<PAGE>

                      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 transition period from _______________ to ___________________

                        Commission File Number. 0-24625


                             CFS BANCSHARES, INC.
                 --------------------------------------------
                (Name of small business issuer in its charter)
<TABLE>
<S>                                                                 <C>
                           Delaware                                             63-0367958
----------------------------------------------------------------    -----------------------------------
(State or other jurisdiction of incorporation or organization)      (I.R.S. Employer Identification No.)

1700 Third Avenue North, Birmingham, Alabama                                                    35203
--------------------------------------------------------------------------------------------------------
  (Address of principal executive offices)                                                    (Zip Code)
</TABLE>

      Registrant's telephone number, including area code:  (205) 328-2041
                                                           --------------

       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)

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

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

     State issuer's revenues for its most recent fiscal year:  $6,793,380

     The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the last sale of which the registrant was aware (25 shares
at $18.50 per share during June, 1999), was approximately $804,269 as of
December 10, 1999.  Solely for the purposes of this calculation, the term
"affiliate" refers to all directors and executive officers of the registrant and
all stockholders beneficially owning more than 5% of the registrant's common
stock.

     As of December 10, 1999, there were issued and outstanding 130,000 shares
of the registrant's common stock, of which 85,526 shares were held by
affiliates.


                      DOCUMENTS INCORPORATED BY REFERENCE

     1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
        September 30, 1999.  (Parts I  and II)
     2. Portions of Proxy Statement for the 2000 Annual Meeting of Stockholders.
        (Part III)
<PAGE>

                                    PART I

Item 1.  Description of Business
--------------------------------

General

     The Company.  CFS Bancshares, Inc. ("the Company"), a Delaware corporation,
was organized by Citizens Federal Savings Bank ("Citizens Federal" or the
"Bank") to be a savings and loan holding company.  The Company was organized at
the direction of the Bank in January 1998 to acquire all of the capital stock of
the Bank upon the consummation of the reorganization of the Bank into the
holding company form of ownership (the "Reorganization"), which was completed on
June 30, 1998.  The company's stock, par value $1.00 per share (the "Common
Stock") became registered under the Securities Exchange Act of 1934 on June 30,
1998.  The Company has no significant assets other than the corporate stock of
the Bank.  For that reason, substantially all of the discussion in this Form 10-
KSB relates to the operations of the Bank and its subsidiaries.

     The executive offices of the Company are located at 1700 Third Avenue
North, Birmingham, Alabama.  The telephone number is (205) 328-2041.

     Citizens Federal Savings Bank.  Citizens Federal was chartered by the
Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision
("OTS"), in September 1956.  Since its organization it has been a member of the
Federal Home Loan Bank System ("FHLBS").  The Bank's savings accounts are
insured up to the applicable limits by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC").  On March 28, 1983, the Bank's charter was restated when it converted
from a federal mutual savings and loan association to a federal capital stock
association through the sale and issuance of 130,000 shares of common stock.  On
October 10, 1983 the Bank converted from a federal stock savings and loan
association to a federal stock savings bank and on June 30, 1998 became the
wholly owned subsidiary of the Company.  The Bank is subject to supervision and
regulation by the OTS and the FDIC.

     The Bank's operations are conducted through its main office at 1700 Third
Avenue North, Birmingham, Alabama (main telephone number: (205) 328-2041) and
branch offices at 2100 Bessemer Road, Birmingham, Alabama and 213 Main Street,
Eutaw, Alabama.  On October 14, 1996, the Bank relocated its entire main office
operation from leased space at 300 18th Street North in Birmingham to a new
building owned by the Bank.  See "Item 2.  Properties" for more information on
these offices.

     The Bank's primary business is the promotion of thrift through the
solicitation of savings accounts from its depositors and the general public, and
the promotion of home ownership through the granting of mortgage loans,
principally to finance the purchase and/or construction of residential dwellings
located within its principal lending area in Jefferson and Greene Counties,
Alabama.  The real estate market in the Birmingham, Alabama area has been
relatively strong in recent years.  The

                                       2
<PAGE>

Bank has also been active in using excess funds to purchase mortgage-backed
securities during periods of reduced loan demand.

Recent Banking Legislation

     On November 12, 1999, the Gramm-Leach-Bliley Act was signed into law.  The
Act calls for the modernization of the banking system and could have far-
reaching effects on the financial services industry and the Company's and the
Bank's operations.  For additional information on the provisions of this
legislation, see "Regulation of the Bank -- Recently Enacted Legislation."

Market Area

     The Bank considers Jefferson County in the Birmingham, Alabama Metropolitan
area and Greene County, to be its primary market areas for savings and mortgage
loans, although it also makes loans in surrounding counties from time to time.
As of September 30, 1999, there were approximately three savings institutions
and 18 commercial banks located in its primary market area with total assets of
$126 billion.  The Company's assets at September 30, 1999 totaled $96 million.

Asset/Liability Management

     Citizens Federal, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice on a
different basis than its interest-bearing assets. Management believes it is
critical to manage the relationship between interest rates and the effect on the
Bank's net portfolio value ("NPV").  This approach calculates the difference
between the present value of expected cash flows from assets and the present
value of expected cash flows from liabilities, as well as cash flows from any
off-balance sheet contracts.  Management of the Bank's assets and liabilities is
done within the context of the marketplace, but also within limits established
by the Board of Directors on the amount of change in NPV which is acceptable
given certain interest rate changes.

     The OTS has adopted a final rule which uses a net market value methodology
to measure the interest rate risk exposure of thrift institutions.  Under this
rule, an institution's "normal" level of interest rate risk in the event of an
assumed change in interest rates is a decrease in the institution's NPV in an
amount not exceeding 2% of the present value of its assets.  Beginning July 1,
1994, thrift institutions with greater than "normal" interest rate exposure must
take a deduction from their total capital available to meet their risk-based
capital requirement.  The amount of that deduction is one-half of the difference
between (a) the institution's actual calculated exposure to a 200 basis point
(100 basis points equals 1.0%) interest rate increase or decrease (whichever
results in the greater pro forma decrease in NPV) and (b) its "normal" level of
exposure which is 2% of the present value of its assets.

                                       3
<PAGE>

     Institutions with less than $300 million in assets and at least a 12% risk-
based capital ratio are not subject to an interest rate risk capital component
(IRR) unless notified by the OTS.  The Bank is not currently required to
maintain an interest rate risk capital component.

     Presented below is an analysis of the Bank's interest rate risk as measured
by changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 300 basis points and compared
to policy limits set by the Board of Directors and in accordance with OTS
regulations.  Such limits have been established with consideration of the dollar
impact of various rate changes and the Bank's capital position.

<TABLE>
<CAPTION>

  Change in                                 At September 30, 1999
Interest Rate    Board Limit                ---------------------
(Basis Points)    % Change     $ Amount     $ Change     % Change
--------------    --------     --------     --------     --------
                               (Dollars in Thousands)
<S>              <C>           <C>          <C>          <C>
     +300            -70       $  9,509     $ (3,726)       -28%
     +200            -50         11,070       (2,165)       -16
     +100            -25         12,298         (937)        -7
        0             --         13,235           --         --
     -100            -25         14,069          834          6
     -200            -50         14,519        1,284         10
     -300            -70         14,463        1,228          8
</TABLE>

                                       4
<PAGE>

     In the above table the first column on the left presents the basis point
increments of yield curve shifts.  The second presents the board policy limits
of each 100 basis point increment for the Bank's percent change in NPV.  For
example, the Board's policy limit for a 100 basis point shift in the yield curve
up or down indicates that NPV should not decrease by more than 25%. The
remaining columns present the Bank's actual position in dollars, dollar change
and percent change in NPV at each basis point increment.

     The OTS rule will not become effective until the OTS adopts the process by
which banks may appeal an interest rate risk deduction determination.  However,
if the Bank had been subject to the interest rate risk capital component at
September 30, 1999, no risk-based capital deduction would have been required as
the Bank had a "normal" level of interest rate risk.

     The Bank's goal is to continue to monitor and minimize volatility in the
net interest margin by taking an active role in managing the level, mix, and
maturities of assets and liabilities.

     As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table.  For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates.  Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage ("ARM") loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset.  Further, in the event of a change in interest
rates, expected rates of prepayments on loans and early withdrawals from
certificates could likely deviate significantly from those assumed in
calculating the table.  The primary assumptions used in determining the Bank's
interest rate risk exposure are prepayment rate estimates for loans and mortgage
backed securities obtained from the OTS "Asset and Liability Price Tables" as of
September 30, 1999 and passbook decay rates determined by the Bank from a core
deposit analysis.

Lending Activities

     General.  The principal lending activity of Citizens Federal has
historically consisted of the origination of conventional loans (loans that are
neither insured nor partially guaranteed by government agencies) on single-
family residential properties.  The Bank, to a much lesser degree, also
originates conventional loans on multiple-unit dwellings and on nonresidential
properties.  The remainder of the Bank's loan portfolio consists of consumer
loans, commercial loans and loans secured by savings accounts.  The Bank makes
loans primarily in Jefferson and Greene Counties and to a lesser extent in
surrounding counties in the State of Alabama.  The Bank originates loans
primarily for its own portfolio.  During periods of reduced loan demand the Bank
has used excess funds to purchase loans from other lenders.

     The loan-to-value ratio, maturity and other provisions of the loans made by
Citizens Federal generally reflect the Bank's policy of making the maximum loan
permissible consistent with applicable regulations, sound lending practices,
market conditions and the Bank's underwriting

                                       5
<PAGE>

standards. The Bank has generally made long term loans, amortized on a monthly
basis, with principal and interest due each month. Interest rates and points
charged on loans originated by the Bank are competitive with other thrift
institutions in the general market area. Because of refinancing and prepayments
residential loans generally remain outstanding for shorter periods than their
contractual terms.

     Loans to One Borrower Limitations.  Under federal regulations, the Bank's
loans-to-one-borrower limit is generally the greater of 15% of the unimpaired
capital and surplus of the Bank or $500,000.  Loans and extensions of credit
fully secured by readily marketable collateral (as defined by regulation) may
comprise an additional 10% of unimpaired capital and surplus.

     At September 30, 1999, the maximum amount the Bank was permitted to lend to
one borrower was $1,239,760.  At that date, the Bank's largest loan-to-one-
borrower was $777,769, which was secured by a non-residential property located
in the Bank's primary market area.

     Loan Portfolio Composition.  Set forth below is selected data relating to
the composition of the Bank's loan portfolio on the dates indicated:

<TABLE>
<CAPTION>

                                                                  At September 30,
                                                 ----------------------------------------------------
                                                         1999                            1998
                                                 --------------------          ----------------------
                                                 Amount            %           Amount              %
                                                 ------           ---          ------             ---
<S>                                            <C>              <C>          <C>               <C>
Type of Loan:
Real Estate:
  Insured or guaranteed  mortgage loans......  $        --          --%      $    50,530          .11%
  Conventional loans on existing properties..   43,392,722       94.53        44,283,512        94.12
Loans for other purposes (share loans,
 home improvement loans, commercial
 loans and consumer loans)...................    2,511,484        5.47         2,713,645         5.77
                                               -----------      ------       -----------       ------
     Total loans.............................  $45,904,206      100.00%      $47,047,687       100.00%
                                               ===========      ======       ===========       ======

Type of Security:
  Residential:
   Single family.............................  $29,353,617       63.95%      $32,599,150        69.29%
   Other dwelling units......................      942,201        2.05           176,182          .37
  Non-residential............................   14,039,105       30.58        11,558,710        24.57
  Savings accounts...........................      856,566        1.87           950,701         2.02
  Other......................................      712,717        1.55         1,762,944         3.75
                                               -----------      ------       -----------       ------
     Total loans.............................  $45,904,206      100.00%      $47,047,687       100.00%
                                               ===========      ======       ===========       ======
</TABLE>

                                       6
<PAGE>

     Residential Real Estate Lending.  Citizens Federal has concentrated its
lending activities on the origination of conventional first mortgage loans for
the purchase or refinancing of both new and existing one-to four- family
residential property. These loans have been made on primarily a fixed term,
fixed rate basis.  The Bank also offers adjustable rate loans with terms of up
to 30 years, but to date has not originated a significant amount of ARM loans.
The Bank originated $2,569,057 in residential mortgage loans during the year
ended September 30, 1999, all of which were fixed rate loans.  Purchased
adjustable rate mortgage loans in the Bank's loan portfolio amounted to 7.68% of
the total loan portfolio at September 30, 1999.

     The Bank extends loans on single-family dwellings in an amount up to 90% of
the fair market value as determined by a qualified appraiser.  In addition,
loans up to 95% of the fair market value are extended if the borrower obtains
private mortgage guarantee insurance to cover a portion of the loan.  Loans in
excess of 80% of fair market value are limited from time to time as a result of
economic conditions.  In addition to the principal and interest payment, the
borrower pays into an escrow account an amount equal to 1/12th of the hazard
insurance premium and property taxes.

     Nonresidential Real Estate Loans.  Citizens Federal also offers loans for
the acquisition of nonresidential real estate.  The primary security on such a
loan is the nonresidential real property, such as churches, small retail
establishments and small commercial buildings.  Loans secured by nonresidential
real estate are generally limited to 70% of appraised value and generally have
an initial contractual loan payment period of up to 15 years.  Although these
loans are generally considered to be of a higher risk than residential loans and
constitute a lesser portion of the Bank's portfolio, they provide higher loan
origination fees and interest rate yields than residential loans. A substantial
amount of the Bank's nonresidential real estate loans are secured by churches
located in the Bank's primary market area.

     The application process for non-residential real estate loans includes the
same procedures which are required for other mortgage loans.  Total loans
originated by the Bank on nonresidential real estate during the 1999 fiscal year
amounted to $3,333,425, which were secured by churches and commercial property.

     Nonresidential real estate lending may entail significant additional risks
compared to residential mortgage lending.  The loans may involve large loan
balances to single borrowers or groups of related borrowers.  In addition, the
payment experience on loans secured by income producing properties is typically
dependent on the successful operation of the properties and thus may be subject
to a greater extent, to adverse conditions in the real estate market or in the
economy generally.

     Consumer and Other Loans.  Federal regulations permit federally chartered
savings institutions to make secured and unsecured consumer loans up to 35% of
the institution's assets.  In addition, a federal savings association has
lending authority above the 35% category for certain consumer loans, such as
home equity loans, property improvement loans, mobile home loans and loans
secured by savings accounts.  Citizens Federal offers share loans, loans on
consumer goods,

                                       7
<PAGE>

as well as home improvement loans, second mortgages, savings account secured
loans and mobile home loans. The Bank's consumer loans have terms of up to 15
years and carry fixed interest rates.

     The Bank's consumer and commercial loan originations totaled $951,169 for
the year ended September 30, 1999.  As of September 30, 1999, consumer loans
constituted approximately 3.49% of the Bank's total loan portfolio.

     Reference is made to Note 4 of the Notes to Financial Statements for
further information on the Bank's lending activities.

     Loan Solicitation, Originations, Purchases and Sales.  The Bank actively
solicits mortgage loan applications from existing customers, local realtors,
builders, real estate developers, and various other persons.  Upon receipt of a
loan application from a prospective borrower, a credit report is ordered to
verify specific information relating to the loan applicant's employment, income,
and credit standing.  This information may be further verified by personal
contacts with other reference sources. An appraisal of the real estate intended
to secure the proposed loan is undertaken by an independent appraiser.  The
appraisals of the independent appraiser are supplemented by site visits of an
officer or member of the Bank's Board of Directors, or both.  Once the required
information has been obtained and the appraisal completed, the loan is submitted
to the Loan Committee of the Board of Directors which consists of Directors
Stokes, Bennett, and Greene, and Loan Officers Eberhardt and Gilmore.  All
actions of the Loan Committee are reviewed and ratified by the full Board of
Directors.

     Loan applicants are promptly notified of the decision of the Bank's Loan
Committee within thirty days by telephone or letter setting forth the terms and
conditions of the decision.  If approved, these terms and conditions include the
amount of the loan, interest rate, amortization term, a brief description of
real estate to be mortgaged to the Bank, and the required amount of fire and
casualty insurance coverage to be maintained to protect the Bank's interest.
The borrower has a right to select his own settlement attorney or title company,
and his own insurance broker or agent.  The borrower is required to pay all
costs of the Bank as well as his own costs in connection with the particular
loan closing.

     The Bank's loan portfolio consists of loans originated by the Bank and
purchased whole loans.

                                       8
<PAGE>

     Set forth below is a table showing the Bank's loan originations and
purchase and sales activities for the periods indicated:

<TABLE>
<CAPTION>
                                                         Year Ended September 30,
                                                         ------------------------
                                                            1999          1998
                                                         ----------    ----------
<S>                                                      <C>           <C>
Loan Originated:
 Conventional Real Estate Loans:
  Loans on Existing Property...........................  $2,047,232    $2,651,995
  Loans Refinanced.....................................   3,855,250     3,653,800
 Other Loans...........................................     951,169     3,321,706
                                                         ----------    ----------
Total Loans Originated.................................  $6,853,651    $9,627,501
                                                         ==========    ==========

Loans Purchased:
 Real Estate Loans.....................................  $       --    $       --
                                                         ----------    ----------
Total Loans and Mortgage-Backed Securities Purchased...  $       --    $       --
                                                         ==========    ==========

Loans Sold:
Whole Loans............................................  $       --    $       --
                                                         ----------    ----------
Total Loans Sold.......................................  $       --    $       --
                                                         ==========    ==========

Other Loan Activity:

Loans Foreclosed Upon..................................  $  127,604    $   88,779
Total Other Activity...................................     127,604        88,779
                                                         ----------    ----------
Total Net Loan Activity................................  $6,726,047    $9,538,722
                                                         ==========    ==========
(exclusive of loan repayments)
</TABLE>

                                       9
<PAGE>

     Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 1999 regarding the dollar amount of loans and
mortgage-backed securities maturing (or repricing) in the Bank's portfolio based
on their contractual maturity date. Demand loans and loans having no stated
maturity are reported as due in one year or less.


<TABLE>
<CAPTION>
                                                     Due more      Due more than   Due more than   Due more than   Due more than
                                     Due in one    than one year    two years to    three years    five years to   ten years to
                                    year or less   to two years     three years    to five years     ten years     fifteen years
                                   after 9-30-99   after 9-30-99   after 9-30-99   after 9-30-99   after 9-30-99   after 9-30-99
                                   -------------   -------------   -------------   -------------   -------------   -------------
<S>                                <C>             <C>             <C>             <C>             <C>             <C>
Single family residential
 mortgage loans.................   $   1,858,048   $   1,932,835   $   1,876,269   $   3,585,885   $   7,070,052   $   4,800,663
Multifamily and nonresidential
 mortgage loans.................       1,020,749         941,909         844,724       1,547,243       3,341,437       2,634,574
Consumer and commercial
 loans..........................         810,810         519,204         333,164         279,203         560,109           6,236
                                   -------------   -------------   -------------   -------------   -------------   -------------
                                   $   3,689,607   $   3,393,948   $   3,054,157   $   5,412,331   $  10,971,598   $   7,441,473
                                   =============   =============   =============   =============   =============   =============

<CAPTION>
                                   Due more than
                                   fifteen years
                                   after 9-30-99        Total
                                   -------------    -------------
<S>                                <C>              <C>
Single family residential
 mortgage loans.................   $   8,809,852    $  29,933,604
Multifamily and nonresidential
 mortgage loans.................       3,128,482       13,459,118
Consumer and commercial
 loans..........................           2,758        2,511,484
                                   -------------    -------------
                                   $  11,941,092    $  45,904,206
                                   =============    =============
</TABLE>

     The following table sets forth the dollar amount of all loans due after one
year from September 30, 1999 which have predetermined maturities and have
floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                                      Rate Structure for Loans
                                                                   Maturing in More Than One Year
                                                                ------------------------------------
                                                                Predetermined          Floating or
                                                                Interest Rate        Adjustable Rate
                                                                -------------        ---------------
               <S>                                              <C>                  <C>
               Single family residential mortgage loans.......  $  24,597,846        $    3,477,710
               Multifamily and nonresidential mortgage loans..     12,254,302               184,067
               Consumer and commercial loans..................      1,077,507               623,167
                                                                -------------        --------------
                                                                $  37,929,655        $    4,284,944
                                                                =============        ==============
</TABLE>

                                       10
<PAGE>

     Loan Origination Fees and Other Fees.  Citizens Federal receives loan
origination fees for originating loans.  Loan origination fees are a percentage
of the principal amount of the mortgage loan and are charged to the borrower by
the Bank from creation of the loan.  The Bank's loan origination fees are
generally 1% on conventional residential mortgages.  The total fee income for
real estate loans for the year ended September 30, 1999 was $61,607.  The total
amount of deferred loan fees at September 30, 1999, was $614,963.  Any deferred
loan fees are recognized in income as the principal balance is paid down or when
the loan is sold.

     The Bank currently receives fee income related to the prepayment, late
payment or nonpayment of existing loans.  These fees which are commonly referred
to as prepayment penalties and late charges have not constituted a material
source of income to the Bank.  For more information on the Bank's loan fees and
other fees see Note 4 of the Notes to Financial Statements.

     The Bank limits immediate recognition of loan origination fees as revenues
in that such income (net of certain loan origination costs) for each loan is
amortized using the interest method over the estimated life of a loan.

     Non-Performing Loans and Asset Classification.  The Bank's collection
procedures provide that when a loan becomes 15 days delinquent, the borrower is
contacted by mail and payment requested.  If the delinquency continues,
subsequent efforts are made to contact and request payment from the delinquent
borrower.  In certain instances the Bank may work out a repayment schedule with
the borrower.  If the loan continues in a delinquent status for 45 days, the
Bank will generally commence foreclosure proceedings.  All property acquired as
the result of foreclosure or by deed in lieu of foreclosure is classified as
"real estate acquired by foreclosure" until such time as it is sold or otherwise
disposed of by the Bank.  When such property is acquired, it is recorded at the
lower of the recorded investment in the loan or the property's fair value on the
date of foreclosure, less costs to dispose of the property.  Any write-down of
the property at foreclosure is charged to expense.

     Loans are reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful.  Residential mortgage loans are placed on non-accrual status when
either principal or interest is 90 days or more past due. Consumer loans
generally are charged off when the loan becomes over 120 days delinquent.
Commercial real estate loans are placed on non-accrual status when the loan is
90 days or more past due.  Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income.  Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan.

                                       11
<PAGE>

     The following table sets forth information with respect to the Bank's non-
performing assets for the periods indicated.  The Bank does not accrue interest
on loans 90 days or more past due. During the periods shown, the Bank had no
restructured loans within the meaning of Statement of Financial Accounting
Standards No. 15.

<TABLE>
<CAPTION>
                                                           September 30,
                                                     ---------------------------
                                                        1999           1998
                                                     -----------  --------------
<S>                                                  <C>          <C>
Loans accounted for on a non-accrual basis:
  Real Estate:
     Residential...................................  $  392,085        $804,615
     Non-residential...............................     743,741         144,911
  Consumer and commercial..........................     255,854          24,948
                                                     ----------        --------
           Total of nonaccrual.....................  $1,391,680        $974,474
                                                     ==========        ========

Accruing loans which are contractually past due
  90 days or more:
  Real Estate:
     Residential...................................          --              --
     Non-residential...............................          --              --
  Consumer and commercial..........................          --              --
                                                     ----------        --------
            Total of 90 days past due loans........  $       --        $     --
                                                     ==========        ========
            Total of non-accrual and 90 days past
                due loans..........................  $1,391,680        $974,474
                                                     ==========        ========

Percentage of total assets.........................        1.45%           1.06%
Other non-performing assets/(1)/...................  $   47,269        $ 59,364
                                                     ==========        ========
</TABLE>

_________________________
/(1)/     Other non-performing assets represent property acquired by the Bank
          through foreclosure or repossession. This property is carried at the
          lower of its fair market value (less costs to dispose) or the recorded
          investment in the loan.


     During the year ended September 30, 1999, gross interest income of
approximately $62,189 would have been recorded on loans accounted for on a non-
accrual basis if the loans had been current throughout the period.  No interest
on such loans was included in income during the year ended September 30, 1999.

     The following is information concerning the Bank's non-accrual loans and
other non-performing assets.

     Non-accrual Loans.  The Bank's non-accrual loans at September 30, 1999
totaled $1,391,680, and are in various stages of foreclosure or collection.  All
accrued uncollected interest has been charged off and the accrual of interest
has ceased.  At September 30, 1999, nonaccruals included 18 real estate loans
and 12 consumer loans with individual balances outstanding ranging from $3,664
to $195,887.

                                       12
<PAGE>

     The Bank's most significant problem loan is a loan with a 66% Small
Business Administration ("SBA") guarantee and a balance of $141,673 at September
30, 1999.  The Bank has recorded loan loss provisions for the amount of the loan
which is not guaranteed by the SBA and is exploring legal and other remedies for
collection.

     Other Non-performing Assets.  Other non-performing assets at September 30,
1999 are two residential properties and one vacant lot acquired through
foreclosure with a carrying value of $47,270.

     Except as discussed above, at September 30, 1999, there were no loans which
were excluded from the table of non-performing assets, where known information
about possible credit problems of borrowers caused management to have serious
concerns as to the ability of the borrowers to comply with present loan
repayment terms and may result in disclosure as non-accrual, 90 days past due or
restructured.  In addition, the Bank does not have any significant
concentrations of real estate loans or commitments in areas experiencing
deteriorating economic conditions.

     Federal regulations require each savings association to review its asset
quality on a regular basis.  In addition, in connection with examinations of
such savings associations, federal examiners have authority to identify problem
assets and, if appropriate, classify them.  An asset is classified substandard
if it is determined to be inadequately protected by the current net worth and
paying capacity of the obligor or the collateral pledged, if any.  As a general
rule, the Bank will classify a loan as substandard if the Bank can no longer
rely on the borrower's income as the primary source for repayment of the
indebtedness and must look to secondary sources such as guarantors or
collateral.  An asset is classified as doubtful if full collection is highly
questionable or improbable. An asset is classified as loss if it is considered
uncollectible, even if a partial recovery could be expected in the future.  The
regulations also provide for a special mention classification, described as
assets which do not currently expose a savings association to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention.  Assets classified
as substandard or doubtful require a savings association to establish general
allowances for loan losses. If an asset or portion thereof is classified loss, a
savings association must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified loss, or charge off
such amount.  Federal examiners may disagree with a savings association's
classifications and amounts reserved.  If a savings association does not agree
with an examiner's classification of an asset, it may appeal this determination
to the OTS District Director.  At September 30, 1999, the Bank had $848,537 in
assets classified as substandard, no assets classified as doubtful and $54,589
in assets classified as loss.

     At September 30, 1999 the Bank's substandard assets consisted of six loans
on residential properties and nine loans on commercial property and consumer
loans with an aggregate balance of $801,267 and balances outstanding ranging
from $2,865 to $195,887 and real estate owned of $47,270.

                                       13
<PAGE>

     Allowances for Losses on Loans.  In making loans, Citizens Federal
recognizes the fact that credit losses will be experienced and that the risk of
loss will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan and, in the case of a
secured loan, the quality of the security for the loan.

     It is management's policy to maintain adequate allowances for estimated
losses on the loan portfolio as a whole.  Generally, the allowances are based
on, among other things, estimates of the historical loan loss experience,
evaluation of economic conditions, and periodic reviews of the Bank's loan
portfolio. At September 30, 1999, the Bank's reserve for loan losses was
$310,157. During the fiscal year ended September 30, 1999 the Bank made an
addition to the provision for loan losses of $45,000.

     Management believes that the current allowance for loan losses which is
equal to .68% of gross loans and 22.29% of non-accrual loans, is adequate to
cover any potential future loan losses which may exist in the loan portfolio.

     The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated. The allowance for loan losses applies
primarily to the Bank's mortgage loan portfolio.

<TABLE>
<CAPTION>
                                                          September 30,
                                                    ------------------------
                                                      1999            1998
                                                    --------        --------
<S>                                                 <C>             <C>
  Real Estate:
  Balance at Beginning of Period..................  $553,797        $630,423
                                                    --------        --------
Loans Charged-Off:
 Real Estate - Mortgage:
  Residential.....................................   257,501         249,015
  Consumer........................................    69,089          65,975
                                                    --------        --------
Total Charge-Offs.................................   326,590         314,990
                                                    --------        --------
Total Recoveries..................................    37,950          62,364
                                                    --------        --------
Net Loans Charged-Off.............................   288,640         252,626
                                                    --------        --------
Provision for Loan Losses.........................    45,000         176,000
                                                    --------        --------
Balance at End of Period..........................  $310,157        $553,797
                                                    ========        ========
Ratio of Net Charge-Offs to Average
 Loans Outstanding During the Period..............       .66%            .57%
</TABLE>

     For more information on the Bank's loan loss allowance see Note 5 of the
Notes to Financial Statements.

                                       14
<PAGE>

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

<TABLE>
<CAPTION>
                                                           September 30,
                                       ------------------------------------------------
                                                  1999                    1998
                                       ----------------------    ----------------------
                                                 Percent of                Percent of
                                                  Loans in                  Loans in
                                                 Category to               Category to
                                        Amount   Total Loans    Amount     Total Loans
                                       --------  ------------  --------  --------------
<S>                                    <C>       <C>           <C>       <C>
Real estate - mortgage:
  Residential........................  $ 82,401        63.95%  $195,743          69.66%
  Non-residential....................   170,078        30.58    280,353          24.57
Commercial business..................    31,243         1.98     56,600           1.47
Consumer.............................    26,435         3.49     21,101           4.30
                                       --------       ------   --------         ------
    Total allowance for loan losses..  $310,157       100.00%  $553,797         100.00%
                                       ========       ======   ========         ======
</TABLE>

Investment Activities

     Citizens Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations.  Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans.  Historically, the Bank has generally
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows.  Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained.  At September 30, 1999, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 50.15%.

                                       15
<PAGE>

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

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

     As of September 30, 1999, the Bank had $500,000 and $4,429,808 classified
as investment and mortgage-backed securities held to maturity, respectively, and
$10,441,601 and $23,162,657 classified as investment and mortgage-backed
securities available for sale, respectively.

      The following table sets forth an analysis of the Bank's investment
securities at the dates indicated.

<TABLE>
<CAPTION>
                                              Year Ended September 30,
                                              -------------------------
                                               1999/(1)/     1998/(1)/
                                              -----------  ------------
<S>                                           <C>          <C>
U.S. Treasury and U.S. Government agencies..  $ 7,233,203   $ 2,811,127
Mortgage backed securities..................   27,592,465    30,072,819
Other securities............................    3,708,398     2,576,921
                                              -----------   -----------
                                              $38,534,066   $35,460,867
                                              ===========   ===========
</TABLE>

-------------------------
/(1)/     Includes securities available for sale which had an amortized cost and
          approximate market value of $34,389,879 and $33,604,258, respectively,
          at September 30, 1999 and $29,110,859 and $29,122,737, respectively,
          at September 30, 1998, and securities held to maturity which had an
          amortized cost and approximate market value of $4,929,808 and
          $4,919,789, respectively at September 30, 1999 and $6,338,130 and
          $6,406,439 at September 30, 1998. Securities available for sale
          consist of U.S. Treasury and U.S. Government agency securities, U.S.
          Government agency mortgage backed securities (including CMOs) and
          shares in an adjustable rate mutual fund.

                                       16
<PAGE>

     The following table sets forth the contractual maturities, par values,
market values and average yields for the Bank's investment securities at
September 30, 1999.

<TABLE>
<CAPTION>
                                                   At September 30, 1999/(1)/
                              --------------------------------------------------------------
                               One Year or Less      One to Five Years     Five to Ten Years
                              -----------------    --------------------  --------------------

                                Par      Average      Par      Average      Par      Average
                               Value      Yield      Value      Yield      Value      Yield
                             ----------  --------  ----------  --------  ----------  --------
<S>                          <C>         <C>       <C>         <C>       <C>         <C>
U.S. Government and agency
 obligations...............  $  146,336     6.63%  $3,500,000     5.57%  $4,000,000     5.70%
Other investments..........   3,749,765     5.41           --       --           --       --
                             ----------            ----------            ----------
     Total.................  $3,896,101            $3,500,000            $4,000,000
                             ==========            ==========            ==========
<CAPTION>
                                                   At September 30, 1999/(1)/
                            ------------------------------------------------------------------------
                                More than Ten Years              Total Investment Portfolio
                            ------------------------   ---------------------------------------------
                             Par        Average           Par               Market          Average
                            Value        Yield           Value              Value            Yield
                            -----       --------       ----------        -----------        --------
<S>                         <C>         <C>            <C>               <C>                <C>

U.S. Government and agency
 obligations..............  $  --            --%      $ 7,646,336        $ 7,228,787           5.66%
Other investments.........     --            --         3,794,765          3,708,398           5.41
                            -----                     -----------        -----------
     Total................  $  --                     $11,441,101        $10,937,185
                            =====                     ===========        ===========
</TABLE>
_____________
/(1)/     Includes investment securities available for sale at September 30,
          1999 with an amortized cost and market value of $10,785,197 and
          $10,441,601, respectively, and securities held to maturity at
          September 30, 1999 with an amortized cost of $500,000 and market value
          of $495,584. Contractual maturities of securities available for sale
          at September 30, 1999 range from five months to nine and a half years.
          Securities available for sale consist of U.S. Treasury and U.S.
          government agency securities and shares in an adjustable-rate mutual
          fund.

                                       17
<PAGE>

     Maturity of Mortgage-Backed Securities Portfolio.  The following table sets
forth certain information at September 30, 1999 regarding the dollar amount of
mortgage-backed securities maturing (or repricing) in the Bank's portfolio based
on their contractual maturity date.

<TABLE>
<CAPTION>
                                                        Due more         Due more than       Due more than
                                    Due in one        than one year      two years to         three years
                                   year or less       to two years        three years        to five years
                                   after 9-30-99      after 9-30-99      after 9-30-99       after 9-30-99
                                   -------------      -------------      -------------       -------------
<S>                                <C>                <C>                <C>                 <C>
Mortgage-backed securities.......    $1,817,283        $  847,832          $  703,505         $1,506,044
CMOs.............................       622,863           627,837             667,562          1,341,747
                                     ----------        ----------          ----------         ----------
                                     $2,440,146        $1,475,669          $1,371,067         $2,847,791
                                     ==========        ==========          ==========         ==========
<CAPTION>
                                    Due more than      Due more than
                                    five years to      ten years to       Due more than
                                      ten years        fifteen years      fifteen years
                                    after 9-30-99      after 9-30-99      after 9-30-99         Total
                                    --------------     -------------      -------------      -----------
<S>                                 <C>                <C>                <C>                <C>
Mortgage-backed securities.......     $3,895,606        $3,158,310       $ 5,889,500         $17,818,080
CMOs.............................      1,999,678         1,824,444         2,789,518           9,873,649
                                      ----------        ----------       -----------         -----------
                                      $5,895,284        $4,982,754       $ 8,679,018         $27,691,729
                                      ==========        ==========       ===========         ===========
</TABLE>

     The following table sets forth the dollar amount of all mortgage-backed
securities due after one year from September 30, 1999.
<TABLE>
<CAPTION>
                             Rate Structure for Mortgage-Backed
                          Securities Maturing in More Than One Year
                          -----------------------------------------
                              Predetermined     Floating or
                              Interest Rate     Adjustable Rate
                              -------------     ---------------
<S>                           <C>               <C>
Mortgage-backed securities..  $ 9,681,019         $ 6,318,778
CMOs........................    4,454,153           4,796,633
                              -----------         -----------
                              $14,135,172         $11,116,411
                              ===========         ===========
</TABLE>

                                       18
<PAGE>

Sources of Funds

     General.  Deposits are the major source of Citizens Federal's funds for
lending and other investment purposes.  In addition to deposits, Citizens
Federal also derives funds from loan principal repayments.  Loan repayments are
a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates, money market conditions and
adverse publicity regarding the savings institution industry.  Borrowings may be
used on a short term basis to compensate for reductions in the availability of
other sources of funds.  They may also be used on a longer term basis for
general business purposes.  Citizens Federal has not in the past relied on
borrowings from the Federal Home Loan Bank of Atlanta or other sources.

     Savings Deposits.  Citizens Federal offers a number of alternative deposit
accounts, including passbook savings accounts, NOW and Super NOW accounts, money
market type accounts and certificates currently ranging in maturity from 14 days
to five years.  Deposit accounts vary as to terms, with the principal
differences being the minimum balance required, the time period the funds must
remain on deposit and the interest rates paid.

     Deposits in the Bank as of September 30, 1999, were represented by various
types of savings programs described below.

<TABLE>
<CAPTION>
Weighted                                                                                                  Percentage
  Average         Minimum                                               Minimum                            of Total
Interest Rate       Term                   Category                      Amount          Balances          Savings
-------------     -------                  --------                     --------         ---------        -----------
<S>               <C>                   <C>                             <C>            <C>                <C>
    .50 %          None                 NOW Accounts                     $    ---      $   8,385,107         11.15%
   2.25            None                 "Super NOW" Accounts                1,000          5,038,147          6.70
   2.75            None                 Passbook Accounts                       5         17,455,461         23.22
   4.83            91 Days              Certificates                          500         19,678,305         26.18
   4.75            14 days              Jumbo Certificates/(1)/           100,000         24,454,528         32.53
                   N/A                  Accrued interest on deposits           --            168,775           .22
                                                                                       -------------        ------
                                                            TOTAL                      $  75,180,323        100.00%
                                                                                       =============        ======
</TABLE>
----------------------
/(1)/     Includes Time Deposit Open Account

     The following table sets forth the savings deposit activities of the Bank
for the periods indicated.

<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                                                    ---------------------------
                                                                          1999         1998
                                                                    -------------  ------------
<S>                                                                 <C>            <C>
Deposits.........................................................   $ 129,937,594  $173,199,987
Withdrawals......................................................     131,309,513   178,350,973
                                                                    -------------  ------------
     Net increase (decrease) before interest credited............      (1,371,919)   (5,150,986)
Interest credited................................................       2,660,053     2,697,449
                                                                    -------------  ------------
  Net (decrease) increase in savings deposits....................   $   1,288,134  $ (2,453,537)
                                                                    =============  ============
</TABLE>

                                       19
<PAGE>

     The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.

<TABLE>
<CAPTION>
                                       Balance at                                 Balance at
                                      September 30,      % of      Increase      September 30,     % of
                                          1999         Deposits    (Decrease)         1998       Deposits
                                     --------------    --------    ----------    -------------   --------
<S>                                  <C>               <C>         <C>           <C>             <C>
NOW checking accounts..........       $ 8,385,107        11.15%    $  384,478     $ 8,000,629      10.83%
Jumbo certificates.............        24,454,528        32.53        920,474      23,534,054      31.85
"Super" NOW checking accounts..         5,038,147         6.70        671,404       4,366,743       5.91
Passbook and regular savings...        17,455,461        23.22        (83,837)     17,539,298      23.74
Certificates of deposit........        19,678,305        26.18       (642,833)     20,321,138      27.50
Accrued interest on deposits...           168,775          .22         38,448         130,327        .17
                                      -----------       ------     ----------     -----------     ------
TOTAL..........................       $75,180,323       100.00%    $1,288,134     $73,892,189     100.00%
                                      ===========       ======     ==========     ===========     ======
</TABLE>

    The following table sets forth the time deposits in the Bank classified by
rates as of the dates indicated.

<TABLE>
<CAPTION>
                                       At September 30,
                                  -----------------------------
                                     1999            1998
                                  -----------     -----------
<S>                               <C>             <C>
3.00 -  4.99%.................... $33,258,630       $ 7,417,332
5.00 -  6.99%....................  10,469,275        35,976,629
7.00 -  8.99%....................     397,394           454,425
9.00 - 10.99%....................       7,534             6,806
                                  -----------       -----------
TOTAL............................ $44,132,833       $43,855,192
                                  ===========       ===========

</TABLE>

     The following table sets forth the amount and maturities of the Bank's time
deposits at September 30, 1999.

<TABLE>
<CAPTION>
                                                                  Amount Due
                                    ---------------------------------------------------------------------------
                                    Less Than                                      After
Rate                                One Year        1-2 Years       2-3 Years       3 Years          Total
----                                --------        ---------       ---------       -------          -----
<S>                                 <C>            <C>             <C>             <C>              <C>
 3.00 - 4.99%.....................  $31,174,920    $  960,956      $  691,917      $   430,837      $33,258,630
 5.00 - 6.99%.....................    6,138,805     1,728,761       1,520,469        1,081,240       10,469,275
 7.00 - 8.99%.....................      178,124            --         146,585           72,685          397,394
 9.00 - 10.99%....................        7,534            --              --               --            7,534
                                    -----------    ----------      ----------      -----------      -----------
                                    $37,499,383    $2,689,717      $2,358,971      $ 1,584,762      $44,132,833
                                    ===========    ==========      ==========      ===========      ===========
</TABLE>

                                       20
<PAGE>

     The following table indicates the amount of the Bank's certificates of
deposit and other time deposits of $100,000 or more by time remaining until
maturity as of September 30, 1999.

<TABLE>
<CAPTION>
                                                 Certificates
                Maturity Period                   of Deposit
                ---------------                  ------------
                <S>                              <C>
                Three months or less...........   $13,833,557
                Over three through six months..     9,520,026
                Over six through 12 months.....       400,000
                Over 12 months.................       700,945
                                                  -----------
                   Total.......................   $24,454,528
                                                  ===========
</TABLE>

     Borrowings.  Savings deposits are the primary source of funds for the
Bank's lending activities and other general business purposes.  However, during
periods when the supply of lendable funds cannot meet the demand for such loans,
the FHLB System seeks to provide a portion of the funds necessary through loans,
called "advances," to its members.  Advances may be on a secured or unsecured
basis, depending on a number of factors, including the purpose for which the
funds are being borrowed and existing advances outstanding.  During the year
ended September 30, 1999 the Bank secured advances totaling $2.65 million.

Subsidiary Activities

     As a federal savings bank, Citizens Federal is permitted to invest an
amount equal to 2% of its assets in subsidiaries with an additional investment
of 1% of assets where such investment serves primarily community, inner-city,
and community development purposes.  Under such limitations, as of September 30,
1999, Citizens Federal was authorized to invest up to approximately $2.88
million in the stock of or loans to subsidiaries.

     On August 21, 1987, the Bank formed Citizens Service Corporation by
acquiring 1,000 shares of $1.00 par value common stock of the new entity,
representing all shares authorized. Citizens Service Corporation did not engage
in any activities during the fiscal year ended September 30, 1999.

     Federal regulations require SAIF-insured savings institutions to give the
FDIC and the Director of OTS 30 days prior notice before establishing or
acquiring a new subsidiary, or commencing any new activity through an existing
subsidiary. Both the FDIC and the Director of OTS have authority to order
termination of subsidiary activities determined to pose a risk to the safety or
soundness of the institution.  In addition, federal regulations require savings
institutions to deduct the amount of their investments in and extensions of
credit to subsidiaries engaged in activities not permissible to national banks
from capital in determining regulatory capital compliance.  See "Regulation --
Regulatory Capital Requirements."

                                       21
<PAGE>

Yields Earned and Rates Paid

     The pre-tax earnings of Citizens Federal depend significantly upon the
spread between the income it receives from its loan and investment portfolios
and its cost of money, consisting of the interest paid on deposit accounts and
borrowings.

     Mortgage loans have historically been primarily long-term with fixed rates
of interest. Savings institutions have had difficulty in adjusting the average
rate of interest received on their loan portfolios at the same pace as changes
in their costs of funds represented by the interest such institutions pay on
deposit accounts and borrowings.  Interest rates paid on deposits have become
increasingly volatile in recent years due to a shortening of the term on most
accounts, deregulation of interest rates payable, and the relating of interest
rates paid to market rates of interest.

<TABLE>
<CAPTION>

                                                                At         Year Ended September 30,
                                                           September 30,   -------------------------
                                                               1999         1999              1998
                                                               ----        ------           --------
<S>                                                        <C>             <C>              <C>
Weighted-average yield on loans granted during
  the period............................................       8.28%        8.39%              8.72%
Weighted-average yield on all loans during the
  period................................................       8.61         8.70               8.88
Weighted-average yield on mortgage-backed
  securities held to maturity during the period.........       6.27         6.15               6.34
Weighted-average yield on mortgage-backed
  securities available for sale during the period.......       5.98         5.64               5.84
Weighted-average yield on investment securities
 held to maturity during the period.....................       5.20         6.56               7.45
Weighted-average yield on investment securities
  available for sale during the period (1)..............       5.67         5.70               6.12
Weighted average yield on other interest-earning
  assets during  the period.............................       5.38         4.75               5.57
Weighted-average yield on all interest earnings
  assets during the period..............................       7.31         7.41               7.50
Weighted-average effective rate paid on savings
  deposits during the period............................       3.64         3.70               3.90
Weighted-average rate on Federal Home Loan
  Bank advances.........................................       5.68         5.68               5.93
Weighted-average rate paid on all interest-
  bearing liabilities for the period....................       3.92         3.93               4.13
Gross margin (spread between weighted-average yield
  on all interest-earning assets during the period and
  total weighted-average rate paid on all interest-
  bearing  liabilities for the period)..................       3.39         3.48               3.37
Net yield (net interest income as a percentage of
  average interest-earning assets)......................       3.39         3.56               3.44
</TABLE>

-------------------
(1) Excluding mortgage backed securities.

                                       22
<PAGE>

     The Bank has been relatively successful in maintaining the spread between
yields earned and rates paid due to an unusually high percentage of deposits
being held in passbook and regular savings accounts rather than in higher rate
fixed term certificates.  In fiscal 1999 the spread between yields earned and
rates paid increased .11% as the Bank's yield on interest-earning assets
decreased by .09% and the rates paid on interest-bearing liabilities decreased
by .20%.

Key Operating Ratios

     The table below sets forth certain performance ratios of the Bank for the
periods indicated.

<TABLE>
<CAPTION>
                                                                  At September 30,
                                                                 -----------------
                                                                  1999       1998
                                                                 ------     ------
<S>                                                              <C>        <C>
Return on Assets (Net Income Divided by Average Total Assets)..    .42%        .23%
Return on Equity (Net Income Divided by Average Equity)........   4.95        2.77
Equity-to-Assets Ratio (Average Equity Divided by Average
 Total Assets).................................................   8.46        8.58
Dividend Payout Ratio (Dividends Paid Divided By Net Income)...  25.29       44.53
</TABLE>

                                       23
<PAGE>

Rate/Volume Analysis

     The following table shows, for the periods indicated, the change in
interest income and interest expense for each major component of interest-
earning assets and interest-bearing liabilities attributable to (i) changes in
volume (change in volume multiplied by old rate), (ii) changes in rates (change
in rate multiplied by old volume) and (iii) changes in rate/volume (change in
rate multiplied by the change in volume). The change in interest income or
expense attributable to the combination of rate variance and volume variance is
included in the table, but such amount has also been allocated between, and
included in the amounts shown as, changes due to rate and changes due to volume.
The allocation of the change due to rate/volume variance was made in proportion
to the amounts due solely to rate variance and solely to volume variance, which
amounts are not included in the table.

<TABLE>
<CAPTION>
                                                                   Year Ended September 30,
                             ------------------------------------------------------------------------------------------------------
                                      1999   vs.   1998                 1998   vs.   1997                 1997   vs.  1996
                             ----------------------------------  ------------------------------   ---------------------------------
                                  Increase (Decrease)Due to         Increase (Decrease)Due to         Increase(Decrease) Due to
                             ----------------------------------  ------------------------------   ---------------------------------
                                 Volume       Rate       Total      Volume     Rate      Total      Volume       Rate       Total
                             ----------- ----------  ----------  ---------  ---------  --------   ---------   ---------   ---------
<S>                          <C>         <C>         <C>         <C>        <C>        <C>        <C>         <C>         <C>
Interest Income:
  Loans....................   $  (6,312)  $  (9,015)  $ (15,327) $ 812,174  $ (91,708) $ 720,466  $ 464,675   $ (53,022)  $ 411,653
  Mortgage-backed
  securities...............      57,721     (78,479)    (20,758)   321,907    (87,390)   234,517    (96,794)     10,899     (85,895)
  Investments..............     (28,924)   (137,450)   (166,374)  (424,825)   (39,068)  (463,893)   (50,756)      4,572     (46,184)
  Other....................     (53,983)    (31,547)    (85,530)    41,343     (4,981)    36,362   (196,289)    (34,956)   (231,245)
                              ---------   ---------   ---------  ---------  ---------  ---------  ---------   ---------   ---------

Total interest-earning
assets.....................     (31,498)   (256,491)   (287,989)   750,599   (223,147)   527,452    120,836     (72,507)     48,329
                              ---------   ---------   ---------  ---------  ---------  ---------  ---------   ---------   ---------

Interest expense:
 Deposits..................     (71,090)   (146,789)   (217,879)   (48,249)   (76,783)  (125,032)    (2,139)   (104,593)   (106,732)
 FHLB advances.............     (30,913)    (24,467)    (55,380)   482,145     40,785    522,930     64,714          --      64,714
                              ---------   ---------   ---------  ---------  ---------  ---------  ---------   ---------   ---------
  Total interest bearing
  liabilities..............    (102,003)   (171,256)   (273,259)   433,896    (35,998)   397,898     62,575    (104,593)    (42,018)

Net interest income........   $  70,505   $ (85,235)  $ (14,730) $ 316,703  $(187,149) $ 129,554  $  58,261   $  32,086   $  90,347
                              =========   =========   =========  =========  =========  =========  =========   =========   =========
</TABLE>

Note:  Variance in interest due to both rate and volume has been allocated in
proportion to the relationship of the absolute dollar amounts of the change in
each.


                                       24
<PAGE>

Regulation of the Bank

     General. Citizens Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, Citizens Federal is subject to
broad federal regulation and oversight extending to all its operations. The Bank
is a member of the FHLB of Atlanta and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). Citizens Federal is a member of the SAIF and the deposits of Citizens
Federal are insured by the FDIC. As a result, the FDIC has certain regulatory
and examination authority over Citizens Federal.

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

     Recently Enacted Legislation. On November 12, 1999, the Gramm-Leach-Bliley
("G-L-B") Act was signed into law. The G-L-B Act authorizes affiliations between
banking, securities and insurance firms and authorizes bank holding companies
and national banks to engage in a variety of new financial activities. Among the
new activities that will be permitted to bank holding companies are securities
and insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The Federal Reserve Board, in consultation with the Department
of Treasury, may approve additional financial activities. National bank
subsidiaries will be permitted to engage in similar financial activities but
only on an agency basis unless they are one of the 50 largest banks in the
country. National bank subsidiaries will be prohibited from insurance
underwriting, real estate development and merchant banking. The G-L-B Act,
however, prohibits future acquisitions of existing unitary savings and loan
holding companies, like the Company, by firms that are engaged in commercial
activities and prohibits the formation of new unitary holding companies.

     The G-L-B Act also imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.

     The G-L-B Act contains significant revisions to the Federal Home Loan Bank
System.  The G-L-B Act imposes new capital requirements on the Federal Home Loan
Banks and authorizes them to issue two classes of stock with differing dividend
rates and redemption requirements.  The G-L-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute $300 million to
pay interest on certain government obligations in favor of a 20% of net earnings
formula.

                                       25
<PAGE>

The G-L-B Act expands the permissible uses of Federal Home Loan Bank advances by
community financial institutions (under $500 million in assets) to include
funding loans to small businesses, small farms and small agri-businesses. The
G-L-B Act makes membership in the Federal Home Loan Bank System voluntary for
federal savings associations.

     The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act.  The G-L-B Act also eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

     The Company is unable to predict the impact of the G-L-B Act on its and the
Bank's operations and competitive environment at this time.  Although the G-L-B
Act reduces the range of companies with which the Company may affiliate, it may
facilitate affiliations with companies in the financial services industry.

     Federal Home Loan Bank System.  The Bank is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB").  The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of Atlanta,
the Bank is required to acquire and hold shares of capital stock in the FHLB of
Atlanta in an amount at least equal to 1% of the aggregate unpaid principal of
its home mortgage loans, home purchase contracts, and similar obligations at the
end of each year, or 1/20 of its advances (borrowings) from the FHLB of Atlanta,
whichever is greater.  The Bank was in compliance with this requirement with an
investment in FHLB of Atlanta stock at September 30, 1999 of $592,500.

     The FHLB of Atlanta serves as a reserve or central bank for its member
institutions within its assigned district.  It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System.  It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Atlanta.  Long-term advances
may only be made for the purpose of providing funds for residential housing
finance.  At September 30, 1999, the Bank had $11.85 million in advances
outstanding from the FHLB of Atlanta.  See "Sources of Funds -- Borrowings."

     Liquidity Requirements.  The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptance,
highly rated corporate debt and commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus short-
term borrowings.  Monetary penalties may

                                       26
<PAGE>

be imposed for failure to meet liquidity requirements. The average regulatory
liquidity ratio of the Bank, with respect to liquid assets, for the month of
September 1999 was 50.15%.

     Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution shall be restricted to those of a national bank; (iii) the
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank.  In addition, any company that controls
a savings institution that fails to qualify as a QTL will be required to
register as, and to be deemed, a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 (the "BHCA") and other
statutes applicable to bank holding companies.  Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for both a national bank
and a savings institution and immediately repay any outstanding FHLB advances
(subject to safety and soundness considerations).

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

     A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months.  A savings institution that fails to maintain
Qualified Thrift Lender status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired.  At September 30,
1999, the Bank qualified as a QTL.

                                       27
<PAGE>

     Uniform Lending Standards. Under OTS regulations, savings banks must adopt
and maintain written policies that establish appropriate limits and standards
for extensions of credit that are secured by liens or interests in real estate
or are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. The real estate lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies
(the "Interagency Guidelines") that have been adopted by the federal bank
regulators.

     The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner-occupied, one- to four-family property), the limit
is 85%.  Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.

     The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based on the support provided by other credit
factors.  The aggregate amount of loans in excess of the supervisory loan-to-
value limits, however, should not exceed 100% of total capital and the total of
such loans secured by commercial, agricultural, multifamily and other non-one-
to-four family residential properties should not exceed 30% of total capital.
The supervisory loan-to-value limits do not apply to certain categories of loans
including loans insured or guaranteed by the U.S. government and its agencies or
by financially capable state, local or municipal governments or agencies, loans
backed by the full faith and credit of a state government, loans that are to be
sold promptly after origination without recourse to a financially responsible
party, loans that are renewed, refinanced or restructured without the
advancement of new funds, loans that are renewed, refinanced or restructured in
connection with a workout, loans to facilitate sales of real estate acquired by
the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.

     Management believes that the Bank's current lending policies conform to the
Interagency Guidelines and does not anticipate that the Interagency Guidelines
will have a material effect on its lending activities.

                                       28
<PAGE>

     Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and a combination of
core and "supplementary" capital equal to 8% of "risk-weighted" assets. In
addition, the OTS has adopted regulations which impose certain restrictions on
savings institutions that have a total risk-based capital ratio that is less
than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a
ratio of Tier 1 capital to adjusted total assets of less than 4% (or 3% if the
institution is rated Composite 1 under the OTS examination rating system). See
"--Prompt Corrective Regulatory Action." For purposes of these regulations, Tier
1 capital has the same definition as core capital. Core capital is defined as
common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, minority interests in the equity
accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts
and pledged deposits and "qualifying supervisory goodwill." Core capital is
generally reduced by the amount of the savings institution's intangible assets
for which no market exists. Limited exceptions to the rule requiring the
deduction of intangible assets are provided for mortgage servicing rights,
purchased credit card relationships and qualifying supervisory goodwill held by
an eligible savings institution. Tangible capital is given the same definition
as core capital, but does not include qualifying supervisory goodwill and is
reduced by the amount of all the savings institution's intangible assets with
only a limited exception for subscribed for mortgage servicing rights and
subscribed for credit card relationships.

     Both core and tangible capital are further reduced by an amount equal to
the savings institution's debt and equity investments in subsidiaries engaged in
activities not permissible for national banks, other than subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities and depository institutions or holding companies therefor.  At
September 30, 1999, the Bank had no such investments.

     Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles increased by certain
goodwill amounts and by a pro rated portion of the assets of unconsolidated
includible subsidiaries in which the savings institution holds a minority
interest.  Adjusted total assets are reduced by the amount of assets that have
been deducted from capital, the savings institution's investments in includible
subsidiaries that must be netted against capital under the capital rules and,
for purposes of the core capital requirement, qualifying supervisory goodwill.
At September 30, 1999, the Company's adjusted total assets for purposes of the
core and tangible capital requirements, were $96.89 million.

     In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital, provided the amount of supplementary capital used does not exceed the
savings association's core capital.  Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loan and lease loss allowances.  Total core and supplementary capital are
reduced by the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements, equity investments and that
portion of land loans

                                       29
<PAGE>

and non-residential construction loans in excess of 80% loan-to-value ratio,
other than those deducted from core and tangible capital. As of September 30,
1999, the Bank had $122,335 in equity investments for which OTS regulations
required a deduction from total capital.

     The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight.  Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%.  Consumer and residential construction loans are assigned a risk weight of
100%.  Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by the FNMA or FHLMC are assigned a 20% risk weight.  Cash and
U.S. Government securities backed by the full faith and credit of the U.S.
Government are given a 0% risk weight. As of September 30, 1999, the Bank's
risk-weighted assets were approximately $46.6 million.

                                       30
<PAGE>

     The table below provides information with respect to the Bank's compliance
with its regulatory capital requirements at September 30, 1999.

<TABLE>
<CAPTION>
                                                     Percent
                                        Amount     of Assets(1)
                                       ---------  --------------
                                          (Dollars in thousands)
     <S>                               <C>        <C>
     Tangible capital................     $8,165         8.44%
     Tangible capital requirement....      1,453         1.50
                                          ------        -----
       Excess........................     $6,812         7.03%
                                          ======        =====

     Core capital....................     $8,165         8.44%
     Core capital requirement (2)....      2,907         3.00
                                          ------        -----
       Excess........................     $5,358         5.53%
                                          ======        =====

     Risk-based capital..............     $8,295        17.78%
     Risk-based capital requirement..      3,733         8.00
                                          ------        -----
       Excess........................     $4,562         9.78%
                                          ======        =====
</TABLE>

--------------------
/(1)/  Based on adjusted total assets for purposes of the tangible capital and
       core capital requirements, and risk-weighted assets for purpose of the
       risk-based capital requirement.
/(2)/  Reflects the capital requirement which the Bank must satisfy to avoid
       regulatory restrictions that may be imposed pursuant to prompt corrective
       action regulations.

     The risk-based capital standards of the OTS require savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital.  A savings institution's interest rate risk is measured in terms
of the sensitivity of its "net portfolio value" to changes in interest rates.
Net portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities.  A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than 2.0% of the current estimated economic value of
its assets.  A savings institution with a greater than normal interest rate risk
will be required to deduct from total capital, for purposes of calculating its
risk-based capital requirement, an amount (the "interest rate risk component")
equal to one-half the difference between the institution's measured interest
rate risk and the normal level of interest rate risk, multiplied by the economic
value of its total assets.

     The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS.  The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the

                                       31
<PAGE>

institution's Thrift Financial Report filed two quarters earlier.  Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports.  However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis and may be subject to
an additional capital requirement based upon its level of interest rate risk as
compared to its peers.  The Bank has determined that, on the basis of current
financial data, it will not be deemed to have more than normal level of interest
rate risk under the rule and believes that it will not be required to increase
its total capital as a result of the rule.

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

     At September 30, 1999, the Bank exceeded all regulatory minimum capital
requirements.

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

                                       32
<PAGE>

restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.

     Under regulations jointly adopted by the federal banking regulators,
including the OTS, a depository institution's capital adequacy for purposes of
the prompt corrective action rules is determined on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets).  Under the regulations, a depository
institution that is not subject to an order or written directive by its primary
federal regulator to meet or maintain a specific capital level will be deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater.  An "adequately capitalized" depository
institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the institution has a composite
1 CAMELS rating).  An "undercapitalized" depository institution is an
institution that has: (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMELS
rating). A "significantly undercapitalized" institution is defined as a
depository institution that has: (i) a total risk-based capital ratio of less
than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii)
a leverage ratio of less than 3.0%.  A "critically undercapitalized" institution
is defined as a depository institution that has a ratio of "tangible equity" to
total assets of less than 2.0%.  "Tangible equity" is defined as core capital
plus the institution's outstanding cumulative perpetual preferred stock (and
related surplus) less all intangibles other than qualifying supervisory goodwill
and certain purchased mortgage servicing rights.  The appropriate federal
banking agency may reclassify a well capitalized depository institution as
adequately capitalized and may require an adequately capitalized or
undercapitalized institution to comply with the supervisory actions applicable
to institutions in the next lower capital category (but may not reclassify a
significantly undercapitalized institution as critically undercapitalized) if
the OTS determines, after notice and an opportunity for a hearing,

                                       33
<PAGE>

that the depository institution is in an unsafe or unsound condition or that the
institution has received and not corrected a less-than-satisfactory rating for
any CAMELS rating category. As of September 30, 1999, the Bank was classified as
"well capitalized" under the prompt corrective action regulations.

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

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

     Historically, institutions with SAIF-assessable deposits, like the Bank,
were required to pay higher deposit insurance premiums than institutions with
deposits insured by the Bank Insurance Fund ("BIF").  In order to recapitalize
the SAIF and address the premium disparity, in November 1996 the FDIC imposed a
one-time special assessment on institutions with SAIF-assessable deposits based
on the amount determined by the FDIC to be necessary to increase the reserve
levels of the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995.  As a result of the
special assessment the Bank incurred a pre-tax expense of $493,687 during fiscal
year 1996.

     The special assessment recapitalized the SAIF, and as a result, the FDIC
lowered the SAIF deposit insurance assessment rates to zero for "well
capitalized" institutions with the highest supervisory ratings and 0.27% of
insured deposits for institutions in the highest risk-based premium category.
Until December 31, 1999, SAIF-insured institutions will be required to pay
assessments

                                       34
<PAGE>

to the FDIC at the rate of 6.5 basis points to help fund interest payments on
certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to finance takeovers of insolvent thrifts. During
this period, BIF members will be assessed for these obligations at the rate of
1.3 basis points. After December 31, 1999, both BIF and SAIF members will be
assessed at the same rate for FICO payments, or sooner if the two funds are
merged.

     Substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive. In the past the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Bank. The
reduction of SAIF deposit insurance premiums effectively eliminated this
disparity and could have the effect of increasing the net earnings of the Bank
and restoring the competitive equality between BIF-insured and SAIF-insured
institutions.

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

     Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $47.8 million of transaction accounts plus 10% on the remainder.
Because required reserves must be maintained in the form of vault cash or in a
non interest-bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. As of September 30, 1999, the Bank met its reserve requirements.

     Dividend Restrictions.  Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of the Bank's
conversion to stock form.  In addition, the Bank, as a savings institution
subsidiary of a

                                       35
<PAGE>

savings and loan holding company, is required by OTS regulations to give the OTS
at least 30 days' prior notice of any proposed declaration of dividends to the
Company.

     OTS regulations impose additional limitations on the payment of dividends
and other capital distributions (including stock repurchases and cash mergers)
by the Bank. Under these regulations, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulations) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, without OTS approval, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of: (i) 75% of its net income for the previous four quarters; or (ii) up
to 100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital ratio requirements but not in excess of fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. A Tier 1 Association that has been
notified by the OTS that it is in need of more than normal supervision will be
treated as either a Tier 2 or Tier 3 Association. The Bank is a Tier 1
Association. Under the OTS' prompt corrective action regulations, the Bank is
also prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition. See "--Prompt Corrective
Regulatory Action."

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

     Transactions with Related Parties.  Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act.  An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution.  In a holding company context, the parent holding company
of a savings institution (like the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution.  Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with

                                       36
<PAGE>

any one affiliate to an amount equal to 10% of such institution's capital stock
and surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans, purchase
of assets, issuance of a guarantee and similar other types of transactions. In
addition to the restrictions imposed by Sections 23A and 23B, OTS regulations
provide that no savings institution may (i) make a loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
institution. Section 106 of the BHCA which applies to the Bank, prohibits the
Bank from extending credit to or offering any other services, or fixing or
varying the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the institution
or certain of its affiliates or not obtain services of a competitor of the
institution, subject to certain exceptions.

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

     Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval by the board of directors
of the depository institution for such extensions of credit to executive
officers of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers.  In addition, Section 106 of the BHCA prohibits extensions of credit
to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms

                                       37
<PAGE>

as those prevailing at the time for comparable transactions with other persons
and does not involve more than the normal risk of repayment or present other
unfavorable features.

     Safety and Soundness Standards.  Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for depository institutions under its authority.  On July 10, 1995,
the federal banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans.  The final rule and the guidelines went into effect on August
9, 1995.  The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business.  The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions.  If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines.  A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan.  Failure to submit or implement a compliance plan may
subject the institution to regulatory sanctions.  Management believes that the
Bank already meets substantially all the standards adopted in the interagency
guidelines, and therefore does not believe that implementation of these
regulatory standards will materially affect the Bank's operations.

     Under federal banking regulations, savings institutions must also adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements.  A savings institution's  real estate lending policy
must reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Real Estate Lending Guidelines") that have been adopted by the
federal banking regulators.  The Real Estate Lending Guidelines, among other
things, call upon savings institutions to establish internal loan-to-value
limits for real estate loans that are not in excess of the specified loan-to-
value limits for the various types of real estate loans.  The Real Estate
Lending Guidelines state, however, that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.

     Additionally, under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate.  On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings.  Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its

                                       38
<PAGE>

operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. Management believes that
the asset quality and earnings standards, in the form proposed by the banking
agencies, would not have a material effect on the Bank's operations.

     Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods.  The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA.  The CRA requires the OTS, in connection
with the examination of the Bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.

     The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA.  Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community.  The Bank was examined for CRA
compliance in 1999 and received a rating of outstanding.

Regulation of the Company

     General.  The Company is a unitary savings and loan holding company as
defined by the Home Owners' Loan Act ("HOLA").  As such, the Company is
registered with the OTS and is subject to OTS regulation, examination,
supervision and reporting requirements.  As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Company and affiliates thereof.  The Company is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Securities and Exchange Commission ("SEC") under federal securities laws.

     Activities Restrictions.  The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company.  However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution.  Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the QTL test, then such unitary

                                       39
<PAGE>

holding company shall also presently become subject to the activities
restrictions applicable to multiple holding companies and, unless the savings
institution requalifies as a QTL within one year thereafter, register as, and
become subject to, the restrictions applicable to a bank holding company. See
"--Regulation of the Bank -- Qualified Thrift Lender Test."

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

     Restrictions on Acquisitions.  The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary.  Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.

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

                                       40
<PAGE>

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

Federal and State Taxation

     Federal Taxation.  Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code (the "Code") are permitted to establish
reserves for bad debts and to make annual additions thereto which may, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes.  The amount of the bad debt reserve deduction
for "non-qualifying loans" is computed under the experience method.  For tax
years beginning before December 31, 1995, the amount of the bad debt reserve
deduction for "qualifying real property loans" (generally loans secured by
improved real estate) may be computed under either the experience method or the
percentage of taxable income method (based on an annual election).  If a saving
association elected the latter method, it could claim, each year, a deduction
based on a percentage of taxable income, without regard to actual bad debt
experience.

     Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings and loan association over a period of years.

     Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, and "large"
associations, i.e., the quarterly average of the association's total assets or
of the consolidated group of which it is a member, exceeds $500 million for the
year, may no longer be entitled to use the experience method of computing
additions to their bad debt reserve.  A "large" association must use the direct
write-off method for deducting bad debts, under which charge-offs are deducted
and recoveries are taken into taxable income as incurred. If the Bank is not a
"large" association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take into
income) over a six-year period its applicable excess reserves, i.e, the balance
of its reserves for losses on qualifying loans and nonqualifying loans, as of
the close of the last tax year beginning before January 1, 1996, over the
greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would

                                       41
<PAGE>

have been the balance of such reserves as of the close of the last tax year
beginning before January 1, 1996, had the bank always computed the additions to
its reserves using the experience method. Postponement of the recapture is
possible for a two-year period if an association meets a minimum level of
mortgage lending for 1996 and 1997. As of September 30, 1999, the Bank's bad
debt reserve subject to recapture over a six-year period totaled approximately
$89,000.

     If an association ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the association no longer qualifies as a bank.  The balance of the pre-
1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.

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

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

     The Bank has been audited by the IRS or the statute of limitations has
expired with respect to consolidated federal income tax returns through the year
ended September 30, 1991.  With respect to years examined by the IRS, either all
deficiencies have been satisfied or sufficient reserves have been established to
satisfy asserted deficiencies.  In the opinion of management, any examination of
still open returns (including returns of predecessors of, or entities merged
into, the Bank) would not result in a deficiency which could have a material
adverse effect on the financial condition of the Bank.

     Alabama Taxation.  Under the laws of Alabama, the Bank is required to pay
an annual excise tax at the rate of 6% of net income as defined in the statute.
This tax is imposed on financial institutions such as the Bank in lieu of a
general state business corporate income tax.

     The Bank's state tax returns have not been audited during the past five
years.

                                       42
<PAGE>

Competition

     The Bank faces strong competition in the attraction of savings deposit (its
primary source of lendable funds) and in the origination of real estate loans.
Its most direct competition for savings deposits has historically come from
other savings institutions and from commercial banks located in its primary
market area. Particularly in times of high interest rates, however, the Bank
faces additional significant competition for investors' funds from short-term
money market securities and other corporate and government securities yielding
interest rates which are in some instances higher than those permitted to be
paid under federal regulations by savings institutions on savings deposits. It
also faces competition for savings from credit unions. The Bank's competition
for real estate loans comes principally from other savings institutions,
commercial banks, mortgage banking companies, insurance companies and other
institutional lenders.

     The Bank competes for loans principally through the interest rates and loan
fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers, and home builders. It competes for savings by
offering depositors a wide variety of savings accounts, a convenient office
location, tax-deferred retirement programs, and other miscellaneous services.

     The competitive environment created by federal legislation in the early
1980's gives thrift institutions such as Citizens Federal the opportunity to
compete in many areas previously reserved for other types of financial
intermediaries, mainly commercial banks. However, the new powers may also
increase the Bank's cost of doing business, and the establishment of the money
market account and the elimination of rate controls may continue to increase the
Bank's cost of funds, especially during periods of high interest rates. The
competitive pressures among thrift institutions, commercial banks and other
financial institutions have increased significantly and will continue to do so.
FIRREA has also increased competitive pressures because of the increased deposit
insurance premiums paid by SAIF-insured institutions.

Personnel

     As of September 30, 1999, the Bank had 32 full-time employees and three
part-time employees.  The employees are not represented by a collective
bargaining group.  The Bank considers its relations with its employees to be
excellent.

                                       43
<PAGE>

Executive Officers Who Are Not Directors

     W. Kent McGriff is 42 years old and joined Citizens Federal in February
1987.  He currently serves as Executive Vice President and Chief Financial
Officer.  From May 1985 through January 1987 he worked in real estate
development and management, and from September 1982 through April 1985 he worked
for a private accounting firm as a public accountant.

     Cynthia D. Nalls is 34 years old and joined Citizens Federal in June 1993.
She currently serves as Executive Vice President and Chief Operations Officer.
Prior to coming to the Bank, she was an audit manager at KPMG Peat Marwick LLP
where she served financial institutions throughout the state of Alabama
including Citizens Federal.

Item 2.  Properties
         ----------

     In October 1996, the Bank moved to a new 19,000 square foot main office
located at 1700 Third Avenue North, Birmingham, which it owns.  The Bank's
investment in its main office and adjacent property was $3,266,721 at September
30, 1999.

     In May 1984, the Bank opened a branch office in Eutaw, Alabama. This owned
branch office has approximately 3,200 square feet and the net book value of the
Bank's investment in this branch at September 30, 1999 was $177,824.

     In July 1991, the Bank opened a branch office in Birmingham, Alabama at
2100 Bessemer Road. This owned branch office has approximately 2,800 square feet
of space and the net book value of the Bank's investment in this branch as of
September 30, 1999 was $304,553.

     As of September 30, 1999, the net book value of the Bank's investment in
the premises, furniture and equipment owned by the Bank was $3,749,098.

     Citizens Federal utilizes the services of Fiserv in connection with its
record-keeping and accounting functions.

                                       44
<PAGE>

Item 3.  Legal Proceedings
         -----------------

     The Company is involved in various real estate foreclosure actions wherein
it enforces its rights as lender, and is involved in certain other legal matters
in its day-to-day operations which are not material to its results of
operations.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1999.


                                    PART II

Item 5.  Market for the Registrant's Common Stock and Related Security Holder
         --------------------------------------------------------------------
         Matters
         -------

     The information contained under the caption "Market Information, Capital
Stock and Retained Earnings" in the Annual Report to Stockholders for the fiscal
year ended September 30, 1999 ("Annual Report") is incorporated herein by
reference.

Item 6.  Management's Discussion and Analysis of Financial Condition and
         ---------------------------------------------------------------
         Results of Operations
         ---------------------

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.

Item 7.  Financial Statements and Supplementary Data
         -------------------------------------------

     The financial statements contained in the Annual Report, which are listed
under Item 13 herein, are incorporated herein by reference.

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

     The registrant, within the 24 months before the date of the most recent
financial statements, has not had any disagreements with its independent auditor
on accounting and financial disclosures, and has not changed its accountants.

                                       45
<PAGE>

                                   PART III

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

     For information on the Company's Directors, the information contained under
the section "Proposal I -- Election of Directors" in the Proxy Statement is
incorporated herein by reference.

     For information on the Company's Executive Officers, reference is made to
"Part I --Business -- Executive Officers Who Are Not Directors" which is
incorporated herein by reference.

     For information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, the information contained under the section
captioned "Beneficial Ownership Reports" in the Proxy Statement is incorporated
herein by reference.

Item 10.  Executive Compensation
          ----------------------

     The information contained under the section captioned "Proposal I --
Election of Directors --Executive Compensation" in the Proxy Statement is
incorporated herein by reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management
          --------------------------------------------------------------

     (a)  Security Ownership of Certain Beneficial Owners

          Information required by this item is incorporated herein by reference
          to the section captioned "Voting Securities and Principal Holders
          Thereof" in the Proxy Statement

     (b)  Security Ownership of Management

          Information required by this item is incorporated herein by reference
          to the sections captioned "Proposal I -- Election of Directors" and
          "Voting Securities and Principal Holders Thereof" in the Proxy
          Statement.

     (c)  Changes In Control

          The Company is not aware of any arrangements, including any pledge by
          any person of securities of the Company, the operation of which may at
          a subsequent date result in a change in control of the Company.

Item 12.  Certain Relationships and Related Transactions
          ----------------------------------------------

     The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Transactions
with Management" in the Proxy Statement.

                                       46
<PAGE>

                                    PART IV

Item 13.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
          ----------------------------------------------------------------

     (a)(1)  Financial Statements - The Financial Statements and Independent
             --------------------
Auditors' Report included in the 1999 Annual Report, listed below, are
incorporated herein by reference.

     Independent Auditors' Report

     Financial Statements:
          Consolidated Balance Sheets as of September 30, 1999 and 1998
          Consolidated Statements of Operations for Each of the Years in the
               Three-Year Period Ended September 30, 1999
          Consolidated Statements of Stockholders' Equity for Each of the Years
               in the Three -Year Period Ended September 30, 1999
          Consolidated Statements of Cash Flows for Each of the Years in the
               Three-Year Period Ended September 30, 1999
          Notes to Consolidated Financial Statements.

     (a)(2)  Financial Statement Schedules - All financial statement schedules
             -----------------------------
have been omitted as the required information is either inapplicable or included
in the Financial Statements or related notes.

     (a)(3)  Exhibits - The following exhibits are either filed or attached as
             --------
part of this report or are incorporated herein by reference.

     Exhibit 3.1    Certificate of Incorporation of CFS Bancshares, Inc. *
     Exhibit 3.2    Bylaws of CFS Bancshares, Inc. *
     Exhibit 10.1   Citizens Federal Savings Bank Stock Option Plan *
     Exhibit 10.2   Employment Contract of President Bunny Stokes, Jr. *
     Exhibit 13     1999 Annual Report to Stockholders
     Exhibit 21     Subsidiaries of the Registrant
     Exhibit 27     Financial Data Schedule
____________
*    Incorporated by reference to the Company's Annual Report on Form 10-KSB
     for the fiscal year ended September 30, 1998.

     (b)  Reports on Form 8-K - No current report on Form 8-K was filed during
          -------------------
the last quarter of the fiscal year covered by this Form 10-KSB.

     (c)  Exhibits - Exhibits to this Form 10-KSB are attached hereto.
          --------

     (d)  Financial Statements Schedules - None.
          ------------------------------

                                       47
<PAGE>

                                  SIGNATURES

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

                                        CITIZENS FEDERAL SAVINGS BANK


Date:  December 22, 1999                By: /s/ Bunny Stokes, Jr.
                                           ---------------------------------
                                           Bunny Stokes, Jr., President
                                           Duly Authorized Representative

     Pursuant to the requirements of the Securities Exchange Act 2 of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


By: /s/ Bunny Stokes, Jr.                             Date:  December 22, 1999
    ---------------------------------------------
        Bunny Stokes, Jr.
        Principal Executive Officer and Director


By: /s/ W. Kent McGriff                               Date:  December 22, 1999
    ---------------------------------------------
        W. Kent McGriff
        Principal Financial and Accounting Officer


By: /s/ Rev. John T. Porter                           Date:  December 22, 1999
    ---------------------------------------------
        Rev. John T. Porter, Director


By: /s/ Odessa Woolfolk                               Date:  December 22, 1999
    ---------------------------------------------
        Odessa Woolfolk, Director


By: /s/ James W. Coleman                              Date:  December 22, 1999
    ---------------------------------------------
        James W. Coleman, Director