UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                                    FORM 10-K

(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                        Commission file number: 000-25145

                            LAMAR CAPITAL CORPORATION
             (exact name of Registrant as specified in its charter)

         MISSISSIPPI                                  64-0733976
(State or other jurisdiction of         (I.R.S. Employer Identification Number)
incorporation of organization)

401 Shelby Speights Drive, Purvis , MS      39475
(Address of principal executive offices)    (Zip Code)

Registrant's telephone number, including area code: 601-794-6047

Securities registered pursuant to Section 12(b) of the Act:

                                                 Name of Each Exchange on
         Title of Each Class                          Which Registered
         -------------------                     -------------------------
               None                                     None

Securities registered pursuant to section 12(g) of the Act:

         Common Stock,  $.50 par value              (Title of Class)

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act if
1934  during  the  preceding  12 months  (or for such  shorted  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 ( )

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K.

         Indicate the number of shares  outstanding of each of the  Registrant's
classes of common stock, as of the latest practicable date.

         Class                                  Outstanding at February 28, 1999
         Common stock, $.50 par value                   4,315,707 Shares

         The aggregate market value of the voting stock held by nonaffiliates of
the Registrant on February 28, 1999 was $26,588,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the following  documents are  incorporated  by reference to
Part I, II, and III of the Form 10-K  report:  Proxy  Statement  dated April 12,
1999 for  Registrant's  Annual Meeting of  Stockholders  to be held May 11, 1999
(Part III).


<PAGE>



                            LAMAR CAPITAL CORPORATION
                                    FORM 10-K
                                      INDEX


                                                                           PAGE
                                                                           ----
                                     PART I
ITEM 1.    BUSINESS............................................................1
ITEM 2.    PROPERTIES.........................................................10
ITEM 3.    LEGAL PROCEEDINGS..................................................12
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................12

                                     PART II
ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
           STOCKHOLDER MATTERS................................................12
ITEM 6.    SELECTED FINANCIAL DATA............................................14
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS..............................................15
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................31
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE...........................................55

                                    PART III
ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................55
ITEM 11.   EXECUTIVE COMPENSATION.............................................55
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT.........................................................55
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................55

                                     PART IV
ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....55

SIGNATURES....................................................................57




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                            LAMAR CAPITAL CORPORATION
                                    FORM 10-K

                                     PART I


         In addition to historical information,  this report contains statements
which constitute  forward-looking  statements and information which are based on
management's  beliefs,  plans,  expectations  and assumptions and on information
currently  available  to  management.   The  words  "may,"  "should,"  "expect,"
"anticipate,"  "intend," "plan," "continue,"  "believe," "seek," "estimate," and
similar  expressions  used in this report that do not relate to historical facts
are intended to identify forward-looking statements.  These statements appear in
a number of places in this  report,  including,  but not limited to,  statements
found in Item 1 "Business" and in Item 7 "Management's Discussion and Analysis."
All  phases of the  Company's  operations  are  subject to a number of risks and
uncertainties.  Investors are cautioned that any such forward-looking statements
are not guarantees of future  performance  and involve risks and  uncertainties,
and that  actual  results  may  differ  materially  from those  projects  in the
forward-looking statements. Among the factors that could cause actual results to
differ  materially  are the risks and  uncertainties  discussed  in this report,
including,   without   limitation,   the  portions  referenced  above,  and  the
uncertainties  set forth from time to time in the Company's other public reports
and filings and public  statements,  many of which are beyond the control of the
Company,  and any of which, or a combination of which,  could materially  affect
the results of the Company's operations and whether  forward-looking  statements
made by the Company ultimately prove to be accurate.

ITEM 1.  BUSINESS

Background

         Lamar Capital Corporation (the "Company") was formed in 1986 to serve
as a holding company for Lamar Bank (the "Bank").  The Company  conducts its
business activities through the Bank and the other subsidiaries described below.

         Since the establishment of the Bank (then called  Lamar County Bank) in
1904 in Purvis,  Mississippi,  the Bank has grown to seven banking facilities in
three southeastern Mississippi counties. Most of this growth has occurred in the
last decade as management responded to opportunities  presented by the growth of
the Lamar County and Hattiesburg, Mississippi market areas.

         In 1935, the Bank expanded outside of Purvis by  acquiring  the Sumrall
Bank,  located in the extreme north end of Lamar County. In 1980, the Bank moved
into its current  main  office  facilities.  In response to the rapid  growth of
northeast  Lamar  County,  the  Bank  built  a  branch  on  Highway  98  West in
Hattiesburg  in 1989,  marking  the Bank's  initial  entry into the  Hattiesburg
market area. In 1991,  the Bank expanded for the first time into another  county
by purchasing the Prentiss branch of a failed savings and loan  association from
the Resolution Trust Corporation.  In 1994, the Bank opened a second Hattiesburg
branch in the newly constructed  Turtle Creek Mall. This opening was followed by
the Bank's first entry into Forrest County,  Mississippi with the opening of the
Petal branch in 1996. In June of 1998, the Bank acquired  property which will be
used to open a new branch in Hattiesburg,  Mississippi on Hardy Street,  a major
thoroughfare,  near the main campus of the  University of Southern  Mississippi.
This branch is expected to open in the second half of 1999.

         During the 1990's, the Company also expanded its financial products and
its customer base. In 1992, the Bank established a consumer finance  subsidiary,
Southern  Financial  Services,  Inc.  ("SFSI"),  which makes  consumer  loans to
persons who may not be eligible for financing  from the Bank.  SFSI, has offices
in Purvis, Hattiesburg,  Petal, Prentiss, Monticello,  Poplarville and Gulfport,
Mississippi.  In 1997,  the Company  founded The Mortgage  Shop,  Inc.  ("MSI"),
located in Hattiesburg, Mississippi. MSI originates B and C grade mortgage loans
which are sold in the secondary market.  Most recently the Bank further expanded
the range of  services  offered by entering an  arrangement  with Robert  Thomas
Securities,  Inc. to provide  stock and other  securities  trading  services for
customers  of the Bank and other  investors.  These  services  are  provided  in
Hattiesburg  and by appointment at other  locations.  With the addition of these
services,  the Company is  executing  its  strategy of offering a broad range of
banking  and  financial  services  with the  personalized  focus of a  community
banking organization.

         The Company continues to look for additional  expansion  opportunities,
either  by  establishing  de  novo  banking  offices  or by  acquiring  existing
institutions in the financial services industry. The Company intends to consider
various  strategic  acquisitions  of banks or banking assets in those areas that
management  believes  would  complement  and  increase  the  Company's  existing
business,  or expand in market areas or product lines that management  considers
attractive.



                                        1

<PAGE>
Lines of Business

         Historically,  the Company has extended credit and provided general
banking services through its banking center network to individuals and small and
medium-sized  businesses.  During the past several  years the Company has sought
new  lines of  business  to  diversify  its asset mix and  further  enhance  its
profitability. While each new line of business reflects the Company's efforts to
enrich its asset mix,  each of these lines of business  is an  outgrowth  of the
community  banking and lending  services that the Company has performed over the
years.  In  keeping  with  the  Company's  operating  philosophy,  each of these
businesses  has been  carefully  developed  and is subject  to  various  quality
controls. The Company's principal lines of business are:


     o    Real  Estate  Lending.  The  Bank's  real  estate  loans  consist of
          residential first and second mortgage loans,  residential construction
          loans and home equity lines of credit and term loans  secured by first
          and  second   mortgages  on  the  residences  of  borrowers  for  home
          improvements,  education  and other  personal  expenditures.  The Bank
          makes  mortgage  loans  with a variety of terms,  including  fixed and
          floating  rates.  These  loans  are made  consistent  with the  Bank's
          appraisal  policy  and real  estate  lending  policy  which  prescribe
          maximum  loan-to-value ratios and maturities.  Management expects that
          these   loan-to-value   ratios  are   sufficient  to  compensate   for
          fluctuations  in the real estate  market and to  minimize  the risk of
          loss that could result from a downturn in that market.  Generally, the
          Bank  retains real estate  loans with  maturities  under ten years and
          sells  mortgage loans with longer  maturities.  MSI originates B and C
          grade mortgage loans which are sold in the secondary market.

     o    Consumer Lending. The Bank and SFSI offer consumer installment loans
          to business  owners and other  individuals  for  personal,  family and
          household purposes.  Consumer loan repayments depend upon a borrower's
          financial  stability  and are more likely to be adversely  affected by
          job loss, divorce,  illness and other personal hardships. In addition,
          collateral  such as automobiles and other personal  property  securing
          consumer  loans  depreciates  rapidly and  sometimes is an  inadequate
          repayment  source if a borrower  defaults.  In evaluating these loans,
          the Bank requires its lending  officers to review the borrower's level
          and stability of income,  past credit  history and the impact of these
          factors  on the  borrower's  ability  to  repay  the  loan in a timely
          manner.  In  addition,  the Bank  requires  that its banking  officers
          maintain an appropriate  margin between the loan amount and collateral
          value.

     o    Commercial  Lending.   The  Bank's  commercial  loan  portfolio  is
          dispersed   among   various   business   lines   such  as   commercial
          construction,  trucking,  timber,  utilities,  auto  and  recreational
          vehicles, farm supplies and heavy equipment.  Such loans are primarily
          for the financing of accounts receivable,  property,  plant, equipment
          and  inventory.  The Bank also offers  Small  Business  Administration
          loans.  Commercial  lending  entails  greater risks than  traditional,
          single family residential lending.  Commercial loans typically involve
          larger loan balances concentrated in fewer borrowers.  The analysis of
          commercial loans,  which requires expertise in evaluating a commercial
          enterprise  and its  collateral,  is  generally  more complex than the
          analysis required for single family residential lending. Like consumer
          loans,  commercial  loans are  subject  to adverse  conditions  in the
          economy,  as well as the market for the  specific  goods and  services
          sold by the  commercial  borrower.  Loans secured by  commercial  real
          estate can also be affected by trends in the local real estate market.
          In making  these  loans,  the Bank manages its credit risk by actively
          monitoring such measures as advance rate, cash flow,  collateral value
          and other appropriate credit factors.

     o    Deposits and Other  Borrowings.  Deposits are a key component of the
          Company's banking business, serving as a source of funding for lending
          as well as for increasing customer account relationships.  The Company
          offers  competitively  priced deposit  products,  including  checking,
          savings and time deposit  accounts,  seeking to increase core deposits
          and market share.  Borrowings,  principally from the Federal Home Loan
          Bank  ("FHLB"),  and lines of credit with other banks,  provide  other
          sources of liquidity.

     o    Brokerage  Services.  The Bank provides brokerage services through a
          joint arrangement with Robert Thomas Securities, Inc., a subsidiary of
          Raymond  James &  Associates,  Inc.  These  services  are  provided in
          Hattiesburg  and  by  appointment  at  other  locations.  The  Company
          developed brokerage services to (1) help retain existing customers who
          were  seeking   alternative   investments,   (2)  attract  additional,
          sophisticated  customers from its market areas, and (3) to enhance the
          Company's franchise by offering a broader scope of financial services.

                                        2

<PAGE>



     o    Investments. The Company's investment securities, together with cash
          and cash  equivalents,  provide an important source of liquidity.  The
          Company uses its  investments  as  collateral  for  borrowings  and to
          secure public fund deposits. The investment portfolio is managed by an
          internal  committee  chaired  by  the  President  in  accordance  with
          policies approved by the Company's Board of Directors.

         The Company's operating revenues are derived primarily from interest
earned from its loan and investment  securities portfolios and fee income from
loan and deposit products.  The Company is not dependent upon a single customer,
or a few customers,  the loss of any one or more of which  would have a material
adverse effect on the statement of condition or results of operations.


Competition

         The Company competes with several local and regional commercial  banks,
thrifts,  credit unions and mortgage  companies  for  deposits,  loans and other
banking related financial  services.  There is intense competition in the Bank's
markets from other financial  institutions as well as other "non-bank" companies
which engage in similar  activities.  Some of the Company's  competitors are not
subject to the degree of regulatory  review and restrictions  which apply to the
Bank.  In  addition,  the  Company  must  compete  with  much  larger  financial
institutions  which  have  greater  financial  resources  than the  Company  and
aggressively  compete for market share in the Lamar/Forrest County market. These
competitors  attempt to gain market share through their financial  products mix,
pricing  strategies  and  banking  center  locations.  Legislative  developments
related to  interstate  branching  and banking in general,  by  providing  large
banking institutions easier access to a broader  marketplace,  are creating more
competitive  pressure  on  smaller  financial  institutions.  The  Company  also
competes with insurance  companies,  savings banks,  consumer finance companies,
investment  banking firms,  brokerage houses,  mutual fund managers,  investment
advisors and credit unions. Retail establishments  compete for loans by offering
credit  cards and retail  installment  contracts  for the  purchase of goods and
merchandise.  It is  anticipated  that  competition  from both bank and non-bank
entities will continue to grow.

Employees

         As of December 31, 1998, the  Bank had 130  employees  of whom 114 were
full-time and 16  part-time.  MSI has four  full-time  employees and SFSI has 24
employees of whom 19 were  full-time and five part-time.  In addition to a bonus
program,  the Bank currently  maintains an employee  benefit program  providing,
among other benefits,  a self-insured  medical plan, a profit sharing and 401(k)
retirement  plan,   employee  stock  ownership  plan  and  life  and  disability
insurance.  In August of 1998, the Company  adopted a stock incentive plan under
which it plans to grant stock  options for selected  employees.  These  employee
benefits,  as a whole, are considered by management to be generally  competitive
with employee benefits  provided by other employers in Mississippi.  The Company
believes the future  success of its  subsidiaries  will depend,  in part, on its
ability  to  continue  to attract  and retain  skilled  retail,  technical,  and
managerial  personnel in order to maintain its quality delivery of financial and
banking  services.  None of the Company's  employees are subject to a collective
bargaining agreement, and the Company has never experienced a work stoppage.

Supervision and Regulation

         The supervision and regulation of  bank  holding  companies  and  their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit  Insurance  Corporation  (the "FDIC") and
the banking  system as a whole,  and not for the  protection of the bank holding
company  shareholders or creditors.  The banking agencies have broad enforcement
power  over  bank  holding  companies  and banks  including  the power to impose
substantial fines and other penalties for violations of laws and regulations.

         The following description  summarizes some of the laws to which the
Company and the Bank are subject. References herein to applicable  statutes  and
regulations are brief summaries thereof, do not purport to be complete,  and are
qualified in their entirety by reference to such statutes and regulations.

         The Company. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended (the "BHCA"),  and it is subject to
supervision, regulation and examination by the Board of Governors of the Federal
Reserve System (the "Federal  Reserve  Board").  The BHCA and other federal laws
subject bank holding

                                        3

<PAGE>
companies to  particular  restrictions  on the types of activities in which they
may engage, and to a range of supervisory requirements and activities, including
regulatory enforcement actions for violations of laws and regulations.

         Regulatory Restrictions on Dividends;  Source of Strength. It is the
policy of the Federal Reserve Board that bank holding companies should  pay cash
dividends  on common stock only out of income  available  over the past year and
only if prospective  earnings  retention is consistent  with the  organization's
expected  future needs and financial  condition.  The policy  provides that bank
holding  companies should not maintain a level of cash dividends that undermines
the bank  holding  company's  ability  to serve as a source of  strength  to its
banking subsidiaries.

         Under Federal Reserve Board policy,  a bank holding company is expected
to act as a source of financial strength to each of its banking subsidiaries and
to commit resources to their support.  Such support may be  required at times
when, absent this Federal Reserve Board policy,  a holding company may not be
inclined to provide it. As discussed below, a bank  holding  company  in certain
circumstances   could  be  required  to   guarantee   the  capital  plan  of  an
undercapitalized banking subsidiary.

         In the event of a bank holding company's bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure  immediately  any deficit  under any  commitment  by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.

         Activities "Closely Related" to Banking.  The BHCA prohibits a bank
holding company,  with certain  limited  exceptions,  from acquiring  direct or
indirect ownership or control of any voting  shares of any company which is not
a bank or from engaging in any activities other than those of banking,  managing
or controlling banks and certain other  subsidiaries,  or furnishing services to
or performing services for its subsidiaries.  One  principal  exception to these
prohibitions  allows the acquisition of interests in companies whose  activities
are found by the Federal Reserve Board, by order or regulation, to be so closely
related to banking or managing or controlling  banks, as to be a proper incident
to banking. Some of the activities that have been determined by regulation to be
closely  related to banking are making or servicing  loans,  performing  certain
data  processing  services,  acting as an  investment  or  financial  advisor to
certain  investment trusts and investment  companies,  and providing  securities
brokerage  services.  Other  activities  approved by the Federal  Reserve  Board
include consumer financial counseling, tax planning and tax preparation, futures
and options advisory services,  check guaranty  services,  collection agency and
credit  bureau  services,   and  personal  property  appraisals.   In  approving
acquisitions by bank holding companies of companies  engaged in  banking-related
activities,  the Federal Reserve Board considers a number of factors, and weighs
the expected  benefits to the public (such as greater  convenience and increased
competition  or gains in  efficiency)  against  the  risks of  possible  adverse
effects  (such  as  undue  concentration  of  resources,   decreased  or  unfair
competition  or  conflicts  of  interest).  The  Federal  Reserve  Board is also
empowered to differentiate  between activities  commenced de novo and activities
commenced through  acquisition of a going concern.  Despite prior approval,  the
Federal Reserve may order a holding company or its subsidiaries to terminate any
activity,  or terminate its ownership or control of any subsidiary,  when it has
reasonable  cause to believe that  continuation  of such activity  constitutes a
serious  risk to the  financial  safety,  soundness  or  stability  of any  bank
subsidiary of the bank holding company.

         Securities Activities.  The Federal Reserve Board has approved
applications by bank holding companies to engage, through nonbank  subsidiaries,
in certain securities-related activities (underwriting of municipal revenue
bonds, commercial paper, consumer receivable-related  securities and one-to-four
family mortgage-backed securities), provided that the affiliates  would  not  be
"principally  engaged"  in such  activities  for  purposes  of Section 20 of the
Glass-Steagall Act. In limited situations,  holding companies may be able to use
such   subsidiaries  to  underwrite  and  deal  in  corporate  debt  and  equity
securities.

         Safe and Sound Banking Practices.  Bank holding companies are not
permitted to engage in unsafe and unsound banking practices. The Federal Reserve
Board's Regulation Y, for example, generally requires a holding  company to give
the Federal  Reserve  Board prior notice of any  redemption or repurchase of its
own equity securities, if  the  consideration to  be  paid,  together  with  the
consideration  paid for any repurchases or redemptions in the preceding year, is
equal  to 10% or more of the  company's  consolidated  net  worth.  The  Federal
Reserve Board may oppose the  transaction  if it believes  that the  transaction
would  constitute  an unsafe or unsound  practice  or would  violate  any law or
regulation.

         The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their nonbanking  subsidiaries which represent unsafe
and unsound banking practices or which constitute violations of laws

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<PAGE>
or  regulations,  and can assess civil money  penalties  for certain  activities
conducted  on a  knowing  and  reckless  basis,  if  those  activities  caused a
substantial  loss to a depository  institution.  The penalties can be as high as
$1,000,000 for each day the activity continues.

         Anti-tying Restrictions. With certain limited exceptions,  bank holding
companies  and their  affiliates  are  prohibited  from tying the  provision  of
certain  services,  such as extensions of credit, to other services offered by a
holding company or its affiliates.

         Capital Adequacy Requirements. The Federal Reserve  Board has adopted a
system using risk-based  capital  guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines,  specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding  asset balances to
determine a "risk-weighted"  asset base. The guidelines  require a minimum total
risk-based  capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1  capital  elements).  Total  capital  is the sum of Tier 1 and  Tier 2
capital. As of December 31, 1998, the Company's ratio of Tier 1 capital to total
risk-weighted  assets  was  14.65%  and its  ratio  of  total  capital  to total
risk-weighted  assets  was  15.90%.  See Note 11 to the  Consolidated  Financial
Statements.

         In addition to the risk-based capital guidelines, the Federal Reserve
Board uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a company's Tier 1
capital divided by its average total consolidated  assets  (less  goodwill  and
certain  other intangible assets).  Certain  highly-rated bank holding companies
may maintain a minimum leverage ratio of 3.0%, but other bank holding companies
may be required to maintain a leverage ratio of up to 200 basis points above the
regulatory minimum. As of December 31, 1998, the Company's leverage ratio was
9.55%.

         The federal banking agencies' risk-based and leverage ratios are
minimum supervisory ratios generally applicable to banking organizations  that
meet certain specified criteria, assuming that they have the highest  regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with  capital  positions  well  above  the  minimum  ratios.  The  federal  bank
regulatory  agencies  may set  capital  requirements  for a  particular  banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal  Reserve  Board  guidelines  also  provide  that  banking  organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions  substantially  above the minimum  supervisory  levels,
without significant reliance on intangible assets.

         Imposition of Liability for Undercapitalized Subsidiaries.  Bank
regulators are required to take "prompt corrective  action" to resolve problems
associated with insured  depository  institutions  whose capital declines  below
certain levels. In the event an institution becomes "undercapitalized," it must
submit a capital restoration plan. The capital restoration plan will not be
accepted by the  regulators  unless  each  company  having  control of the
undercapitalized institution guarantees the subsidiary's  compliance with the
capital restoration plan up to a certain  specified amount.  Any such  guarantee
from a depository institution's holding company is entitled to a priority of
payment in bankruptcy.

         The aggregate liability of the holding company of an undercapitalized
bank is limited to the lesser of 5% of the institution's assets at the time it
became undercapitalized or the amount necessary to cause  the institution  to be
"adequately  capitalized."  The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital  restoration plan. For example, a bank holding company
controlling  such an institution can be required to obtain prior Federal Reserve
Board  approval  of  proposed  dividends,  or might be  required to consent to a
consolidation or to divest the troubled institution or other affiliates.

         Acquisitions by Bank Holding Companies. The BHCA requires  every  bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially  all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such  acquisition it would
own or control,  directly or  indirectly,  more than 5% of the voting  shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future  prospects  of the bank  holding  company  and the banks  concerned,  the
convenience and needs of the communities to be served,  and various  competitive
factors.

         Control Acquisitions. The Change in Bank Control Act prohibits a person
or group of persons from acquiring  "control" of a bank holding  company unless
the Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal  Reserve
Board, the acquisition of 10% or more

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<PAGE>



of a class of voting stock of a bank holding  company with a class of securities
registered  under  Section  12 of the  Exchange  Act,  such as  proposed  by the
Company, would, under the circumstances set forth in the presumption, constitute
acquisition of control of the Company.

         In addition, any company is required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Common Stock
of the Company, or otherwise obtaining control or a "controlling influence" over
the Company.

         The Bank. The Bank is a Mississippi chartered banking corporation,  the
deposits  of which are  insured by the Bank  Insurance  Fund  ("BIF") and by the
Savings  Association  Insurance  Fund ("SAIF") of the FDIC.  The SAIF  insurance
funds resulted from the  acquisition of thrift  deposits in Purvis and Prentiss.
The Bank is not a member of the Federal Reserve  System;  the Bank is subject to
supervision and regulation by the FDIC and the Mississippi Department of Banking
and Consumer  Finance.  Such  supervision  and  regulation  subjects the Bank to
special restrictions,  requirements,  potential enforcement actions and periodic
examination by the FDIC and the  Mississippi  Department of Banking and Consumer
Finance.  Because the Federal  Reserve Board  regulates the bank holding company
parent of the Bank,  the Federal  Reserve Board also has  supervisory  authority
which directly affects the Bank.

         Equivalence to National Bank Powers. To the extent that the Mississippi
laws and  regulations  may have  allowed  state-chartered  banks to  engage in a
broader range of activities than national banks,  the Federal Deposit  Insurance
Act (the "Federal Reserve Act") has been amended to limit this authority.  Under
the  Federal  Reserve  Act,  no state bank or  subsidiary  thereof may engage as
principal  in  any  activity  not  permitted  for  national  banks,  unless  the
institution   complies  with  applicable  capital   requirements  and  the  FDIC
determines that the activity poses no significant risk to the insurance fund. In
general,  statutory  restrictions  on the  activities  of  banks  are  aimed  at
protecting  the safety and soundness of depository  institutions.  However,  the
provisions of Miss. Code Ann.  ss.81-5-1(10)  provide  state-chartered banks the
right to engage in activities  approved for national banks by the Comptroller of
the Currency to provide parity between state chartered and nationally  chartered
banks.

         Branching.  Mississippi law permits a Mississippi  chartered bank, with
prior  regulatory  approval,  to  establish  a branch  office  in any  county in
Mississippi.  In addition, a Mississippi  chartered bank is permitted to combine
with  any  other  bank  or  thrift  regardless  of its  location,  provided  the
Mississippi  institution  has been in  operation  for at least five  years.  The
Mississippi  banking  statutes  also  permit  a  Mississippi  bank,  with  prior
regulatory approval, to engage in an interstate merger transaction,  and thereby
establish a branch office outside of  Mississippi.  In any case, the transaction
must  also be  approved  by the  FDIC,  which  considers  a number  of  factors,
including financial history, capital adequacy, earnings prospects,  character of
management, needs of the community and consistency with corporate powers.

         Restrictions on Transactions with Affiliates and Insiders. Transactions
between the Bank and its  nonbanking  affiliates,  including  the  Company,  are
subject to Section 23A of the  Federal  Reserve  Act.  In  general,  Section 23A
imposes  limits on the amount of such  transactions,  and also requires  certain
levels of collateral for loans to affiliated  parties. It also limits the amount
of advances to third  parties  which are  collateralized  by the  securities  or
obligations of the Company or its subsidiaries.

         Affiliate  transactions  are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain  transactions between the Bank
and its affiliates be on terms  substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.

         The restrictions on loans to directors,  executive officers,  principal
shareholders  and their related  interests  (collectively  referred to herein as
"insiders")  contained in the Federal  Reserve Act and Regulation O apply to all
insured  institutions  and  their  subsidiaries  and  holding  companies.  These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their  related  interests.  These loans cannot  exceed the
institution's  total unimpaired capital and surplus,  and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.

         Restrictions  on  Distribution of Subsidiary Bank Dividends and Assets.
Dividends  paid by the Bank have  provided a  substantial  part of the Company's
operating funds and for the foreseeable  future it is anticipated that dividends
paid by the Bank to the  Company  will  continue to be the  Company's  principal
source of operating  funds.  Under  Mississippi law, the payment of dividends by
the Bank must be approved by the Mississippi Department of Banking and

                                        6

<PAGE>
Consumer Finance.  Capital adequacy  requirements also serve to limit the amount
of dividends  that may be paid by the Bank.  Under  federal law, the Bank cannot
pay  a   dividend   if,   after   paying   the   dividend,   the  Bank  will  be
"undercapitalized."  The FDIC may  declare a  dividend  payment to be unsafe and
unsound  even though the Bank would  continue  to meet its capital  requirements
after the dividend.

         Because the Company is a legal entity  separate  and distinct  from its
subsidiaries,  its right to  participate  in the  distribution  of assets of any
subsidiary upon the subsidiary's  liquidation or reorganization  will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or  other  resolution  of an  insured  depository  institution,  the  claims  of
depositors  and other  general  or  subordinated  creditors  are  entitled  to a
priority  of  payment  over the  claims  of  holders  of any  obligation  of the
institution to its shareholders,  including any depository  institution  holding
company (such as the Company) or any shareholder or creditor thereof.

         Examinations.  The FDIC  periodically  examines and  evaluates  insured
banks.  Based upon such an  evaluation,  the FDIC may  revalue the assets of the
institution  and require that it establish  specific  reserves to compensate for
the  difference  between  the  FDIC-determined  value and the book value of such
assets. The Mississippi Department of Banking and Consumer Finance also conducts
examinations of state banks but may accept the results of a federal  examination
in lieu of conducting an independent examination.

         Audit Reports.  Insured  institutions with total assets of $500 million
or more must submit annual audit  reports  prepared by  independent  auditors to
federal  and  state  regulators.  In some  instances,  the  audit  report of the
institution's holding company can be used to satisfy this requirement.  Auditors
must  receive  examination  reports,   supervisory  agreements  and  reports  of
enforcement  actions. In addition,  financial  statements prepared in accordance
with  generally  accepted  accounting  principles,  management's  certifications
concerning  responsibility for the financial  statements,  internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor  regarding the  statements  of  management  relating to the internal
controls must be submitted.  For institutions  with total assets of more than $3
billion,  independent  auditors  may be required to review  quarterly  financial
statements.  The Federal Deposit  Insurance Act requires that independent  audit
committees be formed,  consisting of outside  directors  only. The committees of
such  institutions  must include members with experience in banking or financial
management,   must  have  access  to  outside  counsel,  and  must  not  include
representatives of large customers.

         Capital  Adequacy  Requirements.   The  FDIC  has  adopted  regulations
establishing   minimum   requirements   for  the  capital  adequacy  of  insured
institutions.  The  FDIC may  establish  higher  minimum  requirements  if,  for
example,  a  bank  has  previously  received  special  attention  or  has a high
susceptibility to interest rate risk.

         The FDIC's risk-based capital guidelines  generally require state banks
to have a minimum  ratio of Tier 1 capital to total  risk-weighted  assets of 4%
and a ratio of total  capital to total  risk-weighted  assets of 8%. The capital
categories  have the same  definitions  for the Bank as for the  Company.  As of
December  31, 1998,  the Bank's  ratio of Tier 1 capital to total  risk-weighted
assets was 9.98% and its ratio of total capital to total  risk-weighted  assets
was 11.23%.

         The FDIC's leverage  guidelines  require state banks to maintain Tier 1
capital  of no less  than 5% of  average  total  assets,  except  in the case of
certain  highly  rated banks for which the  requirement  is 3% of average  total
assets.  As of December 31, 1998,  the Bank's ratio of Tier 1 capital to average
total assets (leverage ratio) was 7.06%.

         Corrective  Measures  for Capital  Deficiencies.  The  federal  banking
regulators  are  required to take  "prompt  corrective  action"  with respect to
capital-deficient  institutions.  Agency  regulations  define,  for each capital
category,  the levels at which institutions are "well capitalized,"  "adequately
capitalized,"    "undercapitalized,"    "significantly   undercapitalized"   and
"critically  undercapitalized." A "well capitalized" bank has a total risk-based
capital  ratio of 10% or  higher;  a Tier 1  risk-based  capital  ratio of 6% or
higher;  a leverage  ratio of 5% or higher;  and is not  subject to any  written
agreement,  order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk-based
capital  ratio  of 8% or  higher;  a Tier 1  risk-based  capital  ratio of 4% or
higher;  a leverage  ratio of 4% or higher (3% or higher if the bank was rated a
CAMEL  1  in  its  most  recent  examination  report  and  is  not  experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is  "undercapitalized" if it fails to meet any one of the ratios required
to be adequately capitalized.

         In  addition to  requiring  undercapitalized  institutions  to submit a
capital  restoration  plan,  agency  regulations  contain broad  restrictions on
certain  activities of  undercapitalized  institutions  including  asset growth,
acquisitions,  branch  establishment,  and expansion into new lines of business.
With certain exceptions, an insured depository institution is

                                        7
<PAGE>
prohibited  from  making  capital  distributions,  including  dividends,  and is
prohibited  from paying  management  fees to control  persons if the institution
would be undercapitalized after any such distribution or payment.

         As an institution's  capital  decreases,  the FDIC's enforcement powers
become more severe. A significantly  undercapitalized  institution is subject to
mandated  capital  raising  activities,  restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions. The
FDIC  has  only  very   limited   discretion   in  dealing   with  a  critically
undercapitalized  institution and is virtually required to appoint a receiver or
conservator.

         Banks with  risk-based  capital and leverage  ratios below the required
minimums may also be subject to certain  administrative  actions,  including the
termination  of deposit  insurance  upon  notice  and  hearing,  or a  temporary
suspension of insurance  without a hearing in the event the  institution  has no
tangible capital.

         Deposit  Insurance  Assessments.  The Bank must pay  assessments to the
FDIC for federal deposit insurance protection. The FDIC has adopted a risk based
assessment  system  as  required  by  amendments  made  to the  Federal  Deposit
Insurance  Act.  Under this system,  FDIC-insured  depository  institutions  pay
insurance  premiums  at rates based on their risk  classification.  Institutions
assigned  to  higher-risk  classifications  (that is,  institutions  that pose a
greater  risk  of  loss  to  their  respective   deposit  insurance  funds)  pay
assessments  at  higher  rates  than  institutions  that pose a lower  risk.  An
institution's  risk  classification  is assigned based on its capital levels and
the level of supervisory  concern the institution  poses to the  regulators.  In
addition, the FDIC can impose special assessments in certain instances.

         After  the  one-time  SAIF  assessment  in 1996,  the  assessment  rate
disparity between BIF and SAIF members was eliminated.  The current range of BIF
and SAIF  assessments  is between 0% and .27% of  deposits.  Institutions  which
qualify for the 0% assessment  category,  however,  still have to pay the $1,000
minimum semi-annual assessment required by federal statute.

         The FDIC  established  a process for raising or lowering  all rates for
insured  institutions  semi-annually if conditions warrant a change.  Under this
new system,  the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without  seeking prior public  comment,  but only within a range of
five cents per $100 above or below the premium schedule adopted.  Changes in the
rate  schedule  outside the five cent range above or below the current  schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.

         On September 30, 1996, a law was enacted that contained a comprehensive
approach to  recapitalizing  the SAIF and to assure the payment of the Financing
Corporation's  ("FICO") bond  obligations that were issued by FICO to help shore
up the ailing Federal Savings and Loan Insurance Corporation in 1987. Under this
new act,  banks  insured  under the BIF are  required  to pay a  portion  of the
interest  due on the FICO bonds.  The BIF rate must equal  one-fifth of the SAIF
rate through  year-end 1999, or until the insurance funds are merged,  whichever
occurs first.  Thereafter  BIF and SAIF payers will be assessed pro rata for the
FICO bond  obligations.  With regard to the assessment for the FICO  obligation,
the current BIF rate is 0.0122% of annual  deposits and the SAIF rate is 0.0610%
of annual deposits.

         Enforcement  Powers.  The FDIC and the other federal  banking  agencies
have  broad  enforcement  powers,  including  the  power  to  terminate  deposit
insurance,  impose  substantial fines and other civil and criminal penalties and
appoint a  conservator  or  receiver.  Failure to comply with  applicable  laws,
regulations and supervisory  agreements could subject the Company or its banking
subsidiaries,  as well as officers,  directors and other  institution-affiliated
parties of these  organizations,  to  administrative  sanctions and  potentially
substantial  civil money penalties.  The appropriate  federal banking agency may
appoint the FDIC as  conservator or receiver for a banking  institution  (or the
FDIC may appoint itself,  under certain  circumstances)  if any one or more of a
number of circumstances exist, including,  without limitation, the fact that the
banking  institution  is  undercapitalized  and has no  reasonable  prospect  of
becoming  adequately  capitalized;  fails to become adequately  capitalized when
required to do so; fails to submit a timely and acceptable  capital  restoration
plan; or materially fails to implement an accepted capital restoration plan.

         Brokered  Deposit  Restrictions.   Well  capitalized  institutions  may
solicit and accept,  renew or roll over brokered  deposits without  restriction.
Institutions which are adequately capitalized, but not well capitalized,  cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to  restrictions  on the interest rates that can be paid on such
deposits.  Undercapitalized  institutions  may not accept,  renew,  or roll over
brokered deposits.

         Cross-guarantee Provisions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository

                                        8
<PAGE>



institutions  liable to the FDIC for any losses  incurred in connection with the
failure of a commonly controlled depository institution.

         Community  Reinvestment  Act. The  Community  Reinvestment  Act of 1977
("CRA") and the regulations issued thereunder are intended to encourage banks to
help meet the credit needs of their  service  area,  including  low and moderate
income  neighborhoods,  consistent  with the safe and  sound  operations  of the
banks.  These  regulations  also provide for  regulatory  assessment of a bank's
record in meeting the needs of its service area when considering applications to
establish banking centers,  merger  applications and applications to acquire the
assets and assume the  liabilities  of another  bank.  FIRREA  requires  federal
banking agencies to make public a rating of a bank's  performance under the CRA.
In the case of a bank holding company,  the CRA performance  record of the banks
involved in the  transaction  are reviewed in  connection  with the filing of an
application to acquire  ownership or control of shares or assets of a bank or to
merge  with any  other  bank  holding  company.  An  unsatisfactory  record  can
substantially delay or block the transaction.

         Consumer Laws and Regulations.  In addition to the laws and regulations
discussed  herein,  the  Bank is also  subject  to  certain  consumer  laws  and
regulations that are designed to protect  consumers in transactions  with banks.
While the list set forth herein is not  exhaustive,  these laws and  regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, the Real Estate  Settlement  Procedures Act and the Fair Housing Act, among
others.  These laws and regulations mandate certain disclosure  requirements and
regulate the manner in which  financial  institutions  must deal with  customers
when taking  deposits or making  loans to such  customers.  The Bank must comply
with the applicable provisions of these consumer protection laws and regulations
as part of its ongoing customer relations.


Executive Officers of the Registrant

     The following table sets forth certain information concerning the executive
officers and directors of the Company.


Name                      Age   Positions with the Company
------------------------  ----  ------------------------------------------------
Robert W. Roseberry.....   48   Chairman and Chief Executive Officer, Director
Jane P. Roberts.........   62   Vice Chairman and Secretary, Director
Kenneth M. Lott.........   44   President and Chief Operating Officer, Director
W. H. Macko.............   48   Senior Vice President
Donna T. Rutland........   32   Chief Financial Officer and Treasurer

     Robert W.  Roseberry  began his career with the Bank in 1971 and has served
in numerous  positions.  In 1986, he became Chief Executive  Officer of the Bank
and the  Company.  He has served as a  director  of the Bank since 1971 and as a
director of the Company  since its  formation in 1986.  Robert W.  Roseberry and
Monty C. Roseberry are half- brothers.

     Jane P.  Roberts  has worked  with the Bank for 35 years.  She  assumed her
current  position of Vice  Chairman in 1998.  She has served as Secretary  since
1986 and was the  Secretary/Treasurer  from 1986 to July of 1998. She has served
as a director of the Bank since 1981 and as a director of the Company  since its
formation in 1986. Ms. Roberts and James R. Pylant are first cousins.

     Kenneth M. Lott began his banking career at First Mississippi National Bank
in Hattiesburg in 1976. In 1988, he joined the Bank as Senior Vice President. He
assumed his present  position of President  and Chief  Operating  Officer of the
Company in July of 1998. He has served as a director of the Company since 1992.

     W. H. Macko has 22 years of banking experience, including loan collections,
commercial and consumer lending, branch administration and loan operations. He
joined the Bank in 1989 as Vice President and Branch Manager and assumed his
present position of Senior Vice President of the Company in July of 1998.


                                        9

<PAGE>



     Donna T. Rutland,  C.P.A., worked as a staff accountant with the accounting
firm of McArthur,  Thames,  Slay and Dews,  PLLC from 1988 to 1993. In 1993, she
joined the Bank as Internal Auditor.  In 1995, Ms. Rutland became Vice President
and Controller of the Bank. In July of 1998, she assumed her present position as
Chief Financial Officer and Treasurer of the Company.

The executive officers of the Company are selected by the Board of Directors and
hold office at the discretion of the Board of Directors.

Quarterly Results of Operations (Unaudited)

                                                      Quarter
                              --------------------------------------------------
In thousands, except per
 share amounts                    First         Second       Third        Fourth
                                  -----         ------       -----        ------
1998:
Interest income               $   5,356     $   5,955    $   6,252    $   6,353
Interest expense                  3,023         3,500        3,690        3,690
                              ---------     ---------    ---------    ----------
Net interest income               2,333         2,455        2,562        2,663
Provision for loan losses           169           190          200          226
Other income                        726           805          784          929
Securities gains                    217             4            1           92
Other expenses                    1,869         2,172        2,140        2,551
                              ---------     ---------    ---------    ----------
Income before income taxes        1,238           902        1,007          907
Income taxes                        309           226          252          218
                              ---------     ---------    ---------    ----------
Net Income                    $     929     $     676    $     755    $     689
                              =========     =========    =========    ==========
Net income per common share:
     Basic and diluted        $    0.34     $    0.25    $    0.27    $    0.24
                              =========     =========    =========    ==========

1997:
Interest income               $   4,415     $   4,763    $   5,009    $   5,255
Interest expense                  2,415         2,610        2,719        2,792
                              ---------     ---------    ---------    ----------
Net interest income               2,000         2,153        2,290        2,463
Provision for loan losses           142           147          214          222
Other income                        642           688          705          667
Securities gains (losses)           (20)          (11)          20           (2)
Other expenses                    1,739         1,909        1,871        2,158
                              ---------     ---------    ---------    ----------
Income before income taxes          741           774          930          748
Income taxes                        198           207          253          196
                              ---------     ---------    ---------    ----------
Net income                    $     543     $     567    $     677    $     552
                              =========     =========    =========    ==========
Net income per common share:
     Basic and diluted        $    0.20     $    0.21    $    0.26    $    0.20
                              =========     =========    =========    ==========


ITEM 2.  PROPERTIES

         The Company's  executive  offices and principal support and operational
functions are located at 401 Shelby Speights Drive,  Purvis,  Mississippi 39475.
All  of  the  offices  of  the  subsidiaries  of  the  Company  are  located  in
Mississippi.

                                       10

<PAGE>

<TABLE>
<CAPTION>



                                                                                             Deposits
                                           Square      Owned (O)/      Loans as of             as of
Bank Offices                               Footage     Leased (L)   December 31, 1998    December 31, 1998
------------                               -------     ----------   -----------------    -----------------
                                                                      (in thousands)       (in thousands)
Purvis
 Main Office

<S>                                        <C>            <C>            <C>                  <C>    
 401 Shelby Speights Drive, Purvis.......  19,600         O              $59,868              $87,094

#4 Highway 589, Purvis...................  11,203         O                7,507               10,339

Sumrall
 1193 Highway 42 East, Sumrall...........   5,000         O               30,048               38,509


Hattiesburg
 6052 Highway 98 West, Hattiesburg*......  16,308         O               49,252               68,928

Turtle Creek Mall Branch Office
 1000 Turtle Creek Drive, Space 125,
Hattiesburg..............................     667         L                    0                5,357

Petal
 535 Highway 42, Petal...................  16,810         O               36,481               26,478

Prentiss
 965 South Columbia Avenue, Prentiss.....   4,822         O               11,823               41,567
<FN>

*Includes Mortgage & Investment Center
located at 6042 Highway 98 West,
Hattiesburg.
</FN>
</TABLE>


                                         Square   Owned (O)/      Loans as of
Offices of SFSI                          Footage  Leased (L)   December 31, 1998
---------------                          -------  ----------   -----------------
                                                                 (in thousands)
Hattiesburg
 706 Broadway Drive, Hattiesburg......... 3,780       L           $    918

Petal
 300 New Richton Road, Petal............. 1,440       L                228

Prentiss
 951 South Columbia Avenue, Prentiss..... 1,440       L                587

Purvis
 70 Shelby Speights Drive, Purvis........ 2,160       O              1,697

Monticello
863 Highway 84 West, Monticello.......... 1,100       O                768

Poplarville
 1235 South Main Street, Poplarville..... 1,500       O                762


                                       11

<PAGE>
Gulfport
 1010 Pass Road, Gulfport.................1,100       L                721

                                          Square   Owned (O)/
The Mortgage Shop, Inc.                   Footage  Leased (L)
-----------------------                   -------  ----------
Hattiesburg
 114 North 40th Avenue,
 Suite H, Hattiesburg                       950       L

     The agreements for the leased  facilities have unexpired terms ranging from
May 1999 to 2003, including renewal options.  The Bank also acquired property in
June of 1998 which will be used to open a new branch in Hattiesburg, Mississippi
on Hardy Street, a major thoroughfare, near the main campus of the University of
Southern Mississippi.  This branch is expected to open in the second half of
1999.


ITEM 3.  LEGAL PROCEEDINGS

         SFSI is a defendant in a case filed on June 11, 1998,  in the Circuit
Court of Forrest County, Mississippi. The complaint alleges that the plaintiff
was not given  any  choice  with  respect  to the  purchase  of credit  life and
credit disability  insurance and that SFSI improperly forced placed property
insurance on the collateral  for the  plaintiff's  loan with SFSI. The plaintiff
asks for actual damages of $50,000 and punitive  damages of $500,000.  The case
is in the discovery  stage.  While the ultimate outcome of the lawsuit cannot be
predicted with  certainty,  management  believes  the case is  without  merit,
denies all liability and believes that the ultimate resolution of this matter
will not have a material adverse effect on the Company's financial condition.

         In addition, in  the  ordinary  course  of  operations,  the  Company's
subsidiaries  are  parties  to  various  legal  proceedings.  In the  opinion of
management,  there is no proceeding  pending,  or to the knowledge of management
threatened, in which an adverse decision would have a material adverse effect on
the Company's financial condition.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to the Company's shareholders during
the fourth quarter of 1998.

                                     PART II


ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
         STOCKHOLDER MATTERS

Price Range of Common Stock

         The Company's common stock is traded on The Nasdaq National Market
under the symbol "LCCO." The following table presents the high and low sales
prices of the Company's common stock for the periods indicated during 1998, as
reported by The Nasdaq National Market. The Company completed its initial public
offering in the fourth quarter of 1998 at a price of $10.00 per share.


                                                  Sales Price Per Share
                                               High                   Low
December 18, 1998 to February 28, 1999        $10.25                 $8.25

                                       12
<PAGE>


Dividends

         The Company's dividend policy is for holders of Common Stock to be
entitled to receive dividends when, as and if declared by the Company's Board of
Directors out of funds legally available therefore.  During 1998, 1997 and 1996,
the Company  declared and paid cash  dividends  per share on its Common Stock as
follows:

     For Three Month Period Ended(1)       Date Paid         Dividends Per Share
     ----------------------------       ----------------     -------------------
     December 31, 1998                  January 15, 1999           $.0300
     September 30, 1998                 October 9, 1998            $.0300

     For Six Month Period Ended
     --------------------------
     June 30, 1998                      July 1, 1998               $.0567
     December 31, 1997                  January 2, 1998             .0547
     June 30, 1997                      July 1, 1997                .0462

         (1) The Company began the regular  payment of quarterly  cash dividends
on the Common Stock in the third quarter of 1998.

         While historically the Company has paid regular cash dividends, there
is no assurance that the Company will pay dividends on the Common Stock in the
future. The declaration and payment of dividends on the Common Stock will depend
upon the earnings and financial  condition of the Company,  its liquidity and
capital requirements, the general economic and regulatory climate, the Company's
ability to service any equity or debt obligations senior to the Common Stock and
other factors deemed relevant by the Company's Board of Directors. It is the
policy of the Federal Reserve Board that bank holding  companies should pay cash
dividends on Common Stock only out of income available over the past year and
only if prospective  earnings retention is consistent with the  organization's
expected future needs and  financial condition.  The policy  provides  that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.

         The Company's principal source of funds to pay  dividends  will be cash
dividends  that the Company  receives from the Bank. The payment of dividends by
the Bank to the  Company is subject to certain  restrictions  imposed by federal
and state banking laws, regulations and authorities.  Dividends by the Bank must
be approved by the Mississippi Department of Banking and Consumer Finance.

         The federal banking statutes prohibit federally insured banks from
making any capital distributions (including a dividend payment) if, after making
the distribution, the institution would be "undercapitalized" as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit  an insured  bank from  engaging in an unsafe or unsound
practice, as determined by the agency, in  conducting an activity.  The payment
of dividends could be deemed to constitute such an unsafe or unsound  practice,
depending on the financial condition of the Bank. Regulatory  authorities  could
impose stricter  limitations on the ability of the Bank to pay dividends to the
Company if such limits were deemed  appropriate  to preserve  certain  capital
adequacy requirements.

Holders of Record

         As of February 28, 1999, there were 348 stockholders  of record of the
common stock.

         In December  1998, the Company  completed its initial public  offering
(the "Offering") of 1,548,636 shares of Common Stock (including 185,000 shares
issued January 11, 1999 in connection with the exercise  of  the   underwriters'
over-allotment option) at a price per share of $10.00.

  (1)  Effective date of Registration Statement: December 16, 1998 (File No.
       333-61355)
  (2)  The Offering commenced on December 16, 1998 and was consummated on
       December 22, 1998.
  (3)  All securities registered in the Offering were sold.
  (4)  The managing underwriters of the Offering were Morgan Keegan & Company,
       Inc. and Sterne, Agee & Leach, Inc.

                                       13

<PAGE>
  (5)  Common Stock, $.50 par value.
  (6)  Amount registered and sold: 1,548,636.
  (7)  Aggregate purchase price: $15,486,360.
  (8)  All shares were sold for the account of the Issuer.
  (9)  $1,084,045 in underwriting discounts and commissions were paid to the
       underwriters. $483,081 of other expenses were incurred, including
       estimated expenses.
  (10) $13,919,234 of net Offering proceeds to the Issuer.
  (11) Use of Proceeds: $3,660,288 to retire indebtedness of the Company to Bank
       One, New Orleans, Louisiana;  $7,500,000 was injected into the capital of
       the Bank in order to improve the  capital  ratios of the Bank so that the
       Bank  will  be  positioned  to make  necessary  capital  expenditures  to
       establish two de novo branches in  Hattiesburg,  Mississippi one of which
       the Company expects to be operational in the second half of 1999; and the
       remainder of the Offering  proceeds are being held by the Company for the
       possible future  acquisition of other financial  institutions or branches
       and the  contribution  of additional  capital to the Bank to support loan
       growth.

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>


                                                            As of and for the Years Ended December 31,
                                                        ---------------------------------------------------
                                                        1998       1997         1996       1995      1994
                                                        -------    -------    -------    -------    -------
                                                               (in thousands, except per share data)

Income Statement Data:

<S>                                                     <C>        <C>        <C>        <C>        <C>    
Interest income......................................   $23,916    $19,442    $16,190    $13,903    $11,357
Interest expense.....................................    13,903     10,536      8,429      7,100      5,307
Net interest income..................................    10,013      8,906      7,761      6,803      6,050
Provision for loan losses............................       785        725        557        517        638
Non-interest income..................................     3,558      2,689      2,325      1,751      1,590
Non-interest expense.................................     8,732      7,677      6,890      6,146      5,491
Income before taxes..................................     4,054      3,193      2,639      1,891      1,511
Net income...........................................     3,049      2,339      2,028      1,474      1,189



Balance Sheet Data:
Total assets.........................................  $330,516   $247,022   $207,330   $169,636   $151,895
Total securities.....................................    90,828     58,921     41,562     33,037     32,864
Total loans, net.....................................   197,096    159,552    140,318    119,556    103,268
Allowance for loan losses............................     3,564      3,101      2,837      2,529      2,427
Total deposits.......................................   278,272    211,498    185,404    156,631    139,209
Other borrowed funds.................................    19,120     17,620      7,000         --         --
Total stockholders' equity...........................    31,331     16,160     13,473     11,765     10,123

Per Share Data:
Net income per share--basic and diluted............... $   1.09   $   0.87   $   0.75   $   0.54   $   0.43
Book value...........................................      7.58       5.88       4.97       4.34       3.62
Cash dividends per share.............................     .1167     0.1002     0.0923     0.0923     0.0895


                                       14

<PAGE>




Performance Ratios:
Return on average assets.............................      1.03%      1.02%      1.06%      0.90%      0.80%
Return on average equity.............................     17.65      15.69      15.88      13.56      11.66
Net interest margin..................................      3.65       4.20       4.41       4.50       4.92
Efficiency ratio.....................................        65         66         68         72         72

Asset Quality Ratios:
Allowance for loan losses to nonperforming loans.....       323%       777%       360%       295%       366%
Allowance for loan losses to total loans.............      1.74       1.87       1.93       2.01       2.25
Nonperforming assets to total loans..................      0.90       0.49       1.06       0.93       0.76
Net loan charge-offs to average loans................      0.18       0.30       0.19       0.38       0.36

Capital Ratios:
Leverage ratio.......................................      9.55%      6.87%      7.11%      7.19%      7.14%
Average stockholders' equity to average total assets.      5.82       6.49       6.69       6.63       6.82
Tier 1 risk-based capital ratio......................     14.65       9.84       9.67      10.21      10.50
Total risk-based capital ratio.......................     15.90      11.09      10.92      11.47       9.31
Dividend payout ratio................................         5         12         12         17         21

</TABLE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

Overview

         Since 1996, the Company's net income, earning  assets and deposits have
increased substantially. Net income grew 30.4% from $2.3 million in 1997 to $3.0
million in 1998.  Net income  increased  15.3% from $2.0 million in 1996 to $2.3
million in 1997. Total loans rose 40.5% from $140.3 million at December 31, 1996
to $197.1 million at December 31, 1998. Total  securities  increased 118.5% from
$41.6 million at December 31, 1996 to $90.8 million at December 31, 1998.  Total
deposits  increased  50.1% from $185.4  million at  December  31, 1996 to $278.3
million at December 31, 1998.

         The growth in net income has been caused primarily  by  higher  income
resulting from increased volume in earning assets.  Loans have increased because
of greater  market  penetration  and strong loan demand in the Company's  market
area due to economic  growth.  Securities have risen because of additional funds
available for investment  resulting  from increased  deposits and other borrowed
funds.  Deposits  increased  because of the Company's  strategies to attract new
deposits and strong  economic  growth in the region.  The rise in net income has
been  partially  offset by a decline in the net  interest  margin from 4.41% for
1996 to 3.65% for 1998.

              For the Years Ended December 31, 1998, 1997 and 1996

RESULTS OF OPERATIONS

Net Interest Income

         The principal source of the Company's  revenue is net interest income.
Net interest income is the difference between interest income on  interest-
earning assets, principally loans and investment securities, and the interest
expense on interest-bearing deposits and borrowings used to fund those assets.
Net interest income is impacted by both changes in the amount and composition of
interest-earning  assets  and  interest-bearing  liabilities  and the  level  of
interest rates.  The change in net interest income is typically  measured by net
interest spread and net interest  margin.  Net interest spread is the difference
between the average  yield on  interest-earning  assets and the average  cost of
interest-bearing  liabilities. Net interest margin is determined by dividing net
interest income by average interest-earning assets.

                                       15

<PAGE>



         Net interest income increased 12.4% in 1998 as compared to 1997,
following a 14.8% increase in 1997 as compared to 1996. The increase in 1998 is
attributable to an increase in the Company's average  interest-earning assets of
29.3%,   principally   in  the  loan  and  investment   securities   portfolios.
Interest-bearing  liabilities and average cost of  interest-bearing  liabilities
also increased  limiting the growth of net interest income. The increase in 1997
was due to growth in the average  interest-earning assets of 20.7%,  principally
in the investment securities and loan portfolios.

         During 1998, average  interest-bearing  liabilities increased $58.2
million to $251.6 million, an increase of 30.1% over 1997.  This was  primarily
from increases in other borrowed funds, time deposits and transaction  accounts.
In 1997, average interest-bearing liabilities increased 21.8% to $193.4 million.
This increase of $34.7  million was  primarily in time deposits and  transaction
accounts.

         The Company's net interest margin was 3.65% in 1998,  4.20% in 1997 and
4.41% in 1996.  The reduction in net interest  margin in 1998 from 1997 resulted
from a decrease in yield on interest-earning  assets of .45% while the Company's
cost of  interest-bearing  liabilities  increased .08%. The net reduction in net
interest  margin in 1997 as compared to 1996  resulted from an increase in yield
on   interest-earning   assets  of  .05%  offset  by  an  increase  in  cost  of
interest-bearing liabilities of .14%.

         The net interest margin may be negatively impacted by the interest rate
environment  and  changes in the  earning  asset mix and  deposit  funding  fix.
Approximately  $15.0 million of the Company's other borrowings from the FHLB are
adjustable  rate advances and are subject to changes in market  interest  rates.
Increased  rates may  negatively  impact the  Company's  borrowing  and  deposit
funding costs.


                                       16

<PAGE>




     Table 1 provides  detailed  information  as to average  balances,  interest
income/expense,  and rates by major  balance  sheet  category  for  years  ended
December 31, 1998, 1997 and 1996.


Table 1--Average Balance Sheets and Rates for December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                    1998                              1997                          1996
                                      --------------------------------  ------------------------------  ----------------------------
                                       Average                 Average    Average              Average   Average             Average
                                       Balance    Interest       Rate     Balance   Interest     Rate    Balance   Interest    Rate
                                      ----------  --------     -------  ---------   --------   -------  ---------  --------  -------
                                                                                 (in thousands)
ASSETS
Earning assets:
U.S. Treasury securities and
<S>                                   <C>          <C>          <C>    <C>          <C>          <C>   <C>         <C>         <C>  
   obligations of U.S. agencies.      $  32,753    $ 2,171      6.63%  $  22,110    $ 1,493      6.75% $   9,875   $    583    5.90%
Obligations of state and political
   subdivisions (1)..............        32,903      2,433      7.39      24,139      1,844      7.64     23,751      1,850    7.79
Mortgage-backed securities.......        14,868        794      5.34       5,985        399      6.66      5,885        361    6.13
Federal Home Loan Bank stock            .   822         50      6.08         818         52      6.36        511         31    6.07
Federal funds sold...............        10,721        589      5.49       5,478        297      5.42      3,836        204    5.32
Total loan and fees..............       182,395     18,706     10.26     153,656     15,984     10.40    131,956     13,790   10.45
                                       ---------    ------             ----------   -------            ----------    ------
Total earning assets (1).........       274,462     24,743      9.02     212,186     20,069      9.46    175,814     16,819    9.57
Less: Allowance for loan losses          (3,416)                          (3,020)                         (2,767)
Nonearning assets
Cash and due from banks..........        11,598                            7,915                           7,732
Premises and equipment, net......         8,004                            6,476                           5,399
Other assets.....................         6,298                            6,043                           4,687
                                       ---------                       ----------                      ----------
Total assets.....................     $ 296,946                        $ 229,600                       $ 190,865
                                       =========                       ==========                      ==========
LIABILITIES AND
   STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts.............      $ 74,973      3,581      4.78   $  53,344      2,387      4.47  $   44,394      1,944   4.38
Savings accounts.................         9,214        243      2.64       8,881        243      2.74       8,763        249   2.84
Time deposits....................       149,435      8,861      5.93     120,269      7,169      5.96     104,129      6,165   5.92
Other borrowed funds.............        17,985      1,218      6.77      10,866        737      6.78       1,418         71   5.01
                                       --------    -------              --------    -------               -------   --------
Total interest-bearing liabilities      251,607     13,903      5.53     193,360     10,536      5.45     158,704      8,429   5.31
                                                   -------    -------               -------     ------              --------  ------

Noninterest-bearing liabilities:
Noninterest-bearing deposits.....        25,938                           19,524                           17,721
Other liabilities................         2,127                            1,813                            1,669
Stockholders' equity.............        17,274                           14,903                           12,771
                                       --------                      -----------                        ---------
Total liabilities and
stockholders' equity.............      $296,946                        $ 229,600                        $ 190,865
                                       ========                        ==========                       =========
Net interest income (1)..........                  $10,840                          $ 9,533                          $ 8,390
                                                   =======                          =======                          =======
Net interest spread (1)..........                               3.49%                            4.01%                         4.26%
                                                              =======                          =======                        ======
Net interest margin (1)..........                               3.95%                            4.49%                         4.77%
                                                              =======                          =======                        ======


Note:   Calculations include non-accruing loans in the average loan amounts outstanding.
<FN>

(1)  The  interest  earned  on  non-taxable  securities  is  reflected  on a tax
equivalent  basis  assuming  a  federal  income  tax  rate of 34% for all  years
presented.
</FN>
</TABLE>

                                       17

<PAGE>



     Table 2 presents the extent to which changes in interest  rates and changes
in the  volume  of  interest-earning  assets  and  interest-bearing  liabilities
affected the Company's  interest  income and interest  expense  during the years
indicated. Information is provided in each category with respect to: (1) changes
attributable to changes in volume; (2) changes  attributable to changes in rate;
and (3) net change.


Table 2--Volume/Rate Variance Analysis

<TABLE>
<CAPTION>

                                                        Year Ended December 31,     Year Ended December 31,
                                                                 1998                         1997
                                                             compared to                  compared to
                                                        Year Ended December 31,     Year Ended December 31,
                                                                 1997                         1996
                                                     ---------------------------  ---------------------------
                                                         INCREASE/(DECREASE)          INCREASE/(DECREASE)
                                                               due to                       due to
                                                     ---------------------------  ---------------------------
                                                     Total Net                    Total Net
                                                      Change     Volume    Rate    Change    Volume    Rate
                                                     ---------   ------    ----   ---------  ------    ----
                                                                         (in thousands)
Interest income(1):
U.S. Treasury securities and obligations of U.S.
<S>                                                  <C>        <C>       <C>     <C>       <C>        <C> 
   agencies........................................  $    678   $   705   $ (27)  $   910   $   826    $ 84
Obligations of state and political subdivisions....       589       648     (59)       (6)       30     (36)
Mortgage-backed securities.........................       395       474     (79)       38         7      31
Federal Home Loan Bank stock.......................        (2)       --      (2)       21        20       1
Federal funds sold.................................       292       288       4        93        89       4
Total loans and fees...............................     2,722     2,947    (225)    2,194     2,257     (63)
                                                     ---------  --------  ------   -------    ------    ----
Total increase (decrease) in interest income.......     4,674     5,062    (388)    3,250     3,229      21

Interest expense:
Interest-bearing liabilities:
Transaction accounts...............................     1,194     1,033     161       443       401      42
Saving accounts....................................        --         8      (8)       (6)        3      (9)
Time deposits......................................     1,692     1,729     (37)    1,004       962      42
Other borrowed funds...............................       481        482     (1)      666       641      25
                                                      --------  --------- ------  --------  -------    -----
Total increase in interest expense.................     3,367      3,252    115     2,107     2,007     100
                                                      --------  -------- -------  --------  -------    -----
Increase (decrease) in net interest income.........   $ 1,307    $ 1,810  $(503)  $  1,143  $ 1,222    $(79)
                                                      ========  ========  =====   ========  ========    ====
<FN>

  (1) Interest income for loans on non-accrual status has been excluded from
      interest income.
</FN>
</TABLE>


Noninterest Income

        Table 3 illustrates the Company's primary sources of noninterest income.
Noninterest  income increased 32.3% to $3.6 million in 1998 from $2.7 million in
1997.  This  increase  was  principally  due to the  gain on sale of  securities
available for sale of $220,000 in February of 1998,  which is reflected in other
operating income.  The noninterest  income for 1997 increased  $364,000 or 15.7%
from $2.3 million in 1996.



                                       18

<PAGE>



Table 3--Analysis of Noninterest Income

<TABLE>
<CAPTION>

                                                                               Percent
                                                                               Increase
                                             Year Ended December 31,          (Decrease)
                                           --------------------------    --------------------
                                            1998      1997      1996      1998/97    1997/96
                                           ------    ------    ------    ---------  ---------
                                                 (in thousands)

<S>                                        <C>       <C>       <C>          <C>        <C> 
Service charges on deposit accounts......  $1,777    $1,670    $1,519       6.4%       9.9%
Mortgage loan fees.......................     639       362       260      76.5       39.2
Commissions on credit life insurance.....     439       391       320      12.3       22.2
Other operating income...................     703       266       226     164.3       17.7
                                          -------    -------   ------
Total....................................  $3,558    $2,689    $2,325      32.3       15.7
                                          =======    =======   =======   =========  =======
</TABLE>


   Service charges on deposit accounts increased in 1998 as compared to 1997 and
in 1997 as compared to 1996 from increased quantity of transaction accounts.

   Mortgage  loan fees from 1996 to 1998  have  been  positively  influenced  by
increases in secondary market  residential loan originations due to historically
low mortgage rates.

   Increases in commissions on credit life insurance in 1998 as compared to 1997
and in 1997 as compared to 1996 were due to increased loan originations.

Noninterest Expense

   As shown in Table 4, total  noninterest  expense  increased  by 13.7% to $8.7
million in 1998, as compared to $7.7 million in 1997. The noninterest expense in
1997 increased $787,000 or 7.7% over the $6.9 million in 1996.

   Noninterest  expense  levels are often  measured  using an  efficiency  ratio
(noninterest  expense  divided by the sum of net interest income and noninterest
income). The efficiency ratio measures the level of expense required to generate
one dollar of revenue.  Improvement  in the ratio is measured by a reduction  in
the percentage reported. The Company's efficiency ratios for 1998, 1997 and 1996
were 64.3%, 66.2% and 68.3%, respectively.


                                       19

<PAGE>




Table 4--Analysis of Noninterest Expense


                                                                     Percent
                                                                     Increase
                                       Year Ended December 31,     (Decrease)
                                      ------------------------- ---------------
                                        1998    1997     1996   1998/97  1997/96
                                      -------  ------   ------- -------- -------
                                           (in thousands)

Salaries and employee benefits....... $4,906   $4,173   $3,595   17.6%    16.1%
Occupancy expense....................    653      610      504    7.0     21.0
Furniture and equipment expense......  1,007      878      787   14.7     11.6
Other operating expenses.............  2,166    2,016    2,004    7.4      0.6
                                      -------  -------  -------
Total................................ $8,732   $7,677   $6,890   13.7     11.4
                                      =======  =======  ======= =======  ======


     Salary and employee benefits expense increased $733,000 or 17.6% in 1998 as
compared to 1997. The increase is related primarily to staffing increases at the
Petal  banking  branch,  SFSI  Petal  office,  MSI  and the  brokerage  services
department.  Salary and employee benefit expense increased  $578,000 or 16.1% in
1997 as compared to 1996. The increase  reflects the cost of staffing MSI, which
began  operations  in January of 1997,  and  additional  staffing for the Purvis
banking  branch in December of 1996. In addition,  these  increases also reflect
annual cost of living and merit increases for all employees.

     Occupancy  expenses  rose  $43,000 or 7.0% in 1998 as  compared to 1997 and
$106,000 or 21.0% in 1997 as compared to 1996.  These  increases  were primarily
due to additional depreciation and building maintenance expenses attributable to
the Purvis and Petal banking branches.

     Furniture and equipment expense  increased  $129,000 or 14.7% for 1998 from
$878,000 in 1997. The increases were primarily due to depreciation and equipment
maintenance  expenses  related to  additional  furniture  and  equipment for the
Purvis and Petal banking branches.


Income Tax Expense

     The Company's  effective  income tax rate  increased  from 23.2% in 1996 to
26.7% in 1997 and decreased to 24.8% in 1998. The  fluctuations in the effective
income tax rate from 1996 through 1998 is primarily  attributable  to the change
in non-taxable income as a percentage of pretax income.


FINANCIAL CONDITION

Loan Portfolio

     The Company  continued to experience loan growth  throughout its markets in
1998 and 1997.  Total loans  increased  23.1% to $204.5  million at December 31,
1998,  compared to $166.1 million at December 31, 1997. The increase in loans in
1997 was $19.4 million or 13.2% as compared to 1996.

     The Company's real estate loan portfolio  increased 16.6% to $103.3 million
at December 31, 1998 from $88.6 million at December 31, 1997. In 1997,  the real
estate  portfolio  increased  $9.4 million or 11.9% from December 31, 1996.  The
Company's increased real estate loan demand has been principally for residential
mortgages in the Bank's market areas.  Residential  loans increased $5.9 million
from  December 31, 1997 to December 31, 1998 and $7.3 million from  December 31,
1996 to December  31,  1997.  As a result of this  increased  loan  demand,  the
Company has hired additional lending personnel.  In addition,  emphasis has also
been placed on acquiring the deposit relationships from these loan customers.


                                       20

<PAGE>



     The  Company's  commercial  loans  increased  by 54.5% to $39.5  million at
December  31, 1998 from $25.6  million at December  31,  1997.  The  increase in
commercial  loans was $3.6  million or 16.2% at December 31, 1997 as compared to
December 31, 1996. The increases in commercial  loans have been  principally due
to increased economic activities in the Company's market areas.

     The Company's  consumer loans  increased to $61.7  million,  including $5.7
million  from SFSI,  at December  31, 1998 from $52.0  million,  including  $5.4
million from SFSI at December 31, 1997.  The increase in consumer loans was $6.4
million  or 14.1%  from  1996 to  1997.  These  increases  are  attributable  to
increased  customer demands and the Company's  marketing efforts to increase the
number of  consumer  loan  customers.  Substantially  all of the  consumer  loan
portfolio consists of secured loans, the majority of which are collateralized by
automobiles and personal property.


Table 5--Loans by Type

<TABLE>
<CAPTION>

                                                          December 31,
                                    ---------------------------------------------------
                                        1998      1997       1996       1995      1994
                                    --------- ---------- ---------- --------- ---------
                                                           (in thousands)
Real estate:

<S>                                 <C>       <C>        <C>        <C>       <C>      
 Residential....................... $ 61,280  $  55,406  $  48,062  $  41,151 $  36,005
 Mortgage loans held for sale......    1,053        421        361      1,245       574
 Construction......................    9,095      4,226      4,680      4,479     6,428
 Commercial........................   31,915     28,591     26,125     24,946    22,291
Consumer...........................   61,686     51,965     45,555     36,678    33,668
Commercial.........................   39,493     25,556     21,992     17,082     9,132
                                     --------  ---------  ---------  --------- ---------
Total loans........................ $204,522   $166,165   $146,775   $125,581  $108,098
                                     ========  =========  =========  ========= =========
</TABLE>


   The table below illustrates the Company's fixed rate maturities and repricing
frequency for the loan portfolio:

Table 6--Selected Loan Distribution


                                                  December 31, 1998
                                       -----------------------------------------
                                                            Over One
                                                 One Year   Through    Over Five
                                        Total    or Less   Five Years    Years
                                       --------  --------  ----------  ---------
                                                      (in thousands)

Fixed rate maturities................  $189,451  $ 88,987   $ 95,400   $ 5,064
Variable rate repricing frequency....    15,071     9,199      3,280     2,592
                                       --------  --------   --------   -------
Total................................  $204,522  $ 98,186   $ 98,680   $ 7,656
                                       ========  ========   ========   =======

     At  December  31,  1998,  92.6%  of the  Company's  loans  had  fixed  rate
maturities. Of the fixed rate portfolio, 47.0% of those loans have maturities of
one year or less when originated or renewed.  Such maturities  allow the Company
to reprice its portfolio frequently.


Allowance and Provision for Loan Losses

     The  allowance  for loan losses is regularly  evaluated by  management  and
approved by the Board of Directors and is  maintained at a level  believed to be
adequate to absorb future loan losses in the Company's portfolio.  The provision
for loan losses is determined in part using an internal  watch list developed by
a review of  essentially  all loans by  management.  Loans are assigned a rating
based on credit quality as determined by the  borrower's  payment  history,  the
financial  strength  of the  borrower  or  guarantor  as measured by the balance
sheet, earnings and cash flow quality,

                                       21

<PAGE>



collateral  values and the liquidity and quality of the collateral and assets of
the borrower.  Loans with a  deterioration  of credit  quality are placed on the
watch  list.  The  provision  for loan losses  pertaining  to the rated loans is
determined by the amount of loans on the watch list and an allocation  for loans
that are not on the watch  list  based on the  Company's  historical  charge off
percentage.  In addition,  management  considers the potential adverse impact of
the economic trends in the Company's trade area on certain borrowers that are in
cyclical  businesses  and the loan  growth  resulting  from new loan  customers.
Management  believes that the allowance for loan losses at December 31, 1998 was
adequate. Although management believes it uses the best information available to
make allowance  provisions,  future  adjustments  which could be material may be
necessary if management's  assumptions  differ from the loan portfolio's  actual
future performance.

     The  allowance  for loan losses  increased  $463,000 to $3.6  million  from
December 31, 1997 to December 31, 1998.  The increase is primarily  attributable
to an increase in the volume of loans.  The Company's  allowance for loan losses
to total  loan  ratio  decreased  from 1.93% at  December  31,  1996 to 1.87% at
December 31, 1997 to 1.74% at December 31, 1998.

     Net charge-offs were $322,000 during 1998 compared to $461,000 and $249,000
for 1997 and 1996, respectively.  Of these net charge-offs,  for the same years,
$182,000, $151,000 and $88,000,  respectively,  pertained to SFSI. The Company's
consumer loan portfolio  accounted for the majority of net loan  charge-offs for
the years ended December 31, 1998, 1997 and 1996, respectively.


Table 7--Summary of Loan Loss Experience

<TABLE>
<CAPTION>

                                                                            As of and for the Year Ended December 31,
                                                                       --------------------------------------------------
                                                                         1998      1997       1996       1995       1994
                                                                       --------  --------  --------    --------  --------
                                                                                        (in thousands)

<S>                                                                    <C>       <C>        <C>        <C>        <C>    
Allowance for loan losses at beginning of year...................      $ 3,101   $ 2,837    $ 2,529    $ 2,427    $ 2,140
Charge-offs:
     Real Estate.................................................           --        --        (50)       (28)        --
     Consumer....................................................         (475)     (400)      (270)      (516)      (120)
     Commercial..................................................          (51)     (238)      (168)       (88)      (370)
                                                                       --------  --------    -------    -------    -------
          Total..................................................         (526)     (638)      (488)      (632)      (490)
Recoveries: 
     Real Estate.................................................           24        10         --          4         14
     Consumer....................................................          142       127        229        167         34
     Commercial..................................................           38        40         10         46         91
                                                                       --------  --------   --------   --------   --------
          Total..................................................          204       177        239        217        139
                                                                       --------  --------   --------   --------   --------
Net loan charge-offs.............................................         (322)     (461)      (249)      (415)      (351)
Provision for loan losses........................................          785       725        557        517        638
                                                                       --------  --------   --------   --------   --------
Allowance for loan losses at end of year.........................      $ 3,564   $ 3,101    $ 2,837    $ 2,529    $ 2,427
                                                                       ========  ========   ========   ========   ========
Ratios:
     Allowance for loan losses to total loans....................         1.74%     1.87%      1.93%      2.01%      2.25%
     Net loan charge-offs to average loans outstanding for the
        year.......................................................       0.18      0.30       0.19       0.38       0.36
     Allowance for loan losses to non-performing loans...........          323       777        360        295        366

</TABLE>

   The  following  table is  management's  allocation  of the allowance for loan
losses by loan type. Allowance allocation is based on management's assessment of
economic conditions,  past loss experience,  loan volume, loan quality, past due
history  and other  factors.  Since these  factors  are  subject to change,  the
allocation is not necessarily predictive of future portfolio performance.


                                       22

<PAGE>




Table 8--Management's Allocation of the Allowance for Loan Losses

<TABLE>
<CAPTION>

                                                                      December 31,
                   -----------------------------------------------------------------------------------------------------------------
                           1998                    1997                   1996                   1995                  1994
                   ---------------------- ----------------------- ---------------------- ---------------------- --------------------

                                Percent                 Percent                Percent                Percent               Percent
                                of Loans                of Loans               of Loans               of Loans              of Loans
                    Allocated   to Total   Allocated    to Total   Allocated   to Total   Allocated   to Total   Allocated  to Total
                    Allowance    Loans     Allowance     Loans     Allowance    Loans     Allowance    Loans     Allowance   Loans
                   -----------  --------  ------------  --------   ---------   --------   ----------  --------   ---------  --------
                                                                    (in thousands)

<S>                <C>            <C>     <C>             <C>      <C>           <C>      <C>           <C>      <C>          <C>  
Real Estate        $      997     50.5%   $    936        53.3%    $   881       54.0%    $    817      57.2%    $    754     60.4%
Consumer                1,577     30.2       1,355        31.3       1,293       31.0        1,268      29.2          925     31.2
Commercial                705     19.3         546        15.4         357       15.0          160      13.6          122      8.4
Unallocated               285                  264          --         306         --          284        --          626       --
                   -----------   -------  ---------     --------   --------     -------   ---------    -------   ---------  --------
Total               $   3,564      100%   $  3,101       100.0%    $ 2,837      100.0%    $  2,529     100.0%    $  2,427    100.0%
                   ===========   =======  =========     =========  ========     =======   =========    =======   =========  ========

</TABLE>

                                       23

<PAGE>



Asset Quality

     Loans  (including  any impaired loans under SFAS 114 and 118) are placed on
non-accrual  status when they become past due 90 days or more as to principal or
interest,  unless they are adequately  secured and in the process of collection.
When loans are placed on  non-accrual  status,  all unpaid  accrued  interest is
reversed.   These  loans  remain  on  non-accrual   status  until  the  borrower
demonstrates  the ability to remain current or the loan is deemed  uncollectible
and is charged off. SFSI consumer loans are charged off when they reach 120 days
past due.

     Table 9 provides information related to non-performing  assets and loans 90
days or more past due.  Accruing  loans  contractually  90 days or more past due
decreased  slightly  from $252,000 at December 31, 1997, to $172,000 at December
31, 1998.  Should the underlying  collateral be determined to be insufficient to
satisfy the  obligation,  the loan is classified and the Company's  allowance is
increased accordingly. Historically, the Company's security in residential loans
has been adequate and has acted to limit the Company's  exposure to loss.  Loans
on non-accrual status increased from $147,000 to $931,000 from December 31, 1997
to December 31, 1998.


Table 9--Non-Performing Assets


                                                     December 31,
                                       -----------------------------------------
                                        1998     1997    1996     1995     1994
                                       ------   ------- -------  -------  ------
                                                    (in thousands)

Loans on non-accrual status(1)(2)..... $  931    $ 147  $  400   $  645   $ 313
Loans past due 90 days or more........    172      252     387      211     351
                                       -------   ------  ------   ------  ------
Total non-performing loans............  1,103      399     787      856     664
Other real estate owned...............    742      411     767      309     157
                                       -------   ------  ------  -------  ------
Total non-performing assets........... $1,845    $ 810  $1,554   $1,165   $ 821
                                       =======   ====== =======  =======  ======
Percentage of non-performing loans
  to total loans......................   0.54%    0.24%   0.54%    0.68%   0.61%
Percentage of non-performing assets
  to total loans......................   0.90     0.49    1.06     0.93    0.76


(1) There were no impaired loans for the years indicated.
(2) The interest income that would have been earned and received on non-accrual
    loans was not material.

Investment Securities

   The investment  securities  portfolio  consists of U.S. Treasury  securities,
obligations  of U.S.  government  agencies,  obligations of states and political
subdivisions and mortgage-backed securities (MBS). MBS consist of 15 year and 30
year fixed and 7 year balloon mortgage  securities,  underwritten and guaranteed
by FNMA, FHLMC and GNMA, government-sponsored agencies.

   Securities,  including those classified as held to maturity and available for
sale,  increased  from $41.6  million at December  31, 1996 to $58.9  million at
December 31, 1997, to $90.8 million at December 31, 1998.




                                       24

<PAGE>



Table 10--Debt Securities Available For Sale

<TABLE>
<CAPTION>

                                                                                       December 31, 1998
                                                                           ------------------------------------------
                                                                                      Estimated  Average    Weighted
                                                                           Carrying     Fair     Maturity   Average
                                                                            Value       Value    in Years    Yield
                                                                           ---------  ---------  --------  ----------
                                                                                          (in thousands)
U. S. Treasury securities and obligations of U.S. government agencies:
<S>                                                                        <C>        <C>           <C>       <C>  
  Over one through five years..........................................    $  2,482   $  2,482      4.9       5.27%
  Over five through ten years..........................................      13,709     13,709      9.0       6.55
  Over ten years.......................................................      11,903     11,903     14.4       6.99
                                                                            --------   --------
       Total...........................................................      28,094     28,094                6.63
Obligations of states and political subdivision:
  Within one year......................................................         201        201      0.3       6.21(1)
  Over one through five years..........................................       3,522      3,522      3.3       7.29(1)
  Over five through ten years..........................................       4,393      4,393      6.9       7.68(1)
  Over ten years.......................................................       2,369      2,369     11.1       8.33(1)
                                                                            --------   --------                      
       Total...........................................................      10,485     10,485                7.67(1)
Mortgage-backed securities.............................................      19,235     19,235                6.24
                                                                            --------   --------
Total debt securities available for sale...............................    $ 57,814   $ 57,814
                                                                            ========   =======
</TABLE>


Table 11--Debt Securities Held to Maturity

<TABLE>
<CAPTION>

                                                                                        December 31, 1998
                                                                           ------------------------------------------
                                                                                      Estimated  Average    Weighted
                                                                           Carrying     Fair     Maturity   Average
                                                                             Value      Value    in Years   Yield
                                                                           ---------  ---------  --------  ----------
                                                                                          (in thousands)
U. S. Treasury securities and obligations of U.S. government agencies:
<S>                                                                        <C>        <C>          <C>        <C>  
     Over five through ten years.......................................    $ 4,076    $ 4,135      2.3        5.65%
Obligations of states and political subdivisions:
     Within one year...................................................      1,432      1,445      0.6        7.08(1)
     Over one through five years.......................................      7,589      7,675      3.1        7.00(1)
     Over five through ten years.......................................      6,935      7,073      7.6        7.21(1)
     Over ten years....................................................     11,564     11,729     12.7        7.21(1)
                                                                           --------   --------
          Total........................................................     27,520     27,922                 7.15(1)
Mortgage-backed securities.............................................      1,418      1,455                 6.75
                                                                           --------   --------
Total debt securities held to maturity.................................    $33,014    $33,512
                                                                           ========   ========

<FN>
     (1) The weighted average yield on non-taxable  securities is reflected on a
     tax  equivalent  basis  assuming  a federal  income tax rate of 34% for all
     periods presented.
</FN>
</TABLE>



                                       25

<PAGE>



Table 11A--Analysis of Debt Securities

<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                            ------------------------------
                                                                              1998       1997      1996
                                                                            -------    --------  ---------
                                                                                   (in thousands)

<S>                                                                           <C>       <C>      <C>     
U.S. Treasury securities and obligations of U.S. government agencies.....     $28,094   $23,696  $  5,118
Obligations of states and political subdivision..........................      10,485     9,758    10,740
Mortgage-backed securities...............................................      19,235     3,356     2,802
                                                                            --------- ---------  --------
Total debt securities available for sale.................................     $57,814   $36,810  $ 18,660
                                                                            =========  ========  ========

</TABLE>

<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                            ------------------------------
                                                                              1998       1997      1996
                                                                            --------- --------- ----------
                                                                                   (in thousands)

<S>                                                                         <C>       <C>       <C>     
U.S. Treasury securities and obligations of U.S. government agencies.....   $  4,076  $  4,911  $  5,658
Obligations of states and political subdivision..........................     27,520    14,913    13,697
Mortgage-backed securities...............................................      1,418     2,287     3,547
                                                                            --------- --------- ---------
Total debt securities held to maturity...................................   $ 33,014  $ 22,111  $ 22,902
                                                                            ========= ========= =========
</TABLE>


Deposits

     Total deposits increased from $211.5 million at December 31, 1997 to $278.3
million at December 31, 1998. Of that increase, time deposits increased by $28.6
million from 1997 to 1998.  Management  continues to seek retail and  commercial
deposits through its marketing  initiatives for transaction and savings accounts
and competitive  rates for time deposits.  As of December 31, 1998, public funds
deposits  totaled $45.2 million or 16.3% of total  deposits.  These deposits are
considered  to be a stable  source of funds and are  targeted  in the  Company's
deposit marketing initiatives.

Table 12--Deposits


                                                              December 31,
                                                         ---------------------
                                                            1998       1997
                                                         ---------  ----------
                                                             (in thousands)

Demand (NOW, SuperNOW and Money Market)..............     $ 81,516  $  50,765
Savings..............................................        9,437      8,877
Individual retirement accounts.......................       14,127     11,058
Time deposits, $100,000 and over.....................       45,040     35,635
Other time deposits..................................      100,311     81,112
                                                         --------- ----------
Total interest bearing deposits......................      250,431    187,447
Total non-interest bearing deposits..................       27,841     24,051
                                                         --------- ----------
Total................................................     $278,272   $211,498
                                                          ========   ========



                                       26

<PAGE>



Table 13--Maturity of Time Deposits $100,000 and over


                                                          As of
                                                    December 31, 1998
                                                    -----------------
                                                     (in thousands)
Three months or less........................            $  9,435
Over three months through six months........               8,363
Over six months through twelve months.......               6,494
Over twelve months..........................              20,748
                                                        --------
Total.......................................             $45,040
                                                        ========


Other Borrowed Funds

     Other borrowed  funds  increased from $7.0 million at December 31, 1996, to
$17.6 million at December 31, 1997,  to $19.1 million at December 31, 1998.  The
$10.0  million  borrowed  from the FHLB was  used to  purchase  debt  securities
resulting in a favorable  interest rate spread. A $5.0 million revolving line of
credit ($4.1 million outstanding at December 31, 1998) was obtained from Bank of
America  during 1997 to finance  part of the  consumer  loan  portfolio of SFSI.
Prior to obtaining this line of credit, SFSI's funding was provided by the Bank.
Additional borrowings above current levels will be evaluated by management, with
consideration given to the growth of the Bank's loan portfolio, liquidity needs,
cost of retail deposits, market conditions, and other factors.


Liquidity

     The Company  maintains  sufficient  liquidity to fund loan demand,  deposit
withdrawals and debt  repayments.  Liquidity is managed by retaining  sufficient
liquid assets in the form of cash and cash equivalents and core deposits to meet
such  demand.  Funding and cash flows can also be realized  from the  investment
securities  portfolio  and pay  downs  from the loan  portfolio.  The Bank  also
provides access to the retail deposit market. In addition, the Company has funds
available  under a line of  credit,  federal  funds  lines and  additional  FHLB
borrowings to address liquidity needs.

     The Company's objectives include preserving an adequate liquidity position.
Asset/liability management is designed to ensure safety and soundness,  maintain
liquidity  and  regulatory  capital  standards,  and achieve an  acceptable  net
interest  margin.  The Company  continues to  experience  strong loan demand and
management  continues  to  monitor  interest  rate  and  liquidity  risks  while
implementing appropriate funding and balance sheet strategies.

     Net cash provided by operating  activities and deposits from customers have
historically  been  primary  sources  of  liquidity  for the  Company.  Net cash
provided by operating  activities  totaled $6.8  million,  $3.6 million and $4.0
million in 1998, 1997 and 1996, respectively. The net cash provided by increases
in deposits was $66.8 million, $26.1 million and $28.8 million in 1998, 1997 and
1996, respectively. Net cash used in investing activities has been primarily for
funding the net  increase  in loans of $38.1  million,  $19.9  million and $22.8
million  in 1998,  1997  and  1996,  respectively,  and in  securities  of $35.2
million,  $16.9 million and $8.8 million in 1998,  1997 and 1996,  respectively.
The Company also had net bank  borrowings of $1.4 million in 1998,  $6.6 million
in 1997 and $7.0 million in 1996.


Capital

     Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. The Company improved its capital position during 1998
due to the completion of the initial public offering and the increased retained
earnings achieved during the year. The


                                       27

<PAGE>



Company's  capital to average  assets  ratio was 10.55% at December  31, 1998 as
compared to 7.04% at  December  31,  1997.  At December  31,  1998,  the Company
exceeded  the  Federal  Reserve  Board's   regulatory   definition  of  a  "well
capitalized" institution. See Note 11 to the Consolidated Financial Statements.


Asset/Liability Management and Market Risk

     Asset/liability  management  control  is  designed  to  ensure  safety  and
soundness,  maintain  liquidity and regulatory  capital  standards,  and achieve
acceptable net interest income.  Management  considers  interest rate risk to be
the Company's most significant  market risk.  Interest rate risk is the exposure
to adverse changes in the net interest income as a result of market fluctuations
in interest rates.

     Management regularly monitors interest rate risk in relation to prospective
market and business  conditions.  The Company's  Board of Directors  sets policy
guidelines  establishing  maximum  limits on the  Company's  interest  rate risk
exposure. Management monitors and adjusts exposure to interest rate fluctuations
as influenced by the Company's loan, investment and deposit portfolios.

     The Company  uses an  earnings  simulation  model to analyze  net  interest
income  sensitivity.  Potential  changes  in  market  interest  rates  and their
subsequent effect on interest income are then evaluated.  The model projects the
effect  of  instantaneous  movements  in  interest  rates of 200  basis  points.
Assumptions based on the historical  behavior of the Company's deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model.  These assumptions are inherently  uncertain,  and as a result, the model
cannot precisely  measure net interest income or precisely predict the impact of
fluctuations  in market  interest rates on net interest  income.  Actual results
will differ  from the model's  simulated  results due to timing,  magnitude  and
frequency of interest rate changes,  as well as changes in market conditions and
the application of various management strategies.

     Interest  rate  risk  management  focuses  on  maintaining  acceptable  net
interest  income within policy  limits  approved by the Board of Directors.  The
Company's Board of Directors monitors and manages interest rate risk to maintain
an  acceptable  level of change to net  interest  income  resulting  from market
interest rate changes.  The Company's  interest rate risk policy, as approved by
the Board of Directors,  is stated in terms of the change in net interest income
given a 200 basis point  immediate and sustained  increase or decrease in market
interest  rates.  The current limits approved by the Board of Directors are plus
or minus 10% of net interest income for a 200 basis point movement.

     In 1996, the Company's  Board of Directors  determined  that interest rates
were likely to decline and that this decline could cause net interest  income to
fall outside of the 10% range established in the asset/liability  policy because
the yield on loans would be adversely affected more than on other earning assets
or the cost of interest bearing liabilities.  As a result, in August of 1996 and
January of 1997,  the Company  purchased  interest  rate  "floors" in a notional
amount of $20 million,  which  effectively  converted  approximately  10% of the
Company's loans at December 31, 1998 to a minimum fixed rate basis. A premium of
$258,500  was paid for the floors  and is being  amortized  over the  three-year
term.  The index used is the  three-month  LIBOR rate with a 6% floor rate.  The
three-month LIBOR rate was 5.00% at December 31, 1998. Through December 31 1998,
the Bank has amortized $190,987 of the premium and received $141,932,  which has
been recognized as adjustments to net interest income.

     The following table illustrates the Company's estimated annualized earnings
sensitivity profile as of December 31, 1998:





                                       28

<PAGE>



Table 14--Interest Rate Sensitivity


                                     Decrease                      Increase
                                     in Rates--                    in Rates--
                                  200 Basis Points     BASE     200 Basis Points
                                  ----------------   --------   ----------------
                                               (in thousands)

Projected interest income:
Loans.........................        $19,848        $20,932         $22,244
Investment securities.........          4,983          5,296           5,540
Federal funds sold............            339            443             553
                                      --------       -------         -------
Total interest income.........         25,170         26,671          28,337

Projected interest expense:
Deposits......................         12,538         13,848          15,202
Other borrowed funds..........            769            847             925
                                      --------       -------         -------
Total interest expense........         13,307         14,695          16,127
                                      --------       -------         -------
Net interest income...........        $11,863        $11,976         $12,210
                                      ========       =======         =======

Change from base..............        $  (113)                       $   234
% Change from base............           (.94)%                         1.95%

   Given an  immediate,  sustained  200 basis point  increase to the yield curve
used in the simulation model, it is estimated net interest income would increase
1.95%. A 200 basis point immediate,  sustained decrease to the yield curve would
decrease net interest  income by an estimated .94%.  These potential  changes in
net  interest  income  are  within  the  policy  guidelines  established  by the
Company's Board of Directors.

   These interest rate sensitivity  profiles of the Company at any point in time
will be  affected  by a number of  factors.  These  factors  include  the mix of
interest  sensitive assets and liabilities and may not be a precise  measurement
of the effect of changing interest rates on the Company in the future.


Year 2000

     The Company  continues to  implement  plans to address the Year 2000 issue.
The issue arises from the fact that many existing computer programs were written
to  store  only  two  digits  of  date-related  information  in  order  to  more
efficiently  handle and store data.  Thus,  the programs were unable to properly
distinguish  between the year 1900 and the year 2000.  The Company has converted
or replaced various programs,  hardware and instrumentation systems to make them
Year 2000  compliant.  The  Company's  Year 2000  project  is  comprised  of two
components - business applications and equipment.

     In  addressing  the Year 2000  problem,  the Company has  examined  its own
software  and  equipment,  potential  problems  with  borrowers,  and  potential
problems with government  entities and others providing services to the Company.
In addition to computer  equipment,  the Company has addressed possible problems
with   micro-processors   embedded   within   operating   equipment,   such   as
telecommunication  equipment,  vaults, security and alarm systems, and automated
teller machines. The Company continues to monitor the impact of the failure of a
borrower's  systems or a borrower's  failure to comply with debt covenant  terms
regarding  Year 2000  issues on the  credit  quality of the  borrower's  loan by
communicating  with  its  significant   existing  and  new  loan  customers  and
ascertaining   whether  the  customers  need  to  include   remediation   and/or
replacement  of systems as part of their  Year 2000  program  and when they will
have that


                                       29

<PAGE>



completed.  Presently,  the Company has no reason to believe that its  borrowers
will not be able to adequately address the Year 2000 issue.

     The  Company's  President  is  Chairman  of its Year  2000  committee.  The
Committee  has devoted  appropriate  personnel  resources  to achieve  Year 2000
compliance  in a timely  manner.  Such  personnel are working with the Company's
Board of Directors and other  members of  management  in completing  its action,
testing and contingency  plans.  The Company is also subject to oversight by the
FDIC, the Federal  Reserve Board and the  Mississippi  Department of Banking and
Consumer Finance with respect to Year 2000 compliance.

     The  Company  has  completed  the  Year  2000  awareness,  assessment,  and
remediation phases.  Minor  implementations will be completed by March 31, 1999.
Service provider testing of critical information systems should be completed for
the majority testing required by March 31, 1999. Testing of all critical systems
and a contingency/business resumption plan should be completed in advance of the
June 30,  1999  regulatory  deadline.  The Company  has  expended  approximately
$73,000  through   December  31,  1998  and  projects  the  additional  cost  of
remediation will be approximately  $75,000. To date, independent analysis of the
Company's  Year 2000 exposure has not been  obtained.  Approximately  $50,000 is
projected to be  capitalized  because  certain  systems and  equipment are being
replaced and these costs are associated with purchasing new systems.  Corrective
actions to make the Company's  core  operating  systems Year 2000 compliant have
been  made  by  the  Company's   software  providers  under  existing  licensing
agreements with the Company at no additional expense.

     The Year 2000 issue  principally  involves  the  installation  of  selected
software releases which are Year 2000 compliant.  Certain of these installations
would have been  scheduled for  completion by the Year 2000 in the normal course
of business.  The Year 2000 compliance of the Company's  software suppliers will
be  essential  for the  Company's  successful  implementation  of its Year  2000
objectives.

     The Company has examined the Year 2000 issue's  impact on services  such as
payroll and investment securities operations that are provided by third parties.
The  capabilities  and  readiness  for Year 2000 of other vendors have also been
reviewed.  Presently,  the testing phase  provides the Company with no reason to
believe that its software  providers,  service providers and vendors will not be
able to  adequately  address  the Year 2000  issue.  To the extent the  software
providers',  service providers' and vendors' responses are not satisfactory, the
Company  will  proceed  with  the  steps  outlined  in its  contingency/business
resumption plan.

     The  contingency/business  resumption  plan will include  critical  Company
areas such as  operations,  personnel,  network and business  systems as well as
systems external to the Company.  The plan will address various alternatives and
will include assessing a variety of scenarios that could emerge in the year 2000
and require the Company to react.
As an  integral  part  of  the  plan  potential  liquidity  challenges  will  be
addressed.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In response  to this Item,  the  information  set forth in Item 7 under the
caption  Asset/Liability  Management and Market Risk and in Table 14 on pages 28
and 29 is incorporated herein by reference.



                                       30

<PAGE>




ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Auditors...........................................     32

Consolidated Balance Sheets as of December 31, 1998 and 1997.............     33

Consolidated Statements of Income and Comprehensive Income
 for the years ended December 31, 1998, 1997 and 1996....................     35

Consolidated Statements of Changes in Stockholders' Equity
 for the years ended December 31, 1998, 1997 and 1996....................     37

Consolidated Statements of Cash Flows for the years ended
 December 31, 1998, 1997 and 1996........................................     38

Notes to Consolidated Financial Statements...............................     40



                                       31

<PAGE>




                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Lamar Capital Corporation

     We have  audited  the  accompanying  consolidated  balance  sheets of Lamar
Capital  Corporation and  subsidiaries as of December 31, 1998 and 1997, and the
related   consolidated   statements   of  income   and   comprehensive   income,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1998. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  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 financial statements referred to above present fairly,
in all material respects,  the consolidated  financial position of Lamar Capital
Corporation at December 31, 1998 and 1997,  and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1998 in conformity with generally accepted accounting principles.

                                         ERNST & YOUNG LLP



Jackson, Mississippi
January 22, 1999



                                       32

<PAGE>




                   LAMAR CAPITAL CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)


                                                                  December 31,
                                                             -------------------
                                                                1998       1997
                                                             ---------  --------


                                   ASSETS
Cash and due from banks..................................   $  15,038   $  7,787
Federal funds sold.......................................      11,400      7,950
                                                            ---------   --------
Cash and cash equivalents................................      26,438     15,737
Securities available for sale (amortized cost--$57,159
   in 1998 and $36,365 in 1997)                                57,814     36,810
Securities held to maturity (fair value--$33,512 in 1998
   and $22,203 in 1997)                                        33,014     22,111
Loans (less allowance for loan losses of $3,564 in 1998
   and $3,101 in 1997)                                        197,096    159,552
Accrued interest receivable..............................       3,256      2,391
Premises and equipment...................................       9,111      6,638
Other real estate........................................         742        411
Federal Home Loan Bank stock.............................         788        963
Cash surrender value of life insurance...................       1,298      1,233
Deferred income taxes....................................         760        689
Other assets.............................................         199        487
                                                            ---------   --------
          Total assets...................................   $ 330,516   $247,022
                                                            =========   ========

                    LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing.....................................   $  27,841  $  24,051
Interest bearing.........................................     250,431    187,447
                                                            ---------- ---------
          Total deposits.................................     278,272    211,498
Interest payable.........................................         615        812
Dividends payable........................................         124        150
Other liabilities........................................       1,054        782
Other borrowed funds.....................................      19,120     17,620
                                                            ---------- ---------
          Total liabilities..............................     299,185    230,862



                                       33

<PAGE>




Stockholders' equity
Common stock, $.50 par value at December 31, 1998, $10
   par value at December 31, 1997,  50,000,000  shares
   authorized  at December 31, 1998,  100,000  shares
   authorized at December 31, 1997;  4,130,707  shares
   issued and outstanding at December 31, 1998,
   46,569.44 shares issued and outstanding at
   December 31, 1997....................................        2,065       466
Paid-in capital.........................................       15,885     5,374
Retained earnings.......................................       12,970    10,283
Accumulated other comprehensive income..................          411       279
Treasury stock, none at December 31, 1998 and 763.44
   shares at December 31, 1997..........................           --      (242)
                                                             ---------  --------
          Total stockholders' equity....................       31,331    16,160
                                                             ---------  --------
          Total liabilities and stockholders' equity....     $330,516   $247,022
                                                             ========   ========

                             See accompanying notes.



                                       34

<PAGE>




                   LAMAR CAPITAL CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                    (in thousands, except per share amounts)



                                                        Year ended December 31,
                                                     ---------------------------
                                                       1998      1997      1996
                                                     -------   --------  -------

Interest income
Loans, including fees............................    $18,706   $15,984   $13,790
Federal funds sold...............................        589       297       204
Interest on securities
Taxable..........................................      3,039     1,956     1,029
Non-taxable......................................      1,582     1,205     1,167
                                                     --------  --------  -------
                                                       4,621     3,161     2,196
                                                     --------  --------  -------
               Total interest income.............     23,916    19,442    16,190
Interest expense
Deposits ........................................     12,685     9,799     8,358
Other borrowed funds.............................      1,218       737        71
                                                     --------  --------  -------
               Total interest expense............     13,903    10,536     8,429
                                                     --------  --------  -------
Net interest income..............................     10,013     8,906     7,761
Provision for loan losses........................        785       725       557
Net interest income after provision for loan         --------  --------  -------
 losses..........................................      9,228     8,181     7,204
Other income
Service charges on deposit accounts..............      1,777     1,670     1,519
Mortgage loan fees...............................        639       362       260
Commissions on credit life insurance.............        439       391       320
Gain (loss) on sale of securities available for
 sale............................................        191       (13)       10
Trading account gains............................        123        --        --
Other operating income...........................        389       279       216
                                                     --------  --------  -------
               Total other income................      3,558     2,689     2,325
Other expense
Salaries and employee benefits...................      4,906     4,173     3,595
Occupancy expense................................        653       610       504
Furniture and equipment expense..................      1,007       878       787
Other operating expense..........................      2,166     2,016     2,004
                                                     --------  --------  -------
               Total other expense...............      8,732     7,677     6,890
                                                     --------  --------  -------
Income before income taxes.......................      4,054     3,193     2,639
Income tax expense...............................      1,005       854       611
                                                     --------  --------  -------
Net income     ..................................      3,049     2,339     2,028



                                       35

<PAGE>






Other comprehensive income (loss), net of
 income taxes
Change in unrealized gain (loss) on securities
 available for sale..............................        132       377      (68)
Reclassification of realized amount..............       (120)        8       (6)
                                                     -------- --------  --------
Net unrealized gain (loss) recognized in
 comprehensive income............................         12       385      (74)
                                                     -------- --------  --------
               Comprehensive income..............    $ 3,061  $  2,724  $ 1,954
                                                     ======== ========  ========
Earnings per share--basic and dilutive...........    $  1.09  $    .87  $    .75
                                                     ======== ========= ========
Weighted average shares outstanding - basic and
 dilutive........................................      2,793     2,687     2,709
                                                     ======== ========= ========

                             See accompanying notes.



                                       36

<PAGE>


<TABLE>
<CAPTION>


                                                                  LAMAR CAPITAL CORPORATION AND SUBSIDIARIES

                                                          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                    (in thousands, except for share amounts)


                                                                                      Accumulated
                                                                                         Other                              Total
                                               Common Stock       Paid-in   Retained Comprehensive   Treasury Stock    Stockholders'
                                            Shares      Amount    Capital   Earnings     Income     Shares    Amount        Equity
                                        ------------- --------- ----------  --------- ------------ ---------- -------- -------------


<S>                                        <C>          <C>      <C>        <C>         <C>        <C>       <C>        <C>     
Balance at January 1, 1996.............    46,569.44    $  466   $  5,227   $  6,441    $   (30)   1,409.30  $  (339)   $ 11,765
Net income for 1996....................                                        2,028                                       2,028
Dividend ($.09 per share)..............                                         (250)                                       (250)
Purchase of treasury stock.............                                                                8.14       (2)         (2)
Change in unrealized gain (loss), net
   of income taxes, on securities
   available for sale..................                                                     (68)                             (68)
                                        -------------  --------  ---------  --------- ----------  ---------- ---------  ---------
Balance at December 31, 1996...........    46,569.44       466      5,227      8,219        (98)   1,417.44     (341)     13,473
Net income for 1997....................                                        2,339                                       2,339
Dividend ($.10 per share)..............                                         (275)                                       (275)
Purchase of treasury stock.............                                                            1,374.00     (436)       (436)
Sale of treasury stock.................                               147                         (2,028.00)     535         682
Change in unrealized gain (loss), net
   of income taxes, on securities
   available for sale..................                                                     377                              377
                                        -------------  --------  ---------  ---------  ---------  ---------- ---------  ---------
Balance at December 31, 1997...........    46,569.44       466      5,374     10,283        279      763.44     (242)     16,160
Net income for 1998....................                                        3,049                                       3,049
Stock split (60-for-1)................. 2,747,596.96       931       (931)                        56,842.96                   --
Dividend ($.12 per share)..............                                         (362)                                       (362)
Purchase of treasury stock.............                                                              200.00      (72)        (72)
Sale of treasury stock.................                                51                        (30,711.00)     174         225
Retirement of treasury stock...........   (27,095.40)      (14)      (126)                       (27,095.40)     140          --
Sale of common stock...................    1,363,636       682     11,517                                                 12,199
Change in unrealized gain (loss), net
   of income taxes, on securities
   available for sale..................                                                     132                              132
                                        -------------  --------  ---------  ---------   --------  ---------- ---------  ---------
Balance at December 31, 1998               4,130,707   $ 2,065   $ 15,885   $ 12,970    $   411           -- $    --    $ 31,331
                                        =============  ========  =========  =========   ========  ========== =========  =========
</TABLE>

                             See accompanying notes.





                                       37

<PAGE>



                   LAMAR CAPITAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)



                                                     Year ended December 31,
                                                 ------------------------------
                                                   1998       1997       1996
                                                 --------   --------   --------

Operating Activities
  Net income...................................  $  3,049   $  2,339   $  2,028
  Adjustments to reconcile net income to net
  cash provided by operating activities:
    Provision for loan losses..................       785        725        557
    Provision for losses on other real estate..        11         44         18
    Deferred income tax benefit................      (149)       (89)      (108)
    Depreciation and amortization expense......       836        726        654
    Amortization of securities premiums........       254        167        208
    Accretion of securities discounts..........       (34)       (69)       (12)
    Increase in cash surrender value of life
      insurance................................       (65)       (64)       (61)
    Federal Home Loan Bank dividend............       (48)       (49)       (30)
    (Gain) loss on sales of securities
      available for sale.......................      (191)        13        (10)
    Trading account gains......................      (123)        --         --
    Proceeds from sales of trading securities..     3,619         --         --
    Gain of sales of other real estate.........        (7)       (12)       (18)
    Mortgage loan originations.................   (20,730)   (13,568)   (11,697)
    Proceeds from sales of mortgage loans......    20,099     13,508     12,581
    Increase in interest receivable............      (865)      (401)      (387)
    Increase (decrease) in interest payable....      (197)       120         10
    Decrease in other assets...................       288         79         81
    Increase in other liabilities..............       272        146         203
                                                  --------  ---------  ---------
Net cash provided by operating activities......     6,804      3,615      4,017
Investing activities
  Securities held to maturity:
    Proceeds from calls, maturities, and
      principal reductions.....................     4,672      2,821      3,195
    Purchase of securities.....................   (18,480)    (2,115)    (9,823)
  Securities available for sale:
    Proceeds from calls, maturities, and
      principal reductions.....................    14,725      3,554      2,162
    Proceeds from sales of securities..........     9,966     19,618      2,182
    Purchases of securities....................   (46,105)   (40,746)    (6,536)
  (Purchases) sales of Federal Home Loan Bank
      stock....................................       223       (375)       (29)
  Net increase in loans........................   (38,058)   (19,899)   (22,763)
  Proceeds from sales of other real estate.....        25        324        102



                                       38

<PAGE>




  Purchases of premises and equipment..........    (3,309)    (1,146)    (2,548)
                                                 ---------  ---------  ---------
  Net cash used in investing activities........   (76,341)   (37,964)   (34,058)
Financing activities
  Net increase in deposits.....................    66,774     26,094     28,773
  Net increase in revolving line of credit.....       100      4,020         --
  Borrowings from banks........................     5,000     10,000      7,000
  Payments on notes payable to banks...........    (3,600)    (3,400)        --
  Proceeds from sale of common stock...........    12,199         --         --
  Purchases of treasury stock..................       (72)      (436)        (2)
  Proceeds from sales of treasury stock........       225        682         --
  Dividends paid...............................      (388)      (250)      (250)
                                                 ---------  ---------  ---------
  Net cash provided by financing activities....    80,238     36,710     35,521
                                                 ---------  ---------  ---------
  Net increase in cash and cash equivalents....    10,701      2,361      5,480
  Cash and cash equivalents at beginning of
    year.......................................    15,737     13,376      7,896
                                                 ---------  --------  ----------
  Cash and cash equivalents at end of year.....  $ 26,438   $ 15,737  $  13,376
                                                 =========  ========  ==========

                             See accompanying notes.



                                       39

<PAGE>




                   LAMAR CAPITAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except share amounts)

                  Years ended December 31, 1998, 1997 and 1996

1. Summary of Significant Accounting Policies

   Consolidation

     The consolidated financial statements include the accounts of Lamar Capital
Corporation  (the  "Company") and its  wholly-owned  subsidiaries,  The Mortgage
Shop, Inc. ("MSI") and Lamar Bank (the "Bank") and its wholly-owned  subsidiary,
Southern  Financial  Services,  Inc.  ("SFSI").  All  significant   intercompany
balances and transactions have been eliminated in consolidation.


   Business

     The  Company  is  a  one-bank  holding  company  headquartered  in  Purvis,
Mississippi. The Company operates seven full service banking locations in retail
banking predominantly in Lamar and Forrest counties in southeastern Mississippi.
SFSI operates a finance company in seven  locations in southeastern  Mississippi
to  provide  consumer  loans to  customers  who may not be  eligible  to  obtain
financing  from the Bank. The Company's  consolidated  results of operations are
dependent upon net interest income, which is the difference between the interest
income on  interest-earning  assets and the interest expense on interest-bearing
liabilities.  Principal  interest-earning assets are securities and real estate,
consumer  and  commercial  loans.   Interest-bearing   liabilities   consist  of
interest-bearing deposit accounts and other borrowed funds.

     Other sources of income  include fees charged to customers for a variety of
banking  services such as deposit  account fees and  commissions  on credit life
insurance.  The Company also generates fees in its mortgage  banking  activities
from the  origination  and sale of loans and servicing  rights of 15 year and 30
year fixed rate loans in the secondary market.

     The Company's operating expenses consist primarily of salaries and employee
benefits, occupancy, furniture and equipment expenses,  communications costs and
other general and administrative  operating  expenses.  The Company's results of
operations  are  significantly  affected  by general  economic  and  competitive
conditions,  particularly changes in market interest rates,  government policies
and actions of regulatory agencies.


   Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.


   Cash and Cash Equivalents

     Cash and cash  equivalents  are  stated at cost.  Federal  funds  sold have
maturities  generally  of one day.  The Bank is  required  to  maintain  average
balances with the Federal Reserve Bank. The required reserve balance at December
31, 1998 was $2,410.  Cash paid for interest during the years ended December 31,
1998, 1997 and 1996 was $14,100, $10,416 and $8,419, respectively.



                                       40

<PAGE>



   Securities

     Debt securities available for sale are carried at estimated fair value. The
amortized cost of debt  securities  classified as available for sale is adjusted
for amortization of premiums and accretion of discounts to maturity.  Unrealized
gains or losses on these debt  securities are included in  stockholders'  equity
net of income  taxes.  Debt  securities  which the Bank has the  ability and the
intent to hold until maturity are stated at cost,  adjusted for  amortization of
premiums and  accretion of  discounts.  The adjusted  cost of the specific  debt
securities  sold is used to compute  gains or losses on the sale of  securities.
Premiums and  discounts  are  recognized  in interest  income using the interest
method over the period to maturity.  Trading account  securities consist of debt
securities held for resale in anticipation  of short-term  market  movements and
are carried at estimated fair value.  Trading  account gains include the effects
of adjustments to fair values. The adjusted cost of the specific securities sold
is used to compute gains or losses on the sale of securities.

     Federal Home Loan Bank stock is not considered a marketable equity security
under Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" and, therefore, is carried at
cost.


   Mortgage Banking Activities

     The Company  originates  first mortgage loans  (traditional  15 year and 30
year fixed and variable rate loans) for sale, with the servicing  rights, in the
secondary  market.  The  Company  limits  its  interest  rate risk on such loans
originated by selling individual loans immediately after the customers lock into
their rate. Origination fees and any gains or losses on the sale of the mortgage
loans  and  servicing  rights,  which  are  not  material  to  the  consolidated
operations for the years presented, are included in mortgage loan fees. Mortgage
loans  originated  and intended for sale in the secondary  market are carried at
the lower of  aggregate  cost or market  value,  based on the  subsequent  sales
prices of such loans.

     In June of 1996, the Financial  Accounting  Standards Board ("FASB") issued
SFAS No. 125,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of  Liabilities,"  which  requires an entity to  recognize  the
financial and servicing  assets it controls and the  liabilities it has incurred
and to cease  to  recognize  them as  financial  assets  when  control  has been
surrendered  in  accordance  with the  criteria  provided in SFAS No.  125.  The
Company  adopted the  provisions of SFAS No. 125 effective  January 1, 1998. The
adoption  of SFAS No.  125 did not have a  material  impact on the  consolidated
financial condition or operating results of the Company.


   Loans

     Loans, other than mortgage loans held for sale, are stated at the principal
amounts  outstanding,  less  unearned  income and the reserve for possible  loan
losses.  Interest  on loans and  accretion  of unearned  income are  computed by
methods  which  approximate a level rate of return on recorded  principal.  Loan
origination  fees and certain  direct loan  origination  costs are  deferred and
recognized over the average lives of the loans as an adjustment to yield.

     Commercial and real estate loans are placed on non-accrual status when they
become  past due 90 days or more as to  principal  or  interest  unless they are
adequately  secured and in the process of  collection.  All  commercial and real
estate  nonaccrual  loans are considered to be impaired in accordance  with SFAS
No. 114,  "Accounting  by Creditors for  Impairment of a Loan."  Consumer  loans
generally are not placed on nonaccrual status but are reviewed  periodically and
charged off when deemed uncollectible or any payment of principal or interest is
more than 120 days delinquent.  Interest  payments  received on nonaccrual loans
are applied to principal  if in  management's  opinion  there is doubt as to the
collectibility  of the  principal;  otherwise,  these  receipts  are recorded as
interest income.  A loan remains on nonaccrual  status until it is current as to
principal and interest and the borrower  demonstrates the ability to fulfill the
contractual obligation.




                                       41

<PAGE>



   Allowance for Loan Losses

     The allowance for loan losses is maintained at a level considered  adequate
by  management  and approved by the Board of Directors to provide for  potential
loan  losses.  Management's  determination  of  the  adequacy  is  based  on  an
evaluation of the portfolio,  past loan loss experience,  growth and composition
of the loan portfolio,  economic  conditions and other relevant factors;  actual
losses  may vary from the  current  estimate.  The  allowance  is  increased  by
provisions  for loan  losses  charged  against  income.  Actual  loan losses are
deducted from and subsequent recoveries are added to the allowance.


   Premises and Equipment

     Premises and  equipment are stated at cost less  accumulated  depreciation.
Depreciation  is computed by the modified  accelerated  cost recovery method for
financial  reporting  purposes  based  upon the  estimated  useful  lives of the
assets.  Expenditures  for major renewals and  betterments  are  capitalized and
those for maintenance and repairs are charged to expense when incurred.


   Other Real Estate

     Other real  estate is stated at the lower of fair  value,  based on current
market appraisals, or the recorded investment in the related loan.


   Long-Lived Assets

     The Company  accounts for  impairment  losses on long-lived  assets used in
operations when indicators of impairment are present and the  undiscounted  cash
flows  estimated  to be  generated  by those  assets  are less than the  assets'
carrying amount in accordance with SFAS No. 121,  "Accounting for the Impairment
of  Long-Lived  Assets and Assets to be Disposed  Of". The Company also accounts
for  long-lived  assets that are expected to be disposed of in  accordance  with
SFAS No. 121.


   Income Taxes

     The  Company and its  subsidiaries  file a  consolidated  federal and state
income tax return.  The Company  accounts for income  taxes using the  liability
method.  Temporary  differences  occur between the  financial  reporting and tax
bases of assets  and  liabilities.  Deferred  tax  assets  and  liabilities  are
recorded for these  differences based on enacted tax rates and laws that will be
in effect when the differences are expected to reverse.


   Comprehensive Income

     The  Company   adopted  the   provisions   of  SFAS  No.  130,   "Reporting
Comprehensive  Income," effective for the year ended December 31, 1998. SFAS No.
130 requires the presentation of comprehensive income and establishes  standards
for reporting its components (revenue, expenses, gains and losses) in a full set
of general purpose  financial  statements.  The years prior to December 31, 1998
have been restated to meet the current reporting formats.




                                       42

<PAGE>



   Derivatives and Hedging Activities

     Effective  October 1, 1998, the Company  adopted the provisions of SFAS No.
133, "Accounting for Derivative  Instruments and Hedging  Activities".  SFAS No.
133 requires the Company to recognize  all  derivatives  on the balance sheet at
fair  value.  Derivatives  that are not hedges  must be  adjusted  to fair value
through  income.  If the  derivative is a hedge,  depending on the nature of the
hedge,  changes in the fair value of  derivatives  are either offset against the
change in fair value of assets,  liabilities, or firm commitments through income
or recognized in other comprehensive  income until the hedged item is recognized
in income. The ineffective  portion of a derivative's  change in fair value will
be immediately  recognized in income.  The fair value of the derivatives held at
October  1,  1998  was not  material  to the  Company's  consolidated  financial
position.

     SFAS  No.  133  also  allowed,  upon  adoption,   the  reclassification  of
held-to-maturity  securities to the  available-for-  sale or trading  portfolios
without tainting the remaining securities in the held-to-maturity portfolio. The
Company  reclassified $3,497 of  held-to-maturity  securities to trading account
securities  as of  October  1,  1998.  The  unrealized  gain of the  transferred
securities was not material to the Company's  consolidated financial position or
operations,  thus the  adoption  of SFAS No. 133 did not result in a  cumulative
effect adjustment.


   Recent Accounting Pronouncements

     In June of 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments
of an Enterprise and Related  Information," which establishes  standards for the
reporting of financial information from operating segments in annual and interim
financial  statements.  SFAS No. 131  requires  that  financial  information  be
reported on the same basis that is reported  internally for  evaluating  segment
performance and allocating  resources to segments.  The Company adopted SFAS No.
131 during  1998,  but the adoption  did not impact the  consolidated  financial
position or operating results of the Company.


   Net Income per Common Share

     Effective May 13, 1998, the Board of Directors adopted and the shareholders
approved an amendment to the Company's Articles of Incorporation to increase the
authorized  shares to 2,000,000  shares of Common Stock with a par value of $.50
per share and completed a 20-for-1 stock split of its Common Stock. On August 3,
1998, the Board of Directors  approved a 3-for-1 stock split of its Common Stock
and an  amendment to the  Company's  Articles of  Incorporation  to increase the
authorized  shares to 50,000,000 shares of Common Stock with a par value of $.50
per share.  The  shareholders  approved the amendment to increase the authorized
shares on August 25, 1998.  Consolidated net income per basic and diluted common
share and dividends  per share has been restated for each year  presented in the
accompanying  consolidated  statements  of income and  changes in  stockholders'
equity to reflect the stock splits described above.


   Reclassifications

     Certain  reclassifications have been made in the accompanying  consolidated
financial statements from prior presentations.


2. Initial Public Offering

     In December 1998, the Company sold 1,363,636  shares of its Common Stock at
$10 per share in an underwritten  initial public offering (the "Offering").  Net
proceeds from the Offering were $12,199. In January 1999, the underwriters


                                       43

<PAGE>



exercised their overallotment option and the Company sold 185,000 shares at $10
per share.  Net proceeds from the sale of these shares were $1,720.


3.  Debt Securities

     The aggregate  carrying amounts and estimated fair value of debt securities
were as follows:

<TABLE>
<CAPTION>

                                                                                             December 31, 1998
                                                                                ----------------------------------------------
                                                                                             Gross       Gross      Estimated
                                                                                Amortized  Unrealized  Unrealized     Fair
                                                                                   Cost       Gains      Losses       Value
                                                                                ---------  ----------  ----------   ----------
Debt securities available for sale:

<S>                                                                              <C>        <C>         <C>          <C>    
   U.S. Treasury securities and obligations of U.S. government agencies.......   $27,781    $   332     $   (19)     $28,094
   Obligations of states and political subdivisions...........................    10,177        308          --       10,485
   Mortgage-backed securities.................................................    19,201         81         (47)      19,235
                                                                                ---------  ----------  ----------   ----------
Total debt securities available for sale......................................   $57,159    $   721     $   (66)     $57,814
                                                                                =========  ==========  ==========   ==========
Debt securities held to maturity:
   U.S. Treasury securities and obligations of U.S. government agencies.......   $ 4,076    $    59     $    --      $ 4,135
   Obligations of states and political subdivisions...........................    27,520        497         (95)      27,922
   Mortgage-backed securities.................................................     1,418         37          --        1,455
                                                                                ---------  ----------  ----------  -----------
Total debt securities held to maturity........................................   $33,014    $   593     $   (95)     $33,512
                                                                                =========  ==========  ==========   ==========

</TABLE>


<TABLE>
<CAPTION>

                                                                                 December 31, 1997
                                                                   ----------------------------------------------
                                                                                 Gross        Gross    Estimated
                                                                   Amortized   Unrealized  Unrealized     Fair
                                                                     Cost        Gains      Losses       Value
Debt securities available for sale:                                ----------  ----------  ----------  ----------
   U.S. Treasury securities and obligations of U.S.

<S>                                                                <C>         <C>         <C>          <C>    
      government agencies....................................      $ 23,387    $     314   $     (5)    $23,696
   Obligations of states and political subdivisions..........         9,621          165        (28)      9,758
   Mortgage-backed securities................................         3,357           16        (17)      3,356
                                                                   ----------  ----------  ----------  ----------
Total debt securities available for sale.....................      $ 36,365    $     495   $    (50)    $36,810
                                                                   ==========  ==========  ==========  ==========
Debt securities held to maturity:
   U.S. Treasury securities and obligations of U.S.
      government agencies....................................      $  4,911    $       3   $    (20)    $ 4,894
   Obligations of states and political subdivisions..........        14,913          149        (88)     14,974
   Mortgage-backed securities................................         2,287           49         (1)      2,335
                                                                   ----------  ----------  ----------  ----------
Total debt securities held to maturity.......................      $ 22,111    $     201   $   (109)    $22,203
                                                                   ==========  ==========  ==========  ==========

</TABLE>



     During the years ended December 31, 1998, 1997 and 1996, available-for-sale
debt  securities  with a fair value at the date of sale of $9,966,  $19,618  and
$2,182,  respectively,  were sold.  The gross  realized  gains or losses on such
sales  totaled  $191,  $(13) and $10,  respectively.  The  amortized  cost and
estimated fair value of debt securities as of December 31, 1998,


                                       44

<PAGE>



by  contractual  maturity,  are shown below.  Expected  maturities may differ
from contractual  maturities because borrowers may have the right to call or
prepay certain obligations with or without call or prepayment penalties.


                                                                    Estimated
                                                       Amortized      Fair
                                                          Cost        Value
                                                       ----------   ----------
     Debt securities available for sale:
          Due in one year or less...................   $     200    $    201
          Due after one year through five years.....       5,953       6,004
          Due after five years through ten years....      17,692      18,102
          Due after ten years.......................      14,113      14,272
          Mortgage-backed securities................      19,201      19,235
                                                       ----------   ---------
                                                       $  57,159    $ 57,814
                                                       ==========   =========

     Debt securities held to maturity:
          Due in one year or less...................   $   1,432    $  1,445
          Due after one year through five years.....      11,665      11,810
          Due after five years through ten years....       6,935       7,073
          Due after ten years.......................      11,564      11,729
          Mortgage-backed securities................       1,418       1,455
                                                       ----------   ---------
                                                       $  33,014    $ 33,512
                                                       ==========   =========

     Debt securities  having carrying amounts of $63,520 and $38,604 at December
31, 1998 and 1997, respectively,  were pledged to secure public deposits and for
other purposes required or permitted by law.


4.   Loans

     Loans consisted of the following:



                                                      December 31,
                                                 ----------------------
                                                    1998        1997
                                                 ---------  -----------
     Real estate:
          Residential.....................       $ 61,280   $  55,406
          Mortgage loans held for sale....          1,053         421
          Construction....................          9,095       4,226
          Commercial......................         31,915      28,591
     Consumer.............................         61,686      51,965
     Commercial...........................         39,493      25,556
                                                 ---------  ----------
                                                  204,522     166,165
     Unearned income......................         (3,862)     (3,512)
     Allowance for loan losses............         (3,564)     (3,101)
                                                 ---------  ----------
     Net loans............................       $197,096    $159,552
                                                 =========  ==========

                                       45

<PAGE>

     Loans are made  principally  to customers in the Company's  trade area. The
economy in this trade area is primarily  retail,  service and medical based. The
Company's  loan  portfolio  is  primarily  centered in  consumer  loans and real
estate; therefore, the collections of such loans are dependent on the trade area
economy. The Company's lending policy provides that loans collateralized by real
estate are normally made with  loan-to-value  ratios of 80% or less.  Commercial
loans are typically  collateralized by property,  equipment,  inventories and/or
receivables  with  loan-to-value  ratios  from 50% to 80%.  Consumer  loans  are
typically collateralized by automobiles and personal property.

     Transactions in the allowance for loan losses are summarized as follows:




                                                   As of and for the year ended
                                                           December 31,
                                                  ------------------------------
                                                    1998       1997      1996
                                                  --------   --------  ---------

     Balance at beginning of year .............   $  3,101   $ 2,837   $  2,529
     Provision for loan losses.................        785       725        557
     Loans charged off.........................       (526)     (638)      (488)
     Recoveries of loans previously charged
        off....................................        204       177        239
                                                  ---------  --------- ---------
     Balance at end of year ...................   $  3,564   $ 3,101   $  2,837
                                                  =========  ========= =========

     Non-accrual  loans  at  December  31,  1998 and 1997  were  $931 and  $147,
respectively.

     Certain  directors,  executive  officers,  principal  shareholders,   their
immediate  family members and entities in which they or their  immediate  family
members  have  principal  ownership   interests,   are  customers  of  and  have
transactions with the Company in the ordinary course of business. Loans to these
parties are made on substantially the same terms,  including  interest rates and
collateral,   as  those  prevailing  at  the  time  for  comparable  third-party
transactions  and do not involve  more than normal  risks of  collectibility  or
present other unfavorable features.

     These related party loan transactions are summarized as follows:


                                                         Year ended
                                                     December 31, 1998
                                                     -----------------

     Balance at beginning of year ................... $    1,436
     New loans.......................................      1,283
     Repayments......................................     (1,251)
                                                      -----------
     Balance at end of year.......................... $    1,468
                                                      ===========




                                       46

<PAGE>



5.  Premises and Equipment

     Premises and equipment consisted of the following at:



                                                  December 31,
                                             ---------------------
                                               1998         1997
                                             ---------   ---------
     Land.................................   $ 2,301      $ 1,657
     Bank premises........................     6,400        4,923
     Furniture, fixtures and equipment....     4,614        3,651
     Computer software....................       798          674
     Accumulated depreciation.............    (5,002)      (4,267)
                                             ---------   ---------
                                             $ 9,111      $ 6,638
                                             =========   =========


6.  Other Real Estate

     Other real estate transactions consisted of the following:




                                      As of and for the year ended
                                              December 31,
                                  -------------------------------------
                                   1998           1997           1996
                                  --------       ---------      -------

     Beginning balance.......     $   411        $    767        $ 309
     Transfers of loans......         360              24          560
     Sales...................         (18)           (336)         (84)
     Provision for losses....         (11)            (44)         (18)
                                  --------       ---------      -------
     Ending balance..........     $   742        $    411        $ 767
                                  ========       =========      =======



                                       47

<PAGE>




7.  Interest-Bearing Deposits

     Interest-bearing deposits consisted of the following:



                                                               December 31,
                                                           ---------------------
                                                             1998        1997
                                                           ---------   ---------
     Demand (Now, SuperNow and money market)...........    $ 81,516    $ 50,765
     Savings...........................................       9,437       8,877
     Individual retirement accounts....................      14,127      11,058
     Time deposits, $100,000 and over..................      45,040      35,635
     Other time deposits...............................     100,311      81,112
                                                           ---------   ---------
                                                           $250,431    $187,447
                                                           =========   =========

     Scheduled  maturities of time  deposits,  including  individual  retirement
accounts, outstanding at December 31, 1998 are as follows:


     1999....................   $  87,925
     2000....................      51,752
     2001....................       9,364
     2002....................       4,518
     2003....................       5,919
                                 --------
                                 $159,478
                                 ========

     In the normal  course of business,  the Company has accepted  deposits from
certain directors,  executive officers, principal shareholders and other related
parties on  substantially  the same terms,  including  interest  rates, as those
prevailing at the time of comparable  transactions  with third-party  customers.
Such deposits were $746 and $900 at December 31, 1998 and 1997, respectively.


8.   Other Borrowed Funds

     Other  borrowed  funds include  borrowings of $4,120 and $4,020 at December
31, 1998 and 1997, respectively, under a $5,000 revolving line of credit with an
unrelated bank. Borrowings accrue interest at a variable rate (9.00% at December
31,  1998 and 9.25% at  December  31,  1997) with  interest  paid  monthly.  The
revolving  line of credit  expires in  December  of 1999.  Borrowings  under the
revolving line of credit are  collateralized  by substantially all of the assets
of SFSI.

     Other  borrowed  funds include  $3,600 at December 31, 1997 to an unrelated
bank that was repaid in December 1998.

     Notes payable to banks include  advances of $15,000 and $10,000 at December
31, 1998 and 1997,  respectively,  from  Federal  Home Loan Bank  ("FHLB").  The
advances  accrue  interest at variable rates (4.89% and 5.66%  weighted  average
rate at December 31, 1998 and 1997,  respectively)  with  interest paid monthly.
The Company paid $5,000 of the amount  outstanding in January 1999  (unaudited).
The $10,000 advance matures in November 2008. The advances are


                                       48
<PAGE>



collateralized  by the Bank's  investment in FHLB stock,  which totaled $788 and
$963 at December 31, 1998 and 1997, respectively, and by a blanket pledge of the
Bank's eligible real estate loans.  The Bank had available  collateral to borrow
an additional $53,000 from the FHLB at December 31, 1998.


9.   Income Taxes

     Income tax expense (benefit) consisted of the following:


                            Year ended December 31,
                         ------------------------------
                           1998       1997       1996
                         --------   --------   --------
     Current:
          Federal....    $   999    $   831    $   627
          State......        155        112         92
                         --------   --------   --------
                           1,154        943        719
     Deferred........       (149)       (89)      (108)
                         --------   --------   --------
                         $ 1,005    $   854    $   611
                         =========  =========  ========

     The  differences  between the Bank's  actual income tax expense and amounts
computed at the statutory rates are summarized as follows:



                                                         Year ended December 31,
                                                        ------------------------
                                                         1998     1997    1996
                                                        ------- -------- -------
Amount computed at statutory rate on income before
   income taxes.......................................  $1,379   $1,086  $  897
Increase (decrease) in income taxes resulting from:
     State income taxes, net of federal benefit.......      89       66      51
     Income from non-taxable securities...............    (447)    (323)   (319)
     Other............................................     (16)      25     (18)
                                                        -------  ------- -------
                                                        $1,005   $  854  $  611
                                                        =======  ======= ======

     The Company  made income tax  payments of $1,113,  $984 and $762 during the
years ended December 31, 1998, 1997 and 1996, respectively.




                                       49

<PAGE>



     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets consisted of the following:


                                                                   December 31,
                                                                  --------------
                                                                   1998   1997
                                                                  ------ -------
     Allowance for loan losses..................................  $ 878  $ 706
     Other real estate..........................................     26     23
     Deferred compensation......................................    131    105
     Net unrealized gains on securities available for sale......  (244)   (166)
     Other......................................................   (31)     21
                                                                  -----  ------
     Total net deferred tax assets..............................  $ 760  $ 689
                                                                  ====== =======


10.   Employment Benefit Plans

     The Company has a defined  contribution  401(k) plan with a profit  sharing
feature which covers  substantially  all employees.  Participants  in the 401(k)
plan may  contribute  up to the  maximum  allowed by  Internal  Revenue  Service
regulations.  The Company matches participants' contributions to the 401(k) plan
up to 3% of each  participant's  annual  salary.  The  Company may make a profit
sharing  contribution  as determined by the  Company's  Board of Directors.  The
Company's matching and profit sharing  contributions vest 20% annually beginning
with the participant's third year of service. The Company's contributions to the
401(k) plan were $88, $85 and $206 for the years ended  December 31, 1998,  1997
and 1996, respectively.

     The Company established an employee stock ownership plan ("ESOP") effective
January 1, 1997 which covers  substantially all employees.  The Company may make
contributions to the ESOP at the discretion of its Board of Directors and may be
made in cash or common stock. The contributions vest 20% annually beginning with
the participant's third year of service. The Company's contributions to the ESOP
were $165 and $150 for the years ended December 31, 1998 and 1997, respectively.
On July 30, 1998, the ESOP purchased 18,711 shares of the Company's Common Stock
included in treasury stock.

     In August of 1998, the Company  adopted a stock  incentive plan under which
it plans to grant stock options for selected employees. As of December 31, 1998,
no stock options had been granted under the plan.

     The Company  maintains a  self-insured  medical plan.  Under this plan, the
Company  self-insures,   in  part,  coverage  for  substantially  all  full-time
employees with coverage by insurance  carriers for certain stop-loss  provisions
for  losses  greater  than $30 for each  occurrence  up to a maximum  benefit of
$1,000.  The Company's  expenses  pertaining to the  self-insured  medical plan,
including  accruals for incurred but not reported  claims,  were $436,  $323 and
$233 for the years ended December 31, 1998, 1997 and 1996, respectively.

     The Company has deferred compensation  agreements with certain officers for
payments to be made over specified periods beginning when the officers reach age
65. Amounts  accrued for these  agreements are based upon deferred  compensation
earned,  discounted over the estimated  remaining  service life of each officer.
Deferred  compensation  expense  totaled  $71,  $66 and $62 for the years  ended
December 31, 1998, 1997 and 1996, respectively.


11.   Regulatory Matters

     The Federal  Reserve  Board has adopted a system using  risk-based  capital
guidelines  to evaluate the capital  adequacy of bank holding  companies.  These
guidelines require a minimum total risk-based capital ratio of 8.0% (of


                                       50

<PAGE>



which at least 4.0% is  required  to consist  of Tier 1 capital  elements).  The
Federal  Reserve Board also utilizes a leverage ratio (Tier 1 capital divided by
average  total  consolidated  assets) to evaluate  the capital  adequacy of bank
holding  companies.  The Company's  current  regulatory  ratios placed it in the
"well-capitalized category.

     The Company's actual capital amounts and applicable ratios are as follows:



                                                                December 31,
                                                             -------------------
                                                              1998       1997
                                                             ---------  --------
     Capital:
     Stockholders' equity...............................     $31,331    $16,160
     Less unrealized gains on securities, net of
        income taxes....................................        (411)      (279)
     Intangible asset...................................         (94)      (102)
                                                             ---------  --------
     Tier 1 capital.....................................      30,826     15,779
     Qualifying allowance for loan losses...............       2,642      2,009
                                                             ---------  --------
     Total capital......................................     $33,468    $17,788
                                                             =========  ========
     Ratios:
     Total capital to risk-weighted assets..............       15.90%     11.09%
     Tier 1 capital to risk-weighted assets...............     14.65       9.84
     Tier 1 capital to total average assets (leverage
        ratio)............................................      9.55       6.87

     State banking regulations require the Mississippi Department of Banking and
Consumer Finance to approve the payment of any dividends.


12.  Off-Balance Sheet Risks, Commitments and Contingent Liabilities

     Loan  commitments  are  made to  accommodate  the  financial  needs  of the
Company's  customers.  Standby  letters  of credit  commit  the  Company to make
payments on behalf of customers when certain specified future events occur. They
primarily are issued to support customers' trade transactions.

     Both arrangements have credit risk essentially the same as that involved in
extending  loans to customers  and are subject to the  Company's  normal  credit
policies.  Collateral is obtained based on management's credit assessment of the
customer.

     The  Company's  maximum  exposure  to credit  losses  for loan  commitments
(unused lines of credit)  outstanding  at December 31, 1998 and expiring  during
1999 is $14,946.

     The Company uses interest rate floor  agreements to  effectively  convert a
portion of its loans to a minimum fixed rate basis,  thus reducing the impact of
lower  interest rates on the Company's net interest  margin  because  management
believes that lower  interest  rates would  adversely  affect the yield on loans
more than on other earning assets or the cost of  interest-bearing  liabilities.
At December 31, 1998 approximately 10.0% of the Company's loans were effectively
subject to the Company's  interest rate floor  agreements that expire at various
dates through  January 16, 2000. The notional  amount of $20.0 million for these
agreements  effectively  fixes the Company's  minimum variable  interest rate on
$20.0  million of loans  using a 6%  three-month  LIBOR  rate as the  floor.  At
December  31,  1998 and 1997,  the  three-month  LIBOR rate was 5.00% and 5.81%,
respectively. The agreements are settled monthly and recognized with the


                                       51

<PAGE>



amortization of the premium as adjustments to interest income. The fair value of
the agreements were immaterial to the Company's  consolidated financial position
at December 31, 1998 and 1997.

     The Company is involved in certain legal actions and claims  arising in the
ordinary  course of  business.  Although  the  ultimate  outcome of these  other
actions  and claims  cannot be  ascertained  at this time,  it is the opinion of
management  (based on advice of legal  counsel) that such  litigation and claims
should  be  resolved  without  material  effect  on the  Company's  consolidated
financial position or operating results.


13.  Parent Company Condensed Financial Information

     Balance Sheets

                                                           December 31,
                                                      ---------------------
                                                         1998        1997
                                                      ---------   ---------
Assets:
Cash and cash equivalents.......................      $  8,500    $     --
Investment in subsidiaries......................        21,729      19,069
Due from subsidiaries...........................           164         660
Premises and equipment..........................         1,170       1,173
Other...........................................            19          19
                                                      ---------   ---------
    Total assets................................      $ 31,582    $ 20,921
                                                      =========   =========
Liabilities:
Due to subsidiaries.............................      $     --    $  1,010
Other liabilities...............................           251         151
Other borrowed funds............................            --       3,600
                                                      ---------   ---------
    Total liabilities...........................           251       4,761

Stockholders' equity:
Common stock....................................         2,065         466
Paid-in capital.................................        15,885       5,374
Retained earnings...............................        12,970      10,283
Accumulated other comprehensive income..........           411         279
Treasury stock..................................            --        (242)
                                                      ---------   ---------
  Total stockholders' equity....................        31,331      16,160
                                                      ---------   ---------
    Total liabilities and stockholders' equity..      $ 31,582    $ 20,921
                                                      =========   =========




                                       52

<PAGE>



     Statements of Income

                                                      Year ended December 31,
                                                    ----------------------------
                                                     1998       1997      1996
                                                    -------    -------   -------
     Income:
     Dividends from subsidiaries..................  $   750     $1,110   $   475
     Other     ...................................       22         23         1
                                                    --------   --------  -------
               Total income.......................      772      1,133       476
     Expenses:
     Interest expense.............................      342        392         1
     Other     ...................................       55         60        59
                                                    --------   --------  -------
               Total expenses.....................      397        452        60
                                                    -------    -------   -------
     Income before income taxes...................      375        681       416
     Income tax benefit...........................      146        160        22
                                                    -------    -------   -------
     Income before equity in undistributed net
       income of subsidiaries.....................      521        841       438
     Equity in undistributed net income of
       subsidiaries...............................    2,528      1,498     1,590
                                                     -------   -------    ------
     Net income...................................   $3,049     $2,339    $2,028
                                                     =======   =======    ======



     Statements of Cash Flows                         Year ended December 31,
                                                    ----------------------------
                                                     1998       1997      1996
                                                    -------   --------  --------
     Operating activities:
     Net income.................................... $ 3,049   $ 2,339   $ 2,028
     Adjustments to reconcile net income to
       net cash provided by operating
       activities:
         Undistributed net income of subsidiaries..  (2,528)   (1,498)   (1,590)
         Depreciation expense......................       9         9        --
         (Increase) decrease in due from
           subsidiaries............                    (514)     (298)      815
         Increase in other assets..................      --        --       (14)
         Increase in other liabilities.............     126        --         1
                                                    --------  --------  --------
         Net cash provided by operating
          activities...............................     142       552     1,240
     Investment activities:
     Capital contribution to subsidiary............      --      (150)   (3,850)
     Purchases of premises and equipment...........      (6)     (182)   (1,000)
                                                    --------  --------  --------
     Net cash used in investing activities.........      (6)     (332)   (4,850)
     Financing activities:
     Dividends paid................................    (388)     (250)     (250)
     Borrowings from a bank........................      --        --     4,000
     Payments on note payable to a bank............  (3,600)     (400)       --
     Proceeds from sale of common stock............  12,199        --        --
     Purchases of treasury stock...................     (72)     (436)       (2)
     Proceeds from sales of treasury stock.........     225       682        --
                                                    --------  --------  --------
     Net cash provided by (used in) financing
       activities..................................   8,364      (404)    3,748
                                                    --------  --------  --------
     Net increase (decrease) in cash and cash
       equivalents.................................   8,500      (184)      138
     Cash and cash equivalents at beginning of
       year........................................      --       184        46
                                                    --------  --------  --------
     Cash and cash equivalents at end of year...... $ 8,500   $    --   $   184
                                                    ========  ========  ========




                                       53

<PAGE>



14.  Fair Values of Financial Instruments

     Generally accepted  accounting  principles require disclosure of fair value
information about financial  instruments for which it is practicable to estimate
fair value,  whether or not the  financial  instruments  are  recognized  in the
financial statements.  When quoted market prices are not available,  fair values
are based on estimates using present value or other valuation techniques.  Those
techniques are  significantly  affected by the assumptions  used,  including the
discount  rate and  estimates  of future  cash  flows.  The  derived  fair value
estimates cannot be substantiated through comparison to independent markets and,
in many cases, could not be realized in immediate  settlement of the instrument.
Certain  financial  instruments and all  non-financial  instruments are excluded
from  these  disclosure  requirements.  Accordingly,  the  aggregate  fair value
amounts presented do not represent the underlying value of the Company.  The use
of different market assumptions and estimation methodologies may have a material
effect on the estimated fair value amounts.

     The  carrying  amount of cash and cash  equivalents,  non-interest  bearing
deposits,  other  borrowed  funds and  interest  rate  floors  approximates  the
estimated fair value of these financial instruments. The estimated fair value of
securities is based on quoted market prices,  dealer quotes and prices  obtained
from  independent  pricing  services.  The  estimated  fair  value of loans  and
interest-bearing   deposits  is  based  on  present   values  using   applicable
risk-adjusted  spreads to the  appropriate  yield curve to  approximate  current
interest rates applicable to each category of these financial  instruments.  The
fair value of the loan  commitments  to extend credit is based on the difference
between the interest rate at which the Company's committed to make the loans and
the current rates at which similar loans would be made to borrowers with similar
credit ratings and the same maturities. The fair value is not material.

     Variances between the carrying amount and the estimated fair value of loans
reflect  both  credit risk and  interest  rate risk.  The  Company is  protected
against changes in credit risk by the allowance for loan losses.

     The fair value  estimates  presented are based on information  available to
management as of December 31, 1998 and 1997. Although management is not aware of
any factors that would  significantly  affect the estimated  fair value amounts,
these amounts have not been revalued for purposes of these financial  statements
since  those  dates.  Therefore,  current  estimates  of fair  value may  differ
significantly from the amounts presented.


                                                    December 31,
                                      ------------------------------------------
                                              1998               1997
                                      -------------------- ---------------------
                                       Carrying     Fair     Carrying    Fair
                                        Amount      Value     Amount    Value
                                      ---------  ---------  ---------  ---------
  Securities available for sale.      $ 57,814   $ 57,814   $ 36,810   $ 36,810
  Securities held to maturity....       33,014     33,512     22,111     22,203
  Loans..........................      197,096    194,672    159,552    158,116
  Interest-bearing deposits......      250,431    252,188    187,447    181,355


15.  Subsequent Event

     On January 21, 1999, the Bank obtained a $40,000 advance from the FHLB at a
4.49% interest rate (fixed for a three-year term) that matures January 21, 2009.
The note is callable quarterly  beginning April 22, 2002. The proceeds from this
advance  were  used by the  Company  to  purchase  securities,  which  have been
classified as available for sale.




                                       54

<PAGE>




ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information  on the directors and executive  officers of the Registrant can
be found  under Item 1  Description  of Business of this Report on Form 10-K and
under the headings  "Election of Directors" and Executive  Compensation"  in the
Proxy Statement to shareholders dated April 12, 1999, and is incorporated herein
by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     Information required by this item can be found under the heading "Executive
Compensation"  in the Proxy  Statement dated April 12, 1999, and is incorporated
herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information  regarding  security ownership of certain beneficial owners
and the officers and directors can be found under the headings "Stock  Ownership
of Principal Stockholder" and "Stock Ownership of Directors and Officers" in the
Proxy Statement dated April 12, 1999, and is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  regarding certain  relationships and related  transactions
can be found under the caption  "Other  Transactions  with  Management,"  in the
Proxy Statement dated April 12, 1999, and is incorporated herein by reference.


                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

A-1.     Financial Statements

Report of Independent Auditors

Consolidated Balance Sheets as of December 31, 1998 and 1997

Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996



                                       55

<PAGE>





Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996

Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996

Notes to Consolidated Financial Statements


A-2.     Financial Statement Schedules

         None.

A-3.     Exhibits Required by Item 601 of Regulation S-K

3.1      Articles of Incorporation of Registrant, as amended (1)(2)

3.3      Bylaws of Registrant, as amended(1)

4.1      Provisions of Articles of Incorporation  of Registrant  defining rights
         of security  holders (see  Articles of  Incorporation,  as amended,  of
         Registrant filed as Exhibits 3.1 and 3.3 herein)(1)

4.2      Shareholder Rights Plan(1)

4.3      Specimen Stock Certificate(2)

10.1     Executive Salary Continuation Agreements(1)

10.2     Stock Incentive Plan(2)

21       Subsidiaries of the Registrant(1)

27       Financial Data Schedule

         (1) Filed an as an exhibit to the S-1 Registration Statement of the
Company (File No. 333-61355) filed on August 13, 1998 and incorporated by
reference herein.

         (2) Filed an as an exhibit to Amendment No. 1 to the S-1 Registration
Statement of the Company (File No. 333-61355) filed on October 1, 1998 and
incorporated by reference herein.

B.        Reports on Form 8-K

          None









                                       56

<PAGE>



SIGNATURES

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



                                       BY: /s/ Robert W. Roseberry
                                          --------------------------------------
                                           ROBERT W. ROSEBERRY
                                           CHAIRMAN AND
                                           CHIEF EXECUTIVE OFFICER
                                           (PRINCIPAL EXECUTIVE OFFICER)


DATE:  MARCH  29, 1999
             ----
                                       By: /s/ Donna T. Rutland
                                          --------------------------------------
                                           DONNA T. RUTLAND
                                           CHIEF FINANCIAL OFFICER
                                           (PRINCIPAL FINANCIAL OFFICER AND
                                           PRINCIPAL ACCOUNTING OFFICER)



                                       57

<PAGE>




                                   SIGNATURES

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


SIGNATURES                     CAPACITIES                            DATE
----------                     ----------                            ----


/s/ O. B. Black, Jr.           Director                        March  29, 1999
---------------------------                                          ----
O. B. Black, Jr.


/s/ William H. Jordan          Director                        March  29, 1999
---------------------------                                          ----
William H. Jordan


/s/ Kenneth M. Lott            Director                        March  29, 1999
---------------------------                                          ----
Kenneth M. Lott


/s/ James R. Pylant            Director                        March  29, 1999
---------------------------                                          ----
James R. Pylant


/s/ Jane P. Roberts            Director                        March  29, 1999
---------------------------                                          ----
Jane P. Roberts


/s/ Monty C. Roseberry         Director                        March  29, 1999
---------------------------                                          ----
Monty C. Roseberry


/s/ Robert W. Roseberry        Director (Principal             March  29, 1999
---------------------------    Executive Officer)                    ----
Robert W. Roseberry


/s/ Donna T. Rutland           Chief Financial Officer         March  29, 1999
---------------------------    (Principal Accounting and             ----
Donna T. Rutland               Financial Officer)




                                       58

<PAGE>


                                INDEX TO EXHIBITS

3.1        Articles of Incorporation of Registrant, as amended (1)(2)

3.3        Bylaws of Registrant, as amended(1)

4.1        Provisions of Articles of Incorporation of Registrant defining rights
           of security holders (see Articles of  Incorporation,  as amended,  of
           Registrant filed as Exhibits 3.1 and 3.3 herein)(1)

4.2        Shareholder Rights Plan(1)

4.3        Specimen Stock Certificate(2)

10.1       Executive Salary Continuation Agreements(1)

10.2       Stock Incentive Plan(2)

21         Subsidiaries of the Registrant(1)

27         Financial Data Schedule

         (1) Filed an as an exhibit to the S-1 Registration Statement of the
Company (File No. 333-61355) filed on August 13, 1998 and incorporated by
reference herein.

         (2) Filed an as an exhibit to Amendment No. 1 to the S-1 Registration
Statement of the Company (File No. 333-61355) filed on October 1, 1998 and
incorporated by reference herein.


                                       59