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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(MARK ONE)
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934.

For the fiscal year ended September 30, 2001
                                       OR

[X]  TRANSITION REPORT UNDER 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)

         Issuer'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 $.01 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  Exchange  Act 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 is not  contained  in  this  form,  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. [ ]

State issuer's revenues for its most recent fiscal year: $7,672,915

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 December 2001),  was  approximately  $1,142,652 as of
December  10,  2001.  Solely  for the  purposes  of this  calculation,  the term
"affiliate" refers to all directors and executive officers of the registrant and
all stockholders  beneficially  owning more than 5% of the  registrant's  common
stock.

As of December 10, 2001, there were issued and outstanding 139,220 shares of the
registrant's common stock, of which 77,455 shares were held by affiliates.

Transitional Small Business Disclosure Format (check one): Yes      No X
                                                               ---    ---


                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Proxy  Statement for the 2002 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 at the  direction  of Citizens  Federal  Savings Bank  ("Citizens
Federal" or 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. As the successor  issuer to the Bank, the Company's common stock,
par value  $.01 per share  (the  "Common  Stock")  became  registered  under the
Securities  Exchange Act of 1934 on June 30,  1998.  The Company is a registered
savings and loan holding  company.  The Company has no significant  assets other
than its  investment  in 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 ("FHLB") System.  The Bank's savings accounts are insured
up to the applicable limits by the Savings Association  Insurance Fund ("SAIF"),
which is administered by the Federal Deposit Insurance  Corporation ("FDIC"). On
March 28, 1983, the Bank's charter was restated when it converted from a federal
mutual  savings and loan  association  to a federal  capital  stock  association
through the sale and issuance of 130,000 shares of common stock.  On October 10,
1983, the Bank converted from a federal stock savings and loan  association to a
federal  stock  savings  bank and on June  30,  1998  became  the  wholly  owned
subsidiary of the Company.  The Bank is subject to supervision and regulation by
the OTS and the FDIC.

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

     The  Bank's  primary  business  is the  promotion  of  thrift  through  the
solicitation of savings accounts from its depositors and the general public, and
the  promotion  of home  ownership  through  the  granting  of  mortgage  loans,
principally to finance the purchase and/or construction of residential dwellings
located  within its  principal  lending area in Jefferson  and Greene  Counties,
Alabama.  The  real  estate  market  in the  Birmingham,  Alabama  area has been
relatively strong in recent years. The Bank has also been active in using excess
funds to purchase  mortgage-backed  securities  during  periods of reduced  loan
demand.
                                       1
<PAGE>

MARKET AREA

     The Bank operates in the Birmingham, Alabama Metropolitan area where it has
two offices and in Greene  County  where it has one  office.  According  to FDIC
data,  there were 28  FDIC-insured  institutions  in the  Birmingham MSA and two
FDIC-insured institutions in Greene County. According to such data, the Bank had
a deposit market share of less than 1.0% in the Birmingham MSA and 20% in Greene
County.

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, 2001
 INTEREST RATE                     BOARD LIMIT                                  -----------------------------
(BASIS POINTS)                      % CHANGE           $ AMOUNT                 $ CHANGE             % CHANGE
--------------                      --------           --------                 --------             --------
                                                            (DOLLARS IN THOUSANDS)

      <S>                              <C>             <C>                      <C>                     <C>
      +300                             (70)%           $  14,825                $   (219)               (1)%
      +200                             (50)               15,391                     347                 2
      +100                             (25)               15,807                     763                 5
         0                              --                15,044                      --
      -100                             (25)               13,839                  (1,205)               (8)
      -200                             (50)               11,800                  (3,244)              (22)
      -300                             (70)                9,193                  (5,851)              (39)
</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.

     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,
2001  and  passbook  decay  rates  determined  by the Bank  from a core  deposit
analysis.

LENDING ACTIVITIES

     General.   The  principal   lending   activity  of  Citizens   Federal  has
historically  consisted of the origination of conventional loans (loans that are
neither   insured  nor  partially   guaranteed   by   government   agencies)  on
single-family  residential  properties.  To a much lesser degree,  the Bank 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

                                       3
<PAGE>
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, 2001, the maximum amount the Bank was permitted to lend to
one   borrower   was   $1,398,570.    At   that   date,   the   Bank's   largest
loan-to-one-borrower  was  $1,249,809,  which was  secured by a  non-residential
property located in the Bank's primary market area.

     Loan  Portfolio  Composition.  Set forth below is selected data relating to
the composition of the Bank's loan portfolio on the dates indicated:
<TABLE>
<CAPTION>
                                                                             SEPTEMBER  30,
                                                          --------------------------------------------------------
                                                                       2001                         2000
                                                          ------------------------      --------------------------
                                                             AMOUNT           %            AMOUNT             %
                                                          ------------     -------      ------------       -------
<S>                                                       <C>               <C>         <C>                 <C>
Real estate mortgage:
   Residential.........................................   $ 26,457,539      61.34%      $ 31,217,704        61.56%
   Nonresidential......................................     12,824,972      29.73         13,928,347        27.46
Construction...........................................      2,500,000       5.80          3,041,774         6.00
Consumer installment...................................      1,050,227       2.43          1,318,057         2.60
Commercial.............................................        302,661       0.70          1,207,034         2.38
                                                          ------------     ------       ------------       ------
     Gross loans.......................................     43,135,399     100.00%        50,712,916       100.00%
                                                                           ======                          ======
Plus unearned premium on loans purchased...............          4,726                        18,877
Less:
   Undisbursed portion of loans in process.............      1,085,403                     1,516,383
   Unamortized loan origination fees...................        548,387                       635,214
   Allowance for loan losses...........................        396,768                       342,156
                                                          ------------                  ------------
     Net loans.........................................   $ 41,109,567                  $ 48,238,040
                                                          ============                  ============
</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

                                       4
<PAGE>
originated  $1,311,858  in  residential  mortgage  loans  during  the year ended
September  30,  2001,  all of  which  were  fixed-rate  loans.  The Bank did not
purchase  any  loans  during  the  year  ended  September  30,  2001.  Purchased
adjustable-rate mortgage loans in the Bank's loan portfolio amounted to 8.01% of
the total loan portfolio at September 30, 2001.

     The Bank extends loans on single-family dwellings in an amount up to 90% of
the value of the property as determined by a qualified  appraiser.  In addition,
loans up to 95% of the  value  are  extended  if the  borrower  obtains  private
mortgage guarantee  insurance to cover a portion of the loan. Loans in excess of
80% of  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 approximately  1/12th of
the hazard insurance premium and property taxes.

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

     The application process for non-residential  real estate loans includes the
same  procedures  which are  required  for other  mortgage  loans.  Total  loans
originated by the Bank on nonresidential real estate during the 2001 fiscal year
amounted to $1,687,122, 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.

     Construction  Lending.  Citizens Federal offers  construction  financing to
individuals for the  construction  of individual  residences and to churches for
construction  of  church  buildings.   Such  loans  are  usually  structured  as
construction/permanent loans which convert to permanent loans upon completion of
construction. All construction loans are secured by a first lien on the property
under  construction.  Loan proceeds are disbursed in increments as  construction
progresses  and  as  inspections  warrant.   Construction/permanent   loans  are
underwritten  in accordance with the same  requirements as permanent  mortgages,
except  the  loans  generally  provide  for  disbursement  in  stages  during  a
construction  period of up to one year,  during which period the borrower may or
may not be required to make monthly payments.  Borrowers must satisfy all credit
requirements that would apply to its permanent  mortgage loan financing prior to
receiving construction financing for the subject property.

                                       5
<PAGE>

     Construction  financing  involves  a  higher  degree  of risk of loss  than
long-term financing on existing, improved, occupied real estate. Risk of loss on
a  construction  loan depends  upon the accuracy of the initial  estimate of the
property's value at completion of construction and the estimated cost (including
interest) of construction.  During the  construction  phase, a number of factors
could cause delays and cost overruns.  If the estimate of construction  costs is
inaccurate,  it may be required to advance  funds  beyond the amount  originally
committed to permit completion of the construction.  If the estimate of value is
inaccurate,  it may be confronted, at or prior to the maturity of the loan, with
a property having a value which is insufficient to assure full repayment.

     Consumer 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 loan originations totaled $1,195,399 for the year ended
September  30,  2001.  As of  September  30, 2001,  consumer  loans  constituted
approximately 2.44% of the Bank's total loan portfolio.

     Commercial  Lending.  Citizens  Federal makes commercial loans from time to
time primarily as an accommodation to existing customers.  The Bank's commercial
loans are generally  secured by the assets of the business,  including  accounts
receivable.  The Bank has also originated loans guaranteed by the Small Business
Administration.  At September  30, 2001,  the Bank's  commercial  loans  totaled
$302,661, or 0.70% of the loan portfolio.

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

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

                                       6
<PAGE>

     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 or her own  settlement  attorney  or title
company,  and his or her 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.

     Maturity  of  Loan  Portfolio.  The  following  table  sets  forth  certain
information  at September 30, 2001 regarding the dollar amount of loans maturing
(or repricing) in the Bank's portfolio based on their contractual maturity date.
<TABLE>
<CAPTION>
                                                                  DUE ONE
                                          DUE WITHIN              THROUGH             DUE AFTER
                                        ONE YEAR AFTER         5 YEARS AFTER        5 YEARS AFTER
                                      SEPTEMBER 30, 2001    SEPTEMBER 30, 2001   SEPTEMBER 30, 2001       TOTAL
                                      ------------------    ------------------   ------------------      -------
<S>                                   <C>                     <C>                   <C>              <C>
Real estate mortgage:
   Residential......................  $ 1,447,969             $ 5,523,917           $ 19,485,653     $  26,457,539
   Nonresidential loans.............      895,713               3,401,905              8,527,354        12,824,972
Construction........................       31,613                 158,148              2,310,239         2,500,000
Consumer and commercial loans.......      735,884                 444,320                172,684         1,352,888
                                      -----------             -----------           ------------     -------------
     Total gross loans..............  $ 3,111,179             $ 9,528,290           $ 30,495,930     $  43,135,399
                                      ===========             ===========           ============     =============
</TABLE>

     The following table sets forth the dollar amount of all loans due after one
year from September 30, 2001 which have predetermined rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
                                                    PREDETERMINED      FLOATING OR
                                                        RATE         ADJUSTABLE RATES          TOTAL
                                                    -------------    ----------------          -----
<S>                                                 <C>                <C>                <C>
Real estate mortgage:
   Residential...................................   $ 21,606,781       $ 3,402,789        $   25,009,570
   Nonresidential loans..........................     11,929,259                --            11,929,259
Construction.....................................      2,468,387                --             2,468,387
Consumer and commercial loans....................        617,004                --               617,004
                                                    ------------       -----------        --------------
     Total gross loans...........................   $ 36,621,431       $ 3,402,789        $   40,024,220
                                                    ============       ===========        ==============
</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, 2001 was $190,137.  The total

                                       7
<PAGE>

amount of net  deferred  loan fees at  September  30, 2001,  was  $543,661.  Any
deferred loan fees are recognized in income using the effective interest method.

     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.

     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.

                                       8
<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,
                                                                       ----------------------------
                                                                           2001             2000
                                                                       -----------      -----------
         <S>                                                           <C>              <C>
         Loans accounted for on a non-accrual basis:
           Real estate mortgage:
              Residential............................................  $   902,174      $   928,369
              Non-residential........................................      384,774          153,240
           Construction..............................................           --          195,887
           Consumer and commercial...................................      280,761          477,515
                                                                       -----------      -----------
                    Total of nonaccrual..............................  $ 1,567,709      $ 1,755,011
                                                                       ===========      ===========

         Accruing loans which are contractually past due
           90 days or more:
           Real estate mortgage:
              Residential............................................  $        --      $        --
              Non-residential........................................           --               --
           Construction..............................................           --               --
           Consumer and commercial...................................           --               --
                                                                       -----------      -----------
                     Total of 90 days past due loans.................  $        --      $        --
                                                                       ===========      ===========
                     Total of non-accrual and 90 days past
                         due loans...................................  $ 1,567,709      $ 1,755,011
                                                                       ===========      ===========
         Percentage of total assets..................................         1.52%            1.75%
                                                                       ===========      ===========
         Other non-performing assets(1)..............................  $   267,413      $    86,237
                                                                       ===========      ===========
<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 value (less costs to dispose) or its cost basis.
</FN>
</TABLE>
     During  the year  ended  September  30,  2001,  gross  interest  income  of
approximately  $89,385  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, 2001.

     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, 2001
totaled $1,567,709,  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, 2001, nonaccruals included 18 real estate loans, 21
consumer  loans and one commercial  loan with  individual  balances  outstanding
ranging from $345 to $184,545.

     The Bank has two significant  problem loans. The most  significant  problem
loan is an unsecured  loan with a balance of $100,000 to a  commercial  customer
that is in the midst of  bankruptcy  proceedings.  The Bank has  recorded a loan
loss  provision  for the full amount of the loan.  A second  problem loan is one
with a 66% Small  Business  Administration  ("SBA")

                                       9
<PAGE>
guarantee and a balance of $141,673 at September 30, 2001. 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,
2001  are  five  residential  properties  acquired  through  foreclosure  with a
carrying value of $246,913 and two repossessed automobiles with a carrying value
of $20,500.

     Except as discussed  above, at September 30, 2001, 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 Regional  Director.  At September 30, 2001,  the Bank had $935,214 in
assets classified as substandard,  no assets classified as doubtful and $155,475
in assets classified as loss.

     At  September  30, 2001 the Bank's  substandard  assets  consisted of eight
loans on  residential  properties,  three loans on commercial  property and nine
consumer  loans with an aggregate  balance of $667,801 and balances  outstanding
ranging from $344 to $176,676 and real estate owned and repossessed  automobiles
of $267,413.

     Allowances  for  Losses  on  Loans.  In  making  loans,   Citizens  Federal
recognizes that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of

                                       10
<PAGE>

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,
2001, the Bank's allowance for loan losses was $396,768.

     Management  believes  that the current  allowance  for loan losses which is
equal to 0.92% of gross loans and 25.31% 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>
                                                               YEAR ENDED SEPTEMBER 30,
                                                             ----------------------------
                                                                 2001              2000
                                                             -----------        ---------
<S>                                                          <C>                <C>
Balance at Beginning of Period............................   $   342,156        $ 310,157
                                                             -----------        ---------

Loans Charged-Off:
  Residential mortgage....................................        17,301           44,573
  Consumer................................................        23,672           39,828
                                                             -----------        ---------
      Total Charge-Offs...................................        40,973           84,401
                                                             -----------        ---------

Loan Recoveries:
  Residential mortgage....................................        52,233          180,587
  Consumer................................................        43,352           40,313
                                                             -----------        ---------
      Total Recoveries....................................        95,585          220,900
                                                             -----------        ---------

Net Loans Charged-Off (Recovered).........................       (54,612)        (136,499)
                                                             -----------        ---------

Provision for (Recovery of) Loan Losses...................            --         (104,500)
                                                             -----------        ---------

Balance at End of Period..................................   $   396,768        $ 342,156
                                                             ===========        =========

Ratio of Net Charge-Offs (Recoveries) to Average
Loans Outstanding During the Period.......................         (0.12)%          (0.30)%
</TABLE>

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

                                       11
<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,
                                          ------------------------------------------------
                                                  2001                        2000
                                          ----------------------    ----------------------
                                                    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...........................  $ 149,689     61.34%       $121,010     61.56%
  Non-residential.......................     67,078     29.73          59,520     27.46
  Construction..........................      3,360      5.80          32,549      6.00
Commercial business.....................     55,736      0.70          48,537      2.38
Consumer................................    120,905      2.44          80,540      2.60
                                          ---------     -----        --------     -----
    Total allowance for loan losses.....  $ 396,768    100.00%       $342,156    100.00%
                                          =========    ======        ========    ======
</TABLE>
INVESTMENT ACTIVITIES

     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, 2001, the Bank had $1,210,924  classified as securities
held to maturity and  $47,260,024  classified as securities  available for sale,
respectively.

                                       12
<PAGE>
     The  following  table  sets  forth an  analysis  of the  Bank's  investment
securities at the dates  indicated.  Other than its investment on the Shay Asset
Management  Fund  (Adjustable-Rate  Mortgage  Portfolio) and its  investments in
securities  issued  by  U.S.  Government   Agencies  and  Government   Sponsored
Enterprises,  the Company had not  invested  more than 10% of its  stockholders'
equity in the securities of a single issuer.
<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30,
                                                                --------------------------------
                                                                    2001(1)           2000(1)
                                                                -------------      -------------
<S>                                                             <C>                <C>
U.S. Government agencies......................................  $   7,999,142      $   9,029,274
Mortgage backed securities ...................................     34,596,426         30,816,902
Shay Asset Management Fund (Adjustable-Rate
    Mortgage Portfolio).......................................      5,875,380          3,057,864
                                                                -------------      -------------
                                                                $  48,470,948      $  42,904,040
                                                                =============      =============
<FN>
______________
(1)  Includes  securities  available  for sale which had an  amortized  cost and
     approximate  fair value of $46,448,236 and  $47,260,024,  respectively,  at
     September  30,  2001 and  $40,099,815  and  $39,376,161,  respectively,  at
     September 30, 2000, and securities  held to maturity which had an amortized
     cost and approximate fair value of $1,210,924 and $1,244,186, respectively,
     at September 30, 2001,  and  $3,527,879  and  $3,506,924,  respectively  at
     September  30,  2000.   Securities  available  for  sale  consist  of  U.S.
     Government  agency  securities,  U.S.  Government  agency  mortgage  backed
     securities (including CMOs) and shares in an adjustable-rate mutual fund.
</FN>
</TABLE>

                                       13
<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, 2001.

<TABLE>
<CAPTION>
                                                          AT SEPTEMBER 30, 2001(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 agency
 obligations.....................  $        --    -- %    $ 1,970,000  6.40%    $4,840,000   6.35%

Shay Asset Management Fund
   (Adjustable-Rate Mortgage
   Portfolio)....................    5,877,375   4.55              --   --              --    --
                                   -----------            -----------           ----------
     Total.......................  $ 5,877,375            $ 1,970,000           $4,840,000
                                   ===========            ===========           ==========
<CAPTION>
                                                     AT SEPTEMBER 30, 2001(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 agency
 obligations.....................    $1,000,000    7.19%   $ 7,810,000  $ 7,999,142    6.47%

Shay Asset Management Fund
   (Adjustable-Rate Mortgage
   Portfolio)....................            --      --      5,877,375    5,875,380    4.55
                                     ----------            -----------  -----------
     Total.......................    $1,000,000            $13,687,375  $13,874,522
                                     ==========            ===========  ===========
<FN>
-------------
(1)  Includes  investment  securities  available  for sale at September 30, 2001
     with an  amortized  cost and fair  value of  $13,542,654  and  $13,874,522,
     respectively.  Contractual  maturities of securities  available for sale at
     September  30,  2001 range  from one month to  thirteen  and a half  years.
     Securities  available for sale consist of U.S. Government agency securities
     and shares in an adjustable-rate mutual fund.
</FN>
</TABLE>

                                       14
<PAGE>
     Maturity of Mortgage-Backed Securities Portfolio.  The following table sets
forth certain information at September 30, 2001 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 IN ONE       THAN ONE YEAR     TWO YEARS TO     THREE YEARS
                                      YEAR OR LESS      TO TWO YEARS      THREE YEARS     TO FIVE YEARS
                                      AFTER 9-30-01     AFTER 9-30-01     AFTER 9-30-01    AFTER 9-30-01        TOTAL
                                      -------------     -------------    ---------------  --------------     -----------
<S>                                    <C>             <C>               <C>              <C>               <C>
Mortgage-backed securities..........   $ 1,030,641     $ 4,867,611       $ 4,668,430      $   5,884,726     $ 16,451,408
CMOs................................       585,662       2,701,153         3,916,194         11,759,535       18,962,544
                                       -----------     -----------       -----------      -------------     ------------
                                       $ 1,616,303     $ 7,568,764       $ 8,584,624      $  17,644,261     $ 35,413,952
                                       ===========     ===========       ===========      =============     ============
</TABLE>
     The  following  table  sets  forth the  dollar  amount  (par  value) of all
mortgage-backed securities due after one year from September 30, 2001.
<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 .................................  $   8,824,506                  $   6,596,261
CMOs........................................................      4,055,281                     14,321,601
                                                              -------------                  -------------
                                                              $  12,879,787                  $  20,917,862
                                                              =============                  =============
</TABLE>

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
publicity regarding the financial services 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.

     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.

                                       15
<PAGE>

     Deposits in the Bank as of September 30, 2001 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>
0.45%               None                   NOW Accounts                  $    --     $  9,015,368          11.72%
2.00                None                   "Super NOW" Accounts            1,000        4,326,760           5.62
2.49                None                   Passbook Accounts                   5       17,258,958          22.43
4.58                91 Days                Certificates                      500       22,180,546          28.83
3.98                14 days                Jumbo Certificates(1)         100,000       24,046,106          31.25
                    N/A                    Accrued interest on deposits       --          117,603           0.15
                                                                                     ------------          -----
                                           TOTAL                                     $ 76,945,341         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,
                                                                 -------------------------------
                                                                     2001                2000
                                                                 ------------       ------------
<S>                                                             <C>                <C>
Deposits......................................................  $ 157,919,465      $ 174,151,031
Withdrawals...................................................    160,268,179        175,799,596
                                                                -------------      -------------
     Net (decrease) before interest credited..................     (2,348,714)        (1,648,565)
Interest credited.............................................      2,959,614          2,802,683
                                                                -------------      -------------
  Net increase in savings deposits............................  $     610,900      $   1,154,118
                                                                =============      =============
</TABLE>
     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
                                               2001          DEPOSITS    (DECREASE)        2000            DEPOSITS
                                           -------------     --------    ----------     ------------       -------
<S>                                        <C>                <C>       <C>             <C>                <C>
NOW checking accounts....................  $  9,015,368       11.72%    $    260,287    $  8,755,081       11.47%
Jumbo certificates.......................    24,046,106       31.25       (3,539,831)     27,585,937       36.14
"Super" NOW checking accounts............     4,326,760        5.62         (372,317)      4,699,077        6.15
Passbook and regular savings.............    17,258,958       22.43          794,716      16,464,242       21.57
Certificates of deposit..................    22,180,546       28.83        3,607,864      18,572,682       24.33
Accrued interest on deposits.............       117,603        0.15         (139,819)        257,422        0.34
                                           ------------       -----     ------------    ------------       -----
     Total...............................  $ 76,945,341      100.00%    $    610,900    $ 76,334,441      100.00%
                                           ============      ======     ============    ============      ======
</TABLE>

                                       16
<PAGE>

         The following table sets forth the time deposits in the Bank classified
by rates as of the dates indicated.
<TABLE>
<CAPTION>
                                                                      AT SEPTEMBER 30,
                                                              --------------------------------
                                                                  2001               2000
                                                              -------------      -------------
<S>                                                           <C>               <C>
 1.00 -  2.99%..............................................  $     285,000     $           --
 3.00 -  4.99%..............................................     37,192,232          7,827,489
 5.00 -  6.99%..............................................      8,276,470         37,609,287
 7.00 -  8.99%..............................................        472,950            721,843
                                                              -------------     --------------
                                                              $  46,226,652     $   46,158,619
                                                              =============     ==============
</TABLE>

     The following table sets forth the amount and maturities of the Bank's time
deposits at September 30, 2001.
<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>
 1.00 - 2.99%..................   $     285,000  $          --  $          --   $          --  $     285,000
 3.00 - 4.99%..................      35,016,434      1,023,796        819,378         332,624     37,192,232
 5.00 - 6.99%..................       4,572,386      2,302,948        962,784         438,352      8,276,470
 7.00 - 8.99%..................         235,192        217,343             --          20,415        472,950
                                  -------------  -------------  -------------   -------------  -------------
                                  $  40,109,012  $   3,544,087  $   1,782,162   $     791,391  $  46,226,652
                                  =============  =============  =============   =============  =============
</TABLE>
     The  following  table  sets forth for the  periods  indicated  the  average
balances  outstanding  and  average  interest  rates for each major  category of
deposits.
<TABLE>
<CAPTION>
                                                                    YEAR ENDED SEPTEMBER 30,
                                                     -----------------------------------------------------
                                                                2001                       2000
                                                     ------------------------       ----------------------
                                                     AVERAGE         AVERAGE        AVERAGE        AVERAGE
                                                     BALANCE           RATE         BALANCE          RATE
                                                     -------         -------        -------        -------
                                                                    (DOLLARS IN THOUSANDS)
         <S>                                         <C>                  <C>       <C>                <C>
         Savings...................................  $    16,870          2.49%     $    16,720        2.47%
         Interest-bearing demand and money
            market accounts........................       13,312          1.14           12,536        1.18
         Certificates of deposit...................       46,160          5.01           44,485        4.90
                                                     -----------                    -----------
             Total interest-bearing deposits.......       76,342                         73,741
         Non-interest-bearing demand
            deposits...............................        1,102                          1,213
                                                     -----------                    -----------
              Total average deposits...............  $    77,444                    $    74,954
                                                     ===========                    ===========
</TABLE>

                                       17
<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, 2001.

         MATURITY PERIOD                                  AMOUNT
         ---------------                                  ------

         Three months or less.....................  $    14,028,341
         Over three through six months............        9,372,858
         Over six through 12 months...............          200,000
         Over 12 months...........................          444,907
                                                    ---------------
               Total..............................  $    24,046,106
                                                    ===============


     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, 2001, the Bank did not secure any new advances.  However, at
September  30,  2001 the Bank had  $14,950,000  of advances  outstanding.  These
advances are secured by qualifying residential first mortgage loans.

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,
2001, Citizens Federal was authorized to invest up to approximately $3.0 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."

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").

                                       18
<PAGE>

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.  The Gramm-Leach-Bliley ("G-L-B") Act,
which was enacted in November 1999,  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  holding  companies
formed after May 4, 1999.

     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 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 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
operations  at this time.  Although the G-L-B Act reduces the range of companies
which may acquire control of the Company,  it may facilitate  affiliations  with
companies in the financial services industry.

                                       19
<PAGE>

     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, 2001 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, 2001, the Bank had $14.95 million in advances outstanding from the
FHLB of Atlanta. See "Sources of Funds -- Borrowings."

     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

                                       20
<PAGE>

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,
2001, the Bank qualified as a QTL.

     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

                                       21
<PAGE>
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.

     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,
2001, 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

                                       22
<PAGE>

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, 2001, the Bank's  adjusted total assets
for  purposes  of the core  and  tangible  capital  requirements,  were  $102.34
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   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, 2001,
the Bank had $111,529 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, 2001, the Bank's  risk-weighted
assets were approximately $45.56 million.



                                       23
<PAGE>

     The table below provides  information with respect to the Bank's compliance
with its regulatory capital requirements at September 30, 2001.
<TABLE>
<CAPTION>
                                                                                            PERCENT
                                                                         AMOUNT            OF ASSETS(1)
                                                                         ------            ------------
                                                                          (DOLLARS IN THOUSANDS)
          <S>                                                         <C>                      <C>
          Tangible capital..........................................  $     9,147              8.94%
          Tangible capital requirement..............................        1,535              1.50
                                                                      -----------             -----
             Excess.................................................  $     7,612              7.44%
                                                                      ===========            ======

          Core capital..............................................  $     9,147              8.94%
          Core capital requirement (2)..............................        3,070              3.00
                                                                      -----------             -----
             Excess.................................................  $     6,077              5.94%
                                                                      ===========            ======

          Risk-based capital........................................  $    10,088             22.10%
          Risk-based capital requirement............................        3,645              8.00
                                                                      -----------             -----
             Excess.................................................  $     6,443             14.10%
                                                                      ===========           =======
<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 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

                                       24
<PAGE>
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, 2001,  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  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

                                       25
<PAGE>

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>

     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 OTS
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 OTS 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.

                                       26
<PAGE>

     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.

     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.

     Federal  Reserve  System.  Pursuant to regulations  of the Federal  Reserve
Board, a thrift  institution must maintain average daily reserves equal to 3% of
net transaction accounts on up to $42.8 million of transaction accounts plus 10%
on the remainder.  Because  required  reserves must be maintained in the form of
vault cash or in a non  interest-bearing  account at a Federal Reserve Bank, the
effect of the reserve  requirement is to reduce the amount of the  institution's
interest-earning  assets.  As of September  30,  2001,  the Bank met its reserve
requirements.

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

     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

                                       27
<PAGE>
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  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

                                       28
<PAGE>

22(h) also prohibits loans, above amounts prescribed by the appropriate  federal
banking  agency,  to  directors,   executive   officers  and  greater  than  10%
stockholders of a savings institution,  and their respective affiliates,  unless
such loan is approved in advance by a majority of the board of  directors of the
institution with any "interested"  director not participating in the voting. The
Federal  Reserve Board has prescribed the loan amount (which  includes all other
outstanding  loans to such  person)  as to which such  prior  board of  director
approval  is  required,  as being the  greater of  $25,000 or 5% of capital  and
surplus  (up to  $500,000).  Further,  Section  22(h)  requires  that  loans  to
directors,  executive  officers  and  principal  stockholders  be made on  terms
substantially  the same as offered in comparable  transactions to other persons.
Section 22(h) also generally prohibits a depository  institution from paying the
overdrafts of any of its executive officers or directors.

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

                                       29
<PAGE>

therefore does not believe that  implementation  of these  regulatory  standards
will materially affect the Bank's operations.

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

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

                                       30
<PAGE>

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 which acquired  control of its subsidiary  thrift prior to
May 4,  1999.  However,  if the  Director  of the OTS  determines  that there is
reasonable  cause to believe that the continuation by a savings and loan holding
company of an  activity  constitutes  a serious  risk to the  financial  safety,
soundness or stability of its subsidiary  savings  institution,  the Director of
the OTS may impose such  restrictions  as deemed  necessary to address such risk
including limiting:  (i) payment of dividends by the savings  institution;  (ii)
transactions  between the savings institution and its affiliates;  and (iii) any
activities of the savings  institution that might create a serious risk that the
liabilities  of the  holding  company and its  affiliates  may be imposed on the
savings institution.  Notwithstanding the above rules as to permissible business
activities  of  unitary  savings  and loan  holding  companies,  if the  savings
institution  subsidiary  of such a holding  company  fails to meet the QTL test,
then such unitary  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

                                       31
<PAGE>

occupied by a subsidiary savings institution;  (v) acting as trustee under deeds
of trust; (vi) those activities  previously directly authorized by regulation as
of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless
the Director of the OTS by regulation  prohibits or limits such  activities  for
savings and loan holding companies,  those activities  authorized by the Federal
Reserve  Board as  permissible  for bank  holding  companies.  Those  activities
described  in (vii) above must also be approved by the Director of the OTS prior
to being engaged in by a multiple savings and loan holding company.

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

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

     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.

                                       32
<PAGE>

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 allowance deduction
for  "non-qualifying  loans" is computed  under the experience  method.  For tax
years  beginning  before  December 31, 1995,  the amount of the bad debt reserve
deduction for  "qualifying  real  property  loans"  (generally  loans secured by
improved real estate) may be computed under either the experience  method or the
percentage of taxable income method (based on an annual  election).  If a saving
association  elected the latter method,  it could claim,  each year, a deduction
based on a  percentage  of  taxable  income,  without  regard to actual bad debt
experience.

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

     Under recently enacted legislation, the percentage of taxable income method
has been  repealed for years  beginning  after  December  31, 1995,  and "large"
associations,  i.e., the quarterly average of the association's  total assets or
of the consolidated group of which it is a member,  exceeds $500 million for the
year,  may no longer  be  entitled  to use the  experience  method of  computing
additions to their bad debt reserve.  A "large"  association must use the direct
write-off method for deducting bad debts,  under which  charge-offs are deducted
and recoveries  are taken into taxable income as incurred.  If the Bank is not a
"large"  association,  the  Bank  will  continue  to be  permitted  to  use  the
experience  method.  The Bank will be required  to  recapture  (i.e.,  take into
income)  over a six-year  period its  applicable  excess  allowances,  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,  2001,  the
Bank's bad debt reserve  subject to  recapture  over a six-year  period  totaled
approximately $89,000.

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

                                       33
<PAGE>
     In addition to the regular  income  tax,  corporations,  including  savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental  tax equal to 0.12% of the excess
of alternative  minimum taxable income for the taxable year (determined  without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.

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

     The Bank has been  audited  by the IRS or the  statute of  limitations  has
expired with respect to consolidated federal income tax returns through the year
ended  September 30, 1995. 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.

                                       34
<PAGE>

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

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

PERSONNEL

     As of September  30, 2001,  the Bank had 31 full-time  employees  and three
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining  group.  The Bank  considers its  relations  with its employees to be
excellent.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

     W. Kent  McGriff is 44 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  N. Day is 36 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 LLP where she
served financial institutions throughout the state of Alabama including Citizens
Federal.


                                       35
<PAGE>
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 $3,054,536 at September
30, 2001.

     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, 2001 was $154,025.

     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, 2001 was $242,001.

     As of September  30, 2001,  the net book value of the Bank's  investment in
the premises, furniture and equipment owned by the Bank was $3,450,612.

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 financial  condition
or 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, 2001.


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
---------------------------------------------------------------------

     There is currently no public trading market for the Company's Common Stock.
During  the past two years  there  have been 15 trades of which the  Company  is
aware,  all for $18.50 per share.  As of December 10, 2001,  the Company had 319
stockholders  of record.  The Company has paid annual  dividends  since 1983. On
October 25, 2001, the Company's  Board of Directors  declared a cash dividend of
$0.85 payable to  stockholders of record as of December 10, 2001. In December of
2000 and 1999,  the Company  paid  annual  dividends  of $0.75  each.  Under the
Delaware  General  Corporation  Law, the Company may only pay  dividends  out of
surplus  or, if there is no  surplus,  out of net profits for the fiscal year in
which the dividend is declared and/or the preceding  fiscal year. The payment of
future dividends is also subject to the receipt of dividends from the Bank which
is subject to certain regulatory  restrictions on the payment of dividends.  See
"Item  1.  Description  of  Business  --  Regulation  of  the  Bank  -  Dividend
Restrictions."

                                       36
<PAGE>

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
--------------------------------------------------------------------

     CFS Bancshares,  Inc. ("CFS  Bancshares" or "the Company") 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,  which was  completed on June 30, 1998.  The  Company's  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,  the discussion  herein relates  primarily to the operations of
the Bank.

     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
and, to a lesser extent,  non-residential buildings located within its principal
lending areas in Jefferson and Greene Counties, Alabama.

FINANCIAL CONDITION

     At September 30, 2001,  the  Company's  total assets were  $103,328,293  as
compared to  $100,563,728  at September  30, 2000,  an increase of $2,764,565 or
2.75%.  The  increase in total  assets  resulted  from an increase in the Bank's
total investment portfolio of $5,566,908 from $42,904,040 at September 30, 2000,
to $48,470,948  at September 30, 2001, an increase in cash and cash  equivalents
of $2,524,651  from $3,594,355 at September 30, 2000, to $6,119,006 at September
30,  2001 and an  increase  in other  assets  of  $1,853,952  from  $525,440  at
September 30, 2000,  to  $2,379,392  at September 30, 2001.  The increase in the
categories  listed  above  was  partially  offset  by a  decrease  in net  loans
receivable of $7,128,473 from  $48,238,040 at September 30, 2000, to $41,109,567
at September  30, 2001.  The decrease in net loans  receivable  resulted  from a
decrease in the volume of loans granted  during the year and from an increase in
the number of prepayments on the existing loan portfolio.  During the year ended
September  30,  2000,  the Bank  purchased  approximately  $2.8 million of loans
serviced by other institutions, while there were no such transactions during the
year ended September 30, 2001.

     Deposits totaled $76,945,341 at September 30, 2001, compared to $76,334,441
at  September  30, 2000,  an increase of $610,900 or .80%.  The increase was the
result of an increase of $794,716 in passbook and statement savings accounts and
was partially offset by small declines in all other categories of deposits. FHLB
advances at September 30, 2001, were $14,950,000  unchanged from the balances at
September 30, 2000. The Bank's one to four family residential mortgage portfolio
serves as collateral for the FHLB advances.

     Non-performing  assets,  which  include  non-accrual  loans and real estate
acquired  by  foreclosure  (REO)  decreased  $6,126 or .33% from  $1,841,248  at
September 30, 2000, to  $1,835,122 at September 30, 2001, as  non-accrual  loans
decreased from  $1,755,011 at September 30, 2000, to $1,567,709 at September 30,
2001,  and REO  increased by $181,176  from

                                       37
<PAGE>

$86,237 at September  30, 2000,  to $267,413 at September 30, 2001. At September
30,  2001,  non-performing  assets  represented  1.78%  of  total  assets  while
non-accrual  loans  represented  3.63% of gross loans outstanding as compared to
September 30, 2000, when non-performing assets represented 1.83% of total assets
while non-accrual loans were 3.46% of gross loans outstanding.

     Interest  rate  levels,  the health of the economy  (particularly  the real
estate economy), securities transactions and the amount of non-performing assets
affect the Bank's financial condition and results of operations.

COMPARISON OF YEARS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000

     General.  Net income for the year ended  September  30, 2001,  was $590,332
compared to $499,320 at September  30,  2000,  an increase of $91,012 or 18.23%.
The increase  resulted  primarily from an increase in net interest income and an
increase in gains on sale or call of securities. The average balance of interest
earning  assets  and  interest  bearing  liabilities  outstanding  increased  by
approximately $7.2 million and $5.6 million, respectively when comparing average
the balance  sheets for the years ended  September  30, 2001 and 2000.  Gains on
sales or call of  investments  increased  by $116,837  from a loss of $6,125 for
fiscal 2000 to a gain of $110,712 for the year ended  September  30,  2001.  The
Bank's operating  results depend largely upon its net interest margin,  which is
the  difference  between  the income  earned on loans and  investments,  and the
interest  expense  paid on deposits  and  borrowings,  divided by average  total
interest earning assets. The net interest margin is affected by the economic and
market factors that influence interest rates, loan demand and deposit flows. The
interest  rate margin  decreased  from 3.58% at September  30, 2000, to 3.35% at
September 30, 2001.

     Interest  Income.  Net interest  income  before  provision  for loan losses
increased  by  $256,760 or 8.07% from  $3,183,575  at  September  30,  2000,  to
$3,440,335  for the 2001 fiscal year.  Interest and fees on loans the year ended
for September 30, 2001,  were  $4,093,642 as compared to $3,910,135 for the 2000
fiscal year, an increase of $183,507 or 4.69%.  Interest and dividend  income on
investment   securities  and  interest  income  on  mortgage  backed  securities
increased by $150,562 and $107,631,  respectively, from $546,598 and $2,125,940,
respectively  for fiscal 2000 to $697,160 and $2,233,571,  respectively  for the
2001 fiscal year end.  The  increases  resulted  from  increases  in the average
balance  outstanding  of investment  securities and mortgage  backed  securities
between the fiscal year ended  September  30,  2000,  and the 2001 fiscal  year.
Combined interest income on federal funds sold and other interest income for the
fiscal  year ended  September  30,  2001  increased  by  $20,839 or 16.67%  when
compared  to fiscal  year end 2000 as the result of an  increase  in the average
balance in federal funds and interest  bearing  deposits  during the fiscal year
2001 as  compared  to the average  balances  outstanding  during the fiscal year
ended September 30, 2000.

     Interest  Expense.  Total  interest  expense  increased  by  $205,779  from
$3,524,117  for the fiscal year ended  September 30, 2000 to $3,729,896  for the
2001 fiscal year, an increase of 5.84%.  The higher  interest  expense  resulted
from  increases  in  the  average  balance  of  interest   bearing   liabilities
outstanding.  The average  balance of interest  bearing  deposits  increased  by

                                       38
<PAGE>
approximately  $2.45 million when comparing the fiscal year ended  September 30,
2001 to the 2000 fiscal year. The average balance of FHLB advances  increased by
approximately  $3.1 million between the year ended September 30, 2000 and fiscal
2001.  The average rate paid on interest  bearing  liabilities  decreased by two
basis  points from 4.06% at  September  30,  2000,  to 4.04% for the 2001 fiscal
year.

     Other Income. Total other income increased $47,047 or 10.33% for the fiscal
year ended September 30, 2001,  compared to the 2000 fiscal year.  Gains on sale
or call of investment securities increased by $116,837 from a loss of $6,125 for
the fiscal year ended  September  30,  2000,  to a gain of $110,712 for the 2001
fiscal year. Included in the gain for fiscal 2001 was a $41,156 gain on callable
agency  securities with a par value of $1,840,000 that were called at the end of
September 2001.

     Other  Expense.  Total other  expense  consists of  salaries  and  employee
benefits,   occupancy  and  equipment  expense,  FDIC  deposit  insurance,  data
processing  expense,  legal and  professional  services,  advertising  and other
expenses. The costs of carrying and administering  non-performing assets is also
included in other  expense.  Other  expense  increased  by $72,596 or 2.45% from
$2,968,218 at September 30, 2000,  to $3,040,814  for the 2001 fiscal year.  The
increase resulted from an increase in salaries and employee benefits of $140,049
or 10.21% from  $1,372,332  for the fiscal year ended  September  30,  2000,  to
$1,512,381  for the 2001 fiscal  year.  Increases in  temporary  employee  cost,
security  services,  employee health  insurance and modest increases in existing
employee  salaries  between the 2000 and 2001 fiscal years were  responsible for
the rise in the category.  The rise in employee  expense was partially offset by
declines in several expense categories including  depreciation and amortization,
professional services, advertising and other expense.

COMPARISON OF YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999

     General.  Net income for the year ended  September  30, 2000,  was $499,320
compared to  $385,587  for the year ended  September  30,  1999,  an increase of
$113,733  or 29.50%.  The  increase  is  primarily  the result of  decreases  in
provisions for loan losses and an increase in net interest income. The provision
for loan losses decreased from $45,000 for the year ended September 30, 1999, to
a recovery of $104,500 for the 2000 fiscal year. During the year ended September
30, 2000, the Bank collected $154,500 of loans which had been previously charged
off. This recovery was offset by additions to the allowance of $50,000 to create
the negative provision in 2000. The Bank's operating results depend largely upon
its net interest  margin,  which is the difference  between the income earned on
loans and investments, and the interest expense paid on deposits and borrowings,
divided by average total interest  earning  assets.  The net interest  margin is
affected by the economic and market factors that influence  interest rates, loan
demand and deposit flows.  The interest rate margin increased from 3.56% for the
year ended September 30, 1999, to 3.58% for the year ended September 30, 2000.

     Interest  Income.  Net interest  income  before  provision  for loan losses
increased by $180,103 or 6.00% from  $3,003,472 for the year ended September 30,
1999, to $3,183,575 for the 2000 fiscal year. Interest and fees on loans for the
year ended September 30, 2000, were

                                       39
<PAGE>
$3,910,135 and  $3,974,970  for the year ended  September 30, 1999, a decline of
$64,835 or 1.63%.  Interest and dividend  income on  investment  securities  and
interest  income  on  mortgage  backed  securities  increased  by  $234,460  and
$262,055,  respectively,  from $312,138 and $1,863,885,  respectively for fiscal
1999 to $546,598 and $2,125,940,  respectively for the 2000 fiscal year end. The
increases  resulted  from  increases  in  the  average  balance  outstanding  of
investment securities and mortgage backed securities as well as increases in the
average rate of interest received on those respective security groups.  Combined
interest  income on federal funds sold and other  interest  income  increased by
$21,000  or 20.19%  when  compared  to fiscal  year end 1999 as the result of an
increase of  approximately 92 basis points in the average yield in federal funds
and interest bearing deposits.

     Interest  Expense.  Total  interest  expense  increased  by  $272,577  from
$3,251,540  for the year ended  September 30, 1999,  to $3,524,117  for the 2000
fiscal year September 30, 2000, an increase of 8.38%. The increase resulted from
increases  in market  interest  rates which  impact the rates paid on the Bank's
interest  bearing  liabilities  and from  increases  in the  average  balance of
interest bearing liabilities outstanding.  (See table of selected financial data
for additional  detail).  The average rate paid on interest bearing  liabilities
increased by 13 basis points from 3.93% for the year ended  September  30, 1999,
to 4.06% for the 2000 fiscal year.

     Other Income.  Total other income decreased  $82,731 or 15.37% for the year
ended  September 30, 2000 compared to the 1999 fiscal year. The primary  changes
between the 2000  fiscal  year and the 1999  fiscal  year  occurred in the other
category  and in gains and losses on the sale of  investment  securities.  Other
income  declined  from  $99,889 at September  30, 1999,  to $46,293 for the 2000
fiscal  year,  a  decrease  of  $53,596.  During the 1999  fiscal  year the Bank
recognized  approximately  $50,000 from the  recapture of a litigation  accrual,
while there was no such item during the 2000 fiscal  year.  Gains on the sale of
investment securities declined $33,611 from a gain of $27,486 for the year ended
September 30, 1999, to a loss of $6,125 for the 2000 fiscal year.

     Other  Expense.  Total other  expense  consists of  salaries  and  employee
benefits,   occupancy  and  equipment  expense,  FDIC  deposit  insurance,  data
processing  expense,  legal and  professional  services,  advertising  and other
expenses. The costs of carrying and administering  non-performing assets is also
included in other  expense.  Other  expense  increased  by $73,858 or 2.55% from
$2,894,360  for the year ended  September 30, 1999,  to $2,968,218  for the 2000
fiscal year. Two expense categories,  other and professional services, increased
by $135,167 and $81,753  respectively  from $345,673 and $172,103,  respectively
for the year ended  September 30, 1999,  to $480,840 and $253,856,  respectively
for the 2000 fiscal year. The increase in other includes  increases in franchise
and  property tax of $57,576;  bad check  expense of $19,996;  contributions  of
$16,357;  and write  downs of  foreclosed  assets of $8,180  for the year  ended
September  30, 2000,  as compared to fiscal 1999.  The increase in franchise and
property tax resulted  from the  revamping of Alabama  franchise tax law because
prior law had been declared  unconstitutional,  and from an increase in property
tax  resulting  from recent  revaluation  of property  values.  The  increase in
professional  services was  primarily the result of an  unsuccessful  bid by the
Bank for an  institution  offered  for sale by the FDIC and from legal  expenses
associated with the workout of two classified loans.

                                       40
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

     The Bank's  primary  sources of  liquidity  are  deposits,  loan  payments,
maturing investment securities,  principal and interest payments on investments,
mortgage-backed  securities  and CMOs,  and advances  from the Federal Home Loan
Bank of Atlanta.  Management  believes  it is prudent to maintain an  investment
portfolio that not only provides a source of income,  but also provides a source
of  liquidity  through its  principal  payments and  maturities  to meet lending
demands and  fluctuations in deposit flows. The various sources of liquidity are
utilized to fund withdrawals, new loans and other investments, as well as to pay
expenses of operations.  Management  believes that the Bank's various sources of
funds are adequate to meet its commitments in the ordinary course of business.

     Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
at right) of total and Tier I capital  to  risk-weighted  assets,  and of Tier I
capital to average assets.  Management believes,  as of September 30, 2001, that
the Bank meets all capital  adequacy  requirements and meets the requirements to
be classified as "well capitalized."
<TABLE>
<CAPTION>
                                                                                        WELL CAPITALIZED UNDER
                                                                   FOR CAPITAL            PROMPT CORRECTIVE
                                            ACTUAL               ADEQUACY PURPOSES         ACTION PROVISION
                                    ----------------------    ---------------------     -----------------------
                                    AMOUNT           RATIO    AMOUNT          RATIO     AMOUNT            RATIO
                                    ------           -----    ------          -----     ------            -----
<S>                              <C>                 <C>      <C>               <C>    <C>                <C>
As of September 30, 2001:

Total capital
  (to risk weighted assets)      $ 10,088,000        22.14%   $ 3,645,167       8.0%   $  4,556,459       10.0%
Tier I capital
   (to risk weighted assets)     $  9,147,000        20.08%   $ 1,822,583       4.0%   $  2,733,875        6.0%
Tier I capital
   (to average assets)           $  9,147,000         8.98%   $ 4,074,388       4.0%   $  5,092,984        5.0%
</TABLE>

IMPACT OF INFLATION AND CHANGING PRICES

     The financial  statements and related  financial data presented herein have
been prepared in accordance with accounting principles generally accepted in the
United States of America which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
relative  purchasing  power over time due to inflation.  Unlike most  industrial
companies,  virtually all the assets and liabilities of the Bank are monetary in
nature. As a result,  interest rates generally have a more significant impact on
a financial institution's performance than does the effect of inflation. Because
the Bank's  primary assets are loans and  investment  securities,  which include
more fixed rate,  fixed term loans and securities than adjustable rate loans and
investments,  changes in interest  rates in the economy have a gradual impact on
asset yields.  The Bank's  principal  liability is deposit  accounts,  which are
primarily  short term in nature and,  therefore,  adjust rapidly with changes in
the economy.  In general,  periods of high  inflation  are  accompanied  by high
interest rates.  When rates move up

                                       41
<PAGE>
rapidly,  the  Bank's  cost of funds  increases  rapidly  while the yield on its
assets  increases  slowly,  resulting  in  a  negative  impact  on  net  income.
Conversely,  during periods of low inflation,  lower and more moderate  interest
rates are  normally  present,  which  results  in a low cost of funds and a more
favorable impact on net income.

CONTINGENCIES AND COMMITMENTS

     The Bank is  defending  various  claims  arising  out of the conduct of its
business.  While the ultimate  results of these claims cannot be predicted  with
certainty,  in the opinion of  management,  the  ultimate  disposition  of these
matters  will  not  have a  significant  effect  on the  consolidated  financial
position of the Company.

INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

     Any statement  contained in this report which is not a historical  fact, or
which might  otherwise be  considered an opinion or  projection  concerning  the
Company or its business, whether expressed or implied, is meant as and should be
considered  a  forward-looking  statement as that term is defined in the Private
Securities Litigation Reform Act of 1995.  Forward-looking  statements are based
on  assumptions  and opinions  concerning a variety of known and unknown  risks,
including but not necessarily  limited to changes in market conditions,  natural
disasters  and other  catastrophic  events,  increased  competition,  changes in
availability and cost of reinsurance,  changes in governmental regulations,  and
general economic conditions, as well as other risks more completely described in
the Company's  filings with the  Securities and Exchange  Commission,  including
this Annual Report on Form 10-KSB. If any of these assumptions or opinions prove
incorrect, any forward-looking  statements made on the basis of such assumptions
or opinions may also prove materially incorrect in one or more respects.

                                       42
<PAGE>
<TABLE>
<CAPTION>
                                                                        AT SEPTEMBER 30,
                                                -----------------------------------------------------------
                                                 2001        2000            1999         1998        1997
                                                ------       -----          ------       ------      ------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                             <C>           <C>           <C>          <C>          <C>
BALANCE SHEETS
Total assets.................................   $  103,328    100,564       96,104       92,166       99,640
Loans, net...................................       41,110     48,238       43,521       45,413       42,573
Investment securities........................       48,471     42,904       38,534       35,461       44,718
Deposits.....................................       76,945     76,334       75,180       73,892       76,346
Borrowed funds...............................       14,950     14,950       11,850        9,200        9,200
Stockholders' equity*........................        9,843      8,223        7,763        7,908        7,798
Shares outstanding*
     (actual number).........................      139,220    130,000      130,000      130,000      130,000
Book value per share*........................        70.70      63.25        59.71        60.83        59.98
</TABLE>

<TABLE>
<CAPTION>
                                                                   YEARS ENDED SEPTEMBER 30,
                                                ------------------------------------------------------------
                                                 2001        2000            1999         1998        1997
                                                ------       -----          ------       ------      ------
<S>                                             <C>         <C>           <C>          <C>         <C>
OPERATIONS
Interest income..............................   $    7,170  $   6,708     $  6,255     $  6,543    $   6,016
Interest expense.............................        3,730      3,524        3,252        3,525        3,127
Net interest income..........................        3,440      3,184        3,003        3,018        2,889
Provision for loan loss......................           --       (104)          45          176           --
Net gain (loss) on securities................          111         (6)          27           47          141
Other noninterest income.....................          392        461          511          443          475
Other noninterest expense....................        3,040      2,968        2,894        2,981        2,947
Income before income taxes...................          902        775          602          351          558
Income tax expense...........................          312        276          217          132          200
Net income ..................................          590        499          386          219          358

PER SHARE INFORMATION
Basic earnings per share.....................         4.58       3.94         3.05         1.72         2.75
Basic weighted average
    shares outstanding*......................      128,846    126,621      126,419      127,218      130,000
Diluted earnings per share...................         4.58       3.71         2.89         1.61         2.75
Diluted weighted average shares
   outstanding*..............................      128,846    134,421      133,619      136,018      130,000

Cash dividends declared......................         0.85       0.75         0.75         0.75         0.75
</TABLE>

<TABLE>
<CAPTION>
OTHER DATA
                                                             FOR  THE  YEARS  ENDED  SEPTEMBER  30,
                                                 --------------------------------------------------------
                                                 2001        2000         1999         1998        1997
                                                ------       -----       ------       ------      ------
<S>                                              <C>         <C>          <C>          <C>          <C>
Return on average assets.....................    0.58%       0.52%        0.41%        0.23%        0.42%
Return on average stockholders' equity*......    6.95%       6.40%        4.98%        2.77%        4.80%
Equity to assets ratio*......................    9.37%       8.18%        8.08%        8.58%        7.83%
Dividend payout ratio........................   20.05%      19.53%       25.29%       44.53%       27.23%
<FN>
----------
* Includes common stock subject to put obligation.
</FN>
</TABLE>


                                       43
<PAGE>
     The following table set forth certain information relating to the Company's
average balance sheets,  including  interest  earning assets,  interest  bearing
liabilities and net interest margin.
<TABLE>
<CAPTION>
                                                                    YEAR ENDED SEPTEMBER 30,
                                            ---------------------------------------------------------------------------
                                                     2001                     2000                      1999
                                            ----------------------     ---------------------       --------------------
                                            AVERAGE       YIELD OR     AVERAGE        YIELD OR     AVERAGE     YIELD OR
                                            BALANCE         RATE       BALANCE          RATE       BALANCE       RATE
                                            -------       --------     -------        --------     -------     --------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                         <C>              <C>           <C>         <C>           <C>          <C>
ASSETS
Federal funds and interest
    bearing deposits......................  $   2,984        4.88%         2,195       5.67%         2,188        4.75%
Investments securities held
    to maturity (1).......................      2,920        6.46%         5,180       6.19%         6,744        6.22%
Investment securities available for sale..     44,560        6.15%        36,025       6.53%        30,853        5.70%
Loans (2).................................     45,106        8.96%        44,986       8.58%        44,708        8.69%
                                            ---------        ----      ---------       ----      ---------        ----
     Total interest earning assets........     95,570        7.50%        88,386       7.54%        84,032        7.41%
Loan loss allowances......................       (362)                      (285)                     (461)
Non-interest earnings assets..............      7,403                      8,079                     8,080
                                            ---------                  ---------                 ---------
      Total assets........................    102,611                     96,180                    92,112
                                            ---------                  ---------                 ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits.................     77,444        3.72%        74,954       3.78%        73,502        3.70%
FHLB advances.............................     14,950        5.65%        11,836       5.89%         9,385        5.68%
                                            ---------        ----      ---------       ----      ---------        ----
      Total interest bearing liabilities..     92,394        4.04%        86,790       4.06%        82,887        3.93%
Accrued interest on deposits..............        286                        285                       338
Other liabilities.........................      1,342                      1,305                     1,096
Stockholders' equity (4)..................      8,589                      7,800                     7,791
                                            ---------                  ---------                 ---------
     Total liabilities and
        stockholders' equity..............  $ 102,611                     96,180                    92,112
                                            ---------                  ---------                 ---------
Interest rate spread......................                   3.46%                     3.48%                      3.48%
Net interest margin (3)...................                   3.35%                     3.58%                      3.56%
<FN>
------------
(1)  Includes Federal Home Loan Bank stock.
(2)  Loan yields calculated using average balance of gross loans.
(3)  Net interest  income  before loan loss  provision  divided by total average
     interest earning assets.
(4)  Includes common stock subject to put obligation.
</FN>
</TABLE>



                                       44
<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) and (ii) changes in
rates (change in rate multiplied by old volume).  Changes in rate/volume (change
in rate multiplied by the change in volume) have been allocated in proportion to
the relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
                                                                        YEAR ENDED SEPTEMBER  30,
                                            -----------------------------------------------------------------------------
                                                     2001 VS. 2000                           2000     VS.     1999
                                            --------------------------------------  -------------------------------------
                                                 INCREASE (DECREASE) DUE TO             INCREASE (DECREASE) DUE TO
                                            --------------------------------------  -------------------------------------
                                              VOLUME          RATE        TOTAL       VOLUME         RATE          TOTAL
                                            -----------   -----------  -----------  -----------  -----------  -----------
<S>                                         <C>           <C>          <C>          <C>          <C>          <C>
Interest income:
  Loans...................................  $    10,425   $   173,082  $   183,507  $    64,219  $  (129,054) $   (64,835)
  Mortgage-backed securities..............      245,518      (137,887)     107,631      157,267      104,788      262,055
  Investments.............................      152,732        (2,170)     150,562      121,436      113,024      234,460
  Other...................................       42,900       (22,061)      20,839          342       20,658       21,000
                                            -----------   -----------  -----------  -----------  -----------  -----------
     Total................................      451,575        10,964      462,539      343,264      109,416      452,680
                                            -----------   -----------  -----------  -----------  -----------  -----------

Interest expense:
 Deposits.................................       99,313       (42,491)      56,822       56,677       51,782      108,459
 FHLB advances............................      172,159       (23,202)     148,957      143,766       20,352      164,118
                                            -----------   -----------  -----------  -----------  -----------  -----------
     Total................................      271,472       (65,693)     205,779      200,443       72,134      272,577
                                            -----------   -----------  -----------  -----------  -----------  -----------

Net interest income.......................  $   180,103   $    76,657  $   256,760  $   142,831  $    37,282  $   180,103
                                            ===========   ===========  ===========  ===========  ===========  ===========
</TABLE>
ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

                      CFS Bancshares, Inc. and Subsidiaries

                   Index to Consolidated Financial Statements

                                                                         Page
                                                                         ----
Independent Auditors' Report.............................................  46
Consolidated Balance Sheets..............................................  47
Consolidated Statements of Operations....................................  48
Consolidated Statements of Stockholders' Equity and
     Comprehensive Income (Loss).........................................  49
Consolidated Statements of Cash Flows....................................  51
Notes to Consolidated Financial Statements...............................  52

                                       45

<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Stockholders and Board of Directors
CFS Bancshares, Inc. and Subsidiaries:


We have audited the accompanying  consolidated balance sheets of CFS Bancshares,
Inc. and  subsidiaries  (the Company) as of September 30, 2001 and 2000, and the
related  consolidated   statements  of  operations,   stockholders'  equity  and
comprehensive  income  (loss),  and  cash  flows  for  each of the  years in the
three-year  period  ended  September  30,  2001.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of CFS Bancshares, Inc.
and  subsidiaries  as of September  30, 2001 and 2000,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  September 30, 2001, in conformity with  accounting  principles  generally
accepted in the United States of America.

As more fully described in Note 19 to the financial statements,  the Company has
presented the put obligation  under its Employee Stock Ownership Plan outside of
stockholders'  equity as of September  30, 2001 and  restated  its  consolidated
financial  statements  for  September  30,  2000 and 1999 to  conform  with this
presentation.


                                       /s/ KPMG LLP


November 2, 2001

                                       46
<PAGE>
                                   CFS BANCSHARES, INC.
                                     AND SUBSIDIARIES

                               Consolidated Balance Sheets
                               September 30, 2001 and 2000
<TABLE>
<CAPTION>
                                 ASSETS                                             2001               2000
                                                                               -------------    -------------
<S>                                                                            <C>                  <C>
Cash and amounts due from depository institutions                              $   3,508,465        2,918,542
Federal funds sold and overnight deposits                                          2,610,541          675,813
                                                                               -------------    -------------
          Total cash and cash equivalents                                          6,119,006        3,594,355
Interest-earning deposits in other financial institutions                            163,142          163,142
Investment securities held to maturity (fair value of
    $1,244,186 and $3,506,924, respectively)                                       1,210,924        3,527,879
Investment securities available for sale, at fair value (cost of
    $46,448,236 and $40,099,815, respectively)                                    47,260,024       39,376,161
Federal Home Loan Bank stock                                                         747,500          747,500
Loans receivable, net                                                             41,109,567       48,238,040
Premises and equipment, net                                                        3,450,612        3,644,836
Real estate acquired by foreclosure, net                                             267,413           86,237
Accrued interest receivable on investment securities                                 146,704          149,907
Accrued interest receivable on mortgage-backed securities                            152,567          185,749
Accrued interest receivable on loans                                                 321,442          324,482
Other assets                                                                       2,379,392          525,440
                                                                               -------------    -------------
          Total assets                                                         $ 103,328,293      100,563,728
                                                                               =============    =============
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Interest-bearing deposits, including accrued interest                      $  76,945,341       76,334,441
    Advance payments by borrowers for taxes and insurance                            270,788          267,533
    Other liabilities                                                              1,262,817          725,003
    Employee stock ownership plan debt                                                56,000           64,000
    FHLB advances                                                                 14,950,000       14,950,000
                                                                               -------------    -------------
          Total liabilities                                                       93,484,946       92,340,977
Common stock subject to put option (27,986 and 27,586 shares, respectively)        1,175,412        1,103,440
Stockholders' equity:
    Serial preferred stock; 300,000 shares authorized; none outstanding                   --               --
    Common stock of $.01 par value; 700,000 shares authorized;
      139,220 and 130,000 shares issued and outstanding, respectively                  1,392            1,300
    Additional paid-in capital                                                     1,446,846        1,313,458
    Retained earnings-substantially restricted                                     6,739,788        6,318,928
    Accumulated other comprehensive income (loss)                                    519,545         (463,139)
    Unearned common stock held by ESOP                                               (39,636)         (51,236)
                                                                               -------------    -------------
          Total stockholders' equity                                               8,667,935        7,119,311
Commitments and contingencies
                                                                               -------------    -------------
          Total liabilities and stockholders' equity                           $ 103,328,293      100,563,728
                                                                               =============    =============
</TABLE>
See accompanying notes to consolidated financial statements.

                                       47
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                     Consolidated Statements of Operations

                 Years ended September 30, 2001, 2000, and 1999
<TABLE>
<CAPTION>
                                                                                 2001         2000          1999
                                                                              ----------   ----------    ----------
<S>                                                                           <C>           <C>           <C>
Interest income:
    Interest and fees on loans                                                $4,093,642    3,910,135     3,974,970
    Interest and dividend income on investment securities                        697,160      546,598       312,138
    Interest income on mortgage-backed securities                              2,233,571    2,125,940     1,863,885
    Interest income on federal funds sold                                        100,462       58,876        65,228
    Other interest income                                                         45,396       66,143        38,791
                                                                              ----------   ----------    ----------
          Total interest income                                                7,170,231    6,707,692     6,255,012
Interest expense:
    Interest on deposits                                                       2,884,557    2,827,735     2,719,276
    Interest on FHLB advances                                                    845,339      696,382       532,264
                                                                              ----------   ----------    ----------
          Total interest expense                                               3,729,896    3,524,117     3,251,540
                                                                              ----------   ----------    ----------
          Net interest income                                                  3,440,335    3,183,575     3,003,472
Provision for (recovery of) loan losses                                               --     (104,500)       45,000
                                                                              ----------   ----------    ----------
          Net interest income after provision for (recovery of) loan losses    3,440,335    3,288,075     2,958,472
                                                                              ----------   ----------    ----------
Other income:
    Service charges on deposit accounts                                          358,383      415,469       410,993
    Gains (losses) on sales and calls of investment securities                   110,712       (6,125)       27,486
    Other                                                                         33,589       46,293        99,889
                                                                              ----------   ----------    ----------
          Total other income                                                     502,684      455,637       538,368
                                                                              ----------   ----------    ----------
Other expense:
    Salaries and employee benefits                                             1,512,381    1,372,332     1,333,455
    Net occupancy expense                                                        130,828      120,853       115,754
    Federal insurance premiums                                                    48,972       56,786        97,494
    Data processing expenses                                                     215,450      208,665       229,336
    Professional services                                                        234,189      253,856       172,103
    Depreciation and amortization                                                243,035      281,325       301,281
    Advertising expense                                                           53,140       70,302       163,175
    Office supplies                                                               65,923       57,198        75,420
    Insurance expense                                                             69,546       66,061        60,669
    Other                                                                        467,350      480,840       345,673
                                                                              ----------   ----------    ----------
          Total other expense                                                  3,040,814    2,968,218     2,894,360
                                                                              ----------   ----------    ----------
          Income before income taxes                                             902,205      775,494       602,480
Income tax expense                                                               311,873      276,174       216,893
                                                                              ----------   ----------    ----------
          Net income                                                          $  590,332      499,320       385,587
                                                                              ==========   ==========    ==========
Basic earnings per share                                                      $     4.58         3.67          3.05
                                                                              ==========   ==========    ==========
Basic weighted average shares outstanding                                        128,846       99,035       126,419
                                                                              ==========   ==========    ==========
Diluted earnings per share                                                    $     4.58         3.40          2.89
                                                                              ==========   ==========    ==========
Diluted weighted average shares outstanding                                      128,846      106,835       133,619
                                                                              ==========   ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       48
<PAGE>
                CFS BANCSHARES, INC.
                  AND SUBSIDIARIES

 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
                    Years ended September 30, 2001, 2000, and 1999
<TABLE>
<CAPTION>
                                                                                                               ACCUMULATED
                                                                                           RETAINED              OTHER
                                                                        ADDITIONAL         EARNINGS -        COMPREHENSIVE
                                                         COMMON          PAID-IN         SUBSTANTIALLY           INCOME
                                                         STOCK           CAPITAL          RESTRICTED             (LOSS)
                                                         ------         ----------       -------------       -------------
<S>                                                     <C>            <C>                 <C>                      <C>
Balance at September 30, 1998
    (as previously reported)                            $ 1,300        1,295,860           6,732,461                7,602
Prior period adjustment                                      --               --          (1,251,548)                  --
                                                        -------       ----------         -----------            ---------
Balance at September 30, 1998 (as restated)               1,300        1,295,860           5,480,913                7,602
    Net income                                               --               --             385,587                   --
    Unrealized loss on investment
       securities available for sale, net                    --               --                  --             (510,400)
    Comprehensive loss
    Difference between fair value and cost
       of Employee Stock Ownership Plan
       shares committed to be released                       --           12,900                  --                   --
    Release of Employee Stock Ownership
       Plan shares                                           --               --                  --                   --
    Decrease in fair value of common stock
       subject to put option                                 --               --             300,948                   --
    Cash dividends declared ($.75 per share)                 --               --             (97,500)                  --
                                                        -------       ----------         -----------            ---------
Balance at September 30, 1999                           $ 1,300        1,308,760           6,069,948             (502,798)
    Net income                                               --               --             499,320                   --
    Unrealized gain on investment
       securities available for sale, net                    --               --                  --               39,659
    Comprehensive income
    Difference between fair value and cost
       of Employee Stock Ownership Plan
       shares committed to be released                       --            4,698                  --                   --
    Release of Employee Stock Ownership
       Plan shares                                           --               --                  --                   --
    Increase in fair value of common stock
       subject to put option                                 --               --            (152,840)                  --
    Cash dividends declared ($.75 per share)                 --               --             (97,500)                  --
                                                        -------       ----------         -----------            ---------
Balance at September 30, 2000                           $ 1,300        1,313,458           6,318,928             (463,139)
    Net income                                               --               --             590,332                   --
    Unrealized gain on investment
       securities available for sale, net                    --               --                  --              982,684
    Comprehensive income
    Exercise of stock options                                92          128,988                  --                   --
    Difference between fair value and cost
       of Employee Stock Ownership Plan
       shares committed to be released                       --            4,400                  --                   --
    Release of Employee Stock Ownership
       Plan shares                                           --               --                  --                   --
    Increase in fair value of common stock
       subject to put option                                 --               --             (71,972)                  --
    Cash dividends declared ($.75 per share)                 --               --             (97,500)                  --
                                                        -------       ----------         -----------            ---------
Balance at September 30, 2001                           $ 1,392        1,446,846           6,739,788              519,545
                                                        =======       ==========         ===========            =========

<CAPTION>
                                                         UNEARNED
                                                          COMMON
                                                           STOCK           TOTAL
                                                          HELD BY      STOCKHOLDERS'        COMPREHENSIVE
                                                           ESOP           EQUITY            INCOME (LOSS)
                                                         --------      ------------         -------------
<S>                                                      <C>            <C>                  <C>
Balance at September 30, 1998
    (as previously reported)                             (129,171)      7,908,052
Prior period adjustment                                        --      (1,251,548)
                                                        ---------     -----------
Balance at September 30, 1998 (as restated)              (129,171)      6,656,504
    Net income                                                 --         385,587             $  385,587
    Unrealized loss on investment
       securities available for sale, net                      --        (510,400)              (510,400)
                                                                                              ----------
    Comprehensive loss                                                                        $ (124,813)
                                                                                              ==========
    Difference between fair value and cost
       of Employee Stock Ownership Plan
       shares committed to be released                         --          12,900
    Release of Employee Stock Ownership
       Plan shares                                         64,085          64,085
    Decrease in fair value of common stock
       subject to put option                                   --         300,948
    Cash dividends declared ($.75 per share)                   --         (97,500)
                                                        ---------     -----------
Balance at September 30, 1999                             (65,086)      6,812,124
    Net income                                                 --         499,320             $  499,320
    Unrealized gain on investment
       securities available for sale, net                      --          39,659                 39,659
                                                                                              ----------
    Comprehensive income                                                                      $  538,979
                                                                                              ==========
    Difference between fair value and cost
       of Employee Stock Ownership Plan
       shares committed to be released                         --           4,698
    Release of Employee Stock Ownership
       Plan shares                                         13,850          13,850
    Increase in fair value of common stock
       subject to put option                                   --        (152,840)
    Cash dividends declared ($.75 per share)                   --         (97,500)
                                                        ---------     -----------
Balance at September 30, 2000                             (51,236)      7,119,311
    Net income                                                 --         590,332             $  590,332
    Unrealized gain on investment
       securities available for sale, net                      --         982,684                982,684
                                                                                              ----------
    Comprehensive income                                                                      $1,573,016
                                                                                              ==========
    Exercise of stock options                                  --         129,080
    Difference between fair value and cost
       of Employee Stock Ownership Plan
       shares committed to be released                         --           4,400
    Release of Employee Stock Ownership
       Plan shares                                         11,600          11,600
    Increase in fair value of common stock
       subject to put option                                   --         (71,972)
    Cash dividends declared ($.75 per share)                   --         (97,500)
                                                        ---------     -----------
Balance at September 30, 2001                             (39,636)      8,667,935
                                                        =========     ===========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       49
<PAGE>
                          CFS BANCSHARES, INC.
                            AND SUBSIDIARIES
                  Consolidated Statements of Cash Flows
             Years ended September 30, 2001, 2000, and 1999
<TABLE>
<CAPTION>
                                                                                  2001              2000             1999
                                                                                ---------       ----------         ---------
<S>                                                                             <C>                 <C>              <C>
Cash flows from operating activities:
    Net income                                                                  $ 590,332           499,320          385,587
    Adjustments to reconcile net income to net
       cash provided by operating activities:
          Provision for (recovery of) loan losses                                      --          (104,500)          45,000
          Depreciation and amortization                                           243,035           281,325          301,281
          Net amortization of premium and accretion
            of discount on investment securities                                   66,312            46,066          134,208
          Net accretion of deferred loan origination fees                         (86,827)          (50,188)         (61,607)
          Compensation expense recognized on
            ESOP shares allocation                                                 16,000            18,548           36,162
          Loss (gain) on sale of investment securities
            available for sale, net                                               (14,201)            4,083          (25,850)
          Loss (gain) on sale of investment securities held to
            maturity, net                                                              --             2,042               --
          Gain on call of investment securities
            available for sale, net                                               (96,511)               --           (1,636)
          Loss (gain) on sale of real estate acquired by foreclosure               (3,336)          (16,552)          (5,482)
          Decrease (increase) in accrued interest receivable                       39,425           (50,683)          31,858
          Decrease (increase) in other assets                                     (13,032)          529,765         (336,694)
          Increase (decrease) in other liabilities                                (14,944)         (256,599)         261,920
          Increase (decrease) in accrued interest on deposits                    (139,819)           88,647           38,448
                                                                                ---------        ----------        ---------
               Net cash provided by operating activities                          586,434           991,274          803,195
                                                                                ---------        ----------        ---------
</TABLE>

                                       50
<PAGE>
                            CFS BANCSHARES, INC.
                              AND SUBSIDIARIES

                   Consolidated Statements of Cash Flows

               Years ended September 30, 2001, 2000, and 1999
<TABLE>
<CAPTION>
                                                                           2001                2000              1999
                                                                       ------------        -----------        ------------
<S>                                                                    <C>                      <C>                <C>
Cash flows from investing activities:
    Increase in interest-earning
       deposits in other financial institutions                        $         --             (1,618)            (2,009)
    Proceeds from sale of investment securities held to maturity                 --             81,232                 --
    Purchases of investment securities held to maturity                          --                 --           (502,656)
    Purchases of mortgage - backed securities
       held to maturity                                                          --                 --           (953,886)
    Proceeds from principal collected on mortgage-
       backed securities and collateralized mortgage                      2,313,993          1,305,991          2,837,205
       obligations held to maturity
    Proceeds from sale of investment securities
       available for sale                                                 2,031,020          1,309,941          1,550,760
    Proceeds from maturity or call of investment
       securities available for sale                                      4,840,000            146,336          2,661,567
    Purchases of investment securities available for sale               (16,979,474)        (1,897,478)        (6,884,031)
    Purchases of mortgage-backed securities available for sale           (2,149,526)        (8,646,922)       (12,512,826)
    Proceeds from principal collected on mortgage-backed
       securities and collateralized mortgage obligations
       available for sale                                                 4,116,000          3,340,701          9,826,447
    Redemption (purchase) of FHLB stock                                          --           (155,000)            77,500
    Net change in loans                                                   6,971,492         (4,638,190)         1,781,327
    Proceeds from sale of premises and equipment                                 --              1,782                 --
    Purchases of premises and equipment                                     (48,811)           (56,510)          (141,718)
    Proceeds from sale of real estate acquired by foreclosure                65,969             57,346            145,450
    Improvements to real estate acquired by foreclosure                          --             (3,761)                --
                                                                       ------------       ------------        -----------
            Net cash provided by (used in) investing activities           1,160,663         (9,156,150)        (2,116,870)
                                                                       ------------       ------------        -----------
Cash flows from financing activities:
    Net increase in interest-bearing deposits                               750,719          1,065,471          1,249,686
    Cash dividends                                                          (97,500)           (97,500)           (97,500)
    Increase (decrease) in advance payments by
       borrowers for taxes and insurance                                      3,255              9,809            (42,924)
    Net proceeds from FHLB advances                                              --          3,100,000          2,650,000
    Repayment of ESOP debt                                                   (8,000)            (8,000)           (73,471)
    Proceeds from exercise of stock options                                 129,080                 --                 --
                                                                       ------------       ------------        -----------
            Net cash provided by financing activities                       777,554          4,069,780          3,685,791
                                                                       ------------       ------------        -----------
Net increase (decrease) in cash and cash equivalents                      2,524,651         (4,095,096)         2,372,166
Cash and cash equivalents at beginning of year                            3,594,355          7,689,451          5,317,285
                                                                       ------------       ------------        -----------
Cash and cash equivalents at end of year                               $  6,119,006          3,594,355          7,689,451
                                                                       ============       ============        ===========
Supplemental information on cash payments:
    Interest paid                                                      $  3,869,715          3,435,470          3,213,092
                                                                       ============       ============        ===========
    Income taxes paid                                                  $    374,205            337,500                 --
                                                                       ============       ============        ===========
Supplemental information on noncash investing
  and financing activities:
    Loans transferred to real estate acquired by foreclosure           $    243,809             75,998            127,604
                                                                       ============       ============        ===========
    Change in fair value of common stock subject to put option         $     71,972            152,840           (417,183)
                                                                       ============       ============        ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       51
<PAGE>

                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     CFS Bancshares, Inc. is a holding company for Citizens Federal Savings Bank
     (the  Bank)  and  the  Bank's  wholly-owned  subsidiary,  Citizens  Service
     Corporation - collectively the Company.  The Bank is a federally  chartered
     stock savings bank regulated by the Office of Thrift  Supervision (OTS) and
     certain other federal  agencies.  The Bank provides a full range of banking
     services to customers through its offices in Birmingham and Eutaw, Alabama.
     The Bank is subject to competition from other financial institutions in the
     market in which it operates.  The  following is a  description  of the more
     significant  accounting and reporting  policies that the Company follows in
     preparing and presenting its financial statements:

     (a)  BASIS OF PRESENTATION

          The  consolidated  financial  statements  include the  accounts of CFS
          Bancshares,  Inc. and its subsidiaries.  All intercompany accounts and
          transactions have been eliminated in consolidation.

          The  financial  statements  have  been  prepared  in  conformity  with
          accounting  principles  generally  accepted  in the  United  States of
          America. In preparing the financial statements, management is required
          to make estimates and assumptions  that affect the reported amounts of
          assets and  liabilities  and the  disclosure of contingent  assets and
          liabilities  as of the date of the  balance  sheet  and  revenues  and
          expenses for the period.  Actual  results  could differ  significantly
          from those estimates.

          One estimate that is particularly  susceptible to a significant change
          in the near term relates to the  determination  of the  allowance  for
          loan losses.  A significant  portion of the Bank's  mortgage  loans is
          secured by real estate in Alabama,  primarily in Jefferson  County and
          the  surrounding  areas.  The  ultimate  collectibility  of  the  loan
          portfolio is susceptible to changes in market conditions in Alabama.

          Management  believes  that the  allowance for loan losses is adequate.
          While  management  uses available  information to recognize  losses on
          loans,  future  changes to the  allowance  may be  necessary  based on
          changes  in  economic  conditions.  In  addition,  various  regulatory
          agencies,   as  an  integral  part  of  their   examination   process,
          periodically  review  the  Bank's  allowance  for  loan  losses.  Such
          agencies may require the Bank to recognize  additions to the allowance
          based on their  judgments about  information  available to them at the
          time of their examination.

                                                                     (Continued)

                                       52
<PAGE>

                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     (b)  CASH AND CASH EQUIVALENTS

          Cash and cash  equivalents  include  cash on  hand,  amounts  due from
          financial  institutions  and federal  funds sold.  Generally,  federal
          funds are purchased and sold for one-day periods.

     (c)  INVESTMENT SECURITIES

          The Bank  classifies  its  investment  securities  in two  categories:
          available  for sale or held to maturity.  Held to maturity  securities
          are those  securities for which the Bank has the ability and intent to
          hold the security until maturity.  All other securities are classified
          as available for sale.

          Available  for sale  securities  are  recorded at fair value.  Held to
          maturity securities are recorded at cost adjusted for the amortization
          or accretion of premiums and discounts.  Unrealized  holding gains and
          losses, net of the related income tax effects, on securities available
          for sale are  excluded  from  earnings  and are reported as a separate
          component of stockholders' equity until realized.

          A   decline   in  the  fair   value  of  any   available-for-sale   or
          held-to-maturity  security  below  cost  that  is  deemed  other  than
          temporary  results in a charge to earnings and the  establishment of a
          new cost basis for the security.

          Premiums and  discounts are amortized or accreted over the life of the
          related  security  as an  adjustment  to yield  using the  level-yield
          method and prepayment  assumptions.  Dividend and interest  income are
          recognized  when  earned.  Realized  gains and losses  for  investment
          securities  sold are  included in earnings  and are derived  using the
          specific  identification  method  for  determining  the  cost  of  the
          security sold.

          The  investment in the stock of the Federal Home Loan Bank is required
          of insured  institutions that utilize the services of the Federal Home
          Loan  Bank.  The stock has no quoted  fair  value and no ready  market
          exists.   However,   the  Federal  Home  Loan  Bank  has  historically
          repurchased the stock at cost.  Accordingly,  the stock is reported in
          the financial statements at cost.

     (d)  LOANS AND INTEREST INCOME

          Loans receivable are stated at their unpaid principal balance less the
          undisbursed portion of loans in process,  unearned interest income and
          an  allowance  for loan losses.  Interest  income on loans is recorded
          using a simple interest  method.  It is the general policy of the Bank
          to  discontinue  the accrual of interest  when  principal  or interest
          payments are delinquent 90 days or more or the ultimate  collection of
          either is in doubt.  Unearned  discount on loans purchased is accreted
          to income over the  remaining  life of the loans  purchased  using the
          level-yield method.

                                                                     (Continued)
                                       53
<PAGE>

                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999


          At  September  30, 2000,  approximately  23 percent of the Bank's loan
          portfolio consists of mortgage loans to churches.  The Bank's exposure
          to credit  loss in the event of  nonperformance  by the parties to the
          church  loans  is  represented  by the  contractual  amounts  of these
          instruments.

     (e)  ALLOWANCE FOR LOAN LOSSES

          Additions to the allowance  for loan losses are based on  management's
          evaluation of the loan portfolio  under current  economic  conditions,
          including   such  factors  as  the  volume  and   character  of  loans
          outstanding,  past loss experience,  and such other factors,  which in
          management's judgment,  deserve recognition in estimating loan losses.
          Loans are charged to the allowance when, in the opinion of management,
          such loans are deemed to be uncollectible.  Provisions for loan losses
          and recoveries of loans previously  charged to the allowance are added
          to the allowance.

          One of the procedures used by management in establishing the allowance
          for loan losses is the evaluation of potential  impairment on selected
          loans.  A  loan  is  considered   impaired  when,   based  on  current
          information and events, it is probable that the Bank will be unable to
          collect all amounts due according to the contractual terms of the note
          agreement.  Impaired  loans are measured based on the present value of
          expected  future  cash  flows,  discounted  at  the  loan's  effective
          interest rate, or at the loan's  observable  market price, or the fair
          value of the  collateral  if the loan is collateral  dependent.  Loans
          that are  determined  to be  impaired  require a  valuation  allowance
          equivalent to the amount of impairment. Impairment losses are included
          in the allowance for loan losses through a charge to the provision for
          loan  losses.  Cash  receipts  on  impaired  loans  that are  accruing
          interest are applied to principal and interest  under the  contractual
          terms of the loan agreement. Cash receipts on impaired loans for which
          the accrual of interest  has been  discontinued  are applied to reduce
          the  principal  amount  of such  loans  until the  principal  has been
          recovered and are recognized as interest income thereafter.

     (f)  LOAN FEES

          Loan origination  fees and certain direct loan  origination  costs are
          deferred and recognized over the lives of the related loans as a yield
          adjustment using a method which approximates the level-yield method.

     (g)  REAL ESTATE ACQUIRED BY FORECLOSURE

          For real  estate  acquired  through  foreclosure,  a new cost basis is
          established at the lower of cost or fair value, adjusted for estimated
          costs to sell, at the time of foreclosure.  Subsequent to foreclosure,
          foreclosed  assets  are  carried  at the  lower  of  fair  value  less
          estimated  costs to sell or cost,  with the  difference  recorded as a
          valuation  allowance,  on an  individual  asset basis.  Changes in the
          valuation allowance are recognized as charges or credits to earnings.

                                                                     (Continued)

                                       54
<PAGE>

                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999


     (h)  INCOME TAXES

          Deferred tax assets and  liabilities are recognized for the future tax
          consequences   attributable  to  differences   between  the  financial
          statement  carrying  amounts of existing  assets and  liabilities  and
          their  respective tax bases.  Deferred tax assets and  liabilities are
          measured  using enacted tax rates  expected to apply to taxable income
          in the years in which those  temporary  differences are expected to be
          realized or settled. The effect on deferred tax assets and liabilities
          of a change in tax rates is recognized in the period that includes the
          enactment date.

     (i)  PREMISES AND EQUIPMENT

          Land is stated at cost. Premises and equipment are stated at cost less
          accumulated depreciation.  Depreciation is provided over the estimated
          useful lives of the respective  assets on primarily the  straight-line
          method.

     (j)  EMPLOYEE STOCK OWNERSHIP PLAN

          The Company  sponsors an Employee Stock  Ownership Plan (ESOP),  which
          has  borrowed  funds from  another  financial  institution  to acquire
          common  stock  of the  Company.  The  Company  has  committed  to make
          contributions  to the plan  that,  when  combined  with  dividends  on
          unallocated  shares,  are  sufficient  to fund  interest and principal
          payments  on the  ESOP  debt.  Unallocated  shares  are  reflected  as
          unearned ESOP shares in stockholders'  equity. Shares are released and
          allocated to participants as principal payments are made on the loans.
          The Company  records  compensation  expense equal to the fair value of
          the committed-to-be-released shares.

          The Company presents the maximum  obligation to repurchase ESOP shares
          subject to a put at the option of withdrawing  participants outside of
          stockholders'  equity. This obligation is adjusted to reflect the fair
          value of the allocated  ESOP shares  subject to the put option at each
          reporting date. There is no put obligation related to unallocated ESOP
          shares   because  these  shares  have  not  yet  been  earned  by  the
          participants.

     (k)  EARNINGS PER SHARE

          Basic  earnings  per  share  is  calculated  by  dividing  net  income
          available to common  stockholders  by the  weighted  average of common
          shares  outstanding  during the year.  Diluted  earnings  per share is
          calculated by using the weighted average of common shares  outstanding
          adjusted to include the potentially dilutive effect of any outstanding
          stock options.

          If the effect of the fair value adjustment to the common stock subject
          to the put option is  dilutive,  basic and diluted  earnings per share
          amounts are  calculated  by reducing  net income  available  to common
          shareholders  by the increase in the fair value of ESOP shares subject
          to the put option and  reducing  weighted  average  basic and  diluted
          shares outstanding by the ESOP shares subject to the put option.

                                                                     (Continued)
                                       55
<PAGE>

                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     (l)  RECENTLY ISSUED ACCOUNTING STANDARDS

          In June 1998, the Financial  Accounting  Standards Board (FASB) issued
          Statement No. 133, "Accounting for Derivative  Instruments and Hedging
          Activities".   Statement  133  establishes  accounting  and  reporting
          standards for derivative  instruments,  including  certain  derivative
          instruments  embedded in other contracts,  and for hedging activities.
          It requires that an entity  recognize all derivatives as either assets
          or  liabilities  in the  statement of  financial  position and measure
          those instruments at fair value. For CFS Bancshares,  Inc.,  Statement
          133,  as  amended,  was  effective  October 1, 2000.  The  adoption of
          Statement  133 has not had an  impact  on the  consolidated  financial
          statements of the Company.

          In September 2000, the FASB issued Statement No. 140,  "Accounting for
          Transfers and  Servicing of Financial  Assets and  Extinguishments  of
          Liabilities".  Statement  140  is  effective  for  all  transfers  and
          servicing of financial assets and extinguishments of liabilities after
          March 31,  2001.  The  Statement  is  effective  for  recognition  and
          reclassification   of   collateral   and   disclosures   relating   to
          securitization  transactions  and  collateral  for fiscal years ending
          after  December  15,  2000.  Due to  the  nature  of  its  activities,
          Statement  140  has  had  no  impact  on  the  Company's  consolidated
          financial statements.

          In  July  2001,   the  FASB  issued   Statement  No.  141,   "Business
          Combinations",  and Statement No. 142,  "Goodwill and Other Intangible
          Assets". Statement 141 requires that the purchase method of accounting
          be used for all business  combinations  initiated after June 30, 2001.
          Statement 141 also specifies criteria  intangible assets acquired in a
          purchase  method business  combination  must meet to be recognized and
          reported apart from goodwill. Statement 142 will require that goodwill
          and  intangible  assets  with  indefinite  useful  lives no  longer be
          amortized,  but instead be tested for  impairment at least annually in
          accordance  with the provisions of Statement  142.  Statement 142 will
          also require that  intangible  assets with  estimable  useful lives be
          amortized  over  their  respective  estimated  useful  lives  to their
          estimated  residual values,  and reviewed for impairment in accordance
          with  FASB  Statement  No.  121,  "Accounting  for the  Impairment  of
          Long-Lived  Assets and for Long-Lived Assets to be Disposed Of", or as
          described  below,   FASB  Statement  No.  144,   "Accounting  for  the
          Impairment or Disposal of Long-Lived Assets".  The Company is required
          to adopt the provisions of Statement No. 141 effective immediately and
          Statement  142  effective  October  1,  2002.  The  Company  does  not
          currently  have any goodwill or other  intangibles  capitalized on its
          balance sheet. Accordingly,  the Company currently does not expect the
          adoption of  Statements  141 and 142 to have a material  impact on its
          consolidated financial statements.

          In July 2001,  the FASB issued  Statement 143,  "Accounting  for Asset
          Retirement Obligations". This standard requires entities to record the
          fair value of a liability  for an asset  retirement  obligation in the
          period  in  which  it is  incurred.  When  a  liability  is  initially
          recorded,  an  entity  must  capitalize  the  cost by  increasing  the
          carrying  amount of the  related  long-lived  asset.  Over  time,  the
          liability  is  accreted  to its  present  value each  period,  and the
          capitalized  cost is  depreciated  over the useful life of the related
          asset. Upon settlement of the liability,  an entity

                                                                     (Continued)
                                       56
<PAGE>

                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

          either settles the obligation for its recorded amount or incurs a gain
          or loss  upon  settlement.  The  Company  is  required  to  adopt  the
          provisions of Statement 143 for fiscal years  beginning after June 15,
          2002. The Company is currently  assessing  whether  Statement 143 will
          have an impact on its consolidated financial statements.

          In July 2001,  the Office of the Chief  Accountant and the Division of
          Corporation  Finance of the  Securities and Exchange  Commission  (the
          Commission)  released  Staff  Accounting  Bulletin No. 102, (SAB 102),
          "Selected Loan Loss Allowance  Methodology and Documentation  Issues",
          which  provides   certain  views  of  the  Commission   staff  on  the
          development,  documentation, and application of a systematic loan loss
          allowance  methodology.  SAB 102 does not change any of the accounting
          profession's  existing rules of accounting for loan loss provisions or
          allowances.   Rather,  SAB  102  draws  upon  existing  guidance,   in
          Commission rules and  interpretations,  generally accepted  accounting
          principles,  and generally accepted auditing  standards,  and explains
          certain views of the Commission  staff on applying  existing  guidance
          related to loan allowance methodologies and supporting  documentation.
          SAB 102 is effective  immediately.  SAB 102 has not had a  significant
          impact on the Company's consolidated financial statements.

          In August 2001, the FASB issued  Statement 144, which  supersedes both
          Statement  121 and the  accounting  and  reporting  provisions  of APB
          Opinion No. 30,  "Reporting  and Results of Operations - Reporting the
          Effects of  Disposal of a Segment of a  Business,  and  Extraordinary,
          Unusual and Infrequent  Occurring  Events and  Transactions"  (Opinion
          30),  for the  disposal  of a segment  of a  business  (as  previously
          defined  in that  Opinion).  Statement  144  retains  the  fundamental
          provisions in Statement 121 for recognizing  and measuring  impairment
          losses on long-lived  assets held for use and long-lived  assets to be
          disposed of by sale, while also resolving  significant  implementation
          issues  associated  with  Statement  121. For example,  Statement  144
          provides guidance on how a long-lived asset that is used, as part of a
          group should be evaluated  for  impairment,  establishes  criteria for
          when  a  long-lived  asset  is  held  for  sale,  and  prescribes  the
          accounting for a long-lived  asset that will be disposed of other than
          by sale.  Statement 144 retains the basic  provisions of Opinion 30 on
          how to present  discontinued  operations  in the income  statement but
          broadens that presentation to include a component of an entity (rather
          than a segment of a business).  Unlike  Statement  121, an  impairment
          assessment  under  Statement  144 will not result in a  write-down  of
          goodwill. Rather, goodwill is evaluated for impairment under Statement
          No. 142, "Goodwill and Other Intangible Assets".

          The Company is required to adopt  Statement 144 no later than the year
          beginning  after  December 15, 2001, and plans to adopt its provisions
          for the quarter ending  December 31, 2001.  Management does not expect
          the  adoption  of  Statement  144 to  have a  material  impact  on the
          Company's financial statements because the impairment assessment under
          Statement 144 is largely  unchanged from Statement 121. The provisions
          of the Statement for assets held for sale or other disposal  generally
          are required to be applied  prospectively  after the adoption  date to
          newly initiated  disposal  activities.  Therefore,  management  cannot
          fully  determine the potential  effects that adoption of Statement 144
          will have on the Company's financial statements.

                                                                     (Continued)

                                       57
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

(2)  CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS

     The  Bank is  required  to  maintain  certain  daily  reserve  balances  in
     accordance  with  the  Federal  Reserve  Board  requirements.   The  Bank's
     applicable  cash and cash  equivalents  exceeded the  required  balances of
     approximately $25,000 at September 30, 2001 and 2000.


(3)  INVESTMENT SECURITIES

     The amortized cost and approximate fair value of investment securities held
     to maturity at September 30, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
                                                          2001                          2000
                                               --------------------------     -------------------------
                                                AMORTIZED        FAIR          AMORTIZED       FAIR
                                                  COST          VALUE            COST          VALUE
                                               -----------    ----------      ----------    -----------
       <S>                                     <C>            <C>             <C>           <C>
       U.S. Government agencies                $        --            --         500,000        496,360
       Mortgage-backed securities                  893,349       924,957       1,877,722      1,868,204
       Collateralized mortgage
         obligations                               317,575       319,229       1,150,157      1,142,360
                                                ----------    ----------      ----------     ----------

                                               $ 1,210,924     1,244,186       3,527,879      3,506,924
                                                ==========    ==========      ==========     ==========
</TABLE>

     The amortized  cost and  approximate  fair value of  investment  securities
     available for sale at September 30, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
                                                          2001                          2000
                                               --------------------------     -------------------------
                                                AMORTIZED        FAIR          AMORTIZED       FAIR
                                                  COST          VALUE            COST          VALUE
                                               -----------    ----------      ----------    -----------
       <S>                                     <C>            <C>             <C>           <C>
       U.S. Treasury and U.S.
         Government agencies                   $ 7,665,279       7,999,142      8,804,664      8,529,274
       Equity securities                         5,877,375       5,875,380      3,102,882      3,057,864
       Mortgage-backed securities               15,918,309      16,185,096     14,262,037     13,913,202
       Collateralized mortgage
         obligations                            16,987,273      17,200,406     13,930,232     13,875,821
                                                ----------     -----------    -----------    -----------

                                               $46,448,236      47,260,024     40,099,815     39,376,161
                                                ==========     ===========    ===========    ===========
</TABLE>
                                                                     (Continued)
                                       58
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     The gross  unrealized  gains and losses of  investment  securities  held to
     maturity at September 30, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
                                                              2001                                  2000
                                                ----------------------------------    ----------------------------------
                                                    GROSS              GROSS              GROSS              GROSS
                                                  UNREALIZED         UNREALIZED         UNREALIZED         UNREALIZED
                                                    GAINS              LOSSES             GAINS              LOSSES
                                                -------------      -------------      -------------      --------------
<S>                                          <C>                    <C>                <C>                 <C>
       U.S. Treasury and U.S.
         Government agencies                 $            --                  --                --              (3,640)
       Mortgage-backed securities                     31,608                  --             1,805             (11,323)
       Collateralized mortgage
         obligations                                   1,654                  --                --              (7,797)
                                                ------------       -------------      ------------       -------------

                                             $        33,262                  --             1,805             (22,760)
                                                ============       =============      ============       =============
</TABLE>

     The gross  unrealized gains and losses of investment  securities  available
     for sale at September 30, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
                                                              2001                                  2000
                                                ---------------------------------     ---------------------------------
                                                    GROSS              GROSS              GROSS              GROSS
                                                  UNREALIZED         UNREALIZED         UNREALIZED         UNREALIZED
                                                    GAINS              LOSSES             GAINS              LOSSES
                                                -------------      --------------     -------------      --------------
<S>                                            <C>                  <C>                <C>                 <C>
       U.S. Treasury and U.S.
         Government agencies                   $     333,863                  --            26,860            (302,250)
       Equity securities                                  --              (1,995)               --             (45,018)
       Mortgage-backed securities                    266,787                  --            18,523            (367,358)
       Collateralized mortgage
         obligations                                 255,264             (42,131)           72,025            (126,436)
                                                ------------       -------------      ------------       -------------

                                               $     855,914             (44,126)          117,408            (841,062)
                                                ============       =============      ============       =============
</TABLE>
                                                                     (Continued)
                                       59
<PAGE>

                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     The amortized cost and approximate fair value of debt investment securities
     available  for sale at September 30, 2001, by  contractual  maturities  are
     shown below. Actual maturities could differ from contractual maturities due
     to call or prepayment provisions.
<TABLE>
<CAPTION>
                                                                   AMORTIZED             FAIR
                                                                     COST                VALUE
                                                                  ------------         -----------
         <S>                                                      <C>                  <C>
         Due from five to ten years                               $  7,665,279           7,999,142
         Mortgage-backed securities and collateralized
           mortgage obligations                                     32,905,582          33,385,502
                                                                   -----------         ------------

                                                                  $ 40,570,861          41,384,644
                                                                   ===========         ============
</TABLE>

     Proceeds  from  sales of  investment  securities  available  for sale  were
     $2,031,020,  $1,309,941,  and $1,550,760 for the years ended  September 30,
     2001, 2000, and 1999, respectively. Gross gains of $17,872 and gross losses
     of $3,671 were  realized on those sales for the years ended  September  30,
     2001.  Gross  losses of $4,083  were  realized on those sales for the years
     ended  September  30, 2000.  Gross gains of $25,850 were  realized on those
     sales for the years ended September 30, 1999.

     Proceeds from sales of investment  securities held to maturity were $81,232
     for the year ended  September  30,  2000.  The  amortized  cost of the sold
     investment  security held to maturity was $83,274 resulting in gross losses
     of $2,042 for the year ended September 30, 2000. The sale of the investment
     security held to maturity in 2000 occurred  after the Bank  collected  over
     85% of the principal outstanding.  There were no investment securities held
     to maturity sold during 2001 or 1999.

     Investment securities with amortized cost of $36,041,628 and $35,128,321 at
     September  30, 2001 and 2000,  respectively,  were pledged to secure public
     deposits  as  required  by law and for  other  purposes.  Additionally,  in
     accordance  with  Office of  Thrift  Supervision  regulations,  the Bank is
     required to maintain a certain percentage (4 percent at September 30, 2001)
     of its withdrawable  deposits and current borrowings in cash, U.S. Treasury
     obligations,  or other approved  investments  that are readily  convertible
     into cash. The Bank met this liquidity requirement at September 30, 2001.

                                                                     (Continued)
                                       60
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

(4)  LOANS

     A summary of the  components  of the  Company's  net loans at September 30,
     2001 and 2000 follows:
<TABLE>
<CAPTION>
                                                                                   2001                2000
                                                                             -------------         ------------
        <S>                                                                  <C>                     <C>
        Total loans                                                          $  43,135,399           50,712,916

        Plus unearned premium on loans purchased                                     4,726               18,877

        Less:  Unamortized loan origination fees                                  (548,387)            (635,214)
                Undisbursed portion of loans in process                         (1,085,403)          (1,516,383)
                Allowance for loan losses                                         (396,768)            (342,156)
                                                                              ------------        -------------

        Net loans                                                            $  41,109,567           48,238,040
                                                                              ============        =============
</TABLE>

       The composition of the total loan portfolio follows:
<TABLE>
<CAPTION>
                                                                                 2001                   2000
                                                                             -------------           ------------
        <S>                                                                  <C>                       <C>
        Residential real estate mortgage                                     $   27,073,539            32,424,554
        Consumer installment                                                      1,050,227             1,318,057
        Non residential mortgage                                                 14,708,972            15,763,271
        Commercial                                                                  302,661             1,207,034
                                                                              -------------          ------------

               Total loans                                                   $   43,135,399            50,712,916
                                                                              =============          ============
</TABLE>

     A summary of the  transactions  in the  allowance  for loan  losses for the
     years ended September 30, 2001, 2000, and 1999 follows:
<TABLE>
<CAPTION>
                                                              2001                 2000                1999
                                                          ------------         ------------        ------------
        <S>                                              <C>                        <C>                 <C>
        Balance at beginning of year                     $     342,156              310,157             553,797
        Net charge-offs
            Gross charge-offs                                  (40,973)             (84,401)           (326,590)
            Gross recoveries                                    95,585              220,900              37,950
        Provision for (recovery of) loan losses                     --             (104,500)             45,000
                                                          ------------         ------------        ------------

        Balance at end of year                           $     396,768              342,156             310,157
                                                          ============         ============        ============
</TABLE>
                                                                     (Continued)

                                       61
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999


     Loans on which the accrual of interest  had been  discontinued  amounted to
     $1,567,709 and $1,755,011 as of September 30, 2001 and 2000,  respectively.
     If these loans had been current  throughout  their terms,  interest  income
     would have been increased by $89,385,  $66,594, and $62,189 for 2001, 2000,
     and 1999, respectively.

     Impaired  loans  at  September  30,  2001  and 2000  totaled  $248,979  and
     $148,075,  respectively.  The  allowance  amounts,  which were $155,475 and
     $54,572 in 2001 and 2000, respectively, were primarily determined using the
     fair value of the related  collateral.  The average recorded  investment in
     impaired loans for the years ended  September 30, 2001,  2000, and 1999 was
     $198,527,  $149,078,  and  $221,001,   respectively.  The  interest  income
     recognized on impaired loans for the years ended September 30, 2001,  2000,
     and 1999 was approximately $0, $85, and $3,744, respectively.

     During 2001, certain officers and directors of the Company, including their
     immediate families and companies with which they are associated,  were loan
     customers  of the  Bank.  Such  loans  are made in the  ordinary  course of
     business at normal credit  terms,  including  interest rate and  collateral
     requirements,  and do not  present  more  than a normal  credit  risk.  The
     following  is a  summary  of  activity  during  2001  with  respect  to the
     aggregate loans to these individuals and their associates:

              Balance at September 30, 2000              $   1,760,860
                  New loans                                     24,110
                  Repayments                                (1,157,486)
                                                         -------------

              Balance at September 30, 2001              $     627,484
                                                         =============

                                                                     (Continued)

                                       62
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

(5)  PREMISES AND EQUIPMENT

     Premises and  equipment at September  30, 2001 and 2000 are  summarized  as
     follows:
<TABLE>
<CAPTION>
                                                                        2001               2000
                                                                  -------------       ------------
       <S>                                                      <C>                         <C>
       Land                                                       $     733,242             733,242
       Buildings and leasehold improvements                           3,052,339           3,038,911
       Furniture, fixtures and equipment                              2,216,763           2,197,013
                                                                   -------------       ------------

                                                                      6,002,344           5,969,166

       Less: accumulated depreciation                                (2,551,732)         (2,324,330)
                                                                   -------------       ------------

                                                                  $   3,450,612           3,644,836
                                                                   =============       ============
</TABLE>
(6)  REAL ESTATE ACQUIRED BY FORECLOSURE

     Real estate acquired by foreclosure, net, as of September 30, 2001 and 2000
     totaled $267,413 and $86,237,  respectively.  There were no transactions in
     the  allowance  for losses on the real estate  acquired by  foreclosure  in
     2001, 2000 or 1999.


(7)  INTEREST-BEARING DEPOSITS

     At  September  30,  2001 and  2000,  the  composition  of  interest-bearing
     deposits and applicable weighted average interest rates were as follows:
<TABLE>
<CAPTION>
                                                                                          2001                2000
                                                                                     ----------------    --------------

       <S>                                                                           <C>                      <C>
       NOW accounts (2001 - .45%. 2000 - .43%)                                       $    9,015,368           8,755,081
       Super NOW accounts (2001- 2.00%, 2000 - 2.27%)                                     4,326,760           4,699,077
       Passbook savings (2001 - 2.49%, 2000 - 2.49%)                                     17,258,958          16,464,242
       Time deposits:
           Certificates of deposit less than $100,000 (2001 - 4.58%,
       2000 - 5.09%)                                                                     22,180,546          18,572,682
           Certificates of deposit greater than $100,000 (2001 - 3.98%,
              2000 -5.93%)                                                               24,046,106          27,585,937
                                                                                      -------------      --------------

                Total time deposits                                                      46,226,652          46,158,619

       Accrued interest on deposits                                                         117,603             257,422
                                                                                      -------------      --------------

                Total deposits                                                       $   76,945,341          76,334,441
                                                                                      =============      ==============
</TABLE>
                                                                     (Continued)

                                       63
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     Weighted  average  interest  rates on deposit  accounts  were as follows at
     September 30, 2001 and 2000:
<TABLE>
<CAPTION>
                                                                              2001              2000
                                                                            --------           -------

             <S>                                                                <C>               <C>
             NOW and demand deposit accounts                                    .45%              .43%
             Super NOW accounts                                                2.00%             2.27%
             Passbook savings accounts                                         2.49%             2.49%
             Certificates of deposit less than $100,000                        4.58%             5.09%
             Certificates of deposit greater than $100,000                     3.98%             5.93%
                 Total                                                         3.29%             4.12%
</TABLE>


     Interest on deposits is summarized as follows:
<TABLE>
<CAPTION>
                                                          2001               2000                1999
                                                      ------------       ------------        ------------

             <S>                                     <C>                       <C>                 <C>
             NOW accounts                            $      59,672             40,317              36,040
             Super NOW accounts                             91,932            107,477              97,103
             Passbook savings                              419,823            416,499             435,261
             Time deposits                               2,313,130          2,263,442           2,150,872
                                                      ------------       ------------        ------------

                                                     $   2,884,557          2,827,735           2,719,276
                                                      ============       ============        ============
</TABLE>

     The amounts and  maturities of time deposits at September 30, 2001 and 2000
     are as follows:
<TABLE>
<CAPTION>
                                                                              2001               2000
                                                                          ------------      ------------

             <S>                                                         <C>                  <C>
             Within one year                                             $  40,109,012        38,924,656
             After one but within two years                                  3,544,087         4,381,218
             After two but within three years                                1,782,162         2,164,490
             After three but within four years                                 468,071           365,486
             After four but within five years                                  296,651           282,622
             Greater than five years                                            26,669            40,147
                                                                          ------------      ------------

                                                                         $  46,226,652        46,158,619
                                                                          ============      ============
</TABLE>
                                                                     (Continued)

                                       64
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999


(8)  BORROWED FUNDS

     The  Company  was  liable to the  Federal  Home Loan Bank of Atlanta on the
     following advances at September 30, 2001:
<TABLE>
<CAPTION>
                                                                             FIXED
                                                                           INTEREST
             MATURITY DATE                                                   RATE
             -------------------------------------------------------       ----------
             <S>                                                               <C>         <C>
             September 2004                                                    5.71%       $    5,000,000
             June 2008                                                         5.51%            4,200,000
             January 2011                                                      5.05%            5,750,000
                                                                                            -------------

                 Total (weighted average rate of 5.40%)                                    $   14,950,000
                                                                                            =============
</TABLE>

     At September 30, 2001, the advances were collateralized by a blanket pledge
     of  first-mortgage  residential  loans.  The September 2004 advance and the
     June  2008  advance  are   callable  in  September   2001  and  June  2003,
     respectively.


(9)  INCOME TAXES

     For the years ended September 30, 2001, 2000, and 1999,  income tax expense
     (benefit) consists of the following:
<TABLE>
<CAPTION>
                                                           2001               2000               1999
                                                      ------------       ------------       ------------
             <S>                                      <C>                     <C>                <C>
             Current:
                 Federal                              $    386,657            274,210            113,290
                 State                                      28,866             19,219             12,037
                                                      ------------       ------------       ------------

                                                           415,523            293,429            125,327
                                                      ------------       ------------       ------------

             Deferred:
                 Federal                                   (93,946)           (14,845)            84,509
                 State                                      (9,704)            (2,410)             7,057
                                                      ------------       ------------       ------------

                                                          (103,650)           (17,255)            91,566
                                                      ------------       ------------       ------------

                                                      $    311,873            276,174            216,893
                                                      ============       ============       ============
</TABLE>
                                                                     (Continued)
                                       65
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     The income tax  expense  above  represents  an  effective  tax rate of 34.6
     percent,  35.6  percent,  and  36.0  percent  for  2001,  2000,  and  1999,
     respectively.  The  actual  income tax  expense  for 2001,  2000,  and 1999
     differs  from the  "expected"  income tax  expense for those years which is
     computed  by  applying  the U.S.  Federal  corporate  income tax rate of 34
     percent for 2001, 2000, and 1999 to income before income taxes as follows:
<TABLE>
<CAPTION>
                                                                     2001                  2000                1999
                                                                 ------------          ------------        ------------
       <S>                                                      <C>                         <C>                 <C>
       Computed "expected" income tax expense                   $     306,750               263,668             204,844
       State tax, net of federal effect                                12,647                11,095               9,400
       Dividends paid to ESOP                                          (7,851)               (7,845)             (7,845)
       Other, net                                                         327                 9,256              10,494
                                                                 ------------          ------------        ------------

                                                                $     311,873               276,174             216,893
                                                                 ============          ============        ============
</TABLE>

     The tax  effects of  temporary  differences  that give rise to  significant
     portions  of the  deferred  tax  assets and  deferred  tax  liabilities  at
     September 30, 2001 and 2000 are presented below:
<TABLE>
<CAPTION>
                                                                                           2001                2000
                                                                                       ------------        ------------
       <S>                                                                           <C>                         <C>
       Deferred tax assets:
           Unrealized loss on investment securities available for sale                $          --             260,515
           Loans - unearned loan fee income                                                  11,667              14,381
           Nonaccrual interest                                                              105,642             125,033
           Foreclosed property                                                               43,794              21,726
           Prepaid expenses and accruals                                                     11,018              11,791
           Other                                                                              1,586              10,580
                                                                                       ------------        ------------

                                                                                            173,707             444,026
                                                                                       ------------        ------------

       Deferred tax liabilities:
           Unrealized gain on investment securities available for sale                      292,243                  --
           Loans - allowance for loan losses                                                 41,960              46,186
           FHLB stock                                                                        40,942              40,942
           Premises and equipment - differences in depreciation expense                          --              15,422
           Loan basis - book to tax difference                                                   --              93,704
           Other                                                                                 --                 102
                                                                                       ------------        ------------

                                                                                            375,145             196,356
                                                                                       ------------        ------------

       Net deferred tax (liability) asset                                             $    (201,438)            247,670
                                                                                       ============        ============
</TABLE>
                                                                     (Continued)

                                       66
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999


     Management  believes results of future operations will generate  sufficient
     taxable  income and resulting tax  liabilities  to realize the deferred tax
     asset.  There was no valuation  allowance at September 30, 2001 or 2000, or
     any change in the valuation  allowance during the years ended September 30,
     2001, 2000, or 1999


(10) EMPLOYEE BENEFIT PLANS

     The Company  sponsors an Employee Stock Ownership Plan (ESOP).  The ESOP is
     available  to  all   employees   who  have  met  certain  age  and  service
     requirements.  Contributions  to the plan are  determined  by the  board of
     directors,  based  on  a  percentage  of  the  total  payroll  and  certain
     limitations as to the deductibility  for tax purposes.  The Company intends
     to make  contributions  to the Plan that,  when combined with  dividends on
     unallocated  shares, are sufficient to fund interest and principal payments
     on the ESOP  debt.  The  ESOP has  borrowed  funds  on three  occasions  to
     purchase  shares of common  stock of the Bank for the  benefit  of the ESOP
     participants.

     The common stock of the Company  acquired by the ESOP is held as collateral
     for the loans.  As of  September  30, 2001,  the ESOP holds  30,790  (22.11
     percent) shares of the Company's  outstanding stock, of which 27,986 shares
     have been allocated to the participants. The Company makes contributions to
     the ESOP,  which are used to make loan  interest  and  principal  payments.
     Shares are released and  allocated  to the  participants'  prorata with the
     paydowns on the ESOP debt. All dividends paid on allocated and  unallocated
     shares are used to reduce interest expense related to the ESOP debt.

     The first ESOP loan (1989 loan) was paid off as of September 30, 1999.  The
     second ESOP loan (1995 loan) was paid off as of  September  30,  1999.  The
     third  ESOP loan  (1998  loan) is  repayable  in  monthly  installments  of
     interest  at the prime rate and annual  installments  of  principal  in the
     amount of $8,000.  The loan  originated  on March 9, 1998 to purchase  4005
     shares (1998 shares).  The principal  outstanding at September 30, 2001 and
     2000 was $56,000 and  $64,000,  respectively.  Unearned  shares at year-end
     2001 and 2000  totaled  2,571 and 2,971 with fair  values of  $107,982  and
     $118,840, respectively.

     Contributions  to fund the installments on the 1989 loan have been recorded
     as compensation expense.  Such contributions  approximated $13,000 in 1999.
     The fair  value of the  committed-to-be-released  1995 and 1998  shares are
     also reported as  compensation  expense.  Such shares totaled 400, 400, and
     860 for  2001,  2000,  and 1999,  respectively.  The  related  compensation
     expense approximated $17,000, $18,000, and $36,000 in 2001, 2000, and 1999,
     respectively.

     Under the  terms of the ESOP,  withdrawing  participants  that have  either
     reached  retirement or otherwise  have been separated from service for five
     years can liquidate their  investment in the Company's  common stock at its
     fair value by selling the stock to the Company or the ESOP. The Company may
     repurchase the shares in 20% increments annually over a five-year period.

                                                                     (Continued)

                                       67
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     The Bank also sponsors a 401(k)  retirement plan (401(k)).  The 401(k) is a
     trusteed,  salary  reduction  plan which is available to all  employees who
     have  completed one year of service and have attained the age of 21. 401(k)
     participants  may elect to defer a percentage  of their  compensation  each
     year up to a certain dollar limit established by law. The Bank's management
     may make a discretionary matching contribution equal to a percentage of the
     amount of salary  reduction  401(k)  participants  elected  to defer.  Such
     discretionary  contributions  for the years ended September 30, 2001, 2000,
     and 1999 were $28,030,  $28,536, and $27,078,  respectively.  The Bank also
     provides  major  medical  and  dental   coverage   funded  through  pre-tax
     withholdings from the participants.


(11) EARNINGS PER SHARE

     Presented  below is a summary of the components used to calculate basic and
     diluted  earnings per share for the years ended  September 30, 2001,  2000,
     and 1999.  The effect of the  increase  in the fair  value  during the year
     ended  September  30,  2000 of the  allocated  ESOP shares  outstanding  at
     October 1, 1999 and the effect of the  assumed  exercise of all put options
     on the weighted average shares outstanding for the year ended September 30,
     2000 have been included in the 2000 earnings per share calculation  because
     the effects were dilutive.  Such effects were  anti-dilutive  for the years
     ended September 30, 2001 and 1999 and have,  therefore,  been excluded from
     the respective earnings per share calculations.
<TABLE>
<CAPTION>
                                                                         2001               2000               1999
                                                                    ------------       ------------       ------------
<S>                                                                <C>                      <C>                <C>
       Numerator:
           Net income                                              $     590,332            499,320            385,587
           Increase in fair value of put obligation                           --           (135,800)                --
                                                                    ------------       ------------       ------------

           Numerator for basic and diluted net income
             available to common shareholders                      $     590,332            363,520            385,587
                                                                    ============       ============       ============

       Denominator:
           Weighted average common shares
             outstanding                                                 128,846            126,621            126,419
           Effect of assumed exercise of put option by
             withdrawing ESOP participants                                    --            (27,586)                --
                                                                    ------------       ------------       ------------

           Denominator for basic net income per
             common share                                                128,846             99,035            126,419
                                                                    ============       ============       ============
</TABLE>
                                                                     (Continued)

                                       68
<PAGE>

                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999
<TABLE>
<CAPTION>
                                                                         2001               2000               1999
                                                                    ------------       ------------       ------------
<S>                                                                      <C>                <C>                <C>
       Denominator:
           Weighted average common shares
            outstanding                                                  128,846            126,621            126,419
           Net effect of the assumed exercise of stock
            options-based on the treasury stock
            method using average market price for
            the year                                                          --              7,800              7,200
                                                                    ------------       ------------       ------------

           Weighted average diluted shares
            outstanding                                                  128,846            134,421            133,619
           Effect of assumed exercise of put option by
            withdrawing ESOP participants                                     --            (27,586)                --
           Denominator for diluted net income per
            share - adjusted weighted average shares
            and assumed conversions                                      128,846            106,835            133,619
                                                                    ============       ============       ============

       Basic net income per common share:
           Net income                                               $       4.58               3.94               3.05
           Effect of increase in fair value of put
            obligation                                                        --              (0.27)                --
                                                                    ------------       ------------       ------------
           Basic net income per common share                        $       4.58               3.67               3.05
                                                                    ============       ============       ============
       Diluted net income per common share:
           Net income                                               $       4.58               3.71               2.89
           Effect of increase in fair value of put
            obligation                                                        --              (0.31)                --
                                                                    ------------       ------------       ------------
           Diluted net income per common share                      $       4.58               3.40               2.89
                                                                    ============       ============       ============
</TABLE>
                                                                     (Continued)

                                       69
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

(12) COMPREHENSIVE INCOME

     Presented below is a summary of other  comprehensive  income (loss) for the
     years ended September 30, 2001, 2000, and 1999:
<TABLE>
<CAPTION>
                                                                                   YEAR ENDED SEPTEMBER 30,
                                                                         2001                2000               1999
                                                                     ------------       ------------       ------------
<S>                                                                 <C>                       <C>              <C>
       Other comprehensive income (loss) before tax:
           Unrealized holding gain (loss) on
            investment securities available for sale
            arising during the period, net                          $   1,646,154             57,884           (770,055)
           Less: reclassification adjustment for gains
            (losses) on investment securities available
            for sale realized in net income                               110,712             (4,083)            27,486
                                                                     ------------       ------------       ------------

           Other comprehensive income (loss), before
            income taxes                                                1,535,442             61,967           (797,541)
                                                                     ------------       ------------       ------------

       Income tax expense (benefit) related to other
           comprehensive income:
           Unrealized holding gain (loss) on
            investment securities available for sale
            arising during the period, net                                592,615             20,838           (276,147)
           Less: reclassification adjustment for gains
            (losses) on investment securities available
            for sale realized in net income                                39,857             (1,470)            10,994
                                                                     ------------       ------------       ------------

                 Total income tax expense (benefit)
                   related to other comprehensive
                   income                                                 552,758             22,308           (287,141)
                                                                     ------------       ------------       ------------
           Other comprehensive income (loss)                        $     982,684             39,659           (510,400)
                                                                     ============       ============       ============
</TABLE>
                                                                     (Continued)

                                       70
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

(13) STOCKHOLDERS' EQUITY

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

     Quantitative measures established by regulations to ensure capital adequacy
     require the Bank to maintain  minimum  amounts and ratios (set forth in the
     table below) of total and Tier I capital to  risk-weighted  assets,  and of
     Tier I capital to average assets as set forth in the table below.
<TABLE>
<CAPTION>
                                                                     FOR CAPITAL ADEQUACY
                                               ACTUAL                      PURPOSES                WELL CAPITALIZED
                                    -----------------------------  --------------------------  --------------------------
                                       AMOUNT           RATIO        AMOUNT          RATIO        AMOUNT        RATIO
                                    --------------   ------------  ------------    ----------  -------------  -----------
       <S>                          <C>                 <C>        <C>              <C>        <C>             <C>
       As of September 30, 2001:
          Total capital
            (to risk weighted
            assets)                 $ 10,088,000        22.1%       3,645,000        8.0%       4,556,000       10.0%
          Tier I capital
            (to risk weighted
            assets)                    9,147,000        20.1%       1,822,000        4.0%       2,734,000        6.0%
          Tier I capital
            (to average assets)        9,147,000         9.0%       4,074,000        4.0%       5,093,000        5.0%

       As of September 30, 2000:
          Total capital
            (to risk weighted
            assets)                 $  8,780,000        17.6%       3,997,304        8.0%       4,996,630       10.0%
          Tier I capital
            (to risk weighted
            assets)                    8,610,000        17.2%       1,998,652        4.0%       2,997,978        6.0%
          Tier I capital
            (to average assets)        8,610,000         8.8%       3,933,362        4.0%       4,916,703        5.0%
</TABLE>
                                                                     (Continued)

                                       71
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     Savings  institutions with more than a "normal" level of interest rate risk
     are required to maintain  additional total capital.  A savings  institution
     with a  greater  than  normal  interest  rate  risk is  required  to deduct
     specified  amounts  from total  capital,  for purposes of  determining  its
     compliance with risk-based capital requirements. The Bank was in compliance
     with capital standards at September 30, 2001 and 2000.

     Retained  earnings at  September  30, 2001 and 2000  include  approximately
     $2,200,000 for which no provision for income tax has been made. This amount
     represents  allocations of income to bad debt deductions for federal income
     tax purposes.  If, in the future, this portion of retained earnings is used
     for any purpose other than to absorb tax bad debt losses,  income taxes may
     be  imposed at the then  applicable  rates.  An  additional  $1,400,000  of
     retained  earnings is also  restricted at September 30, 2001 and 2000, as a
     result of the liquidation  account  established  upon conversion to a stock
     company.  No dividends may be paid to  stockholders if such dividends would
     reduce  the  net  worth  of the  Bank  below  the  amount  required  by the
     liquidation account.


(14) CONTINGENCIES

     The Company is defending  various  lawsuits  and claims  arising out of the
     conduct of its business.  While the ultimate  results of these lawsuits and
     claims cannot be predicted  with  certainty,  in the opinion of management,
     the  ultimate  disposition  of these  matters  will not have a  significant
     effect on the consolidated  financial  position or results of operations of
     the Company.


(15) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

     The Bank is a party to financial instruments with off-balance-sheet risk in
     the normal course of business to meet the financing needs of its customers.
     These  financial  instruments  include  commitments to extend credit.  Such
     instruments  involve  elements  of credit  risk in  excess  of the  amounts
     recognized in the financial statements.

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

                                                                     (Continued)

                                       72
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     The  off-balance   sheet  financial   instruments  whose  contract  amounts
     represent credit risk as of September 30, 2001, are as follows:

           Commitments to extend credit               $   850,000
           Commitments to fund lines of credit              1,000
                                                      -----------

                                                      $   851,000
                                                      ===========

     Commitments  to extend credit are  agreements to lend to a customer as long
     as there is no  violation of any  condition  established  in the  contract.
     Commitments  generally  have fixed  expiration  dates or other  termination
     clauses and may require payment of a fee. Since some of the commitments are
     expected to expire without being drawn upon, the total  commitment  amounts
     do not necessarily represent future cash requirements.


(16) STOCK OPTION PLAN

     In 1991, under the terms of the Company's  incentive stock option plan, the
     Company  granted 12,000 common stock options to officers and key employees.
     All options were exercisable through August 1, 2001. The exercise price for
     the  options  was $14 per share.  On August 1,  2001,  9,220  options  were
     exercised and 2,780  expired.  The proforma  impact of these options on the
     Company's  net income and  earnings  per share using the fair value  method
     prescribed  by  FASB  Statement  No.  123,   "Accounting  for  Stock  Based
     Compensation" was inconsequential for all years presented.


(17) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  following  table  provides  fair  values  of the  Company's  financial
     instruments at September 30, 2001 and 2000.  Fair value  estimates are made
     at a specific  point in time,  based on  relevant  market  information  and
     information about the financial instrument.  These estimates do not reflect
     any premium or discount  that could  result from  offering  for sale at one
     time the Company's  entire holdings of a particular  financial  instrument.
     Because  no  market  exists  for  a  portion  of  the  Company's  financial
     instruments,  fair value estimates are based on judgments  regarding future
     expected loss experience, current economic conditions, risk characteristics
     of various financial  instruments,  and other factors.  These estimates are
     subjective in nature and involve  uncertainties  and matters of significant
     judgment and,  therefore,  cannot be determined with precision.  Changes in
     assumptions could significantly affect the estimates.  Fair value estimates
     are  based on  existing  on and  off-balance  sheet  financial  instruments
     without attempting to estimate the value of anticipated future business and
     the value of  assets  and  liabilities  that are not  considered  financial
     instruments.  In addition, the tax ramifications related to the realization
     of the  unrealized  gains and losses can have a significant  effect on fair
     value estimates and have not been  considered in any of the estimates.  The
     assumptions  used in the  estimation  of the fair  value  of the  Company's
     financial  instruments are explained below.  Where quoted market prices are
     not available,  fair values are based on estimates  using  discounted  cash
     flow and other valuation techniques.

                                                                     (Continued)

                                       73
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     Discounted  cash flows can be  significantly  affected  by the  assumptions
     used, including the discount rate and estimates of future cash flows.

     The following fair value estimates cannot be substantiated by comparison to
     independent  markets  and should not be  considered  representative  of the
     liquidation  value of the  Company's  financial  instruments,  but rather a
     good-faith estimate of the fair value of financial  instruments held by the
     Bank.

     The  following  methods  and  assumptions  were  used  by  the  Company  in
     estimating the fair value of its financial instruments:

     Cash and Cash Equivalents and  Interest-earning  Deposits in Other Banks --
     Fair value  equals the  carrying  value of such assets due to their  liquid
     nature.

     Investment  Securities and Accrued Interest Receivable -- The fair value of
     investments is based on quoted market prices when  available.  The carrying
     amount of related accrued interest receivable approximates its fair value.

     Federal Home Loan Bank Stock -- The Federal Home Loan Bank has historically
     repurchased its stock at cost. Therefore, the carrying amount is considered
     a reasonable estimate of its fair value.

     Loans  Receivable -- The fair value of loans is calculated using discounted
     cash flows by loan type.  The discount  rate used to determine  the present
     value of the loan  portfolio  is an  estimated  market  discount  rate that
     reflects the credit and interest rate risk inherent in the loan  portfolio.
     The estimated maturity is based on the Company's historical experience with
     repayments  adjusted to estimate the effect of current  market  conditions.
     The carrying amount of related accrued interest receivable approximates its
     fair value.

     Deposits -- Fair values for  certificates  of deposit have been  determined
     using  discounted cash flows.  The discount rate used is based on estimated
     market rates for  deposits of similar  remaining  maturities.  The carrying
     amount of all other deposits,  due to their short-term nature,  approximate
     their fair values.  The carrying amount of related accrued interest payable
     approximates its fair value.

                                                                     (Continued)

                                       74
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

     FHLB  Advances  and  ESOP  Debt -- Fair  value  has been  determined  using
     discounted cash flows. The discount rate used is based on estimated current
     rates for advances with similar maturities.
<TABLE>
<CAPTION>
                                                              2001                                  2000
                                                ----------------------------------    ----------------------------------
                                                   CARRYING          ESTIMATED           CARRYING          ESTIMATED
                                                    AMOUNT           FAIR VALUE           AMOUNT           FAIR VALUE
                                                ---------------    ---------------    ---------------    ---------------
<S>                                          <C>                       <C>               <C>                 <C>
       Financial assets:
           Cash and cash equivalents         $     6,119,006           6,119,006         3,594,355           3,594,355
           Interest-earning deposits in
             other banks                             163,142             163,142           163,142             163,142
           Investment securities                  48,470,948          48,504,210        42,904,040          42,883,085
           Federal Home Loan Bank
             stock                                   747,500             747,500           747,500             747,500
           Loans receivable, net                  41,109,567          43,587,000        48,238,040          47,407,000
           Accrued interest receivable               620,713             620,713           660,138             660,138

       Financial liabilities:
           Deposits, including accrued
             interest payable                     76,945,341          75,020,000        76,334,441          76,147,822
           FHLB advances                          14,950,000          15,758,235        14,950,000          14,956,000
           ESOP debt                                  56,000              56,000            64,000              64,000
</TABLE>


(18) DIVIDENDS FROM SUBSIDIARY

     Dividends  paid by the  subsidiary  bank are the  primary  source  of funds
     available to the Company for payment of dividends to its  stockholders  and
     for other needs.  Applicable  federal and state  statutes  and  regulations
     impose restrictions on the amounts of dividends that may be declared by the
     subsidiary  bank.  In addition,  the  subsidiary  bank is also  required to
     maintain  minimum amounts of capital to total  "risk-weighted"  assets,  as
     defined  by  banking  regulators.  Capital  adequacy  considerations  could
     further limit the  availability  of dividends from the subsidiary  bank. At
     September 30, 2001, the Bank could have declared dividends of approximately
     $3,337,000 without prior approval of regulatory  authorities.  Accordingly,
     at September 30, 2001,  approximately $6,386,000 of the parent's investment
     in its subsidiary was restricted from transfer in the form of dividends.

                                                                     (Continued)

                                       75
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999


(19) RESTATEMENT

     The  Company's  financial  statements  as of  September  30, 2000 and prior
     periods have been restated to reflect the Company's  obligation to fund the
     repurchase  of any  common  shares  put  to the  ESOP  or  the  Company  by
     withdrawing  participants at fair value.  The amount of this obligation has
     been  segregated  from  retained  earnings and  presented  separately  from
     stockholders' equity. This presentation was necessitated by the policies of
     the Securities and Exchange Commission.

     Also,  earnings per share for the year ended  September  30, 2000 have been
     restated  to  reflect  the  dilutive  effect  of the  increase  in the  put
     obligation  caused by an increase in the fair value of the Company's common
     stock.  Earnings per share for 1999 were not restated because the effect of
     the restatement was not dilutive.

     The effects of the restatements are as follows:
<TABLE>
<CAPTION>
                                                                                  AS PREVIOUSLY
                                                                                    REPORTED             AS RESTATED
                                                                                  --------------         -----------
        <S>                                                                        <C>                     <C>
        AS OF SEPTEMBER 30, 1998
             Retained earnings - substantially restricted                          $ 6,732,461             5,480,913
             Common stock subject to put option                                             --             1,251,548

        AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1999
             Retained earnings - substantially restricted                            7,020,548             6,069,948
             Common stock subject to put option                                             --               950,600

        AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2000
             Retained earnings - substantially restricted                            7,422,368             6,318,928
             Common stock subject to put option                                             --             1,103,440
             Basic earnings per share                                                   3.94                  3.67
             Diluted earnings per share                                                 3.71                  3.40
</TABLE>

                                                                     (Continued)

                                       76
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999


(20) PARENT COMPANY FINANCIAL INFORMATION

     The  condensed  financial  information  for CFS  Bancshares,  Inc.  (Parent
     Company Only) is presented as follows:

                              (PARENT COMPANY ONLY)
                            CONDENSED BALANCE SHEETS
                           SEPTEMBER 30, 2001 AND 2000
                                    <TABLE>
<CAPTION>

                                     ASSETS                                           2001                 2000
                                                                                 -------------       -------------

      <S>                                                                        <C>                  <C>
      Cash                                                                       $     176,549              54,271
      Investment in subsidiary Bank                                                  9,722,798           8,232,480
                                                                                 -------------       -------------

               Total assets                                                      $   9,899,347           8,286,751
                                                                                 =============       =============
                                   LIABILITIES

      Note payable (ESOP debt)                                                   $      56,000              64,000
                                                                                 -------------       -------------
               Total liabilities                                                        56,000              64,000
                                                                                 -------------       -------------

      Common stock subject to put option                                             1,175,412           1,103,440

                              STOCKHOLDERS' EQUITY

      Serial preferred stock                                                                --                  --
      Common stock                                                                     139,220             130,000
      Additional paid-in capital                                                     1,309,018           1,184,758
      Retained earnings                                                              6,739,788           6,318,928
      Accumulated other comprehensive income (loss)                                    519,545            (463,139)
      Unearned common stock held by ESOP                                               (39,636)            (51,236)
                                                                                 -------------       --------------
                 Total stockholders' equity                                          8,667,935           7,119,311
                                                                                 -------------       -------------
                 Total liabilities and stockholders' equity                      $   9,899,347           8,286,751
                                                                                 =============       =============
</TABLE>
                                                                     (Continued)

                                       77
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

                              (PARENT COMPANY ONLY)
                       CONDENSED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999


<TABLE>
<CAPTION>
                                                                  2001                2000                 1999
                                                             ---------------     ----------------    -----------------
<S>                                                          <C>                          <C>                 <C>
      Income:
           Cash dividends from Bank                          $        97,500              97,500              97,500
           Interest income                                               358                 484                  --
                                                             ---------------     ----------------    ---------------
                   Total income                                       97,858              97,984              97,500

      Miscellaneous expense                                            7,160              15,274                  --
                                                             ---------------     ----------------    ---------------

           Earnings before equity in undistributed
      earnings of subsidiary                                          90,698              82,710              97,500
           Equity in undistributed earnings of
           subsidiary                                                499,634             416,610             288,087
                                                             ---------------     ----------------    ---------------

                   Net earnings                              $       590,332             499,320             385,587
                                                             ===============     ================    =================
</TABLE>
                                                                     (Continued)

                                       78
<PAGE>
                              CFS BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       September 30, 2001, 2000, and 1999

                              (PARENT COMPANY ONLY)
                       CONDENSED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                  2001                2000                 1999
                                                             -------------      -------------        -------------
      <S>                                                    <C>                 <C>                  <C>
      Cash flows from operating activities:
           Net earnings                                      $     590,332            499,320              385,587
           Adjustments to reconcile net earnings
             to net cash provided by operating
             activities:
               Equity in undistributed earnings of
                 subsidiary                                       (499,634)          (416,610)            (288,087)
               Decrease in other liabilities                            --            (30,939)                  --
                                                             -------------      -------------        -------------

           Net cash provided by operating
             activities                                             90,698             51,771               97,500
                                                             -------------      -------------        -------------
      Cash flows from financing activities:
           Cash dividends paid                                     (97,500)           (97,500)             (97,500)
           Proceeds from exercise of stock
             options                                               129,080                 --                   --
                                                             -------------      -------------        -------------
           Net cash provided by (used in)
             financing activities                                   31,580            (97,500)             (97,500)
                                                             -------------      -------------        -------------
      Net increase (decrease) in cash                              122,278            (45,729)                  --

      Cash at beginning of year                                     54,271            100,000              100,000
                                                             -------------      -------------        -------------
      Cash at end of year                                    $     176,549             54,271              100,000
                                                             =============      =============        =============
</TABLE>


                                       79
<PAGE>
ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------

     Not applicable.

                                    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 for the
Company's  2002  Annual  Meeting of  Stockholders  (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.


                                       80
<PAGE>

     (c)  CHANGES IN CONTROL

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

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

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

                                     PART IV

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

     (a) 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    Employment Contract of President Bunny Stokes, Jr. * +
         Exhibit 21      Subsidiaries of the Registrant
------------
*        Incorporated by reference to the Company's Annual Report on Form 10-KSB
         for the fiscal year ended September 30, 1998.
+        Management contract or compensatory plan or arrangement.


     (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.


                                       81

<PAGE>
                                 SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                             CFS BANCSHARES, INC.


Date:    December 13, 2001   By: /s/ Bunny Stokes, Jr.
                                 -----------------------------------------------
                                 Bunny Stokes, Jr.
                                 Chairman, President and Chief Executive Officer
                                 (Duly Authorized Representative)

     In  accordance  with the Exchange  Act,  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 13, 2001
    ----------------------------------------
    Bunny Stokes, Jr.
    Principal Executive Officer and Director


By: /s/ W. Kent McGriff                                 Date:  December 13, 2001
    ----------------------------------------
    W. Kent McGriff
    Principal Financial and Accounting Officer


By: /s/ Rev. John T. Porter                             Date:  December 13, 2001
    ----------------------------------------
    Rev. John T. Porter, Director


By: /s/ Odessa Woolfolk                                 Date:  December 13, 2001
    ----------------------------------------
    Odessa Woolfolk, Director


By: /s/ James W. Coleman                                Date:  December 13, 2001
    ----------------------------------------
    James W. Coleman, Director