996
         and 1995                                                                105,000    $     105,000
                                                                            ------------    -------------
         Total debt                                                         $ 13,605,000    $     105,000
                                                                            ============    =============
</TABLE>

Convertible debentures payable to the President of the Company bear interest at
the prime rate of a large Alabama financial institution. As of December 31,
1996, the debentures are convertible into 35,004 shares of Company common
stock; the original conversion price was $12.50 per share, subject to
adjustment for any stock splits or stock dividends.  On February 17, 1997, the
debentures were converted into 35,004 shares of Company common stock at $2.99
per share.

The Company has $5,500,000 of available credit with the FHLB in addition to the
$12,500,000 above, $11,000,000 of available credit with a large regional
financial institution, and federal funds borrowings lines of $23,500,000 with
various correspondent banks.

The FHLB has a blanket lien on the Company's 1-4 family mortgage loans in the
amount of the outstanding debt.

7.      INCOME TAXES

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                                                      1996             1995              1994
         <S>                                                     <C>               <C>              <C>
         Currently payable:
            Federal                                              $     993,491     $    697,091     $     419,109
            State                                                      149,017          123,714            82,293
                                                                 -------------     ------------     -------------
              Total currently payable                                1,142,508          820,805           501,402
                                                                        (2,172)        (273,812)          (40,085)
                                                                 -------------     ------------     -------------
         Deferred tax benefit                                    $   1,140,336     $    546,993     $     461,317
                                                                 =============     ============     =============
              Total income tax expense
</TABLE>




                                      15
<PAGE>   46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


The net deferred tax asset consisted of the following as of December 31:
<TABLE>
<CAPTION>
                                                                                       1996              1995
         <S>                                                                       <C>              <C>
         Deferred tax liability                                                    $   (21,284)     $      13,575
         Deferred tax asset:
            Unrealized loss on securities available for sale                           228,914            319,826
            Depreciation expense                                                        36,823             58,864
            Provision for loan losses                                                  508,520            486,836
            Other                                                                        6,327                433
                                                                                   -----------      -------------
              Deferred tax asset                                                       780,584            865,959
                                                                                   -----------      -------------
              Net deferred tax asset                                               $   759,300      $     852,384
                                                                                   ===========      =============
</TABLE>


The effective tax rates differ from the expected tax using federal statutory
rates.  A reconciliation between the expected tax and actual income tax expense
follows:

<TABLE>
<CAPTION>
                                                                      1996              1995             1994
         <S>                                                     <C>               <C>              <C>

         Expected tax at federal statutory rates                 $   1,204,452     $    884,858     $     655,846
         Federal tax effect of interest on obligations of
         states and
            political subdivisions                                    (204,214)        (279,640)         (332,859)
         State excise taxes less federal income tax benefit             98,351           81,651            52,796
         Effect of disallowed interest expense                          28,981           40,562            37,493
         Decrease in valuation allowance                                               (189,302)
         Other, net                                                     12,766            8,864            48,041
                                                                 -------------     ------------     -------------
              Totals                                             $   1,140,336     $    546,993     $     461,317
                                                                 =============     ============     =============
</TABLE>


8.      Commitments and Contingencies

Mortgage loans held for sale are originated and sold in the secondary mortgage
loan market.  Under the provisions of some of the mortgage loan purchase
agreements, investors have full recourse on some of the mortgage loans
purchased for a period of up to six months.  As of December 31, 1996 and 1995,
the remaining uncollected principal balance on which investors have recourse
totaled approximately $129,500 and $116,900, respectively.

The consolidated financial statements properly do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk.  These commitments and contingent liabilities are commitments
to extend credit and standby letters-of-credit. A summary of commitments and
contingent liabilities at December 31, 1996 and 1995 is as follows:

<TABLE>
<CAPTION>
                                                                                        1996              1995
         <S>                                                                       <C>              <C>
         Commitments to extend credit                                              $  32,587,485     $   21,182,261
         Standby letters-of-credit                                                       312,600            480,150
</TABLE>


                                      16
<PAGE>   47





Notes to Consolidated Financial Statements, Continued


Commitments to extend credit and standby letters-of-credit all include exposure
to some credit loss in the event of nonperformance of the customer.  The
Company's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extension of credit that are recorded in
the consolidated statements of condition.  Because these instruments have fixed
maturity dates, and because many of them expire without being drawn upon, they
do not generally present any significant liquidity risk to the Company.

The Company is from time to time defendants in legal actions from normal
business activities.  Management does not anticipate that the ultimate
liability arising from litigation outstanding at December 31, 1996, will have a
materially adverse effect on the Company's financial statements.

9.      Profit Sharing Plan

The Company has a contributory profit-sharing plan held by trustee for the
benefit of employees who qualify as to age and length of service.  The annual
contribution to the profit-sharing plan is a discretionary amount determined by
the Company's Board of Directors, not to exceed fifteen percent of the
compensation otherwise paid to the participants in the plan.  The Company
expects to continue the plan indefinitely; however, the Company does have the
right to modify, amend, or terminate the plan at any time.  During 1996, 1995
and 1994, contributions to the plan charged to operations were $100,960,
$87,857 and $65,359, respectively.

10.     Stock Splits

During 1996, the Company issued 204,548 shares of common stock in connection
with a 11 for 10 stock split effected in the form of a 10% stock dividend.
During 1995, the Company issued 682,277 shares of common stock in connection
with a 3 for 2 stock split effected in the form of a 50% stock dividend.
During 1994, the Company issued 94,614 shares of common stock in connection
with an 11 for 10 stock split effected in the form of a 10% stock dividend.

All per share figures included throughout the financial statements are based on
the increased number of shares of common stock after giving effect to these
splits.

11.     Stock Option Plan

Under the terms of the 1992 Stock Option Plan (the "1992 Plan"), options to
purchase shares of the Company's common stock are granted at a price equal to
the market price of the stock at the date of grant. The initial grant of
options under the 1992 Plan was made on October 20, 1992 with an option term of
ten years, which expires October 20, 2002.  Shares subject to the option become
vested at the rate of one tenth per year each December 31 except that one-tenth
of the shares became vested at the date of grant, October 20, 1992. On February
20, 1996, options were granted at a price equal to the market price of the
stock at the date of grant. Options may be exercised as they become vested over
the option term of ten years, which expires February 20, 2006. Shares subject
to the option become vested at the rate of one-fifth per year each December 31.
The Stock Option Plan Committee has a period of three months following each
December 31 to increase or decrease the extent to which an option may become
vested.  The





                                      17
<PAGE>   48

Notes to Consolidated Financial Statements, Continued


Stock Options and the option price have been adjusted for all stock splits
effected in the form of stock dividends.

Under the terms of the 1994 Stock Option Plan, options to purchase shares of
the Company's common stock are granted at an exercise price not less than the
fair market value of the common stock at the date of grant. Options may become
vested at the option term of ten years, which expires October 18, 2004. Shares
subject to the option become vested at the rate of one-tenth per year each
December 31, except that two-tenths became vested November 1, 1994. The Stock
Option Committee has a period of three months following each December 31 to
increase or decrease the extent to which an option may become vested.

On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock
Based Compensation (SFAS 123). As permitted by SFAS 123, the Company has chosen
to apply APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its Plans. Accordingly, no
compensation cost has been recognized for options granted under the Plans.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumption used for grants in 1996: cash dividend yield of 0%; expected
volatility of 11.4%; risk-free interest rate of 5.5%; and expected life of 7
years.  Had compensation cost for the Plan been determined based on the fair
value at the grant date for awards under the Plan consistent with the method of
SFAS 123, the impact on the Company's 1996 net income and net income per share
would not have been material.

A summary of the status of the Plans as of December 31, 1996, 1995, and 1994,
and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
                                                                                                      WEIGHTED
                                                                                                       AVERAGE
                                                                                                      EXERCISE
                                                                                      SHARES            PRICE
                                                                                     ----------     ------------
         <S>                                                                              <C>       <C>

         1992 PLAN

         Outstanding at December 31, 1994                                                 89842     $       5.75
                                                                                     ==========     ============

         Outstanding at December 31, 1995                                                 89842     $       5.75
                                                                                     ==========     ============

         Granted in 1996                                                                   5500     $      13.18
                                                                                     ==========     ============

         Outstanding at December 31, 1996                                                 95342     $       6.17
                                                                                     ==========     ============

</TABLE>


Options exercisable at December 31, 1996, 1995 and 1994 include 10,000, 8,984
and 8,984 options subject to committee review, respectively.

The weighted average grant date fair value of options granted during 1996 was
$5.21.




                                      18
<PAGE>   49

Notes to Consolidated Financial Statements, Continued


At December 31, 1996, there were 4,482 shares reserved under the 1992 Plan for
future grants.

<TABLE>
<CAPTION>
                                                                                                      WEIGHTED
                                                                                                       AVERAGE
                                                                                                      EXERCISE
                                                                                         SHARES        PRICE
                                                                                         ------     ------------
         <S>                                                                              <C>       <C>

         1994 PLAN


         Granted in 1994                                                                 16,500     $       9.09
                                                                                         ======     ============

         Outstanding at December 31, 1994                                                16,500     $       9.09
                                                                                         ======     ============

         Outstanding at December 31, 1995                                                16,500     $       9.09
                                                                                         ======     ============

         Outstanding at December 31, 1996                                                16,500     $       9.09
                                                                                         ======     ============
</TABLE>


Options exercisable at December 31, 1996, 1995 and 1994 include 1,650 options
for each of the three years subject to committee review.

At December 31, 1996, there were 66,000 shares reserved under the 1994 Plan for
future grants.

The following table summarizes information about the Plans' stock options at
December 31, 1996:

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                     ----------------------------    --------------------------------------------------
                                       WEIGHTED-
                                        AVERAGE
                        NUMBER         REMAINING       WEIGHTED-            NUMBER        WEIGHTED-
   RANGE OF          OUTSTANDING      CONTRACTUAL       AVERAGE           EXERCISABLE      AVERAGE
 EXERCISE PRICES     AT 12/31/96          LIFE       EXERCISE PRICE      AT 12/31/96    EXERCISE PRICE
----------------     -----------      -----------    --------------     ------------    ---------------
 <S>                       <C>          <C>            <C>                      <C>       <C>
  1992 Plan
     5.75                  53,904       5.1 years      $        5.75           53,904     $       5.75
    13.18                   5,500       9.2 years              13.18            1,100            13.18


 1994 Plan
     9.09                  16,500       7.8 years               9.09            8,250             9.09

</TABLE>



                                      19
<PAGE>   50

Notes to Consolidated Financial Statements, Continued


12.     FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

CASH AND SHORT TERM INVESTMENTS - For those short term instruments, the carrying
amount is a reasonable estimate of fair value.

SECURITIES AVAILABLE FOR SALE - For marketable equity securities and other
securities held as available for sale, fair value equals quoted market price,
if available.  If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.

LOAN RECEIVABLES - For certain homogeneous categories of loans, such as some
residential mortgages, credit card receivables, and other consumer loans, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.

DEPOSIT LIABILITIES - The fair value of demand deposits, savings, and certain
money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.

SHORT-TERM BORROWINGS - The carrying amount of these liabilities is a
reasonable estimate of their fair value.

CAPITAL LEASE OBLIGATION - The carrying amount of this liability is a
reasonable estimate of its fair value.

LONG-TERM DEBT - Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing
debt.

COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN - The value of these unrecognized financial  instruments is
estimated based on the fee income associated with the commitments.  Such fee
income is not material to the Company's financial statements at December 31,
1996 and 1995 and, therefore, the fair value of these commitments is not
presented.




                                      20
<PAGE>   51

Notes to Consolidated Financial Statements, Continued


The estimated fair values of the Company's financial instruments at December
31, 1996 and 1995 (in thousands) are as follows:

<TABLE>
<CAPTION>
                                                     1996                          1995
                                           ---------------------------  ---------------------------
                                            CARRYING                      CARRYING
                                             AMOUNT       FAIR VALUE       AMOUNT       FAIR VALUE
                                           ---------      ------------  -----------     -----------
        <S>                                <C>            <C>            <C>            <C>


        Financial Assets:
          Cash and short-term investments  $     8,320    $     8,320    $     9,558    $    9,558
          Securities available for sale         29,248         29,248         41,564        41,564
          Net loans                            171,285        174,410        125,541       127,018
                                           -----------    -----------    -----------    ----------
              Total financial assets       $   208,853    $   211,978    $   176,663    $  178,140
                                           ===========    ===========    ===========    ==========

        Financial Liabilities:
          Deposits, excluding
              certificates of
              deposit                      $    92,381    $    92,381    $    90,611    $   90,611
          Certificates of deposit               91,042         91,242         74,752        74,876
          Short term borrowings                  2,430          2,430            825           825
          Capital lease obligation                 139            139            163           163
          Long-term debt                        12,500         12,500            105           105
                                           -----------    -----------    -----------    ----------
            Total financial liabilities    $   198,492    $   198,692    $   166,456    $  166,580
                                           ===========    ===========    ===========    ==========
</TABLE>

13.      RELATED PARTY TRANSACTIONS

The directors, officers and principal shareholders borrow money from time to
time from the Company.  Such loans are made on substantially the same terms
including interest rates, as to other customers of the Company.  Loan activity
for executive officers, directors and principal shareholders which aggregated a
loan balance of more than $60,000 to the individual during the year ended
December 31, 1996 are summarized as follows:


<TABLE>
<CAPTION>
       BALANCE                                                     BALANCE
      JANUARY 1             LOANS             REPAYMENT          DECEMBER 31
      ---------             -----             ---------          -----------
     <S>                 <C>                 <C>                  <C>
     $7,451,787          $8,934,427          $8,796,588           $7,589,626
     ==========          ==========          ==========           ==========
</TABLE>


Certain directors of the Company have direct interest in the lease obligation
described in Note 5.

The Company made payments totaling $41,000 and $27,000 in 1996 and 1995,
respectively, to a law firm in which two members of the Company's Board of
Directors are partners.

The Company obtains its workers compensation, liability and bond insurance
through a member of the Company's Board of Directors, as agent of record.
During 1996 and 1995, the Company paid premiums of $112,000 and $67,000,
respectively.

The Company  utilizes several brokerage firms to purchase and sell investment
securities. During 1996, the Company purchased $4,690,368 and sold $13,558,850,
respectively, of investment securities through firms which employ relatives of
certain directors. The transactions were conducted at arms-length through the
competitive bidding process.




                                      21
<PAGE>   52

Notes to Consolidated Financial Statements, Continued


14.      Regulatory Restrictions

Dividends payable by state banks in any year, without prior approval of the
appropriate regulatory authorities, are limited to the Company's net profits
(as defined) for that year combined with its retained net profits for the
preceding two years.

Based on the types and amounts of deposits received, banks must maintain
appropriate noninterest bearing cash balances in accordance with Federal
Reserve bank reserve requirements.  In 1996, the average noninterest cash
balance needed to meet reserve requirements was approximately $175,000.

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined).  Management believes, as of December 31, 1996, that the
Company meets all capital adequacy requirements to which it is subject.

As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company as well capitalized under the
regulatory framework for prompt corrective action.  To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, and Tier I capital ratios as set forth in the table.  There are no
conditions or events since that notification that management believes have
changed the institution's category.




                                      22
<PAGE>   53



Notes to Consolidated Financial Statements, Continued


The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
                                                                     THE COMPANY
                                        ----------------------------------------------------------------------
                                                                                                 TO BE WELL
                                                                                             CAPITALIZED UNDER
                                                                                                   PROMPT
                                                                      FOR CAPITAL            CORRECTIVE ACTION
                                               ACTUAL              ADEQUACY PURPOSES             PROVISIONS
                                        -------------------       -------------------       ------------------
                                         AMOUNT       RATIO       AMOUNT        RATIO       AMOUNT       RATIO
                                        --------      -----       ------        -----       ------       -----
 <S>                                    <C>           <C>        <C>             <C>       <C>            <C>


 AS OF DECEMBER 31, 1996
    Total Capital (to Risk
      Weighted  Assets)                $422,682       12.77%     $ 14,207        8.00%     $ 17,759       10.00%


    Tier I Capital (to Risk
      Weighted Assets)                   22,598       12.72%        7,104        4.00%       10,655        6.00%

    Tier I Capital Ratio (to
      Average Assets)                    22,598       10.88%        8,311        4.00%       10,389        5.00%


 AS OF DECEMBER 31, 1995
    Total Capital (to Risk
      Weighted Assets)                   19,955       14.17%       11,263        8.00%       14,079       10.00%

    Tier I Capital (to Risk
      Weighted Assets)                   20,243       14.38%        5,632        4.00%        8,448        6.00%

    Tier I Capital Ratio (to
      Average Assets)                    20,243       10.89%        7,598        4.00%        9,498        5.00%
</TABLE>



<TABLE>
<CAPTION>
                                                                       THE BANK
                                        ----------------------------------------------------------------------

                                                                                                TO BE WELL
                                                                                             CAPITALIZED UNDER
                                                                      FOR CAPITAL                 PROMPT
                                               ACTUAL              ADEQUACY PURPOSES        CORRECTIVE ACTION
                                       -------------------       -------------------       -------------------
                                         AMOUNT       RATIO       AMOUNT        RATIO       AMOUNT       RATIO
                                       --------      -----       ------        -----       ------       -----
 <S>                                   <C>            <C>        <C>             <C>       <C>            <C>


 AS OF DECEMBER 31, 1996
    Total Capital (to Risk
      Weighted Assets)                 $ 22,313       12.58%     $ 14,194        8.00%     $ 17,743       10.00%

    Tier I Capital (to Risk
      Weighted Assets)                   22,229       12.53%        7,097        4.00%       10,646        6.00%

    Tier I Capital Ratio (to
      Average Assets)                    22,229       10.70%        8,309        4.00%       10,386        5.00%


 AS OF DECEMBER 31, 1995
    Total Capital (to Risk
      Weighted Assets)                   19,763       13.94%       11,342        8.00%       14,177       10.00%
    Tier I Capital (to Risk
      Weighted Assets)                   20,243       14.28%        5,671        4.00%        8,506        6.00%
    Tier I Capital Ratio (to
      Average Assets)                    20,243       10.89%        7,437        4.00%        9,296        5.00%

</TABLE>




                                      23
<PAGE>   54

Notes to Consolidated Financial Statements, Continued


15.     Other Operating Expenses

Other operating expenses for the years ended December 31, 1996, 1995
and 1994 consist of the following:

<TABLE>
<CAPTION>
                                                                1996           1995           1994
           <S>                                               <C>            <C>            <C>

           Data processing expense                           $  288,439     $  198,916     $  164,015
           Credit card expense                                  108,783         94,793         96,483
           Advertising and business development                 388,384        326,893        266,134
           Communication expense                                376,400        247,672        212,168
           Deposit and other insurance expense                   48,222        230,450        352,813
           Professional fees                                    454,518        276,659        218,608
           Supplies                                             200,401        127,363        100,844
           Director and committee fees                          134,866        126,122        126,210
           Other                                                307,478        152,006        161,942
                                                             ----------     ----------     ----------

                Total                                        $2,307,491     $1,780,874     $1,707,217
                                                             ==========     ==========     ==========
</TABLE>


16.      Concentrations of Credit

All of the Company's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Company's market area.  The
concentrations by type of loan or commitment are set forth in Notes 3 and 8.
Investments in state and municipal securities involve governmental entities
primarily within the State of Alabama.

17.      Supplemental Cash Flow Information

Supplemental cash flow information for the years ended December 31, 1996, 1995,
and 1994 is as follows:

<TABLE>
<CAPTION>
                                                                 1996              1995             1994
         <S>                                                     <C>               <C>              <C>


         Cash paid during the year for:
            Interest                                             $   7,847,785     $  7,214,213     $   5,010,772

            Income taxes                                               947,523          824,435            449208


         Supplemental disclosure of noncash investing and
            financing activities
              Issuance of common stock for the non-employee
                 Director Stock Plan                             $      49,300
              Assets acquired in business combination                2,154,287
              Liabilities assumed in business combination            8,949,918
              Transfer of investment securities to
                 securities available for sale                                     $ 23,643,726
              Loans originated from the sale of other real estate                                   $      43,000
</TABLE>




                                      24
<PAGE>   55

Notes to Consolidated Financial Statements, Continued


18.     Parent Company The condensed financial information for First American
Bancorp (Parent Company only) is presented as follows:

<TABLE>
<CAPTION>
         STATEMENTS OF CONDITION                                                       1996          1995


                                    ASSETS
         <S>                                                                      <C>              <C>

         Cash*                                                                    $     404,923     $     237,681
         Investment in subsidiary, at equity*                                        22,319,826        19,763,458
         Other assets                                                                    62,613            61,709
                                                                                  -------------    --------------


               Total assets                                                       $  22,787,362    $   20,062,848
                                                                                  =============    ==============


                                 LIABILITIES

         Debentures payable                                                        $    105,000    $      105,000
         Other liabilities                                                                                  2,500
                                                                                  -------------    --------------
              Total liabilities                                                         105,000           107,500
                                                                                  -------------    --------------


                             SHAREHOLDERS' EQUITY

         Common stock par value $.01 per share; authorized 10,000,000 shares
           at December 31, 1996 and 2,500,000 at December 31, 1995; issued and
           outstanding 2,263,884 shares at December 31, 1996 and 2,047,083
           shares, at December 31, 1995                                                  22,639            20,471

         Additional paid in capital                                                  15,166,195        12,010,615
         Retained earnings                                                            7,836,899         8,404,001
         Unrealized loss on securities available for sale, net of deferred
           tax benefit                                                                 (343,371)         (479,739)
                                                                                   ------------      ------------
              Total shareholders' equity                                             22,686,362        19,955,348
                                                                                   ------------      ------------
              Total liabilities and shareholders' equity                           $ 22,787,362    $   20,062,848
                                                                                   ============    ==============

</TABLE>



 *Eliminated in consolidation.




                                      25
<PAGE>   56

Notes to Consolidated Financial Statements, Continued


<TABLE>
<CAPTION>
         STATEMENTS OF INCOME                                         1996             1995            1994
         <S>                                                     <C>               <C>              <C>
         Income:
            Interest                                             $      13,238     $      7,143     $         892
            Dividends                                                                                      15,000
            Other                                                        5,500                              1,548
                                                                 -------------     ------------     -------------
                                                                        18,738            7,143            17,440
              Total income                                       -------------     ------------     -------------


         Expenses:
            Interest                                                    11,177            7,162              7605
            Other                                                       23,935           18,509             12997
                                                                 -------------     ------------     -------------
              Total expenses                                            35,112           25,671             20602
                                                                 -------------     ------------     -------------
              Operating loss before income tax benefit                 (16,374)         (18,528)            (3162)
         Income tax benefit                                              5,535            6,264              6200
                                                                 -------------     ------------     -------------


              Income (loss) before undistributed earnings of
                 subsidiary                                            (10,839)         (12,264)           (3,038)

         Undistributed earnings of subsidiary:
            Net income of subsidiary*                                2,413,010        2,067,795         1,479,605
            Less:  dividends                                                                              (15,000)
                                                                 -------------     ------------     -------------
                                                                     2,413,010        2,067,795         1,464,605
                                                                 -------------     ------------     -------------
              Net income                                         $   2,402,171     $  2,055,531     $   1,467,643
                                                                 =============     ============     =============



         STATEMENTS OF CASH FLOWS                                      1996             1995             1994
         Cash flows from operating activities:
            Net income                                           $   2,402,171     $  2,055,531     $   1,467,643
            Adjustments to reconcile net income to net cash
              (used in) provided by operating activities:
                 Amortization                                              966              966               966
                 Increase in taxes receivable                           (5,535)          (6,264)             (240)
                 Increase (decrease) in accrued interest                                 (1,237)              712
                 payable
                 Other                                                  (5,826)           2,498              (201)
                 Undistributed earnings of subsidiary*              (2,413,010)      (2,067,795)       (1,464,605)
                                                                 -------------     ------------     -------------

                   Net cash (used in) provided by operating
                      activities                                       (21,234)         (16,301)            4,275
                                                                 -------------     ------------     -------------

         Cash flows used in investing activities:
            Capital contribution to subsidiary*                                      (1,158,739)         (433,000)
                                                                 -------------     ------------     -------------

         Cash flows from financing activities:
            Distribution for fractional shares                          (3,326)          (1,506)           (3,078)
            Proceeds from issuance of common stock                     191,801        1,348,232         4,379,605
                                                                 -------------     ------------     -------------
                   Net cash provided by financing activities           188,475        1,346,726         4,376,278
                                                                 -------------     ------------     -------------
                   Net increase in cash                                167,241          171,686            50,553



         Cash at beginning of year                                     237,681           65,995            15,442
                                                                 -------------     ------------     -------------
         Cash at end of year*                                    $     404,922     $    237,681     $      65,995
                                                                 =============     ============     =============
         Supplemental disclosure of cash flow information:
            Cash paid during the year for:
              Interest                                           $      11,177     $      8,399     $       7,605

</TABLE>


         *Eliminated in consolidation.




                                      26
<PAGE>   57
          ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                     ACCOUNTING AND FINANCIAL DISCLOSURE

None.



                                  PART III

        ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information required by this item concerning Directors and Executive
Officers of the Company is incorporated by reference from the sections entitled
"Election of Directors" and "Executive Compensation and Other Information' in
the Proxy Statement for the Annual Meeting of Shareholders to be held April 29,
1997, (the "Proxy Statement") which is to be filed with the Securities and
Exchange Commission.


                      ITEM 11 - EXECUTIVE COMPENSATION

     Information required by the item is incorporated by reference from the
sections entitled "Executive Compensation and Other Information" and "Meetings
of the Board of Directors" in the Proxy Statement, which is to be filed with
the Securities and Exchange Commission.


  ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and Principal Shareholders" in the
Proxy Statement, which is to be filed with the Securities and Exchange
Commission.


          ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this item is incorporated by reference from the
section entitled "Certain Transactions" in the Proxy Statement, which is to
be filed with the Securities and Exchange Commission.






<PAGE>   58


                                   PART IV


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

(a)  (1) and (2) list of Financial Statements and Financial Statement Schedules
     filed as a part of this report:

     The following consolidated financial statements of First American Bancorp
     and its subsidiary and report of independent auditors are filed as part
     of this report:
<TABLE>
<CAPTION>

                                                                    Page(s)
     <S>                                                            <C>
     Independent Auditors' Report

     Consolidated Statements of  Condition as of
      December 31, 1996 and 1995                                    F-2

     Consolidated Statements of Income for the Years Ended
      December 31, 1996, 1995, 1994                                 F-3

     Consolidated Statements of Changes in Shareholders' Equity for
      The Years Ended December 31, 1996, 1995, 1994                 F-4

     Consolidated Statements of Cash Flows for the Years Ended
      December 31, 1996, 1995, 1994                                 F-5

     Notes to Consolidated Financial Statements --
      December 31, 1996, 1995, 1994                                 F-6
</TABLE>
(b)  Reports on Form 8-K:

     None.

(c)  (3) List of Exhibits Including Items Incorporated by Reference:

     The Response of this portion of Item 14 is submitted as a separate
     section of this report.

(d)  Financial statements required by Regulation S-X which are excluded from the
     annual report to Shareholders by Rule 14a-3(b):

     None.

<PAGE>   59



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

                                          First American Bancorp

                                          /s/ Dan M. David
Date:  March 21, 1997                     --------------------------------------
                                          Dan M. David
                                          Chairman and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signature                   Title                    Date
-------------------------   -----------------------  --------------
<S>                         <C>                      <C>


/s/ Dan M. David            Chairman and Director    March 21, 1997
--------------------------
Dan M. David


/s/ Alfred E. Cheatham, Jr. Chief Financial Officer  March 21, 1997
--------------------------
Alfred E. Cheatham, Jr.


/s/ Lynn C. Fowler          Director                 March 21, 1997
--------------------------
Lynn C. Fowler


/s/ Allen Hamilton          Director                 March 21, 1997
--------------------------
Allen Hamilton


/s/ Robert H. Harris        Director                 March 21, 1997
--------------------------
Robert H. Harris


/s/ James E. Hurst          Director                 March 21, 1997
--------------------------
James E. Hurst


/s/ Jon H. Moores           Director                 March 21, 1997
--------------------------
Jon H. Moores


/s/ Lloyd Nix               Director                 March 21, 1997
--------------------------
Lloyd Nix

</TABLE>



<PAGE>   60
<TABLE>

<S>                           <C>                      <C>
/s/ R. W. Orr, Jr.            Director                 March 21, 1997
---------------------------
R.W. Orr, Jr.


/s/ William E. Sexton         Director                 March 21, 1997
---------------------------
William E. Sexton


/s/ Barrett C. Shelton        Director                 March 21, 1997
---------------------------
Barrett C. Shelton


/s/ Jimmy D. Smith            Director                 March 21, 1997
---------------------------
Jimmy D. Smith



/s/ Leonard W. Gossett, Jr.   Director                 March 21, 1997
---------------------------
Leonard W. Gossett, Jr.


</TABLE>


<PAGE>   61


                    FIRST AMERICAN BANCORP AND SUBSIDIARY

                                  FORM 10-K

                              INDEX TO EXHIBITS


<TABLE>
<CAPTION>

Exhibit                                                                                       Sequentially
Number         Description                                                                   Numbered Page
-------        -----------                                                                   -------------
<S>            <C>                                                                           <C>
2.0            Articles of Merger of Allegiance Mortgage, Inc., into First American
               Bank -- Filed as Exhibit 2.0 to 12/31/91 Annual Report on Form 10-K.

3.0            Articles of Incorporation of Registrant -- Filed as Exhibit 3.0 to Registration
               Statement on Form S-18, Commission Fiel No. 33-24045-A.

3.1            By-Laws of Registrant -- Filed as Exhibit 3.1 to
               Registration Statement on Form S-18, Commission File
               No. 33-24045-A.

4.0            Specimen Stock Certificate Defining the Rights of
               Security Holders, Including Indentures -- Filed as Exhibit 4.0
               to 12/31/89 Annual Report on Form 10-K.

10.1           Form of First in a Series of 21 Identical Fluctuating Rate
               Convertible Debentures Due February 18, 19997
               Payable by First American Bancorp to Dan M. David --
               Filed as Exhibit 10.1 to Registration Statement on Form S-18
               Commission File No. 33-24045-A.

10.2           Form of Shareholder Restrictive Agreement Between
               Dan M. David and First American Bancorp -- Filed as
               Exhibit 10.2 to Registration Statement on Form S-18,
               Commission File No. 33-24045-A.

10.3           First American Bancorp 1987 Long-Term Incentive Plan --
               Filed as Exhibit 10.3 to Registration Statement on Form S-18,
               Commission File No. 33-24045-A.

10.4           First American Bancorp Stock Option Plan Adopted by the
               Board of Directors on October 20, 1992 and Form of the
               Stock Option Agreement -- Filed as Exhibit 10.4 to 12/31/92
               Annual Report on Form 10-K.

10.6           Lease Agreement Between Orr & Company, Inc. as
               Successor to R. W. Orr, Sr. (Deceased) and First American
               Bank, Inc. -- Filed as Exhibit 10.7 to Registration Statement
               on Form S-18, Commission File No. 33-24045-A.

10.7           Form of Cash Management Agreement between the City of Decatur
               and First American Bank dated January 2, 1992 -- Filed as
               Exhibit 10.7 to 12/31/92 Annual Report on Form 10-K.

10.10          Lease Agreement between Sexton's, Inc. and First American Bank
               -- Filed as Exhibit 10.10 to 12/31/91 Annual Report on Form 10-K.

10.11          Lease Agreement between 214 Johnston Street and First American
               Bank -- Filed as Exhibit 10.11 to 12/31/91 Annual Report on
</TABLE>

<PAGE>   62


<TABLE>
<CAPTION>

Exhibit                                                                                      Sequentially
Number         Description                                                                   Numbered Page
-------        -----------                                                                   -------------
<S>            <C>                                                                           <C>
10.13          Warranty Deed from City of Decatur to First
               American Bank -- Filed as Exhibit 10.14 to
               12/31/91 Annual Report on Form 10-K.

10.14          Real Estate Purchase Agreement - First American Lot -
               between First American Bank and Central Bank of the South --
               Filed as Exhibit 10.14 to 12/31/91 Annual Report on
               Form 10-K.

10.15          Real Estate Purchase Agreement - Central Main Branch -
               between First American Bank and Central Bank of the South--
               Filed as Exhibit 10.15 to 12/31/91 Annual Report on
               Form 10-K.

10.16          Real Estate Purchase Agreement - Central Annex - Between
               First American Bank and Central Bank of the South --
               Filed as Exhibit 10.16 to 12/31/91 Annual Report on
               Form 10-K.

10.17          Real Estate Purchase Agreement - Property situated in
               downtown Athens - between First American Bank and
               William Charles Clem, Jr. -- Filed as Exhibit 10.17 to
               12/31/92 Annual Report on Form 10-K.

10.18          Real Estate Purchase Agreement - Property situated in
               downtown Athens - between First American Bank and
               George P. Harper and Harold Buchanan -- Filed as
               Exhibit 10.18 to 12/31/92 Annual Report on Form 10-K.

10.19          Real Estate Purchase Agreement - Property situated in Madison,
               Alabama - between First American Bank and and Lowe Family, LLC -
               Filed as Exhibit 10.19 to 12/31/94 Annual Report on Form 10-K.

10.20          First American Bancorp 1994 Stock Option Plan approved by the
               shareholders of the Company April 25, 1995 and Form of the Stock
               Option Agreement - Filed as Exhbit 10.20 to 12/31/95 Annual Report
               on Form 10-K.

10.21          First American Bancorp Non-Employee Director Stock Plan approved
               by the shareholders of the Company April 25, 1995 - Filed as Exhibit
               10.21 to 12/31/96 Annual Report on Form 10-K.

10.22          Previous Independent Accountants Letter to the SEC

13             1996 Annual Report to Shareholders

21.0           Subsidiaries of The Registrant

22.0           1997 Annual Meeting Notice and Proxy Statement - to be filed
               April 9, 1997

23.0           1997 Annual Meeting Notice and Proxy Statement - to be filed
               April 9, 1997
24.0           Consent of Coopers and Lybrand

25.0           Consent of Dudley, Hopton-Jones, Sims and Freeman PLLP
</TABLE>