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

                                   FORM 10-KSB

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

     FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transaction period from __________________ to _____________________

                         Commission File Number: 0-23971

                          GASTON FEDERAL BANCORP, INC.
                 (Name of Small Business Issuer in its Charter)

<TABLE>
<S>                                                                 <C>
                           FEDERAL                                                 56-2063438
(State or Other Jurisdiction of Incorporation or Organization)      (I.R.S. Employer Identification Number)

        245 WEST MAIN AVENUE, GASTONIA, NORTH CAROLINA                               28053
            (Address of Principal Executive Office)                                (Zip Code)
</TABLE>

                                 (704) 868-5200

             (Issuer's Telephone Number, Including Area Code)

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

                                      NONE

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

                     COMMON STOCK, PAR VALUE $1.00 PER SHARE

                                (Title of Class)

         Indicate by check mark whether the issuer (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 twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.

YES   x    NO
     ---       ---

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B 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-KSB or any
amendments to this Form 10-KSB. [ ]

         The issuer's revenues for the fiscal year ended September 30,
1999 were $17.6 million.

         As of November 30, 1999, there were issued and outstanding 4,328,634
shares of the Registrant's Common Stock. The aggregate value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the closing
price of the Common Stock as of November 30, 1999 ($12.375) was $19.1 million.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.       Sections of Annual Report to Stockholders for the fiscal year ended
         September 30, 1999 (Parts II and IV).

2.       Sections of the Proxy Statement for the 2000 Annual Meeting of
         Stockholders (Part III).
<PAGE>   2
                                     PART I

ITEM 1.  BUSINESS

GASTON FEDERAL BANCORP, INC.

     Gaston Federal Bancorp, Inc. (the "Company") was formed on March 18, 1998,
for the purpose of acting as the holding company for Gaston Federal Bank (the
"Bank"). The Company's assets consist primarily of the outstanding capital stock
of the Bank and cash and investments of $5.7 million. At September 30, 1999,
1,986,489 shares of the Company's common stock, par value $1.00 per share, were
held by the public, and 2,383,145 shares were held by Gaston Federal Holdings,
MHC (the "Mutual Company"), the Company's parent mutual holding company. The
Company's principal business is overseeing and directing the business of the
Bank and investing the net stock offering proceeds retained by it.

     The Company's executive office is located at 245 West Main Avenue, P.O. Box
2249, Gastonia, North Carolina 28053-2249. Its telephone number at this address
is (704) 868-5200.

GASTON FEDERAL BANK

     The Bank was organized in 1904 as a state chartered building and loan
association. The Bank's deposits are insured by the Savings Association
Insurance Fund (the "SAIF"), as administered by the FDIC, up to the maximum
amount permitted by law. The Bank is a community-oriented savings bank engaged
primarily in the business of offering FDIC-insured deposits to customers through
its branch offices and investing those deposits, together with funds generated
from operations and borrowings, in one- to four-family residential, multifamily
residential and commercial real estate loans, commercial business loans,
construction loans and consumer loans, and investment and mortgage-backed
securities.

     The Bank's executive office is located at 245 West Main Avenue, P.O.
Box 2249, Gastonia, North Carolina 28053-2249. Its telephone number at that
address is (704) 868-5200.

MARKET AREA

     All of the Bank's offices are located in the County of Gaston. The
main office and two branches are located in the City of Gastonia, and one branch
is located in the City of Mount Holly. Gaston County is located on the I-85
corridor in the Southern Piedmont region of North Carolina, not far from the
regional banking center of Charlotte, North Carolina, and the South Carolina
state line. Gaston County is bounded by the North Carolina Counties of
Mecklenburg, Lincoln and Cleveland, and the South Carolina County of York. The
Bank considers Gaston and these contiguous counties to be its primary market
area.

     Gaston County has a population of approximately 200,000, and has an economy
based on manufacturing, especially textiles, apparel, fabricated metals,
machinery, chemicals, and automotive transportation equipment, and has developed
a strong base in service industries, especially construction and retail trade.
Twenty-one Fortune 500 companies operate in Gaston County. Among the largest
employers in Gaston County are Freightliner, Firestone, Parkdale Mills, Pharr
Yarns, Dana Corporation, Gaston Memorial Hospital and Gaston College.

LENDING ACTIVITIES

     General. At September 30, 1999, the Bank's net loans receivable
totaled $168.0 million, or 70.4% of total assets at that date. The Bank has
traditionally concentrated its lending activities on conventional first mortgage
loans secured by one- to four-family properties. In addition, the Bank
originates construction loans, commercial real estate loans, multifamily
residential real estate loans, land loans, commercial business loans and
consumer loans. A substantial portion of the Bank's loan portfolio is
secured by real estate, either as primary or secondary collateral, located in
its primary market area.
<PAGE>   3
     Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's loan portfolio at the dates indicated. The Bank had no
concentration of loans exceeding 10% of total gross loans other than as
disclosed below.

<TABLE>
<CAPTION>
                                                            At September 30,
                                            1999                  1998                1997
                                      -----------------    -----------------    -----------------
                                      Amount    Percent    Amount    Percent    Amount    Percent
                                      ------    -------    ------    -------    ------    -------
                                                         (Dollars in Thousands)
<S>                                  <C>        <C>       <C>        <C>       <C>        <C>
Real estate loans:
One- to four-family ..............   $129,332    73.42%   $105,526    73.50%   $106,422    76.50%
Construction .....................     11,176     6.34      10,573     7.36       5,869     4.22
Commercial .......................      7,266     4.13       8,076     5.63       7,318     5.26
Multifamily residential ..........      2,414     1.37       3,771     2.63       6,514     4.68
                                     --------   ------    --------   ------    --------   ------
   Total real estate loans .......    150,188    85.26     127,946    89.12     126,123    90.66

Commercial business loans ........     14,356     8.15       6,629     4.62%      5,558     4.00

Consumer loans:
Home equity lines of credit ......      8,867     5.03       6,764     4.71       5,651     4.06
Loans on deposits ................        995     0.56       1,052     0.73         688     0.49
Other ............................      1,737     0.99       1,173     0.82       1,091     0.78
                                     --------   ------    --------   ------    --------   ------
Total consumer loans .............     11,599     6.58       8,989     6.26       7,430     5.34
                                     --------   ------    --------   ------    --------   ------

Total loans ......................    176,143   100.00%    143,564   100.00%    139,111   100.00%
                                                ======               ======               ======
Less:
Loans in process .................      6,205                5,152                2,990
Deferred loan origination fees ...        385                  501                  520
Allowance for loan losses ........      1,509                1,411                1,110
                                     --------             --------             --------

Total loans, net .................   $168,044             $136,500             $134,491
                                     ========             ========             ========
</TABLE>

<TABLE>
<CAPTION>
                                                 At September 30,
                                            1996                 1995
                                     -----------------    -----------------
                                     Amount    Percent    Amount    Percent
                                     ------    -------    ------    -------
                                              (Dollars in Thousands)
<S>                                 <C>        <C>       <C>        <C>
Real estate loans:
One- to four-family ..............  $104,363    76.72%   $ 93,694    75.74%
Construction .....................     6,827     5.02       5,667     4.58
Commercial .......................     6,458     4.75       5,051     4.08
Multifamily residential ..........     6,843     5.03       7,367     5.96
                                    --------   ------    --------   ------
   Total real estate loans .......   124,491    91.52     111,779    90.36

Commercial business loans ........     5,160     3.79       6,030     4.87

Consumer loans:
Home equity lines of credit ......     4,747     3.49       4,154     3.36
Loans on deposits ................       709     0.52         672     0.54
Other ............................       923     0.68       1,075     0.87
                                    --------   ------    --------   ------
Total consumer loans .............     6,379     4.69       5,901     4.77
                                    --------   ------    --------   ------

Total loans ......................   136,030   100.00%    123,710   100.00%
                                               ======               ======
Less:
Loans in process .................     3,812                2,994
Deferred loan origination fees ...       526                  422
Allowance for loan losses ........       830                  786
                                    --------             --------

Total loans, net .................  $130,862             $119,508
                                    ========             ========
</TABLE>
<PAGE>   4
         One- to Four-Family Real Estate Lending. Historically, the Bank has
concentrated its lending activities on the origination of loans secured by a
first mortgage on existing one- to four-family residences located in its primary
market area. At September 30, 1999, $129.3 million, or 73.4% of the Bank's
total loan portfolio, consisted of one- to four-family residential real estate
loans. The Bank originated $17.4 million, $21.3 million and $12.6 million of
one- to four-family residential mortgage loans during the fiscal years ended
September 30, 1999, 1998 and 1997, respectively.

         Generally, the Bank's fixed-rate one- to four-family mortgage
loans have maturities ranging from ten to 30 years and are fully amortizing with
monthly or bi-weekly payments sufficient to repay the total amount of the loan
with interest by the end of the loan term. Generally, they are originated under
terms, conditions and documentation which permit them to be sold to U.S.
Government-sponsored agencies such as FHLMC ("Freddie Mac"). The Bank's
fixed-rate loans customarily include "due on sale" clauses, which give the Bank
the right to declare a loan immediately due and payable in the event the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.

         Management implemented a residential wholesale correspondent lending
program in 1998. This program enables the Bank to purchase one- to four-family
residential mortgage loans from private mortgage bankers. The Bank intends to
confine this practice to select mortgage banking companies located only in the
Sate of North Carolina. The purpose of this program is to provide an additional
medium by which the Bank can invest its new capital in conservative interest
sensitive assets such as residential loan products with three, five, seven and
ten year rate adjustments or shorter-term 15-year fixed rate loans. During 1999,
the objectives of the program were met. While the Bank still continues to offer
this program, it will only purchase adjustable rate products at above market
interest rates. This revised strategy, by design, has eliminated new loan volume
from the program.

         The Bank offers adjustable-rate mortgage ("ARM") loans at rates and
terms competitive with market conditions. At September 30, 1999, $37.1 million,
or 28.7% of the Bank's total one- to four-family residential loan
portfolio, was subject to periodic interest rate adjustments. Substantially all
of the Bank's ARM loan originations meet the underwriting standards of
Freddie Mac even though the Bank originates ARM loans primarily for its own
portfolio. The Bank's ARM loans typically provide for an interest rate
which adjusts every year after an initial term of one, three, five, seven or ten
years based on the one year Treasury constant maturity index and are typically
based on a 30-year amortization schedule. The Bank's current ARM loans do
not provide for negative amortization. The Bank's ARM loans generally
provide for annual and lifetime interest rate adjustment limits of 2% and 5%,
respectively. The Bank offers discounted or "teaser" initial interest rates that
may be more than 2% below the interest rate to which the loan would adjust after
the initial term based on the market rates of interest at the time the loan was
originated.

         Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.

         The retention of ARM loans in the Bank's loan portfolio helps
reduce the Bank's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to changed rates to be paid by the customer. It is possible that
during periods of rising interest rates the risk of default on ARM loans may
increase as a result of repricing and the increased payments required by the
borrower. In addition, although ARM loans allow the Bank to increase the
sensitivity of its asset base to changes in the interest rates, the extent of
this interest sensitivity is limited by the annual and lifetime interest rate
adjustment limits. Because of these considerations, the Bank has no assurance
that yields on ARM loans will be sufficient to offset increases in the
Bank's cost of funds. The Bank believes these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding fixed-rate loans in portfolio during a rising interest
rate environment.

         During 1999, the Bank began originating and selling mortgages to
investors on a servicing released basis. This allows the Bank to provide
competitive mortgage products to its market area including 15- and 30-year
fixed-rate loans and long-term fixed-rate FHA and VA products. The sale of
long-term fixed-rate loans helps the Bank manage its interest rate risk. The
Bank also benefits by being able to book fee income it earns on these loans
during the period in which the loan is sold.
<PAGE>   5
         The Bank requires title insurance insuring the status of its lien or an
acceptable attorney's opinion on all loans where real estate is the
primary source of security. The Bank also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.

         Pursuant to underwriting guidelines adopted by the Bank's Board
of Directors, the Bank can lend up to 95% of the appraised value of the property
securing a one- to four-family residential loan. For loans of up to 80% of the
appraised value of the property, the Bank does not require private mortgage
insurance, for loans of more than 80% to up to 95% of the appraised value of the
property, the Bank requires private mortgage insurance for between 20% and 30%
of the amount of the loan.

         Construction Lending. The Bank originates residential construction
loans to local home builders, generally with whom it has an established
relationship, and to individuals who have a contract with a builder for the
construction of their residence. The Bank also originates commercial
construction loans to local builders on a very limited basis and only to those
with a very satisfactory financial condition. The Bank's construction
loans are generally secured by property located in the Bank's primary
market area. At September 30, 1999, construction loans amounted to $11.2
million, or 6.4% of the Bank's total loan portfolio.

         The Bank's construction loans to home builders generally have
fixed interest rates and are for a term of twelve months. Construction loans to
individuals are typically made in connection with the granting of the permanent
financing on the property. Construction loans to individuals convert to a fully
amortizing adjustable- or fixed-rate loan at the end of the 12 month
construction term; if the construction is not complete after 12 months, the Bank
will generally modify the loan so that the term is for a period necessary to
complete construction. Construction loans to builders are typically originated
with a maximum loan to value ratio of 80%. Construction loans to individuals are
generally originated pursuant to the same policy regarding loan to value ratios
as are used in connection with loans secured by one- to four-family residential
real estate.

         The Bank's construction loans to builders are made on either a
pre-sold or speculative (unsold) basis. However, the Bank generally limits the
number of outstanding loans on unsold homes under construction to individual
builders, with the amount dependent on the financial strength of the builder,
the present exposure of the builder to the Bank, the location of the property
and prior sales of homes in the development. At September 30, 1999, speculative
construction loans amounted to $2.7 million.

         Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by an independent state-licensed and
qualified appraiser approved by the Board of Directors. The Bank's staff
or an independent appraiser retained by the Bank, reviews and inspects each
project prior to disbursement of funds during the term of the construction loan.
Loan proceeds are disbursed after inspection of the project based on a
percentage of completion. Monthly payment of accrued interest is required, with
all accrued interest collected at maturity.

         Construction lending affords the Bank the opportunity to charge higher
interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating a
property's value at completion of the project, the estimated cost of the
project, and the amount of time that might be needed to sell out the project.
The nature of these loans is such that they are generally more difficult to
evaluate and monitor. If the estimate of construction cost proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted at or
prior to the maturity of the loan with a project the value of which is
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the payoff for the loan is dependent
on the builder's ability to sell the property prior to the time that the
construction loan is due. The Bank has attempted to minimize the foregoing risks
by, among other things, limiting its construction lending primarily to
residential properties located within its market area, doing business with
contractors with whom it has established relationships and who have been
thoroughly underwritten by the Bank and requiring personal guarantees from the
principals of its corporate borrowers.
<PAGE>   6
         Commercial Real Estate Lending. The Bank originates mortgage loans for
the acquisition and refinancing of commercial real estate properties. At
September 30, 1999, $7.3 million, or 4.1% of the Bank's total loan
portfolio consisted of loans secured by commercial real estate properties. The
majority of the Bank's commercial real estate properties are secured by
office buildings, churches, and retail shops, which are generally located in the
Bank's primary market area. The Bank's commercial real estate loans
generally have interest rates that adjust at either one-, three-, or five-year
intervals, based on the constant maturity Treasury index, with annual and
lifetime interest rate adjustment limits of 2% and 5%, respectively, or adjust
based on the Bank's Prime Rate, and are originated to amortize in a
maximum of 20 years.

         The Bank requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by an independent appraiser designated by
the Bank, all of which are reviewed by management. The Bank considers the
quality and location of the real estate, the credit of the borrower, the cash
flow of the project and the quality of management involved with the property.

         Loan to value ratios on the Bank's commercial real estate loans
are generally limited to 80% of the appraised value of the secured property. As
part of the criteria for underwriting commercial real estate loans, the Bank
generally imposes a debt coverage ratio (the ratio of net cash from operations
before payment of debt service to debt service) of not less than 1.25. It is
also the Bank's policy to obtain personal guarantees from the principals
of its corporate borrowers on its commercial real estate loans.

         Commercial real estate lending affords the Bank an opportunity to
receive interest at rates higher than those generally available from one- to
four-family residential lending. However, loans secured by such properties
usually have higher balances and are more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to four-family residential
mortgage loans. If the estimate of value proves to be inaccurate, in the event
of default and foreclosure the Bank may be confronted with a property the value
of which is insufficient to assure full repayment. Because payments on such
loans are often dependent on the successful development, operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks by limiting the maximum loan-to-value ratio and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. The Bank also
obtains loan guarantees from financially capable parties based on a review of
personal financial statements.

         Multifamily Residential Real Estate Lending. The Bank originates
mortgage loans secured by multifamily dwelling units (more than four units). At
September 30, 1999, $2.4 million, or 1.4% of the Bank's total loan
portfolio consisted of loans secured by multifamily residential real estate. The
majority of the Bank's multifamily residential real estate loans are
secured by apartment buildings located in the Bank's primary market area.
The interest rates for the Bank's multifamily residential real estate
loans generally have interest rates that adjust at either one-, three-, or
five-year intervals, based on the constant maturity Treasury index, with annual
and lifetime interest rate adjustment limits of 2% and 5%, respectively, or
adjust based on the Bank's Prime Rate, and are originated to amortize in a
maximum of 20 years.

         The Bank requires appraisals of all properties securing multifamily
residential real estate loans. Appraisals are performed by an independent
appraiser designated by the Bank, all of which are reviewed by management. The
Bank considers the quality and location of the real estate, the credit of the
borrower, the cash flow of the project and the quality of management involved
with the property.

         Loan-to-value ratios on the Bank's multifamily residential real
estate loans are generally limited to 80%. As part of the criteria for
underwriting multifamily residential real estate loans, the Bank generally
imposes a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of not less than 1.25. It is also the
Bank's policy to obtain personal guarantees from the principals of its
corporate borrowers on its multifamily residential real estate loans.

         Multifamily residential real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties usually have higher balances and are more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. If the estimate of value proves to be
inaccurate, in the event of default and foreclosure the Bank may be confronted
with a property the value of which is insufficient to assure full repayment.
Because
<PAGE>   7
payments on such loans are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks by limiting the maximum loan-to-value ratio and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. The Bank also
obtains loan guarantees from financially capable parties based on a review of
personal financial statements.

         Consumer Lending. The Bank originates a variety of consumer loans
primarily on a secured basis. Consumer loans include home equity lines of
credit, loans secured by savings accounts, automobiles, recreational vehicles
and second mortgages, and unsecured personal loans. The Bank's home equity lines
of credit are secured by a first or second mortgage on residential property,
have variable interest rates that are tied to The Wall Street Journal prime
lending rate (the "Prime Rate") and may adjust monthly, and generally mature in
15 years. Other consumer loans are made with fixed interest rates and have terms
that generally do not exceed five years. At September 30, 1999, consumer loans
amounted to $11.6 million, or 6.6% of the total loan portfolio.

         At September 30, 1999, the largest component of the consumer loan
portfolio consisted of home equity lines of credit, which totaled $8.9 million,
or 5.0% of the total loan portfolio. At September 30, 1999, unused commitments
to extend credit under home equity lines of credit totaled $12.4 million.

         The majority of the Bank's consumer loans are made to existing
customers, although the Bank actively promotes consumer loans by contacting
existing customers and by other promotions and advertising directed at existing
and prospective customers. The Bank views consumer lending as an important part
of its business because consumer loans generally have shorter terms and higher
yields, thus reducing exposure to changes in interest rates. In addition, the
Bank believes that offering consumer loans helps to expand and create stronger
ties to its customer base. Subject to market conditions, the Bank intends to
continue emphasizing consumer lending. Consumer loans entail greater risk than
do residential mortgage loans, particularly in the case of consumer loans that
are unsecured or secured by rapidly depreciating assets. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and are more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount that can
be recovered on such loans. The Bank believes that these risks are not as
prevalent in the case of the Bank's consumer loan portfolio because a large
percentage of the portfolio consists of home equity lines of credit that are
underwritten in a manner such that they result in credit risk that is
substantially similar to one- to four-family residential mortgage loans.
Nevertheless, home equity lines of credit have greater credit risk than one- to
four-family residential mortgage loans because they often are secured by
mortgages subordinated to the existing first mortgage on the property, which may
or may not be held by the Bank. At September 30, 1999, the Bank had no consumer
loans that were delinquent in excess of 90 days.

         The Bank employs strict underwriting procedures for consumer loans.
These procedures include an assessment of the applicant's credit history and the
ability to meet existing and proposed debt obligations. Although the applicant's
creditworthiness is the primary consideration, the underwriting process also
includes an evaluation of the proposed collateral for the loan. The Bank
underwrites and originates its consumer loans internally, which the Bank
believes limits its exposure to credit risks associated with loans underwritten
or purchased from brokers and other external sources.

         Commercial Business Loans. The Bank also originates commercial business
loans, generally to customers who are well known to the Bank. Commercial
business loans are frequently secured by real estate, although the decision to
grant a commercial business loan depends primarily on the creditworthiness and
cash flow of the borrower (and any guarantors) and secondarily on the value of
and ability to liquidate the collateral. The Bank generally requires annual
financial statements from its corporate borrowers and personal guarantees from
the corporate principals. The Bank also generally requires an appraisal of any
real estate that secures the loan. At September 30, 1999, the Bank had $14.4
million of commercial business loans which represented 8.2% of the total loan
portfolio. As of September 30, 1999, unsecured commercial business loans totaled
$692,000.
<PAGE>   8
         In addition, the Bank's portfolio of commercial business loans as
of September 30, 1999 includes residential acquisition and development loans
("A&D loans"). The Bank's A&D loans are originated to local developers for
the purpose of developing land for resale as residential by installing roads,
sewers, water and other utilities. The Bank originated a very limited number of
A&D loans for the development of commercial real estate. These loans are
generally made to established customers of the Bank with very satisfactory
financial condition. A&D loans are secured by a lien on the property, and are
typically made for a period of three years with interest rates that are tied to
the Prime Rate. The Bank requires monthly interest payments during the term of
the loan. The Bank's A&D loans are structured so that the Bank is repaid
in full upon the sale by the borrower of approximately 75% of the available
lots. All of the Bank's A&D loans are secured by property located in its
primary market area. In addition, the Bank obtains personal guarantees from the
principals of its corporate borrowers and generally originates A&D loans to
developers with whom its has established relationships.

         Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan to collateral values and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans may be collateralized by
equipment or other business assets, the liquidation of collateral in the event
of a borrower default is often an insufficient source of repayment because
equipment and other business assets may be obsolete or of limited use, among
other things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.

         Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 1999 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but
does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due within one year. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loans losses.

<TABLE>
<CAPTION>
                                                                    Real Estate Loans
                              -----------------------------------------------------------------------------------------------
                              One- to Four-                                          Multi-       Commercial
                                 Family                                              Family      Business and
                               Residential     Construction      Commercial       Residential       Consumer          Total
                               -----------     ------------      ----------       -----------       --------          -----
                                                                      (In Thousands)
<S>                           <C>              <C>               <C>              <C>            <C>                 <C>
Amounts Due:
Within 1 year .........         $    225         $  2,699         $      1         $      0         $  5,684         $  8,609
Over 1 to 2 years .....              123                0              105                0            1,670            1,898
Over 2 to 3 years .....              276                0              244               22            2,159            2,701
Over 3 to 5 years .....            1,281                0              276              193            4,119            5,869
Over 5 to 10 years ....           17,738                0              954              585            4,349           23,626
Over 10 to 20 years ...           64,916            3,714            5,686            1,614            7,898           83,828
Over 20 years .........           44,773            4,763                0                0               76           49,612
                                --------         --------         --------         --------         --------         --------
Total amount due ......         $129,332         $ 11,176         $  7,266         $  2,414         $ 25,955         $176,143
                                ========         ========         ========         ========         ========         ========
</TABLE>

         The following table sets forth the dollar amount of all loans for which
final payment is not due until after September 30, 2000. The table also shows
the amount of loans which have fixed rates of interest and those which have
adjustable rates of interest.

<TABLE>
<CAPTION>
                                               Fixed Rates   Adjustable Rates       Total
                                               -----------   ----------------       -----
                                                             (In Thousands)
<S>                                            <C>           <C>                  <C>
Real Estate Loans:
   One- to four-family residential ....         $ 92,020         $ 37,087         $129,107
   Construction .......................            8,477                0            8,477
   Commercial real estate .............              513            6,752            7,265
   Multifamily residential ............                0            2,414            2,414
                                                --------         --------         --------

Total real estate loans ...............          101,010           46,253          147,263
Commercial and consumer ...............            6,282           13,989           20,271
                                                --------         --------         --------
   Total loans ........................         $107,292         $ 60,242         $167,534
                                                ========         ========         ========
</TABLE>
<PAGE>   9
         Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates. Furthermore, management believes
that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.

         Loan Solicitation and Processing. The Bank's lending activities
are subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are real estate agents, home builders, walk-in
customers, referrals and existing customers. The Bank also advertises its loan
products by television and newspaper, and its loan officers call on local
businesses soliciting commercial products. In its marketing, the Bank emphasizes
its community ties, customized personal service and an efficient underwriting
and approval process. The Bank uses professional fee appraisers for most
residential real estate loans and construction loans and all commercial real
estate and land loans. The Bank requires hazard, title and, to the extent
applicable, flood insurance on all security property.

         All loans (i) of $600,000 or more, or (ii) in any amount to borrowers
with existing exposure to the Bank of $600,000 or more, or (iii) in any amount
that when added to the borrower's existing exposure to the Bank cause such total
exposure to be $600,000 or more, must be approved by the Board of Directors of
the Bank. Loans of less than $600,000 may be approved by a majority vote of the
Bank's Loan Committee, consisting of the Bank's President, Chief Credit Officer,
Mortgage Center Manager, and three senior lending officers. In addition,
individual lending officers may approve loans individually or jointly with other
lending officers within the loan approval limits delegated by the Board of
Directors of the Bank.
<PAGE>   10
         Loan Originations, Sales and Purchases. The following table sets forth
total loans originated and repaid during the periods indicated.

<TABLE>
<CAPTION>
                                                                         For the Years Ended
                                                                            September 30,
                                                          -----------------------------------------------
                                                             1999               1998               1997
                                                             ----               ----               ----
                                                                          (In Thousands)
<S>                                                       <C>                <C>                <C>
Total loans receivable at beginning of period ...         $ 143,564          $ 139,111          $ 136,030
Total loan originations:
   One- to four-family residential ..............            17,427             21,282             12,608
   Construction .................................             8,552             10,701              7,536
   Commercial real estate .......................                 0              1,265              1,747
   Multifamily ..................................               150                  0                  0
   Commercial business and consumer .............            27,234             19,456              9,430
                                                          ---------          ---------          ---------
Total loans originated ..........................            53,363             52,704             31,321
Loans purchased .................................            38,262              8,835                  0
Loans sold ......................................           (13,136)            (9,600)                 0
Principal repayments ............................           (45,910)           (47,486)           (28,240)
                                                          ---------          ---------          ---------
Net loan activity ...............................            32,579              4,453              3,081
                                                          ---------          ---------          ---------
Total loans receivable at end of period .........         $ 176,143          $ 143,564          $ 139,111
                                                          =========          =========          =========
</TABLE>

         Loan Commitments. The Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 60 days from
approval, depending on the type of transaction. At September 30, 1999, the Bank
had loan commitments (excluding undisbursed portions of interim construction
loans of $6.2 million) of $704,000 and unused lines of credit of $19.3 million.

         Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.

         The Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. In accordance with applicable accounting
procedures, loan origination fees and discount points in excess of loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. Discounts and premiums on
loans purchased are accreted and amortized in the same manner. Fees collected on
loans originated and sold to investors are recognized in the period in which the
loan is sold. The Bank recognized $232,000, $231,000 and $172,000 of deferred
loan fees during the fiscal years ended September 30, 1999, 1998 and 1997,
respectively, in connection with loan refinancings, payoffs, sales and ongoing
amortization of outstanding loans.

         Nonperforming Assets and Delinquencies. When a borrower fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Computer generated late notices
are mailed 15 days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, additional contact is made either through
a notice or other means and the Bank will attempt to work out a payment schedule
and actively encourage delinquent borrowers to seek home ownership counseling.
While the Bank generally prefers to work with borrowers to resolve such
problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.

         Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with the
terms of the loan agreement, or when principal or interest is past due 90 days
or more. Interest accrued but not collected at the date the loan is placed on
nonaccrual status is reversed against income in the current period. Loans may be
reinstated to accrual status when payments are under 90 days past due and, in
the opinion of management, collection of the remaining past due balances can be
reasonably expected.

         The Bank's Board of Directors is informed monthly of the status
of all mortgage loans delinquent more than 60 days, all consumer and commercial
business loans delinquent more than 30 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Bank.

<PAGE>   11

         The following table sets forth information with respect to the
Bank's nonperforming assets at the dates indicated. As of such dates, the
Bank had no restructured loans within the meaning of SFAS No. 15.

<TABLE>
<CAPTION>
                                                                                           At September 30,
                                                                      ----------------------------------------------------------
                                                                       1999         1998         1997         1996         1995
                                                                      ------       ------       ------       ------       ------
                                                                                          (Dollars in Thousands)
<S>                                                                   <C>          <C>          <C>          <C>          <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
    One- to four-family residential ............................      $   94       $  970       $  876       $1,053       $  778
    Multifamily residential ....................................           0          177          183          141            0
    Commercial real estate .....................................           0           91            0            0            0
Commercial business and consumer ...............................           0            0            0            0            0
Total nonaccrual loans .........................................          94        1,238        1,059        1,194          778
Accruing loans which were contractually past due 90 days or more      0            0            0            0            0
                                                                      ------       ------       ------       ------       ------
Total nonperforming loans ......................................          94        1,238        1,059        1,194          778
Real estate owned ..............................................         259          247          247          258          426
                                                                      ------       ------       ------       ------       ------
Total nonperforming assets .....................................      $  353       $1,485       $1,306       $1,452        1,204
                                                                      ======       ======       ======       ======        =====
Nonaccrual loans and loans 90 days past due as a
    percentage of net loans ....................................        0.06%        0.91%        0.79%        0.91%        0.65%
Nonaccrual loans and loans 90 days past due as a
    percentage of total assets .................................        0.04%        0.60%        0.61%        0.69%        0.47%
Total nonperforming assets as a percentage of total assets .....        0.15%        0.71%        0.75%        0.84%        0.73%
</TABLE>

         Interest income that would have been recorded for the fiscal years
ended September 30, 1999, 1998 and 1997 had nonaccruing loans been current in
accordance with their original terms amounted to $10,000, $77,000 and $42,000,
respectively. The Bank did not include any interest income on such loans for
such periods.

         Real Estate Acquired in Settlement of Loans. Real estate acquired by
the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as real estate acquired in settlement of loans until sold. Generally,
foreclosed assets are held for sale and such assets are carried at fair value
minus estimated cost to sell the property. After the date of acquisition, all
costs incurred in maintaining the property are expensed and costs incurred for
the improvement or development of such property are capitalized up to the extent
of their net realizable value. At September 30, 1999, the Bank had $259,000 of
real estate acquired in settlement of loans.

         Restructured Loans. Under Generally Accepted Accounting Principals
("GAAP"), the Bank is required to account for certain loan modifications or
restructuring as a "troubled debt restructuring." In general, the modification
or restructuring of a debt constitutes a troubled debt restructuring if the Bank
for economic or legal reasons related to the borrower's financial
difficulties grants a concession to the borrowers that the Bank would not
otherwise consider. Debt restructurings or loan modifications for a borrower do
not necessarily always constitute troubled debt restructurings, however, and
troubled debt restructurings do not necessarily result in nonaccrual loans. The
Bank had no restructured loans as of September 30, 1999.

         Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for
loan losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Bank.
<PAGE>   12
         As of September 30, 1999, the aggregate amount of the Bank's
assets classified as substandard was $599,000, no assets were classified as
doubtful or loss, and the aggregate amount not classified but designated special
mention was $1.3 million. As of September 30, 1998, the aggregate amount of the
Bank's assets classified as substandard was $2.1 million, no assets were
classified as doubtful or loss, and the aggregate amount not classified but
designated special mention was $384,000. As of September 30, 1997, the aggregate
amount of the Bank's assets classified as substandard was $2.3 million, no
assets were classified as doubtful or loss, and the aggregate amount not
classified but designated special mention was $312,000.

         Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.

         In originating loans, the Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Bank increases its allowance for loan
losses by charging provisions for loan losses against the Bank's income.

         The general valuation allowance is maintained to cover losses inherent
in the loan portfolio. Management's periodic evaluation of the adequacy of
the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. Specific valuation allowances are
established to absorb losses on loans for which full collectibility cannot be
reasonably assured. The amount of the allowance is based on the estimated value
of the collateral securing the loan and other analyses pertinent to each
situation. Generally, a provision for losses is charged against income monthly
to maintain the allowances.

         At September 30, 1999, the Bank had an allowance for loan losses of
$1.5 million. Management believes that the amount maintained in the allowance at
September 30, 1999 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance for
loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.
<PAGE>   13
         The following table sets forth an analysis of the Bank's
allowance for loan losses.

<TABLE>
<CAPTION>
                                                                        At and For the Fiscal Years
                                                                             Ended September 30,
                                                   --------------------------------------------------------------
                                                     1999          1998         1997         1996         1995
                                                   ---------    ---------    ---------     --------     ---------
                                                                         (Dollars in Thousands)
<S>                                                <C>          <C>          <C>          <C>           <C>
Total loans outstanding..........................  $ 176,143    $ 143,564    $ 139,111    $ 136,030     $123,710
                                                   =========    =========    =========    =========     ========
Average loans outstanding........................  $ 166,343    $ 143,555    $ 137,149    $ 131,671     $119,527
                                                   =========    =========    =========    =========     ========

Allowance at beginning of period.................  $   1,411    $   1,110    $     830    $     786     $    726
Provision........................................        105          300          293           47           60
Recoveries.......................................          1            6            0            0            0
Charge-offs:
  Consumer loans.................................          8            5           13            3            0
                                                   ---------    ---------    ---------    ---------     --------
Allowance at end of period.......................  $   1,509    $   1,411    $   1,110    $     830     $    786
                                                   =========    =========    =========    =========     ========

Allowance for loan losses as a percentage
  of total loans outstanding.....................       0.86%        0.98%        0.80%        0.61%        0.64%
                                                   =========    =========    =========    =========     ========

Net loans charged off as a percentage of total
  loans outstanding..............................        -- %         -- %        0.01%          --%         -- %
Ratio of allowance to nonperforming loans........   1,605.32%      113.97%      104.82%       69.51%      101.03%
                                                   =========    =========    =========    =========     ========
</TABLE>
<PAGE>   14
         The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.

<TABLE>
<CAPTION>
                                                                  At September 30,
                                                1999                    1998                     1997
                                       ----------------------   ----------------------   ----------------------
                                                Percent of               Percent of               Percent of
                                                Loans in Each            Loans in Each            Loans in Each
                                                Category to              Category to              Category to
                                       Amount   Total Loans     Amount   Total Loans     Amount   Total Loans
                                       ------   -----------     ------   -----------     ------   -----------
                                                                (Dollars in Thousands)
<S>                                    <C>      <C>             <C>      <C>             <C>      <C>
Real estate loans:
  One- to four-family residential...   $  700       73.42%      $  699       73.5%       $  643      76.50%
  Construction .....................      100        6.34          125        7.36           55       4.22
  Commercial .......................      225        4.13          200        5.63          105       5.26
  Multifamily residential ..........       75        1.37           75        2.63          100       4.68
Commercial and consumer ............      409       14.74          312       10.88          207       9.34
                                       ------       -----       ------       ----        ------      -----
Total allowance for loan losses ....   $1,509      100.00%      $1,411      100.00%      $1,110     100.00%
                                       ======      ======       ======      ======       ======     ======
</TABLE>

<TABLE>
<CAPTION>
                                                      At September 30,
                                                1996                   1995
                                       ----------------------   ----------------------
                                                Percent of               Percent of
                                                Loans in Each            Loans in Each
                                                Category to              Category to
                                       Amount   Total Loans     Amount   Total Loans
                                       ------   -----------     ------   -----------
                                                    (Dollars in Thousands)
<S>                                    <C>      <C>             <C>      <C>
Real estate loans:
  One- to four-family residential...   $  450       76.72%      $  436       75.74%
  Construction .....................       50        5.02           50        4.58
  Commercial .......................       88        4.75           75        4.08
  Multifamily residential ..........       75        5.03           75        5.96
Commercial and consumer ............      167        8.48          150        9.64
                                       ------       -----       ------       -----
Total allowance for loan losses.....   $  830      100.00%      $  786      100.00%
                                       ======      ======       ======      ======
</TABLE>
<PAGE>   15
INVESTMENT ACTIVITIES

      The Bank purchases investment securities with excess liquidity arising
when investable funds exceed loan demand. The Bank's investment policies
generally limit investments to U.S. Government and agency securities, municipal
bonds, certificates of deposit, investment grade corporate debt obligations,
mortgage-backed securities and certain types of mutual funds. The Bank's
investment policy does not permit engaging directly in hedging activities or
purchasing high risk mortgage derivative products or non-investment grade
corporate bonds. Investments are made based on certain considerations, which
include the interest rate, yield, settlement date and maturity of the
investment, the Bank's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Bank's credit and interest rate
risk and risk-based capital is also considered.
<PAGE>   16
      The following table sets forth the amortized cost and fair value of our
investment and mortgage-backed securities, at the dates indicated.


<TABLE>
<CAPTION>
                                                                                          At September 30,
                                                               --------------------------------------------------------------------
                                                                             1999                                1998
                                                               --------------------------------    --------------------------------
                                                                              Net                                 Net
                                                               Amortized  Unrealized     Fair      Amortized  Unrealized     Fair
                                                                 Cost      Gain(Loss)    Value        Cost     Gain(Loss)    Value
                                                               ---------  -----------   -------    ---------  -----------   -------
                                                                                     (Dollars in Thousands)
<S>                                                             <C>         <C>         <C>          <C>         <C>        <C>
Investment Securities:
   U.S. Government and agency securities held to maturity .     $12,498     $  (497)    $12,001      $15,228     $  371     $15,599
   U.S. Government and agency securities available for sale       9,256         (97)      9,159       15,047        156      15,203
   Municipal bonds - held to maturity .....................         367           0         367          360          8         368
   Municipal bonds - available for sale ...................       5,737        (373)      5,364          680         15         695
                                                                -------     -------     -------      -------     ------     -------
Total investment securities ...............................     $27,858     $  (967)    $26,891      $31,315     $  550     $31,865
                                                                =======     =======     =======      =======     ======     =======

 Mortgage-backed securities:
   FHLMC held to maturity .................................     $ 1,646     $   (13)    $ 1,633      $ 3,039     $   72     $ 3,111
   FNMA held to maturity ..................................       1,416         (15)      1,401        2,353         27       2,380
   GNMA held to maturity ..................................         764           6         770          966         43       1,009
   FNMA available for sale ................................       2,485         (72)      2,413        1,457         24       1,481
   GNMA available for sale ................................       8,015        (233)      7,782        4,809         45       4,854
   SBA available for sale .................................       6,043         (71)      5,972        1,825        190       2,015
                                                                -------     -------     -------      -------     ------     -------
Total mortgage-backed securities ..........................     $20,369     $  (398)    $19,971      $14,449     $  401     $14,850
                                                                =======     =======     =======      =======     ======     =======

Other Investments available for sale:
   US League Asset Management Fund ........................     $     0     $     0     $     0      $ 1,459     $   37     $ 1,496
   Federated Government Trust .............................           0           0           0        1,163        135       1,298
   FHLMC common stock .....................................          25       1,136       1,161           44      2,184       2,228
   Other equity securities ................................          93           0          93            0          0           0
                                                                -------     -------     -------      -------     ------     -------

Total other investments ...................................     $   118     $ 1,136     $ 1,254      $ 2,666     $2,356     $ 5,022
                                                                =======     =======     =======      =======     ======     =======
</TABLE>


<TABLE>
<CAPTION>
                                                                            At September 30,
                                                                   ------------------------------------
                                                                                  1997
                                                                  ------------------------------------
                                                                                  Net
                                                                  Amortized   Unrealized        Fair
                                                                    Cost       Gain(Loss)       Value
                                                                  ---------   ----------       -------
                                                                         (Dollars in Thousands)
<S>                                                                <C>           <C>           <C>
Investment Securities:
   U.S. Government and agency securities held to maturity .        $10,407       $   18        $10,425
   U.S. Government and agency securities available for sale          1,988           22          2,010
   Municipal bonds - held to maturity .....................              0            0              0
   Municipal bonds - available for sale ...................              0            0              0
                                                                   -------       ------        -------
Total investment securities ...............................        $12,395       $   40        $12,435
                                                                   =======       ======        =======

 Mortgage-backed securities:
   FHLMC held to maturity .................................        $ 5,238       $   94        $ 5,332
   FNMA held to maturity ..................................          3,588          (18)         3,570
   GNMA held to maturity ..................................          1,261           30          1,291
   FNMA available for sale ................................              0            0              0
   GNMA available for sale ................................              0            0              0
   SBA available for sale .................................              0            0              0
                                                                   -------       ------        -------
Total mortgage-backed securities ..........................        $10,087       $  106        $10,193
                                                                   =======       ======        =======

Other Investments available for sale:
   US League Asset Management Fund ........................        $ 1,375       $   14        $ 1,389
   Federated Government Trust .............................          3,036          228          3,264
   FHLMC common stock .....................................             44        1,542          1,586
   Other equity securities ................................              0            0              0
                                                                   -------       ------        -------

Total other investments ...................................        $ 4,455       $1,784        $ 6,239
                                                                   =======       ======        =======
</TABLE>
<PAGE>   17
      The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investment securities portfolio at September 30, 1999 by
contractual maturity. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.

<TABLE>
<CAPTION>
                                                                    At September 30, 1999
                                   --------------------------------------------------------------------------------------
                                        Less than 1 year                1 to 5 years                Over 5 to 10 years
                                   ------------------------       ------------------------       ------------------------
                                                   Weighed                        Weighted                       Weighted
                                   Carrying        Average        Carrying        Average        Carrying         Average
                                     Value         Yield(1)        Value          Yield(1)         Value          Yield(1)
                                    ------          ----           ------          ----           -------          ----
                                                                 (Dollars in Thousands)
<S>                                 <C>             <C>            <C>             <C>            <C>              <C>
U.S. Government securities          $  999          6.50%          $    0          0.00%          $     0          0.00%

U.S. Agency securities ...             502          5.62            8,254          6.22            11,999          6.38

Municipal securities .....               0          0.00            1,221          5.99             2,269          6.15
                                    ------          ----           ------          ----           -------          ----

Total ....................          $1,501          6.21%          $9,475          6.19%          $14,268          6.34%
                                    ======          ====           ======          ====           =======          ====
</TABLE>


<TABLE>
<CAPTION>
                                                            At September 30, 1999
                                   ------------------------------------------------------------------------
                                          Over 10 years                     Total Securities
                                   ------------------------       -----------------------------------------
                                                   Weighted                           Weighted
                                   Carrying        Average        Carrying            Average      Market
                                     Value         Yield(1)         Value             Yield(1)      Value
                                    ------          ----           -------             ----        -------
                                                            (Dollars in Thousands)
<S>                                 <C>             <C>            <C>                 <C>         <C>
U.S. Government securities          $    0          0.00%          $   999             6.50%       $ 1,004

U.S. Agency securities ...               0          0.00            20,755             6.30         20,156

Municipal securities .....           2,614          7.04             6,104             6.50          5,731
                                    ------          ----           -------             ----        -------

Total ....................          $2,614          7.04%          $27,858             6.35%       $26,891
                                    ======          ====           =======             ====        =======
</TABLE>

--------------------

(1) Yields on tax exempt obligations have been computed on a tax equivalent
basis.
<PAGE>   18
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

      General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Borrowings
from the FHLB-Atlanta may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. Presently, the Bank
has no other borrowing arrangements.

      Deposit Accounts. The Bank's deposit products include a broad selection of
deposit instruments, including NOW accounts, demand deposit accounts, money
market accounts, regular passbook savings, statement savings accounts and term
certificate accounts. Deposit account terms vary with the principal difference
being the minimum balance deposit, early withdrawal penalties and the interest
rate. The Bank reviews its deposit mix and pricing weekly. The Bank does not
utilize brokered deposits, nor has it aggressively sought jumbo certificates of
deposit.

      The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank does not seek to pay the
highest deposit rates but a competitive rate. The Bank determines the rates paid
based on a number of conditions, including rates paid by competitors, rates on
U.S. Treasury securities, rates offered on various FHLB-Atlanta lending
programs, and the deposit growth rate the Bank is seeking to achieve.

      From time to time, the Bank may use premiums to attract new checking
accounts, particularly in conjunction with new branch openings. Should they be
used, these premium offers would be reflected in an increase in the Bank's
advertising and promotion expense, as well as its cost of funds. The Bank also
seeks business checking accounts and promotes individual retirement accounts
("IRAs") and Self Employment Plan retirement accounts to businesses.

      The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at September 30, 1999.

<TABLE>
<CAPTION>
                                     At September 30, 1999            At September 30, 1998           At September 30, 1997
                                     ---------------------            ---------------------           ---------------------
                                                    Average                          Average                          Average
                                                    Interest                         Interest                         Interest
Category                             Balance          Rate           Balance           Rate           Balance           Rate
--------                             -------          ----           -------           ----           -------           ----
                                                                     (Dollars in Thousands)
<S>                                 <C>             <C>              <C>             <C>              <C>             <C>
Noninterest bearing demand          $  6,481          0.00           $  5,878          0.00           $  3,023          0.00
Interest bearing demand ..            11,916          1.60             10,913          2.40             11,666          1.80
Money market demand ......            13,709          2.10             11,929          2.40             14,240          3.04
Savings accounts .........            23,869          3.20             20,558          3.40             14,197          2.90
Certificates of deposit ..           103,450          5.20             94,623          5.40            102,318          5.80
                                    --------          ----           --------          ----           --------          ----
Total Deposits ...........          $159,425          4.10%          $143,901          4.30%          $145,444          5.00%
                                    ========          ====           ========          ====           ========          ====
</TABLE>

      The following table indicates the amount of the Bank's certificate
accounts with a principal balance greater than $100,000 by time remaining until
maturity as of September 30, 1999.

<TABLE>
<CAPTION>
Maturity Period                                Certificates of Deposit
---------------                                -----------------------
                                                    (In Thousands)
<S>                                                     <C>
Within three months....................                 $6,551
Three to six months....................                  4,974
Six through twelve months..............                  3,195
Over twelve months.....................                  3,008
                                                        ------
   Total jumbo certificates of deposit.                 $17,728
                                                        =======
</TABLE>
<PAGE>   19
      Time Deposits by Rates. The following table sets forth the amount of time
deposits in the Bank categorized by rates at the dates indicated.

<TABLE>
<CAPTION>
                                                                 As of September 30,
                                                    ------------------------------------------
                                                      1999              1998            1997
                                                    --------          -------         --------
                                                                  (In Thousands)
Interest Rate
<S>                                                 <C>               <C>             <C>
2.00-4.00% .................................        $    759          $   399         $    172
4.01-6.00% .................................         102,279           91,641           92,311
6.01-8.00% .................................             412            2,583            9,835
                                                    --------          -------         --------
                                                    $103,450          $94,623         $102,318
                                                    ========          =======         ========
</TABLE>


      Time Deposits by Maturities. The following table sets forth the amount of
time deposits in the Bank categorized by rates and maturities at September 30,
1999.

<TABLE>
<CAPTION>
                                                                                                  After
Interest Rate            September 30, 2000    September 30, 2001     September 30, 2002     September 30, 2002          Total
-------------            ------------------    ------------------     ------------------     ------------------          -----
                                                                       (In Thousands)
<S>                      <C>                    <C>                   <C>                    <C>                     <C>
2.01-4.0%..............    $        759           $          0           $          0           $          0         $        759
4.01-6.0%..............          84,148                 12,862                  4,683                    586              102,279
6.01-8.0%..............             258                    154                      0                      0                  412
                           ------------           ------------           ------------           ------------         ------------
Total..................    $     85,165           $     13,016           $      4,683           $        586         $    103,450
                           ============           ============           ============           ============         ============
</TABLE>

      Deposit Activity.  The following table set forth the deposit activity
of the Bank for the periods indicated.

<TABLE>
<CAPTION>
                                                                               Year Ended September 30,
                                                       ------------------------------------------------------------------------
                                                           1999           1998           1997           1996           1995
                                                       ------------   ------------   ------------   ------------   ------------
                                                                                    (In Thousands)
<S>                                                    <C>            <C>            <C>            <C>            <C>
Beginning balance...................................   $    143,901   $    145,444   $    145,975   $    141,432   $    129,681
Net increase (decrease) before interest credited....          9,102         (8,215)        (7,386)        (2,751)         5,649
Interest credited...................................          6,422          6,672          6,855          7,294          6,102
                                                       ------------   ------------   ------------   ------------   ------------
Net increase (decrease) in savings deposits.........         15,524         (1,543)          (531)         4,543         11,751
                                                       ------------   -------------  ------------   ------------   ------------
Ending balance......................................   $    159,425   $    143,901   $    145,444   $    145,975   $    141,432
                                                       ============   ============   ============   ============   ============
</TABLE>

      Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank has the ability to use advances from the FHLB-Atlanta to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Atlanta functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of the
FHLB-Atlanta, the Bank is required to own capital stock in the FHLB-Atlanta and
is authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities that are obligations
of, or guaranteed by, the U.S. Government) provided certain creditworthiness
standards have been met. Advances are made pursuant to several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial condition of the member institution and the adequacy of collateral
pledged to secure the credit. The maximum outstanding balances of the Bank's
FHLB advances for the fiscal years ended September 30, 1999, 1998 and 1997 were
$35.5 million, $19.5 million and $3.8 million, respectively, the average
balances outstanding were $28.7 million, $7.9 million and $2.3 million,
respectively, and the weighted average interest rates were 5.2%, 5.50% and
6.28%, respectively. The Bank's outstanding balances of FHLB advances as of
September 30, 1999, 1998 and 1997, were $35.5 million, $19.5 million and $3.5
million, respectively.

MANAGEMENT OF MARKET RISK

      Generally. The Bank's most significant form of market risk is
interest-rate risk, as the majority of the Bank's assets and liabilities are
sensitive to changes in interest rates. The principal objective of the Bank's
interest rate risk management is to evaluate the interest rate risk inherent in
the Bank's assets and liabilities, determine the level of risk appropriate given
the Bank's business strategy, operating environment, capital and liquidity
requirements and performance objectives, and manage the risk consistent with the
guidelines approved by the Board of Directors. Through such management, the Bank
seeks
<PAGE>   20
to reduce the vulnerability of its operations to changes in interest rates. The
Bank's Asset/Liability Committee comprises the Bank's senior management under
the direction of the Board of Directors, with senior management responsible for
reviewing with the Board of Directors its activities and strategies, the effect
of those strategies on the Bank's net interest margin, the fair value of the
portfolio and the effect that changes in interest rates will have on the Bank's
portfolio and the Bank's exposure limits.

      In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of one- to
four-family residential ARM loans and fixed-rate loans with maturities of 15
years or less, (2) emphasizing the origination and retention of shorter term
commercial business loans, (3) emphasizing the origination of adjustable rate
home equity lines of credit, and (4) investing in shorter term investment
securities. Management recognizes that the long-term effect of interest rate
changes on the Bank's income can be substantial. Accordingly, management has
increased the attractiveness of its 10 to 15 year mortgage loans with
below-market rates. In addition, the Bank aggressively markets shorter term
nonmortgage loans and adjustable rate home equity lines of credit.

      Net Portfolio Value. In recent years, The Bank has measured its interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain time periods, based on
assumptions regarding loan prepayment and deposit decay rates formerly provided
by the OTS. However, the OTS now requires the computation of amounts by which
the net present value of an institution's cash flow from assets, liabilities and
off balance sheet items (the institution's net portfolio value or "NPV") would
change in the event of a range of assumed changes in market interest rates.
These computations estimate the effect on an institution's NPV from
instantaneous and permanent 1% to 3% (100 to 300 basis points) increases and
decreases in market interest rates.

<PAGE>   21
         The following table presents NPV at September 30, 1999, as calculated
by the OTS, which is based upon quarterly information voluntarily provided to
the OTS by the Bank.

                    Percentage Change in Net Portfolio Value

<TABLE>
<CAPTION>
             Changes                                      Board
            in Market             Projected              Policy
         Interest Rates          Change (1)             Limit (2)
         --------------          ----------             ---------
         (basis points)
<S>                              <C>                   <C>
               +300                -35.00%               -40.00%
               +200                -24.00%               -30.00%
               +100                -12.00%               -15.00%
                  0                  0.00%                 0.00%
               -100                 10.00%               -15.00%
               -200                 20.00%               -30.00%
               -300                 29.00%               -40.00%
</TABLE>

-------------------------
(1)      Calculated as the amount of change in the estimated NPV divided by the
         estimated NPV assuming no change in interest rates.

(2)      Limits are established by the Bank's Board of Directors.

         Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV requires the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV table presented assumes that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV table provides an indication of the
Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income and
will differ from actual results.

EMPLOYEES

         As of September 30, 1999, the Bank had 61 full-time and 7 part-time
employees, none of whom is represented by a collective bargaining unit. The Bank
believes its relationship with its employees is good.

                                   REGULATION

         As a federally chartered SAIF-insured stock savings bank, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The Bank also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that they may
find in the Bank's operations. The FDIC also examines the Bank in its role as
the administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Company, the Bank, the Mutual Company, the Company's parent mutual holding
company, and their operations.

FEDERAL REGULATION OF SAVINGS INSTITUTIONS

         Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
<PAGE>   22
         Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus, and an additional 10% of unimpaired capital and surplus if
such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. The OTS by regulation has
amended the loans to one borrower rule to permit savings associations meeting
certain requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.

         Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.

         Recent legislation has expanded the qualified thrift lender test to
provide savings associations with greater authority to lend and diversify their
portfolios. In particular, credit card and education loans may now be made by
savings associations without regard to any percentage-of-assets limit, and
commercial loans may be made in an amount up to 10 percent of total assets, plus
an additional 10 percent for small business loans. Loans for personal, family
and household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. The Bank satisfied the qualified
thrift lender test at September 30, 1999.

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

         Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
for the quarter ended September 30, 1999, exceeded the then applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.

         Community Reinvestment Act and Fair Lending Laws. Savings association
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.

         Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Stock
Company and any nonsavings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies.
<PAGE>   23
         Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.

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

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

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

         The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive
<PAGE>   24
or defer an association's interest rate risk component on a case-by-case basis.
The OTS has postponed the date that the component will first be deducted from an
institution's total capital to provide it with an opportunity to review the
interest rate risk approaches taken by the other federal banking agencies. At
September 30, 1999, the Bank met each of its capital requirements, in each case
on a fully phased-in basis.

         Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. The Company cannot determine
whether, or in what form, such legislation may eventually be enacted and there
can be no assurance that any legislation that is enacted would not adversely
affect the Bank and the Company.

PROMPT CORRECTIVE REGULATORY ACTION

         Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS may also take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.

INSURANCE OF DEPOSIT ACCOUNTS

         The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.

FEDERAL HOME LOAN BANK SYSTEM

         The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. As of September 30, 1999, the Bank was in
compliance with this requirement. The FHLBs are required to provide funds for
the resolution of insolvent thrifts and to contribute funds for affordable
housing programs. These requirements could reduce the amount of dividends that
the FHLBs pay to their members and could also result in the FHLBs imposing a
higher rate of interest on advances to their members.

FEDERAL RESERVE SYSTEM

         The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). At September 30, 1999, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.

HOLDING COMPANY REGULATION

<PAGE>   25
         Generally. The Mutual Company and the Company are nondiversified mutual
savings and loan holding companies within the meaning of the HOLA, as amended.
As such, the Mutual Company and the Company are registered with the OTS and are
subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Company and the Company and any nonsavings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution. As
federal corporations, the Company and the Mutual Company are generally not
subject to state business organizations law.

         Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a mutual holding company and a federally chartered
mid-tier holding company such as the Company may engage in the following
activities: (i) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company; one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act of
1956, unless the Director, by regulation, prohibits or limits any such activity
for savings and loan holding companies; or (B) in which multiple savings and
loan holding companies were authorized (by regulation) to directly engage on
March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a mutual
holding company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (x) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.

         The HOLA prohibits a savings and loan holding company, including the
Stock Company and the Mutual Company, directly or indirectly, or through one or
more subsidiaries, from acquiring another savings institution or holding company
thereof, without prior written approval of the OTS. It also prohibits the
acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.

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

         Waivers of Dividends by the Mutual Company. OTS regulations require the
Mutual Company to notify the OTS of any proposed waiver of its right to receive
dividends. The OTS' reviews dividend waiver notices on a case-by-case basis,
and, in general, does not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction to the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.

         Conversion of the Mutual Company to Stock Form. OTS regulations permit
the Mutual Company to convert from the mutual to the capital stock form of
organization (a "Conversion Transaction"). In a Conversion Transaction a new
holding company would be formed as the successor to the Company (the "New
Holding Company"), the Mutual Company's
<PAGE>   26
corporate existence would end, and certain depositors of the Bank would receive
the right to subscribe for additional shares of the New Holding Company. In a
Conversion Transaction, each share of Common Stock held by the Company's public
stockholders ("Minority Stockholders") would be automatically converted into a
number of shares of common stock of the New Holding Company determined pursuant
an exchange ratio that ensures that after the Conversion Transaction, subject to
the Dividend Waiver Adjustment described below and any adjustment to reflect the
receipt of cash in lieu of fractional shares, the percentage of the to-be
outstanding shares of the New Holding Company issued to Minority Stockholders in
exchange for their Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders immediately
prior to the Conversion Transaction. The total number of shares held by Minority
Stockholders after the Conversion Transaction would also be affected by any
purchases by such persons in the offering that would be conducted as part of the
Conversion Transaction.

         The Dividend Waiver Adjustment would decrease the percentage of the
to-be outstanding shares of common stock of the New Holding Company issued to
Minority Stockholders in exchange for their shares of Common Stock to reflect
(i) the aggregate amount of dividends waived by the Mutual Company and (ii)
assets other than Common Stock held by the Mutual Company. Pursuant to the
Dividend Waiver Adjustment, the percentage of the to-be outstanding shares of
the New Holding Company issued to Minority Stockholders in exchange for their
shares of Common Stock would be equal to the percentage of the outstanding
shares of Common Stock held by Minority Stockholders multiplied by the Dividend
Waiver Fraction. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Stock Company's stockholders'
equity at the time of the Conversion Transaction less the aggregate amount of
dividends waived by the Mutual Company and the denominator is equal to the Stock
Company's stockholders' equity at the time of the Conversion Transaction, and
(b) a fraction, of which the numerator is equal to the appraised pro forma
market value of the New Holding Company minus the value of the Mutual Company's
assets other than Common Stock and the denominator is equal to the pro forma
market value of the New Holding Company.

FEDERAL SECURITIES LAWS

         Shares of the Company's Common Stock are registered with the SEC under
Section 12(g) of the Exchange Act. The Company is also subject to the proxy
rules, tender offer rules, insider trading restrictions, annual and periodic
reporting, and other requirements of the Exchange Act.

                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

         General. The Company and the Bank are subject to federal income
taxation in the same general manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Bank.

         Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending September 30 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective for taxable years beginning after 1995.

         Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
September 30, 1996 over those established as of September 30, 1988. The amount
of such reserve subject to recapture as of September 30, 1999, was approximately
$705,000.

         Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain nondividend distributions or cease to maintain a bank
charter. At September 30, 1999, the Bank's total federal pre-1988 reserve was
approximately $4.8 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made.
<PAGE>   27
         Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.

         Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 1999, the Bank had no net
operating loss carryforwards for federal income tax purposes.

         Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The Mutual Company owns less than 80% of the
outstanding Common Stock. As such, the Mutual Company is not permitted to file a
consolidated federal income tax return with the Company and the Bank. The
corporate dividends-received deduction is 80% in the case of dividends received
from corporations with which a corporate recipient does not file a consolidated
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf.

STATE TAXATION

         State of North Carolina. Under North Carolina law, the corporate income
tax is 7.50% of federal taxable income as computed under the Code, subject to
certain prescribed adjustments. In addition, for tax years beginning in 1991,
1992, 1993 and 1994, corporate taxpayers were required to pay a surtax equal to
4%, 3%, 2% and 1%, respectively, of the state income tax otherwise payable by
it. An annual state franchise tax is imposed at a rate of 0.15% applied to the
greatest of the institution's (i) capital stock, surplus and undivided profits,
(ii) investment in tangible property in North Carolina or (iii) 55% of the
appraised valuation of property in North Carolina.

ITEM 2. PROPERTIES

         The following table sets forth certain information regarding the Bank's
offices at September 30, 1999, all of which are owned by the Bank.

<TABLE>
<CAPTION>
                                                                                     Approximate
Location                                                  Year Opened        Square Feet        Deposits
--------                                                  -----------        -----------        --------
<S>                                                       <C>                <C>             <C>
245 West Main Avenue                                          1971              12,400       $ 46,016,000
Gastonia, North Carolina  28052-4140

1670 Neal Hawkins Road                                        1987              5,322          22,657,000
Gastonia, North Carolina  28056-6429

1535 Burtonwood Drive                                         1976              2,372          49,097,000
Gastonia, North Carolina  28054-4011

233 South Main Street                                         1990              4,739          40,845,000
Mount Holly, North Carolina  28120-1620

         Total Deposits                                                                      $159,425,000
</TABLE>

         At September 30, 1999, the net book value of the Bank's office
properties and the Bank's fixtures, furniture, and equipments was $2.5 million.

ITEM 3. LEGAL PROCEEDINGS

         Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
<PAGE>   28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The "Common Stock and Related Matters" section of the Company's Annual
Report to Stockholders is incorporated herein by reference.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.

ITEM 7. FINANCIAL STATEMENTS

         The financial statements are contained in the Company's Annual Report
to Stockholders and is incorporated herein by reference.

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

         None.

                                    PART III

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

         The "Proposal I-Election of Directors" section of the Registrant's
definitive proxy statement for its 2000 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference. In addition, see Item 1.
"Executive Officers of the Registrant" for information concerning the Bank's
executive officers.

ITEM 10. EXECUTIVE COMPENSATION

         The "Proposal I-Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The "Proposal I-Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The "Proposal I-Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
<PAGE>   29
                                     PART IV

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

         (a)(1)  Financial Statements

         The exhibits and financial statement schedules filed as a part of this
Form 10-KSB are as follows:

                  (A)      Report of Independent Auditors

                  (B)      Consolidated Statements of Condition

                  (C)      Consolidated Statements of Operations

                  (D)      Consolidated Statements of Comprehensive Income

                  (E)      Consolidated Statements of Changes in Equity

                  (F)      Consolidated Statements of Cash Flows

                  (G)      Notes to Consolidated Financial Statements

         (a)(2)  Financial Statement Schedules

         All financial statement schedules have been omitted as the required
         information is inapplicable or has been included in the Notes to
         Consolidated Financial Statements.

         (b)      Reports on Form 8-K

         The Company has not filed a Current Report on Form 8-K during the
fourth quarter of the fiscal year ended September 30, 1999.

         (c)      Exhibits

<TABLE>
<CAPTION>
<S>      <C>         <C>
         3.1         Stock Holding Company Charter of Gaston Federal Bancorp, Inc. (incorporated
                     herein by reference to the Company's registration statement on SB-2, file No.
                     333-42951 ("Form SB-2"))

         3.2         Bylaws of Gaston Federal Bancorp, Inc. (incorporated herein by reference to
                     the Company's Form SB-2)

         4           Form of Stock Certificate of Gaston Federal Bancorp, Inc. (incorporated herein
                     by reference to the Form SB-2)

         10.1        Employment Agreement with Kim S. Price (incorporated herein by reference to
                     the Company's Form SB-2)

         10.2        Deferred Compensation and Income Continuation Agreement (incorporated herein
                     by reference to the Company's Form SB-2)

         10.3        Employee Stock Ownership Plan (incorporated herein by reference to the
                     Company's Form SB-2)

         10.4        Supplemental Executive Retirement Plan (incorporated herein by reference to
                     the Company's Form SB-2)

         13          1999 Annual Report to Stockholders

         21          Subsidiaries of the Company
</TABLE>
<PAGE>   30
<TABLE>
<CAPTION>
<S>      <C>         <C>

         23.1        Consent of Cherry Bekaert & Holland, L.L.P.

         27          EDGAR Financial Data Schedule
</TABLE>
<PAGE>   31
                                   SIGNATURES

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

                                          GASTON FEDERAL BANCORP, INC.

Date:  December 28, 1999              By: /s/ Kim S. Price
       ------------------                 -----------------------------------
                                          Kim S. Price
                                          President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange 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>
<S>                                                         <C>
By:    /s/Kim S. Price                                      By: /s/Gary F. Hoskins
       --------------------------------------------             --------------------------------------------
       Kim S. Price                                             Gary F. Hoskins
       President, Chief Executive Officer and                   Senior Vice President, Treasurer and
       Director (Principal Executive Officer)                   Chief Financial Officer
                                                                (Principal Financial and Accounting Officer)

Date:  December 28, 1999                                    Date: December 28, 1999
       --------------------------------------------             --------------------------------------------

By:    /s/David W. Hoyle                                    By: /s/Ben R. Rudisill, II
       --------------------------------------------             --------------------------------------------
       David W. Hoyle                                           Ben R. Rudisill, II
       Chairman                                                 Vice Chairman

Date:  December 28, 1999                                    Date: December 28, 1999
       --------------------                                     --------------------------------------------

By:    /s/Martha B. Beal                                    By: /s/Charles D. Massey
       --------------------------------------------             --------------------------------------------
       Martha B. Beal                                           Charles D. Massey
       Director                                                 Director

Date:  December 28, 1999                                    Date: December 28, 1999
       --------------------                                     --------------------------------------------

By:    /s/James J. Fuller                                   By: /s/Eugene R. Matthews, II
       --------------------------------------------             --------------------------------------------
       James J. Fuller                                          Eugene R. Matthews, II
       Director                                                 Director

Date:  December 28, 1999                                    Date: December 28, 1999
       --------------------                                     --------------------------------------------

By:    /s/ William H. Keith                                 By: /s/Robert W. Williams, Sr.
       --------------------------------------------             --------------------------------------------
       William H. Keith                                         Robert W. Williams, Sr.
       Director                                                 Director

Date:  December 28, 1999                                    Date:  December 28, 1999
       --------------------------------------------              -------------------------------------------
</TABLE>