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, 2002
 OR

[_]  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: $6,720,157

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  based on the  pending  acquisition  price of  $64.90  per  share was
approximately  $3,590,657  as of December 10,  2002.  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. The registrant is unaware of recent sales of
its common stock.

As of December 10, 2002, there were issued and outstanding 139,220 shares of the
registrant's common stock, of which 83,894 shares were held by affiliates.

Transitional Small Business Disclosure Format (check one): Yes [_] No [X]

DOCUMENTS INCORPORATED BY REFERENCE:  None

                                       1
<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.

     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.

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.

                                        2

<PAGE>

     The OTS uses a net portfolio 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.

<TABLE>
<CAPTION>

                                                             At September 30, 2002
                                                             ---------------------

    Change In
  Interest Rate       Board Limit
  (Basis Points)        % Change         $ Amount          $ Change         % Change
  --------------        --------         --------          --------         --------
                                           (Dollars In Thousands)

<S>    <C>               <C>               <C>                <C>               <C>
      +300               (70)%             $12,133            $223              2%
      +200               (50)               12,457             547              5%
      +100               (25)               12,937           1,027              9%
         0                --                11,910              --             --%
      -100               (25)               10,421          (1,489)           (13)%
      -200               (50)                   NM*             NM*            NM*
      -300               (70)                   NM*             NM*            NM*
</TABLE>

* Not meaningful due to the low prevailing interest rate environment.


     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,
2002  and  passbook  decay  rates  determined  by the Bank  from a core  deposit
analysis.


                                       3

<PAGE>

LENDING ACTIVITIES

     General.   The  principal   lending   activity  of  Citizens   Federal  has
historically  consisted of the origination of conventional loans (loans that are
neither   insured  nor  partially   guaranteed   by   government   agencies)  on
single-family  residential  properties.  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 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, 2002, the maximum amount the Bank was permitted to lend to
one   borrower   was   $1,468,128.    At   that   date,   the   Bank's   largest
loan-to-one-borrower  was  $1,224,668,  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,
                                                            --------------------------------------------------
                                                                     2002                        2001
                                                            ------------------------ -------------------------
                                                              Amount          %          Amount           %
                                                              ------          -          ------           -

Real estate mortgage:
<S>                                                          <C>             <C>        <C>             <C>
     Residential                                             $22,331,136     59.07%     $26,457,539     61.34%
     Nonresidential                                           13,616,861     36.02       12,824,972     29.73
Construction                                                     939,613      2.49        2,500,000      5.80
Consumer installment                                             764,393      2.02        1,050,227      2.43
Commercial                                                       152,695       .40          302,661      0.70
                                                            ------------  ---------    ------------  --------

     Gross loans                                              37,804,698    100.00%      43,135,399    100.00%
                                                                            ======                      ======

Plus unearned premium on loans purchased                              --                      4,726
Less:
     Undisbursed portion of loans in process                    (400,069)                (1,085,403)
     Unamortized loan origination fees                          (491,352)                  (548,387)
     Allowance for loan losses                                  (363,986)                  (396,768)
                                                                 -------                    -------

     Net loans                                               $36,549,291                $41,109,567
                                                              ==========                 ==========
</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


                                       4

<PAGE>

four-family  residential  property.  These  loans have been made on  primarily a
fixed-term,  fixed-rate basis. The Bank also offers  adjustable-rate  loans with
terms of up to 30 years, but to date has not originated a significant  amount of
ARM loans. The Bank originated  $1,905,010 in residential  mortgage loans during
the year ended September 30, 2002, all of which were fixed-rate  loans. The Bank
did not purchase any loans during the year ended  September 30, 2002.  Purchased
adjustable-rate mortgage loans in the Bank's loan portfolio amounted to 6.36% of
the total loan portfolio at September 30, 2002.

     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 2002 fiscal year
amounted to $1,006,950, 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.

     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.



                                       5




<PAGE>

     The Bank's consumer loan originations totaled $1,095,563 for the year ended
September  30,  2002.  As of  September  30, 2002,  consumer  loans  constituted
approximately 2.02% 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, 2002,  the Bank's  commercial  loans  totaled
$152,695, or .40% of the loan portfolio.

     Reference  is  made  to  Note  5 of the  Notes  to  Consolidated  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.

     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 or her 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, 2002 regarding the dollar amount of loans maturing
(or repricing) in the Bank's portfolio based on their contractual maturity date.

<TABLE>
<CAPTION>


                                   Due Within            Due One Through             Due After
                                 One Year After           5 Years After            5 Years After
                               September 30, 2002       September 30, 2002      September 30, 2002        Total
                               ------------------       ------------------      ------------------     ------------


Real estate mortgage:
<S>                                 <C>                      <C>                     <C>               <C>
     Residential                    $1,249,775               $4,939,617              $16,141,744       $22,331,136
     Nonresidential loans              969,698                3,137,247                9,509,916        13,616,861
Construction                            10,827                   54,148                  874,638           939,613
Consumer and commercial
  loans                                425,321                  426,836                   64,931           917,088
                                    ----------               ----------            -------------        -----------



     Total gross loans              $2,655,621               $8,557,848              $26,591,229       $37,804,698
                                     =========                =========               ==========        ==========
</TABLE>


                                       6

<PAGE>
<TABLE>
<CAPTION>


     The following table sets forth the dollar amount of all loans due after one
year from September 30, 2002 which have predetermined rates and have floating or
adjustable interest rates.

                                         Predetermined Rate     Floating or Adjustable Rates       Total
                                         ------------------     ----------------------------       -----

Real estate mortgage:
<S>                                         <C>                       <C>                       <C>
     Residential                            $18,743,725               $ 2,337,636               $21,081,361
     Nonresidential loans                    12,647,163                      --                  12,647,163
Construction                                    928,786                      --                     928,786
Consumer and commercial loans                   491,767                      --                     491,767
                                            -----------               -----------               -----------

     Total gross loans                      $32,811,441               $ 2,337,636               $35,149,077
                                            ===========               ===========               ===========
</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, 2002 was $146,560.  The total
amount of net  deferred  loan fees at  September  30, 2002,  was  $491,352.  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 5 of the Notes to Consolidated 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.

                                       7



<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.


                                                           September 30,
                                                    ----------------------------
                                                         2002          2001
                                                         ----          ----
Loans accounted for on a non-accrual basis:
  Real estate mortgage:
     Residential .................................   $  239,559    $  902,174
     Non-residential .............................      182,609       384,774
  Construction ...................................         --            --
  Consumer and commercial ........................      189,791       280,761
                                                     ----------    ----------

         Total of non-accrual ....................   $  611,959    $1,567,709
                                                     ==========    ==========

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 .................................   $  611,959    $1,567,709
                                                     ==========    ==========
Percentage of total assets .......................          .57%         1.52%
                                                     ==========    ==========
Other non-performing assets (1) ..................   $  562,334    $  267,413
                                                     ==========    ==========

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

     During  the year  ended  September  30,  2002,  gross  interest  income  of
approximately  $42,574  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, 2002.

     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, 2002
totaled  $611,959,  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, 2002, nonaccruals included seven real estate loans,
seven  consumer  loans  and  one  commercial  loan  with   individual   balances
outstanding ranging from $1,068 to $145,239.

     The Bank has two significant  problem loans. The most  significant  problem
loan is an  unsecured  loan with a balance of $100,000 to a 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 an 85% Small
Business Administration ("SBA") guarantee and a balance of $145,239 at September
30, 2002. 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,
2002 are 10 residential  properties acquired through foreclosure with a carrying
value of $385,668 and one parcel of land with a carrying value of $176,676.

     Except as discussed  above, at September 30, 2002, 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


                                       8

<PAGE>


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, 2002, the Bank had $1,064,752 in
assets classified as substandard,  no assets classified as doubtful and $109,551
in assets classified as loss.

     At September 30, 2002, the Bank's substandard assets consisted of six loans
on residential  properties,  two loans on commercial  property and four consumer
loans with an aggregate  balance of $502,408 and  balances  outstanding  ranging
from $1,068 to $145,239 and real estate owned of $562,344.

     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 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,
2002, the Bank's allowance for loan losses was $363,986.

     Management  believes  that the current  allowance  for loan losses which is
equal to .96% of gross  loans and 59.48% of  non-accrual  loans,  is adequate to
cover any potential loan losses which may exist in the loan portfolio.


                                       9


<PAGE>


     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,
                                                                                     ---------------------------
                                                                                        2002             2001
                                                                                     -----------      ----------
<S>                                                                                   <C>               <C>
Balance at Beginning of  Period.................................................      $396,768          $342,156
                                                                                       -------           -------
Loans Charged-Off:
   Residential mortgage.........................................................        43,462            17,301
   Consumer ....................................................................        42,357            23,672
                                                                                     ---------          --------
     Total Charge-Offs..........................................................        85,819            40,973
                                                                                     ---------          --------
Loan Recoveries:
   Residential mortgage.........................................................        26,549            52,233
   Consumer ....................................................................        26,488            43,352
                                                                                     ---------          --------
     Total Recoveries...........................................................        53,037            95,585
                                                                                     ---------          --------
Net Loans Charged-Off (Recovered)                                                       32,782           (54,612)
                                                                                     ---------          --------
Provision for (Recovery of) Loan Losses.........................................            --                --
                                                                                     ---------          --------
Balance at End of Period........................................................     $ 363,986          $396,768

Ratio of Net Charge-Offs (Recoveries) to Average Loans Outstanding During the
   Period   ....................................................................           .08%              (0.12)%
</TABLE>

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

     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,
                                                ----------------------------------------------------------------------
                                                              2002                                 2001
                                                ----------------------------------    --------------------------------
                                                                     Percent of                          Percent of
                                                                      Loans in                            Loans in
                                                                    Category to                          Category to
                                                    Amount          Total Loans          Amount          Total Loans
                                                ---------------    ---------------    -------------     --------------

Real estate mortgage:
<S>                                                <C>                 <C>            <C>                   <C>
   Residential                                     $145,415            59.07%         $149,689              61.34%
   Non-residential                                   84,149            36.02            67,078              29.73
   Construction                                       2,524             2.49             3,360               5.80
Commercial business                                   3,817             2.02            55,736               0.70
Consumer                                            128,081              .40           120,905               2.44
                                                    -------          -------           -------            -------
         Total allowance for loan losses           $363,986           100.00%         $396,768             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.

                                       10

<PAGE>


     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, 2002,  the Bank had $687,377  classified as securities
held to maturity and  $56,598,140  classified as securities  available for sale,
respectively.

     The  following  table  sets  forth an  analysis  of the  Bank's  investment
securities at the dates indicated.  Other than its investments in the Shay Asset
Management  Funds and its  investments in securities  issued by U.S.  Government
Agencies and Government Sponsored Enterprises, the Company has not invested more
than 10% of its stockholders' equity in the securities of a single issuer.

                                                             September 30,
                                                     ---------------------------
                                                        2002(1)         2001(1)
                                                     -----------   -------------

U.S. Government agencies .......................     $ 3,221,722     $ 7,999,142
Mortgage-backed securities (including CMOs) ....      44,891,062      34,596,426
Shay Asset Management Funds ....................       9,172,733       5,875,380
                                                     -----------     -----------
                                                     $57,285,517     $48,470,948
                                                     ===========     ===========

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

(1)  Includes  securities  available  for sale which had an  amortized  cost and
     approximate  fair value of $55,547,714 and  $56,598,140,  respectively,  at
     September  30,  2002 and  $46,448,236  and  $47,260,024,  respectively,  at
     September 30, 2001, and securities  held to maturity which had an amortized
     cost and approximate fair value of $687,377 and $727,656,  respectively, at
     September  30,  2002  and  $1,210,924  and  $1,244,186,   respectively,  at
     September  30,  2001.   Securities  available  for  sale  consist  of  U.S.
     Government  agency  securities,  U.S.  Government  agency  mortgage  backed
     securities (including CMOs) and shares in two adjustable-rate mutual funds.


                                       11


<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, 2002.
<TABLE>
<CAPTION>

                                                                 At September 30, 2002 (1)
                                ----------------------------------------------------------------------------------------------
                                   One Year or Less        One to Five Years     Five to Ten Years        More than Ten Years
                                -----------------------  ---------------------  --------------------     ---------------------
                                    Par        Average      Par       Average      Par      Average         Par       Average
                                   Value        Yield      Value       Yield      Value      Yield         Value       Yield
                                   -----        -----      -----       -----      -----      -----         -----       -----
<S>                             <C>              <C>       <C>          <C>     <C>           <C>          <C>      <C>
U.S. Government Agency
  Obligations                   $1,000,000       5.63%     $970,000     7.20%   $1,000,000    5.55%          --          --%

Shay Asset Management Fund
   (Adjustable-Rate Mortgage
   Portfolio)                    8,147,910       3.03            --       --            --      --           --          --

Shay Asset Management Fund

   (Ultra-Short Portfolio)       1,024,823       2.76            --       --            --      --           --          --
                                 ----------                --------              ---------             -----------
   Total                        $10,172,733      3.26     $ 970,000     7.20%   $1,000,000    5.55%   $      --          --
                                 ==========                ========              =========             ===========

<CAPTION>

                                        At September 30, 2002 (1)
                                -------------------------------------
                                      Total Investment Portfolio
                                    Par         Fair        Average
                                   Value        Value        Yield
                                -----------  -----------  -----------
<S>                             <C>          <C>               <C>
U.S. Government Agency
   Obligations                 $  2,970,000  $ 3,221,722       6.12%

Shay Asset Management Fund
   (Adjustable-Rate Mortgage
   Portfolio)                     8,147,910    8,147,910       3.03


Shay Asset Management Fund
   (Ultra-Short Portfolio)        1,024,823    1,024,823       2.76
                                 -----------  -----------
    Total                       $12,142,733  $12,394,455       4.11%
                                 ==========   ===========
</TABLE>
--------------------

(1)      Consists of investment securities available for sale at September 30,
         2002 with an amortized cost and fair value of $12,143,057 and
         $12,394,455, respectively. Contractual maturities of securities
         available for sale at September 30, 2002 range from one month to 6.3
         years. Securities available for sale consist of U.S. Government agency
         securities and shares in an adjustable-rate mutual fund.


                                       12



<PAGE>


     Maturity of Mortgage-Backed  Securities Portfolio. The following table sets
forth certain information at September 30, 2002 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 in One          Than One Year         Five Years to         Due More than
                           Year or Less         To Five Years           Ten Years             Ten Years
                          After 9/30/02         After 9/30/02         After 9/30/02         After 9/30/02            Total
                         -----------------    ------------------    ------------------    -------------------    --------------
<S>                         <C>                   <C>                   <C>                  <C>                   <C>
Mortgage-backed
  Securities                $1,359,558            $6,129,767            $5,805,065           $15,194,479           $28,488,869
CMOs                           602,957             2,695,342             3,951,352             7,931,392            15,181,043
                            ----------             ---------             ---------           -----------            ----------
       Total                $1,962,515            $8,825,109            $9,756,417           $23,125,871           $43,669,912
                             =========             =========             =========            ==========            ==========
</TABLE>

     The  following  table  sets  forth the  dollar  amount  (par  value) of all
mortgage-backed securities due after one year from September 30, 2002.

                                          Rate Structure for Mortgage-Backed
                                       Securities Maturing in More than One Year
                                       -----------------------------------------
                                        Predetermined              Floating or
                                        Interest Rate            Adjustable Rate
                                       --------------            ---------------
Mortgage-backed securities               $17,776,620               $ 9,352,691
CMOs                                       3,907,937                10,670,149
                                         -----------               -----------
     Total                               $21,684,557               $20,022,840
                                         ===========               ===========

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.

         Deposits in the Bank as of September 30, 2002 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>                   <C>
       .43%           None             NOW Accounts                    $      --        $9,161,202            12.05%


      1.00            None             "Super NOW" Accounts                1,000         4,892,933             6.44

      1.49            None             Passbook Accounts                       5        17,210,364            22.63

      3.16            91 Days          Certificates                          500        20,287,530            26.68

      2.25            14 Days          Jumbo Certificates(1)             100,000        24,428,217            32.13
                                       Accrued interest on
       --             N/A                  Deposits                           --            56,833              .07
                                                                                       -------------       ---------


                                       Total                                           $76,037,079           100.00%
                                                                                        ==========          =======
</TABLE>

----------------
(1) Includes Time Deposit Open Account.


                                       13

<PAGE>


         The following table sets forth the savings deposit activities of the
Bank for the periods indicated.
<TABLE>
<CAPTION>

                                                                         Year Ended September 30,
                                                              ------------------------------------------------
                                                                      2002                      2001
                                                              ---------------------    -----------------------

<S>                                                               <C>                         <C>
Deposits                                                          $144,760,838                $157,919,465
Withdrawals                                                        147,546,051                 160,268,179
                                                                    -----------                -----------

       Net (decrease) before interest credited                      (2,785,213)                 (2,348,714)
Interest credited                                                    1,876,951                   2,959,614
                                                                 -------------                 ------------

   Net increase (decrease) in savings deposits                    $   (908,262)             $      610,900
                                                                   ==============            =============
</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
                                           2002            Deposits          (Decrease)              2001                Deposits
                                     -----------------    ------------    -----------------    ------------------    --------------

<S>                                    <C>                    <C>           <C>                 <C>                         <C>
NOW checking accounts                  $ 9,161,202            12.05%        $   145,834         $  9,015,368                11.72%
Jumbo certificates                      24,428,217            32.13             382,111           24,046,106                31.25
"Super NOW" checking accounts            4,892,933             6.44             566,173            4,326,760                 5.62
Passbook and regular savings            17,210,364            22.63             (48,594)          17,258,958                22.43
Certificates of deposit                 20,287,530            26.68          (1,893,016)          22,180,546                28.83
Accrued interest on deposits                56,833              .07             (60,770)             117,603                 0.15
                                       -------------      ---------        -------------       ---------------            --------

         Total                         $76,037,079           100.00%        $  (908,262)        $76,945,341                100.00%
                                       ===========           ======          ===========         ==========                ======
</TABLE>

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

                                               At September 30,
                                  ------------------------------------------
                                     2002                            2001
                                  -------------------   --------------------
1.00 - 2.99%                      $35,009,481                    $   285,000
3.00 - 4.99%                        5,752,247                     37,192,232
5.00 - 6.99%                        3,699,307                      8,276,470
7.00 - 8.99%                          254,712                        472,950
                                  -----------                    -----------

         Total                    $44,715,747                    $46,226,652
                                  ===========                    ===========

   The following table sets forth the amount and maturities of the Bank's time
deposits at September 30, 2002.

<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%               $34,559,813        $   449,668      $                   $                     $35,009,481
3.00 - 4.99%                 1,421,780          1,700,479         1,399,113           1,230,875            5,752,247
5.00 - 6.99%                 2,407,079            926,045           131,065             235,118            3,699,307
7.00 - 8.99%                   232,250                 --             4,975              17,487              254,712
                         -------------      -------------      -------------        -----------        -------------

                           $38,620,922         $3,076,192        $1,535,153          $1,483,480          $44,715,747
                            ==========          =========         =========           =========           ==========
</TABLE>


                                       14

<PAGE>


     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,
                                           ---------------------------------------------------------------------------
                                                          2002                                    2001
                                           ------------------------------------    -----------------------------------
                                               Average             Average            Average             Average
                                               Balance              Rate              Balance               Rate
                                           ----------------    ----------------    ---------------  -------------
                                                                     (Dollars in Thousands)

<S>                                             <C>                  <C>               <C>                   <C>
Savings                                         $17,186              1.49%             $16,870               2.49%
Interest-bearing demand deposits                 13,231               .73               13,312               1.14
Certificates of deposit                          45,725              3.13               46,160               5.01
                                                 ------                                 ------

     Total interest-bearing deposits             76,142              2.34               76,342               3.78
Non-interest-bearing demand deposits              1,082                                  1,102
                                                -------                                -------

     Total average deposits                     $77,224                                $77,444
                                                 ======                                 ======
</TABLE>


     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, 2002.

Maturity Period                                                Amount
---------------                                            ------------
Three months or less                                        $14,021,471
Over three through six months                                 9,675,000
Over six through 12 months                                      400,000
Over 12 months                                                  331,746
                                                           ------------

         Total                                              $24,428,217
                                                             ==========


     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,  2002,  the  Bank  secured  additional  advances  totaling
$4,000,000.  At  September  30,  2002,  the Bank  had  $18,950.000  of  advances
outstanding. These advances are secured by qualifying residential first mortgage
loans and by  mortgage-backed  securities  with a fair  value of  $3,307,577  at
September 30, 2002.

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,
2002, Citizens Federal was authorized to invest up to approximately $3.2 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."


                                       15

<PAGE>


REGULATION OF THE BANK

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

     Citizens  Federal  is a member  of the SAIF and the  deposits  of  Citizens
Federal are insured by the FDIC.  As a result,  the FDIC has certain  regulatory
and examination authority over Citizens Federal.

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

     Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into law
the  Sarbanes-Oxley  Act of 2002 (the "Act")  implementing  legislative  reforms
intended  to  address  corporate  and  accounting  fraud.  In  addition  to  the
establishment of a new accounting  oversight board which will enforce  auditing,
quality control and  independence  standards and will be funded by fees from all
publicly  traded  companies,  the bill restricts  provision of both auditing and
consulting  services by accounting  firms. To ensure auditor  independence,  any
non-audit services being provided to an audit client will require preapproval by
the Company's audit committee  members.  In addition,  certain  partners must be
rotated  periodically.  The bill  requires  chief  executive  officers and chief
financial officers, or their equivalent,  to certify to the accuracy of periodic
reports  filed with the SEC,  subject to civil and  criminal  penalties  if they
knowingly or  willfully  violate this  certification  requirement.  In addition,
under the Act,  counsel  will be  required  to  report  evidence  of a  material
violation of the  securities  laws or a breach of fiduciary duty by a company to
its chief  executive  officer or its chief legal  officer,  and, if such officer
does not appropriately  respond,  to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.

     Longer  prison  terms  will also be  applied to  corporate  executives  who
violate federal  securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended,  and bonuses
issued  to  top  executives  prior  to  restatement  of  a  company's  financial
statements  are now  subject  to  disgorgement  if such  restatement  was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement  plan  "blackout"  periods,  and  loans  to  company  executives  are
restricted.  In addition, a provision directs that civil penalties levied by the
SEC as a result  of any  judicial  or  administrative  action  under  the Act be
deposited to a fund for the benefit of harmed  investors.  The Federal  Accounts
for Investor  Restitution  ("FAIR")  provision  also requires the SEC to develop
methods of improving  collection  rates.  The  legislation  accelerates the time
frame for disclosures by public companies, as they must immediately disclose any
material  changes in their  financial  condition or  operations.  Directors  and
executive  officers must also provide  information for most changes in ownership
in a company's securities within two business days of the change.

     The Act also increases the oversight of, and codifies certain  requirements
relating to audit  committees  of public  companies and how they interact with a
company's "registered public accounting firm" ("RPAF").  Audit committee members
must be independent and are barred from accepting consulting,  advisory or other
compensatory fees from the issuer. In addition,  companies must disclose whether
at least one member of the committee is a "financial  expert" (as such term will
be defined by the SEC) and if not, why not.  Under the Act, a RPAF is prohibited
from  performing  statutorily  mandated  audit  services  for a company  if such
company's chief executive officer, chief financial officer,  comptroller,  chief
accounting  officer  or any  person  serving in  equivalent  positions  has been
employed by such firm and  participated  in the audit of such company during the
one-year period  preceding the audit initiation date. The Act also prohibits any
officer  or  director  of a  company  or any other  person  acting  under  their
direction from taking any action to fraudulently influence,  coerce,  manipulate
or mislead any independent  public or certified  accountant engaged in the audit
of the Company's financial statements for the purpose of rendering the financial
statement's  materially  misleading.  The Act also requires the SEC to prescribe
rules  requiring  inclusion  of an internal  control  report and  assessment  by
management in the annual report to shareholders.  The Act requires the RPAF that
issues the audit report to attest to and report on  management's  assessment  of
the  Company's  internal  controls.  In  addition,  the Act  requires  that each
financial  report  required to be prepared in accordance with (or reconciled to)
generally  accepted  accounting  principles  and filed with the SEC  reflect all
material correcting adjustments that are identified by a RPAF in accordance with
generally  accepted  accounting  principles and the rules and regulations of the
SEC.


                                       16

<PAGE>


     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 G-L-B Act has not had a material impact on the Company's  operations to
date.  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.

     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 5% 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, 2002 of $947,500.

     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, 2002, the Bank had $18.95 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:  (1) 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;  (2) the  branching  powers  of the
institution  shall be restricted to those of a national bank; and (3) 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

                                       17

<PAGE>

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:  (1) 50% of the dollar amount of residential mortgage loans subject
to sale under certain conditions, (2) investments,  both debt and equity, in the
capital  stock or  obligations  of and any  other  security  issued by a service
corporation or operating  subsidiary,  provided that such subsidiary  derives at
least 80% of its annual  gross  revenues  from  activities  directly  related to
purchasing,   refinancing,   constructing,   improving  or  repairing   domestic
residential  housing or manufactured  housing,  (3) 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, (4) loans for the purchase,  construction,
development  or  improvement  of  community  service  facilities,  (5) loans for
personal,  family, or household purposes, and (6) 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,
2002, 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:  (1) for  loans
secured by raw land, the supervisory  loan-to-value limit is 65% of the value of
the collateral;  (2) 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%;  (3) for loans for the  construction  of  commercial,
multifamily or other nonresidential  property, the supervisory limit is 80%; (4)
for loans for the construction of one-to four-family properties, the supervisory
limit is 85%;  and (5) for  loans  secured  by other  improved  property  (e.g.,
farmland,  completed  commercial  property and other  income-producing  property
including  non-owner-occupied,  one-to four-family property),  the limit is 85%.
Although  no  supervisory   loan-to-value   limit  has  been   established   for
owner-occupied,  one-to  four-family  and home  equity  loans,  the  Interagency
Guidelines  state that for any such loan with a loan-to-value  ratio that equals
or exceeds 90% at origination,  an institution should require appropriate credit
enhancement  in the form of either  mortgage  insurance  or  readily  marketable
collateral.

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


                                       18

<PAGE>


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,
2002, the Bank had no such investments.

     Adjusted  total  assets  are  a  savings   institution's  total  assets  as
determined under generally accepted accounting  principles  increased by certain
goodwill  amounts  and by a pro rated  portion of the  assets of  unconsolidated
includible  subsidiaries  in which  the  savings  institution  holds a  minority
interest.  Adjusted  total  assets are reduced by the amount of assets that have
been deducted from capital, the savings institution's  investments in includible
subsidiaries  that must be netted  against  capital under the capital rules and,
for purposes of the core capital requirement,  qualifying  supervisory goodwill.
At September 30, 2002, the Bank's adjusted total assets for purposes of the core
and tangible capital requirements were $105.8 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 an 80%  loan-to-value  ratio,
other than those  deducted from core and tangible  capital.  As of September 30,
2002,  the Bank had  $110,094 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, 2002, the Bank's  risk-weighted
assets were approximately $54 million.


                                       19

<PAGE>


     The table below provides  information with respect to the Bank's compliance
with its regulatory capital requirements at September 30, 2002.
<TABLE>
<CAPTION>

                                                           Amount             Percent of Assets (1)
                                                          ------------        --------------------
                                                                ( Dollars in Thousands)
<S>                                                       <C>                         <C>
Tangible capital.................................         $  9,788                    9.16%
Tangible capital requirement.....................            1,587                    1.50
                                                           -------                  ------
     Excess......................................         $  8,201                    7.66%
                                                           =======                  ======
Core capital.....................................         $  9,788                    9.16%
Core capital requirement (2).....................            3,174                    3.00
                                                           -------                  ------
     Excess......................................         $  6,614                    6.16%
                                                           =======                  ======
Risk-based capital...............................          $10,612                   19.61%
Risk-based capital requirement...................            4,330                    8.00
                                                           -------                  ------
     Excess......................................         $  6,282                   11.61%
                                                           =======                   =====

</TABLE>

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

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

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

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

     At September 30, 2002,  the Bank exceeded all  regulatory  minimum  capital
requirements.


                                       20


<PAGE>


     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: (1) subject to  increased
monitoring by the appropriate federal banking regulator;  (2) required to submit
an  acceptable  capital  restoration  plan within 45 days;  (3) subject to asset
growth  limits;  and (4)  required  to  obtain  prior  regulatory  approval  for
acquisitions,  branching and new lines of  businesses.  The capital  restoration
plan must  include a guarantee  by the  institution's  holding  company that the
institution  will comply with the plan until it has been adequately  capitalized
on average for four consecutive quarters,  under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the  institution  into capital  compliance  as of the date it
failed  to  comply  with  its  capital   restoration   plan.  A   "significantly
undercapitalized"  institution, as well as any undercapitalized institution that
does not  submit an  acceptable  capital  restoration  plan,  may be  subject to
regulatory demands for recapitalization,  broader application of restrictions on
transactions  with  affiliates,  limitations on interest rates paid on deposits,
asset  growth  and other  activities,  possible  replacement  of  directors  and
officers,  and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required  to divest the  institution  or the  institution  could be  required to
divest   subsidiaries.   The  senior  executive   officers  of  a  significantly
undercapitalized   institution   may  not  receive   bonuses  or   increases  in
compensation  without prior  approval and the  institution  is  prohibited  from
making  payments of principal  or interest on its  subordinated  debt.  In their
discretion,  the  federal  banking  regulators  may also  impose  the  foregoing
sanctions on an  undercapitalized  institution if the regulators  determine that
such actions are  necessary  to carry out the purposes of the prompt  corrective
provisions.  If an institution's ratio of tangible capital to total assets falls
below the  "critical  capital  level"  established  by the  appropriate  federal
banking  regulator,  the  institution  will be  subject  to  conservatorship  or
receivership within specified time periods.

     Under  the  implementing  regulations,   the  federal  banking  regulators,
including the OTS,  generally  measure an institution's  capital adequacy on the
basis of its total  risk-based  capital ratio (the ratio of its total capital to
risk-weighted  assets),  Tier 1 risk-based  capital ratio (the ratio of its core
capital  to  risk-weighted  assets)  and  leverage  ratio (the ratio of its core
capital to adjusted total assets).  The following table shows the capital ratios
required for the various prompt corrective action categories.

<TABLE>
<CAPTION>


                                                  Adequately                                         Significantly
                         Well Capitalized         Capitalized          Undercapitalized            Undercapitalized
                         ----------------         -----------          ----------------            ----------------
<S>                        <C>                    <C>                   <C>                           <C>
Total risk-based
  capital ratio           10.0% or more           8.0% or more          Less than 8.0%                Less than 6.0%
Tier 1 risk-based
   capital ratio           6.0 % or more          4.0% or more          Less than 4.0%                Less than 3.0%
Leverage ratio             5.0% or more           4.0% or more *        Less than 4.0% *              Less than 3.0%
</TABLE>

------------
*    3.0% if institution has a composite 1 CAMELS rating.

     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



                                       21

<PAGE>

of estimated  insured deposits that the FDIC determines to be justified for that
year by circumstances indicating a significant risk of substantial future losses
to the SAIF.

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

     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 $41.3 million of transaction accounts plus 10%
on the  remainder,  provided that no reserves are required on up to $5.7 million
of transaction  accounts.  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, 2002, 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 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 (1)  limit the  extent  to which  the  savings
institution or its subsidiaries may engage in "covered transactions"



                                       22

<PAGE>

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
(2) 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 (a) 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 (b)
purchase  or  invest  in  any  stocks,  bonds,  debentures,   notes  or  similar
obligations of any affiliate,  except for affiliates  which are  subsidiaries of
the  savings  institution.  Section  106 of the BHCA which  applies to the Bank,
prohibits the Bank from extending  credit to or offering any other services,  or
fixing or varying the consideration for such extension of credit or service,  on
the  condition  that  the  customer  obtain  some  additional  service  from the
institution or certain of its affiliates or not obtain  services of a competitor
of the institution, subject to certain exceptions.

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

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


                                       23


<PAGE>

interagency  guidelines,  and that implementation of these regulatory  standards
has not materially affected 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 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  Company  presently  operates  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:  (1) payment of dividends by
the savings  institution;  (2) transactions  between the savings institution and
its  affiliates;  and (3) 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


                                       24


<PAGE>

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:  (1)  furnishing  or
performing  management  services  for  a  subsidiary  savings  institution;  (2)
conducting an insurance agency or escrow  business;  (3) holding,  managing,  or
liquidating assets owned by or acquired from a subsidiary  savings  institution;
(4) holding or managing  properties  used or  occupied by a  subsidiary  savings
institution;  (5) acting as trustee under deeds of trust;  (6) those  activities
previously  directly  authorized by regulation as of March 5, 1987 to be engaged
in by  multiple  holding  companies;  or (7) 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 (7) 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 the
OTS, (a) control of any other  savings  institution  or savings and loan holding
company  or  substantially  all the assets  thereof,  or (b) 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:  (a) 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;  (b)  the  acquiror  is  authorized  to  acquire  control  of the  savings
institution  pursuant to the  emergency  acquisition  provisions  of the Federal
Deposit Insurance Act; or (c) 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 (1) the federal savings  institution  qualifies as a
QTL or as a "domestic building and loan institution"  under Section  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
(2) 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 bank
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.


                                       25

<PAGE>


FEDERAL AND STATE TAXATION

     Federal  Taxation.  The Small  Business  Protection  Act of 1996 (the "1996
Act")  eliminated  the use of the  reserve  method  of  accounting  for bad debt
reserves by savings  institutions,  effective for taxable years  beginning after
December 31, 1995.  Prior to the 1996 Act, the Bank was permitted to establish a
reserve for bad debts and to make  additions  to the  reserve.  These  additions
could,  within  specified  formula  limits,  be  deducted in arriving at taxable
income. As a result of the 1996 Act, savings  associations must use the specific
chargeoff method in computing their bad debt deduction beginning with their 1996
federal tax return.  In addition,  federal  legislation  requires the  recapture
(over a six year period) of the excess of tax bad debt  reserves at December 31,
1995 over those  established  as of December 31, 1987.  The amount of the Bank's
reserve  subject to  recapture as of  September  30, 2002 totaled  approximately
$23,054.
-------

     Prior to the 1996 Act, bad debt  reserves  created prior to January 1, 1988
were subject to recapture into taxable income if the Bank failed to meet certain
thrift asset and definitional  tests. New federal  legislation  eliminated these
thrift related  recapture rules.  However,  under current law, pre-1988 reserves
remain  subject  to  recapture   should  the  Bank  make  certain   non-dividend
distributions or ceases to maintain a bank charter.


     At  September  30,  2002,  the Bank's total  federal  pre-1988  reserve was
approximately $2,176,318. The reserve reflects the cumulative effects of federal
               ---------
tax deductions for which no federal income tax provisions have been made.

     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.

     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


                                       26

<PAGE>
comes principally from other savings  institutions,  commercial banks,  mortgage
banking companies, insurance companies and other institutional lenders.

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

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

PERSONNEL

     As of  September  30,  2002,  the  Bank  had 32  full-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 45 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.

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 $2,964,975 at September
30, 2002.

     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, 2002 was $159,204.

     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, 2002 was $229,299.

     As of September  30, 2002,  the net book value of the Bank's  investment in
the premises, furniture and equipment owned by the Bank was $3,353,478.

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, 2002.


                                       27

<PAGE>



                                     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.
From October 1, 2000 through March 5, 2002, there have been four trades of which
the Company is aware,  all for $18.50 per share. The Company is not aware of any
trades in its Common Stock subsequent to March 5, 2002. As of December 10, 2002,
the Company had 319  stockholders of record.  The Company paid annual  dividends
from 1983 through 2001. No dividend was paid in calendar 2002 due to the pending
acquisition  of the  Company,  as  the  merger  agreement  with  CFS  Bancshares
precludes  us from  paying  dividends.  See Item 11(c) for a  discussion  of the
pending merger. 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."

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.

     At September 30, 2002,  the  Company's  total assets were  $106,899,412  as
compared to  $103,328,293  at September  30, 2001,  an increase of $3,571,119 or
3.46%. The increase in total assets resulted from an $8,784,569  increase in the
Bank's total  investment  portfolio  from  $48,470,948  at September 30, 2001 to
$57,285,517  at September 30, 2002,  and a $1,081,464  increase in cash and cash
equivalents from $6,119,006 at September 30, 2001 to $7,200,470 at September 30,
2002. The increase in the  categories of investments  listed above was partially
offset by a $4,560,276  decrease in net loans  receivable  from  $41,109,567  at
September  30,  2001,  to  $36,549,291  at  September  30, 2002 and a $2,068,912
decrease in other assets from  $2,379,392  at September  30, 2001 to $310,480 at
September  30,  2002.  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.  Other  assets at
September 30, 2001  included a receivable  for called  investment  securities of
$1,840,000, the proceeds of which were received in early October 2002. There was
no such item at September 30, 2002.

     Deposits totaled $76,037,079 at September 30, 2002, compared to $76,945,341
at  September  30,  2001,  a decrease  of $980,262  or 1.18%.  FHLB  advances at
September 30, 2002 were $18,950,000,  an increase of $4,000,000 from the balance
of $14,950,000 at September 30, 2001. The Bank's one to four family  residential
mortgage portfolio and certain investment securities serve as collateral for the
FHLB advances.

         Non-performing assets, which include non-accrual loans and real estate
acquired by foreclosure ("REO"), decreased $660,819 or 36.01% from $1,835,122 at
September 30, 2001, to $1,174,303 at September 30, 2002, as non-accrual loans
decreased from $1,567,709 at September 30, 2001, to $611,959 at September 30,
2002, and REO increased by $294,931from $267,413 at September 30, 2001, to
$562,344 at September 30, 2002. At September 30, 2002, non-performing assets
represented 1.10% of total assets while non-accrual loans represented 1.62% of
gross loans outstanding as compared to September 30, 2001, when non-performing
assets represented 1.78% of total assets and non-accrual loans were 3.63% of
gross loans outstanding.


                                       28

<PAGE>


     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, 2002 and September 30, 2001

General

     Net income for the year ended  September 30, 2002 was $569,504  compared to
$590,332 for the year ended  September 30, 2001, a decrease of $20,288 or 3.53%.
The decline resulted from expenses associated with merger negotiations that took
place  during the fiscal year ended  September  30, 2002.  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 3.35% for the year ended September 30, 2001, to 3.18% for
the year ended September 30, 2002.

Interest Income

     Net interest income before  provision for loan losses  decreased by $59,120
or 1.72% from $3,440,335 for the year ended September 30, 2001 to $3,381,215 for
the 2002  fiscal  year.  Interest  and fees on loans for the  fiscal  year ended
September 30, 2002 were $3,440,165 as compared to $4,093,642 for the fiscal year
ended  September  30,  2001,  a decrease  of $653,477  or 15.96%.  Interest  and
dividend income on investment  securities and interest income on mortgage-backed
securities  decreased by $312,403 and $46,802  respectively,  from  $697,160 and
$2,233,571,   respectively   for  fiscal  2001  to  $384,757   and   $2,186,769,
respectively  for the 2002  fiscal  year end.  The  decreases  in  interest  and
dividends  on  investment  securities  resulted  from  declines  in the  average
balances outstanding as well as a decline in the average interest rate earned on
the  investments  in  the  portfolio.  Interest  on  mortgage-backed  securities
declined  despite an  increase in the average  balance  outstanding  as interest
rates  declined to unusually low levels during  fiscal 2002.  Combined  interest
income on federal funds sold and other interest  income  decreased by $91,997 or
63.07%  when  compared  to  fiscal  year end  2001,  also as a result of the low
interest rate environment.

Interest Expense

     Total  interest  expense  decreased by $1,045,559  from  $3,729,896 for the
fiscal year ended  September  30, 2001 to  $2,684,337  for the fiscal year ended
September 30, 2002, a decrease of 28.03%.  The lower interest  expense  resulted
from  decreases  in  the  average  rate  paid  on  interest-bearing  liabilities
outstanding.

     The  average  balance  of  interest-bearing  deposits  remained  relatively
stable,  decreasing by  approximately  $220,000  when  comparing the fiscal year
ended  September 30, 2002 to the 2001 fiscal year.  The average  balance of FHLB
advances  increased  by  approximately  $3.05  million  between  the year  ended
September 30, 2001 and fiscal 2002 as the Bank secured an additional  $4,000,000
of FHLB advances  during the fiscal year ended  September 30, 2002.  The average
rate paid on interest-bearing  deposits decreased by 141 basis points from 3.72%
for the year ended  September 30, 2001 to 2.31% for the year ended September 30,
2002.  The average rate paid on FHLB advances  decreased by 64 basis points from
5.65% for the fiscal year ended  September 30, 2001 to 5.01% for the 2002 fiscal
year.

Other Income

     Total  other  income  increased  $151,921  or  30.22%  for the  year  ended
September 30, 2002 compared to the fiscal year ended  September 30, 2001.  Gains
on the sale or call of investment securities increased by $90,318 from a gain of
$110,712 for the fiscal year ended  September 30, 2001 to a gain of $201,030 for
the 2002 fiscal year. Included in the gain for fiscal 2002 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 2002.

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 cost of carrying
and administering non-performing assets is also included in other expense. Other
expense increased

                                       29


<PAGE>

by $135,255 or 4.45% from  $3,040,814  for the fiscal year ended  September  30,
2001, to $3,176,069 for the 2002 fiscal year. The increase related  primarily to
increases in salaries and employee  benefits and  professional  services,  which
includes legal,  accounting and other professional services. The higher expenses
in these  categories  resulted  from costs  associated  with the  execution of a
definitive  merger  agreement  with  Citizens  Bancshares,  Inc. and the filings
related to the pending  merger.  Salaries  and  employee  benefits  increased by
$138,712 or 9.17% from  $1,512,381 for the fiscal year ended  September 30, 2001
to  $1,651,093   for  the  2002  fiscal  year.   The  Company  paid  bonuses  of
approximately  $125,000 to executive management for the additional work incurred
in  connection  with the pending  merger.  Professional  services  increased  by
$112,886 from $234,189 for the fiscal year ended  September 30, 2001 to $347,075
for the 2002 fiscal year. All of the increase in professional  services  relates
to expenses incurred in connection with the pending merger. The rise in employee
expenses and  professional  services was partially offset by declines in several
expense categories including depreciation and amortization,  office supplies and
other expense.

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  for the year ended  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 investment  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 the average  balance sheets for the years ended September 30, 2001 and
September 30, 2000.  Gains on sale 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% for the year ended
September 30, 2000 to 3.35% for the year ended September 30, 2001.

Interest Income

     Net interest income before  provision for loan losses increased by $256,760
or 8.07% from $3,183,575 for the year ended September 30, 2000 to $3,440,335 for
the 2001  fiscal  year.  Interest  and fees on loans for the  fiscal  year ended
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. 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  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 fiscal
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 fiscal year ended September
30,  2001,  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  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% for the fiscal year ended  September  30, 2000 to 4.04%
for the 2001 fiscal year.

Other Income

     Total other income increased $47,047 or 10.33% for the year ended September
30,  2001  compared  to the  2000  fiscal  year.  Gains  on the  sale or call of
investment securities increased by $116,837 from a loss of $6,125 for


                                       30


<PAGE>

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 cost 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 for the fiscal year ended
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.

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, 2002, that
the Bank meets all capital  adequacy  requirements and meets the requirements to
be classified as "well capitalized."

<TABLE>
<CAPTION>


                                                                                             Well Capitalized Under
                                                Actual                 For Capital             Prompt Corrective
                                                                    Adequacy Purposes          Action Provisions
                                       ----------------------   ------------------------  --------------------------
                                          Amount       Ratio       Amount        Ratio        Amount         Ratio
                                          ------       -----       ------        -----        ------         -----

As of September 30, 2002:
<S>                                    <C>              <C>       <C>             <C>       <C>              <C>

Total capital
     (to risk weighted assets)         $10,612,000      19.6%     $4,330,000      8.0%      $5,412,000       10.0%
Tier I capital
     (to risk weighted assets)          $9,788,000      18.0%     $2,165,000      4.0%      $3,247,000        6.0%
Tier I capital
     (to average assets)                $9,788,000       9.2%     $4,233,000      4.0%      $5,291,000        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


                                       31

<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.

Critical Accounting Policies

     Management has determined that the accounting for loan loss allowances is a
critical  accounting  policy  with  respect to the  determination  of  financial
condition and reporting results of operations.

     Management   determines  the  required   allowances  by  classifying  loans
according to credit quality and collateral security and applying historical loss
percentages to each category.  Additionally, as necessary, management determines
specific  allowances  related to impaired  loans  based on the present  value of
expected future cash flows discounted at the loan's effective  interest rate, or
the fair value of the  collateral  if the loan is  collateral  dependent.  A key
component in the accounting  policy is  management's  ability to timely identify
changes in credit quality which may impact the Company's financial results.

     Management   recognizes  that  in  making  loans,  credit  losses  will  be
experienced  and that the risk of loss will vary with,  among other things,  the
type of loan being made, the  creditworthiness  of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.  Management's policy is to maintain an appropriate allowance for estimated
losses on the portfolio as a whole. The allowances are based on estimates of the
historical loan loss experience,  evaluation of economic  conditions and regular
periodic  reviews of the Company's loan portfolio.  The Company's loan portfolio
consists  mostly of  residential  and  non-residential  real estate.  Management
believes that the effects of any reasonably  likely changes in the economy would
be limited somewhat due to the fact that most of the loan portfolio is backed by
real estate.

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.


                                       32

<PAGE>


Selected Financial Data
<TABLE>
<CAPTION>

                                                                     At September 30,
                                         ------------------------------------------------------------------------
                                           2002            2001            2000            1999            1998
                                         ---------       --------        --------        --------        --------
                                                      (Dollars In Thousands, except per share data)
BALANCE SHEETS
<S>                                      <C>              <C>             <C>              <C>           <C>
Total  assets                            $106,899         $103,328        $100,564         $ 96,104      $ 92,166
Loans, net                                 36,549           41,110          48,238           43,521        45,413
Investment securities                      57,286           48,471          42,904           38,534        35,461
Deposits                                   76,037           76,945          76,334           75,180        73,892
Borrowed funds                             18,950           14,950          14,950           11,850         9,200
Stockholders' equity*                      10,465            9,843           8,223            7,763         7,908
Shares outstanding*
     (actual number)                      139,220          139,220         130,000          130,000       130,000

Book value per share*                       75.17            70.70           63.25            59.71         60.83

                                                                 Year Ended September 30,
                                         ------------------------------------------------------------------------
                                            2002            2001            2000            1999            1998
                                         ---------       --------        --------        --------        --------
                                                       (Dollars in Thousands, except per share data)
OPERATIONS
Interest income                            $6,065         $7,170          $6,708          $6,255          $6,543
Interest expense                            2,684          3,730           3,524           3,252           3,525
Net interest income                         3,381          3,440           3,184           3,003           3,018
Provision for recovery of loan loss            --             --            (104)             45             176
Net gain (loss) on securities                 201            111              (6)             27              47
Other noninterest income                      454            392             461             511             443
Other noninterest expense                   3,176          3,040           2,968           2,894           2,981
Income before income taxes                    860            902             775             602             351
Income tax expense                            290            312             276             217             132
Net income                                    570            590             499             386             219

PER SHARE INFORMATION
Basic earnings per share                     4.17           4.58            3.94            3.05            1.72
Basic weighted average
  shares outstanding*                     136,616        128,846         126,621         126,419         127,218
Diluted earnings per share                   4.09           4.58            3.71            2.89            1.61
Diluted weighted average shares
    outstanding*                          139,108        128,846         134,421         133,619         136,018

Cash dividends paid                          0.85           0.75            0.75            0.75            0.75
</TABLE>


                                       33

<PAGE>


OTHER DATA
<TABLE>
<CAPTION>
                                                     For The Year Ended Septmeber 30,
                                      -------------------------------------------------------
                                         2002       2001       2000        1999         1998
                                      ----------  ---------  -------     --------    --------
<S>                                     <C>         <C>         <C>         <C>         <C>
Return on average assets                0.54%       0.58%       0.52%       0.41%       0.23%
Return on average stockholders'
     equity*                            6.12%       6.95%       6.40%       4.98%       2.77%
Equity to assets ratio*                 9.79%       9.37%       8.18%       8.08%       8.58%
Dividend payout ratio                  20.78%      16.52%      19.53%      25.29%      44.53%
</TABLE>

-------------------
* Includes common stock subject to put obligation.

     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,
                                                ---------------------------------------------------------------------
                                                          2002                   2001                   2000
                                                ---------------------  ----------------------  ----------------------
                                                 Average     Yield or    Average    Yield or    Average     Yield or
                                                  Balance       Rate      Balance      Rate      Balance      Rate
                                                  -------       ----      -------      ----      -------      ----
                                                                        (Dollars in Thousands)
ASSETS
<S>                                                <C>          <C>      <C>           <C>        <C>          <C>
Federal funds and interest-bearing deposits        $  2,971     1.81%    $   2,984     4.88%      $ 2,195      5.67%
Investments securities held to maturity (1)           1,790     6.60%        2,920     6.46%        5,180      6.19%
Investment securities available for sale             54,728     4.48%       44,650     6.15%       36,025      6.53%
Loans (2)                                            39,452     8.61%       45,106     8.96%       44,986      8.58%
                                                   --------    ------     --------     ----        ------      ----
     Total interest earning assets                   98,941     6.10%       95,570     7.50%       88,386      7.54%
Loan loss allowances                                   (384)                  (362)                  (285)
Non-interest-earning assets                           7,604                  7,403                  8,079
                                                  ---------              ---------                -------
     Total assets                                  $106,161               $102,611                $96,180
                                                    =======                =======                 ======

LIABILITIES AND STOCKHOLDERS'EQUITY

Interest-bearing deposits                          $ 77,224     2.31%     $ 77,444     3.72%      $74,954      3.78%
FHLB advances                                        17,997     5.01%       14,950     5.65%       11,836      5.89%
                                                   --------     ----       -------     ----        ------      ----
     Total interest-bearing liabilities              95,397     2.82%       92,394     4.04%       86,790      4.06%
Accrued interest on deposits                            176                    286                    285
Other liabilities                                     1,288                  1,342                  1,305
Stockholders' equity (4)                              9,300                  8,589                  7,800
                                                  ---------              ---------                -------
     Total liabilities and stockholders' equity    $106,161               $102,611                $96,180
                                                    =======                =======                 ======
Interest rate spread                                            3.28%                  3.46%                   3.48%
Net interest margin (3)                                         3.18%                  3.35%                   3.58%
</TABLE>

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


                                       34

<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,
                                      ------------------------------------------------------------------------------
                                                  2002 vs. 2001                            2001 vs. 2000
                                      --------------------------------------   -------------------------------------
                                           Increase (decrease) due to                Increase (decrease) due to
                                      --------------------------------------    ------------------------------------
                                      Volume         Rate           Total        Volume         Rate         Total
                                      ----------  -----------    ------------   ----------    ----------   ---------
Interest income:
<S>                                   <C>          <C>            <C>            <C>           <C>          <C>
     Loans                            $(498,218)   $(155,259)     $ (653,477)    $  10,425     $173,082     $183,507
     Mortgage-backed securities         623,075     (669,877)        (46,802)      245,518     (137,887)     107,631
     Investments                       (164,535)    (147,868)       (312,403)      152,732       (2,170)     150,562
     Other                                 (388)     (91,609)        (91,997)       42,900      (22,061)      20,839
                                     ----------  -----------    ------------      --------     --------     --------
         Total                          (40,066)  (1,064,613)     (1,104,679)      451,575       10,964      462,539
                                        -------   ----------      ----------       -------     --------      -------
     Interest expenses:
     Deposits                            (8,193)  (1,093,104)     (1,101,297)       99,313      (42,491)      56,822
     FHLB advances                      158,826     (103,088)         55,738       172,159      (23,202)     148,957
                                       --------    ---------    ------------       -------       ------      -------
         Total                          150,633   (1,196,192)     (1,045,559)      271,472      (65,693)     205,779
                                       --------   ----------      ----------       -------     --------      -------
Net interest income                   $(190,699) $   131,579    $    (59,120)     $180,103    $  76,657     $256,760
                                       ========   ==========     ===========       =======     ========      =======
</TABLE>

                                       35


<PAGE>



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

We have audited the accompanying  consolidated balance sheets of CFS Bancshares,
Inc. and  subsidiary  (the Company) as of September  30, 2002 and 2001,  and the
related  consolidated   statements  of  operations,   stockholders'  equity  and
comprehensive  income,  and cash  flows for each of the years in the  three-year
period ended September 30, 2002. 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  subsidiary  as of  September  30,  2002 and 2001 and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  September 30, 2002, in conformity with  accounting  principles  generally
accepted in the United States of America.




                                                                    /s/ KPMG LLP


Birmingham, Alabama
December 6, 2002


                                     36


<PAGE>
                             CFS BANCSHARES, INC.
                                 AND SUBSIDIARY
                           Consolidated Balance Sheets
                           September 30, 2002 and 2001
<TABLE>
<CAPTION>


                                                                                     2002                 2001
                                                                                ------------------   ------------------
                     Assets
<S>                                                                          <C>                          <C>
Cash and amounts due from depository institutions                            $       3,388,410            3,508,465
Federal funds sold and overnight deposits                                            3,812,060            2,610,541
                                                                               ------------------   ------------------
             Total cash and cash equivalents                                         7,200,470            6,119,006
Interest-earning deposits in other financial institutions                              149,353              163,142
Investment securities held to maturity (fair value of
    $727,656 and $1,244,186, respectively)                                             687,377            1,210,924
Investment securities available for sale, at fair value (cost of
    $55,547,713 and $46,448,236, respectively)                                      56,598,140           47,260,024
Federal Home Loan Bank stock                                                           947,500              747,500
Loans receivable, net                                                               36,549,291           41,109,567
Premises and equipment, net                                                          3,353,478            3,450,612
Real estate acquired by foreclosure, net                                               562,344              267,413
Accrued interest receivable on investment securities                                    51,039              146,704
Accrued interest receivable on mortgage-backed securities                              211,679              152,567
Accrued interest receivable on loans                                                   278,261              321,442
Other assets                                                                           310,480            2,379,392
                                                                               ------------------   ------------------
             Total assets                                                    $     106,899,412          103,328,293
                                                                               ==================   ==================
                   Liabilities and Stockholders' Equity
Liabilities:
    Interest-bearing deposits, including accrued interest                    $      76,037,079           76,945,341
    Advance payments by borrowers for taxes and insurance                              243,591              270,788
    Other liabilities                                                                1,155,340            1,262,817
    Employee stock ownership plan debt                                                  48,000               56,000
    Federal Home Loan Bank advances                                                 18,950,000           14,950,000
                                                                               ------------------   ------------------
             Total liabilities                                                      96,434,010           93,484,946
Common stock subject to put option (27,831 and 27,986 shares,
    respectively)                                                                    1,287,356            1,175,412
Stockholders' equity:
    Serial preferred stock; 300,000 shares authorized; none outstanding                     --                   --
    Common stock of $.01 par value; 700,000 shares authorized;
       139,220 shares issued and outstanding                                             1,392                1,392
    Additional paid-in capital                                                       1,451,545            1,446,846
    Retained earnings-substantially restricted                                       7,079,010            6,739,788
    Accumulated other comprehensive income                                             674,035              519,545
    Unearned common stock held by ESOP                                                 (27,936)             (39,636)
                                                                               ------------------   ------------------
             Total stockholders' equity                                              9,178,046            8,667,935
Commitments and contingencies
                                                                               ------------------   ------------------
             Total liabilities and stockholders' equity                      $     106,899,412          103,328,293
                                                                               ==================   ==================
See accompanying notes to consolidated financial statements.
</TABLE>

                                      37
<PAGE>
<TABLE>
<CAPTION>






                                                      CFS BANCSHARES, INC.
                                                         AND SUBSIDIARY
                                               Consolidated Statements of Operations
                                           Years ended September 30, 2002, 2001, and 2000


                                                                             2002              2001               2000
                                                                        ----------------  ----------------   ---------------
Interest income:
<S>                                                                   <C>                     <C>               <C>
    Interest and fees on loans                                        $     3,440,165         4,093,642         3,910,135
    Interest and dividend income on investment securities                     384,757           697,160           546,598
    Interest income on mortgage-backed securities                           2,186,769         2,233,571         2,125,940
    Interest income on federal funds sold                                      49,525           100,462            58,876
    Other interest income                                                       4,336            45,396            66,143
                                                                        ----------------  ----------------   ---------------
            Total interest income                                           6,065,552         7,170,231         6,707,692
Interest expense:
    Interest on deposits                                                    1,783,260         2,884,557         2,827,735
    Interest on Federal Home Loan Bank advances                               901,077           845,339           696,382
                                                                        ----------------  ----------------   ---------------
            Total interest expense                                          2,684,337         3,729,896         3,524,117
                                                                        ----------------  ----------------   ---------------
            Net interest income                                             3,381,215         3,440,335         3,183,575
Provision for (recovery of) loan losses                                          --                --            (104,500)
                                                                        ----------------  ----------------   ---------------
            Net interest income after provision for (recovery of)           3,381,215         3,440,335         3,288,075
            loan losses                                                 ----------------  ----------------   ---------------
Other income:
    Service charges on deposit accounts                                       426,900           358,383           415,469
    Gains (losses) on sales and calls of investment securities                201,030           110,712            (6,125)
    Other                                                                      26,675            33,589            46,293
                                                                        ----------------  ----------------   ---------------
            Total other income                                                654,605           502,684           455,637
                                                                        ----------------  ----------------   ---------------
Other expense:
    Salaries and employee benefits                                          1,651,093         1,512,381         1,372,332
    Net occupancy expense                                                     141,158           130,828           120,853
    Federal insurance premiums                                                 43,572            48,972            56,786
    Data processing expenses                                                  219,482           215,450           208,665
    Professional services                                                     347,075           234,189           253,856
    Depreciation and amortization                                             168,721           243,035           281,325
    Advertising expense                                                        63,300            53,140            70,302
    Office supplies                                                            52,072            65,923            57,198
    Insurance expense                                                          44,143            69,546            66,061
    Other                                                                     445,453           467,350           480,840
                                                                        ----------------  ----------------   ---------------
            Total other expense                                             3,176,069         3,040,814         2,968,218
                                                                        ----------------  ----------------   ---------------
            Income before income taxes                                        859,751           902,205           775,494
Income tax expense                                                            290,247           311,873           276,174
                                                                        ----------------  ----------------   ---------------
         Net income                                                   $       569,504           590,332           499,320
                                                                        ================  ================   ===============
Basic earnings per share                                              $          4.17              4.58              3.67
Basic weighted average shares outstanding                                     136,616           128,846            99,035
Diluted earnings per share                                            $          4.09              4.58              3.40
Diluted weighted average shares outstanding                                   139,108           128,846           106,835
See accompanying notes to consolidated financial statements.
</TABLE>


                                       38
<PAGE>



                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY
               Consolidated Statements of Stockholders' Equity and
                              Comprehensive Income
                 Years ended September 30, 2002, 2001, and 2000

<TABLE>
<CAPTION>

                                                                              Accumulated    Unearned
                                                                  Retained       other       common
                                                    Additional   earnings -   comprehensive   stock         Total
                                         Common      paid-in    substantially   income       held by    stockholders' Comprehensive
                                         stock       capital     restricted     (loss)        ESOP         equity         income
                                       -----------  -----------  -----------  ------------ ------------  -----------    -----------
<S>                                     <C>           <C>          <C>            <C>            <C>       <C>           <C>
Balance at September 30, 1999           $    1,300    1,308,760    6,069,948      (502,798)     (65,086)   6,812,124
   Net income                                   --           --      499,320            --           --      499,320     $  499,320
   Unrealized gain on investment
     securities available for sale, net         --           --           --        39,659           --       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           --            --           --        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)           --           --     (152,840)
Cash dividends declared($.75 per share)         --           --      (97,500)           --           --      (97,500)
                                        -----------  -----------  -----------  ------------ ------------  -----------
Balance at September 30, 2000           $    1,300    1,313,458    6,318,928      (463,139)     (51,236)   7,119,311
     Net income                                 --           --      590,332            --           --      590,332     $  590,332
     Unrealized gain on investment
       securities available for
       sale, net                                --           --           --       982,684           --      982,684        982,684
                                                                                                                        -----------
     Comprehensive income                                                                                               $ 1,573,016
                                                                                                                        ===========
     Exercise of stock options                  92      128,988           --            --           --      129,080
     Difference between fair value
       and cost of Employee Stock
       Ownership Plan shares committed
       to be released                                   --        4,400           --            --           --        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)           --           --      (71,972)
     Cash dividends declared
       ($.75 per share)                         --           --      (97,500)           --           --      (97,500)
                                       -----------  -----------  -----------  ------------ ------------  -----------
Balance at September 30, 2001           $    1,392    1,446,846    6,739,788       519,545      (39,636)   8,667,935
     Net income                                 --           --      569,504            --           --      569,504     $  569,504
     Unrealized gain on investment
       securities available for
       sale, net                                --           --           --       154,490           --      154,490        154,490
                                                                                                                        -----------
     Comprehensive income                                                                                                $  723,994
                                                                                                                        ===========
     Difference between fair value
       and cost of Employee
       Stock Ownership Plan shares
       committed to be released                 --        4,699           --            --           --        4,699
     Release of Employee Stock
       Ownership Plan shares                    --           --           --            --       11,700       11,700
     Increase in fair value of common
       stock subject to put option              --           --     (111,944)           --           --     (111,944)
     Cash dividends declared
       ($.85 per shares)                        --           --     (118,338)           --           --     (118,338)
                                       -----------  -----------  -----------  ------------ ------------  -----------
Balance at September 30, 2002           $    1,392    1,451,545    7,079,010       674,035      (27,936)   9,178,046
                                       ===========  ===========  ===========  ============ ============  ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       39

<PAGE>


                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                 Years ended September 30, 2002, 2001, and 2000


<TABLE>
<CAPTION>

                                                                          2002                2001               2000
                                                                     ----------------   -----------------  -----------------
<S>                                                                <C>                         <C>                <C>
Cash flows from operating activities:
    Net income                                                     $       569,504             590,332            499,320
    Adjustments to reconcile net income to net
       cash provided by operating activities:
          Provision for (recovery of) loan losses                             --                  --             (104,500)
          Depreciation and amortization                                    168,721             243,035            281,325
          Net amortization of premium and accretion
            of discount on investment securities                           207,144              66,312             46,066
          Net accretion of deferred loan origination fees                  (80,709)            (86,827)           (50,188)
          Compensation expense recognized on
            ESOP shares allocation                                          16,399              16,000             18,548
          Loss (gain) on sale of investment securities
            available for sale, net                                       (205,674)            (14,201)             4,083
          Loss on sale of investment securities held to
            maturity, net                                                     --                  --                2,042
          (Gain) loss on call of investment securities
            available for sale, net                                          4,644             (96,511)                --
          Loss (gain) on sale of real estate acquired by foreclosure        30,909              (3,336)           (16,552)
          Decrease (increase) in accrued interest receivable                79,734              39,425            (50,683)
          Decrease (increase) in other assets                              366,627             (13,032)            529,765
          Increase in other liabilities                                   (194,378)            (14,944)          (256,599)
          Increase (decrease) in accrued interest on deposits              (60,770)           (139,819)            88,647
                                                                     ----------------   -----------------  -----------------
               Net cash provided by operating activities                   902,151             586,434            991,274
                                                                     ----------------   -----------------  -----------------
</TABLE>

                                       40

<PAGE>



                      CFS BANCSHARES, INC.
                         AND SUBSIDIARY
              Consolidated Statements of Cash Flows
         Years ended September 30, 2002, 2001, and 2000

<TABLE>
<CAPTION>

                                                                           2002              2001              2000
                                                                     ----------------  ----------------   ---------------
<S>                                                                       <C>                                   <C>
Cash flows from investing activities:
    Decrease (increase) in interest-earning deposits in other
       finanial institutions                                              $     13,789            --            (1,618)
    Proceeds from sale of investment securities held to maturity                  --              --            81,232
    Proceeds from principal collected on mortgage-backed securities
       and collateralized mortgage obligations held to maturity                520,165       2,313,993       1,305,991
    Proceeds from sale of investment securities available for sale           8,883,303       2,031,020       1,309,941
    Proceeds from maturity or call of investment securities
       available for sale                                                         --         4,840,000         146,336
    Purchases of investment securities available for sale                  (26,028,941)    (16,979,474)     (1,897,478)
    Purchases of mortgage-backed securities available for sale                    --        (2,149,526)     (8,646,922)
    Proceeds from principal collected on mortgage-backed securities
       and collateralized mortgage obligations available for sale            9,748,466       4,116,000       3,340,701
    Purchase of Federal Home Loan Bank stock                                  (200,000)           --          (155,000)
    Net change in loans                                                      4,160,834       6,971,492      (4,638,190)
    Proceeds from sale of premises and equipment                                  --              --             1,782
    Purchases of premises and equipment                                        (71,587)        (48,811)        (56,510)
    Proceeds from sale of real estate acquired by foreclosure                  175,835          65,969          57,346
    Improvements to real estate acquired by foreclosure                        (21,524)           --            (3,761)
                                                                          ------------    ------------    ------------
            Net cash provided by (used in) investing activities             (2,819,660)      1,160,663      (9,156,150)
                                                                          ------------    ------------    ------------
Cash flows from financing activities:
    Net increase (decrease) in interest-bearing deposits                      (847,492)        750,719       1,065,471
    Cash dividends                                                            (118,338)        (97,500)        (97,500)
    Increase (decrease) in advance payments by
       borrowers for taxes and insurance                                       (27,197)          3,255           9,809
    Net proceeds from Federal Home Loan Bank advances                        4,000,000            --         3,100,000
    Repayment of ESOP debt                                                      (8,000)         (8,000)         (8,000)
    Proceeds from exercise of stock options                                       --           129,080            --
                                                                          ------------    ------------    ------------
            Net cash provided by financing activities                        2,998,973         777,554       4,069,780
                                                                          ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents                         1,081,464       2,524,651      (4,095,096)
Cash and cash equivalents, beginning of year                                 6,119,006       3,594,355       7,689,451
                                                                          ------------    ------------    ------------
Cash and cash equivalents, end of year                                    $  7,200,470       6,119,006       3,594,355
                                                                          ============    ============    ============
Supplemental information on cash payments:
    Interest paid                                                         $  2,745,107       3,869,715       3,435,470
    Income taxes paid                                                     $    370,924         374,205         337,500
Supplemental information on noncash investing and financing activities:
    Loans transferred to real estate acquired by foreclosure              $    480,151         243,809          75,998
    Change in fair value of common stock subject to put option            $    111,944          71,972         152,840
See accompanying notes to consolidated financial statements
</TABLE>

                                       41
<PAGE>


                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000





(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 consolidated financial statements:

(a)  Basis of Presentation

     The  consolidated   financial   statements  include  the  accounts  of  CFS
     Bancshares,   Inc.  and  its  subsidiary.  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 changes to the
     allowance based on their judgments about  information  available to them at
     the time of their examination.

(b)  Cash and Cash Equivalents

     Cash and cash equivalents include cash on hand, amounts due from depository
     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

                                                                     (Continued)
                                       42

<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000



     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 the
     level-yield 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.

     At  September  30,  2002,  approximately  25% 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.


                                       43
<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000





     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.

(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

                                                                     (Continued)

                                       44
<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000



     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.

(l)  Recently Issued Accounting Standards

     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 requires 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 requires 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  adopted the  provisions  of Statement 141 in 2001 and
     Statement  142  effective  October 1, 2002.  The Company does not currently
     have any  goodwill or other  intangibles  capitalized  on its  consolidated
     balance sheet.

     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

                                                                     (Continued)

                                       45

<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000




     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 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  currently does not expect the adoption of Statement 143
     to have a material 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 was  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 adopted Statement 144 for the quarter ending December 31, 2001.
     The  adoption  of  Statement  144 did not  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.  Adoption of  Statement  144 has not had a
     material impact on the Company's financial statements.

     In April 2002,  the FASB issued SFAS No. 145,  Rescission of FASB Statement
     No.  4,  44,  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
     Corrections,  which  rescinds SFAS No. 4,  Reporting  Gains and Losses from
     Extinguishments of Debt, SFAS No. 44, Accounting for Intangible

                                                                     (Continued)
                                       46

<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000




     Assets of Motor Carriers,  and SFAS No. 64, Extinguishments of Debt Made to
     Satisfy   Sinking-Fund   Requirements.   The   rescissions   eliminate  the
     requirement to report gains and losses from the  extinguishment  of debt as
     an extraordinary  item, net of related income tax effect, and are effective
     for fiscal years  beginning  after May 15, 2002. This statement also amends
     SFAS No. 13,  Accounting for Leases,  and requires that capital leases that
     are modified so that the  resulting  lease  agreement is  classified  as an
     operating  lease be accounted for as a  sale-leaseback.  This  amendment is
     effective for  transactions  occurring  after May 15, 2002.  Finally,  this
     statement amends several  pronouncements  to make technical  corrections to
     existing  authoritative  pronouncements.  The Company  does not expect this
     statement  to  have  a  material  impact  on  its  consolidated   financial
     statements.

     In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
     with Exit or  Disposal  Activities.  The  standard  requires  companies  to
     recognize costs  associated with exit or disposal  activities when they are
     incurred  rather  than at the date of a  commitment  to an exit or disposal
     plan.  Examples of costs covered by the standard include lease  termination
     costs and  certain  employee  severance  costs that are  associated  with a
     restructuring,  discontinued  operation,  plant  closing,  or other exit or
     disposal activity. This statement is to be applied prospectively to exit or
     disposal activities initiated after December 31, 2002. The Company does not
     expect  this  statement  to  have a  material  impact  on its  consolidated
     financial statements.

     In October 2002, the FASB issued SFAS No. 147,  which removes  acquisitions
     of  financial  institutions  (other than  transactions  between two or more
     mutual  enterprises)  from the scope of SFAS No. 72, Accounting for Certain
     Acquisitions of Banking or Thrift  Institutions and FASB Interpretation No.
     9,  Applying  APB  Opinions 16 and 17, When a Savings and Loan or a Similar
     Institution  is Acquired  in a Business  Combination  Accounted  for by the
     Purchase  Method.  These types of transactions  are now accounted for under
     SFAS No. 141 and 142.  In  addition,  this  statement  amends SFAS No. 144,
     Accounting for the Impairment or Disposal of Long-Lived  Assets, to include
     in its scope long-term customer relationship intangible assets of financial
     institutions.  The provisions of this  statement were effective  October 1,
     2002.  This  statement  did not have a  material  impact  on the  Company's
     consolidated financial statements.

(2)  Acquisition

     Effective May 30, 2002,  the Company  entered into an agreement and plan of
     merger  with  Citizens  Trust  Bank  (CTB).  Under the terms of the  merger
     agreement,  each share of Company  common stock will be converted  into the
     right to receive $64.62,  subject to certain adjustments that are dependent
     upon when the merger is completed. CTB will be the surviving entity.

(3)  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, 2002 and 2001.

                                                                     (Continued)
                                       47



<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000





(4)  Investment Securities

     The amortized cost and approximate fair value of investment securities held
     to maturity at September 30, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>

                                                   2002                                   2001
                                    ------------------------------------   ------------------------------------
                                    Amortized cost           Fair           Amortized cost          Fair
                                                             value                                  value
                                    ----------------    ----------------   -----------------   ----------------

<S>                              <C>                             <C>                <C>                 <C>
     Mortgage-backed securities  $           687,377             727,656            893,349             924,957
     Collateralized mortgage
          obligations                             --                  --            317,575             319,229
                                    ----------------    ----------------   -----------------   ----------------

                                 $           687,377             727,656          1,210,924           1,244,186
                                    ================    ================   =================   ================

</TABLE>

     The amortized  cost and  approximate  fair value of  investment  securities
     available for sale at September 30, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>

                                                   2002                                   2001
                                    ------------------------------------   ------------------------------------
                                    Amortized cost           Fair           Amortized cost          Fair
                                                             value                                  value
                                    ----------------    ----------------   -----------------   ----------------

<S>                              <C>                           <C>                <C>                 <C>
     U.S. Treasury and U.S.
       Government agencies       $         2,973,417           3,221,722          7,665,279           7,999,142
     Equity securities                     9,169,640           9,172,733          5,877,375           5,875,380
     Mortgage-backed securities           28,114,561          28,848,874         15,918,309          16,185,096
     Collateralized mortgage
         obligations                      15,290,095          15,354,811         16,987,273          17,200,406
                                    ----------------    ----------------   -----------------   ----------------

                                 $        55,547,713          56,598,140         46,448,236          47,260,024
                                    ================    ================   =================   ================
</TABLE>

     The gross  unrealized  gains and losses of  investment  securities  held to
     maturity at September 30, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>

                                                  2002                                    2001
                                   ------------------------------------    ------------------------------------
                                        Gross               Gross               Gross               Gross
                                     unrealized          unrealized          unrealized          unrealized
                                        gains              losses               gains              losses
                                   ----------------    ----------------    ----------------    ----------------

<S>                             <C>                                                  <C>
     Mortgage-backed securities $            40,279                  --              31,608                  --
     Collateralized mortgage
        obligations                              --                  --               1,654                  --
                                   ----------------    ----------------    ----------------    ----------------

                                $            40,279                  --              33,262                  --
                                   ================    ================    ================    ================
</TABLE>



                                       48
<PAGE>


                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000


     The gross  unrealized gains and losses of investment  securities  available
     for sale at September 30, 2002 and 2001 were as follows:
<TABLE>
<CAPTION>


                                                  2002                                    2001
                                   ------------------------------------    ------------------------------------
                                        Gross               Gross               Gross               Gross
                                     unrealized          unrealized          unrealized          unrealized
                                        gains              losses               gains              losses
                                   ----------------    ----------------    ----------------    ----------------

<S>                             <C>                                                 <C>
     U.S. Treasury and U.S.
        Government agencies     $           248,304                  --             333,863                  --
     Equity securities                        3,094                  --                  --              (1,995)
     Mortgage-backed securities             734,313                  --             266,787                  --
     Collateralized mortgage
        obligations                          64,716                  --             255,264             (42,131)
                                   ----------------    ----------------    ----------------    ----------------

                                $         1,050,427                  --             855,914             (44,126)
                                   ================    ================    ================    ================
</TABLE>


     The amortized cost and approximate fair value of debt investment securities
     available  for sale at September 30, 2002, by  contractual  maturities  are
     shown below. Actual maturities could differ from contractual maturities due
     to call or prepayment provisions.


<TABLE>
<CAPTION>

                                                                                        Fair
                                                            Amortized cost              value
                                                          -------------------    -------------------

<S>                                                    <C>                              <C>
         Due from one to five years                    $         1,958,855              2,109,213
         Due from five to ten years                              1,014,562              1,112,509
         Equity securities                                       9,169,640              9,172,733
         Mortgage-backed securities and collateralized
           mortgage obligations                                 43,404,656             44,203,685
                                                          -------------------    -------------------

                                                       $        55,547,713             56,598,140
                                                          ===================    ===================
</TABLE>


     Proceeds  from  sales of  investment  securities  available  for sale  were
     $8,883,303,  $2,031,020,  and $1,305,941, for the years ended September 30,
     2002,  2001,  and 2000,  respectively.  Gross gains of  $205,674  and gross
     losses of $0 were realized on those sales for the year ended  September 30,
     2002.  Gross gains of $17,872 and gross  losses of $3,671 were  realized on
     those sales for the year ended  September 30, 2001.  Gross losses of $4,083
     were realized on those sales for the year ended September 30, 2000.

     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 2002 or 2001.


                                       49
<PAGE>

                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000





     Investment securities with amortized cost of $39,447,788 and $36,041,628 at
     September  30, 2002 and 2001,  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 prudent  amount of its  withdrawable  deposits  and
     current  borrowings in cash, U.S. Treasury  obligations,  or other approved
     investments that are readily convertible into cash.

(5)  Loans

     A summary of the  components  of the  Company's  net loans at September 30,
     2002 and 2001 follows:
<TABLE>
<CAPTION>

                                                                             2002                   2001
                                                                      -------------------    -------------------

<S>                                                                <C>                             <C>
Total loans                                                        $        37,804,698             43,135,399

Plus unearned premium on loans purchased                                            --                  4,726

Less:
    Unamortized loan origination fees                                         (491,352)              (548,387)
    Undisbursed portion of loans in process                                   (400,069)            (1,085,403)
    Allowance for loan losses                                                 (363,986)              (396,768)
                                                                      -------------------    -------------------

              Net loans                                            $        36,549,291             41,109,567
                                                                      ===================    ===================
</TABLE>


     The composition of the total loan portfolio follows:

<TABLE>
<CAPTION>
                                                                             2002                   2001
                                                                      -------------------    -------------------

<S>                                                                <C>                             <C>
     Residential real estate mortgage                              $        22,331,136             27,073,539
     Consumer installment                                                      764,393              1,050,227
     Non residential mortgage                                               14,556,474             14,708,972
     Commercial                                                                152,695                302,661
                                                                      -------------------    -------------------

              Total loans                                          $        37,804,698             43,135,399
                                                                      ===================    ===================

</TABLE>

     A summary of the  transactions  in the  allowance  for loan  losses for the
     years ended September 30, 2002, 2001, and 2000 follows:

<TABLE>
<CAPTION>


                                                         2002                   2001                   2000
                                                  -------------------    -------------------    -------------------

<S>                                            <C>                                <C>                    <C>
     Balance at beginning of year              $           396,768                342,156                310,157
     Net charge-offs
        Gross charge-offs                                  (85,819)               (40,973)               (84,401)
        Gross recoveries                                    53,037                 95,585                220,900
     Provision for (recovery of) loan losses                    --                     --               (104,500)
                                                  -------------------    -------------------    -------------------

              Balance at end of year           $           363,986                396,768                342,156
                                                  ===================    ===================    ===================
</TABLE>


                                       50


<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000







     Loans on which the accrual of interest  had been  discontinued  amounted to
     $611,959 and $1,567,709 as of September 30, 2002 and 2001, respectively. If
     these loans had been current throughout their terms,  interest income would
     have been increased by $42,574,  $89,385,  and $66,594 for 2002,  2001, and
     2000, respectively.

     Impaired  loans  at  September  30,  2002  and 2001  totaled  $109,551  and
     $248,979,  respectively.  The  allowance  amounts,  which were $109,551 and
     $155,475 in 2002 and 2001,  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, 2002,  2001, and 2000
     was $192,731,  $198,527,  and $149,078,  respectively.  The interest income
     recognized on impaired loans for the years ended September 30, 2002,  2001,
     and 2000 was approximately $1,672, $0, and $85, respectively.

     During 2002, 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  2002  with  respect  to the
     aggregate loans to these individuals and their associates:

             Balance at September 30, 2001             $           627,484
               New loans                                            91,504
               Repayments                                         (114,582)
                                                          -------------------

             Balance at September 30, 2002             $           604,406
                                                          ===================


(6)  Premises and Equipment

     Premises and  equipment at September  30, 2002 and 2001 are  summarized  as
     follows:


<TABLE>
<CAPTION>

                                                                   2002                   2001
                                                            -------------------    -------------------

<S>                                                      <C>                                <C>
         Land                                            $           733,242                733,242
         Buildings and leasehold improvements                      3,065,540              3,052,339
         Furniture, fixtures and equipment                         2,275,149              2,216,763
                                                            -------------------    -------------------

                                                                   6,073,931              6,002,344

         Less accumulated depreciation                            (2,720,453)            (2,551,732)
                                                            -------------------    -------------------

                                                         $         3,353,478              3,450,612
                                                            ===================    ===================
</TABLE>


(7)  Real Estate Acquired by Foreclosure

     Real estate acquired by foreclosure, net, as of September 30, 2002 and 2001
     totaled $562,344 and $267,413,  respectively. There were no transactions in
     the allowance for losses on real estate  acquired by  foreclosure  in 2002,
     2001, or 2000.


                                       51

<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000



(8)  Interest-Bearing Deposits

     At  September  30,  2002 and  2001,  the  composition  of  interest-bearing
     deposits and applicable weighted average interest rates were as follows:
<TABLE>
<CAPTION>

                                                                           2002                 2001
                                                                     -----------------    -----------------

<S>                                                               <C>                           <C>
NOW accounts (2002 - 0.43%, 2001 - 0.45%)                         $         9,161,202            9,015,368
Super NOW accounts (2002 - 1.00%, 2001- 2.00%)                              4,892,933            4,326,760
Passbook savings (2002 - 1.49%, 2001 - 2.49%)                              17,210,364           17,258,958
Time deposits:
    Certificates of deposit less than $100,000 (2002 - 3.16%,
      2001 - 4.58%)                                                        20,287,530           22,180,546
    Certificates of deposit greater than $100,000 (2002 - 2.25%,
      2001 - 3.98%)                                                        24,428,217           24,046,106
                                                                     -----------------    -----------------

              Total time deposits                                          44,715,747           46,226,652

Accrued interest on deposits                                                   56,833              117,603
                                                                     -----------------    -----------------

              Total deposits                                      $        76,037,079           76,945,341
                                                                     =================    =================
</TABLE>


     Weighted  average  interest  rates on deposit  accounts  were as follows at
     September 30, 2002 and 2001:
<TABLE>
<CAPTION>

                                                                    2002                   2001
                                                             -------------------    -------------------

<S>                                                                         <C>                    <C>
     NOW and demand deposit accounts                                        0.43%                  0.45%
     Super NOW accounts                                                     1.00%                  2.00%
     Passbook savings accounts                                              1.49%                  2.49%
     Certificates of deposit less than $100,000                             3.16%                  4.58%
     Certificates of deposit greater than $100,000                          2.25%                  3.98%
                                                             -------------------    -------------------

              Total                                                         2.02%                  3.29%
                                                             ===================    ===================
</TABLE>



                                       52
<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000



     Interest on deposits is summarized as follows:


<TABLE>
<CAPTION>

                                               2002                   2001                   2000
                                        -------------------    -------------------    -------------------

<S>                                  <C>                                 <C>                    <C>
       NOW accounts                  $            36,286                 59,672                 40,317
       Super NOW accounts                         59,651                 91,932                107,477
       Passbook savings                          265,146                419,823                416,499
       Time deposits                           1,422,177              2,313,130              2,263,442
                                        -------------------    -------------------    -------------------

                                     $         1,783,260              2,884,557              2,827,735
                                        ===================    ===================    ===================
</TABLE>


     The amounts and  maturities of time deposits at September 30, 2002 and 2001
     are as follows:
<TABLE>
<CAPTION>

                                                                    2002                   2001
                                                             -------------------    -------------------

<S>                                                       <C>                             <C>
     Within one year                                      $        38,620,922             40,109,012
     After one but within two years                                 3,076,192              3,544,087
     After two but within three years                               1,535,153              1,782,162
     After three but within four years                                888,120                468,071
     After four but within five years                                 538,193                296,651
     Greater than five years                                           57,167                 26,669
                                                             -------------------    -------------------

                                                          $        44,715,747             46,226,652
                                                             ===================    ===================
</TABLE>

(9) Borrowed Funds

     The  Company  was  liable to the  Federal  Home Loan Bank of Atlanta on the
     following advances at September 30, 2002:

                                        Fixed interest
Maturity date                                rate
-----------------------------------  ------------------

December 2002                               2.09%         $2,000,000
June 2003                                   3.20%          2,000,000
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 4.57%)                    $18,950,000
                                                          ===========


At September 30, 2001, the advances were  collateralized  by a blanket pledge of
first-mortgage residential loans. The June 2008 advance is callable in June 2003
and the January 2011 advance is callable in 2006.


                                       53


<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000



(10)   Income Taxes

       For the years ended September 30, 2002, 2001, and 2000, income tax
expense (benefit) consists of the following:

<TABLE>
<CAPTION>


                                               2002                   2001                   2000
                                        -------------------    -------------------    -------------------


<S>                                  <C>                                <C>                    <C>
       Current:                      $           309,089                386,657                274,210
           Federal                                35,824                 28,866                 19,219
           State                        -------------------    -------------------    -------------------

                                                 344,913                415,523                293,429


       Deferred:                                 (48,166)               (93,946)               (14,845)
           Federal                                (6,500)                (9,704)                (2,410)
           State                        -------------------    -------------------    -------------------

                                                 (54,666)              (103,650)               (17,255)
                                        -------------------    -------------------    -------------------

                                     $           290,247                311,873                276,174
                                        ===================    ===================    ===================
</TABLE>


The income tax expense above  represents an effective tax rate of 33.8%,  34.6%,
and 35.6% for 2002, 2001, and 2000, respectively.  The actual income tax expense
for 2002,  2001,  and 2000  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% for 2002, 2001, and 2000 to income before income taxes as follows:

<TABLE>


                                                        2002                2001                2000
                                                  -----------------   -----------------   -----------------

<S>                                            <C>                             <C>                 <C>
       Computed "expected" income tax expense  $           292,315             306,750             263,668
       State tax, net of federal effect                     19,354              12,647              11,095
       Dividends paid to ESOP                               (8,981)             (7,851)             (7,845)
       Other, net                                          (12,441)                327               9,256
                                                  -----------------   -----------------   -----------------

                                               $           290,247             311,873             276,174
                                                  =================   =================   =================
</TABLE>



                                       54
<PAGE>

                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000


The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax  liabilities  at September  30, 2002
and 2001 are presented below:
<TABLE>
<CAPTION>

                                                                            2002                2001
                                                                      -----------------   -----------------

<S>                                                                <C>                              <C>
Deferred tax assets:
    Loans - unearned loan fee income                               $             9,030              11,667
    Nonaccrual interest                                                        115,985             105,642
    Foreclosed property                                                        118,960              43,794
    Prepaid expenses and accruals                                               14,102              11,018
    Other                                                                       27,319               1,586
                                                                      -----------------   -----------------

                                                                               285,396             173,707
                                                                      -----------------   -----------------

Deferred tax liabilities:
    Unrealized gain on investment securities available for sale                370,208             292,243
    Loans - allowance for loan losses                                           98,981              41,960
    FHLB stock                                                                  40,942              40,942
                                                                      -----------------   -----------------

                                                                               510,131             375,145
                                                                      -----------------   -----------------

              Net deferred tax (liability) asset                   $          (224,735)           (201,438)

                                                                      =================   =================
</TABLE>


     Management  believes results of future operations will generate  sufficient
     taxable  income and resulting tax  liabilities  to realize the deferred tax
     assets.  There was no valuation allowance at September 30, 2002 or 2001, or
     any change in the valuation  allowance during the years ended September 30,
     2002, 2001, or 2000.

(11) 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 ESOP 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 Company 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, 2002,  the ESOP holds  31,063  shares
     (22.31%) of the Company's  outstanding  stock,  of which 27,831 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.


                                       55
<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000


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, 2002 and 2001 was $48,000 and $56,000,
respectively.  Unearned shares at year-end 2002 and 2001 totaled 2,171 and 2,571
with fair values of $99,866 and $107,982, respectively.

Contributions  to fund the  installments  on the 1989 loan have been recorded as
compensation  expense. The fair value of the  committed-to-be-released  1995 and
1998 shares are also reported as compensation  expense.  Such shares totaled 400
in each of the years 2002, 2001, and 2000. The related  compensation expense was
$16,399, $16,000 and $18,548 in 2002, 2001, and 2000, 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.

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,  2002,  2001 and 2000  were
$31,473,  $28,030,  and  $28,536,  respectively.  The Bank also  provides  major
medical  and  dental  coverage  funded  through  pre-tax  withholdings  from the
participants.


                                       56
<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000


(12) 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, 2002,  2001,
     and 2000.  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, 2002 and 2001 and have,  therefore,  been excluded from
     the respective earnings per share calculations.

<TABLE>
<CAPTION>

                                                        2002                2001                2000
                                                   ----------------    ----------------   -----------------

Numerator:
<S>                                             <C>                             <C>                <C>
    Net income                                  $           569,504             590,332            499,320
    Increase in fair value of put obligation                     --                  --           (135,800)
                                                   ----------------    ----------------   -----------------

              Numerator for basic and diluted
                net income available to
                common shareholders             $           569,504             590,332            363,520
                                                   ================    ================   =================

Denominator:
    Weighted average common shares outstanding  $           136,616             128,846            126,621
    Effect of assumed exercise of put option
      by withdrawing ESOP participants                           --                  --            (27,586)
                                                   ----------------    ----------------   -----------------

              Denominator for basic net
                income per common share         $           136,616             128,846             99,035
                                                   ================    ================   =================
</TABLE>
                                                                     (Continued)
                                       57


<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000

<TABLE>
<CAPTION>


Denominator:

<S>                                                         <C>                 <C>                <C>
    Weighted average common shares outstanding              136,616             128,846            126,621
    Net effect of the assumed exercise of
      stock options-based on the treasury
      stock method using average market price
      during the year                                         2,492                  --              7,800
                                                   ----------------    ----------------   -----------------

    Weighted average diluted shares
      outstanding                                           139,108             128,846            134,421
    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                        139,108             128,846            106,835
                                                   ================    ================   =================

Basic net income per common share:
Net income                                      $              4.17                4.58               3.94
Effect of increase in fair value of put
    obligation                                                   --                  --              (0.27)

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

              Basic net income per common
                share                           $              4.17                4.58               3.67
                                                   ================    ================   =================

Diluted net income per common share:
Net income                                      $              4.09                4.58               3.71
Effect of increase in fair value of put
    obligation                                                   --                  --              (0.31)
                                                   ----------------    ----------------   -----------------

              Diluted net income per common
                share                           $              4.09                4.58               3.40
                                                   ================    ================   =================

</TABLE>



                                       58


<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000


(13) Comprehensive Income

     Presented  below is a summary of other  comprehensive  income for the years
     ended September 30, 2002, 2001, and 2000:
<TABLE>
<CAPTION>



                                                         2002               2001                2000
                                                   -----------------   ----------------    ----------------

<S>                                             <C>                           <C>                    <C>
Other comprehensive income before tax:
Unrealized holding gain on investment
    securities available for sale arising
    during the period, net                      $           442,421           1,646,154              57,884
Less: reclassification adjustment for gains
    (losses) on investment securities
    available for sale realized in net income               201,030             110,712              (4,083)
                                                   -----------------   ----------------    ----------------

              Other comprehensive income,
                before income taxes                         241,391           1,535,442              61,967
                                                   -----------------   ----------------    ----------------

Income tax expense (benefit) related to other
    comprehensive income:
Unrealized holding gain on investment
    securities available for sale arising
    during the period, net                                  159,272             592,615              20,838

Less: reclassification adjustment for gains
    (losses) on investment securities
    available for sale realized in net income                72,371              39,857              (1,470)
                                                   -----------------   ----------------    ----------------

Total income tax expense (benefit) related to
    other comprehensive income                               86,901             552,758              22,308
                                                   -----------------   ----------------    ----------------

              Other comprehensive income        $           154,490             982,684              39,659
                                                   =================   ================    ================
</TABLE>


(14) 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.

                                                                     (Continued)
                                       59

<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000

<TABLE>
<CAPTION>



                                       Actual               For capital adequacy           Well capitalized
                                                                  purposes
                             ---------------------------  --------------------------  ---------------------------
                               Amount         Ratio         Amount         Ratio         Amount         Ratio
                             ------------  -------------  ------------  ------------  -------------  ------------

<S>                          <C>              <C>           <C>             <C>         <C>             <C>
As of September 30, 2002:
Total capital
    (to risk weighted
    assets)                  $10,612,000      19.61%        4,330,000       8.00%       5,412,000       10.00%
Tier I capital
    (to risk weighted
    assets)                    9,788,000      18.08%        2,165,000       4.00%       3,247,000        6.00%
Tier I capital
    (to average assets)        9,788,000       9.25%        4,233,000       4.00%       5,291,000        5.00%

As of September 30, 2001:
Total capital
    (to risk weighted
    assets)                  $10,088,000      22.10%       3,645,000        8.00%       4,556,000       10.00%
Tier I capital
    (to risk weighted
    assets)                    9,147,000      20.10%       1,822,000        4.00%       2,734,000        6.00%
Tier I capital
    (to average assets)        9,147,000       9.00%       4,074,000        4.00%       5,093,000        5.00%
</TABLE>


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, 2002 and 2001.

Retained  earnings  at  September  30,  2002  and  2001  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,  2002 and 2001,  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.

(15) 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.

(16) 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.

                                       60


<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000




The Bank uses the same credit  policies in making  commitments  and  conditional
obligations as it does for on-balance-sheet instruments.

The  off-balance-sheet  financial  instruments  whose contract amounts represent
credit risk as of September 30, 2002 are as follows:

              Commitments to extend credit                $ 1,472,050
              Commitments to fund lines of credit                  --
                                                           ------------

                                                          $ 1,472,050
                                                           ============


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.

(17) 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.  Under a new stock option plan,  the Company
     granted  10,450  common  stock  options in 2001 with an  exercise  price of
     $18.50 per share to directors and certain key employees.  All option issued
     in 2001 are outstanding and exercisable at September 30, 2002. 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.

(18)   Fair Value of Financial Instruments

     The  following  table  provides  fair  values  of the  Company's  financial
     instruments at September 30, 2002 and 2001.  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

                                                                     (Continued)
                                       61

<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000


     discounted cash flow and other valuation techniques.  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)
                                       62

<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000



       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>


                                                    2002                                      2001
                                      --------------------------------------    --------------------------------------
                                        Carrying amount      Estimated fair      Carrying amount      Estimated fair
                                                                 value                                     value
                                      ------------------   -----------------    -----------------   ------------------
<S>                              <C>                            <C>                  <C>                 <C>

Financial assets:
    Cash and cash equivalents    $         7,200,470            7,200,470            6,119,006           6,119,006
    Interest-earning deposits
      in other banks                         149,353              149,353              163,142             163,142
    Investment securities                 57,285,517           57,325,796           48,470,948          48,504,210

    Federal Home Loan Bank stock             947,500              947,500              747,500             747,500
    Loans receivable, net                 36,549,291           38,765,000           41,109,567          43,587,000
    Accrued interest receivable              540,979              540,979              620,713             620,713

Financial liabilities:
    Deposits, including accrued
      interest payable                    76,037,079           76,974,000           76,945,341          75,020,000
    FHLB advances                         18,950,000           20,468,635           14,950,000          15,758,235
    ESOP debt                                 48,000               48,000               56,000              56,000
</TABLE>


(19) 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, 2002, the Bank could have declared dividends of approximately
     $4,035,000 without prior approval of regulatory  authorities;  however, the
     Bank would be required to submit a notice of such  dividends  to the Office
     of Thrift Supervision.

                                                                     (Continued)
                                       63


<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000




20) Parent Company Financial Information

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


<TABLE>
<CAPTION>

                              (Parent Company Only)
                            Condensed Balance Sheets
                           September 30, 2002 and 2001
      --------------------------------------------------------------------------------------------------------------------
                                     Assets                                            2002                   2001
                                                                                -------------------    -------------------

<S>                                                                          <C>                                <C>
      Cash                                                                   $            36,163                176,549
      Investment in subsidiary Bank                                                   10,515,744              9,722,798
      Income tax receivable                                                              102,346                     --
                                                                                -------------------    -------------------

                    Total assets                                             $        10,654,253              9,899,347
                                                                                ===================    ===================

                                   Liabilities

      Note payable (ESOP debt)                                               $            48,000                 56,000
      Other liabilities                                                                  140,851                     --
                                                                                -------------------    -------------------

                    Total liabilities                                                    188,851                 56,000
                                                                                -------------------    -------------------

      Common stock subject to put option                                               1,287,356              1,175,412

                              Stockholders' Equity

      Serial preferred stock                                                                  --                     --
      Common stock                                                                         1,392                  1,392
      Additional paid-in capital                                                       1,451,545              1,446,846
      Retained earnings                                                                7,079,010              6,739,788
      Accumulated other comprehensive income                                             674,035                519,545
      Unearned common stock held by ESOP                                                 (27,936)               (39,636)
                                                                                -------------------    -------------------

                    Total stockholders' equity                                         9,178,046              8,667,935
                                                                                -------------------    -------------------

                    Total liabilities and stockholders' equity               $        10,654,253              9,899,347
                                                                                ===================    ===================

</TABLE>

                                                                     (Continued)
                                       64
<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000

<TABLE>
<CAPTION>



                              (Parent Company Only)
                       Condensed Statements of Operations
             For the years ended September 30, 2002, 2001, and 2000
      -----------------------------------------------------------------------------------------------------------------------
                                                                   2002                   2001                   2000
                                                            -------------------    -------------------    -------------------

<S>                                                      <C>                                 <C>                    <C>
      Income:
          Cash dividends from Bank                       $            97,500                 97,500                 97,500
          Interest income                                                749                    358                    484
                                                            -------------------    -------------------    -------------------

                    Total income                                      98,249                 97,858                 97,984

      Miscellaneous expense                                          179,640                  7,160                 15,274
                                                            -------------------    -------------------    -------------------

          Earnings (loss) before equity in                           (81,391)                90,698                 82,710
            undistributed earnings of subsidiary
          Equity in undistributed earnings of subsidiary             650,895                499,634                416,610
                                                            -------------------    -------------------    -------------------

                    Net earnings                         $           569,504                590,332                499,320
                                                            ===================    ===================    ===================

</TABLE>
                                                                     (Continued)
                                       65




<PAGE>
                              CFS BANCSHARES, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                       September 30, 2002, 2001, and 2000

<TABLE>
<CAPTION>



                              (Parent Company Only)
                       Condensed Statements of Cash Flows
              For the years ended September 30, 2002, 2001 and 2000
-----------------------------------------------------------------------------------------------------------------------------
                                                                   2002                   2001                   2000
                                                            -------------------    -------------------    -------------------

<S>                                                      <C>                                <C>                    <C>
       Cash flows from operating activities:
           Net earnings                                  $           569,504                590,332                499,320
           Adjustments to reconcile net earnings to net
             cash provided by operating activities:
             Equity in undistributed earnings of
               subsidiary                                           (650,895)              (499,634)              (416,610)

             Increase in other assets                               (102,346)                    --                     --

             Increase (decrease) in other liabilities                161,689                     --                (30,939)
                                                            -------------------    -------------------    -------------------

                     Net cash provided by (used in)
                       operating activities                          (22,048)                90,698                 51,771
                                                            -------------------    -------------------    -------------------

       Cash flows from financing activities:
           Cash dividends paid                                      (118,338)               (97,500)               (97,500)
           Proceeds from exercise of stock options                        --                129,080                     --
                                                            -------------------    -------------------    -------------------

                     Net cash provided by (used in)
                       financing activities                         (118,338)                31,580                (97,500)
                                                            -------------------    -------------------    -------------------

                     Net increase (decrease) in cash                (140,386)               122,278                (45,729)

       Cash, beginning of year                                       176,549                 54,271                100,000
                                                            -------------------    -------------------    -------------------

       Cash, end of year                                 $            36,163                176,549                 54,271
                                                            ===================    ===================    ===================

</TABLE>


                                       66

<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

     Pursuant to regulations  promulgated  under the Exchange Act, the Company's
directors and officers,  and persons who own more than ten percent of the Common
Stock,  are required to file reports to report  their  ownership  and changes in
ownership in the Common Stock and to furnish the Company with copies of all such
ownership  reports  that are filed.  Based solely on its review of the copies of
such  reports  received  during the past fiscal year or with respect to the last
fiscal  year,  the Company  believes  that all of its  directors,  officers  and
stockholders owning in excess of ten percent of the Common Stock timely complied
with  the  reporting  requirements,  except  as set  forth  below.  Each  of the
Company's  directors and officers  inadvertently did not timely report the grant
of a stock  option to each of them.  Each of the  options was granted on October
25,  2001 and was  subject to the  receipt of  stockholder  approval,  which was
received on January 24, 2002.  The option  grants were  reported late on Form 4s
filed on December 20, 2002 for each of the directors and officers.

ITEM 10. EXECUTIVE COMPENSATION

     Summary  Compensation  Table.  The following  table sets forth the cash and
noncash compensation for the last three fiscal years awarded to or earned by the
Chief  Executive  Officer for his services to the Company and its  subsidiaries,
and to each other  executive  officer of the Company whose  compensation  earned
during the year ended September 30, 2002 exceeded $100,000 for services rendered
in all capacities to the Company and the Bank.

<TABLE>
<CAPTION>


                                                     Annual Compensation                  Long-Term Compensation
                                         ----------------------------------------------------------------------------
                                                                                        Securities
------------------------                                             Other Annual       Underlying       All Other
Name and Principal         Fiscal Year      Salary        Bonus     Compensation(1)     Options(2)      Compensation
Position                  -------------  -------------  ---------  -----------------  ---------------  --------------
------------------------

<S>                           <C>          <C>          <C>        <C>                      <C>            <C>
Bunny Stokes, Jr.             2002         $136,962     $81,600    $       --               2,500          $9,306(3)
  Chief Executive             2001          130,754      11,600            --                  --           8,922
Officer                       2000          125,127      10,600            --                  --          29,584

Cynthia N. Day                2002         $107,033     $35,700            --               2,000           8,111(4)
  Chief Operations            2001           98,367       8,500            --                  --           6,550
Officer                       2000           78,155       7,500            --                  --          17,467

W. Kent McGriff               2002          $85,154     $35,700            --               1,000           7,090(5)
  Chief Financial             2001           78,999       8,500            --                  --           6,226
Officer                       2000           68,075       6,500            --                  --          17,155
</TABLE>

---------------
(1)  Other annual  compensation  does not include amounts  attributable to other
     miscellaneous benefits received by the executive officers. The costs to the
     Company and the Bank of providing such benefits to each  executive  officer
     during fiscal 2002 did not exceed 10% of the total salary and bonus paid to
     or accrued for the benefit of such individual executive officer.

(2)  Consists of stock  options  granted  pursuant to the 2001 Stock  Option and
     Incentive Plan. The options were granted on October 25, 2001 subject to the
     receipt of  stockholder  approval,  which was received on January 24, 2002.
     The  options  became  fully  exercisable  upon the  receipt of  stockholder
     approval.

(3)  Includes $4,797  representing  the value of shares allocated to his account
     in the Bank's ESOP and $4,509  representing  matching  contributions by the
     Bank to Mr. Stokes' account in the Bank's 401(k) Plan.


                                       67

<PAGE>


(4)  Includes $3,063  representing  the value of shares allocated to her account
     in the Bank's ESOP and $5,048  representing  matching  contributions by the
     Bank to Ms. Day's account in the Bank's 401(k) Plan.

(5)  Includes $2,876  representing  the value of shares allocated to his account
     in the Bank's ESOP and $4,214 representing matching contributions.


     Existing Stock  Options.  The following  table sets forth,  with respect to
each of the executive  officers named in the above Summary  Compensation  Table,
information  with  respect  to stock  options  granted  during  the  year  ended
September 30, 2002.

<TABLE>
<CAPTION>

                                                                 Individual Grants
                          -------------------------------------------------------------------------------------------
                                                    Percent of Total
                                  Options           Options Granted to          Exercise
          Name                   Granted(1)            Employees(2)                Price             Expiration Date
------------------------  ---------------------  ----------------------  ---------------------  ---------------------

<S>                                <C>                  <C>                      <C>               <C>
Bunny Stokes, Jr.                  2,500                23.9%                    $18.50            October 25, 2011
Cynthia N. Day                     2,000                19.1                     $18.50            October 25, 2011
W. Kent McGriff                    1,000                 9.6                     $18.50            October 25, 2011

</TABLE>


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

(1)  None of the indicated awards were accompanied by stock appreciation rights.

(2)  Percentage of options granted to all employees and directors  during fiscal
     2002.

(3)  The  exercise  price was based on the fair market value of the common stock
     on the date of the grant.

     No options  were  exercised  by  executive  officers  during the year ended
September 30, 2002. The following table sets forth,  with respect to each of the
executive  officers named in the Summary  Compensation  Table,  information with
respect to the number of shares of common  stock  covered by options held at the
end of the fiscal year and the value with respect thereto.

<TABLE>
<CAPTION>


                                                                                       Value of Unexercised
                                           Number of Unexercised Options               In-The-Money Options
                                                At Fiscal Year-End                      At Fiscal Year-End
                                         -------------------------------------   -----------------------------------
Name                                       Exercisable/Unexercisable                  Exercisable/Unexercisable
                                         -------------------------------------   -----------------------------------

<S>                                                <C>                  <C>               <C>                 <C>
Bunny Stokes, Jr                                   2,500                --                $115,475            $0
Cynthia N. Day                                     2,000                --                  92,380            --
W. Kent McGriff                                    1,000                --                  46,190            --
</TABLE>

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

(1)  Difference  between the merger price of $64.69 per share at  September  30,
     2002 and the exercise price of $18.50 per share.

     Employment  Agreement.  The Bank has entered into an  employment  agreement
with Bunny Stokes,  Jr.,  President of the Bank. The agreement also provides for
an annual extension of the term of employment for an additional  one-year period
beyond the then effective expiration date subject to Board of Directors approval
of the extension, unless Mr. Stokes gives written notice that the agreement will
not be extended further. The agreement provides that Mr. Stokes will be entitled
to participate in discretionary bonuses, customary fringe benefits, vacation and
sick leave and disability  payments as provided for other management  personnel.
The  agreement  will be  terminated  upon  the  death  of the  employee,  by his
voluntary  termination,  or by the Bank  for  "just  cause"  as  defined  in the
agreement.  If Mr. Stoke's employment is terminated without just cause, he would
be entitled to a


                                       68

<PAGE>


continuation of his salary for the remaining term of the
agreement. Mr. Stokes' salary under the agreement at September 30, 2002 was
$136,500.

     The  employment  agreement  further  provides  that  in  the  event  of the
involuntary  termination of employment in connection  with, or within six months
after, any change in control of the Bank, or voluntary termination of employment
in  conjunction  with, or within six months after,  any change in control of the
Bank which in either case has not been approved in advance by a two-thirds' vote
of the full Board of  Directors,  Mr. Stokes will be paid within 30 days of such
termination  in one lump sum payment or, at his election,  in periodic  payments
over the remaining term of the agreement,  a sum equal to 2.99 times the average
annual compensation he received during the five year period immediately prior to
the date of change of control.  "Control" generally refers to the acquisition by
any  person  or entity  of the  ownership  or power to vote more than 25% of the
Bank's  stock  or the  control  of the  election  of a  majority  of the  Bank's
directors. The agreement also provides for a similar lump sum payment to be made
in the event of his voluntary termination of employment following the occurrence
of certain specified events following any change in control, whether approved by
the Board of  Directors or  otherwise,  including  an  assignment  of duties and
responsibilities  other than those  normally  associated  with his  position,  a
diminishment  of his authority or  responsibility,  failure to maintain  benefit
plans  providing at least a  comparable  level of benefits  presently  afforded,
requiring him to move his personal residence or perform his principal  executive
functions more than 35 miles from the Bank's current main office. If the pending
merger was to be  completed  in 2002,  such  payment  would be equal to $353,056
based  upon Mr.  Stokes'  compensation  during  the past five  years.  Since the
pending merger will not be completed until 2003, the actual  severance amount to
Mr.  Stokes  will be  higher  since it will  include  his  compensation  through
December 31, 2002 as part of his  five-year  average.  Completion of the pending
merger will constitute a change in control.

     Change-in-Control    Protective   Agreements.   The   Bank   entered   into
change-in-control protective agreements with Ms. Day and Mr. McGriff on December
14, 2000 (the  "Change-in-Control  Agreements").  Each of the  Change-in-Control
Agreements were for a period of three years,  subject to an additional  one-year
extension  on each  annual  anniversary  date.  In the event the  executive  (1)
voluntarily  terminates  employment  for any reason  within 30 days  following a
change in  control  of the  Company  or the  Bank,  (2)  voluntarily  terminates
employment  within 90 days of a "good reason" event during the period  beginning
six months  before  the  change in control  and ending on the later of the first
annual  anniversary  of the  change in  control  or the  expiration  date of the
Change-in-Control  Agreement (the  "Protective  Period"),  or (3) has his or her
employment  terminated by the Company,  the Bank or their successors  during the
Protective  Period for any reason other than just cause, then the executive will
be  entitled  to  severance  benefits up to 2.99 times the average of his or her
taxable  income  from the  Company  and the Bank  during the last five  calendar
years.

     The  pending  merger  will   constitute  a  change  in  control  under  the
Change-in-Control  Agreements,  and the  executives  will be entitled to receive
severance  benefits  under  such  agreements.  If the  pending  merger was to be
completed in 2002,  the severance  payments would equal $220,088 for Ms. Day and
$187,731 for Mr. McGriff,  based on their  compensation for the five years ended
December 31, 2001.  Since the pending  merger will not be completed  until 2003,
the actual  severance  amounts to Ms. Day and Mr. McGriff will be higher because
their  five-year  average  compensation  will  include  their  compensation  for
calendar 2002.

     Director's  Compensation.  During the fiscal year ended September 30, 2002,
each director was paid directors'  fees of $4,500 for the year.  Additional fees
of $250 per  meeting  were  paid  for  attendance  at  committee  meetings.  The
Company's  executive  officers who also serve as directors received no directors
fees during fiscal year 2002, and as a policy do not receive directors fees.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     As of September 30, 2002, we had 139,220  shares of common stock issued and
outstanding.  The  following  table sets forth  information  regarding the share
ownership of:

     o    each holder of more than 5% of our outstanding common stock, including
          our Employee Stock Ownership Plan,

     o    each member of our Board of Directors and each  executive  officer who
          is not a director, and



                                       69

<PAGE>
     o all of our directors and executive officers as a group.


                                      Shares Beneficially
Name of Beneficial Owner                  Owned(1)(2)         Percent of Class
------------------------                  -----------         ----------------

                                            31,063(3)               22.3%
Citizens Federal Savings Bank
Employee Stock Ownership Plan
1700 Third Avenue North
Birmingham, Alabama 35203

State Farm Insurance Co.                    12,999                   9.3%
State Farm Plaza
Bloomington, Illinois 61701

Directors:
     Bunny Stokes, Jr                       27,886(4)                19.7%
     James W. Coleman                       12,300(5)               8.8%
     Cynthia N. Day                          3,621(6)                2.6%
     Dr. Ross E. Gardner                     6,866                   4.9%
     Rev. John T. Porter                       800                    .6%
     Odessa Woolfolk                           800                    .6%

Executive Officers:
     W. Kent McGriff                         5,115(7)                3.6%

Directors and executive officers            57,388(8)               38.9%
 as a group (7 persons)
-----------------------------

(1)  Based upon filings made pursuant to the Securities Exchange Act of 1934, as
     amended,  and information  furnished by the respective  individuals.  Under
     regulations  promulgated  pursuant to the  Exchange  Act,  shares of common
     stock are deemed to be beneficially owned by a person if he or she directly
     or indirectly  has or shares (a) voting power,  which includes the power to
     vote or to direct the voting of the shares, or (b) investment power,  which
     includes the power to dispose or to direct the  disposition  of the shares.
     Unless otherwise indicated,  the named beneficial owner has sole (or shares
     with spouse or other immediate family members) voting and dispositive power
     with respect to the shares.

(2)  Under  applicable  regulations,  a  person  is  deemed  to have  beneficial
     ownership  of any  shares  of CFS  Bancshares  common  stock  which  may be
     acquired  within 60 days of the date  shown  pursuant  to the  exercise  of
     outstanding stock options.  Shares of CFS Bancshares common stock which are
     subject to stock  options are deemed to be  outstanding  for the purpose of
     computing the percentage of  outstanding  common stock owned by such person
     or group but not  deemed  outstanding  for the  purpose  of  computing  the
     percentage  of CFS  Bancshares  common  stock owned by any other  person or
     group.  The  amounts  set forth in the table  include  shares  which may be
     received  upon the exercise of stock  options  pursuant to CFS  Bancshares'
     stock option plan as follows: for each of the four non-employee  directors,
     700 shares;  for Mr. Stokes,  2,500 shares;  for Ms. Day, 2,000 shares; for
     Mr. McGriff,  1,000 shares; and for all directors and executive officers as
     a group, 8,300 shares.


                                         (Footnotes continued on following page)


                                       70

<PAGE>


(3)  Includes 27,831 shares allocated to ESOP participants, and 3,232 shares not
     yet allocated to participants.  The participants are entitled to direct the
     voting of the allocated shares. The Trust Company of Sterne,  Agee & Leach,
     Inc.,  the  trustee  of the ESOP,  may be deemed  to own  beneficially  the
     unallocated  shares  held by the  ESOP.  Allocated  shares  as to which the
     trustee does not receive timely voting directions from the participants and
     unallocated  shares  will be voted by the  trustee as  directed by the ESOP
     committee,  consisting  of Lett,  Greene and Woolfolk.  The committee  will
     generally  direct  that  these  shares be voted in the same  proportion  as
     allocated shares are voted by participants,  subject to the requirements of
     applicable law and applicable fiduciary duties.

(4)  Includes 5,078 shares  allocated to Mr.  Stokes' ESOP account.  Mr. Stokes'
     business address is 1700 Third Avenue North, Birmingham, Alabama 35203.

(5)  Mr. Coleman's address is Route 1, Box 287, Sawyerville, Alabama 36776.

(6)  Includes 1,621 shares allocated to Ms. Day's ESOP account.

(7)  Includes 2,557 shares allocated to Mr. McGriff's ESOP account.

(8)  This  total  includes  shares  beneficially  owned  by  all  directors  and
     executive officers listed in the table.

(b)  SECURITY OWNERSHIP OF MANAGEMENT

         See the response to Item 11(a) above.

(c)  CHANGES IN CONTROL

     The  Company and the Bank  entered  into an  Agreement  and Plan of Merger,
     dated May 30, 2002, with Citizens Bancshares Corporation and Citizens Trust
     Bank,  pursuant  to  which  the  Company  and the  Bank  will be  acquired.
     Applications  seeking regulatory approval have been filed with the Board of
     Governors of the Federal Reserve System  ("Federal  Reserve Board") and are
     currently  pending.  On December 6, 2002, the staff of the Federal  Reserve
     Board extended their processing period by an additional 30 days in order to
     complete  their  review of the  financial  and  managerial  aspects  of the
     acquisition.  On December 19,  2002,  the Board of Directors of the Company
     approved an  amendment  to the  Agreement  and Plan of Merger,  pursuant to
     which (1) the deadline for completing the merger was extended from December
     31, 2002 to February 28,  2003,  and (2) the merger price per share will be
     $64.97 if the merger is  completed in January 2003 and $65.04 if the merger
     is  completed  in  February  2003.  We  currently  expect  the merger to be
     completed in February  2003,assuming  Citizens  Bankshares  obtains Federal
     Reserve Board approval.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Bank  has  followed  the  policy  of  offering  loans to its  officers,
     directors and employees  for the  financing of their  personal  residences.
     Applicable  law  requires  that  loans to  directors,  officers  and 10% or
     greater   stockholders   and  their   affiliates  must  be  approved  by  a
     disinterested  majority of the board of  directors if all such loans exceed
     the greater of 5% of capital and surplus, or $25,000.  Such loans must also
     be  made  on  terms   substantially  the  same  as  offered  in  comparable
     transactions with non-affiliated  persons.  The Bank's loan policy complies
     with these requirements. During the year ended September 30, 2002, the Bank
     had no  residential  real estate  loans or other loans  outstanding  to any
     officer or director with unpaid balances totaling in excess of $60,000.

                                     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.


                                     71


<PAGE>






     Exhibit 2.1 Agreement and Plan of Merger, dated May 30, 2002 (a)
     Exhibit 2.2 Amendment to Agreement and Plan of Merger
     Exhibit 3.1 Certificate of Incorporation of CFS Bancshares, Inc. (b)
     Exhibit 3.2 Bylaws of CFS Bancshares, Inc. (b)
     Exhibit 3.3 Amendment to Bylaws of CFS Bancshares, Inc.
     Exhibit 10.1 Employment Contract of President Bunny Stokes, Jr. (b)
     Exhibit 10.2  Change-in-Control  Protective Agreement with Cynthia D. Nalls
     (now Cynthia Day)
     Exhibit 10.3 Change-in-Control Protective Agreement with W. Kent McGriff
     Exhibit 21 Subsidiaries of the Registrant

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

     (a)  Incorporated by reference to the Company's  Current Report on Form 8-K
          dated  May 30,  2002  and  filed  with  the  Securities  and  Exchange
          Commission on May 31, 2002.

     (b)  Incorporated  by  reference  to the  Company's  Annual  Report on Form
          10-KSB for the fiscal year ended September 30, 1998.

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




ITEM 14. CONTROLS AND PROCEDURES

     Within 90 days prior to the date of this annual report, the Company carried
out an  evaluation,  under the  supervision  and with the  participation  of the
Company's  manamgement including the Company's chief executive officer and chief
financial  officer,  of the  effectiveness  of the design and  operation  of the
Company's  disclosure controls and procedures.  Based upon that evaluation,  the
chief executive officer and chief financial officer concluded that the Company's
disclosure  controls and  procedures  are  effective.  There were no significant
changes  in the  Company's  internal  controls  or in other  factors  that could
siginficantly affect these controls subsequent to the date of their evaluation.

     Disclosure controls and procedures are the controls and other procedures of
the Company  that are  designed to ensure  that the  information  required to be
disclosed by the Company in its reports  filed or  submitted  under the Exchange
Act is recorded,  processed,  summarized  and reported,  within the time periods
specifed in the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures  include,  without  limitation,  controls and procedures
designed to ensure that  information  required to be disclosed by the Company in
its reports filed under the Exchange Act is accumulated and  communicated to the
Company's management,  including the chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.



                                       72




<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 19, 2002       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 19, 2002
   ----------------------------------------------
     Bunny Stokes, Jr.
     Principal Executive Officer and Director


By:/s/ W. Kent McGriff                                   Date: December 19, 2002
   ----------------------------------------------
     W. Kent McGriff
     Principal Financial and Accounting Officer


By:/s/ Rev. John T. Porter                               Date: December 19, 2002
   ----------------------------------------------
     Rev. John T. Porter, Director



By:/s/ Odessa Woolfolk                                   Date: December 19, 2002
   ----------------------------------------------
     Odessa Woolfolk, Director



By:/s/ James W. Coleman                                  Date: December 19, 2002
   ----------------------------------------------
     James W. Coleman, Director



By:/s/ Dr. Ross E. Gardner                               Date: December 19, 2002
   ----------------------------------------------
     Dr. Ross E. Gardner, Director


By:/s/ Cynthia N. Day                                    Date: December 19, 2002
   ----------------------------------------------
     Cynthia N. Day, Vice President and Director


                                       73



<PAGE>







                      CERTIFICATION PURSUANT TO RULE 13a-14
               OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Bunny Stokes,  Jr.,  President and Chief Executive Officer of CFS Bancshares,
Inc., certify that:

1. I have reviewed this annual report on Form 10-KSB of CFS Bancshares, Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this quarterly report is being prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
procedures  as of a date  within  90  days  prior  to the  filing  date  of this
quarterly report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions  about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

     a) all  significant  deficiencies  in the design or  operation  of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



Date: December 19, 2002                    /s/ Bunny Stokes, Jr.
                                           -------------------------------------
                                           Bunny Stokes, Jr.
                                           President and Chief Executive Officer

                                       74
<PAGE>



                      CERTIFICATION PURSUANT TO RULE 13a-14
               OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, W. Kent McGriff,  Executive Vice President and Chief Financial Officer of CFS
Bancshares, Inc., certify that:

1. I have reviewed this annual report on Form 10-KSB of CFS Bancshares, Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this quarterly report is being prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
procedures  as of a date  within  90  days  prior  to the  filing  date  of this
quarterly report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions  about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

     a) all  significant  deficiencies  in the design or  operation  of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


 Date: December 19, 2002                      /s/ W. Kent McGriff
                                              ----------------------------------
                                              W. Kent McGriff
                                              Executive Vice President and Chief
                                                Financial Officer


                                       75


<PAGE>



                  CERTIFICATION PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002

The undersigned  executive  officers of the registrant  hereby certify that this
Form  10-KSB  fully  complies  with the  requirements  of  Section  13(a) of the
Securities Exchange Act of 1934 and that the information contained herein fairly
presents,  in all  material  aspects,  the  financial  condition  and results of
operations of the registrant.

                                        CFS Bancshares, Inc.

Dated:   December 19, 2002

                                        By:/s/ Bunny Stokes, Jr.
                                           -------------------------------------
                                           Bunny Stokes, Jr.
                                           President and Chief Executive Officer



                                        By:/s/ W. Kent McGriff
                                           -------------------------------------
                                           W. Kent McGriff
                                           Executive Vice President and Chief
                                               Financial Officer


                                       76