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, 2000

                                       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)

             DELAWARE                                   63-0367958
-----------------------------------        -------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

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

       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:  $7,163,329

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  August  2000),  was  approximately  $1,138,582 as of
December  8,  2000.  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 8, 2000, there were issued and outstanding  130,000 shares of the
registrant's common stock, of which 68,455 shares were held by affiliates.


                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of Annual  Report  to  Stockholders  for the  Fiscal  Year  Ended
     September 30, 2000. (Parts I and II)
2.   Portions of Proxy  Statement for the 2001 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

                                       1
<PAGE>
strong in recent  years.  The Bank has also been active in using excess funds to
purchase mortgage-backed securities during periods of reduced loan demand.

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, 2000, there were  approximately  three savings
institutions  and 19 commercial  banks  located in its primary  market area with
total assets of $146 billion. The Company's assets at September 30, 2000 totaled
$100.6 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 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.  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.

         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.


                                       2
<PAGE>
<TABLE>
<CAPTION>
 Change in                                                                          At September 30, 2000
Interest Rate                      Board Limit                                  -----------------------------
(Basis Points)                      % Change           $ Amount                 $ Change            % Change
--------------                      --------           --------                 --------            --------
                                                                            (Dollars in Thousands)

      <S>                              <C>             <C>                      <C>                    <C>
      +300                             (70)            $   9,622                $ (5,694)              (37)%
      +200                             (50)               11,478                  (3,838)              (25)
      +100                             (25)               13,004                  (2,312)              (15)
         0                              --                15,316                      --                --
      -100                             (25)               16,063                     747                 5
      -200                             (50)               16,112                     796                 5
      -300                             (70)               15,638                     322                 2

</TABLE>
     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, 2000, a risk-based  capital  deduction of  approximately  $900,000
would have been required.

     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,
2000  and  passbook  decay  rates  determined  by the Bank  from a core  deposit
analysis.


                                       3
<PAGE>


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 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, 2000,  the maximum  amount the Bank was  permitted to
lend  to  one  borrower  was  $1,294,743.  At  that  date,  the  Bank's  largest
loan-to-one-borrower  was  $993,552,  which  was  secured  by a  non-residential
property located in the Bank's primary market area.


                                       4
<PAGE>

     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,
                                                          -------------------------------------------------------
                                                                   2000                              1999
                                                          ----------------------        -------------------------
                                                          Amount             %          Amount                %
                                                          ------           -----        ------              -----
<S>                                                       <C>               <C>           <C>               <C>
Type of Loan:
Conventional loans on existing real estate properties..   $ 48,187,825      95.02%        43,392,722        94.53
Loans for other purposes (share loans,
 home improvement loans, commercial
 loans and consumer loans).............................      2,525,091       4.98          2,511,484         5.47
                                                          ------------      -----       ------------       ------
     Total loans.......................................   $ 50,712,916     100.00%      $ 45,904,206       100.00%
                                                          ============     ======       ============       ======

Type of Security:
  Residential:
   Single family (1)...................................   $ 32,274,026      63.64%      $ 29,353,617        63.95%
   Other dwelling units................................        150,528        .30            942,201         2.05
  Non-residential (2)..................................     15,763,271      31.08         14,039,105        30.58
  Savings accounts.....................................        790,867       1.56            856,566         1.87
  Other................................................      1,734,224       3.42            712,717         1.55
                                                          ------------     ------       ------------       ------
     Total loans.......................................   $ 50,712,916     100.00%      $ 45,904,206       100.00%
                                                          ============     ======       ============       ======
<FN>
--------------
(1)  Includes  construction/permanent  loans with a gross  balance of $1,206,850
     and $1,080,701 and undisbursed loans in process of $145,106 and $830,085 at
     September 30, 2000 and 1999, respectively.
(2)  Includes  construction/permanent  loans on church  properties  with a gross
     balance  of  $1,834,924  and  $1,285,000  undisburseed  loans in process of
     $1,371,277 and $630,908 at September 30, 2000 and 1999, respectively.
</FN>
</TABLE>

     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  $3,066,319 in residential  mortgage loans during the year ended
September  30,  2000,  all of which were fixed rate  loans.  The Bank  purchased
$393,947 of fixed rate loans and $2,722,167 of adjustable rate mortgages  during
the year ended September 30, 2000.  Purchased  adjustable rate mortgage loans in
the Bank's  loan  portfolio  amounted to 10.76% of the total loan  portfolio  at
September 30, 2000.

     The Bank extends loans on single-family dwellings in an amount up to 90% of
the fair value of the  property  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 value of the  property  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


                                       5
<PAGE>
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 2000 fiscal year
amounted to $4,984,000, 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,
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 $1,110,938 for
the year ended  September  30,  2000.  As of September  30,  2000,  consumer and
commercial  loans  constituted  approximately  4.98% 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


                                       6
<PAGE>
of Directors Stokes and Greene,  Chief Operating  Officer Nalls and Loan Officer
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.

         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,
                                                              -----------------------------------
                                                                   2000                  1999
                                                              -------------         -------------
<S>                                                           <C>                   <C>
Loan Originated:
 Conventional Real Estate Loans:
  Loans on Existing Property................................  $   1,818,980         $     694,531
  Construction/Permanent....................................      1,575,000             1,352,701
  Loans Refinanced..........................................      3,545,401             3,855,250
 Other Loans................................................      1,110,938               951,169
                                                              -------------         -------------
Total Loans Originated......................................  $   8,050,319         $   6,853,651
                                                              =============         =============

Loans Purchased:
 Real Estate Loans..........................................  $   3,116,114         $          --
                                                              -------------         -------------
Total Loans Purchased.......................................  $   3,116,114         $          --
                                                              =============         =============

Loans Sold:
Whole Loans.................................................  $          --         $          --
                                                              -------------         -------------

Total Loans Sold............................................  $          --         $          --
                                                              =============         =============

Other Loan Activity:

Loans Foreclosed Upon.......................................  $      75,998         $     127,604
                                                              -------------         -------------

Total Net Loan Activity (exclusive of loan repayments)......  $  11,090,435         $   6,726,047
                                                              =============         =============

</TABLE>


                                       7
<PAGE>

     Maturity  of  Loan  Portfolio.  The  following  table  sets  forth  certain
information  at  September  30, 2000  regarding  the dollar  amount of loans and
mortgage-backed securities maturing (or repricing) in the Bank's portfolio based
on their  contractual  maturity  date.
<TABLE>
<CAPTION>
                                                                    Due
                                          Due During              Through             Due After
                                        the Year Ending        5 Years After        5 Years After
                                      September 30, 2001    September 30, 2000   September 30, 2000       Total
                                      ------------------    ------------------   ------------------      -------
<S>                                   <C>                     <C>                   <C>              <C>
Single family residential
    mortgage loans..................  $ 2,099,022             $ 7,320,230           $ 23,005,302     $  32,424,554
Multifamily and nonresidential
    mortgage loans..................    1,051,273               3,814,231             10,897,767        15,763,271
Consumer and commercial loans.......      650,902               1,735,904                138,285         2,525,091
                                      -----------             -----------           ------------     -------------
     Total..........................  $ 3,801,197             $12,870,365           $ 34,041,354     $  50,712,916
                                      ===========             ===========           ============     =============
</TABLE>


     The following table sets forth the dollar amount of all loans due after one
year from  September  30,  2000 which  have  predetermined  maturities  and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                    Predetermined      Floating or
                                                        Rate         Adjustable Rates          Total
                                                    -------------    ----------------          -----

<S>                                                 <C>                <C>                <C>
Single family residential mortgage loans.........   $ 26,564,549       $ 3,760,983        $   30,325,532
Multifamily and nonresidential mortgage loans....     14,529,869           182,129            14,711,998
Consumer and commercial loans....................        884,189           990,000             1,874,189
                                                    ------------       -----------        --------------
     Total.......................................   $ 41,978,607       $ 4,933,112        $   46,911,719
                                                    ============       ===========        ==============
</TABLE>

         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 for  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, 2000 was $113,791.  The total
amount of deferred loan fees at September 30, 2000,  was $635,214.  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 for the Bank. For more  information on the Bank's loan fees and
other fees see Note 4 of the Notes to Financial Statements.


                                       8
<PAGE>
         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  is  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 after 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.


                                       9
<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,
                                                             ------------------------------
                                                                 2000              1999
                                                             -----------        -----------
<S>                                                          <C>                <C>
Loans accounted for on a non-accrual basis:
  Real Estate:
     Residential..........................................   $   928,369        $  392,085
     Non-residential......................................       349,127           743,741
  Consumer and commercial.................................       477,515           255,854
                                                             -----------        ----------
           Total of nonaccrual............................   $ 1,755,011        $1,391,680
                                                             ===========        ==========

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.................................   $ 1,755,011        $1,391,680
                                                             ===========        ==========
Percentage of total assets................................          1.75%             1.45%
Other non-performing assets(1)............................   $    86,237        $   47,270
                                                             ===========        ==========
<FN>
-------------------------
(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 its cost basis.
</FN>
</TABLE>


         During the year ended  September  30, 2000,  gross  interest  income of
approximately  $66,594  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, 2000.

         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, 2000
totaled $1,755,011,  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, 2000, nonaccruals included 17 real estate loans and
eight consumer loans with individual  balances  outstanding ranging from $457 to
$269,392.

         The Bank  has two  significant  problem  loans.  The  most  significant
problem loan is a single family residential loan with a balance of $206,505. The
house  was  damaged  by fire  and the Bank is  awaiting  a  settlement  from the
insurance  company.  A  second  problem  loan is one with a 66%  Small  Business
Administration  ("SBA")  guarantee  and a balance of $153,239 at


                                       10
<PAGE>
September 30, 2000. 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, 2000 are two residential  properties  acquired  through  foreclosure  with a
carrying value of $48,929 and four repossessed automobiles with a carrying value
of $37,308.

         Except as discussed  above, at September 30, 2000,  there were no loans
that  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, 2000,  the Bank had $748,261 in
assets  classified  as  substandard,  $0 in assets  classified  as doubtful  and
$54,572 in assets classified as loss.

         At September 30, 2000 the Bank's  substandard  assets  consisted of six
loans on  residential  properties  and eight loans on  commercial  property  and
consumer  loans with an aggregate  balance of $662,164 and balances  outstanding
ranging from $420 to $195,888 and real estate owned and repossessed  automobiles
of $86,097.

         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,


                                       11
<PAGE>
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
estimates  of the  historical  loan  loss  experience,  evaluation  of  economic
conditions,  and periodic reviews of the Bank's loan portfolio. At September 30,
2000,  the Bank's  reserve for loan losses was $342,156.  During the fiscal year
ended  September  30, 2000 the Bank made an addition to the  provision  for loan
losses of  $50,000.  Also during  fiscal  2000,  the Bank  reduced its loan loss
provision by $154,500 for loans charged off in prior years.

     Management  believes  that the current  allowance  for loan losses which is
equal to .67% of gross  loans and 19.50% 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,
                                                             -----------------------------
                                                                 2000              1999
                                                             ------------       ----------
<S>                                                          <C>                <C>
Real Estate:
  Balance at Beginning of Period..........................   $   310,157        $ 553,797
                                                             -----------        ---------
Loans Charged-Off:
  Residential mortgage....................................        44,573          257,501
  Consumer................................................        39,828           69,089
                                                             -----------        ---------
Total Charge-Offs.........................................        84,401          326,590
                                                             -----------        ---------
Total Recoveries (1)......................................       220,900           37,950
                                                             -----------        ---------
Net Loans Charged-Off (Recovered).........................      (136,499)         288,640
                                                             -----------        ---------
Provision for (Recovery of) Loan Losses...................      (104,500)          45,000
                                                             ------------       ---------
Balance at End of Period (Recoveries).....................   $   342,156        $ 310,157
                                                             ===========        =========
Ratio of Net Charge-Offs to Average
Loans Outstanding During the Period.......................          (.30)%            .66%
<FN>
-------------
(1)  Includes  recoveries on  residential  mortgages of $180,587 and on consumer
     loans of $40,313.
</FN>
</TABLE>

         For more  information  on the Bank's loan loss  allowance see Note 4 of
the Notes to Financial Statements.


                                       12
<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,
                                          ------------------------------------------------
                                                 2000                         1999
                                          ----------------------   -----------------------
                                                     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...........................  $ 121,982     63.94%       $ 82,401     63.95%
  Non-residential.......................     91,097     31.08         170,078     30.58
Commercial business.....................     48,537      2.38          31,243      1.98
Consumer................................     80,540      2.60          26,435      3.49
                                          ---------     -----        --------     -----
    Total allowance for loan losses.....  $ 342,156    100.00%       $310,157    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, 2000,
the Bank's  liquidity  ratio (liquid assets as a percentage of net  withdrawable
savings deposits and current borrowings) was 27.54%.

         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,  2000,  the  Bank  had  $500,000  and  $3,027,879
classified  as  investment  and  mortgage-backed  securities  held to  maturity,
respectively,  and  $8,529,274  and  $30,846,887  classified as  investment  and
mortgage-backed securities available for sale, respectively.

                                       13
<PAGE>
           The following  table sets forth an analysis of the Bank's  investment
securities at the dates indicated.
<TABLE>
<CAPTION>
                                                                           September 30,
                                                                 ----------------------------------
                                                                      2000(1)           1999(1)
                                                                 --------------     ---------------

<S>                                                             <C>                <C>
U.S. Treasury and U.S. Government agencies....................  $   9,029,274      $   7,233,203
Mortgage backed securities ...................................     30,816,902         27,592,465
Other securities..............................................      3,057,864          3,708,398
                                                                -------------      -------------
                                                                $  42,904,040      $  38,534,066
                                                                =============      =============
<FN>
_____________
(1)  Includes  securities  available  for sale which had an  amortized  cost and
     approximate  fair value of $40,099,815 and  $39,376,161,  respectively,  at
     September  30,  2000 and  $34,389,879  and  $33,604,258,  respectively,  at
     September 30, 1999, and securities  held to maturity which had an amortized
     cost  and   approximate   market  value  of  $3,527,879   and   $3,506,924,
     respectively  at  September  30,  2000 and  $4,929,808  and  $4,919,789  at
     September 30, 1999.  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.
</FN>
</TABLE>

                                       14
<PAGE>


     The following table sets forth the contractual maturities, par values, fair
values  and  average  yields  for the Bank's  investment  securities  (excluding
mortgage-backed securities) at September 30, 2000.
<TABLE>
<CAPTION>
                                                                   At September 30, 2000(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................................  $   500,000   5.89%    $ 3,000,000    5.63%   $5,970,000     6.23%
Other investments...........................    3,102,882   6.37              --      --            --       --
                                              -----------            -----------            ----------
     Total..................................  $ 3,602,882            $ 3,000,000            $5,970,000
                                              ===========            ===========            ==========

<CAPTION>


                                                                   At September 30, 2000(1)
                                                   ------------------------------------------------------
                                                     More than Ten Years       Total Investment Portfolio
                                                   --------------------       ---------------------------
                                                    Par         Average         Par      Fair     Average
                                                   Value         Yield         Value     Value     Yield
                                                   ------       -------       ------     ------   -------
<S>                                               <C>            <C>        <C>         <C>          <C>
U.S. Government and agency
 obligations.................................     $      --      -- %       $9,470,000  $ 9,025,634  6.02%
Other investments............................            --      --          3,102,882    3,057,864  6.37
                                                  ---------                -----------  -----------
     Total...................................     $      --                $12,572,882  $12,083,498
                                                  =========                ===========  ===========
<FN>
-------------
(1)  Includes  investment  securities  available  for sale at September 30, 2000
     with an  amortized  cost and fair  value of  $11,907,546  and  $11,587,138,
     respectively, and securities held to maturity at September 30, 2000 with an
     amortized  cost of  $500,000  and  market  value of  $496,360.  Contractual
     maturities  of  securities  available  for sale at September 30, 2000 range
     from ten months to eight 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.
</FN>
</TABLE>


                                       15
<PAGE>

     Maturity of Mortgage-Backed  Securities Portfolio. The following table sets
forth certain information at September 30, 2000 regarding the dollar amount (par
value) 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 more than
                                       Due in one       than one year     two years to     three years      five years to
                                      year or less      to two years      three years     to five years      ten years
                                      after 9-30-00     after 9-30-00     after 9-30-00    after 9-30-00     after 9-30-00
                                      -------------     -------------    ---------------  ---------------   ---------------

<S>                                    <C>             <C>               <C>              <C>               <C>
Mortgage-backed securities..........   $ 1,298,716     $   642,728       $   687,920      $   1,524,594     $  3,513,535
CMOs................................       435,800         466,682           499,787          1,108,617        2,483,242
                                       -----------     -----------       -----------      -------------     ------------
                                       $ 1,734,516     $ 1,109,410       $ 1,187,707      $   2,633,211     $  5,996,777
                                       ===========     ===========       ===========      =============     ============


<CAPTION>

                                       Due more than
                                       ten years to     Due more than
                                       fifteen years    fifteen years
                                       after 9-30-00    after 9-30-00        Total
                                      ---------------  ---------------    -----------

<S>                                     <C>             <C>               <C>
Mortgage-backed securities..........    $ 2,634,107     $ 5,677,863       $15,979,463
CMOs................................      2,844,635       7,193,163        15,031,926
                                        -----------     -----------       -----------
                                        $ 5,478,742     $12,871,026       $31,011,389
                                        ===========     ===========       ===========
</TABLE>


         The following table sets forth the dollar amount of all mortgage-backed
securities due after one year from September 30, 2000.
<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 ..............$ 9,706,071            $ 4,974,676
         CMOs.....................................  2,893,745             11,702,381
                                                  -----------            -----------
                                                  $12,599,816            $16,677,057
                                                  ===========            ===========
</TABLE>


                                       16
<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, 2000 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>
  .43%             None                   NOW Accounts                     $      --     $  8,755,081       11.47%
 2.27              None                   "Super NOW" Accounts                 1,000        4,699,077        6.15
 2.49              None                   Passbook Accounts                        5       16,464,242       21.57
 5.09              91 Days                Certificates                           500       18,572,682       24.33
 5.93              14 days                Jumbo Certificates(1)              100,000       27,585,937       36.14
  --               N/A                    Accrued interest on deposits            --          257,422         .34
                                                                                         ------------      ------
                                               TOTAL                                     $ 76,334,441      100.00%
                                                                                         ============      ======
<FN>
___________
(1)      Includes Time Deposit Open Account
</FN>
</TABLE>


         The following  table sets forth the savings  deposit  activities of the
Bank for the periods indicated.
<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                                 --------------------------------
                                                                       2000               1999
                                                                 ----------------   -------------

<S>                                                             <C>                <C>
Deposits......................................................  $ 177,448,161      $ 129,937,594
Withdrawals...................................................    175,799,596        131,309,513
                                                                -------------      -------------
     Net (decrease) before interest credited..................     (1,648,565)        (1,371,919)
Interest credited.............................................      2,802,683          2,660,053
                                                                -------------      -------------
  Net increase in savings deposits............................  $   1,154,118      $   1,288,134
                                                                =============      =============
</TABLE>

                                       17
<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
                                                2000        Deposits    (Decrease)           1999         Deposits
                                           --------------   --------    ----------      --------------    --------

<S>                                        <C>                  <C>     <C>             <C>                <C>
NOW checking accounts....................  $  8,755,081         11.47%  $    369,974    $  8,385,107       11.15%
Jumbo certificates.......................    27,585,937         36.14      3,131,409      24,454,528       32.53
"Super" NOW checking accounts............     4,699,077          6.15       (339,070)      5,038,147        6.70
Passbook and regular savings.............    16,464,242         21.57       (991,219)     17,455,461       23.22
Certificates of deposit..................    18,572,682         24.33     (1,105,623)     19,678,305       26.18
Accrued interest on deposits.............       257,422           .34         88,647         168,775         .22
                                           ------------        ------   ------------    ------------      ------
TOTAL....................................  $ 76,334,441        100.00%  $  1,154,118    $ 75,180,323      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,
                                                                 ------------------------------
                                                                    2000               1999
                                                                 ----------         ----------

<S>                                                           <C>               <C>
 3.00 -  4.99%..............................................  $   7,827,489     $   33,258,630
 5.00 -  6.99%..............................................     37,609,287         10,469,275
 7.00 -  8.99%..............................................        721,843            397,394
 9.00 - 10.99%..............................................             --              7,534
                                                              -------------     --------------
TOTAL.......................................................  $  46,158,619     $   44,132,833
                                                              =============     ==============
</TABLE>

         The following  table sets forth the amount and maturities of the Bank's
time deposits at September 30, 2000.
<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%..................   $   5,711,580  $   1,476,543  $     465,300   $     174,066  $   7,827,489
 5.00 - 6.99%..................      32,769,569      2,747,710      1,596,820         495,188     37,609,287
 7.00 - 8.99%..................         443,507        156,965        102,370          19,001        721,843
                                  -------------  -------------  -------------   -------------  -------------
                                  $  38,924,656  $   4,381,218  $   2,164,490   $     688,255  $  46,158,619
                                  =============  =============  =============   =============  =============
</TABLE>

                                       18
<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, 2000.

                                                                   Certificates
Maturity Period                                                     of Deposit
---------------                                                    ------------

Three months or less ....................................          $17,142,844
Over three through six months ...........................            9,625,945
Over six through 12 months ..............................              317,148
Over 12 months ..........................................              500,000
                                                                   -----------
      Total .............................................          $27,585,937
                                                                   ===========


         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, 2000 the Bank secured advances totaling $3.10 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,
2000,  Citizens  Federal  was  authorized  to invest up to  approximately  $3.01
million in the stock of or loans to subsidiaries.

         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."

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


                                       19
<PAGE>

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,   ------------------------
                                                                     2000         2000                1999
                                                                     ----         ----               -----
<S>                                                                  <C>            <C>                 <C>
Weighted-average yield on loans granted during
  the period..................................................       8.69%          8.64%            8.39%
Weighted-average yield on all loans during the
  period......................................................       8.66           8.58             8.70
Weighted-average yield on investment securities
 held to maturity during the period...........................       6.08           6.19             6.56
Weighted-average yield on investment securities
  available for sale during the period........................       6.79           6.53             5.70
Weighted average yield on other interest-earning
  assets during  the period...................................       5.96           5.67             4.75
Weighted-average yield on all interest earnings
  assets during the period....................................       7.75           7.54             7.41
Weighted-average effective rate paid on savings
  deposits during the period..................................       4.11           3.78             3.70
Weighted-average rate on Federal Home Loan
  Bank advances...............................................       6.08           5.89             5.68
Weighted-average rate paid on all interest-
  bearing liabilities for the period..........................       4.43           4.06             3.93
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)........................       3.32           3.48             3.48
Net yield (net interest income as a percentage of
  average interest-earning assets)............................       3.32           3.60             3.56

</TABLE>

                                       20
<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 2000 the spread  between yields
earned and rates paid remained the same as the Bank's yield on  interest-earning
assets  increased  by .13% and the rates  paid on  interest-bearing  liabilities
increased by .13%.

Key Operating Ratios

         The table below sets forth certain  performance  ratios of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
                                                                               Year Ended
                                                                              September 30,
                                                                             ----------------
                                                                              2000       1999
                                                                             -----       ----

<S>                                                                           <C>         <C>
Return on Assets (Net Income Divided by Average Total Assets)..........       .52%        .42%
Return on Equity (Net Income Divided by Average Equity)................      6.40        4.95
Equity-to-Assets Ratio (Average Equity Divided by Average
 Total Assets).........................................................      8.11        8.46
Dividend Payout Ratio (Dividends Paid Divided By Net Income)...........     19.53       25.29
</TABLE>

                                       21
<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,
                                            -------------------------------------------------------------------------------
                                                         2000 vs. 1999                          1999  vs.  1998
                                            --------------------------------------  -------------------------------------
                                                  Increase (Decrease) Due to            Increase (Decrease) Due to
                                            --------------------------------------  -------------------------------------
                                              Volume          Rate        Total       Volume         Rate        Total
                                            ----------    -----------  -----------  ----------   -----------  -----------
<S>                                         <C>           <C>          <C>          <C>          <C>          <C>
Interest Income:
  Loans...................................  $    64,219   $  (129,054) $   (64,835) $    (6,312) $    (9,015) $   (15,327)
  Mortgage-backed securities..............      157,267       104,788      262,055       57,721      (78,479)     (20,758)
  Investments.............................      121,436       113,024      234,460      (28,924)    (137,450)    (166,374)
  Other...................................          342        20,658       21,000      (53,983)     (31,547)     (85,530)
                                            -----------   -----------  -----------  -----------  -----------  -----------
Total interest-earning assets.............      343,264       109,416      452,680      (31,498)    (256,491)    (287,989)
                                            -----------   -----------  -----------  -----------  -----------  -----------

Interest expense:
 Deposits.................................       56,677        51,782      108,459      (71,090)    (146,789)    (217,879)
 FHLB advances............................      143,766        20,352      164,118      (30,913)     (24,467)     (55,380)
                                            -----------   -----------  -----------  -----------  -----------  -----------
  Total interest bearing liabilities......      200,443        72,134      272,577     (102,003)    (171,256)    (273,259)

Net interest income.......................  $   142,831   $    37,282  $   180,103  $    70,505  $   (85,235) $   (14,730)
                                            ===========   ===========  ===========  ===========  ===========  ===========

<CAPTION>
                                                     Year Ended September 30,
                                            ---------------------------------------
                                                           1998  vs.  1997
                                             -------------------------------------
                                                    Increase (Decrease) Due to
                                             -------------------------------------
                                                Volume          Rate        Total
                                             ----------     ----------  ----------
<S>                                          <C>             <C>         <C>
Interest Income:
  Loans...................................   $   812,174     $ (91,708)  $  720,466
  Mortgage-backed securities..............       321,907       (87,390)     234,517
  Investments.............................      (424,825)      (39,068)    (463,893)
  Other...................................        41,343        (4,981)      36,362
                                             -----------   ------------ -----------
Total interest-earning assets.............       750,599      (223,147)     527,452
                                             -----------   ------------ -----------

Interest expense:
 Deposits.................................       (48,249)      (76,783)    (125,032)
 FHLB advances............................       482,145        40,785      522,930
                                             -----------   -----------  -----------
  Total interest bearing liabilities......       433,896       (35,998)     397,898

Net interest income.......................   $   316,703   $  (187,149) $   129,554
                                             ===========   ===========  ===========
</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.


                                       22
<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.

         Financial  Modernization  Legislation.  On November 12, 1999, President
Clinton  signed  legislation  which  could  have a  far-reaching  impact  on the
financial services  industry.  The  Gramm-Leach-Bliley  ("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  Secretary  of  the  Treasury,  may  approve  additional
financial activities.  The G-L-B Act, however,  prohibits future acquisitions of
existing unitary savings and loan holding companies,  like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary savings and loan holding companies formed after May 4, 2000.

         The G-L-B Act 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  became
effective in November 2000 with full compliance required by July 1, 2001.

         The G-L-B Act contains  significant  revisions to the FHLB System.  The
G-L-B Act imposes new capital  requirements  on the FHLBs 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 FHLBs
annually   contribute  $300  million  to  pay  interest  on  certain  government
obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the
permissible  uses of FHLB advances by community  financial  institutions  (under
$500  million in


                                       23
<PAGE>
assets) to include  funding  loans to small  businesses,  small  farms and small
agri-businesses.  The G-L-B  Act  makes  membership  in the FHLB  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  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, 2000 of $747,500.

     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  and  small  businesses,  small  farms  and  small  agri-businesses.  At
September 30, 2000, the Bank had $14.95 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 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 2000 was 27.54%.

                                       24
<PAGE>

     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;  and  (iii)
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.

         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, 2000, the Bank qualified as a QTL.

                                       25
<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.

                                       26
<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 4% (3% if the  institution is rated Composite 1
under  the OTS  examination  rating  system)  of  adjusted  total  assets  and a
combination of core and  "supplementary"  capital equal to 8% of "risk-weighted"
assets.  In addition,  OTS  regulations  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.  At September 30,
2000, 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, 2000, the Bank's adjusted total assets for purposes of the core
and tangible capital requirements, were $101.29 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,  a portion of the savings  association's general loan
and  lease  loss  allowances  and  up to  45%  of  unrealized  gains  on  equity
securities.  Total core and  supplementary  capital are reduced by the amount of
capital instruments held by other depository institutions pursuant to reciprocal
arrangements, equity


                                       27
<PAGE>
investments  and that  portion  of land loans 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, 2000, the Bank had $116,932 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, 2000, the Bank's
risk-weighted assets were approximately $49.99 million.

         The  table  below  provides  information  with  respect  to the  Bank's
compliance with its regulatory capital requirements at September 30, 2000.
<TABLE>
<CAPTION>
                                                                                    Percent
                                                                        Amount     of Assets(1)
                                                                        ------     ------------
                                                                        (Dollars in thousands)

          <S>                                                         <C>               <C>
          Tangible capital..........................................  $     8,610       8.50%
          Tangible capital requirement..............................        1,519       1.50
                                                                      -----------      -----
             Excess.................................................  $     7,091       7.00%
                                                                      ===========     ======

          Core capital..............................................  $     8,610       8.50%
          Core capital requirement (2)..............................        3,039       3.00
                                                                      -----------      -----
             Excess.................................................  $     5,571       3.50%
                                                                      ===========     ======

          Risk-based capital........................................  $     8,780      17.60%
          Risk-based capital requirement............................        3,997       8.00
                                                                      -----------      -----
             Excess.................................................  $     4,783       9.60%
                                                                      ===========     ======
<FN>
____________
(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.
</FN>
</TABLE>

         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


                                       28
<PAGE>
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
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, 2000,  the Bank exceeded all  regulatory  minimum  capital
requirements.

     Prompt  Corrective  Regulatory  Action.  Under FDICIA,  the federal banking
regulators  are  required  to  take  prompt  corrective  action  if  an  insured
depository  institution  fails to satisfy certain minimum capital  requirements,
including a leverage  limit,  a risk-based  capital  requirement,  and any other
measure deemed  appropriate by the federal banking  regulators for measuring the
capital  adequacy  of  an  insured  depository  institution.  All  institutions,
regardless


                                       29
<PAGE>
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 does not submit an
acceptable  capital  restoration plan, may be subject to regulatory  demands for
recapitalization,  broader  application of  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 may 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 provisions.  If an institution's ratio
of tangible  capital to total assets falls below the  "critical  capital  level"
established by the appropriate  federal banking regulator,  the institution will
be subject to conservatorship or receivership within specified time periods.

         Under the  implementing  regulations,  the federal banking  regulators,
including the OTS,  generally  measure an institution's  capital adequacy on the
basis of its 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).  The following table shows the capital ratios
required for the various prompt corrective action categories.
<TABLE>
<CAPTION>
                                                     Adequately                                    Significantly
                           Well Capitalized          Capitalized         Undercapitalized        Undercapitalized
                           ----------------          -----------         ----------------        ----------------
<S>                        <C>                       <C>                 <C>                     <C>
Total risk-based
    capital ratio          10.0% or more             8.0% or more        Less than 8.0%          Less than 6.0%
Tier 1 risk-based
    capital ratio           6.0% or more             4.0% or more        Less than 4.0%          Less than 3.0%
Leverage ratio              5.0% or more             4.0% or more *      Less than 4.0% *        Less than 3.0%
<FN>
-----------
*  3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>

                                       30
<PAGE>

         A "critically  undercapitalized"  savings  institution is defined as an
institution  that has a ratio of "tangible  equity" to total assets of less than
2.0%.  Tangible  equity is defined as core  capital  plus  cumulative  perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory  goodwill and certain purchased  mortgage servicing rights. The FDIC
may reclassify a well capitalized savings 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 FDIC determines, after notice
and an opportunity for a hearing,  that the savings  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.

         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.



                                       31
<PAGE>
     The  SAIF  deposit  insurance  assessment  rate set by the FDIC is 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 paid assessments 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,  BIF members
were  assessed  for these  obligations  at the rate of 1.3 basis  points.  After
December 31,  1999,  both BIF and SAIF members are assessed at the same rate for
FICO payments.

     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.

     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  $44.3  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,  2000,  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


                                       32
<PAGE>
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.

     Savings  institutions  must  submit  notice  to the OTS  prior to  making a
capital  distribution  if (a)  they  would  not be  well-capitalized  after  the
distribution,  (b) the distribution would result in the retirement of any of the
institution's  common  or  preferred  stock or debt  counted  as its  regulatory
capital,  or (c) the institution is a subsidiary of a holding company. A savings
institution  must make  application to the OTS to pay a capital  distribution if
(x)  the  institution  would  not  be  adequately   capitalized   following  the
distribution,  (y) the institution's  total  distributions for the calendar year
exceeds the  institution's net income for the calendar year to date plus its net
income (less distributions) for the preceding two years, or (z) the distribution
would  otherwise  violate  applicable  law or regulation or an agreement with or
condition imposed by the OTS.

     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


                                       33
<PAGE>
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  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


                                       34
<PAGE>
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 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


                                       35
<PAGE>
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 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


                                       36
<PAGE>
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  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


                                       37
<PAGE>
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).

         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 ss.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.

                                       38
<PAGE>

         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 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,  2000,  the
Bank's bad debt reserve  subject to  recapture  over a six-year  period  totaled
approximately $69,000.

         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


                                       39
<PAGE>
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, 1992. 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.

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


                                       40
<PAGE>
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, 2000,  the Bank had 31 full-time  employees and two
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining  group.  The Bank  considers its  relations  with its employees to be
excellent.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

         W. Kent McGriff is 43 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 35 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 $3,204,138 at September
30, 2000.

         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, 2000 was $169,804.

         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, 2000 was $270,894.

         As of September 30, 2000,  the net book value of the Bank's  investment
in the premises, furniture and equipment owned by the Bank was $3,644,836.

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



                                       41
<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, 2000.


                                     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,  2000  ("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.



                                       42
<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.



                                       43
<PAGE>

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.

                                     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  2000  Annual  Report,  listed  below,  are
incorporated herein by reference.

         Independent Auditors' Report

         Financial Statements:

               Consolidated Balance Sheets as of September 30, 2000 and 1999

               Consolidated  Statements of  Operations  for Each of the Years in
                    the Three-Year Period Ended September 30, 2000
               Consolidated Statements of Stockholders' Equity and Comprehensive
                    Income (Loss) for Each of the Years in the Three-Year Period
                    Ended September 30, 2000
               Consolidated  Statements  of Cash  Flows for Each of the Years in
                    the Three-Year Period Ended September 30, 2000
               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     2000 Annual Report to Stockholders
         Exhibit 21     Subsidiaries of the Registrant
         Exhibit 27     Financial Data Schedule
[FN]
------------
o        Incorporated by reference to the Company's Annual Report on Form 10-KSB
         for the fiscal year ended September 30, 1998.
</FN>



                                       44
<PAGE>

     (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.
         ------------------------------


                                       45
<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 29, 2000                 By:/s/ Bunny Stokes
                                              ----------------------------------
                                              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 29, 2000
    ---------------------------------------------
    Bunny Stokes, Jr.
    Principal Executive Officer and Director



By: /s/ W. Kent McGriff                                Date:  December 29, 2000
    ---------------------------------------------
    W. Kent McGriff
    Principal Financial and Accounting Officer


By: /s/ Rev. John T. Porter                            Date:  December 29, 2000
    ---------------------------------------------
    Rev. John T. Porter, Director

By: /s/ Odessa Woolfolk                                Date:  December 29, 2000
    ---------------------------------------------
    Odessa Woolfolk, Director


By: /s/ James W. Coleman                               Date:  December 29, 2000
    ---------------------------------------------
    James W. Coleman, Director



                                       46