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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ---------------

                                    FORM 10-K
                                 ---------------
(Mark One)

     [X]  ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
          EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2002

     [ ]  TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
          EXCHANGE ACT OF 1934

               For the transition period from ________ to ________

                        COMMISSION FILE NUMBER 000-31825

                     HERITAGE FINANCIAL HOLDING CORPORATION
               (Exact name of registrant specified in its charter)

           Delaware                                              63-1259533
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

          1323 Stratford Road                                       35601
            Decatur, Alabama                                     (Zip Code)
(Address of principal executive offices)

       Registrant's telephone number, including area code: (256) 355-9500
        Securities registered pursuant to Section 12(b) of the Act: NONE
           Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock -- Par Value $0.01 Per Share
                                (Title of Class)

     Indicate  by a check  mark  whether  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  12 months,  and (2) has been  subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

     Indicate by a 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 the  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 by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

     State the aggregate market value of the voting and non-voting common equity
held by  non-affiliates  computed by  reference to the price at which the common
equity was last sold, or the average bid and asked price of such common  equity,
as of the last business day of the registrant's  most recently  completed second
fiscal quarter. Common Stock, par value $0.01 per share -- $42,141,554.

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock as of March 24, 2003.  Common Stock, par value $0.01 per
share -- 9,113,122 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions  of  the  annual  proxy   statement  for  the  annual  meeting  of
stockholders on May 20, 2003 incorporated by reference into Part III.

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<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION

                          2002 FORM 10-K ANNUAL REPORT

                                Table of Contents
<TABLE>
<CAPTION>
<S>                                                                                                              <C>
PART I............................................................................................................1

   CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.........................................................1
   RISK FACTORS...................................................................................................2
         ITEM 1.  BUSINESS........................................................................................3
         ITEM 2.  PROPERTIES.....................................................................................14
         ITEM 3.  LEGAL PROCEEDINGS..............................................................................14
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................14

PART II..........................................................................................................14

         ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................14
         ITEM 6.  SELECTED FINANCIAL DATA........................................................................17
         ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........18
         ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................40
         ITEM 8.  FINANCIAL STATEMENTS...........................................................................40
         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........83

PART III.........................................................................................................83

         ITEM 10, 11, 12 AND 13.     DIRECTORS AND  EXECUTIVE  OFFICERS OF THE REGISTRANT;
                 EXECUTIVE COMPENSATION; SECURITY  OWNERSHIP  OF CERTAIN BENEFICIAL OWNERS
                 AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS; AND CERTAIN RELATIONSHIPS
                 AND RELATED TRANSACTIONS........................................................................83
         ITEM 14. CONTROLS AND PROCEDURES........................................................................84
         ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................85
         EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS..........................................102
         EXHIBIT 12 - STATEMENTS RE: COMPUTATION OF RATIOS......................................................103
         EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT............................................................104
         EXHIBIT 24 - POWER OF ATTORNEY.........................................................................105
         EXHIBIT 99.1 - CERTIFICATION OF PRESIDENT AND CEO......................................................107
         EXHIBIT 99.2- CERTIFICATION OF CHIEF FINANCIAL OFFICER.................................................108
</TABLE>

<PAGE>
                                     PART I

             CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     This Annual  Report and documents  incorporated  by reference  herein,  may
contain certain  statements  relating to our future results based on information
currently available. The presentations,  and certain of the other disclosures in
this Annual Report,  including any statements  preceded by, followed by or which
include  the  words,  "may,"  "could,"  "should,"  "will,"  "would,"  "believe,"
"expect,"  "anticipate,"  "estimate,"  "intend,"  "plan,"  "assume,"  or similar
expressions, constitute forward-looking statements within the meaning of Section
21E of the Securities  Exchange Act of 1934, as amended.  These forward  looking
statements,  implicitly and explicitly,  include the assumptions  underlying the
statements and other information with respect to our beliefs, plans, objectives,
goals, expectations,  anticipations, estimates, intentions, financial condition,
results  of  operations,   future   performance  and  business,   including  our
expectations  and estimates  with respect to our revenues,  expenses,  return on
equity,  return on assets,  efficiency ratio,  asset quality and other financial
data and capital and performance ratios.

     Although we believe that the expectations  reflected in our forward-looking
statements are  reasonable,  these  statements  involve risks and  uncertainties
which are subject to change based on various  important  factors  (some of which
are beyond our control).  The following factors,  among others,  could cause our
financial  performance to differ materially from our goals,  plans,  objectives,
intentions,  expectations,  and other forward-looking statements: (1) the extent
to which we are able to  achieve  and  maintain  certain  capital  ratios at the
Company  and the Bank,  as well as the  effects of the  inability  or failure to
achieve such ratios;  (2) the effects of certain  operating  restrictions on the
Company and the Bank, including,  without limitation,  the ability to declare or
pay dividends without prior regulatory approval;  (3) the strength of the United
States  economy in general and the strength of the regional and local  economics
in which we conduct  operations;  (4) the effects  of, and  changes  in,  trade,
monetary and fiscal policies and laws,  including  interest rate policies of the
Board of Governors of the Federal Reserve System; (5) inflation,  interest rate,
market and monetary fluctuations; (6) our timely development of new products and
services to a changing environment,  including the features, pricing and quality
compared to the products and services of our competitors; (7) the willingness of
users to  substitute  competitors'  products  and  services for our products and
services;  (8) the impact of changes in financial  services  policies,  laws and
regulations, including laws, regulations and policies concerning taxes, banking,
securities and insurance,  and the application thereof by regulatory bodies; (9)
technological  changes;  (10) changes in consumer  spending and savings  habits;
(11) regulatory or judicial proceedings; and (12) the declaration of war and the
commencement of hostilities in Iraq and elsewhere. We also direct your attention
to the Risk Factors  discussed  immediately  following  this  section  under the
heading "Risk Factors."

     If one or more of the factors affecting our forward-looking information and
statements   proves   incorrect,   then  our  actual  results,   performance  or
achievements  could differ  materially  from those  expressed  in, or implied by
forward-looking  information and statements  contained in this Annual Report. We
do  not  intend  to  update  or  revise  our  forward-looking   information  and
statements, whether written or oral, to reflect any changes. All forward-looking
statements  attributable  to us are  expressly  qualified  by  these  cautionary
statements.

                                       1

<PAGE>
                                  RISK FACTORS

The  Company  and the Bank are  Restricted  from  Certain  Activities  Including
Payment of Dividends to Stockholders.

     During 2002, management of the Company identified  significant  operational
and asset  quality  deficiencies  at the Bank.  These  deficiencies  resulted in
material  increases  to the Bank's  loan loss  reserves,  resulting  in material
reductions in the capital  levels of the Company and the Bank. As a result,  the
Board of Directors and  management  of the Company and the Bank have  identified
specific corrective steps and actions to address capital  deficiencies,  improve
asset  quality,  and enhance  operational  controls  and  procedures.  The Bank,
without the prior written approval of its regulators, may not declare or pay any
cash dividends.  In addition, the Bank has determined to hire and retain certain
personnel  who have  been  given  specific  written  authority  by the  Board of
Directors to implement sound lending,  recordkeeping  and accounting  practices.
The Bank  also has taken  steps to  develop  an  educational  program  for board
members and to create a written review of the Bank's staffing requirements.  The
Board of Directors of the Company intends to cause management of the Company and
the Bank to take  steps to attain  and  maintain  a Tier 1  leverage  ratio of 8
percent and to be  "well-capitalized"  as defined by the FDIC by March 31, 2003.
Should the Tier 1  leverage  ratio  fail to meet the  specified  Tier 1 leverage
ration of 8 percent or subsequently  fall below such level, the Bank must notify
the regulatory authorities and take steps to increase capital sufficient to meet
the required ratios within 30 days.

     If the quality of the  Company's  assets does not  improve,  or if there is
further deterioration in the Bank's loan portfolio, the Company and the Bank may
be required to take  additional  remedial  action that may further  restrict the
Company's and the Bank's operations in future periods.

The Company and the Bank Have Made  Significant  Changes to the Bank's Loan Loss
Reserves as a Result of Reviews of the Bank's Loan  Portfolio,  and The Bank May
Be Required to Further Increase the Allowance for Loan and Lease Losses.

     During the course of a targeted, limited scope review of the loan portfolio
of the Company's wholly-owned subsidiary Heritage Bank, an Alabama state banking
corporation  (the  "Bank"),  and a  concurrent  safety and  soundness  audit and
information systems examination conducted by regulatory authorities,  management
identified certain assets in the Bank's loan portfolio that management  believed
should be  classified.  Due to the erosion in asset  quality  identified  by the
review, the Company increased its allowance for loan losses by $2,000,000 during
the quarterly period ended June 30, 2002.  Additional  review of the Bank's loan
portfolio  subsequently  identified  additional  asset quality  problems,  which
resulted in the Company  increasing  the allowance for loan losses net of charge
offs and recoveries by a total of $20,916,364  for the year ending  December 31,
2002.  As of December 31, 2002,  the  allowance for loan losses on the Company's
consolidated  balance  sheet  totaled  $26,990,594,  compared to  $6,074,230  at
December 31, 2001.

     The fourth  quarter  provision for loan losses in the amount of $16,393,000
contributed  to a  quarterly  loss of  $9,829,000,  and a loss  for the  year of
$14,413,000.  The Board of Directors  and  management  of the Company and of the
Bank engaged in discussions  regarding the Bank's Tier 1 capital that ultimately
led to the Company  entering into a Loan  Agreement  with First  Tennessee  Bank
National  Association dated October 30, 2002,  pursuant to which the Company was
able to borrow up to $7.5  million  (the "First  Tennessee  Loan").  Immediately
following the execution of the Loan Agreement,  the Company drew down $5 million
of the First Tennessee Loan and contributed said loan proceeds to the capital of
the  Bank.  Subsequently,  on  December  27,  2002,  the  Company  drew  down an
additional $1.5 million of the First  Tennessee Loan and  contributed  said loan
proceeds to the capital of the Bank.  Following  the $5 million and $1.5 million
contributions,  the Bank's Tier 1 leverage ratio increased to approximately 5.99
percent as of the year ending December 31, 2002.

     Management has continued the credit review  process,  and this has resulted
in additional  classification of assets following September 30, 2002. Additional
classification  of assets may  result in an  additional  increase  in the Bank's
allowance  for loan losses,  and such  increases  could have a material  adverse
effect on the  Company's  and the  Bank's  financial  condition  and  results of
operations.

     The Board of Directors of the Company  intends to cause  management  of the
Company  and the Bank to take  steps to attain  and  maintain  a Tier 1 leverage
ratio at the Bank of 8 percent by March 31, 2003. The Bank did not

                                       2
<PAGE>
achieve a Tier 1 leverage  ratio of 7.5 percent as of  December  31,  2002,  and
management  believes  the  Bank may not  achieve  a Tier 1  leverage  ratio of 8
percent if the Bank is unable to acquire additional capital.  Failure to achieve
these  capital  ratios  could  subject  the Bank and the  Company to  regulatory
enforcement actions or proceedings.

The Company Has Had a Significant  Change in Operating  Strategy and  Management
Since  March 12,  2002 and There Can Be No  Assurance  that the New  Strategy or
Management Will Result in Improved Financial Condition or Net Income.

     On March 12, 2002, Reginald D. Gilbert,  President, Chief Executive Officer
and  Director  of the  Company  and the Bank,  ended his  relationship  with the
Company  and the Bank.  Harold B.  Jeffreys,  a  Director,  has been  serving as
Interim  President and Chief Executive Officer of the Company until such time as
the Company hires a new President and Chief Executive Officer.  In addition,  on
April 9, 2002, the Board of Directors  accepted the resignations  from the Board
of Directors of three officers of the Bank who had been serving on the Board.

     Effective July 11, 2002, the Board of Directors hired Thomas E. Hemmings as
Chief  Financial  Officer of the  Company.  Mr.  Hemmings  has been charged with
taking  steps to improve  profitability  for the  Company  and,  more  recently,
helping the Company to address its internal controls and procedures.

     On October 23,  2002,  the Board of Directors  engaged  Larry R. Mathews as
President and Chief  Executive  Officer of the Bank.  The decision to retain Mr.
Mathews,  given his  experience in the areas of  management,  credit quality and
internal controls and procedures,  is part of the Company's renewed focus on the
loan  portfolio of the Bank and the overall  credit quality of the Bank, as well
as the operating  controls and  procedures  of the Bank.  The Board of Directors
intends for Mr. Mathews to focus his initial  efforts on improving asset quality
and loan  administration,  continuing the review and  implementation of internal
controls and procedures and improving the Company's overall performance.

     On October 25, 2002, the Board of Directors engaged Don Pruett as Executive
Vice  President and Chief Lending  Officer for the Bank.  The Board of Directors
has given Mr. Pruett the authority and responsibility to implement sound lending
practices,  credit underwriting standards, loan documentation and administration
practices.  Mr.  Pruett  also has been  given  the  overall  responsibility  for
improving the quality of the Bank's loan  portfolio and  maintaining  the Bank's
asset  quality in a manner  that fully  meets safe and sound  banking  practices
requirements and is in compliance with applicable laws and regulations.

     On January 8, 2003,  Heritage  Bank  employed  Robert F.  Harwell,  Jr. and
Michael  Hockman as  President  and Senior  Lender,  respectively,  of the North
Alabama region. Mr. Harwell will have responsibility for both the Huntsville and
Decatur  markets.  Since 1996, he has been employed with a regional bank holding
company in Huntsville  including the last eighteen  months as President of their
North Alabama  Division.  Mr. Hockman served with the same regional bank holding
company prior to accepting his position with the Bank.

     The Company and the Bank have  continued  to add  experienced  personnel to
assist in the review and oversight of important areas such as credit quality and
loan review.  Despite these  changes in  management  and the Board of Directors'
mandate  to   management  to  address  the  Bank's  asset  quality  and  lending
procedures,  and to improve the  Company's  financial  results,  there can be no
assurance that the new management  will be successful in improving the financial
condition or increasing the net income of the Company.

ITEM 1. BUSINESS

GENERAL

     We are a Delaware-chartered  bank holding company headquartered in Decatur,
Alabama.  We offer a broad range of banking and related products and services in
ten locations in Northern  Alabama  through  Heritage  Bank, an Alabama  banking
corporation and our principal  subsidiary.  We had assets of approximately  $593
million,  loans of approximately  $524 million,  deposits of approximately  $526
million and  stockholders'  equity of approximately  $24 million at December 31,
2002.  Our  principal  executive  offices  are located at 1323  Stratford  Road,
Decatur, Alabama 35601, and the telephone number is (256) 355-9500.

                                       3
<PAGE>
     The Company's business is conducted primarily through the Bank. Although we
have no immediate  plans to conduct any other  business,  the Company may engage
directly or indirectly in a number of activities  which the Federal  Reserve has
determined to be so closely related to banking or managing or controlling  banks
as to be a proper incident thereto.

SUBSIDIARY BANK

     At December 31, 2002, the Bank conducted  business  through 10 locations in
Morgan, Madison, Marshall and Jefferson counties, Alabama. We offer a wide range
of commercial and retail banking  services,  including  savings and time deposit
accounts,  personal and commercial  loans and personal and  commercial  checking
accounts.  We seek to provide  superior service to our customers and to become a
vital component of each of the communities which we serve.

RECENT DEVELOPMENTS

     As  previously  reported  in the Form 10-Q  filings of the  Company for the
quarterly  periods  ended June 30,  2002 and  September  30,  2002,  a targeted,
limited scope review of the loan portfolio of the Bank by regulatory authorities
identified certain assets of the Bank that the regulatory  authorities  believed
should be classified.  In connection with such review,  the Company and the Bank
took  steps to  charge  off or  establish  additional  loan  loss  reserves  for
specified assets and to adjust the Bank's levels of loan loss provisions.

     The Board of  Directors  of the Company and the Bank have  imposed  certain
restriction  on the  operations  of the Company and the Bank in order to address
asset  quality  concerns,  operational  controls  and  procedures,  and  capital
deficiencies.  The Bank,  without the prior written  approval of its  regulatory
authorities,  may not declare or pay any cash dividends.  In addition,  the Bank
has undertaken to hire and retain  qualified  lending and operational  personnel
with the specific written authority by the Board of Directors to implement sound
lending, recordkeeping and accounting practices. The Bank also has undertaken to
develop an educational  program for board members and to create a written review
of the Bank's staffing requirements. Our management and staff are working toward
meeting all of these requirements and implementing  policies which will make the
Company and the Bank stronger and more efficient.

     The Board of Directors of the Bank has  determined  to improve and increase
the capital ratios of the Bank,  which have declined as a result of the increase
in the Bank's loan loss reserves.  The Board of Directors of the Company intends
to cause  management  of the  Company  and the Bank to take  steps to attain and
maintain a Tier 1 leverage  ratio of 8 percent and to be  "well-capitalized"  as
defined by the FDIC by March 31, 2003.  Should the Tier 1 leverage ratio fail to
meet or exceed the specified ratio of 8 percent or subsequently  fall below such
level,  the Bank  must  notify  the  regulatory  authorities  and take  steps to
increase  capital  sufficient  to meet  the  required  ratios  within  30  days.
Management  believes  the Bank may fail to achieve a Tier 1 leverage  ratio of 8
percent if the Bank is unable to acquire additional capital.

     The management of the Company and the Bank has aggressively addressed asset
quality,  loan and audit  issues.  The Bank has  charged  off the balance of any
assets classified Loss and one-half of those assets  classified  Doubtful in any
official  report of examination by any of the  regulatory  authorities,  and has
gone further by conducting  additional  reviews of the Bank's loan  portfolio to
insure full knowledge of the Bank's asset quality  issues.  The Bank must reduce
the balance of assets  classified  Substandard or Doubtful in accordance  with a
specific  timetable,  and may  not  extend  additional  credit  to any  borrower
obligated  to the Bank on any  extension  of credit that has been charged off by
the  Bank or  classified  Loss or  Doubtful  as  long  as  such  credit  remains
uncollected.  In addition,  the Bank is obligated to review its existing written
loan policies and to adopt new internal loan review systems to address  problems
with the Bank's loan portfolio.

SERVICES

     We focus on  commercial,  consumer,  residential  mortgage  and real estate
construction lending to customers in our local markets. Our retail loan products
include mortgage banking services,  home equity lines of credit, consumer loans,
including  automobile  loans,  and loans secured by  certificates of deposit and
savings accounts.  Our commercial loan products include working capital lines of
credit,  term loans for both real  estate and  equipment,  letters of credit and
Small Business Administration loans. We also offer a variety of deposit programs
to individuals

                                       4
<PAGE>
and  businesses  and  other  organizations,  including  a  variety  of  personal
checking,  savings,  money market and NOW accounts, as well as business checking
and saving accounts. In addition, we offer individual retirement accounts,  safe
deposit and night depository facilities and additional services such as internet
banking and the sale of traveler's checks, money orders and cashier's checks.

MARKET AREAS

     The Company conducts its banking  activities in Morgan,  Madison,  Marshall
and  Jefferson  counties in Alabama and in the  surrounding  vicinities.  Within
those areas,  the Company has banking  offices located in the cities of Decatur,
Huntsville, Madison, Birmingham and Trussville, Alabama.

LENDING ACTIVITIES

     We offer a range of lending services,  including real estate,  consumer and
commercial   loans,   primarily  to   individuals   and   businesses  and  other
organizations  that are  located  in or conduct a  substantial  portion of their
business in our market  areas.  Our total loans at December 31, 2002 were $523.9
million, or 89.1% of total earning assets. The interest rates we charge on loans
vary  with  the  risk,  maturity  and  amount  of the loan  and are  subject  to
competitive pressures,  money market rates, availability of funds and government
regulations. We do not have any foreign loans.

LOAN PORTFOLIO

     Real  Estate  Loans  -  Loans  secured  by real  estate  are a  significant
component of our loan portfolio,  constituting $371.7 million, or 71.0% of total
loans  at  December  31,  2002.   Our  primary  type  of  real  estate  loan  is
single-family  first mortgage  loans,  construction  loans and  acquisition  and
development loans, typically structured with fixed or adjustable interest rates,
based on market conditions. Fixed rate loans usually have terms of five years or
less, with payments  through the date of maturity  generally based on a 15 to 30
year amortization schedule.  Adjustable rate loans generally have a term of 5 to
30 years. We typically charge an origination fee on these mortgage loans.

     Our nonresidential  mortgage loans include commercial,  industrial and land
loans. The commercial real estate loans are typically used to provide  financing
for retail establishments,  offices and manufacturing  facilities.  We generally
require  nonresidential  mortgage loans to have an 80%  loan-to-value  ratio and
usually underwrite commercial loans on the basis of the borrower's cash flow and
ability to service the debt from  earnings,  more than on the basis of the value
of the collateral.  Terms are typically five years and may have payments through
the  date  of  maturity  based  on  a  15  to  30  year  amortization  schedule.
Construction  loans usually have a term of twelve  months and generally  require
personal guarantees.

     Commercial, Financial and Agricultural Loans - At December 31, 2002, we had
general  commercial,   financial  and  agricultural  loans  of  $132.2  million,
comprising 25.2% of the total loan portfolio. Commercial loans consist primarily
of operating  loans made to  manufacturers,  wholesalers and retailers of goods,
service companies and other industries.  We concentrate on making loans to small
and medium size companies.  The primary  repayment risk for commercial  loans is
the failure of the borrower due to economic or  financial  factors.  Although we
typically look to a commercial  borrower's cash flow as the principal  source of
repayment, many commercial loans are secured by inventory,  equipment,  accounts
receivable and other assets.  These loans are typically made on terms up to five
years at  fixed or  variable  rates  and are  secured  by  accounts  receivable,
inventory or, in the case of equipment loans, the financed equipment. We attempt
to reduce our credit  risk on  commercial  loans by  limiting  the loan to value
ratio to 65% on loans  secured by accounts  receivable  or inventory  and 75% on
equipment  loans.   Agricultural   loans  are  comprised  of  loans  to  finance
agricultural production,  loans to farmers and loans secured by farmland. We are
able to  manage  the  risks  inherent  in these  types of loans due to our small
number of agricultural loans.

     Consumer Loans - At December 31, 2002,  loans to  individuals  for personal
expenditures totaled $19.9 million,  comprising some 3.8% of our loan portfolio.
These  consumer  loans  include  loans  to  purchase  automobiles,  recreational
vehicles,  mobile homes,  appliances and boats, and the Bank continues to hold a
small amount of credit card loans.  Consumer loans are underwritten based on the
borrower's income, current debt, credit history and collateral.  Terms generally
range  from four to five  years on  automobile  loans and one to three  years on
other consumer loans.

                                       5
<PAGE>
CREDIT PROCEDURES AND REVIEW

     The  regulatory  authorities  found  significant  weaknesses  with our loan
policy,  including our loan approval process,  credit analysis,  loan review and
other key lending support functions. As part of our response to these issues, we
have revised the Bank's loan policy to address areas the regulatory  authorities
found to be  inadequate,  and have hired  additional  personnel  to upgrade  our
compliance in these areas.

     Loan  Approval - We attempt to minimize loan losses  through  various means
and use generally recognized  underwriting  criteria.  In particular,  on larger
credits,  we  generally  rely on the cash  flow of a  debtor  as the  source  of
repayment  and  secondarily  on the  value  of  the  underlying  collateral.  In
addition,  we attempt to utilize  shorter loan terms in order to reduce the risk
of a decline in the value of such  collateral.  We have  reduced  the  unsecured
lending  authority of our officers and have reduced the  overdraft  authority of
our officers in order to address certain loan portfolio issues.

     We address  repayment  risks by adhering to internal  credit  policies  and
procedures  that include officer and customer  lending  limits,  a multi-layered
loan approval process for larger loans, periodic  documentation  examination and
follow-up  procedures  for any exceptions to credit  policies.  The point in our
loan  approval  process at which a loan is  approved  depends on the size of the
borrower's  credit  relationship with the Bank. We require approval by the Board
of Directors of the Bank for new advances of credit to any borrowers  with loans
classified  Substandard  and  prohibit the advance of  additional  credit to any
borrower with loans classified Doubtful or Loss.

     Loan Review - The Bank has a loan review process  designed to promote early
identification of credit quality problems. All lending officers are charged with
the  responsibility  of  reviewing  all  past  due  loans  in  their  respective
portfolios.  Lending officers  establish a watch list of loans to be reviewed by
management and the Board of Directors.  Lending  officers also conduct a regular
centralized  internal  review  which  tests  compliance  with  loan  policy  and
documentation for all loans over $250,000 and a sampling of smaller loans.

     The entire loan portfolio  undergoes close scrutiny to maintain its quality
and diversity and to assure proper documentation. This policy also requires that
each loan have an agreed upon repayment  schedule and gives  individual  lending
officers  the   responsibility  of  obtaining,   and  analyzing  current  credit
information.  Maximum  loan to value  ratios  and terms are  established  in the
policy for the various types of loans. The criteria  outlined in the Bank's loan
policy follows  guidelines  provided by banking  regulators.  Through the Bank's
credit policy and credit review procedures,  management believes that it is able
to identify areas of concern in the loan portfolio and to take corrective action
when necessary.

DEPOSITS

     Core deposits are our principal source of funds, constituting approximately
71.4% of our total  deposits as of December 31, 2002.  Core deposits  consist of
demand deposits,  interest-bearing  transaction  accounts,  savings deposits and
certificates  of deposit  (excluding  certificates  of  deposits  and other time
deposits over $100,000). Transaction accounts include checking, money market and
NOW   accounts   that  provide  the  Bank  with  a  source  of  fee  income  and
cross-marketing  opportunities,  as well as a low-cost source of funds. Time and
savings  accounts  also  provide a  relatively  stable  and  low-cost  source of
funding.  The largest source of funds for the Bank is  certificates  of deposit.
Certificates  of deposit in excess of $100,000  are held  primarily by customers
outside of our market areas.

     Deposit  rates are  reviewed  weekly by senior  management.  We believe our
rates are competitive with those offered by competing institutions in our market
areas;  however,  we focus on customer  service,  not high rates, to attract and
retain deposits.

COMPETITION

     The   banking   industry  in  Alabama  is  highly   competitive,   and  our
profitability depends principally on our ability to compete in our market areas.
The area is  dominated  by a number of major  banks and bank  holding  companies
which have substantially greater resources,  and numerous offices and affiliates
operating over wide geographic  areas. We encounter  strong  competition both in
making loans and attracting deposits.  Competition among financial  institutions
is based upon interest rates offered on deposit accounts, interest rates charged
on loans and other  credit and service  charges.  Customers  also  consider  the
quality  and  scope  of  the  services  rendered,  the

                                       6
<PAGE>
convenience  of  banking  facilities  and,  in the case of  loans to  commercial
borrowers,  relative  lending limits,  and may also consider the fact that other
banks offer different  services.  Many of the large regional banks against which
we compete have  significantly  greater lending limits and may offer  additional
products;  however,  we believe we have been able to  compete  effectively  with
other financial institutions,  regardless of their size, by emphasizing customer
service and by  providing a wide array of  services.  In  addition,  most of our
non-bank  competitors are not subject to the same extensive federal  regulations
that govern bank holding companies and federally insured banks. See "Supervision
and  Regulation."  Competition  may further  intensify if  additional  financial
services companies enter markets in which we conduct business.

EMPLOYEES

     As of December 31, 2002, the Company employed approximately 133 individuals
of which approximately 124 were full-time employees.

SUPERVISION AND REGULATION

     The Company,  as a bank holding  company under the Bank Holding Company Act
of 1956, as amended  ("BHCA"),  is subject to the  supervision,  examination and
reporting  requirements  of the Federal Reserve Board and the BHCA. The BHCA and
other federal laws subject bank holding 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.  The  Company is required to file with the
Federal  Reserve  periodic  reports  and such other  information  as the Federal
Reserve may request.  The Federal Reserve conducts  examinations of the Company,
and also may examine its  subsidiaries.  The State of Alabama  does not regulate
bank holding companies.

     In November 1999,  Congress  enacted the  Gramm-Leach-Bliley  Act ("GLBA"),
which  made  substantial  revisions  to the  statutory  restrictions  separating
banking activities from certain other financial activities. Under the GLBA, bank
holding  companies  that are  "well-capitalized"  and  "well-managed"  and whose
subsidiary  banks  have  satisfactory  or better  ratings  under  the  Community
Reinvestment  Act of 1977,  as  amended  (the  "CRA"),  and meet  certain  other
conditions can elect to become "financial holding companies."  Financial holding
companies  and  their  subsidiaries  are  permitted  to  acquire  or  engage  in
previously  impermissible  activities,  such as insurance  underwriting,  travel
agency  activities,  broad insurance agency  activities,  merchant banking,  and
other  activities that the Federal Reserve  determines to be financial in nature
or  complimentary  to  financial  activities.  In  addition,  under the merchant
banking authority added by the GLBA and Federal Reserve  regulations,  financial
holding  companies  are  authorized  to  invest  in  companies  that  engage  in
activities  that are not financial in nature,  as long as the financial  holding
company  makes its  investment  with the  intention of limiting the terms of its
investment,  does not manage the company on a day-to-day basis, and the investee
company  does not  cross-market  with  any of the  financial  holding  company's
controlled depository  institutions.  Financial holding companies continue to be
subject to the overall  oversight and supervision of the Federal Reserve.  While
the Company has not elected to become a financial  holding company,  and may not
do so at the present time, it may elect to do so in the future.

     The  supervision  and  regulation  of  bank  holding  companies  and  their
subsidiaries  are 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,  not for the  protection  of bank
holding  company  stockholders  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  violation  of  laws  and
regulations.  The following description  summarizes some of the laws to which we
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 Bank is subject  to  regulation,  supervision  and  examination  by the
Federal  Reserve,  the Federal Deposit  Insurance  Corporation  ("FDIC") and the
Alabama  Banking  Department.  As a member of the FDIC, the Bank's  deposits are
insured to the maximum extent provided by law.

     Regulatory  Restrictions  on  Dividends - The payment of  dividends  to the
Company  by the Bank is subject  to  certain  restrictions  imposed by state and
federal  banking laws,  regulations and  authorities.  The Federal Reserve Board
requires that bank holding  companies  should pay cash dividends on common stock
only out of income

                                       7
<PAGE>
available  over the past  year and only if  prospective  earnings  retention  is
consistent with the bank holding  company's  expected future needs and financial
condition.  This 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 for its banking  subsidiaries.  The prior approval
of the Federal Reserve is required if the total of all dividends declared by the
state  member bank in any  calendar  year will exceed the sum of such bank's net
profits for the year and its retained net profits for the preceding two calendar
years,  less any required  transfers to surplus.  Federal law also prohibits any
state member bank from paying  dividends  that would be greater than such bank's
undivided profits after deducting  statutory bad debt reserves in excess of such
bank's allowance for loan losses. The Bank is currently prohibited from paying a
cash dividend to the Company without seeking prior written approval from federal
banking authorities.

     Under  Alabama  law, a bank may not pay a dividend  in excess of 90% of its
net earnings  until the bank's  surplus is equal to at least 20% of its capital.
The Bank is also  required  by Alabama  law to obtain the prior  approval of the
Superintendent  of the State  Banking  Department  of Alabama for its payment of
dividends  if the total of all  dividends  declared by the Bank in any  calendar
year will  exceed  the total of (1) the  Bank's  net  earnings  (as  defined  by
statute) for that year, plus (2) its retained net earnings for the preceding two
years, less any required transfers to surplus. No dividends may be paid from the
Bank's surplus  without the prior written  approval of the  Superintendent.  The
Bank is currently  prohibited  from paying  dividends to the Company without the
prior approval of the Superintendent of the State Banking Department.

     In addition, federal bank regulatory authorities have authority to prohibit
the payment of dividends by bank holding  companies if their actions  constitute
unsafe or  unsound  practices.  The  Federal  Reserve  Board has issued a policy
statement  on the payment of cash  dividends by bank  holding  companies,  which
expresses  the  Federal  Reserve  Board's  view  that  a  bank  holding  company
experiencing  earnings  weaknesses should not pay cash dividends that exceed its
net  income or that could  only be funded in ways that  weaken the bank  holding
company's  financial  health,  such as by borrowing.  Our ability and the Bank's
ability to pay  dividends  in the  future is  currently,  and could be  further,
influenced by bank regulatory policies and capital guidelines.

     Source of Strength - Under Federal  Reserve  Board  policy,  a bank holding
company  is  expected  to act as a source  of  financial  strength  for its bank
subsidiary and commit resources to its support.  This support may be required by
the  Federal  Reserve  Board at  times  when,  absent  this  policy,  additional
investments  in a troubled bank may not  otherwise be warranted.  A bank holding
company,  in certain  circumstances,  could be required to guarantee the capital
plan of an undercapitalized  banking subsidiary.  In addition, any capital loans
by a bank  holding  company to any of its  depository  institution  subsidiaries
likely will be unsecured and  subordinate in right of payment to deposits and to
certain other indebtedness of the banks.

     Under  the  Federal  Deposit   Insurance  Act  ("FDIA"),   an  FDIC-insured
depository  institution  can be  held  liable  for  any  loss  incurred  by,  or
reasonably  expected  to be  incurred  by, the FDIC in  connection  with (1) the
default of a common controlled  FDIC-insured  depository  institution or (2) any
assistance  provided  by  the  FDIC  to  any  commonly  controlled  FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the  appointment  of a  conservator  or receiver,  and "in danger of default" is
defined  generally as the  existence  of certain  conditions  indicating  that a
default is likely to occur in the absence of regulatory  assistance.  The FDIC's
claim  for  damages  is  superior  to  claims  of  stockholders  of the  insured
depository  institution  or its holding  company but is subordinate to claims of
depositors,  secured  creditors  and  holders of  subordinated  debt (other than
affiliates)  of the commonly  controlled  FDIC-insured  depository  institution.
Common controlled  FDIC-insured  depository  institutions are liable to the FDIC
for any losses incurred in connection with the failure of a commonly  controlled
institution.

     Safe and Sound Banking Practices - Bank holding companies are not permitted
to engage in unsafe or unsound banking practices.  The Federal Reserve Board has
broad  authority  to prohibit  activities  of bank holding  companies  and their
non-banking  subsidiaries which represent unsafe or unsound banking practices or
which constitute  violations of laws or regulations,  and can assess civil money
penalties for certain  activities  conducted on a knowing or 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.

     The Federal Reserve adopted the Federal Financial Institutions  Examination
Council's   ("FFIEC")   updated  rating  system  which  assigns  each  financial
institution a confidential  composite "CAMELS" rating based on an

                                       8
<PAGE>
evaluation and rating of six essential components of an institution's  financial
condition and operations including capital adequacy, asset quality,  management,
earnings,  liquidity and sensitivity to market risk. For most institutions,  the
FEIEC has indicated that market risk is rated based upon, but not limited to, an
assessment of the  sensitivity  of the financial  institution's  earnings or the
economic  value of its  capital to adverse  changes in interest  rates,  foreign
exchange rates,  commodity  prices,  or equity prices;  management's  ability to
identify,  measure,  monitor and control exposure to market risk; and the nature
and complexity of interest rate risk exposure arising from nontrading positions.

     Capital Adequacy  Requirements - We are required to comply with the capital
adequacy  standards  established by the Federal  Reserve Board,  and the Bank is
subject  to  additional  requirements  of  the  FDIC  and  the  Alabama  Banking
Department.  The Federal Reserve Board has adopted two basic measures of capital
adequacy for bank holding companies:  a risk-based measure and leverage measure.
All applicable capital standards must be satisfied for a bank holding company to
be in compliance.

     The  risk-based   capital   standards  are  designed  to  make   regulatory
requirements more sensitive to differences in risk profiles among banks and bank
holding companies,  to account for off-balance-sheet  exposure,  and to minimize
disincentives  for holding liquid capital assets.  Assets and  off-balance-sheet
items are assigned to broad risk categories,  each with appropriate weights. The
resulting   capital   ratios   represent   capital  as  a  percentage  of  total
risk-weighted assets and off-balance-sheet items.

     The minimum  guidelines for the ratio ("Total Risk-Based Capital Ratio") of
total capital ("Total Capital") to  risked-weighted  assets  (including  certain
off-balance sheet items, such as standby letters of credit) is 8%. At least half
of Total  Capital must be comprised of common stock,  minority  interests in the
equity accounts of consolidated subsidiaries,  noncumulative perpetual preferred
stock,  and a limited  amount of  cumulative  perpetual  preferred  stock,  less
goodwill and other  intangible  assets  ("Tier 1 Capital").  The  remainder  may
consist of subordinated  debt,  other preferred  stock,  and a limited amount of
loan loss reserves ("Tier 2 Capital").

     In addition,  the Federal  Reserve Board has established  minimum  leverage
ratio  guidelines  for bank  holding  companies  and state member  banks.  These
guidelines  provide for a minimum ratio (the "Leverage Ratio") of Tier 1 Capital
to average assets,  less goodwill and certain other intangible assets, of 3% for
bank holding  companies that meet certain specified  criteria,  including having
the highest regulatory  rating.  All other bank holding companies  generally are
required to maintain a Leverage Ratio of at least 3%, plus an additional cushion
of 1% - 2%, if the institution has less than the highest  regulatory rating. The
guidelines also provide that bank holding companies 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. Furthermore,  the Federal Reserve Board has indicated that
it will  consider  a  tangible  Tier 1 Capital  Leverage  Ratio  (deducting  all
intangibles) and other indicia of capital  strength in evaluating  proposals for
expansion or new activities.

     The  Federal  Deposit  Insurance   Corporation   Improvement  Act  of  1991
("FDICIA"),  among other things,  requires the federal banking  agencies to take
"prompt  corrective action" regarding  depository  institutions that do not meet
minimum  capital  requirements.  FDICIA  establishes  five capital tiers:  "well
capitalized,"  "adequately  capitalized,"   "undercapitalized,"   "significantly
undercapitalized," and "critically undercapitalized." A bank's capital tier will
depend upon how its capital levels compare to various  relevant capital measures
and certain other factors, as established by regulations.

     All of the federal banking agencies have adopted  regulations  establishing
relevant  capital  measures and relevant  capital levels.  The relevant  capital
measures are the Total Capital  ratio,  Tier 1 capital  ratio,  and the leverage
ratio.  Under the regulations,  a state member bank will be (i) well capitalized
if it has a Total Capital ratio of 10% or greater,  a Tier 1 capital ratio of 6%
or greater,  a Tier 1 leverage  ratio of 5% or greater and is not subject to any
written  agreement,   order,  capital  directive  or  prompt  corrective  action
directive  by a federal bank  regulatory  agency to meet and maintain a specific
capital level for any capital measure,  (ii) adequately  capitalized if it has a
Total Capital  ratio of 8% or greater,  a Tier 1 capital ratio of 4% or greater,
and a leverage  ratio of 4% or  greater  (3% in  certain  circumstances),  (iii)
undercapitalized  if it has a Total  Capital  ratio  of less  than  8%, a Tier 1
capital  ratio of less than 4% (3% in  certain  circumstances),  and a  leverage
ratio of less than 4%,  (iv)  significantly  undercapitalized  if it has a Total
Capital  ratio of less  than 6%, a Tier 1  capital  ratio of less  than 3% and a
leverage  ratio  of  less  than  3% or (v)  critically  undercapitalized  if its
tangible  equity  is  equal to or less  than 2% of  average  quarterly  tangible
assets.

                                       9
<PAGE>

     As of December 31, 2002, the consolidated capital ratios of the Company and
the Bank were as follows:

<TABLE>
<CAPTION>

                                             Regulatory
                                               Minimum                 Company                       Bank
<S>  <C>                                      <C> <C>                   <C>                          <C>
Tier 1 leverage ratio                         3.0-5.0%                  4.94%                        5.99%
Tier 1 Risk-based capital ratio                  4%                     6.09%                        7.68%
Total Risk-based capital ratio                   8%                     7.81%                        8.98%
</TABLE>


     As of December  31,  2002,  both the Company and the Bank were  "adequately
capitalized."

     Acquisitions  by Bank  Holding  Companies  - The BHCA  requires  every bank
holding  company to obtain prior approval of the Federal Reserve Board before it
(1) may  acquire  all or  substantially  all of the assets of any bank;  (2) may
acquire  direct or  indirect  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; or (3) may merge or  consolidate
with any other bank holding  company.  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 other factors.

     The BHCA further  provides  that the Federal  Reserve Board may not approve
any  transaction  that would result in a monopoly or would be in  furtherance of
any  combination  or  conspiracy  to  monopolize  or attempt to  monopolize  the
business of banking in any section of the United States,  or the effect of which
may be  substantially  to lessen  competition or to tend to create a monopoly in
any section of the country, or that in any other manner would be in restraint of
trade,  unless the  anti-competitive  effects of the  proposed  transaction  are
clearly  outweighed by the public  interest in meeting the convenience and needs
of the  communities  to be served.  The  Federal  Reserve  Board is  required to
consider the financial and managerial resources and future prospects of the bank
holding  companies and banks  concerned,  including  capital  adequacy,  and the
convenience  of the community to be served  including  the parties'  performance
under the Community Reinvestment Act.

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

     In  addition,  under the BHCA,  any company is required to obtain the prior
approval of the Federal  Reserve  Board before  acquiring  25% (and bank holding
companies are required to obtain prior  approval from the Federal  Reserve Board
before  acquiring 5%) or more of the outstanding  common stock of a bank holding
company, or otherwise obtain control or a "controlling  influence" over the bank
holding company.

     Branching - The BHCA, as amended by the  interstate  banking  provisions of
the  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994 (the
"Interstate  Banking Act") repealed prior  statutory  restrictions on interstate
banking,  such that a bank  holding  company may  acquire a bank  located in any
other state,  and any bank holding  company located outside Alabama may lawfully
acquire any  Alabama-based  bank  regardless  of state law to the  contrary,  in
either case subject to certain deposit-percentage,  aging requirements and other
restrictions.  In addition,  the Interstate  Banking Act generally provided that
after June 1, 1997, national state-chartered banks may branch interstate through
acquisition  of banks in other  states.  The State of Alabama has laws  relating
specifically to acquisition of banks,  bank holding companies and other types of
financial  institutions in each state, by financial  institutions that are based
in,  and not based  in,  those  states.  Alabama  law has set five  years as the
minimum age of banks which may be acquired.

     Restrictions on Transactions  With Affiliates and Insiders - The Company is
a legal entity  separate and distinct  from the Bank.  Transactions  between the
Bank and its affiliates,  including the Company, are subject to Sections

                                       10
<PAGE>
23A  and  23B  of  the  Federal  Reserve  Act.   Section  23A  defines  "covered
transactions,"  which include  extensions of credit, and limits a bank's covered
transactions  with any affiliate to 10% of such bank's capital and surplus.  All
covered and exempt  transactions  between a bank and its  affiliates  must be on
terms and conditions consistent with safe and sound banking practices, and banks
and their  subsidiaries are prohibited from purchasing  low-quality  assets from
the  bank's  affiliates.  Finally,  Section  23A  requires  that all of a bank's
extensions  of credit to an affiliate  be  appropriately  secured by  acceptable
collateral, generally United States government or agency securities. Section 23B
of the Federal Reserve Act generally requires that certain  transactions between
a bank and its respective  affiliates be on terms  substantially the same, or at
least as favorable to such 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
stockholders  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 bank 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.  State
banking laws also have similar provisions.

     FDIC Insurance  Assessments - Each financial institution is assigned to one
of  three  capital  groups  -  well  capitalized,   adequately   capitalized  or
undercapitalized  - and  further  assigned  to one of three  subgroups  within a
capital  group,  on the basis of supervisory  evaluations  by the  institution's
primary  federal and, if  applicable,  state  regulators  and other  information
relevant  to the  institution's  financial  condition  and the risk posed to the
applicable insurance fund. The actual assessment rate applicable to a particular
bank will, therefore,  depend in part upon the risk assessment classification so
assigned to the bank by the FDIC.

     Under the FDIA,  insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices,  is in
an unsafe or unsound  condition  to continue  operations,  or has  violated  any
applicable law, regulation, rule, order, or condition imposed by the FDIC.

     Community  Reinvestment  Act - The  Company and the Bank are subject to the
Community   Reinvestment  Act  ("CRA").  The  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.  The CRA does not  establish
specific lending requirements or programs for financial  institutions,  nor does
it limit an  institution's  discretion  to  develop  the types of  products  and
services  that  it  believes  are  best  suited  to  its  particular  community,
consistent with the CRA. The CRA requires a bank's primary federal regulator, in
connection with its examination of the institution,  to assess the institution's
record of assessing and meeting the credit needs of the community served by that
institution,  including low- and moderate-income neighborhoods. These regulatory
assessments are utilized by the Federal Reserve when considering applications to
establish  branches,  merger applications and applications to acquire the assets
and assume the liabilities of another bank. The Financial  Institutions  Reform,
Recovery  and  Enforcement  Act of  1989  ("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 by federal banking  agencies in connection with
the filing of an application to acquire ownership or control of shares or assets
of a bank or  thrift  or to merge  with  any  other  bank  holding  company.  An
unsatisfactory record can substantially delay or block the transaction. The Bank
has received a satisfactory CRA rating from federal banking agencies.

     Current CRA  Regulations  rate banks based on their actual  performance  in
meeting  community  credit needs.  CRA  performance  is evaluated by the Federal
Reserve,  the  Bank's  primary  federal  regulator,  using a  lending  test,  or
investment test, and a service test. The Federal Reserve also will consider: (i)
demographic data about the community;  (ii) the bank's capacity and constraints;
(iii) the bank's product offerings and business  strategy;  and (iv) data on the
prior performance of the bank and similarly-situated lenders. As a result of the
GLBA,  CRA  agreements  with private  parties  must be disclosed  and annual CRA
reports  must be made to a bank's  primary  federal  regulator.  A bank  holding
company will not be permitted to become a financial  holding  company and no new
activities  authorized  under GLBA may be commenced by a holding company or by a
bank financial  subsidiary if any of its bank subsidiaries  received less than a
"satisfactory" CRA rating in its latest CRA examination.

                                       11
<PAGE>
     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 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,  making loans to or
engaging in other types of transactions with such customers.

LEGISLATIVE AND REGULATORY CHANGES

     Various  bills are routinely  introduced in the United States  Congress and
the  Alabama   legislature   with  respect  to  the   regulation   of  financial
institutions. Certain of these proposals, if adopted, could significantly change
the regulation of banks and the financial services  industry.  We cannot predict
whether  any of these  proposals  will be  adopted  or,  if  adopted,  how these
proposals would affect us.

EFFECT ON ECONOMIC ENVIRONMENT

     The policies of regulatory  authorities,  especially the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries.  Among the means available to the
Federal  Reserve Board to affect the money supply are open market  operations in
U.S.  Government  securities,  changes  in the  discount  rate  on  member  bank
borrowings  and changes in reserve  requirements  against  member bank deposits.
These means are used in varying  combinations  to influence  overall  growth and
distribution of bank loans,  investments and deposits,  and their use may affect
interest rates charged on loans or paid for deposits.

     Federal  Reserve  Board  monetary  policies  have  materially  affected the
operating  results of commercial  banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on our business and earnings cannot be predicted.

                                       12
<PAGE>
STATISTICAL DISCLOSURE

Statistical and other information regarding the following items are set forth in
"Item 7 -  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations" in the pages indicated below. Page(s)

<TABLE>
<CAPTION>

<S>                                                                                                         <C>
Loan Portfolio...............................................................................................20

Selected Loan Maturity and Interest Rate Sensitivity.........................................................21

Securities Portfolio.........................................................................................21

Securities Portfolio Maturity Schedule.......................................................................22

Maturities of Large Time Deposits............................................................................23

Maturities of Long-Term Debt.................................................................................24

Return on Equity and Assets..................................................................................25

Capital Adequacy Ratios......................................................................................25

Interest Rate Sensitivity Analysis...........................................................................27

Average Balances, Interest Income/Expense and Yields/Rates...................................................29

Rate/Volume Variance Analysis................................................................................30

Summary of Loan Loss Experience..............................................................................32

Allocation of Loan Loss Reserve..............................................................................33

Nonperforming Assets.........................................................................................34

Noninterest Income...........................................................................................34

Noninterest Expenses.........................................................................................35

Interest Rate Risk...........................................................................................36
</TABLE>

                                       13
<PAGE>
ITEM 2. PROPERTIES

     Our  headquarters  are  located at 1323  Stratford  Road,  Decatur,  Morgan
County,  Alabama.  We operate eight banking offices throughout Northern Alabama.
We own  two and  lease  six of  these  offices.  Rental  expense  on the  leased
properties totaled approximately $635,667 in 2002.

ITEM 3. LEGAL PROCEEDINGS

     The Bank has received  demand letters from two former  directors,  officers
and employees of the Bank.  The Bank  terminated  such officers in November 2002
for cause, as such term is defined by their respective employment contracts. One
officer has claimed  monetary  compensation,  stock options and attorneys' fees,
while the second  officer has claimed  monetary  compensation,  as well as stock
options and payment of country club dues for two years following the date of his
termination.  The Bank maintains  that it terminated  each of these officers for
"cause"  and  that  it is  under  no  obligation  to  pay  them  any  additional
compensation.  On March 14, 2003, one of these officers filed a lawsuit  against
the Bank in the Circuit Court for Morgan  County,  Alabama,  alleging  breach of
contract and  demanding  certain  payments and benefits  allegedly due under his
employment  agreement.  The Bank intends to vigorously defend this and any other
action brought against the Bank by either of the officers,  and does not believe
that the final outcome will have a material impact on the Bank or the Company.

     While we may from  time-to-time  be a party to  various  legal  proceedings
arising  from the  ordinary  course  of  business,  we  believe  that  there are
currently no other  proceedings  threatened  or pending  against us at this time
that will, individually or in the aggregate,  materially or adversely affect our
business, financial condition or results of operations.

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

     No matters were submitted to a vote of  stockholders  of the Company during
the fourth quarter of the fiscal year covered by this report.

                                     PART II

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

     The Company is not listed on any exchange and there is no organized trading
market for the shares of its common  stock.  When  shares are  traded,  they are
traded in privately negotiated transactions.  Therefore, no reliable information
is available as to trades of the Company's  common stock, or as to the prices at
which such common stock has traded.

     Management has reviewed the limited information available to the Company as
to the ranges at which shares of the Company's  common stock has been sold.  The
following table sets forth, on a per share basis for the periods indicated,  the
high and low sale prices of the Company's common stock.
<TABLE>
<CAPTION>
                                               Fiscal 2002                       Fiscal 2001
                                        -----------------------           -----------------------
                                           High          Low                 High          Low
                                        ---------     ---------           ----------    ---------
<S>                                      <C>          <C>                  <C>          <C>
         First Quarter                   $ 12.50      $   8.00             $  13.00     $  12.50
         Second Quarter                  $ 12.00      $  10.00             $  13.00     $  12.00
         Third Quarter                   $ 10.50      $   9.50             $  13.00     $  12.00
         Fourth Quarter                  $  9.50      $   9.50             $  12.50     $   8.00
</TABLE>

     As of December 31, 2002, the Company had approximately  1,116  stockholders
of record.

     Holders of our common stock are entitled to receive  dividends when, as and
if  declared  by our board of  directors.  We have never paid  dividends  on our
common  stock.  We conduct our  principal  business  through  our  subsidiaries,
primarily the Bank. We derive cash available to pay dividends primarily,  if not
entirely,   from

                                       14
<PAGE>
dividends paid by our  subsidiaries.  There are certain  restrictions that limit
the Bank's  ability to pay dividends to us and on our ability to pay  dividends.
In  addition,  the Bank is  currently  prohibited  from paying  dividends to the
Company  without the prior approval of the  Superintendent  of the State Banking
Department.  Our ability to pay dividends to our stockholders will depend on our
earnings  and  financial  condition,  liquidity  and capital  requirements,  the
general  economic and regulatory  climate,  our ability to service any equity or
debt obligations senior to our common stock and other factors deemed relevant by
our board of  directors.  We currently  intend to retain any future  earnings to
fund the  development  and growth of our business.  Therefore,  we do not at the
present  time  anticipate  paying any cash  dividends on our common stock in the
foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

     The following table provides  information as of December 31, 2002 regarding
compensation plans (including individual compensation  arrangements) under which
common stock of the Company is authorized for issuance.

<TABLE>
<CAPTION>

                                               EQUITY COMPENSATION PLAN INFORMATION

                                                                                             Number of securities
                                                                                            remaining available for
                                Number of Securities to be    Weighted-average exercise      future issuance under
                                  issued upon exercise of       price of outstanding       equity compensation plans
                                   outstanding options,         options, warrants and        (excluding securities
                                    warrants and rights                rights              reflected in column (a))
        Plan Category                       (a)                          (b)                          (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
<S>                                      <C>                            <C>                           <C>
Equity Compensation
Plans Approved by
Security Holders                         3,239,016                      3.75                          --

Equity Compensation
Plans not Approved by
Security Holders                            --                           --                           --

Total                                    3,239,016                      3.75
</TABLE>

See Note 13 to the Consolidated  Financial Statements for information  regarding
the material  features of the above plans. Each of the above plans provides that
the number of shares  with  respect to which  options  may be  granted,  and the
number of shares of Company Common Stock subject to an outstanding option, shall
be  proportionately  adjusted in the event of a subdivision or  consolidation of
shares or the  payment of a stock  dividend  on Company  Common  Stock,  and the
purchase  price  per  share of  outstanding  options  shall  be  proportionately
revised.

                                       15
<PAGE>
                            MANAGEMENT'S STATEMENT ON
                     RESPONSIBILITY FOR FINANCIAL REPORTING
                     HERITAGE FINANCIAL HOLDING CORPORATION

     The management of Heritage Financial Holding Corporation is responsible for
the content and integrity of the consolidated financial statements and all other
financial  information included in this annual report.  Management believes that
the  financial  statements  have been  prepared  in  conformity  with  generally
accepted accounting  principles applied on a consistent basis to reflect, in all
material  respects,  the  substance  of events and  transactions  that should be
included,  and that the other  financial  information  in the  annual  report is
consistent with those financial statements. The financial statements necessarily
include amounts that are based on management's best estimates and judgments.

     Management   maintains   and  depends  upon  Heritage   Financial   Holding
Corporation's  accounting systems and related systems of internal controls.  The
internal  control systems are designed to ensure that  transactions are properly
authorized and recorded in the Company's  financial  record and to safeguard the
Company's assets from material loss or misuse. The Company maintains an internal
audit staff which  monitors  compliance  with the Company's  systems of internal
controls and reports to  management  and to the audit  committee of the board of
directors.

     The audit  committee of the board of directors,  composed solely of outside
directors,  has  responsibility  for  recommending to the board of directors the
appointment  of  the  independent   auditors  for  Heritage   Financial  Holding
Corporation. The committee meets periodically with the internal auditors and the
independent  auditors  to  review  the scope and  findings  of their  respective
audits.  The internal  auditors,  independent  auditors and management each have
full and free access to meet privately as well as together with the committee to
discuss internal controls,  accounting,  auditing,  or other financial reporting
matters.

     The  consolidated   financial  statements  of  Heritage  Financial  Holding
Corporation have been audited by Schauer, Taylor, Cox, Vise, Morgan, and Fowler,
P.C.,  independent  auditors,  who were  engaged to express an opinion as to the
fairness of presentation of such financial statements.



/s/ Thomas E. Hemmings                               /s/ Harold B. Jeffreys
---------------------------                          ---------------------------
Thomas E. Hemmings                                   Harold B. Jeffreys
Chief Financial Officer                              Interim President and
                                                     Chief Executive Officer

                                       16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

     The following  table sets forth selected  financial data and ratios for the
Company  and  should  be read in  conjunction  with our  consolidated  financial
statements including the related notes and "Management's Discussion and Analysis
of  Financial  Condition  and  Results  of  Operations."  See "Item 8.  Heritage
Financial Holding Corporation and Subsidiaries Financial Statements."

<TABLE>
<CAPTION>

                                                                        Years ended December 31,
                                                     ---------------------------------------------------------------
                                                         2002         2001         2000         1999         1998
                                                     -----------  -----------   ----------   -----------  ----------
                                                              (Dollars in thousands except per share data)
Earnings Summary:
<S>                                                  <C>          <C>           <C>          <C>          <C>
    Interest income..................................$    41,939  $    44,253   $   35,660   $    17,248  $    9,383
    Interest expense.................................     21,742       28,594       22,018         9,874       5,399
    Net interest income..............................     20,197       15,659       13,642         7,374       3,984
    Provision for loan losses........................     29,469        3,602        3,389         1,808         828
    Net interest income (loss) after
      provision for loan losses......................     (9,272)      12,057       10,253         5,566       3,156
    Noninterest income...............................      2,275        1,556        1,039           642         397
    Noninterest expense..............................     15,303       10,023        8,113         4,952       2,937
    Income (loss) before income taxes................    (22,300)       3,590        3,179         1,256         616
    Income taxes.....................................     (7,887)       1,224          991           395         197
    Net income (loss)................................    (14,413)       2,366        2,188           861         419

Per Common Share Data:

    (Retroactively adjusted for effects of stock splits)

    Net income (loss) - basic........................$     (1.65) $      0.28   $     0.26   $      0.12  $     0.07
    Net income (loss) - diluted......................      (1.40)        0.23         0.22          0.11        0.07
    Cash dividends declared per common share.........       0.00         0.00         0.00          0.00        0.00

Selected Average Balances:
    Total assets.....................................$   617,255  $   559,921   $  401,615   $   213,101  $  114,834
    Total loans......................................    544,079      489,897      333,340       172,418      83,217
    Securities.......................................     39,961       26,662       23,183        19,405      15,786
    Earning assets...................................    605,723      546,517      389,795       204,643     109,675
    Deposits.........................................    544,598      496,283      348,819       180,072      94,796
    Stockholders' equity.............................     35,296       34,178       29,910        19,062      11,606
    Shares outstanding (thousands) (split adjusted)..      8,717        8,485        8,317         7,226       5,616

Selected Period-End Balances:
    Total assets.....................................$   592,942  $   568,291   $  471,458   $   297,952  $  167,378
    Total loans......................................    523,850      505,381      422,135       244,620     116,723
    Securities.......................................     36,762       25,894       26,846        19,969      21,723
    Earnings assets..................................    587,734      550,865      458,478       287,307     155,068
    Deposits.........................................    525,631      504,310      421,244       249,032     137,001
    Stockholders' equity.............................     23,703       36,124       33,499        21,920      19,009
    Shares outstanding (thousands) (split adjusted)..      8,821        8,515        8,476         7,581       7,192

Selected Ratios:
    Return on average equity.........................      (4.08)%       6.92%        7.32%         4.52%       3.61%
    Return on average assets.........................      (2.34)        0.42         0.54          0.40        0.36
    Net interest margin (taxable equivalent).........       3.35         2.88         3.52          3.63        3.65
    Allowance for loan losses to loans...............       5.15         1.20         1.20          1.24        1.20
    Net charge-offs to average loans.................       1.57         0.53         0.41          0.10        0.15
    Average equity to average assets.................       5.72         6.10         7.45          8.95       10.11
</TABLE>

                                       17
<PAGE>
ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

     The following is a narrative discussion and analysis of significant changes
in our results of operations and financial condition.  This discussion should be
read in  conjunction  with the  consolidated  financial  statements and selected
financial data included elsewhere in this Annual Report.

     Our  principal  subsidiary  is  Heritage  Bank,  a  financial   institution
organized and existing under the laws of Alabama and  headquartered  in Decatur,
Alabama.  The Bank operates ten offices throughout Northern Alabama. The Company
also has another wholly-owned  subsidiary,  Heritage Financial Statutory Trust I
("Heritage  Trust"),  a  Connecticut   statutory  trust.  Heritage  Trust  is  a
consolidated  special  purpose  entity formed solely to issue  cumulative  trust
preferred securities.

     The  Company  was  established  in the year 2000 in order to  facilitate  a
reorganization  and  merger  of the  Company  and the Bank  into a bank  holding
company structure. The reorganization was effective on August 31, 2000.

RECENT DEVELOPMENTS

     As  previously  reported  in the Form 10-Q  filings of the  Company for the
quarterly  periods  ended June 30,  2002 and  September  30,  2002,  a targeted,
limited scope review of the loan portfolio of the Bank by regulatory authorities
identified certain assets of the Bank that the regulatory  authorities  believed
should be classified.  In connection with such review,  the Company and the Bank
took  steps to  charge  off or  establish  additional  loan  loss  reserves  for
specified assets and to adjust the Bank's levels of loan loss provisions.

     The regulatory  authorities  charged with overseeing the Bank's  operations
have  outlined  certain  corrective  actions  to be taken by the Bank to address
concerns identified by the regulatory  authorities.  The Bank has agreed that it
will not declare or pay any cash dividends without seeking the prior approval of
the  regulatory  authorities.  In  addition,  the Bank agreed to hire and retain
certain  personnel who would be given specific written authority by the Board of
Directors to implement sound lending,  recordkeeping  and accounting  practices.
The Bank is developing an educational  program for board members and has created
a written review of the Bank's staffing  requirements.  Both the Board education
program  and the  written  review of staffing  requirements  are  required to be
submitted to the regulatory authorities for their review and comment.

     The Bank also agreed to meet certain capital ratios.  By December 31, 2002,
management  of the Company  and the Bank  agreed to take steps to  increase  the
Bank's  Tier 1 leverage  ratio to 7.5 percent  and to be  "well-capitalized"  as
defined  by the FDIC.  The Bank's  Tier 1 leverage  ratio must be no less than 8
percent  by March 31,  2003,  and the Bank must  maintain  a ratio of at least 8
percent until a reduction is approved by the  regulatory  authorities.  The Bank
did not achieve a Tier 1 leverage  ratio of 7.5 percent as of December 31, 2002,
and we believe the Bank may not achieve a Tier 1 leverage  ratio of 8 percent if
the Bank is unable to  acquire  additional  capital.  Should the Tier 1 leverage
ratio  fall  below  the  minimum  specified  levels,  the Bank must  notify  the
regulatory authorities and take steps to increase capital sufficient to meet the
required ratios within 30 days.

     Management  of the  Company and the Bank are  focused on  addressing  asset
quality,  loan and audit  issues.  The Bank has  charged  off the balance of any
assets classified Loss and one-half of those assets  classified  Doubtful in any
official  report of examination by any of the regulatory  authorities.  The Bank
has also reduced the balance of assets classified  Substandard or Doubtful,  and
has refused to extend additional credit to any borrower obligated to the Bank on
any extension of credit that has been charged off by the Bank or classified Loss
or Doubtful as long as such credit remains  uncollected.  In addition,  the Bank
has commenced a review of its existing written loan policies and has adopted new
internal loan review systems to address problems with the Bank's loan portfolio.

CRITICAL ACCOUNTING POLICIES

The  accounting  and  financial  reporting  policies of the  Company  conform to
accounting  principles generally accepted in the United States of America and to
general practices within the banking industry. Following is a

                                       18
<PAGE>
description of the accounting  policies  applied by the Company which are deemed
"critical." In determining  which accounting  policies are "critical" in nature,
the Company has  identified  the policies that require  significant  judgment or
involve complex  estimates.  The application of these policies has a significant
impact on the Company's  financial  statements.  Financial  results could differ
significantly if different judgments or estimates are applied.

Allowance for Loan Losses

The allowance for loan losses is established  through provisions for loan losses
charged to operations.  Loans are charged  against the allowance for loan losses
when  management   believes  that  the  collection  of  principal  is  unlikely.
Subsequent recoveries are added to the allowance. Management's evaluation of the
adequacy of the  allowance for loan losses is based on a formal  analysis  which
assesses  the  risk  within  the  loan   portfolio.   This   analysis   includes
consideration of historical performance,  current economic conditions,  level of
nonperforming  loans,  loan  concentrations,  and review of  certain  individual
loans. Management believes that the allowance for loan losses is adequate. While
management  uses  available  information  to recognize  losses on loans,  future
additions to the allowance for loan losses may be necessary  based on changes in
economic  conditions and the results of management's  ongoing review of the loan
portfolio.  In addition,  various  regulatory  agencies,  as an integral part of
their examination  process,  periodically  review the bank's allowances for loan
losses.  Such  agencies  may  require  the bank to  recognize  additions  to the
allowance for loan losses based on their judgments.

SUMMARY

     Our net loss for 2002 was ($14,413,000),  a 709.2% decrease from 2001 which
was  $2,366,000.  Net income for the year 2001  represented a 8.2% increase from
2000 net income of $2,188,000.  Our basic  earnings  (loss) per common share for
2002, 2001 and 2000 were $(1.65), $0.28 and $0.26, respectively. Pretax loss for
2002  decreased  $25,890,000  or 721.2%  from 2001 and  pretax  income  for 2001
increased $411,000 or 12.9% from 2000.

     The  decrease  in net  income  for  2002 is  primarily  attributable  to an
increase in provision for loan losses,  and retirement costs associated with the
retirement of the Company's former CEO.

EARNING ASSETS

     Our total assets were  $592,942,000  at December  31, 2002,  an increase of
$24,651,000,  or 4.3% from $568,291,000 as of December 31, 2001. The increase in
total assets primarily  related to an increase in securities  available for sale
of $10,868,000 and other assets,  primarily  deferred tax assets, of $9,169,000.
The increase in total assets was funded primarily by an increase in deposits.

     Our  average  earning  assets  were  approximately  $605,723,000  in  2002,
representing  an  increase of  $59,206,000  or 10.8% over 2001  Average  earning
assets  in the  year  2001  were  approximately  $546,517,000,  representing  an
increase of $156,722,000 or 40.2% over the 2000 amount of $389,795,000.

     Management   considers   many  criteria  in  managing   assets,   including
creditworthiness,  diversification and structural characteristics,  maturity and
interest  rate   sensitivity.   The  following   table  sets  forth  the  Bank's
interest-earning  assets by category  at December  31, in each of the last three
years.
<TABLE>
<CAPTION>

                                                                                Years Ended December 31,
                                                                     ----------------------------------------------
                                                                         2002             2001            2000
                                                                     -------------   -------------   --------------
                                                                                     (In thousands)
<S>                                                                  <C>             <C>             <C>
Interest-bearing deposits with banks.............................    $          98   $         326   $          817
Securities.......................................................           36,762          25,894           26,846
Federal funds sold...............................................           14,681           6,716            8,680
Mortgage loans held-for-sale.....................................           12,343          12,548               --
Loans:
   Real estate...................................................          371,714         344,749          296,025
   Commercial and other..........................................          152,136         160,632          126,110
                                                                     -------------   -------------   --------------
     Total loans.................................................          523,850         505,381          422,135
                                                                     -------------   -------------   --------------
Interest-earning assets .........................................    $     587,734   $     550,865   $      458,478
                                                                     =============   =============   ==============
</TABLE>

                                       19
<PAGE>
LOAN PORTFOLIO

     Loans are the largest  category of  interest-earning  assets and  typically
provide higher yields than other types of interest-earning assets. Loans involve
inherent  risk and  liquidity  risks  which  management  attempts to control and
mitigate. Our average loans increased $54,182,000 or 11.1% from year-end 2002 to
2001. The increase in loans was a result of strong loan demand.  Loan growth for
2002 was funded primarily through  deposits.  The most significant loan increase
came from real estate mortgage loans which increased  approximately  $36,832,000
or 13.4% over the 2001 year-end amount.

     Our average  loans  increased  $156,557,000  or 47.0% from year-end 2000 to
2001. The increase in loans was a result of continued  loan demand.  Loan growth
for the year 2001 was funded primarily  through  deposits.  The most significant
loan  increase came from  commercial,  financial  and  agricultural  loans which
increased by $32,951,000 or 31.3% over 2000.

     The Loan  Portfolio  table presents the  classifications  of loans by major
category at December 31, 2002, and for each of the preceding four years.

<TABLE>
<CAPTION>
                                                                      Loan Portfolio

                                                                  December 31,
                              -------------------------------------------------------------------------------------------------
                                    2002                2001                2000                1999               1998
                              ------------------  ------------------  ------------------  ------------------  -----------------
                                        Percent             Percent             Percent             Percent             Percent
                               Amount   of Total   Amount   of Total   Amount   of Total   Amount   of Total   Amount   of Total
                              --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
                                                             (Dollars in Thousands)
Commercial,
  financial and
<S>                           <C>          <C>    <C>          <C>    <C>          <C>     <C>         <C>     <C>         <C>
  agricultural............... $132,237     25.24% $138,344     26.71% $105,393     24.97%  $66,144     27.04%  $45,105     38.64%

Real estate -  construction..   60,206     11.49    70,073     13.53    90,603     21.46    49,432     20.21    12,583     10.78
Real estate - mortgage.......  311,508     59.47   274,676     55.46   205,422     48.66   112,643     46.05    45,320     38.83
Consumer.....................   19,899      3.80    22,288      4.30    20,717      4.91    16,410      6.70    13,658     11.70
Other........................       --      0.00        --      0.00        --      0.00        --      0.00        57      0.05
                              --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
..............................  523,850    100.00%  505,381    100.00%  422,135    100.00%  244,629    100.00%  116,723    100.00%
                                        ========            ========            ========            ========            ========
Allowance for loan losses....  (26,991)             (6,074)             (5,065)             (3,036)             (1,402)
Unearned income..............       --                  --                  --                  (9)                 --
                              --------            --------            --------            --------            --------

Net loans.................... $496,859            $499,307            $417,070            $241,584            $115,321
                              ========            ========            ========            ========            ========
</TABLE>

                                       20
<PAGE>

     The following  table sets forth  maturities  of selected  categories of the
loan portfolio and the related sensitivity to interest rate changes.

<TABLE>
<CAPTION>

                                          SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

                                                                                        Rate Structure for Loans
                                                Maturity                                 Maturing Over One Year
                             ------------------------------------------------------   -----------------------------
                                             Over One
                                  One          Year          Over                     Predetermined    Floating or
                                Year or       Through        Five                        Interest       Adjustable
                                 Less       Five Years       Years        Total            Rate            Rate
                             -----------   -----------    -----------   -----------   -------------    ------------
                                                            (Amounts in thousands)

Commercial, financial
<S>                          <C>           <C>            <C>           <C>           <C>              <C>
   and agricultural........  $    71,571   $    51,850    $     8,816   $   132,237   $      45,839    $     14,827
Real estate - construction.       45,032        12,735          2,439        60,206           6,009           9,165
                             -----------   -----------    -----------   -----------   -------------    ------------

     Total.................  $   116,603   $    64,585    $    11,255   $   192,443   $      51,848    $     23,992
                             ===========   ===========    ===========   ===========   =============    ============
</TABLE>

SECURITIES PORTFOLIO

     Our  securities  portfolio  increased by $10,868,000 or 42.0% from the year
2001 to 2002. The balance in the securities  portfolio  increased as a result of
deposit growth in 2002. Our securities  portfolio  decreased by $952,000 or 3.6%
from 2000 to 2001 as a result of strong loan demand in 2001.

     We  maintain an  investment  strategy of seeking  portfolio  yields  within
acceptable risk levels, as well as providing  liquidity.  The Bank maintains one
classification  of  securities:   "Available-for-Sale."  The  classification  of
securities as Available-for-Sale is consistent with our investment philosophy of
maintaining   flexibility  to  manage  the  portfolio.   The  Available-for-Sale
securities  are carried at fair market value and represent all of our securities
at year-end 2002 and 2001. At year-ends 2002 and 2001,  unrealized losses in the
Available-for-Sale portfolio amounted to $94,509 and $94,581, respectively.

     At year-ends 2002 and 2001,  obligations of the United States Government or
its agencies and  obligations of states and political  subdivisions  represented
approximately 63.1% and 73.0%, respectively, of our securities portfolio.

     The  following  table  presents  the  carrying  amounts  of our  securities
portfolio at December 31, in each of the last three years.

<TABLE>
<CAPTION>
                                                Securities Portfolio

                                                                                      December 31,
                                                                     ----------------------------------------------
                                                                         2002             2001            2000
                                                                     -------------   -------------   --------------
                                                                                     (In thousands)

Available-for-Sale
<S>                                                                  <C>             <C>             <C>
   U.S. government and agencies.................................     $          --   $      15,697   $       18,450
   Mortgage-backed securities...................................            23,208             617            1,020
   Asset-backed securities......................................                --           4,474            1,986
   State and municipal..........................................             1,330           2,590            2,300
   Corporate debt securities....................................            10,588           1,190            1,244
   Equity securities............................................             1,636           1,326            1,846
                                                                     -------------   -------------   --------------

     Total......................................................     $      36,762   $      25,894   $       26,846
                                                                     =============   =============   ==============
</TABLE>

                                       21
<PAGE>
     The maturities and weighted  average yields of the  investments in the 2002
portfolio of securities are presented below.

                      SECURITY PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
                                                                       Maturing
                                    --------------------------------------------------------------------------------------
                                           Within            After One But         After Five But            After
                                          One Year         Within Five Years      Within Ten Years         Ten Years
                                    --------------------  --------------------  --------------------  --------------------
                                     Amount      Yield     Amount       Yield    Amount      Yield     Amount       Yield
                                    --------    --------  --------    --------  --------    --------  ---------    -------
                                                                (Amounts in thousands)
Securities Available-for-Sale
   (amortized cost)
<S>                                 <C>                   <C>             <C>   <C>             <C>      <C>          <C>
   Mortgage-backed securities....   $     32          --  $  2,517        3.63% $  9,371        4.35%    10,912       4.38%
   State and municipal (1).......         --          --        --          --        --          --      1,294       5.27
   Corporate debt securities.....         --          --     2,433        3.99        --          --      8,472       6.86
   Equity securities.............         --          --        --          --        --          --      1,636       7.74
                                    --------              --------              --------              ---------

                                    $     32          --  $  4,950        3.81  $  9,371        4.35  $  22,314       5.62
                                    ========              ========              ========              =========
<FN>
(1)  The weighted  average  yields are  calculated  on the basis of the cost and
     effective yield weighted for the scheduled  maturity of each security.  The
     weighted  average yields on tax-exempt  obligations have been computed on a
     fully  taxable  equivalent  basis  using a tax  rate of  34%.  The  taxable
     equivalent   adjustment  represents  the  annual  amounts  of  income  from
     tax-exempt obligations multiplied by 152%.
</FN>
</TABLE>

     We did not hold any securities of which the aggregate value on December 31,
2002, 2001 and 2000 exceeded ten percent of  stockholders'  equity at that date.
(Securities  which are payable from and secured by the same source of revenue or
taxing authority are considered to be securities of a single issuer.  Securities
of the U.S.  Government and U.S.  Government  agencies and  corporations are not
included.)

DEPOSITS AND BORROWED FUNDS

     Our average  deposits rose  $48,315,000 or 9.7% from the year 2001 to 2002.
Total deposits increased $21,321,000 or 4.2% from 2001 to 2002. The largest area
of growth in 2002 was in  interest  bearing  demand  accounts,  which  increased
$7,417,000  or  13.8%.  From  2001 to 2002,  other  time  deposits  of more than
$100,000 increased  $4,990,000 or 3.5%. Savings deposits increased $3,582,000 or
7.4%, and time deposits of less than $100,000 increased $4,616,000 or 1.9%. From
year-end 2001 to year-end 2002, total  non-interest  bearing deposits  increased
$716,000 or 3.4%.  Deposit  growth has been generated  primarily  outside of our
local markets.

     Our average  deposits rose  $147,464,000 or 42.3% from 2000 to 2001.  Total
deposits  increased  $83,066,000 or 19.7% from 2000 to 2001. The largest area of
growth in 2001 was in other time deposits of less than $100,000, which increased
$33,227,000  or  16.1%.  From 2000 to 2001,  other  time  deposits  of more than
$100,000 increased $7,126,000 or 5.3%, savings deposits increased $13,501,000 or
38.9%, and interest bearing demand accounts increased $19,570,000 or 57.2%. From
year-end 2000 to year-end 2001, total  non-interest  bearing deposits  increased
$9,642,000 or 82.7%.  Deposit growth has been  generated  primarily in our local
markets.

                                       22
<PAGE>
     The  following  table sets forth our deposit  structure  at December 31, of
each of the last three years.
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                     ----------------------------------------------
                                                                         2002             2001            2000
                                                                     -------------   -------------   --------------
                                                                                     (In thousands)
Noninterest-bearing deposits:
<S>                                                                  <C>             <C>             <C>
   Individuals, partnerships and corporations....................    $      22,012   $      21,296   $       11,374
   U.S. Government and states and political subdivisions.........               --              --               --
   Certified and official checks.................................               --              --              280
                                                                     -------------   -------------   --------------
     Total noninterest-bearing deposits..........................           22,012          21,296           11,654
                                                                     -------------   -------------   --------------

Interest-bearing deposits:
   Interest-bearing demand accounts..............................           61,193          53,776           34,206
   Saving accounts...............................................           51,769          48,187           34,686
   Certificates of deposit, less than $100,000...................          244,447         239,831          206,604
   Certificates of deposit, more than $100,000...................          146,210         141,220          134,094
                                                                     -------------   -------------   --------------
     Total interest-bearing deposits.............................          503,619         483,014          409,590
                                                                     -------------   -------------   --------------

     Total deposits..............................................    $     525,631         504,310   $      421,244
                                                                     =============   =============   ==============
</TABLE>

     The following  table presents a breakdown by category of the average amount
of deposits and the average rate paid on deposits for the periods indicated:

<TABLE>
<CAPTION>


                                                                  Years Ended December 31,
                                           ------------------------------------------------------------------------
                                                     2002                    2001                     2000
                                           ---------------------   ----------------------   -----------------------
                                             Amount       Rate        Amount       Rate        Amount       Rate
                                           ----------  ---------   ----------   ---------   -----------   ---------
                                                                   (Dollars in thousands)

<S>                                        <C>               <C>   <C>               <C>    <C>                <C>
Noninterest-bearing deposits.............  $   21,832        .00%  $   16,975        0.00%  $     13,116       0.00%
Interest-bearing demand deposits.........      50,622       1.61       39,299        3.10         28,895       3.74
Savings deposits.........................      64,773       1.92       43,079        3.17         28,664       5.16
Time deposits............................     407,370       4.33      396,930        6.09        278,144       6.58
                                           ----------  ---------   ----------   ---------   ------------  ---------

   Total deposits........................  $  544,597       3.62%  $  496,283        5.39%  $    348,819       5.98%
                                           ==========              ==========               ============
</TABLE>


     At December 31,  2002,  time  deposits  greater  than  $100,000  aggregated
approximately  $146,209,000.  The following table indicates,  as of December 31,
2002, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):

<TABLE>
<CAPTION>
                        MATURITIES OF LARGE TIME DEPOSITS

                                 (In thousands)

<S>                                                                                          <C>
         Three months or less...........................................................     $      19,951
         Over three through six months..................................................            35,112
         Over six through twelve months.................................................            45,821
         Over twelve months.............................................................            45,325
                                                                                             -------------

           Total........................................................................     $     146,209
                                                                                             =============
</TABLE>

     Borrowed funds of $39,650,000 as of December 31, 2002, consist of long-term
Federal  Home Loan Bank  advances,  an  advance  from a pooled  trust  preferred
private placement for subordinated  debentures and a short-term borrowing from a
commercial  bank.  We had  $13,500,000  in available  lines to purchase  Federal
Funds, on an unsecured basis,  from commercial banks. At December 31, 2002, 2001
and 2000, we had no funds advanced  against these lines. We are also approved to
borrow up to $65,223,000 under various short-term and long-term programs offered
by the Federal Home Loan Bank of Atlanta.  These  borrowings are secured under a
blanket lien agreement on certain  qualifying  mortgage  instruments in loan and
investment  security  portfolios.  The unused portion of these  available  funds
amounted to $42,223,000 at year-end 2002 and $46,000,000 at year-end 2001.

                                       23
<PAGE>
     The following  table sets forth the expected debt service for the next five
years based on interest rates and repayment provisions as of December 31, 2002.

<TABLE>
<CAPTION>

                          MATURITIES OF LONG-TERM DEBT

                                 (In thousands)

                                                          2003        2004         2005       2006        2007
                                                       ---------   ---------    ---------  ---------   ---------
<S>                                                    <C>         <C>          <C>        <C>         <C>
   Interest on indebtedness.........................   $   1,986   $   1,986    $   1,986  $   1,986   $   1,986
   Repayment of principal...........................          --          --           --         --          --
                                                       ---------   ---------    ---------  ---------   ---------

                                                       $   1,986   $   1,986    $   1,986  $   1,986   $   1,986
                                                       =========   =========    =========  =========   =========
</TABLE>

CAPITAL RESOURCES

     Stockholders'  equity  decreased  $12,421,000 or 34.4% to $23,703,000 as of
December  31,  2002.  The  decrease  in   stockholders'   equity  was  primarily
attributable  to the net  loss  for the  year.  Stockholders'  equity  increased
$2,625,000 or 7.8% to $36,124,000 as of December 31, 2001.  Stockholders' equity
increased  $11,579,000  or 52.8% to  $33,499,000  as of December 31,  2000.  The
increases  in  stockholders'  equity in 2001 and 2000 were  attributable  to net
income and the  issuance  of stock  through  exempt  offerings,  employee  stock
purchase plan purchases and the exercise of stock options.

     On February  22,  2001,  Heritage  Financial  Statutory  Trust I ("Heritage
Trust"),  a Connecticut  statutory  trust  established by the Company,  received
$10,000,000 in proceeds in exchange for $10,000,000 principal amount of Heritage
Trust's  10.20%   cumulative   trust   preferred   securities   (the  "preferred
securities") in a pooled trust preferred private placement. The proceeds of that
transaction  were then used by Heritage Trust to purchase an equal amount of our
10.20% subordinated debentures (the "subordinated debentures").

     Under  the  terms of the  indenture,  we may  elect to  defer  payments  of
interest  for up to ten  semiannual  payment  periods.  For the duration of such
deferral  period,  we are restricted  from paying  dividends to  shareholders or
paying debt that is junior to the debentures.

     We have fully and  unconditionally  guaranteed all  obligations of Heritage
Trust on a  subordinated  basis with  respect to the  preferred  securities.  We
account for the Heritage  Trust  preferred  securities  as a minority  interest.
Subject to  certain  limitations,  the  preferred  securities  qualify as Tier 1
capital and are presented in the Consolidated  Statements of Financial Condition
as  "Guaranteed  preferred  beneficial  interests in the Company's  subordinated
debentures."  The sole asset of Heritage  Trust is the  subordinated  debentures
issued  by  us.  Both  the  preferred  securities  of  Heritage  Trust  and  our
subordinated  debentures each have 30-year lives.  However, both the Company and
Heritage Trust have a call option of ten years,  subject to regulatory approval,
or earlier, depending upon certain changes in tax or investment company laws, or
regulatory capital requirements.

     A strong capital position,  which is vital to our continued  profitability,
also promotes depositor and investor  confidence and provides a solid foundation
for the future  growth of the  organization.  The  objective of management is to
maintain a level of  capitalization  that is  sufficient  to take  advantage  of
profitable growth opportunities while meeting regulatory  requirements.  This is
achieved by improving  profitability through effectively allocating resources to
more  profitable  businesses,  improving  asset quality,  strengthening  service
quality,  and  streamlining  costs.  The primary  measures used by management to
monitor the results of these efforts are the ratios of return on average assets,
return on average common equity and average equity to average assets.

                                       24
<PAGE>
     The table  below  summarizes  these and other key ratios for us for each of
the last three years.

<TABLE>
<CAPTION>
                                                  RETURN ON EQUITY AND ASSETS

                                                                           2002           2001          2000
                                                                        -----------   -----------   -----------
<S>                                                                           <C>            <C>           <C>
Return on average assets...........................................           (2.34)%        0.42%         0.54%
Return on average common equity....................................           (4.08)         6.92          7.32
Dividend payout ratio..............................................            0.00          0.00          0.00
Average common shareholders' equity to average
   assets ratio....................................................            5.72          6.10          7.45
</TABLE>

     In  addition,  banks and bank  holding  companies  are required to maintain
capital  to  support,  on  a  risk-adjusted  basis,  certain  off-balance  sheet
activities  such as loan  commitments.  The  Federal  Reserve  Board has adopted
capital  guidelines  governing the activities of bank holding  companies.  These
guidelines   require  the   maintenance   of  an  amount  of  capital  based  on
risk-adjusted assets so that categories of assets with potentially higher credit
risk will require more capital than assets with lower risk.

     The capital guidelines classify capital into two tiers, referred to as Tier
1 and Tier 2. Under risk-based capital  requirements,  Total Capital consists of
Tier 1 capital which is generally common  stockholders' equity less goodwill and
Tier 2 capital which is primarily a portion of the allowance for loan losses and
certain   qualifying  debt  instruments.   In  determining   risk-based  capital
requirements,  assets  are  assigned  risk-weights  of  0%  to  100%,  depending
primarily on the regulatory  assigned levels of credit risk associated with such
assets.   Off-balance   sheet  items  are  considered  in  the   calculation  of
risk-adjusted  assets through conversion factors  established by the regulators.
The framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory  minimums of 4% Tier 1 and 8% total  risk-based
capital.  In  1990  regulators  added  a  leverage  computation  to the  capital
requirements, comparing Tier 1 capital to total average assets less goodwill.

     The table below  illustrates  our  regulatory  capital ratios under federal
guidelines at December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                    CAPITAL ADEQUACY RATIOS

                                                             Statutory             Years ended December 31,
                                                                           ----------------------------------------
                                                              Minimum          2002          2001          2000
                                                            ------------   -----------   -----------    -----------
                                                                                    (Amounts in thousands)
<S>  <C>                                                                   <C>           <C>            <C>
Tier 1 Capital                                                             $    30,749   $    46,180    $    33,658
Tier 2 Capital                                                                   8,687         6,074          5,065
                                                                           -----------   -----------    -----------
Total Qualifying Capital                                                   $    39,436   $    52,254    $    38,723
                                                                           ===========   ===========    ===========
Risk Adjusted Total Assets (including
   off-balance-sheet exposures)                                            $   505,129   $   488,824    $   413,536
                                                                           ===========   ===========    ===========

Adjusted quarterly average assets                                          $   650,604   $   587,901    $   463,464
                                                                           ===========   ===========    ===========
Tier 1 Capital Ratio                                             4.00%            6.09%         9.45%          8.14%
Total Capital Ratio                                              8.00             7.81         10.69           9.36
Leverage Ratio                                                   4.00             4.94          7.86           7.26
</TABLE>

     On December 31, 2001 and 2000,  the Company and the Bank each  exceeded the
regulatory  minimums and together  qualified as a well  capitalized  institution
under the regulations. On December 31, 2002, the Bank qualified as an adequately
capitalized institution under the regulations.

                                       25
<PAGE>
LIQUIDITY MANAGEMENT

     The goal of  liquidity  management  is to  provide  adequate  funds to meet
changes  in  loan  demand  or  any  potential  unexpected  deposit  withdrawals.
Additionally,  management  strives to maximize  our  earnings by  investing  our
excess funds in securities.

     Historically,  we have maintained a high loan-to-deposit ratio. To meet our
short-term  liquidity  needs,  we  maintain  core  deposits  and have  borrowing
capacity through the FHLB and federal funds lines. Long-term liquidity needs are
met primarily  through these  sources,  time  deposits,  the repayment of loans,
sales of loans and the  maturity  or sale of  investment  securities,  including
short-term investments. We have entered into certain contractual obligations and
commercial  commitments  that arise in the normal course of business and involve
elements of credit risk, interest rate risk and liquidity risk.

     The  liability  portion of the balance  sheet  provides  liquidity  through
various  interest-bearing and noninterest-bearing  deposit accounts. At December
31, 2002, we had  $13,500,000  of federal funds  available,  $850,000  available
under the short-term borrowing and a line of credit of approximately $65,223,000
from The Federal Home Loan Bank of which approximately $42,223,000 was available
and unused.  At December 31, 2001, we had $13,500,000 of federal funds available
and a line of credit of  approximately  $59,000,000  from The Federal  Home Loan
Bank of which  approximately  $46,000,000 was available and unused.  At December
31, 2000, we had $10,000,000 of federal funds available and a line-of-credit  of
approximately $47,000,000 from the Federal Home Loan Bank of which approximately
$35,000,000 was available and unused.

INTEREST RATE SENSITIVITY MANAGEMENT

     Interest rate sensitivity is a function of the repricing characteristics of
our portfolio of assets and liabilities. These repricing characteristics are the
time frames within which the interest-bearing assets and liabilities are subject
to change in interest rates either at replacement or maturity during the life of
the instruments. Sensitivity is measured as the difference between the volume of
assets and liabilities in our current  portfolio that is subject to repricing in
future time periods.  The differences are known as interest sensitivity gaps and
are usually  calculated  separately  for  segments of time  ranging from zero to
thirty days, thirty-one to ninety days, ninety-one days to one year, one to five
years, over five years and on a cumulative basis.

                                       26
<PAGE>
     The following table shows interest sensitivity gaps for different intervals
as of December 31, 2002.

<TABLE>
<CAPTION>
                       INTEREST RATE SENSITIVITY ANALYSIS
                             (Amounts in thousands)

                                         0-30         31-90        91-365         1-5        Over 5
                                         Days         Days          Days         Years        Years        Total
                                      -----------  -----------  -----------  -----------  -----------   -----------
 Interest-earning assets (1)
<S>                                   <C>          <C>          <C>          <C>          <C>           <C>
   Loans............................  $    53,911  $    39,059  $    88,489  $   256,350  $    70,247   $   508,056
   Mortgage loans held-for-sale.....       12,343           --           --           --           --        12,343
   Securities available-for-sale....           32           --           --        4,516       32,214        36,762
   Time deposits in other banks.....           98           --           --           --           --            98
   Federal funds sold...............       14,681           --           --           --           --        14,681
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                           81,065       39,059       88,489      260,866      102,461       571,940
 Interest-bearing liabilities (2)
   Demand deposits (3)..............       20,398       20,398       20,397           --           --        61,193
   Savings deposits (3).............       17,256       17,256       17,257           --           --        51,769
   Time deposits....................       16,417       34,183      217,137      122,920           --       390,657
   Other debt.......................           --           --        6,650           --       33,000        39,650
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                           54,071       71,837      261,441      122,920       33,000       543,269
                                      -----------  -----------  -----------  -----------  -----------   -----------
   Interest sensitivity gap.........  $    26,994  $   (32,778) $  (172,952) $   137,946  $    69,461   $    28,671
                                      ===========  ============ ============ ===========  ===========   ===========

 Cumulative interest
   sensitivity gap..................  $    26,994  $    (5,784) $  (178,736) $  (40,790)  $    28,671
                                      ===========  ============ ============ ===========  ==========

 Ratio of interest-earning assets to
   interest-bearing liabilities.....         1.50          .55          .34          2.13         3.11

 Cumulative ratio...................         1.50          .96          .54           .92         1.06

 Ratio of cumulative gap to total
   interest-earning assets..........          .05         (.01)        (.30)         (.07)         .05

<FN>

(1)  Excludes nonaccrual loans and securities

(2)  Excludes matured  certificates which have not been redeemed by the customer
     and on which no interest is accruing.

(3)  Demand and savings  deposits  are  assumed to be subject to  movement  into
     other deposit  instruments in equal amounts during the 0-30 day period, the
     31-90 day period, and the 91-365 day period.
</FN>
</TABLE>

     The above table  indicates that in a rising  interest rate  environment our
earnings may be negatively  affected in the short-term  because 21.0% of earning
assets  reprice  within 90 days and only 23.2% of  interest-bearing  liabilities
reprice during the same period. As seen in the preceding table, for the first 90
days of repricing opportunity there is an excess of interest-bearing liabilities
over  earning  assets of  approximately  $5.8  million.  For the first 365 days,
interest-bearing  liabilities  exceed earning assets by $178.7  million.  During
this one-year time frame, 71.3% of all interest-bearing liabilities will reprice
compared to 36.5% of all interest-earning  assets. Changes in the mix of earning
assets or  supporting  liabilities  can  either  increase  or  decrease  the net
interest margin without affecting interest rate sensitivity. Due to management's
continued  emphasis  on  profitability,   many  of  the  higher-yielding  assets
presented in the table above have call or prepayment features,  which may result
in such  assets  having a shorter  effective  life.  This in turn may reduce the
interest rate  sensitivity gap presented  above. It should be noted,  therefore,
that a matched  interest-sensitive  position by itself would not ensure  maximum
net interest income.

     Management  continually evaluates the condition of the economy, the pattern
of market  interest  rates,  and other  economic  data to determine the types of
investments  that should be made and at what  maturities.  Using this  analysis,
management  from  time to  time  assumes  calculated  interest  sensitivity  gap
positions to maximize net interest  income based upon  anticipated  movements in
the general level of interest rates.

                                       27
<PAGE>
                              RESULTS OF OPERATIONS

NET INTEREST INCOME

     The largest  component of our net income is net interest  income,  which is
the difference between the income earned on interest-earning assets and interest
paid on deposits and borrowings.  Net interest income is determined by the rates
earned  on our  interest-earning  assets,  rates  paid  on our  interest-bearing
liabilities,    the   relative   amounts   of   interest-earning    assets   and
interest-bearing  liabilities,  the degree of  mismatch,  and the  maturity  and
repricing  characteristics of our  interest-earning  assets and interest-bearing
liabilities.  Net interest  income  divided by average  interest-earning  assets
represents  our net interest  margin.  The following  discussion is on a taxable
equivalent basis.

     Our net interest income  increased  $4,538,000 or 29.0% to $20,197,000 from
2001 to 2002.  This  increase  in net  interest  income  is due  primarily  to a
decrease  in  interest  paid on  deposits.  Our net  interest  income  increased
$2,017,000 or 14.8% to  $15,659,000  from 2000 to 2001.  The increase in the net
interest income for this period is primarily due to a consistent and significant
increase  in total  loans.  Interest  income  was  $41,939,000  in  2002,  which
represented  a decrease of  $2,314,000  or 5.2% over 2001.  Interest  income was
$44,253,000 in 2001,  which  represented an increase of $8,593,000 or 24.1% over
2000.  Interest  and  fee  income  produced  by  the  loan  portfolio  increased
$9,800,000 or 30.8% in 2001 from 2000.  Interest and fee income  produced by the
loan portfolio  decreased  $1,712,000 or 4.1% in 2002 from 2001. Interest income
on  securities  increased  $151,000  or 9.6% in 2002 from 2001.  This  change is
primarily due to an increase in the size of the investment  portfolio.  Interest
income on securities  decreased  $81,000 or 4.7% from 2000 to 2001. The decrease
in interest  income on securities  from 2000 to 2001 was primarily the result of
the  significant  decrease in bond yields during the year 2001.  Interest income
other than loans and  securities  decreased  $754,000 or 69.8% from 2001 to 2002
and decreased by $1,125,000 or 51.0% in 2000 from 2001.

     Total interest expense  decreased by $6,853,000 or 24.0% in 2002 from 2001.
This  reduction  is  primarily  due to a decline in the rates paid on  deposits.
Interest  expense on deposits  decreased  $7,035,000 or 26.3% in 2002 from 2001.
Total interest  expense  increased by $6,576,000 or 29.9% in 2001 from 2000. The
interest  expense increase from 2000 to 2001 is primarily due to the increase in
interest-bearing   deposit  accounts.   Interest  expense  on  deposit  accounts
increased $5,886,000 or 28.2% from 2000 to 2001.

     The trend in net interest income is commonly  evaluated in terms of average
rates  using the net  interest  margin and the  interest  rate  spread.  The net
interest margin or the net yield on earning assets is computed by dividing fully
taxable  equivalent net interest income by average  earning  assets.  This ratio
represents  the difference  between the average yield on average  earning assets
and the average rate paid for all funds used to support  those  earning  assets.
Our net interest margin increased 47 basis points in 2002 from 2.88% at year-end
2001 to 3.35% at year-end  2002.  The net  interest  margin  decreased  64 basis
points in 2001 from 3.52% at year-end 2000 to 2.88% at year-end  2001. The yield
on earning assets decreased 117 basis points to 6.94% in 2002 from 8.11% in 2001
and decreased 106 basis points to 8.11% in 2001 from 9.17% in 2000. The net cost
of funds,  defined  as  interest  expense  divided by  average  earning  assets,
decreased 164 basis points to 3.59% at year-end 2002 from 5.23% at year-end 2001
and decreased 42 basis points to 5.23% at year-end 2001 from 5.65% in 2000.

     The interest rate spread measures the difference  between the average yield
on earning  assets and the  average  rate paid on  interest  bearing  sources of
funds.  The interest rate spread  eliminates the impact of  noninterest  bearing
funds and gives a direct  perspective  on the  effect  of market  interest  rate
movements.  During recent  years,  the net interest  margins and interests  rate
spreads have been under intense pressure to maintain  historical  levels, due in
part to tax laws  that  discouraged  investment  in  tax-exempt  securities  and
intense  competition  for funds with  non-bank  institutions.  Our interest rate
spread  increased  60 basis  points to 3.03% from 2001 to 2002 and  decreased 55
basis points to 2.43% from 2000 to 2001, due to effects of the overall  economic
environment  and  unprecedented  interest  rate  moves  by the  Federal  Reserve
primarily in 2001.

                                       28
<PAGE>
     The tables that follow show, for the periods  indicated,  the daily average
balances  outstanding for the major  categories of  interest-bearing  assets and
interest-bearing liabilities, and the average interest rate earned or paid by us
thereon. Such yields are calculated by dividing income or expense by the average
balance of the corresponding  assets or liabilities.  Also shown are the changes
in income attributable to changes in volume and changes in rate.

<TABLE>
<CAPTION>

                                            AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES

                                                              Taxable Equivalent Basis

                                                                Years Ended December 31,
                                        2002                             2001                             2000
                          -------------------------------  -------------------------------  -------------------------------
                                      Interest   Average               Interest   Average               Interest   Average
                           Average    Income/    Yields/    Average    Income/    Yields/    Average    Income/    Yields/
                           Balance    Expense     Rates     Balance    Expense     Rates     Balance    Expense     Rates
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------

                                                                  (Dollars in thousands)
Assets
Earning assets:
   Loans, net of
<S>                 <C>   <C>        <C>            <C>    <C>        <C>            <C>    <C>        <C>            <C>
    unearned income (1).  $ 544,079  $  39,897      7.33%  $ 489,897  $  41,610      8.49%  $ 333,340  $  31,810      9.54%
Securities:
   Taxable..............     37,513      1,603      4.27      24,308      1,460      6.01      20,852      1,542      7.39
   Tax exempt...........      2,448        202      8.25       2,354        189      8.03       2,331        188      8.07
                          ---------  ---------             ---------  ---------             ---------  ---------
     Total securities...     39,961      1,805      4.52      26,662      1,649      6.18      23,183      1,730      7.46

   Time deposits in
    other banks.........        161          6      3.73         446         25      5.61       5,920        365      6.17
   Federal funds sold...     21,522        320      1.49      29,512      1,056      3.58      27,352      1,841      6.73
                          ---------  ---------             ---------  ---------             ---------  ---------
     Total interest-
      earning assets (2)    605,723     42,028      6.94     546,517     44,340      8.11     389,795     35,746      9.17

Noninterest-earning assets:
   Cash and due from banks    4,452                            5,410                            6,744
   Premises and equipment     6,753                            6,220                            4,536
   Accrued interest
     and other assets...      8,915                            7,541                            4,582
   Allowance for loan losses (8,588)                          (5,767)                          (4,042)
                          ---------                        ---------                        ---------
     Total assets.......  $ 617,255                        $ 559,921                        $ 401,615
                          =========                        =========                        =========

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
   Demand deposits......  $  50,622  $     854    1.69%    $  39,299  $   1,219      3.10%  $  28,895  $   1,080      3.74%
   Savings deposits.....     64,773      1,245    1.92        43,079      1,367      3.17      28,664      1,478      5.16
   Time deposits........    407,371     17,618    4.32       396,930     24,166      6.09     278,144     18,308      6.58
                          ---------  ---------             ---------  ---------             ---------  ---------
     Total deposits.....    522,766     19,717    3.77       479,308     26,752      5.58     335,703     20,866      6.22

Other short-term
   borrowings...........        928         36    3.88            53          2      3.77          27          1      3.70
Long-term debt..........     32,520      1,988    6.11        24,271      1,841      7.59      19,910      1,151      5.78
                          ---------  ---------             ---------  ---------             ---------  ---------
     Total interest-
      bearing liabilities   556,214     21,741    3.91       503,632     28,595      5.68     355,640     22,018      6.19
                                     ---------                        ---------                        ---------

Noninterest-bearing liabilities:
   Demand deposits......     21,832                           16,975                           13,116
   Accrued interest and
     other liabilities..      3,913                            5,136                            2,949
   Stockholders' equity.     35,296                           34,178                           29,910
                          ---------                        ---------                        ---------
     Total liabilities
       and stockholders'
       equity...........  $ 617,255                        $ 559,921                        $ 401,615
                          =========                        =========                        =========

Net interest income/net
   interest spread......                20,287    3.03%                  15,745      2.43%                13,728      2.98%
                                     =========                        =========                        =========

Net yield on earning assets                       3.35                               2.88%                            3.52%

Taxable equivalent adjustment:
   Loans................                    21                               22                               22
   Investment securities                    69                               64                               64
                                     ---------                        ---------                        ---------
     Total taxable equivalent
      adjustment........                    90                               86                               86
                                     ---------                        ---------                        ---------

Net interest income.....             $  20,197                        $  15,659                        $  13,642
                                     =========                        =========                        =========
<FN>

(1)  Average  loans  include  nonaccrual  loans.  All  loans  and  deposits  are
     domestic.

(2)  Tax  equivalent  adjustments  have been based on an assumed  tax rate of 34
     percent,  and do not give effect to the disallowance for federal income tax
     purpose of interest expense related to certain tax-exempt earning assets.
</FN>
</TABLE>

                                       29
<PAGE>

<TABLE>
<CAPTION>

                                                  RATE/VOLUME VARIANCE ANALYSIS

                                                              Taxable Equivalent Basis

                                     Average Volume                Change in Volume                Average Rate
                             -------------------------------  -------------------------   ------------------------------
                               2002       2001       2000      2002-2001     2001-2000      2002       2001       2000
                             ---------  ---------  ---------  -----------   -----------   --------   --------   --------

                                                               (Dollars in thousands)

Earning assets:
   Loans, net of
<S>                          <C>        <C>        <C>        <C>           <C>              <C>        <C>        <C>
   unearned income.........  $ 544,079  $ 489,897  $ 333,340  $    54,182   $   156,557      7.33%      8.49%      9.54%
Securities:
   Taxable.................     37,513     24,308     20,852       13,205         3,456      4.27       6.01       7.39
   Tax exempt..............      2,448      2,354      2,331           94            23      8.25       8.03       8.07
                             ---------  ---------  ---------  -----------   -----------
     Total securities......     39,961     26,662     23,183       13,299         3,479      4.52       6.18       7.46
                             ---------  ---------  ---------  -----------   -----------
Interest-bearing deposits
   with other banks........        161        446      5,920         (285)       (5,474)     3.73       5.61       6.17
Federal funds sold.........     21,522     29,512     27,352       (7,990)        2,160      1.49       3.58       6.73
                             ---------  ---------  ---------  -----------   -----------

     Total earning assets..  $ 605,723  $ 546,517  $ 389,795  $    59,206   $   156,722      6.94       8.11       9.17
                             =========  =========  =========  ===========   ===========

Interest-bearing liabilities:
  Deposits:
   Demand .................  $  50,622  $  39,299  $  28,895  $    11,323   $    10,404      1.69       3.10       3.74
   Savings.................     64,773     43,079     28,664       21,694        14,415      1.92       3.17       5.16
   Time....................    407,371    396,930    278,144       10,441       118,786      4.32       6.09       6.58
                             ---------  ---------  ---------  -----------   -----------
     Total deposits........    522,766    479,308    335,703       43,458       143,605      3.77       5.58       6.22
                             ---------  ---------  ---------  -----------   -----------

Other short-term borrowings        928         53         27          875            26      3.88       3.77       3.70
Long-term borrowings.......     32,520     24,271     19,910        8,249         4,361      6.11       7.59       5.78
                             ---------  ---------  ---------  -----------   -----------

     Total interest-bearing
       liabilities.........  $ 556,214  $ 503,632  $ 355,640  $    52,582   $   147,992      3.91       5.68       6.19
                             =========  =========  =========  ===========   ===========
Net interest income/net interest spread                                                      3.03       2.43       2.98

Net yield on earning assets                                                                  3.35       2.88       3.52

Net cost of funds..........                                                                  3.59       5.23       5.65
</TABLE>

<TABLE>
<CAPTION>

                                                                                         Variance Attributed to (1)
                                     Interest                                      ---------------------------------------
                                  Income/Expense                 Variance                 2002                 2001
                          ----------------------------   ------------------------  ------------------   ------------------
                            2002      2001      2000      2002-2001    2001-2000    Volume     Rate      Volume     Rate
                          --------  --------  --------   -----------  -----------  --------  --------   --------  --------
                                                    (Dollars in thousands)
Earning assets:
   Loans, net of
<S>                       <C>       <C>       <C>        <C>          <C>          <C>       <C>        <C>       <C>
     unearned income....  $ 39,897  $ 41,610  $ 31,810   $    (1,713) $     9,800  $  4,318  $ (6,031)  $ 13,611  $ (3,811)
Securities:
   Taxable..............     1,603     1,460     1,542           143          (82)      645      (502)       232      (314)
   Tax exempt...........       202       189       188            13            1         8         5          2        (1)
                          --------  --------  --------   -----------  -----------  --------  --------   --------  --------
     Total securities...     1,805     1,649     1,730           156          (81)      653      (497)       234      (315)
                          --------  --------  --------   -----------  -----------  --------  --------   --------  --------
Interest-bearing deposits
   with other banks.....         6        25       365           (19)        (340)      (14)       (5)      (336)       (4)
Federal funds sold......       320     1,056     1,841          (736)        (785)     (233)     (503)       135      (920)
                          --------  --------  --------   -----------  -----------  --------  --------   --------  --------
     Total earning assets   42,028    44,340    35,746        (2,312)       8,594     4,724    (7,036)    13,644    (5,050)

Interest-bearing liabilities:
Deposits:
   Demand...............       854     1,219     1,080          (365)         139       288      (653)       345      (206)
   Savings..............     1,245     1,367     1,478          (122)        (111)      536      (658)       583      (694)
   Time certificates....    17,618    24,166    18,308        (6,548)       5,858       623    (7,171)     7,309    (1,451)
                          --------  --------  --------   -----------  -----------  --------  --------   --------  --------
     Total deposits.....    19,717    26,752    20,866        (7,035)       5,886     1,447    (8,482)     8,237    (2,351)

Other short-term borrowings     36         2         1            34            1        34          0        1         --
Long-term borrowings....     1,988     1,841     1,151           147          690       550      (403)       284       406
                          --------  --------  --------   -----------  -----------  --------  --------   --------  --------

   Total interest-bearing
     liabilities........    21,741    28,595    22,018        (6,854)       6,577     2,031    (8,885)     8,522    (1,945)
                          --------  --------  --------   -----------  -----------  --------  --------   --------  --------

Net interest income/net
   interest spread......  $ 20,287  $ 15,745  $ 13,728   $     4,542  $     2,017  $  2,693  $  1,849   $  5,122  $ (3,105)
                          ========  ========  ========   ===========  ===========  ========  ========   ========  ========
<FN>
(1)  The change in interest  due to both rate and volume has been  allocated  to
     volume and rate changes in proportion to the  relationship  of the absolute
     dollar amounts of the change in each.
</FN>
</TABLE>

                                       30
<PAGE>
ALLOWANCE FOR LOAN LOSSES

     The Bank's  lending  officers are  responsible  for the ongoing  review and
administration of each loan. They make the initial identification of loans which
present some  difficulty in collection or where there is an indication  that the
probability of loss exists.  Lending officers are responsible for the collection
effort on a  delinquent  loan.  Senior  management  is informed of the status of
delinquent and problem loans on a monthly basis.

     Management  makes  recommendations  monthly  to the Board of  Directors  as
to-charge-offs.  Management  reviews the  allowance for loan losses on a monthly
basis.  Our policy is to discontinue  interest accrual when payment of principal
and interest is 90 days or more in arrears.

     The allowance  for loan losses  represents  management's  assessment of the
risks  associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the  allowance  for loan losses and the  appropriate  provisions  required to
maintain a level  considered  adequate to absorb  anticipated  loan  losses.  In
assessing the adequacy of the allowance,  management  reviews the size,  quality
and risk of loans in the  portfolio.  Management  also considers such factors as
loan loss experience,  the amount of past due and nonperforming loans,  specific
known  risks,  the  status  and  amount  of  nonperforming  assets,   underlying
collateral values securing loans,  current and anticipated  economic  conditions
and other factors which affect the allowance for loan losses.

     While it is our  policy to charge  off in the  current  period the loans in
which a loss is considered probable, there are additional risks of future losses
which  cannot be  quantified  precisely or  attributed  to  particular  loans or
classes  of  loans.  Because  these  risks  include  the  state of the  economy,
management's  judgment  as to the  adequacy  of  the  allowance  is  necessarily
approximate and imprecise.

     The  allowance for loan losses for December 31, 2001 was  $6,074,000.  As a
result of events  described  in the "Recent  Developments"  section of this Form
10-K,  this  allowance for loan losses was  increased by  $2,000,000  during the
second  quarter of 2002,  and by  $20,916,000,  net of charge offs, for the year
ending December 31, 2002. As of December 31, 2002, the allowance for loan losses
on  the  Company's   consolidated  balance  sheet  totaled  $26,990,594,   which
Management  believes  is adequate to absorb  known  risks in the  portfolio.  No
assurance can be given,  however,  that adverse economic  circumstances will not
result in increased losses in the loan portfolio, and require greater provisions
for possible loan losses in the future.


              [The remainder of this page intentionally left blank]

                                       31
<PAGE>
     The  following  table sets forth  certain  information  with respect to our
loans,  net of unearned  income,  and the allowance for loan losses for the five
years ended December 31, 2002.

<TABLE>
<CAPTION>
                         SUMMARY OF LOAN LOSS EXPERIENCE

                                                         2002         2001        2000        1999          1998
                                                      ---------   ----------    --------    --------     ----------
                                                                        (Dollars in thousands)
<S>                                                   <C>         <C>           <C>         <C>          <C>
Allowance for loan losses at beginning of year....... $   6,074   $    5,065    $  3,036    $  1,402     $      700
Loans charged off:
     Commercial, financial and agricultural..........     4,274        1,262       1,039          --             15
     Real Estate - mortgage..........................     3,847        1,046          --          --             --
     Consumer........................................       704          387         416         195            136
                                                      ---------   ----------    --------    --------     ----------

        Total loans charged off......................     8,825        2,695       1,455         195            151
                                                      ---------   ----------    --------    --------     ----------

Recoveries on loans previously charged off:
     Commercial, financial and agricultural..........       201           33          66          --             --
     Real Estate - mortgage..........................         3           28          --          --             --
     Consumer........................................        69           41          29          21             25
                                                      ---------   ----------    --------    --------     ----------

        Total recoveries.............................       273          102          95          21             25
                                                      ---------   ----------    --------    --------     ----------

Net loans charged off................................     8,552        2,593       1,360         174            126

Provision for loan losses............................    29,469        3,602       3,389       1,808            828
                                                      ---------   ----------    --------    --------     ----------

Allowance for loan losses at end of period........... $  26,991   $    6,074    $  5,065    $  3,036     $    1,402
                                                      =========   ==========    ========    ========     ==========

Loans, net of unearned income, at end of period...... $ 523,850   $  505,381    $422,135    $244,620     $  116,723

Average loans, net of unearned income,
     outstanding for the period......................   544,079      489,897     333,340     172,418         83,217

Ratio of net charge-offs to net average loans........     1.57%        0.53%       0.41%       0.10%          0.15%

</TABLE>

     In evaluating the allowance,  management also considers our historical loan
loss experience,  the amount of past due and  nonperforming  loans,  current and
anticipated  economic  conditions,  lender  requirements  and other  appropriate
information.  We  allocate  the  allowance  for loan  losses  to  specific  loan
categories  based on an  average of the  previous  two years net losses for each
loan type and management's judgment as to potential losses and significant areas
of risk in the portfolio.

              [The remainder of this page intentionally left blank]

                                       32
<PAGE>
     Management allocated the allowance for loan losses to specific loan classes
as follows:

<TABLE>
<CAPTION>
                                                     ALLOCATION OF LOAN LOSS RESERVE

                                                                   December 31,
                               -----------------------------------------------------------------------------------------
                                     2002            2001              2000            1999              1998
                               ----------------- ----------------- ----------------- ----------------- -----------------

                                         Percent           Percent           Percent           Percent           Percent
                                        of Loans          of Loans          of Loans          of Loans          of Loans
                                         in Each           in Each           in Each           in Each           in Each
                                        Category          Category          Category          Category          Category
                                        to Total          to Total          to Total          to Total          to Total
                                Amount    Loans   Amount    Loans   Amount    Loans   Amount    Loans   Amount    Loans
                               -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
                                                                        (Dollars in thousands)
DOMESTIC LOANS
     Commercial, financial
<S>                            <C>         <C>   <C>         <C>   <C>         <C>   <C>         <C>   <C>         <C>
        and agricultural.....  $  9,593    24.55%$  1,622    26.71%$  1,265    24.97%$    821    27.04%$    542    38.64%
     Real estate ............    16,881    71.78    4,191    68.99    3,552    70.13    2,012    66.26      696    49.61

     Consumer................       517     3.67      261     4.30      248     4.90      203     6.70      164    11.75
                               -------- -------- -------- -------- -------- -------- -------- -------- -------- --------

                               $ 26,991   100.00%$  6,074   100.00%$  5,065   100.00%$  3,036   100.00%$  1,402   100.00%
                               ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

NONPERFORMING ASSETS

     Nonperforming assets include nonperforming loans and foreclosed real estate
held for sale.  Nonperforming  loans include  loans  classified as nonaccrual or
renegotiated.  A delinquent loan is placed on nonaccrual  status when it becomes
90 days or more past due and management believes, after considering economic and
business  conditions  and  collection  efforts,  that the  borrower's  financial
condition is such that the  collection  of interest is doubtful.  When a loan is
placed on nonaccrual status, all interest which has been accrued on the loan but
remains unpaid is reversed and deducted from earnings as a reduction of reported
interest  income.  No additional  interest income is accrued on the loan balance
until the collection of both principal and interest becomes reasonably  certain.
When a problem  loan is  finally  resolved,  there may  ultimately  be an actual
write-down or  charge-off of the principal  balance of the loan to the allowance
for loan losses.  The accrual of interest on loans is  discontinued  at the time
the loan is 90 days  delinquent  unless the loan is well  collateralized  and in
process of collection.  Recognition of any interest after a loan has been placed
on nonaccrual is accounted for on a cash basis.

     We  had  nonperforming  assets  at  December  31,  2002,  of  approximately
$29,782,000,  $12,415,000  as of 2001,  $6,188,000 as of 2000,  $1,170,000 as of
1999 and $34,000 as of December 31, 1998.

              [The remainder of this page intentionally left blank]

                                       33
<PAGE>
     The following table presents information concerning outstanding balances of
nonperforming assets at December 31, 2002, 2001, 2000, 1999 and 1998.

                              NONPERFORMING ASSETS
<TABLE>
<CAPTION>

                                                                              December 31,
                                                      ----------------------------------------------------------
                                                         2002        2001        2000        1999        1998
                                                      ---------   ---------    --------    --------    ---------
                                                                        (Dollars in thousands)
<S>                                                   <C>         <C>          <C>         <C>         <C>
Nonaccruing loans.................................... $  15,794   $   4,062    $    617    $     43    $     11
Loans past due 90 days or more.......................     8,560       4,125       5,358         914          23
Restructured loans...................................        --          --          --          --          --
                                                      ---------   ---------    --------    --------    --------

     Total nonperforming loans.......................    24,354       8,187       5,975         957          34
Nonaccruing securities...............................        --          --          --          --          --
Other real estate....................................     5,428       4,228         213         213          --
                                                      ---------   ---------    --------    --------    --------

     Total........................................... $  29,782   $  12,415    $  6,188    $  1,170    $     34
                                                      =========   =========    ========    ========    ========

Percentages:
     Loans loss allowance to total
        nonperforming assets........................      90.63%       48.92%      81.85%     259.49%   4,123.53%

Total nonperforming loans to total loans
     (net of unearned interest)......................      4.65         1.62        1.42        0.39        0.03
Total nonperforming assets to total assets...........      5.02         2.18        1.31        0.39        0.02
</TABLE>

     There has been no  significant  impact  on our  financial  statements  as a
result of the provisions of Statement of Financial Accounting Standards No. 114,
Accounting  by Creditors  for  Impairment  of a Loan,  or Statement of Financial
Accounting  Standards  No. 118,  Accounting  by Creditors  for  Impairment  of a
Loan-Income Recognition and Disclosures.

NONINTEREST INCOME

     Noninterest  income  consists of revenues  generated  from a broad range of
financial services and activities  including  fee-based services and profits and
commissions earned through credit life insurance sales and other activities.  In
addition,  gains  or  losses  realized  from the  sale of  investment  portfolio
securities  are  included  in  noninterest  income.   Total  noninterest  income
increased by $719,000 or 46.2% for the year ended December 31, 2002, as compared
to the year 2001.  Total  noninterest  income increased by $517,000 or 49.8% for
the year ended December 31, 2001, as compared to 2000.

     The table below sets forth the components of our noninterest income for the
periods indicated.

                               NONINTEREST INCOME
<TABLE>
<CAPTION>

                                                           Years Ended December 31,          Percent Change
                                                      -------------------------------  --------------------------
                                                         2002       2001       2000      2002/2001     2001/2000
                                                      ---------   --------   --------  --------------------------
                                                                        (Dollars in thousands)
<S>                                                   <C>         <C>        <C>           <C>           <C>
Service charges on deposits.......................... $   1,018   $    867   $    745      17.42%        16.38%
Mortgage origination fees and
     service release premiums........................       831        544        224      52.76        142.86
Document prep fees...................................       149         86         40      73.26        115.00
Securities gains.....................................       262         24         --     991.67            --
Other................................................        15         35         30     (57.14)        16.67
                                                      ---------   --------   --------

     Total........................................... $   2,275   $  1,556   $  1,039      46.21%        49.76%
                                                      =========   ========   ========
</TABLE>

                                       34

<PAGE>
NONINTEREST EXPENSES

     Noninterest  expense  increased  $5,281,000  or 52.7% from the year 2001 to
2002. Salaries and employee benefits increased $2,928,000 or 53.6%.  Noninterest
expense increased  $1,910,000 or 23.5% from 2000 to 2001.  Salaries and employee
benefits  increased  $847,000 or 18.4% from 2000 to 2001.  These  increases  are
attributed to the overall growth and expansion of the Company.

     Occupancy and equipment expense  increased  $392,000 or 31.8% from the year
2001 to 2002 and increased $353,000 or 40.1% from 2000 to 2001.

     The  table  below  sets  forth our  noninterest  expenses  for the  periods
indicated.

                              NONINTEREST EXPENSES

<TABLE>
<CAPTION>

                                                            Years Ended December 31,       2002/2001     2001/2000
                                                      ---------------------------------
                                                                                            Percent        Percent
                                                         2002       2001         2000       Change         Change
                                                      ---------   ---------    --------    ---------     ---------
                                                            (Dollars in thousands)
<S>                                                   <C>         <C>          <C>             <C>           <C>
Salaries and employee benefits....................... $   8,388   $   5,460    $  4,613        53.63%        18.36%
Occupancy and equipment expense......................     1,625       1,233         880        31.79         40.11
Professional fees....................................     1,275         583         471       118.70         23.78
Charge off and collection expense....................       533         139          24       283.45        479.17
Loan fees and services...............................       453         303         200        49.51         51.50
Data processing......................................       421         190         136       121.58         39.71
Advertising..........................................       401         336         291        19.35         15.46
Supplies.............................................       399         262         294        52.29        (10.88 )
Telephone............................................       241         171         158        40.94          8.23
Postage..............................................       142         125          90        13.60         38.89
Exam and assessment..................................       138         122          72        13.11         69.44
Other................................................     1,288       1,099         884        17.20         24.32
                                                      ---------   ---------    --------

     Total........................................... $  15,304   $  10,023    $  8,113       52.69%        23.54%
                                                      =========   =========    ========
</TABLE>

INCOME TAXES

     Income tax expense  decreased  $9,111,000 or 644.4% to ($7,887,000) for the
year-end December 31, 2002 and increased $233,000 or 23.5% to $1,224,000 for the
year-end  December  31,  2001.  The  decrease is the result of the net loss from
operations. The effective tax rate as a percentage of pretax income was 35.4% in
2002,  34.1% in 2001 and  31.2% in 2000.  There is no  current  or  pending  tax
legislation of which  management is aware that if passed would have any material
effect  on  the  consolidated  financial  statements.  For  further  information
concerning  the provision for income taxes,  refer to Note 15, Income Taxes,  of
the "Notes to Financial Statements."

IMPACT OF INFLATION AND CHANGING PRICES

     A bank's asset and liability structure is substantially different from that
of an industrial  company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on financial
results  depends  upon our ability to react to changes in interest  rates and by
such reaction to reduce the inflationary  impact on performance.  Interest rates
do not necessarily move in the same direction,  or at the same magnitude, as the
prices of other goods and services. As discussed previously, management seeks to
manage the  relationship  between  interest-sensitive  assets and liabilities in
order to protect  against  wide  interest  rate  fluctuations,  including  those
resulting from inflation.

MARKET RISK

     Market risk is the risk arising  from adverse  changes in the fair value of
financial  instruments  due to a change in interest  rates,  exchange  rates and
equity prices.  The Company's primary market risk is interest rate variations in
the short-term time horizons also known as interest rate risk.

                                       35

<PAGE>
     The  primary  objective  of our  Asset/Liability  Management  is to  manage
interest  rate risk and achieve  reasonable  stability  in net  interest  income
throughout  interest  rate cycles.  This is achieved by  maintaining  the proper
balance of rate sensitive  earning assets and rate  sensitive  liabilities.  The
relationship of rate sensitive  earning assets to rate sensitive  liabilities is
the principal  factor in projecting the effect that  fluctuating  interest rates
will have on future net  interest  income.  Rate  sensitive  earning  assets and
interest-bearing  liabilities  are those that can be repriced to current  market
rates  within a  relatively  short time  period.  Management  monitors  the rate
sensitivity of interest-earning assets and interest-bearing liabilities over the
entire  life of the  instruments,  but places  particular  emphasis on the first
year. An Asset/Liability  Management policy requires risk assessment relative to
interest pricing and related terms.

     We use additional  tools to monitor and manage  interest rate  sensitivity.
One of the primary  tools is  simulation  analysis.  Simulation  analysis is the
primary method of estimating  earnings at risk and capital at risk under varying
interest rate conditions. Simulation analysis is used to test the sensitivity of
our net interest income and  stockholders'  equity to both the level of interest
rates and the slope of the yield  curve.  Simulation  analysis  accounts for the
expected timing and magnitude of assets and liability cash flows, as well as the
expected  timing and  magnitude of deposits that do not reprice on a contractual
basis. In addition, simulation analysis includes adjustments for the lag between
movements in market interest rates on loans and interest-bearing deposits. These
adjustments  are made to reflect  more  accurately  possible  future cash flows,
repricing behavior and ultimately net interest income.

     As of  December  31,  2002,  our  simulation  analysis  reflected  that our
earnings are at greatest risk in a declining interest rate environment.

     The following  table below depicts the results of the  simulation  assuming
one and two percent  decreases  and increases in the prime  interest  rates in a
one-year time horizon.

                               INTEREST RATE RISK
<TABLE>
<CAPTION>

                                                                             One Year Time Horizon
                                                                          Estimated Repricing Amounts
                                                             Down           Up             Down            Up
                                                           1 Percent     1 percent      2 Percent       2 Percent
                                                          -----------   -----------    -----------     -----------
RATE SENSITIVE ASSETS:
<S>                                                       <C>           <C>            <C>             <C>
     Loans.............................................   $   322,314   $   308,279    $   331,671     $   303,601
     Deposits in banks.................................            93            93             93              93
     Federal funds sold................................        14,681        14,681         14,681          14,681
     Securities........................................        19,376        15,098         20,542          14,476
                                                          -----------   -----------    -----------     -----------

        TOTAL RATE SENSITIVE ASSETS....................       356,464       338,151        366,987         332,851
                                                          -----------   -----------    -----------     -----------

RATE SENSITIVE LIABILITIES
     Deposits - Demand.................................        23,397        32,207         23,397          32,207
     Deposits - Time...................................       236,503       236,503        236,503         236,503
     Other Borrowed Money..............................            --            --             --           8,000
                                                          -----------   -----------    -----------     -----------

        TOTAL RATE SENSITIVE LIABILITIES...............       259,900       268,710        259,900         276,710
                                                          -----------   -----------    -----------     -----------

RATE SENSITIVITY GAP...................................   $    96,564   $    69,441    $   107,087     $    56,141
                                                          ===========   ===========    ===========     ===========

Change in Amount of Net Interest Margin................   $      (966)  $       694    $    (2,142)    $     1,123
                                                          ===========   ===========    ===========     ===========

Change in Percent of Net Interest Margin...............         (0.16)%        0.12%         (0.36)%          0.19%
                                                          ===========   ===========    ===========     ===========
</TABLE>

OTHER ACCOUNTING ISSUES

     In June 1998, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 133,  Accounting for
Derivative  Instruments  and  Hedging  Activities.  This  statement  establishes
accounting and reporting  standards for derivative  instruments  and for hedging
activities.  It requires  that an entity  recognize  all  derivatives  as either
assets or liabilities in the statement of financial  condition and measure those
instruments  at fair value.  The  accounting  for changes in the fair value of a
derivative  is to be determined  based upon the intended use of the  derivative.
For certain hedge  designations  (cash flow and foreign

                                       36
<PAGE>
currency  exposure) the derivative's  gain or loss is reported as a component of
other comprehensive  income.  Other designations  require the gain or loss to be
recognized in earnings in the period of change.  This  statement,  amended as to
effective  date by SFAS No. 137,  is  effective  for  financial  statements  for
periods  beginning  after June 15, 2000. In June 2000, the Financial  Accounting
Standards  Board also  issued SFAS No. 138,  Accounting  for Certain  Derivative
Instruments and Certain  Hedging  Activities - an Amendment of SFAS No. 133. The
adoption of SFAS No.  133,  as amended by SFAS No. 138,  did not have a material
impact on our consolidated financial statements.

     In September  2000, the FASB issued SFAS No. 140,  Accounting for Transfers
and  Servicing  of  Financial  Assets and  Extinguishments  of  Liabilities  - a
replacement  of FASB  Statement No. 125. While SFAS No. 140 carries over most of
the  provisions  of SFAS No. 125,  Accounting  for  Transfers  and  Servicing of
Financial Assets and  Extinguishments of Liabilities,  it provides new standards
for reporting  financial assets  transferred as collateral and new standards for
the derecognition of financial assets, in particular  transactions involving the
use of  special  purpose  entities.  SFAS  No.  140 also  prescribes  additional
disclosures  for collateral  transactions  and for  securitization  transactions
accounted for as sales. The new collateral standards and disclosure requirements
are  effective  for fiscal years ending after  December 15, 2000,  while the new
standards for the  derecognition of financial assets are effective for transfers
made  after  March 31,  2001.  The  adoption  of this  statement  did not have a
material effect on our consolidated financial statements.

     In May 2001,  the Auditing  Standards  Board  issued  Statement on Auditing
Standards ("SAS") No. 94, The Effect of Information  Technology on the Auditor's
Consideration of Internal Control in a Financial Statement Audit. This statement
amends SAS No. 55,  Consideration of Internal  Control in a Financial  Statement
Audit, by providing  additional  guidance  related to the  understanding  by the
auditor of an entity's use of information technology relevant to the audit. This
auditing  standard is effective for audits of financial  statements  for periods
beginning on or after June 1, 2001. The impact on the audit of our  consolidated
financial  statements  resulting from the issuance of this auditing  standard is
not expected to be material.

     In June 2001,  the FASB issued SFAS No. 141,  Business  Combinations.  This
statement address financial  accounting and reporting for business  combinations
and  supersedes  ABP Opinion  No. 16,  Business  Combinations,  and SFAS No. 38,
Accounting  for  Preacquisition  Contingencies  of  Purchased  Enterprises.  All
business combinations in the scope of SFAS No. 141 are to be accounted for using
one method,  the  purchase  method.  Prior to the  issuance  of this  statement,
subject to certain criteria,  business combinations were accounted for using one
of two methods, the pooling-of-interests  method or the purchase method. The two
methods  produce  different  financial  statement  results.   The  single-method
approach  used in SFAS No.  141  reflects  the  conclusion  that  virtually  all
business  combinations are acquisitions and therefore should be accounted for in
the same manner as other asset acquisitions based on the values exchanged.  This
statement  provides  expanded and revised  guidance related to the allocation of
the purchase price to goodwill and other  intangibles  arising from the business
combination.  The provisions of SFAS No. 141 apply to all business  combinations
initiated after June 30, 2001.

     In June 2001, the FASB issued SFAS No. 142,  Goodwill and Other  Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other  intangible  assets and  supersedes  APB  Opinion  No. 17,  Intangible
Assets.  SFAS  No.  142  provides  new  standards  for  accounting  relating  to
intangible assets after initial  recognition in the financial  statements.  This
statement   proscribes  the  accounting  practice  of  amortizing  or  expensing
intangibles  ratably over a  prescribed  period of time and imposes new guidance
requiring  that goodwill and certain other  intangibles be tested for impairment
at least  annually by comparing  fair values of those assets with their recorded
amounts. Additional disclosure requirements also are provided. The provisions of
SFAS No. 142 are required to be applied in fiscal years beginning after December
15, 2001.

     The  adoption  of SFAS No. 141 and SFAS No. 142 are not  expected to have a
material effect on our consolidated financial statements.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations.  This statement  requires that the fair value of a liability for an
asset retirement  obligation be recognized in the period in which it is incurred
if a  reasonable  estimate  of fair  value  can be made.  The  associated  asset
retirement  costs  are  capitalized  as  part  of  the  carrying  amount  of the
long-lived  asset.  This statement is effective for financial  statements issued
for fiscal years  beginning  after June 15, 2002. The adoption of this statement
is not  expected  to  have a  material  effect  on  our  consolidated  financial
statements.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-lived Assets. This statement addresses financial  accounting
and  reporting  for the  impairment  or  disposal  of  long-lived

                                       37
<PAGE>
assets.  This statement  supersedes  FASB Statement No. 121,  Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
the  accounting  and reporting  provisions of APB Opinion No. 30,  Reporting the
Results  of  Operations--Reporting  the  Effects of  Disposal  of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that opinion).  This statement also amends  Accounting  Research Bulletin No.
51,   Consolidated   Financial   Statements,   to  eliminate  the  exception  to
consolidation for a subsidiary for which control is likely to be temporary.  The
major changes  resulting from this statement  relate to the  establishment  of a
single method for the recognition of impairment  losses on long-lived  assets to
be held and used whether from discontinuance of a business segment or otherwise.
This  statement is effective  for financial  statements  issued for fiscal years
beginning  after  December  15,  2001.  The  adoption of this  statement  is not
expected to have a material effect on our consolidated financial statements.

     In December 2001,  the  Accounting  Standards  Executive  Committee  issued
Statement of Position ("SOP") 01-6,  Accounting by Certain  Entities  (Including
Entities  With Trade  Receivables)  That Lend to or Finance  the  Activities  of
Others.  This  statement  reconciles  and conforms the  accounting and financial
reporting  provisions for similar  transactions as applied to different entities
within the financial services industry. It eliminates  differences in disclosure
practices  where  not  warranted  and  should  provide  greater  consistency  in
reporting by entities in the  financial  services  industry.  This  statement is
effective for annual and interim  financial  statements  issued for fiscal years
beginning  after  December 15, 2001. The adoption of SOP 01-6 is not expected to
have a material effect on our consolidated financial statements.

     In December 2001, the Auditing Standards Board issued SAS No. 95, Generally
Accepted  Auditing  Standards.  This  statement  supersedes  Generally  Accepted
Auditing  Standards of SAS No. 1 and generally provides  additional  guidance to
the  independent  auditor in the conduct of an audit  engagement,  primarily  by
addressing   authoritative   and   nonauthoritative   publications   for   audit
consideration  and  guidance.  This SAS is  effective  for  audits of  financial
statements for periods beginning on or after December 15, 2001.

     In January  2002,  the  Auditing  Standards  Board issued SAS No. 96, Audit
Documentation.  This statement  supersedes SAS No. 41, Working Papers and amends
SAS No. 47,  Audit Risk and  Materiality  in  Conducting  an Audit,  SAS No. 56,
Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's
Ability to Continue as a Going Concern. This statement provides revised guidance
to the  independent  auditor as to the type,  purpose and  requirements of audit
documentation.  This SAS is  effective  for audits of financial  statements  for
periods beginning on or after May 15, 2002.

     The  impact of SAS No.  95 and SAS No. 96 on the audit of our  consolidated
financial  statements resulting from the issuance of these auditing standards is
not expected to be material.

     In April 2002,  the Financial  Accounting  Standards  Board issued SFAS No.
145,  Rescission  of FASB  Statements  No.  4,  44,  and 64,  Amendment  of FASB
Statement No. 13, and Technical  Corrections.  SFAS No. 145 addresses accounting
and financial reporting for extinguishments of debt,  intangible assets of motor
carriers and leases.  SFAS No. 145 is effective for fiscal years beginning after
and transactions occurring after May 15, 2002. The adoption of this statement is
not expected to have a material effect on the Company's  consolidated  financial
statements.

     In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.  The statement
addresses  financial  reporting and accounting for costs associated with exit or
disposal  activities  and nullifies  Emerging  Issues Task Force Issue No. 94-3,
Liability  Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity  (including Certain Costs Incurred in a Restructuring).  The
primary  difference  between  SFAS  No.  146  and  Issue  94-3  relates  to  the
requirement  for  recognition  of a liability  related to the cost of an exit or
disposal  activity when the liability is incurred.  Under 94-3,  such  liability
would be recognized at the date of an entity's  commitment to an exit plan. SFAS
No. 146 is effective for exit or disposal  activities  initiated  after December
31, 2002, with early application  encouraged.  The adoption of this statement is
not expected to have a material impact on the Company's  consolidated  financial
statements.

     In June 2002, the Auditing  Standards Board issued SAS No. 97, Amendment to
Statement on Auditing Standards No. 50, Reports on the Application of Accounting
Principles.  This  statement  prohibits an accountant  from  providing a written
report on the  application  of accounting  principles  not  involving  facts and
circumstances  of a specific  entity.  This SAS is effective for written reports
issued or oral  advice  provided  on or after June 30,  2002.  The

                                       38
<PAGE>
impact on the audit of the Company's consolidated financial statements resulting
from the issuance of this auditing standard is not expected to be material.

     In September 2002, the Auditing  Standards Board issued SAS No. 98, Omnibus
Statement  on  Auditing  Standards  - 2002.  This  statement  revises and amends
several previously issued Statements on Auditing Standards. The changes required
impose  enhanced  quality  controls  and  audit  considerations  on  a  firm  of
independent  auditors in the  conduct of their  audit of a  company's  financial
statements.  The additional  requirements  primarily  relate to more descriptive
guidance on the  application  of auditing  procedures,  the auditors  report and
related disclosures and supplementary information. This SAS No. 98 was effective
upon  issuance  except for the  amendment to SAS No. 70, which is effective  for
reports  issued on or after  January  1,  2003.  The  impact on the audit of the
Company's  consolidated financial statements resulting from the issuance of this
auditing standard was not material.

     In October 2002, the Financial  Accounting  Standards Board issued SFAS No.
147, Acquisitions of Certain Financial Institutions, an amendment of SFAS No. 72
and 144 and FASB  Interpretation  No. 9. Except for transactions  between two or
more  mutual  enterprises,  SFAS  No.  147  removes  acquisitions  of  financial
institutions  from the scope of SFAS No. 72 and  Interpretation  9 and  requires
those  transactions  be accounted for in  accordance  with SFAS No. 141 and 142.
SFAS No.  147 also  amends  SFAS  No.  144 to  include  in its  scope  long-term
customer-relationship  intangible  assets  of  financial  institutions  such  as
depositor  and borrower  relationship  intangible  assets and credit  cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow  recoverability  test and impairment loss recognition and
measurement  provisions that SFAS No. 144 requires for other  long-lived  assets
that are held and used.  SFAS No. 147 is essentially  effective as of October 1,
2002. As a result,  the Company adopted SFAS No. 147 on October 1, 2002, with no
material impact on the Company's consolidated financial statements.

     In  October  2002,  the  Auditing   Standards  Board  issued  SAS  No.  99,
Consideration of Fraud in a Financial Statement Audit. This statement supersedes
SAS No. 82 and amends SAS No. 1 and SAS No. 85. SAS No. 99  describes  fraud and
its  characteristics;  discusses the need for auditors to exercise  professional
skepticism;  requires (as part of planning the audit) that there be a discussion
among the audit team members regarding the risks of material misstatement due to
fraud; and requires auditors to gather  information  necessary to identify risks
of  material  misstatement  due to fraud.  This SAS is  effective  for audits of
financial  statements  for periods  beginning on or after December 15, 2002. The
impact on the audit of the Company's consolidated financial statements resulting
from the issuance of this auditing standard is not expected to be material.

     In November 2002, the auditing  Standards Board issued SAS No. 100, Interim
financial  Information.  This statement  supersedes  SAS No. 71 and  establishes
standards on the nature,  timing and extent of the procedures to be performed by
an  independent  accountant  when  conducting  a  review  of  interim  financial
information.  This SAS is  effective  for interim  periods  within  fiscal years
beginning  after  December  15. 2002.  The impact on the audit of the  Company's
consolidated  financial  statements resulting from the issuance of this auditing
standard is not expected to be material.

     In  November  2002,  the FASB  issued  Interpretation  No. 45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others.  This  interpretation  changes the current
practice  of  accounting  for,  and  the  disclosures   related  to  guarantees.
Interpretation  No. 45 requires certain guarantees to be recorded at fair value,
which is a change  from the  current  practice  of  generally  only  recording a
liability when a loss is probable and reasonably  estimable.  The interpretation
also requires a guarantor to make new  disclosures,  even when the likelihood of
making any payments under the guarantee is remote,  which is another change from
current  practice.  The  disclosure  requirements  of  this  interpretation  are
effective for financial  statements  of interim or annual  periods  ending after
December  15,  2002.  The  interpretation's   initial  recognition  and  initial
measurement  provisions  are  applicable  on a  prospective  basis to guarantees
issued or modified after December 31, 2002. The guarantor's  previous accounting
for guarantees issued prior to the date of  Interpretation  No. 45 are not to be
revised or restated to reflect the interpretation's  provisions. The adoption of
the disclosure  requirements  of  Interpretation  No. 45 did not have a material
impact on the Company's consolidated  financial statements.  The adoption of the
initial recognition and initial measurement  provisions of Interpretation No. 45
is not  expected  to  have a  material  impact  on  the  Company's  consolidated
financial statements.

     In December 2002, the FASB issued SFAS No. 148,  Accounting for Stock-Based
Compensation - Transition and Disclosure.  This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to  the  fair  value  based  method  of  accounting  for  stock-based   employee
compensation.  It also amends the  disclosure  provisions  of that  Statement to
require  prominent  disclosure  about the effects on  reported  net

                                       39
<PAGE>
income of an entity's accounting policy decisions with respect to stock-based
employee compensation.  This Statement also amends APB Opinion No. 28 to require
disclosure about those effects in interim financial information.  This Statement
is effective for financial statements for fiscal years ending after December 15,
2002 and for financial reports  containing  condensed  financial  statements for
interim periods  beginning after December 15, 2002. The adoption of SFAS No. 148
did  not  have  a  material  impact  on  the  Company's  consolidated  financial
statements.

     In January 2003, the auditing  Standards Board Issued SAS No. 101, Auditing
Fair Value Measurements and Disclosures. This statement establishes standards on
auditing the  measurement  and disclosure of assets,  liabilities,  and specific
components  of  equity  presented  or  disclosed  at  fair  value  in  financial
statements.  This SAS is effective for audit of financial statements for periods
beginning  on or after June 15, 2003.  The impact on the audit of the  Company's
consolidated  financial  statements resulting from the issuance of this auditing
standard is not expected to be material.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Please refer to "Item 7. Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations  -- Market  Risk,"  which is  incorporated
herein by reference.

ITEM 8. FINANCIAL STATEMENTS

     The financial  statements and supplemental  data required by Regulation S-X
and by Item 302 of Regulation S-K are set forth in the pages listed below.


              [The remainder of this page intentionally left blank]

                                       40
<PAGE>
             HERITAGE FINANCIAL HOLDING CORPORATION AND SUBSIDIARIES

                              FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                                           Page(s)

<S>                                                                                                          <C>
Independent Auditors' Report..................................................................................42

Consolidated Statements of Financial Condition

    as of December 31, 2002 and 2001..........................................................................43

Consolidated Statements of Income

    for the Years Ended December 31, 2002, 2001 and 2000......................................................44

Consolidated Statements of Stockholders' Equity

    for the Years Ended December 31, 2002, 2001 and 2000......................................................45

Consolidated Statements of Cash Flows

    for the Years Ended December 31, 2002, 2001 and 2000......................................................46

Notes to Consolidated Financial Statements....................................................................47

Quarterly Results (Unaudited).................................................................................81
</TABLE>

                                       41
<PAGE>

<TABLE>
<CAPTION>

                                      Schauer Taylor Cox Vise Morgan & Fowler, P.C.
                                      Certified Public Accountants and Consultants
                                                  150 Olde Towne Road
                                                Birmingham, Alabama 35216
<S>                                      <C>                                         <C>
Douglas B. Schauer, CPA                           Donald G. Vise, CPA                   David A. Bowers, CPA
Edward R. Taylor, CPA                            Phillip D. Morgan, CPA               Benjamin N. Vance, CPA
W. Ernest Cox, CPA                                Dale E. Fowler, CPA                   Steven W. Brown, CPA
________________                                         * * *                              ________________
C. David Brooks, CPA                            Telephone - 205.822.3488               Russell D. Payne, CPA
M. Bryant King, CPA                               Wats - 800.466.3488                 Raymond A. Patton, CPA
Steven D. Miller, CPA                      Fax - 205.822.3541 or 205.822.0645         Stewart T. Wilson, CPA
                                             Email - Firm@schauertaylor.com

</TABLE>

                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders
Heritage Financial Holding Corporation
Decatur, Alabama


We have audited the accompanying  consolidated statements of financial condition
of  Heritage  Financial  Holding   Corporation  (a  Delaware   corporation)  and
subsidiaries  as of  December  31, 2002 and 2001,  and the related  consolidated
statements of income,  stockholders' equity and cash flows for each of the three
years in the period  ended  December  31,  2002.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Heritage Financial
Holding  Corporation and  subsidiaries as of December 31, 2002 and 2001, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2002, in conformity  with  accounting  principles
generally accepted in the United States of America.


Birmingham, Alabama
February 25, 2003
                               /s/ Schauer Taylor Cox Vise Morgan & Fowler, P.C.


          Member of American Institute of Certified Public Accountants,
    SEC Practice Section and Alabama Society of Certified Public Accountants

                                       42
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           December 31, 2002 and 2001
<TABLE>
<CAPTION>

                                                                                     2002                2001
                                                                                ---------------    ---------------
Assets
<S>                                                                             <C>                <C>
   Cash and due from banks.................................................     $     4,759,310    $      6,660,032
   Interest-bearing deposits with other banks..............................              97,707             325,736
   Federal funds sold......................................................          14,681,498           6,716,000
                                                                                ---------------    ----------------
       Cash and Cash Equivalents...........................................          19,538,515          13,701,768

   Securities available-for-sale...........................................          36,761,802          25,893,863
   Mortgage loans held-for-sale............................................          12,343,440          12,548,322

   Loans...................................................................         523,849,502         505,380,611
   Allowance for loan losses...............................................         (26,990,594)         (6,074,230)
                                                                                ---------------    ----------------
       Net Loans...........................................................         496,858,908         499,306,381

   Premises and equipment, net.............................................           7,105,706           6,407,022
   Accrued interest........................................................           3,404,344           3,873,413
   Foreclosed real estate..................................................           5,428,047           4,227,926
   Other assets............................................................          11,501,035           2,332,392
                                                                                ---------------    ----------------
       Total Assets........................................................     $   592,941,797    $    568,291,087
                                                                                ===============    ================

Liabilities and Stockholders' Equity

Liabilities
   Deposits:
     Noninterest-bearing...................................................     $    21,961,197    $     21,295,986
     Interest-bearing......................................................         503,669,662         483,013,752
                                                                                ---------------    ----------------
       Total Deposits......................................................         525,630,859         504,309,738

   Short-term borrowings...................................................           6,650,000                  --
   Accrued interest........................................................           3,288,749           4,204,515
   FHLB advances...........................................................          23,000,000          13,000,000
   Guaranteed preferred beneficial interest in the Company's
     subordinated debentures...............................................          10,000,000          10,000,000
   Other liabilities.......................................................             669,143             652,954
                                                                                ---------------    ----------------
       Total Liabilities...................................................         569,238,751         532,167,207

Stockholders' Equity
   Preferred stock - par value $0.01 per share; 10,000,000
     authorized, none issued...............................................                  --                  --
   Common stock - par value $.01 per share, 40,000,000 shares
     authorized, 8,821,144 shares issued and outstanding at
     December 31, 2002 and 8,515,147 shares issued and
     outstanding at December 31, 2001......................................              88,211              85,151
   Paid-in capital.........................................................          32,234,654          30,359,218
   Retained earnings.......................................................          (8,676,524)          5,736,259
   Accumulated other comprehensive income (loss): net unrealized (gains)
     losses on securities available-for-sale, net of deferred income tax...              56,705             (56,748)
                                                                                ---------------    ----------------
       Total Stockholders' Equity..........................................          23,703,046          36,123,880
                                                                                ---------------    ----------------

       Total Liabilities and Stockholders' Equity..........................     $   592,941,797    $    568,291,087
                                                                                ===============    ================
</TABLE>

                 See notes to consoildated financial statements

                                       43
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                  Years Ended December 31, 2002, 2001 and 2000
<TABLE>
<CAPTION>

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

Interest Income
<S>                                                         <C>                 <C>                <C>
   Interest and fees on loans...........................    $    39,876,186     $    41,587,737    $     31,788,388
   Interest and dividends on securities:
     Taxable securities.................................          1,603,251           1,460,386           1,542,276
     Nontaxable securities..............................            133,119             124,585             123,619
   Interest on deposits with other banks................              6,264              24,905             365,000
   Interest on federal funds sold and securities
     purchased under agreements to resale...............            320,016           1,055,690           1,840,891
                                                            ---------------     ---------------    ----------------
       Total Interest Income............................         41,938,836          44,253,303          35,660,174

Interest Expense
   Interest on deposits.................................         19,716,658          26,751,607          20,867,463
   Interest on FHLB borrowings..........................            977,348             962,690           1,150,833
   Interest on short-term borrowings....................             35,700               1,888                 229
   Interest on guaranteed preferred beneficial interest
     in the Company's subordinated debentures...........          1,012,029             878,334                  --
                                                            ---------------     ---------------    ----------------
       Total Interest Expense...........................         21,741,735          28,594,519          22,018,525
                                                            ---------------     ---------------    ----------------

Net interest income.....................................         20,197,101          15,658,784          13,641,649
Provision for loan losses...............................         29,468,734           3,602,047           3,388,973
                                                            ---------------     ---------------    ----------------

Net Interest Income (Loss) After Provision
   For Loan Losses......................................         (9,271,633)         12,056,737          10,252,676

Noninterest Income
   Customer service fees................................          1,018,421             867,323             745,377
   Investment security gains............................            233,372              23,926                  --
   Other operating income...............................          1,023,487             665,197             293,666
                                                            ---------------     ---------------    ----------------
       Total Noninterest Income.........................          2,275,280           1,556,446           1,039,043
                                                            ---------------     ---------------    ----------------

Noninterest Expenses
   Salaries and employee benefits.......................          8,388,132           5,460,426           4,612,785
   Occupancy and equipment expense......................          1,625,162           1,232,525             879,910
   Other operating expenses.............................          5,290,357           3,330,345           2,620,324
                                                            ---------------     ---------------    ----------------
       Total Noninterest Expenses.......................         15,303,651          10,023,296           8,113,019
                                                            ---------------     ---------------    ----------------

Income (loss) before income taxes.......................        (22,300,004)          3,589,887           3,178,700
Provision for income tax expense (benefit)..............         (7,887,221)          1,223,966             991,169
                                                            ---------------     ---------------    ----------------
Net Income (Loss).......................................    $   (14,412,783)    $     2,365,921    $      2,187,531
                                                            ===============     ===============    ================

Earnings (Loss) Per Common Share
   Basic................................................    $         (1.65)    $          0.28    $          0.26
   Diluted..............................................              (1.40)               0.23               0.22

Weighted Average Shares Outstanding
   Basic................................................          8,717,303           8,484,624           8,316,756
   Diluted..............................................         10,262,070          10,486,966          10,133,865
</TABLE>

                 See notes to consoildated financial statements

                                       44
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  Years Ended December 31, 2002, 2001 and 2000
<TABLE>
<CAPTION>

                                                                                          Accumulated
                                                                                             Other
                                           Common        Paid-in          Retained     Comprehensive
                                            Stock        Capital          Earnings          Income            Total
                                        -----------  --------------   ---------------  ---------------   --------------
<S>                 <C> <C>             <C>          <C>              <C>              <C>               <C>
Balance at December 31, 1999.........   $    75,810  $   21,554,250   $     1,182,807  $       (892,817) $   21,920,050

Net income - 2000....................            --              --         2,187,531               --        2,187,531
Unrealized gains on available-for-
   sale securities, net of
   reclassification adjustment, net
   of tax of $(489,273)..............            --              --                --           733,910         733,910
                                                                                                         --------------
Comprehensive income.................            --              --                --                --       2,921,441
                                                                                                         --------------
Issuance of shares from
   stock offerings...................         8,500       8,491,500                --                --       8,500,000
Issuance of shares under stock
   option plan.......................           400          66,347                --                --          66,747
Issuance of shares under
   employee stock purchase plan......            48          29,630                --                --          29,678
Compensatory options.................            --          61,386                --                --          61,386
                                        -----------  --------------   ---------------  ----------------  --------------

Balance at
   December 31, 2000.................        84,758      30,203,113         3,370,338          (158,907)     33,499,302

Net income - 2001....................            --              --         2,365,921               --        2,365,921
Unrealized gains on available-for-
   sale securities, net of
   reclassification adjustment, net
   of tax of $(68,104)...............            --              --                --           102,159         102,159
                                                                                                         --------------
Comprehensive income.................            --              --                --                --       2,468,080
                                                                                                         --------------
Stock option exercise................           360          86,850                --                --          87,210
Issuance of shares under
   employee stock purchase plan......            33          31,412                --                --          31,445
Compensatory options.................            --          37,843                --                --          37,843
                                        -----------  --------------   ---------------  ----------------  --------------

Balance at
   December 31, 2001.................        85,151      30,359,218         5,736,259           (56,748)     36,123,880

Net loss - 2002......................            --              --       (14,412,783)              --      (14,412,783)
Unrealized gains on available-for-
   sale securities, net of
   reclassification adjustment, net
   of tax of $(75,636)...............            --              --                --           113,453         113,453
                                                                                                         --------------
Comprehensive loss...................            --              --                --                --     (14,299,330)
                                                                                                         --------------
Compensatory options.................            --       1,126,914                --                --       1,126,914
Tax benefit on stock options.........            --         702,817                --                --         702,817
Stock option exercise................         3,037          20,534                --                --          23,571
Issuance of shares under
   employee stock purchase plan......            23          25,171                --                --          25,194
                                        -----------  --------------   ---------------  ----------------  --------------

Balance at
   December 31, 2002.................   $    88,211  $   32,234,654   $    (8,676,524) $         56,705  $   23,703,046
                                        ===========  ==============   ===============  ================  ==============
</TABLE>

                 See notes to consoildated financial statements

                                       45
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 2002, 2001 and 2000
<TABLE>
<CAPTION>
                                                                 2002                2001                2000
                                                            ---------------     ---------------    ----------------
Operating Activities
<S>                                                         <C>                 <C>                <C>
   Net income (loss)....................................    $   (14,412,783)    $     2,365,921    $      2,187,531
   Adjustments to reconcile net income to net
     cash provided by operating activities:
     Provision for loan losses..........................         29,468,734           3,602,047           3,388,973
     Depreciation, amortization and accretion, net......            790,839             437,999             321,341
     Deferred tax benefit...............................         (6,700,257)           (264,948)           (746,779)
     Security gains.....................................           (261,671)             23,926                  --
     Loss on disposition of fixed assets................              2,250               1,786                  --
     Losses on other real estate........................            249,491              23,926                  --
     Decrease (increase) in accrued interest receivable.            469,069             523,054          (2,314,056)
     Increase (decrease) in accrued interest payable....           (915,766)             52,267           2,679,350
     Net decrease (increase) in mortgage
       loans held for sale..............................            204,882         (12,548,322)                 --
     Increase in income tax receivable..................         (1,832,399)           (188,178)                 --
     Other, net.........................................              7,381             531,321             (47,723)
                                                            ---------------     ---------------    ----------------
       Net Cash Provided By (Used In)
         Operating Activities...........................          7,069,770          (6,173,339)          5,468,637
                                                            ---------------     ---------------    ----------------

Investing Activities
   Purchases of securities available-for-sale...........       (101,267,892)        (18,774,196)         (7,008,487)
   Proceeds from sales of securities available-for-sale.         35,340,361             520,493                  --
   Proceeds from calls, paydowns and maturities of
     securities available-for-sale......................         55,317,503          19,399,714           1,358,567
   Net increase in loans to customers...................        (31,020,203)        (89,959,157)       (178,875,187)
   Purchase of premises and equipment...................         (1,343,238)         (1,287,676)         (2,224,003)
   Proceeds from disposition of fixed assets............             44,315               7,665                  --
   Proceeds from disposition of foreclosed real estate..          2,549,330             106,250                  --
                                                            ---------------     ---------------    ----------------
       Net Cash Used In Investing Activities............        (40,379,824)        (89,986,907)       (186,749,110)
                                                            ---------------     ---------------    ----------------

Financing Activities
   Net increase in demand deposits, NOW accounts,
     and savings accounts...............................         34,867,423          38,279,518          20,653,089
   Net increase (decrease) in certificates of deposit...        (13,546,302)         44,785,982         151,558,986
   Net increase (decrease) in short-term borrowings.....          6,650,000                  --             (24,719)
   Net proceeds from (payments to) FHLB advances........         10,000,000           1,000,000         (13,000,000)
   Net proceeds from issuance of stock..................             48,766             118,655           8,596,425
   Compensatory options.................................          1,126,914              37,843              61,386
   Issuance of guaranteed preferred beneficial interest
     in the Company's subordinated debentures...........                 --          10,000,000                  --
                                                            ---------------     ---------------    ----------------
       Net Cash Provided By Financing Activities........         39,146,801          94,221,998         167,845,167
                                                            ---------------     ---------------    ----------------

Increase (Decrease) in Cash and
   Cash Equivalents.....................................          5,836,747          (1,938,248)        (13,435,306)

Cash and Cash Equivalents at Beginning of Year..........         13,701,768          15,640,016          29,075,322
                                                            ---------------     ---------------    ----------------

Cash and Cash Equivalents at End of Year................    $    19,538,515     $    13,701,768    $     15,640,016
                                                            ===============     ===============    ================
</TABLE>

                 See notes to consoildated financial statements

                                       46
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies

Heritage  Financial  Holding  Corporation  (a  Delaware   corporation)  and  its
wholly-owned  subsidiaries,  Heritage Bank (the "Bank")(an Alabama  corporation)
and  Heritage  Financial  Statutory  Trust I  ("Heritage  Trust")(a  Connecticut
Statutory  Trust)(referred  to herein  collectively  as the  "Company")  operate
predominantly in the domestic  commercial  banking industry.  The Company's main
office is in Decatur,  Alabama with additional Bank branch  locations in Morgan,
Madison and Jefferson counties of North and Central Alabama.

During the course of a targeted,  limited scope review of the loan  portfolio of
the Company's  wholly-owned  subsidiary  Heritage Bank, an Alabama state banking
corporation  (the "Bank"),  and a concurrent  safety and  soundness  examination
conducted by regulatory authorities, management identified certain assets in the
Bank's loan portfolio that management believed should be classified.  Additional
review of the Bank's loan portfolio  subsequently  identified  additional  asset
quality  problems,  which  resulted in the Company  increasing the allowance for
loan losses net of charge offs and recoveries by a total of $20,916,364  for the
year ending December 31, 2002.  Management  believes that the allowance for loan
losses is adequate to absorb known risks in the loan portfolio.

The Bank has engaged a new  President/Chief  Executive Officer,  Chief Financial
Officer  and Chief  Lending  Officer.  These  individuals  have  been  given the
authority and  responsibility  to strengthen  internal  controls,  improve asset
quality and improve bank profitability.  The Company and the Bank have continued
to add experienced  personnel to assist in the review and oversight of important
areas such as credit quality and loan review.

The Board of Directors and senior  management have developed a new capital plan.
This plan addresses the current capital  deficiencies,  and outlines a return to
capital adequacy.

The  accounting  and  reporting  policies  of the Company  conform to  generally
accepted  accounting  principles  in the United States of America and to general
practice  within  the  banking  industry.  The  following  summarizes  the  most
significant of these policies.


Basis of Consolidation

The consolidated financial statements include the accounts of Heritage Financial
Holding Corporation,  the Bank and Heritage Trust. All significant  intercompany
balances and transactions have been eliminated.  Investments in subsidiaries are
carried at the parent company's equity in the underlying net assets.

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  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

                                       47
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

Securities Purchased Under Agreements to Resell

Securities  purchased  under  agreements  to resell  are  generally  treated  as
collateralized  financing  transactions  and are recorded at the amount at which
the securities  were  acquired.  The market value of the collateral is monitored
and additional collateral obtained when deemed appropriate.


Securities

Securities are  classified as either  held-to-maturity,  available-for-sale,  or
trading.

Securities  held-to-maturity  are those  securities for which management has the
ability  and intent to hold until  maturity.  These  securities  are  carried at
amortized cost,  adjusted for amortization of premiums and accretion of discount
to the earlier of the maturity or call date.

Securities available-for-sale represent those securities intended to be held for
an indefinite period of time,  including  securities that management  intends to
use as part of its asset/liability  strategy, or that may be sold in response to
changes in interest  rates,  changes in  prepayment  risk,  the need to increase
regulatory capital, or other similar factors. Securities  available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from stockholders' equity.

Securities  carried  in  trading  accounts  are  carried  at market  value  with
unrealized gains and losses reflected in income.

Realized   and   unrealized   gains  and  losses  are  based  on  the   specific
identification method.

Declines in the fair value of individual held-to-maturity and available-for-sale
securities  below their cost that are other than temporary result in write-downs
of the individual  securities to their fair value.  The related  write-downs are
included in earnings as realized losses.

The Company has no held-to-maturity or trading securities.

Mortgage Loans Held For Sale

Mortgage  loans  held for sale are  carried  at the lower of  aggregate  cost or
market.  The cost of mortgage  loans held for sale is the  mortgage  note amount
plus certain net origination  costs less discounts  collected.  Gains and losses
resulting from changes in the market value of the inventory are netted.  Any net
gain that results is  deferred;  any net loss that  results is  recognized  when
incurred.  The  aggregate  cost of mortgage  loans held for sale at December 31,
2002,  approximates their aggregate net realizable value. Gains or losses on the
sale of mortgage loans held for sale are included in other income.

                                       48
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

Loans

Loans are  stated at unpaid  principal  balances,  less the  allowance  for loan
losses and net deferred loan fees.

Loan  origination  and commitment  fees, as well as certain  direct  origination
costs, when material,  are deferred and amortized as a yield adjustment over the
lives of the related loans using the interest method.


Allowance For Loan Losses

A loan is considered impaired, based on current information and events, if it is
probable  that the Bank will be unable to  collect  the  scheduled  payments  of
principal or interest  when due according to the  contractual  terms of the loan
agreement.  Uncollateralized  loans are  measured  for  impairment  based on the
present  value of  expected  future  cash  flows  discounted  at the  historical
effective interest rate, while all  collateral-dependent  loans are measured for
impairment  based  on  the  fair  value  of  the  collateral.   Smaller  balance
homogeneous loans which consist of residential  mortgages and consumer loans are
evaluated  collectively  and reserves are  established  based on historical loss
experience.

The allowance for loan losses is established  through charges to earnings in the
form of a provision  for loan losses.  Increases  and decreases in the allowance
due to changes in the  measurement  of the  impaired  loans are  included in the
provision for loan losses.  Loans  continue to be classified as impaired  unless
they are brought  fully  current and the  collection  of scheduled  interest and
principal is considered probable. When a loan or portion of a loan is determined
to be  uncollectable,  the portion deemed  uncollectable  is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.

Management's  periodic  evaluation  of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse  situations that may affect the borrowers'  ability to repay,  estimated
value  of  any  underlying  collateral  and  an  analysis  of  current  economic
conditions.  While management  believes that it has established the allowance in
accordance  with  generally  accepted  accounting  principles and has taken into
account the views of its regulators and the current economic environment,  there
can be no  assurance  that in the future the Bank's  regulators  or its economic
environment will not require further increases in the allowance.


Income Recognition on Impaired and Nonaccrual Loans

Loans,  including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of  principal or interest for a period of
more than 90 days, unless such loans are well  collateralized and in the process
of collection.  If a loan or a portion of a loan is classified as doubtful or is
partially  charged off, the loan is generally  classified as  nonaccrual.  Loans
that are on a current  payment  status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.

                                       49
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

Loans may be returned to accrual status when all principal and interest  amounts
contractually  due are  reasonably  assured of  repayment  within an  acceptable
period of time, and there is a sustained period of repayment  performance by the
borrower, in accordance with the contractual terms of interest and principal.

While a loan is classified as nonaccrual  and the future  collectibility  of the
recorded  loan balance is doubtful,  collections  of interest and  principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future  collectibility of the recorded loan balance
is expected,  interest  income may be  recognized  on a cash basis.  In the case
where a nonaccrual loan has been partially charged off,  recognition of interest
on a cash  basis is limited to that  which  would  have been  recognized  on the
recorded loan balance at the  contractual  interest rate.  Receipts in excess of
that amount are recorded as  recoveries  to the  allowance for loan losses until
prior charge offs have been fully  recovered.  Interest  income  recognized on a
cash basis was immaterial for the years ended December 31, 2002, 2001 and 2000.

Premises and Equipment

Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Expenditures for additions and major improvements that significantly  extend the
useful  lives of the  assets  are  capitalized.  Expenditures  for  repairs  and
maintenance  are charged to expense as incurred.  The carrying  values of assets
traded in are used to adjust the carrying  values of the new assets  acquired by
trade.  Assets  which are  disposed of are  removed  from the  accounts  and the
resulting gains or losses are recorded in operations.

Depreciation  is provided  generally by accelerated  and  straight-line  methods
based on the estimated useful lives of the respective assets.

Foreclosed Real Estate

Foreclosed   real  estate  includes  both  formally   foreclosed   property  and
in-substance  foreclosed property.  In-substance foreclosed properties are those
properties for which the institution has taken physical  possession,  regardless
of whether formal foreclosure proceedings have taken place.

At the time of foreclosure or within 90 days thereafter,  foreclosed real estate
is recorded at the lower of the carrying amount or fair value less cost to sell,
which becomes the property's  new basis.  Any  write-downs  based on the asset's
fair value at date of acquisition  are charged to the allowance for loan losses.
After foreclosure, these assets are carried at the lower of their new cost basis
or fair value less cost to sell.

Costs incurred in maintaining  foreclosed real estate and subsequent adjustments
to the  carrying  amount  of the  property  are  included  in  income  (loss) on
foreclosed real estate.

                                       50
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

Advertising Costs

The Company's policy is to expense  advertising  costs as incurred.  Advertising
expense  for the years  ended  December  31,  2002,  2001 and 2000  amounted  to
approximately $401,000, $336,000 and $291,000, respectively.

Income Taxes

Income taxes are provided  for the tax effects of the  transactions  reported in
the financial  statements and consist of taxes currently due plus deferred taxes
related  primarily  to  differences  between  the  basis  of  available-for-sale
securities,  allowance  for loan losses,  estimated  losses on  foreclosed  real
estate, accumulated depreciation and accrued employee benefits for financial and
income tax  reporting.  The deferred tax assets and  liabilities  represent  the
future tax  return  consequences  of those  differences,  which  will  either be
taxable or deductible  when the assets and liabilities are recovered or settled.
Deferred tax assets and liabilities are reflected at income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled.  As changes in tax laws or rates are enacted,  deferred tax
assets and liabilities are adjusted through the provision for income taxes.

The Company and its subsidiary bank file a consolidated federal and state income
tax return.  The subsidiary  bank provides for income taxes on a separate return
basis and remits to the Company amounts determined to be currently payable.

Stock-Based Compensation

In October  1995,  the FASB  issued  SFAS No. 123,  Accounting  for  Stock-Based
Compensation,  which  defines a fair value  based  method of  accounting  for an
employee stock option plan. This statement  establishes financial accounting and
reporting standards for stock-based employee  compensation plans and stock-based
non-employee  compensation.  Under the fair value based method,  compensation is
measured  at the grant  date  based on the value of the award and is  recognized
over the service period, which is usually the vesting period.  However, SFAS No.
123 allows an entity to continue to measure  compensation  costs for those plans
using the intrinsic  value based method of accounting  prescribed by APB Opinion
No, 25,  Accounting  for Stock Issued to  Employees.  The Company has elected to
follow APB No. 25 in accounting for its stock option plans.

Benefit Plans

The Bank has  adopted  a  401(k)  Plan  which  covers  substantially  all of its
employees.  Contributions  to the plan are  determined by the board of directors
and are included in salaries and employee benefits expense.

The Bank has also adopted an Employee  Stock  Purchase  Plan,  which the Company
hasassumed,  covering  substantially  all employees  which allows  employees the
opportunity  to acquire  shares of common stock of the Company  through  payroll
deduction.  The Board approved and ratified  modification  of the Employee Stock
Purchase Plan on May 8, 2001.

                                       51
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued


Off-Balance Sheet Financial Instruments

In the ordinary course of business the Bank has entered into  off-balance  sheet
financial  instruments  consisting of commitments to extend credit,  commitments
under credit card arrangements, commercial letters of credit and standby letters
of credit. Such financial  instruments are recorded in the financial  statements
when they become payable.

The Bank has  available  as a source of  short-term  financing  the  purchase of
federal  funds  from  other  commercial  banks  from  available  lines  totaling
$13,500,000.

The Bank  also has  available  as a source  of  financing  a line of  credit  of
$65,223,000  with the  Federal  Home  Loan  Bank of  Atlanta  ("FHLB")  of which
$42,223,000  was  available  and unused at December 31, 2002,  subject to proper
collateralization.


Segment Information

All of the Company's offices offer similar products and services, are located in
the same geographic  region and serve the same customer  segments of the market.
As a  result,  management  considers  all  units as one  operating  segment  and
therefore  feels that the basic  consolidated  financial  statements and related
footnotes provide details related to segment reporting.


Reclassifications

Certain amounts in 2001 and 2000 have been reclassified to conform with the 2002
presentation.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting  Standards ("SFAS") No. 133,  Accounting for Derivative
Instruments and Hedging Activities.  This statement  establishes  accounting and
reporting standards for derivative  instruments and for hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities   in  the  statement  of  financial   condition  and  measure  those
instruments  at fair value.  The  accounting  for changes in the fair value of a
derivative  is to be determined  based upon the intended use of the  derivative.
For certain hedge  designations  (cash flow and foreign  currency  exposure) the
derivative's  gain or loss is  reported as a  component  of other  comprehensive
income. Other designations require the gain or loss to be recognized in earnings
in the period of change.  This  statement,  amended as to effective date by SFAS
No. 137, is effective for financial  statements for periods beginning after June
15,  2000.  In June 2000,  the FASB also  issued SFAS No.  138,  Accounting  for
Certain Derivative  Instruments and Certain Hedging Activities - an Amendment of
SFAS No. 133.  The  adoption of SFAS No. 133, as amended by SFAS No. 138 did not
have a material impact on the Company's consolidated financial statements.

                                       52
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 1 - Summary of Significant Accounting Policies - Continued

In September  2000,  the FASB issued SFAS No. 140,  Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB  Statement  No.  125.  While  SFAS  No.  140  carries  over  most of the
provisions of SFAS No. 125,  Accounting for Transfers and Servicing of Financial
Assets and  Extinguishments  of  Liabilities,  it  provides  new  standards  for
reporting  financial assets  transferred as collateral and new standards for the
derecognition of financial assets, in particular  transactions involving the use
of special purpose entities. SFAS No. 140 also prescribes additional disclosures
for collateral transactions and for securitization transactions accounted for as
sales.  The new collateral  standards and disclosure  requirements are effective
for fiscal years ending after December 15, 2000, while the new standards for the
derecognition  of financial  assets are effective for transfers made after March
31, 2001. The adoption of this  statement did not have a material  effect on the
Company's consolidated financial statements.

In May 2001, the Auditing Standards Board issued Statement on Auditing Standards
("SAS")  No.  94,  The  Effect  of  Information   Technology  on  the  Auditor's
Consideration of Internal Control in a Financial Statement Audit. This statement
amends SAS No. 55,  Consideration of Internal  Control in a Financial  Statement
Audit, by providing  additional  guidance  related to the  understanding  by the
auditor of an entity's use of information technology relevant to the audit. This
auditing  standard is effective for audits of financial  statements  for periods
beginning  on or after  June 1, 2001.  The impact on the audit of the  Company's
consolidated  financial  statements resulting from the issuance of this auditing
standard was not material.

In June  2001,  the  FASB  issued  SFAS No.  141,  Business  Combinations.  This
statement addresses financial accounting and reporting for business combinations
and supersedes  Accounting  Principles  Board ("APB")  Opinion No. 16,  Business
Combinations,  and SFAS No. 38, Accounting for  Preacquisition  Contingencies of
Purchased  Enterprises.  All business  combinations in the scope of SFAS No. 141
are to be  accounted  for using one method,  the purchase  method.  Prior to the
issuance of this statement,  subject to certain criteria,  business combinations
were accounted for using one of two methods, the pooling-of-interests  method or
the purchase  method.  The two methods  produce  different  financial  statement
results. The single-method approach used in SFAS No. 141 reflects the conclusion
that virtually all business  combinations  are acquisitions and therefore should
be  accounted  for in the same manner as other asset  acquisitions  based on the
values exchanged.  This statement provides expanded and revised guidance related
to the  allocation  of the  purchase  price to  goodwill  and other  intangibles
arising from the business  combination.  The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001.

In June 2001,  the FASB  issued  SFAS No.  142,  Goodwill  and Other  Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other  intangible  assets and  supersedes  APB  Opinion  No. 17,  Intangible
Assets.  SFAS  No.  142  provides  new  standards  for  accounting  relating  to
intangible assets after initial  recognition in the financial  statements.  This
statement   proscribes  the  accounting  practice  of  amortizing  or  expensing
intangibles  ratably over a  prescribed  period of time and imposes new guidance
requiring that goodwill and certain

                                       53
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

other  intangibles  be tested for impairment at least annually by comparing fair
values of those  assets  with  their  recorded  amounts.  Additional  disclosure
requirements  also are provided.  The provisions of SFAS No. 142 are required to
be applied in fiscal years beginning after December 15, 2001.

The adoption of SFAS No. 141 and SFAS No. 142 did not have a material  effect on
the Company's consolidated financial statements.

In June 2001,  the FASB  issued SFAS No. 143,  Accounting  for Asset  Retirement
Obligations.  This statement  requires that the fair value of a liability for an
asset retirement  obligation be recognized in the period in which it is incurred
if a  reasonable  estimate  of fair  value  can be made.  The  associated  asset
retirement  costs  are  capitalized  as  part  of  the  carrying  amount  of the
long-lived  asset.  This statement is effective for financial  statements issued
for fiscal years  beginning  after June 15, 2002. The adoption of this statement
is not  expected  to  have a  material  effect  on  the  Company's  consolidated
financial statements.

In August 2001,  the FASB issued SFAS No. 144,  Accounting for the Impairment or
Disposal of Long-lived Assets. This statement addresses financial accounting and
reporting for the  impairment or disposal of long-lived  assets.  This statement
supersedes  FASB Statement No. 121,  Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be  Disposed  Of, and the  accounting  and
reporting   provisions  of  APB  Opinion  No.  30,   Reporting  the  Results  of
Operations--Reporting  the Effects of  Disposal of a Segment of a Business,  and
Extraordinary,  Unusual and Infrequently Occurring Events and Transactions,  for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends  Accounting  Research  Bulletin No. 51,  Consolidated
Financial  Statements,  to  eliminate  the  exception  to  consolidation  for  a
subsidiary  for  which  control  is likely to be  temporary.  The major  changes
resulting from this statement relate to the establishment of a single method for
the  recognition of impairment  losses on long-lived  assets to be held and used
whether from  discontinuance of a business segment or otherwise.  This statement
is effective for financial  statements  issued for fiscal years  beginning after
December 15, 2001. The adoption of this statement did not have a material effect
on the Company's consolidated financial statements.

In December 2001, the Accounting  Standards Executive Committee issued Statement
of Position  ("SOP") 01-6,  Accounting by Certain Entities  (Including  Entities
With Trade  Receivables) That Lend to or Finance the Activities of Others.  This
statement  reconciles  and  conforms  the  accounting  and  financial  reporting
provisions for similar  transactions as applied to different entities within the
financial services industry.  It eliminates  differences in disclosure practices
where not  warranted  and should  provide  greater  consistency  in reporting by
entities in the financial  services  industry.  This  statement is effective for
annual and interim financial  statements issued for fiscal years beginning after
December  15, 2001.  The adoption of SOP 01-6 did not have a material  effect on
the Company's consolidated financial statements.

                                       54
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

In December  2001,  the Auditing  Standards  Board issued SAS No. 95,  Generally
Accepted  Auditing  Standards.  This  statement  supersedes  Generally  Accepted
Auditing  Standards of SAS No. 1 and generally provides  additional  guidance to
the  independent  auditor in the conduct of an audit  engagement,  primarily  by
addressing   authoritative   and   nonauthoritative   publications   for   audit
consideration  and  guidance.  This SAS is  effective  for  audits of  financial
statements  for periods  beginning on or after  December 15, 2001. The impact on
the audit of the Company's  consolidated financial statements resulting from the
issuance of this auditing standard was not material.

In  January  2002,  the  Auditing  Standards  Board  issued  SAS No.  96,  Audit
Documentation.  This statement  supersedes SAS No. 41, Working Papers and amends
SAS No. 47,  Audit Risk and  Materiality  in  Conducting  an Audit,  SAS No. 56,
Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's
Ability to Continue as a Going Concern. This statement provides revised guidance
to the  independent  auditor as to the type,  purpose and  requirements of audit
documentation.  This SAS is  effective  for audits of financial  statements  for
periods  beginning  on or after  May 15,  2002.  The  impact on the audit of the
Company's  consolidated financial statements resulting from the issuance of this
auditing standard was not material.

In April 2002,  the Financial  Accounting  Standards  Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical  Corrections.  SFAS No. 145 addresses accounting and financial
reporting for  extinguishments of debt,  intangible assets of motor carriers and
leases.  SFAS  No.  145 is  effective  for  fiscal  years  beginning  after  and
transactions occurring after May 15, 2002. The adoption of this statement is not
expected  to have a  material  effect on the  Company's  consolidated  financial
statements.

In June 2002,  the  Financial  Accounting  Standards  Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.  The statement
addresses  financial  reporting and accounting for costs associated with exit or
disposal  activities  and nullifies  Emerging  Issues Task Force Issue No. 94-3,
Liability  Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity  (including Certain Costs Incurred in a Restructuring).  The
primary  difference  between  SFAS  No.  146  and  Issue  94-3  relates  to  the
requirement  for  recognition  of a liability  related to the cost of an exit or
disposal  activity when the liability is incurred.  Under 94-3,  such  liability
would be recognized at the date of an entity's  commitment to an exit plan. SFAS
No. 146 is effective for exit or disposal  activities  initiated  after December
31, 2002, with early application  encouraged.  The adoption of this statement is
not expected to have a material impact on the Company's  consolidated  financial
statements.

In June 2002,  the  Auditing  Standards  Board  issued SAS No. 97,  Amendment to
Statement on Auditing Standards No. 50, Reports on the Application of Accounting
Principles.  This  statement  prohibits an accountant  from  providing a written
report on the  application  of accounting  principles  not  involving  facts and
circumstances  of a specific  entity.  This SAS is effective for written reports
issued or oral  advice  provided  on or after June 30,  2002.  The impact on the
audit of the Company's  consolidated  financial  statements  resulting  from the
issuance of this auditing standard is not expected to be material.

                                       55
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

In September  2002,  the  Auditing  Standards  Board issued SAS No. 98,  Omnibus
Statement  on  Auditing  Standards  - 2002.  This  statement  revises and amends
several previously issued Statements on Auditing Standards. The changes required
impose  enhanced  quality  controls  and  audit  considerations  on  a  firm  of
independent  auditors in the  conduct of their  audit of a  company's  financial
statements.  The additional  requirements  primarily  relate to more descriptive
guidance on the  application  of auditing  procedures,  the auditors  report and
related disclosures and supplementary information. This SAS No. 98 was effective
upon  issuance  except for the  amendment to SAS No. 70, which is effective  for
reports  issued on or after  January  1,  2003.  The  impact on the audit of the
Company's  consolidated financial statements resulting from the issuance of this
auditing standard was not material.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9.
Except for  transactions  between two or more mutual  enterprises,  SFAS No. 147
removes acquisitions of financial institutions from the scope of SFAS No. 72 and
Interpretation 9 and requires those  transactions be accounted for in accordance
with SFAS No. 141 and 142.  SFAS No. 147 also  amends SFAS No. 144 to include in
its  scope  long-term  customer-relationship   intangible  assets  of  financial
institutions such as depositor and borrower  relationship  intangible assets and
credit cardholder intangible assets.  Consequently,  those intangible assets are
subject to the same  undiscounted cash flow  recoverability  test and impairment
loss recognition and measurement provisions that SFAS No. 144 requires for other
long-lived  assets  that  are held  and  used.  The  provisions  of SFAS No.  72
requiring the intangible  recognition and subsequent  amortization of any excess
fair value of net  liabilities  assumed in an acquisition  will no longer apply.
SFAS No. 147 is  essentially  effective as of October 1, 2002. As a result,  the
Company  adopted SFAS No. 147 on October 1, 2002, with no material impact on the
Company's consolidated financial statements.

In October 2002, the Auditing  Standards Board issued SAS No. 99,  Consideration
of Fraud in a Financial  Statement Audit.  This statement  supersedes SAS No. 82
and  amends  SAS No.  1 and SAS No.  85.  SAS No.  99  describes  fraud  and its
characteristics;  discusses  the  need for  auditors  to  exercise  professional
skepticism;  requires (as part of planning the audit) that there be a discussion
among the audit team members regarding the risks of material misstatement due to
fraud; and requires auditors to gather  information  necessary to identify risks
of  material  misstatement  due to fraud.  This SAS is  effective  for audits of
financial  statements  for periods  beginning on or after December 15, 2002. The
impact on the audit of the Company's consolidated financial statements resulting
from the issuance of this auditing standard is not expected to be material.

In November  2002,  the Auditing  Standards  Board  issued SAS No. 100,  Interim
Financial  Information.  This statement  supersedes  SAS No. 71 and  establishes
standards on the nature,  timing and extent of the procedures to be performed by
an  independent  accountant  when  conducting  a  review  of  interim  financial
information.  This SAS is  effective  for interim  periods  within  fiscal years
beginning  after  December  15. 2002.  The impact on the audit of the  Company's
consolidated  financial  statements resulting from the issuance of this auditing
standard is not expected to be material.

                                       56
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

In November 2002, the FASB issued Interpretation No. 45, Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of Others.  This  interpretation  changes the current  practice of
accounting for, and the disclosures related to guarantees. Interpretation No. 45
requires certain guarantees to be recorded at fair value, which is a change from
the current  practice of  generally  only  recording a liability  when a loss is
probable and reasonably estimable.  The interpretation also requires a guarantor
to make new  disclosures,  even when the likelihood of making any payments under
the  guarantee is remote,  which is another  change from current  practice.  The
disclosure  requirements  of this  interpretation  are  effective  for financial
statements  of interim or annual  periods  ending after  December 15, 2002.  The
interpretation's  initial  recognition  and initial  measurement  provisions are
applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December 31, 2002. The  guarantor's  previous  accounting for guarantees  issued
prior to the date of Interpretation  No. 45 are not to be revised or restated to
reflect  the  interpretation's   provisions.  The  adoption  of  the  disclosure
requirements  of  Interpretation  No. 45 did not have a  material  impact on the
Company's  consolidated  financial  statements.  The  adoption  of  the  initial
recognition and initial  measurement  provisions of Interpretation No. 45 is not
expected  to have a  material  impact on the  Company's  consolidated  financial
statements.

In December  2002,  the FASB issued SFAS No.  148,  Accounting  for  Stock-Based
Compensation - Transition and Disclosure.  This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to  the  fair  value  based  method  of  accounting  for  stock-based   employee
compensation.  It amends the disclosure  provisions of that Statement to require
prominent  disclosure  about the effects on  reported  net income of an entity's
accounting policy decisions with respect to stock-based  employee  compensation.
This Statement also amends APB Opinion No. 28 to require  disclosure about those
effects in interim  financial  information.  This  Statement  is  effective  for
financial  statements  for fiscal years  ending after  December 15, 2002 and for
financial reports containing  condensed financial statements for interim periods
beginning  after  December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on the Company's consolidated financial statements.

In January 2003, the Auditing  Standards Board Issued SAS No. 101, Auditing Fair
Value  Measurements and  Disclosures.  This statement  establishes  standards on
auditing the  measurement  and disclosure of assets,  liabilities,  and specific
components  of  equity  presented  or  disclosed  at  fair  value  in  financial
statements. This SAS is effective for audits of financial statements for periods
beginning  on or after June 15, 2003.  The impact on the audit of the  Company's
consolidated  financial  statements resulting from the issuance of this auditing
standard is not expected to be material.

In January  2003,  the FASB issued FIN 46, which  clarifies the  application  of
Accounting Research Bulletin ("ARB") 51, Consolidated  Financial Statements,  to
certain entities (called variable  interest  entities) in which equity investors
do not have the  characteristics  of a controlling  financial interest or do not
have sufficient equity at risk for the entity to finance its activities  without
additional  subordinated  financial  support from other parties.  The disclosure
requirements of this  Interpretation are effective for all financial  statements
issued  after  January 31, 2003.  The  consolidation  requirements  apply to all
variable interest entities created after January 31, 2003. In addition, public

                                       57
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

companies  must  apply  the  consolidation  requirements  to  variable  interest
entities  that  existed  prior to February 1, 2003 and remain in existence as of
the  beginning  of annual or interim  periods  beginning  after  June 15,  2003.
Management is currently assessing the impact of FIN 46, and does not expect this
Interpretation  to  have  a  material  impact  to  the  Consolidated   Financial
Statements.

Earnings Per Common Share

Basic earnings per common share are computed by dividing  earnings  available to
stockholders by the weighted average number of common shares  outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive  potential common stock had been converted to common stock,
as prescribed by SFAS No. 128, Earnings per Share. The following  reconciles the
weighted average number of shares outstanding:

<TABLE>
<CAPTION>

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

<S>                                                               <C>                 <C>                 <C>
Weighted average of common shares outstanding...........          8,717,303           8,484,624           8,316,756
Effect of dilutive options..............................          1,544,767           2,002,342           1,817,109
                                                            ---------------     ---------------    ----------------

Weighted average of common shares
   outstanding effected for dilution....................         10,262,070          10,486,966          10,133,865
                                                            ===============     ===============    ================
</TABLE>

Comprehensive Income

The Company adopted Statement of Financial  Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, on December 31, 1998. This statement establishes
standards  for  the  reporting  and  display  of  comprehensive  income  and its
components in a full set of general-purpose financial statements.  The statement
requires  that an enterprise  classify  items of other  comprehensive  income by
their nature in the financial  statement and display the accumulated  balance of
other comprehensive income separately from retained earnings and additional paid
in  capital  in the  equity  section  of a  statement  of  financial  condition.
Comprehensive  income is generally defined as the change in equity of a business
enterprise  during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.

                                       58
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

In the calculation of comprehensive income, certain reclassification adjustments
are made to avoid double counting items that are displayed as part of net income
for a period that also had been displayed as part of other comprehensive  income
in that  period or  earlier  periods.  The  disclosure  of the  reclassification
amounts and other details of other comprehensive income are as follows:

<TABLE>
<CAPTION>

                                                                        Years Ended December 31,
                                                     --------------------------------------------------------------
                                                            2002                  2001                  2000
                                                     ------------------    ------------------    ------------------
Unrealized gains (losses) on securities
   Unrealized holding gains arising
<S>                                                  <C>                   <C>                   <C>
     during period................................   $          422,461    $          194,189    $        1,223,183
   Less reclassification adjustments for
     gains included in net income.................             (233,372)              (23,926)                   --
                                                     ------------------    ------------------    ------------------
   Net unrealized gains...........................              189,089               170,263             1,223,183
   Income tax related to items of other
     comprehensive loss...........................              (75,636)              (68,104)             (489,273)
                                                     ------------------    ------------------    ------------------

Other comprehensive income........................   $          113,453    $          102,159    $          733,910
                                                     ==================    ==================    ==================
</TABLE>

Statements of Cash Flows

The Company  considers  cash, due from banks and short-term  investments as cash
equivalents  in  preparing  the  consolidated  statements  of  cash  flows.  The
following is  supplemental  disclosure  to the  statements of cash flows for the
three years ended December 31, 2002.

<TABLE>
<CAPTION>

                                                                        Years Ended December 31,
                                                     --------------------------------------------------------------
                                                            2002                  2001                  2000
                                                     ------------------    ------------------    ------------------

<S>                                                  <C>                   <C>                   <C>
Cash paid during the year for interest............   $       22,657,501    $       28,542,252    $       19,339,175

Cash paid during the year for
   income taxes, net..............................              645,436             1,670,781             1,767,689

Non-cash Disclosures:
--------------------

Net increase in unrealized gains/
   losses on securities available-for-sale........              189,089               170,263             1,223,183

Tax benefit of non-qualified options exercised....              702,817                    --                    --

Loans transferred to foreclosed real estate
   during the year................................            5,029,426             4,920,288                    --
</TABLE>

                                       59
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 2 - Business Combinations

In August 2000, the Company  effected a business  combination with Heritage Bank
by  exchanging  8,475,822  shares of its  common  stock for all the  outstanding
common stock of Heritage  Bank.  The  combination  has been  accounted  for as a
pooling of interests and, accordingly, all periods presented reflect the Company
and  Heritage  Bank on a  combined  basis.  Prior to the  effective  date of the
merger, the Company had no operations.


Note 3 - Restrictions on Cash and Due from Bank Accounts

The Bank is required to maintain  average reserve balances either in vault cash,
other cash items, or on deposit with the Federal Reserve.  The average amount of
those  reserves  required  at  December  31,  2002 and  2001  was  approximately
$3,467,000 and $3,530,000, respectively.


Note 4 - Securities

The carrying  amounts of securities as shown in the  consolidated  statements of
financial  condition and their  approximate fair values at December 31, 2002 and
2001 were as follows:

<TABLE>
<CAPTION>
                                                                      Gross             Gross          Estimated
                                                   Amortized       Unrealized        Unrealized          Fair
                                                     Cost             Gains            Losses            Value
                                                --------------   --------------    -------------    --------------
Securities Available-for-Sale

December 31, 2002:
<S>                                             <C>              <C>               <C>              <C>
   Mortgage-backed securities...............    $   22,832,366   $       375,515   $           --   $    23,207,881
   State and municipal securities...........         1,294,471            39,543            4,433         1,329,581
   Corporate debt securities................        10,904,495                --          316,116        10,588,379
   Equity securities........................         1,635,961                --               --         1,635,961
                                                --------------   ---------------   --------------   ---------------

                                                $   36,667,293   $       415,058   $      320,549   $    36,761,802
                                                ==============   ===============   ==============   ===============

December 31, 2001:

   U. S. Government and
     agency securities......................    $   15,682,142   $       177,499   $      162,720   $    15,696,921
   Mortgage-backed securities...............           612,916             3,944               --           616,860
   Asset-backed securities..................         4,451,625            22,280               --         4,473,905
   State and municipal securities...........         2,665,900            14,694           89,978         2,590,616
   Corporate debt securities................         1,250,000                --           60,300         1,189,700
   Equity securities........................         1,325,861                --               --         1,325,861
                                                --------------   ---------------   --------------   ---------------

                                                $   25,988,444   $       218,417   $      312,998   $    25,893,863
                                                ==============   ===============   ==============   ===============
</TABLE>

                                       60
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 4 - Securities - Continued

The  contractual  maturities  of securities  available-for-sale  at December 31,
2002,  are  shown  below.  Expected  maturities  will  differ  from  contractual
maturities  because  borrowers may have the right to call or prepay  obligations
with or without call or prepayment penalties.

<TABLE>
<CAPTION>

                                                                                     Amortized           Fair
Securities Available-for-Sale                                                          Cost              Value
-----------------------------                                                     --------------   ---------------

<S>                                                                               <C>              <C>
   Due in one year or less......................................................  $        32,132  $         32,132
   Due after one year through five years........................................        4,950,484         4,992,639
   Due after five years through ten years.......................................        9,371,082         9,500,313
   Due after ten years..........................................................       20,677,634        20,600,757
   Equity securities............................................................        1,635,961         1,635,961
                                                                                  ---------------  ----------------

                                                                                  $    36,667,293  $     36,761,802
                                                                                  ===============  ================
</TABLE>

Mortgage-backed  securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.

Gross realized gains and losses on dispositions of securities available-for-sale
for the years ended December 31, 2002, 2001 and 2000 were as follows:

<TABLE>
<CAPTION>

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

<S>                                                         <C>                 <C>                <C>
   Realized gains.......................................    $       350,233     $        23,926    $             --
   Realized losses......................................            116,861                  --                  --
</TABLE>

Equity  securities  include a  restricted  investment  in Federal Home Loan Bank
stock which must be maintained to secure  available lines of credit.  The amount
of investment in this stock  amounted to $1,560,100  and  $1,250,000 at December
31, 2002 and 2001.

Securities  pledged to secure public funds on deposit and for other  purposes as
required  by law  amounted  to  approximately  $20,873,000  and  $23,702,000  at
December 31, 2002 and 2001, respectively.


              [The remainder of this page intentionally left blank]

                                       61
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 5 - Loans

The Company grants loans to customers primarily in Morgan, Madison and Jefferson
counties of North and Central Alabama.

The  major  classifications  of loans as of  December  31,  2002 and 2001 are as
follows:

<TABLE>
<CAPTION>

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

<S>                                                                               <C>              <C>
   Commercial, financial and agricultural.......................................  $   132,236,338  $    138,344,502
   Real estate - construction...................................................       60,205,855        70,073,145
   Real estate - mortgage.......................................................      311,508,055       274,675,368
   Consumer.....................................................................       19,899,254        22,287,596
                                                                                  ---------------  ----------------
                                                                                      523,849,502       505,380,611
   Allowance for loan losses....................................................       26,990,594         6,074,230
                                                                                  ---------------  ----------------

   Net loans....................................................................  $   496,858,908  $    499,306,381
                                                                                  ===============  ================
</TABLE>

Total loans,  which the Bank  considered to be impaired at December 31, 2002 and
2001, were $15,794,000 and $4,062,000,  respectively. All of these loans were on
nonaccrual  status  and had  related  allowances  of  $2,991,000  and  $897,000,
respectively.  Collateral dependent loans, which were measured at the fair value
of the  collateral,  constituted  the majority of impaired loans at December 31,
2002 and 2001. The average  recorded  investment in impaired loans for the years
ended December 31, 2002 and 2001 was  approximately  $10,324,000 and $5,275,000,
respectively.  No material  amount of interest income was recognized on impaired
loans for the years  ended  December  31,  2002 and  2001.  For the years  ended
December 31, 2002 and 2001,  the difference  between gross interest  income that
would  have  been  recorded  in such  period if the  nonaccruing  loans had been
current in  accordance  with  their  original  terms and the amount of  interest
income  on those  loans  that was  included  in such  period's  net  income  was
approximately $561,000 for 2002 and $519,000 for 2001.

The  Bank has no  commitments  to loan  additional  funds  to the  borrowers  of
non-accrual loans.

Commercial and residential real estate loans pledged to secure Federal Home Loan
Bank advances amounted to approximately  $86,353,000 and $87,089,000 at December
31, 2002 and 2001, respectively (see Note 9).


              [The remainder of this page intentionally left blank]

                                       62
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 6 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended  December 31, 2002,
2001 and 2000 were as follows:

<TABLE>
<CAPTION>

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

<S>                                                         <C>                 <C>                <C>
Balance at beginning of year............................    $     6,074,230     $     5,064,889    $      3,035,549

Charge-offs.............................................         (8,825,046)         (2,695,237)         (1,454,447)
Recoveries..............................................            272,676             102,531              94,814
                                                            ---------------     ---------------    ----------------
   Net charge-offs......................................         (8,552,370)         (2,592,706)         (1,359,633)

Provision for loan losses...............................         29,468,734           3,602,047           3,388,973
                                                            ---------------     ---------------    ----------------

Balance at end of year..................................    $    26,990,594     $     6,074,230    $      5,064,889
                                                            ===============     ===============    ================
</TABLE>

Note 7 - Premises and Equipment

Premises and equipment as of December 31, 2002 and 2001 is as follows:

<TABLE>
<CAPTION>

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

<S>                                                                               <C>              <C>
    Land  ......................................................................  $     1,152,443  $        930,595
    Buildings...................................................................        1,879,962         1,565,225
    Land and leasehold improvements.............................................        1,761,777         1,675,856
    Furniture and equipment.....................................................        3,927,885         3,179,740
    Automobiles.................................................................          188,220           135,364
    Construction in progress....................................................               --           183,559
                                                                                  ---------------  ----------------
                                                                                        8,910,287         7,670,339
    Accumulated depreciation....................................................        1,804,581         1,263,317
                                                                                  ---------------  ----------------

    Premises and equipment, net.................................................  $     7,105,706  $      6,407,022
                                                                                  ===============  ================
</TABLE>

The provision for  depreciation  charged to occupancy and equipment  expense for
the years ended  December 31,  2002,  2001 and 2000 was  $597,989,  $437,263 and
$324,834, respectively.

                                       63
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 8 - Deposits

The  aggregate  amounts  of  time  deposits  of  $100,000  or  more,   including
certificates  of deposit of $100,000 or more at December  31, 2002 and 2001 were
$146,208,880 and $141,220,175, respectively. Time deposits of less than $100,000
totaled   $244,446,429   and   $239,830,989  at  December  31,  2002  and  2001,
respectively.  Demand deposits  reclassified as loan balances as of December 31,
2002 and 2001 amounted to $134,739 and $271,982, respectively.

The maturities of time certificates of deposit and other time deposits issued by
the Bank at December 31, 2002, are as follows:

<TABLE>
<CAPTION>

<S>                        <C>
     Years Ending December 31,
                2003.............................................................................  $    267,737,736
                2004.............................................................................        73,918,671
                2005.............................................................................        36,398,208
                2006.............................................................................         7,415,927
                2007.............................................................................         5,184,767
                                                                                                   ----------------

                  Total..........................................................................  $    390,655,309
                                                                                                   ================
</TABLE>

Note 9 - Short-term Borrowings

On October 30, 2002, the Company entered into a short-term loan agreement with a
commercial  bank,  whereby  the  Company  can  borrow up to  $7,500,000  bearing
interest at LIBOR plus 2.5%. The note matures  September 30, 2003 and is secured
by the  stock of the bank  and  guaranteed  by the  Board  of  Directors  of the
Company.  It is the intention of  management  to seek renewal of this loan.  The
loan agreement contains certain restrictive covenants that the Company is either
in compliance  with or has  requested  and received  waivers for until March 31,
2003.  At December 31, 2002 the balance was  $6,650,000  whereas at December 31,
2001 there were no borrowings.


              [The remainder of this page intentionally left blank]

                                       64
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 10 - Long-term Debt

At December 31, 2002 and 2001, the Bank had long-term debt totaling  $33,000,000
and $23,000,000, respectively.

Long-term debt consists of the following at December 31, 2002 and 2001:

<TABLE>
<CAPTION>

                                                                                       2002              2001
                                                                                  ---------------  ---------------
<S>                                                                               <C>              <C>
Long-term  Federal  Home Loan Bank  advances;  at December   31, 2002 -
   maturity  dates of February 2011  through   February   2012,   fixed
   interest  rates ranging from 3.85% to 4.97%; at December  31, 2001 -
   maturity dates in February  2011,  fixed interest rates ranging from
   4.16% to 4.97;  all  of the  debt  at  December 31, 2002 and 2001 is
   subject to early  termination  options  y  the  Bank and  conversion
   by  the  issuer   into  a  three  month  LIBOR-based  floating  rate
   advance; secured by real estate mortgage loans...............................  $    23,000,000  $    13,000,000

Long-term  Heritage  Financial  Statutory  Trust  advance from a pooled
   trust  preferred  private  placement  for  subordinated  debentures;
   dated  February  22, 2001,  interest   rate  fixed  at  10.20%,  the
   subordinated   debenture   has a  30-year  life  with a call  option
   of  10  years,  subject   to   regulatory   approval,   or  earlier,
   dependent  upon  certain  changes in tax or investment company laws,
   or regulatory capital requirements...........................................       10,000,000       10,000,000
                                                                                  ---------------  ---------------

                                                                                  $    33,000,000  $    23,000,000
                                                                                  ===============  ===============

</TABLE>

Maturities of long-term debt following December 31, 2002, are as follows:

<TABLE>
<CAPTION>

          Years Ending December 31,
<S>             <C>                                                                                <C>
                2003.............................................................................  $             --
                2004.............................................................................                --
                2005.............................................................................                --
                2006.............................................................................                --
                2007.............................................................................                --
                Thereafter.......................................................................        33,000,000
                                                                                                   ----------------

                  Total..........................................................................  $     33,000,000
                                                                                                   ================
</TABLE>

Note 11 - Stockholders' Equity

As  discussed in Notes 2 and 11, the Company was formed in year 2000 and through
a   1-for-1    exchange   of   stock    acquired    Heritage   Bank    employing
pooling-of-interests   accounting  treatment.   As  a  result,  all  information
contained in these financials, including share information, is represented as if
the Company and the Bank had been combined for all periods presented.

                                       65
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 11 - Stockholders' Equity - Continued

At December 31, 2002 and 2001,  stockholders' equity of the Company consisted of
the following:



Preferred Stock:  10,000,000  shares  authorized,  with a par value of $0.01 per
share, none issued.

Common Stock: 40,000,000 shares authorized, with a par value of $0.01 per share,
8,821,144  shares and 8,515,147 shares issued and outstanding as of December 31,
2002 and 2001, respectively. Voting rights equal to one vote per share.

Paid-in  Capital:  Represents the funds received in excess of par value upon the
issuance  of  stock,  net of  issuance  costs  and the  related  effect of stock
dividends and stock splits.

Retained Earnings: Represents the accumulated net earnings of the Company.

Accumulated Other Comprehensive  Income:  Represents the change in equity during
each  period  from the  effects  of  unrealized  holding  gains  and  losses  on
securities available for sale, net of tax.


On March 26, 2003, the Company  commenced a private placement of up to 1,000,000
shares of common stock to raise up to $3,340,000 in equity capital.  The private
placement  is being  conducted  in order to augment  the  capital  levels of the
Company  and the  Bank.  The  Company  intends  to use the net  proceeds  of the
offering to make a capital  contribution to the Bank. The offering is being made
only to a limited  number of investors,  including the directors and officers of
the Company and the Bank and certain other accredited investors.


On February 29, 2000, the Bank completed an  oversubscribed  exempt  offering of
1,000,000  shares of its common stock,  $0.01 par value per share, at $10.00 per
share.  The  offering  to  new  stockholders  in  the  Birmingham,  Decatur  and
Huntsville,  Alabama  markets  commenced on December 1, 1999,  and culminated in
raising  approximately  $10,000,000 in new capital,  before expenses  associated
with  the   offering.   The  proceeds  from  the  offering  were  used  for  the
establishment of Heritage Bank's Birmingham location,  working capital and other
various uses.


Note 12 - Reorganization

On March  14,  2000,  the  board of  directors  of the Bank  approved  a Plan of
Reorganization  and  Agreement  of Merger  to form a bank  holding  company  and
through the exchange of stock become a wholly-owned  subsidiary.  The Bank filed
documents  with  the  Federal  Reserve,  FDIC  and  the  Alabama  State  Banking
Department to effectuate  this  reorganization  and merger.  Stockholders of the
Bank voted approval upon this matter at the 2000 Annual Meeting of Stockholders.

                                       66
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 12 - Reorganization - Continued

On July 17, 2000, the Federal Deposit  Insurance  Corporation  issued a combined
Order and Basis for Corporation  Approval  approving the Interagency Bank Merger
Application  submitted on behalf of the Bank for consent to merge with  Heritage
Interim  Corporation  under the charter and title of the Bank. On July 20, 2000,
the Board of Governors of the Federal Reserve System approved the application by
the Company to become a bank holding  company by acquiring  the Bank pursuant to
the  Bank  Holding  Company  Act.  The  Bank  and the  Company  consummated  the
reorganization and merger in August 2000.


Note 13 - Regulatory Capital Matters

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
Capital  and  Tier  I  Capital  to  risk-weighted  assets  (as  defined  in  the
regulations),  and Tier I  Capital  (Leverage)  to  adjusted  total  assets  (as
defined). Management believes, as of December 31, 2002, that the Company and the
Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2002, the most recent  notification  from the Federal Deposit
Insurance Corporation  categorized the Bank as adequately  capitalized under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized,  the Bank will  have to  maintain  minimum  Total  Capital,  Tier I
Capital and Tier I Leverage ratios as disclosed in the table below. There are no
conditions  or events since that  notification  that  management  believes  have
changed the Bank's category.

The Bank and Company have agreed to meet certain capital ratios.  As of December
31,  2002,  management  of the Company and the Bank have taken steps to increase
the Bank's Tier I leverage ratio to 7.5% and to be "well-capitalized" as defined
by the FDIC.  The  Bank's  Tier I leverage  ratio  should be no less than 8 % by
March 31,  2003,  and the Bank should  maintain a ratio of at least 8%. The Bank
did not achieve a Tier I leverage  ratio of 7.5% as of December 31, 2002 and the
Bank may fail to achieve a Tier I leverage  ratio of 8% if the Bank is unable to
acquire  additional  capital.  Should the Tier I  leverage  ratio fall below the
minimum desired levels,  the Bank will take steps to increase capital sufficient
to meet desired ratios within 30 days.

                                       67
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 13 - Regulatory Capital Matters - Continued

The Company's and Bank's actual capital amounts and ratios are also presented in
the table.

<TABLE>
<CAPTION>

                                                                                               To Be Well Capitalized
                                                                                                    Under Prompt
                                                                      For Capital                 Corrective Action
                                          Actual                   Adequacy Purposes                 Provisions
                                 ------------------------     -------------------------     ---------------------------
                                     Amount        Ratio          Amount         Ratio          Amount           Ratio
                                 -------------    -------     -------------     -------     -------------       -------
                                                                      (In thousands)
As of December 31, 2002:

Total Capital
<S>                              <C>                 <C>      <C>                  <C>      <C>                   <C>
   Consolidated...............   $      39,436       7.81%    $      40,410        8.00%    $      50,513         10.00%
   Heritage Bank..............          45,182       8.98            40,233        8.00            50,292         10.00
Tier I Capital
   Consolidated...............          30,749       6.09            20,205        4.00            30,308          6.00
   Heritage Bank..............          38,640       7.68            20,117        4.00            30,175          6.00
Tier I Leverage
   Consolidated...............          30,749       4.94            24,923        4.00            31,154          5.00
   Heritage Bank..............          38,640       5.99            25,794        4.00            32,243          5.00


As of December 31, 2001:

Total Capital
   Consolidated...............   $      52,254      10.69%    $      39,106        8.00%    $      48,882         10.00%
   Heritage Bank..............          50,899      10.42            39,080        8.00            48,850         10.00
Tier I Capital
   Consolidated...............          46,180       9.45            19,553        4.00            29,329          6.00
   Heritage Bank..............          44,825       9.18            19,540        4.00            29,310          6.00
Tier I Leverage
   Consolidated...............          46,180       7.86            23,516        4.00            29,395          5.00
   Heritage Bank..............          44,825       7.63            23,500        4.00            29,376          5.00
</TABLE>

Note 14 - Incentive Stock Compensation Plan

The Company entered into an Incentive Stock Compensation Plan (the "Compensation
Plan") with the  Company's  directors  and certain key officers  and  employees.
Under the Compensation Plan, the Company has entered into Incentive Stock Option
Agreements and Nonqualified Option Agreements  (together the "Agreements") which
provide  for  these  directors  and key  employees  to  purchase  shares  of the
Company's  $0.01 par value common stock at the fair market value at the dates of
grant.  The options granted under the Agreements may be exercised within 5 years
and 10 years from the dates of grant. The following  summary sets forth activity
under the Agreements for the years ended December 31, 2002, 2001 and 2000:

                                       68
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 14 - Incentive Stock Compensation Plan - Continued

Fixed Options

<TABLE>
<CAPTION>

                                                2002                      2001                       2000
                                      ------------------------  ------------------------  ------------------------
                                                    Weighted                   Weighted                  Weighted
                                                     Average                    Average                   Average
                                                    Exercise                   Exercise                  Exercise
                                        Options       Price        Options       Price       Options       Price
                                      -----------  -----------  -----------  -----------  -----------   ----------
<S>                                     <C>        <C>            <C>        <C>            <C>         <C>
Outstanding, beginning of the year..    3,957,032  $      3.77    3,970,032  $      3.72    4,008,000   $     3.70
   Granted..........................      120,000         3.34       23,000        11.50        2,000        10.00
   Exercised........................     (451,016)        3.89      (36,000)        2.42      (39,968)        1.67
   Forfeited........................     (387,000)        3.70           --         0.00           --         0.00
                                      -----------               -----------               -----------
Outstanding, end of the year........    3,239,016         3.75    3,957,032         3.77    3,970,032         3.72
                                      ===========               ===========               ===========

Exercisable, end of the year........    1,559,816         3.92    1,630,232         4.03    1,227,632         4.05

Weighted average fair value of options
   granted during the year..........  $      1.52               $      3.43               $      3.38
</TABLE>

Information  pertaining  to options  outstanding  at December  31,  2002,  is as
follows:

<TABLE>
<CAPTION>
                                                                    Outstanding        Expiration        Options
                                                                      Number              Date         Exercisable
                                                                 ----------------   --------------   --------------

<S>                               <C>                                      <C>            <C>   <C>          <C>
Options with an exercise price of $2.84.......................             64,478         04/17/03           64,478
Options with an exercise price of $3.34.......................            300,000         07/14/03          300,000
Options with an exercise price of $3.34.......................             72,000         07/08/09           24,000
Options with an exercise price of $3.34.......................          2,448,000         08/24/08          972,000
Options with an exercise price of $3.34.......................             60,000         03/25/03               --
Options with an exercise price of $5.50.......................             60,000         07/01/04           60,000
Options with an exercise price of $6.50.......................              6,000         07/01/04            6,000
Options with an exercise price of $6.50.......................              2,000         07/08/04            2,000
Options with an exercise price of $6.50.......................              2,000         09/16/04            1,200
Options with an exercise price of $7.50.......................            120,000         11/07/09           36,000
Options with an exercise price of $10.00......................             86,538         12/28/04           86,538
Options with an exercise price of $10.00......................              2,000         01/28/05            1,200
Options with an exercise price of $11.50......................             16,000         03/02/06            6,400
</TABLE>

Of the  3,239,016  outstanding  options at December  31,  2002,  1,559,816  were
exercisable with the remaining  1,679,200 having remaining vesting periods of up
to approximately 7 years. The weighted average exercise price of the exercisable
options at December 31, 2002, was $3.92. Exercise prices for options outstanding
as of December 31, 2002, ranged from $2.84 to $11.50.  Total unexercised options
of  3,239,016  have a  weighted  average  contractual  life of 4.83  years and a
weighted average exercise price of $3.75.

At December 31, 2002,  the shares under option include  nonqualified  options of
2,682,000 issued  primarily to Company  directors and incentive stock options of
557,016 issued to certain key employees of the Company.

                                       69
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 14 - Incentive Stock Compensation Plan - Continued

If the Company had elected to recognize compensation cost for options granted in
2002, 2001 and 2000, based on the fair value of the options as permitted by SFAS
No. 123,  net income and  earnings  per share would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                              Years Ended December 31,
                                                                  -------------------------------------------------
                                                                        2002              2001            2000
                                                                  ----------------   -------------   --------------

Net income (loss):
<S>                                                               <C>                <C>             <C>
   As reported..................................................  $    (14,412,783)  $   2,365,921   $    2,187,531
   Pro forma....................................................       (14,529,404)      1,801,959        1,453,844

Basic earnings (loss) per share:
   As reported..................................................  $         (1.65)   $        0.28   $        0.26
   Pro forma....................................................            (1.67)            0.21            0.17

Diluted earnings (loss) per share:
   As reported..................................................  $         (1.40)   $        0.23   $        0.22
   Pro forma....................................................            (1.42)            0.17            0.14
</TABLE>

All options are assumed to be exercised in the  calculations  of diluted average
common shares  outstanding,  causing the equivalent number of shares outstanding
on a diluted basis to be greater than that used to calculate  basic earnings per
share  by  1,544,767,   2,002,342  and  1,817,109  for  2002,   2001  and  2000,
respectively.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes option pricing model for 2002, 2001 and 2000 grants:

<TABLE>
<CAPTION>

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

<S>                                                                           <C>             <C>              <C>
Expected dividend yield.......................................                0.00%           0.00%            0.00%
Expected stock price volatility...............................               26.00           21.70            24.20
Risk-free interest rate.......................................                4.00            4.95             6.00
Expected life of options......................................              1 year         5 years          5 years
</TABLE>

The effects of applying  FAS 123 for  providing  pro forma  disclosures  are not
likely to be  representative  of the  effects on  reported  earnings  for future
years, nor are the dividend estimates  representative of commitments on the part
of the Bank's Board.

                                       70
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 15 - Other Operating Expenses

The  major  components  of other  operating  expenses  included  in  noninterest
expenses at December 31, 2002, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                 2002                2001                2000
                                                            ---------------     ---------------    ----------------

<S>                                                         <C>                 <C>                <C>
Professional fees.......................................    $     1,275,308     $       582,783    $        471,283
Charge off and collection expense.......................            532,782             139,469              12,642
Loan fees and services..................................            453,301             302,525             199,763
Data processing.........................................            420,998             190,300             136,168
Advertising.............................................            401,505             336,017             290,941
Supplies................................................            398,449             262,024             294,201
Telephone...............................................            240,428             170,874             157,816
Postage.................................................            141,624             125,546              90,207
Exam and assessment.....................................            138,000             122,056              72,408
Other...................................................          1,287,962           1,098,751             894,895
                                                            ---------------     ---------------    ----------------

                                                            $     5,290,357     $     3,330,345    $      2,620,324
                                                            ===============     ===============    ================
</TABLE>

Note 16 - Income Taxes

Federal and state income taxes receivable  (payable) as of December 31, 2002 and
2001 included in other assets (other liabilities), were as follows:

<TABLE>
<CAPTION>

                                                                                       2002              2001
                                                                                  ---------------  ---------------
   Current
<S>                                                                               <C>              <C>
     Federal....................................................................  $     2,041,058  $        166,712
     State......................................................................           54,843          (127,352)
</TABLE>

The components of the net deferred  income tax asset included in other assets as
of December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                                       2002              2001
                                                                                  ---------------  ---------------
   Deferred tax asset:
<S>                                                                               <C>              <C>
     Federal....................................................................  $     8,283,071  $      1,671,166
     State......................................................................        1,292,401           294,723
                                                                                  ---------------  ----------------
       Deferred income tax asset................................................        9,575,472         1,965,889

     Valuation allowance for tax law provision..................................         (319,472)               --
                                                                                  ---------------  ----------------
       Total deferred income tax asset..........................................        9,256,000         1,965,889

   Deferred tax liability:
     Federal....................................................................         (465,818)         (288,808)
     State......................................................................          (60,771)          (50,966)
                                                                                  ---------------  ----------------
       Total deferred income tax liability......................................         (526,589)         (339,774)
                                                                                  ---------------  ----------------

       Net deferred tax asset...................................................  $     8,729,411  $      1,626,115
                                                                                  ===============  ================
</TABLE>

                                       71
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 16 - Income Taxes - Continued

The tax  effects  of each  type of  income  and  expense  item that gave rise to
deferred taxes are:

<TABLE>
<CAPTION>

                                                                                       2002              2001
                                                                                  ---------------  ---------------
<S>                                                                               <C>              <C>
     Depreciation...............................................................  $      (474,204) $       (339,774)
     Allowance for loan losses..................................................        8,437,534         1,810,821
     Net operating loss carryforward............................................          458,642                --
     Unamortized expenses.......................................................           27,466            34,068
     Net unrealized losses (gains) on securities available-for-sale.............          (37,803)           37,833
     Deferred compensation on stock options.....................................          297,373            82,098
     Other......................................................................           20,403             1,069
                                                                                  ---------------  ----------------

     Net deferred tax asset.....................................................  $     8,729,411  $      1,626,115
                                                                                  ===============  ================
</TABLE>

The components of income tax expense  (benefit) for the years ended December 31,
2002, 2001 and 2000 were as follows:

<TABLE>
<CAPTION>
                                                                      2002             2001              2000
                                                                ----------------  ---------------  ----------------
   Current
<S>                                                             <C>               <C>              <C>
     Federal..................................................  $     (1,132,120) $     1,361,567  $      1,641,466
     State....................................................           (54,844)         127,347           121,036

   Deferred
     Federal..................................................        (6,022,845)        (224,469)         (655,483)
     State....................................................          (677,412)         (40,479)         (115,850)
                                                                ----------------  ---------------  ----------------

                                                                $     (7,887,221) $     1,223,966  $        991,169
                                                                ================  ===============  ================
</TABLE>

Tax effect of  securities  transactions  for the years ended  December 31, 2002,
2001 and 2000 were approximately $104,668, $9,570 and $-0-, respectively.

The  principal  reasons for the  difference  in the  effective  tax rate and the
federal  statutory  rate are as follows for the years ended  December  31, 2002,
2001 and 2000:

<TABLE>
<CAPTION>
                                                                 2002                2001                2000
                                                            ---------------     ---------------    ----------------

<S>                                                                   <C>                  <C>                 <C>
Statutory federal income tax rate.......................              (34.0)%              34.0%               34.0%

Effect on rate of:
   Tax exempt security income...........................               (0.2)               (1.2)               (1.3)
   Tax exempt loan income...............................               (0.1)               (0.4)               (0.5)
   State income tax, net of federal tax.................               (3.2)                1.2                (1.1)
   Devaluation of tax carryover benefits................                1.4                 0.0                 0.0
   Other ...............................................                0.7                 0.5                 0.1
                                                            ---------------     ---------------    ----------------

Effective income tax rate...............................              (35.4)%              34.1%               31.2%
                                                            ===============     ===============    ================
</TABLE>

                                       72
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 17 - Retirement Plan

The Bank adopted a 401(k) Plan ("the  Plan") on August 1, 1995.  The Plan covers
substantially all employees, subject to eligibility requirements.  Employees may
defer up to fifteen percent of their compensation, not to exceed $11,000, with a
fifty  percent  matching   employer   contribution  of  up  to  six  percent  of
compensation.  Total  expense  included in salary and  benefits  for years ended
December 31, 2002, 2001 and 2000 was $91,859, $65,604 and $50,032, respectively.

The Bank also adopted an Employee Stock Purchase Plan (the "Stock Plan") on June
20,  1995.  The  Company   assumed  the  Stock  Plan  in  its  holding   company
reorganization  that was  finalized  in  August  2000.  The  Stock  Plan  covers
substantially  all  employees,  subject to eligibility  requirements.  Under the
Stock Plan,  employees are given the opportunity to subscribe to purchase shares
of the  Company's  common  stock at a purchase  price  equivalent  to 85% of the
stated fair value of the common  stock,  as determined by the board of directors
of the  Company.  The stated fair value of the common stock at December 31, 2002
and 2001 was $9.50 and $12.50 per share, respectively. Employee contributions to
the Stock Plan are made through payroll deduction.  The maximum number of shares
available-for-sale  under the Stock  Plan is  100,000.  The Board  approved  and
ratified modification of the Employee Stock Purchase Plan on May 8, 2001.

Note 18 - Commitments and Contingencies

In the  normal  course  of  business,  the Bank  offers a variety  of  financial
products  to its  customers  to aid  them  in  meeting  their  requirements  for
liquidity,  credit enhancement and interest rate protection.  Generally accepted
accounting  principles  recognize these  transactions as contingent  liabilities
and,  accordingly,   they  are  not  reflected  in  the  accompanying  financial
statements.

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.  Historically,
most loan commitments and standby letters of credit expire unused. The Company's
exposure to credit loss in the event of  nonperformance  by the counter-party to
the financial  instrument for loan  commitments and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses the
same underwriting standards in making commitments and conditional obligations as
it does for on-balance sheet instruments.  The amount of collateral  obtained is
based on management's credit evaluation of the customer. Collateral held varies,
but may include accounts receivable,  inventory, property, plant, and equipment,
and income-producing commercial properties.

              [The remainder of this page intentionally left blank]

                                       73
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 18 - Commitments and Contingencies - Continued

A summary of the Bank's  commitments and contingent  liabilities at December 31,
2002 and 2001, is as follows:

<TABLE>
<CAPTION>
                                                                                             Contract or
                                                                                           Notional Amount
                                                                                  --------------------------------
                                                                                       2002              2001
                                                                                  ---------------  ---------------

<S>                                                                               <C>              <C>
   Commitments to extend credit.................................................  $    75,574,000  $     68,927,000
   Credit card arrangements.....................................................               --         3,047,000
   Standby letters of credit....................................................        3,259,000         3,174,000
</TABLE>

Commitments to extend credit,  credit card  arrangements,  commercial letters of
credit and standby letters of credit all include exposure to some credit loss in
the event of  nonperformance  of the customer.  The Bank's  credit  policies and
procedures for credit commitments and financial guarantees are the same as those
for  extension  of credit  that are  recorded  on the  statements  of  financial
condition. Because these instruments have fixed maturity dates, and because many
of them  expire  without  being drawn upon,  they do not  generally  present any
significant liquidity risk to the Bank.

Management  conducts  regular  reviews  of these  instruments  on an  individual
customer basis,  and the results are considered in assessing the adequacy of the
Bank's  allowance for loan losses.  Management  does not anticipate any material
losses as a result of these commitments.

Note 19 - Concentrations of Credit

All of the Bank's  loans,  commitments  and  commercial  and standby  letters of
credit  have  been  granted  to  customers  in  the  Bank's  market  area.   The
concentrations of credit by type of loan are set forth in Note 5.

The Bank  maintains  its cash accounts at various  commercial  banks in Alabama,
Georgia and Tennessee.  The total cash balances in commercial  banks are insured
by the FDIC up to $100,000. Total uninsured balances held at commercial banks at
December 31, 2002 and 2001 amounted to $-0- and $128,412, respectively.

Note 20 - Restrictions on Dividends

The Bank is subject to the dividend  restrictions set forth by the State Banking
Department.  Under  such  restrictions,  the  Bank may not,  without  the  prior
approval of the State Banking Department, declare dividends in excess of the sum
of the current  year's  earnings  plus the retained  earnings from the prior two
years. For the year ending December 31, 2003, the Bank cannot declare dividends,
without prior regulatory approval.

                                       74
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 21 - Leases

The Bank has various  operating lease agreements  involving land,  buildings and
equipment.  These leases are  noncancellable  and expire on various  dates.  The
leases  provide  for  renewal  options  and  generally  require  the Bank to pay
maintenance,  insurance  and property  taxes.  For the years ended  December 31,
2002,  2001 and 2000,  rental  expense for such lease  agreements  was $635,667,
$457,615 and $358,938, respectively.

Future minimum lease payments under these operating lease agreements at December
31, 2002, are as follows:

<TABLE>
<CAPTION>

     Years Ending December 31,
<S>             <C>                                                                                <C>
                2003.............................................................................  $        473,147
                2004.............................................................................           478,313
                2005.............................................................................           465,894
                2006.............................................................................           468,897
                2007.............................................................................           421,293
                Thereafter.......................................................................         1,264,845
                                                                                                   ----------------

                  Total minimum lease payments...................................................  $      3,572,389
                                                                                                   ================
</TABLE>

Note 22 - Related Party Transactions

Loans:  Certain  directors,   executive  officers  and  principal   stockholders
including  their  immediate  families and associates  were loan customers of the
Bank  during  2002 and  2001.  Such  loans  are made in the  ordinary  course of
business at normal credit terms,  including interest rates and collateral and do
not  represent  more  than a normal  risk of  collection.  Total  loans to these
persons at December 31, 2002 and 2001,  amounted to $14,895,966 and $15,067,983,
respectively.  Activity  during 2002 and 2001 in loans to related  parties is as
follows:

<TABLE>
<CAPTION>

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

<S>                                                                               <C>              <C>
   Balance at beginning of year.................................................  $    15,067,983  $     13,767,900
     New loans..................................................................        5,227,395         6,746,436
     Repayments.................................................................       (5,248,925)       (5,446,353)
     Change in composition......................................................         (150,487)               --
                                                                                  ---------------  ----------------

   Balance at end of year.......................................................  $    14,895,966  $     15,067,983
                                                                                  ===============  ================
</TABLE>

Deposits:  Deposits held from related  parties were $3,511,847 and $4,358,804 at
December 31, 2002 and 2001, respectively.

                                       75
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 23 - Litigation

The Bank has received  demand  letters from two former  directors,  officers and
employees of the Bank.  The Bank  terminated  such officers in November 2002 for
cause, as such term is defined by their  respective  employment  contracts.  One
officer has claimed  monetary  compensation,  stock options and attorneys' fees,
while the second  officer has claimed  monetary  compensation,  as well as stock
options and payment of country club dues for two years following the date of his
termination.  The Bank maintains  that it terminated  each of these officers for
"cause"  and  that  it is  under  no  obligation  to  pay  them  any  additional
compensation.  On March 14, 2003, one of these officers filed a lawsuit  against
the Bank in the Circuit Court for Morgan  County,  Alabama,  alleging  breach of
contract and demanding the benefits due under his employment agreement. The Bank
intends to vigorously  defend this and any other action brought against the Bank
by either of the officers, and does not believe that the final outcome will have
a material impact on the Bank or the Company.


Note 24 - Fair Value of Financial Instruments


The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

Cash and Short-Term Investments:  For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.

Securities: For securities  available-for-sale and securities  held-to-maturity,
fair  values  are based on quoted  market  prices  or dealer  quotes.  For other
securities,  fair value equals quoted market  price,  if available.  If a quoted
market  price is not  available,  fair value is estimated  using  quoted  market
prices for similar securities.

Mortgage Loans Held For Sale:  For these  short-term  instruments,  the carrying
amount is a reasonable estimate of fair value.

Loans:  For certain  homogeneous  categories of loans,  such as some residential
mortgage,  credit  card  receivables  and other  consumer  loans,  fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics.  The fair value of other types
of loans is  estimated  by  discounting  the future cash flows using the current
rates at which  similar  loans would be made to borrowers  with  similar  credit
ratings and for the same remaining maturities.

Accrued Interest Receivable:  The carrying amount of accrued interest receivable
approximates its fair value.

Deposits: The fair value of demand deposits,  savings accounts and certain money
market  deposits in the amount payable on demand at the reporting date. The fair
value of  fixed-maturity  certificates  of deposit is estimated  using the rates
currently offered for deposit of similar remaining maturities.

Accrued  Interest  Payable:  The  carrying  amount of accrued  interest  payable
approximates its fair value.

                                       76
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 24 - Fair Value of Financial Instruments - Continued

Short-Term Borrowings: The carrying amounts of short-term borrowings approximate
their fair values.

Long-term Debt:  Rates currently  available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.

Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees
Written:  The  fair  value of  commitments,  letters  of  credit  and  financial
guarantees is estimated to be  approximately  the same as the notional amount of
the related commitment.

The estimated fair values of the Company's financial  instruments as of December
31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>

                                                             2002                               2001
                                               --------------------------------   --------------------------------
                                                   Carrying           Fair           Carrying            Fair
                                                   Amount             Value            Amount            Value
                                               ---------------  ---------------   ---------------  ---------------
                                                        (in thousands)                     (in thousands)

Financial Assets
<S>                                            <C>              <C>               <C>              <C>
   Cash and short-term investments..........   $        13,539  $         13,539  $        13,702  $         13,702
   Securities...............................            36,810            36,810           25,894            25,894
   Mortgage loans held-for-sale.............            12,343            12,343           12,548            12,548
   Loans....................................           523,850           554,047          505,381           529,578
   Accrued interest receivable..............             3,404             3,404            3,873             3,873
                                               ---------------  ----------------  ---------------  ----------------

     Total Financial Assets.................   $       589,946  $        620,143  $       561,398  $        585,595
                                               ===============  ================  ===============  ================
Financial Liabilities
   Deposits.................................   $       525,631  $        527,869  $       504,310  $        513,757
   Short-term borrowings....................             6,650             6,650               --                --
   Subordinated debentures..................            10,000            10,000           10,000            10,308
   FHLB Advances............................            23,000            30,829           13,000            13,778
   Accrued interest payable.................             3,289             3,289            4,205             4,205
                                               ---------------  ----------------  ---------------  ----------------

     Total Financial Liabilities............   $       568,570  $        578,637  $       531,515  $        542,048
                                               ===============  ================  ===============  ================

Unrecognized Financial Instruments
   Commitments to extend credit.............   $        75,574  $         75,574  $        71,974  $         71,974
   Standby letters of credit................             3,259             3,259            3,174             3,174
                                               ---------------  ----------------  ---------------  ----------------


     Total Unrecognized Financial
       Instruments..........................   $        78,833  $         78,833  $        75,148  $         75,148
                                               ===============  ================  ===============  ================
</TABLE>

                                       77

<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 25 - Condensed Parent Company Information

Statements of Financial Condition

<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                       2002              2001
                                                                                  ---------------  ---------------
Assets
<S>                                                                               <C>              <C>
   Cash and due from banks......................................................  $        15,853  $        529,538
   Investment in and amounts due from subsidiaries (equity
     method) -eliminated upon consolidation.....................................       39,017,232        45,469,845
   Other assets.................................................................        2,530,043           961,623
                                                                                  ---------------  ----------------

       Total Assets.............................................................  $    41,563,128  $     46,961,006
                                                                                  ===============  ================

Liabilities and Stockholders' Equity

Liabilities
   Guaranteed preferred beneficial interest in the Company's
     subordinated debentures....................................................  $    10,310,000  $     10,310,000
   Note payable - commercial bank...............................................        6,650,000                --
   Other liabilities............................................................          900,082           527,126
                                                                                  ---------------  ----------------
       Total Liabilities........................................................       17,860,082        10,837,126

Stockholders' Equity............................................................       23,703,046        36,123,880
                                                                                  ---------------  ----------------

       Total Liabilities and Stockholders' Equity...............................  $    41,563,128  $     46,961,006
                                                                                  ===============  ================
</TABLE>

              [The remainder of this page intentionally left blank]

                                       78
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 25 - Condensed Parent Company Information - Continued

Statements of Income

<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                                  ---------------------------------
                                                                                       2002              2001
                                                                                  ---------------  ---------------

Income
   From subsidiaries - eliminated upon consolidation:
<S>                                                                               <C>              <C>
     Dividends..................................................................  $       720,000  $      2,115,710
     Management fees............................................................               --           218,000
     Interest income............................................................           31,357            27,228
                                                                                  ---------------  ----------------
       Total Income.............................................................          751,357         2,360,938
                                                                                  ---------------  ----------------

Expenses
   Interest expense.............................................................        1,099,886           905,562
   Salaries and benefits........................................................        2,119,946           394,734
   Other expenses...............................................................          538,525           471,462
                                                                                  ---------------  ----------------
       Total Expenses...........................................................        3,758,357         1,771,758
                                                                                  ---------------  ----------------

Income (loss) before income taxes and equity
   in undistributed earnings of subsidiary......................................       (3,007,000)          589,180
Income tax benefit..............................................................        1,279,879           583,857
                                                                                  ---------------  ----------------

Income (loss) before equity in undistributed earnings of subsidiary.............       (1,727,121)        1,173,037

Equity (deficit) in undistributed earnings of subsidiary........................      (12,685,662)        1,192,884
                                                                                  ---------------  ----------------

Net Income (Loss)...............................................................  $   (14,412,783) $      2,365,921
                                                                                  ===============  ================
</TABLE>

              [The remainder of this page intentionally left blank]

                                       79
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000

Note 25 - Condensed Parent Company Information - Continued

Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                                  ---------------------------------
                                                                                       2002              2001
                                                                                  ---------------  ---------------

Operating Activities
<S>                                                                               <C>              <C>
   Net income (loss)............................................................  $   (14,412,783) $      2,365,921
   Adjustments to reconcile net income to net cash provided
     by operating activities:
     Equity in undistributed income of subsidiary...............................       12,685,662        (1,192,884)
     Deferred tax benefit.......................................................         (212,257)          (14,548)
     Other, net.................................................................          100,013          (778,339)
                                                                                  ---------------  ----------------
       Net Cash Provided By (Used In) Operating Activities......................       (1,839,365)          380,150
                                                                                  ---------------  ----------------

Investing Activities
   Capital injection in subsidiaries............................................       (6,500,000)      (10,320,200)
                                                                                  ---------------  ----------------
       Net Cash Used In Investing Activities....................................       (6,500,000)      (10,320,200)
                                                                                  ---------------  ----------------

Financing Activities
   Net proceeds from issuance of stock..........................................           48,766           118,656
   Compensatory options recognition.............................................        1,126,914            37,843
   Issuance of guaranteed preferred beneficial interest in the
     Company's subordinated debentures..........................................               --        10,310,000
   Loan proceeds - short-term borrowing.........................................        6,650,000                --
                                                                                  ---------------  ----------------
       Net Cash Provided By Financing Activities................................        7,825,680        10,466,499
                                                                                  ---------------  ----------------

Net Increase (Decrease) in Cash and Cash Equivalents............................         (513,685)          526,449

Cash and Cash Equivalents at Beginning of Year..................................          529,538             3,089
                                                                                  ---------------  ----------------

Cash and Cash Equivalents at End of Year........................................  $        15,853  $        529,538
                                                                                  ===============  ================
</TABLE>

              [The remainder of this page intentionally left blank]

                                       80
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 26 - Quarterly Results of Operations (Unaudited)

Selected quarterly results of operations for the four quarters ended December 31
are as follows:

<TABLE>
<CAPTION>


                                        First           Second           Third           Fourth
                                       Quarter          Quarter         Quarter          Quarter          Total
                                    -------------   -------------    -------------   -------------   -------------
                                                                    (In Thousands)
2002:
<S>                                 <C>             <C>              <C>             <C>             <C>
Total interest income...........    $      10,496   $      10,592    $      10,555   $      10,296   $       41,939
Total interest expense..........            5,492           5,238            5,404           5,608           21,742
Provision for loan losses.......              609           3,087            9,380          16,393           29,469
Net interest income (loss)
   after provision for
   loan losses..................            4,395           2,267           (4,229)        (11,705)          (9,272)
Other noninterest income........              543             458              573             701            2,275
Other noninterest expense.......            4,885           3,016            3,392           4,010           15,303
Income tax benefit..............               18              59            2,626           5,184            7,887
Net Income (Loss)...............               71            (232)          (4,422)         (9,830)         (14,413)

Per Common Share:
   Basic earnings (loss)........            0.01            (0.03)           (0.50)          (1.13)           (1.65)
   Diluted earnings (loss)......            0.01            (0.02)           (0.44)          (0.95)           (1.40)


2001:
Total interest income...........    $      10,953   $      11,058    $      11,348   $      10,894   $       44,253
Total interest expense..........            7,084           7,369            7,479           6,662           28,594
Provision for loan losses.......            1,046             981              850             725            3,602
Net interest income after
   provision for loan losses....            2,823           2,708            3,019           3,507           12,057
Other noninterest income........              337             370              410             439            1,556
Other noninterest expense.......            2,469           2,460            2,606           2,488           10,023
Income tax expense..............              273             188              323             440            1,224
Net Income......................              418             430              500           1,018            2,366

Per Common Share:
   Basic earnings...............             0.05            0.05             0.06            0.12             0.28
   Diluted earnings.............             0.04            0.04             0.05            0.10             0.23
</TABLE>

                                       81
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2002, 2001 and 2000


Note 26 - Quarterly Results of Operations (Unaudited) - Continued

Selected  quarterly results of operations for the quarters ended December 31 are
as follows:

<TABLE>
<CAPTION>

                                        First           Second           Third           Fourth
                                       Quarter          Quarter         Quarter          Quarter          Total
                                    -------------   -------------    -------------   -------------   -------------
                                                                    (In Thousands)
2000:
<S>                                 <C>             <C>              <C>             <C>             <C>
Total interest income...........    $       6,778   $       8,431    $       9,881   $      10,570   $       35,660
Total interest expense..........            3,848           5,065            6,351           6,754           22,018
Provision for loan losses.......              670             966              763             990            3,389
Net interest income after
   provision for loan losses....            2,260           2,400            2,767           2,826           10,253
Other noninterest income........              211             274              262             292            1,039
Other noninterest expense.......            1,789           1,964            2,078           2,282            8,113
Income tax expense..............              259             275              379              78              991
Net Income......................              423             435              572             758            2,188

Per Common Share:
   Basic earnings...............             0.05            0.05             0.07            0.09             0.26
   Diluted earnings.............             0.04            0.04             0.06            0.08             0.22
</TABLE>

                                       82
<PAGE>
ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE.

None.

                                    PART III



ITEM    10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE  OFFICERS OF THE  REGISTRANT;
        EXECUTIVE COMPENSATION; SECURITY OWNERSHIP  OF CERTAIN BENEFICIAL OWNERS
        AND  MANAGEMENT  AND  RELATED  STOCKHOLDER    MATTERS;    AND    CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  information  set forth under the  captions  "Directors  and  Executive
Officers," "Executive  Compensation,"  "Security Ownership of Certain Beneficial
Owners  and   Management   and  Related   Stockholder   Matters,"  and  "Certain
Relationships  and Related  Transactions"  included in the Company's  definitive
proxy statement to be filed no later than April 15, 2003, in connection with the
Company's  2003  Annual  Meeting  of  Stockholders  is  incorporated  herein  by
reference.

                                       83
<PAGE>
ITEM 14. CONTROLS AND PROCEDURES.

(a)  Within the 90 days prior to the date of filing this  Annual  Report on Form
     10-K, the Company  carried out an  evaluation,  under the  supervision  and
     participation of its management,  including the Chief Executive Officer and
     the  Chief  Financial  Officer,  of the  effectiveness  of the  design  and
     operation of the Company's  disclosure  controls and procedures pursuant to
     Exchange Act Rules 13a-14(c) and 15d-14(c).  Based on that evaluation,  the
     Chief Executive  Officer and the Chief Financial Officer concluded that the
     Company's  disclosure  controls  and  procedures  are  effective  in timely
     alerting them to material  information  relating to the Company  (including
     its  consolidated  subsidiaries)  required to be included in the  Company's
     periodic SEC filings. However, the Company recently has experienced several
     changes  in top  management,  and  the  effectiveness  of  such  disclosure
     controls and  procedures is dependent on the Company's  personnel to report
     any issues or matters required to be disclosed in the Company's SEC filings
     to the appropriate management personnel on a timely basis.

(b)  As previously reported,  banking regulatory  authorities recently performed
     both a targeted,  limited  scope review of the Bank's loan  portfolio and a
     safety and soundness  examination  of the Bank. In  conjunction  with these
     reviews,  management  commenced  a  comprehensive  review of the  Company's
     internal control  structures.  Management's  review of the internal control
     structures of the Company and the Bank indicated significant  weaknesses in
     the Company's and the Bank's internal controls and procedures, particularly
     with respect to the Bank's lending functions, including credit underwriting
     and loan review.  As a result of the information  gathered in the course of
     these reviews, management of both the Company and the Bank have taken steps
     to modify and  supplement  internal  controls  and  procedures  in order to
     augment  the  Company's  reporting  and  to  ensure  timely  evaluation  of
     reporting  regarding the operations of the Bank,  particularly with respect
     to the credit and asset quality of the Bank. Furthermore,  in the course of
     these reviews,  the Company and the Bank determined  that certain  internal
     controls relating to loan policies and procedures have not been followed by
     Bank  personnel,  and have taken steps to correct these matters,  including
     the dismissal of certain employees of the Bank. The Bank has retained a new
     President and Chief Executive Officer, and,  additionally,  the Company has
     changed  outside  legal  counsel.  Management  has  disclosed  the  control
     weaknesses  discovered  in the course of its review to its Audit  Committee
     and to the outside auditors of the Company, and is continuing to seek their
     advice and support in revising and  supplementing the internal controls and
     procedures of the Company and the Bank.

     The management of the Company and the Bank,  including the Chief  Executive
     Officer and Chief  Financial  Officer of the Company,  does not expect that
     either the disclosure  controls or the internal controls of the Company and
     the Bank will prevent all error and all fraud. A control system,  no matter
     how well conceived and operated, can provide only reasonable, not absolute,
     assurance that the objectives of the control system are met. Control issues
     can present  particular  difficulties  for entities such as the Company and
     the Bank, which have experienced recent lapses in their control systems and
     are  endeavoring  to  update  their  controls  and  procedures  in a manner
     designed to prevent future lapses.  Because of the inherent  limitations in
     all  control  systems,  no  evaluation  of controls  can  provide  absolute
     assurance  that all control issues and instances of fraud,  if any,  within
     the  Company or the Bank have been  detected.  These  inherent  limitations
     include the realities that judgment in  decision-making  can be faulty, and
     that breakdowns can occur because of simple error or mistake. Additionally,
     controls can be  circumvented  by the individual  acts of some persons,  by
     collusion of two or more people, or by management  override of the control.
     The design of any  system of  controls  also is based in part upon  certain
     assumptions  about the  likelihood  of future  events,  and there can be no
     assurance that any design will succeed in achieving its stated goals in all
     potential  future  conditions;  over time,  control  may become  inadequate
     because of  changes in  conditions,  or the degree of  compliance  with the
     policies or procedures may deteriorate. Because of the inherent limitations
     in a cost-effective control system, misstatements due to error or fraud may
     occur and not be detected.

                                       84

<PAGE>
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  Financial Statements, Financial Schedules and Exhibits.

     (1)  The consolidated  financial  statements of Heritage  Financial Holding
          Corporation and its subsidiaries filed as a part of this Annual Report
          on Form 10-K are listed in Item 8 of this Annual  Report on Form 10-K,
          which is hereby incorporated by reference herein.

     (2)  All  schedules to the  consolidated  financial  statements of Heritage
          Financial  Holding  Corporation and its subsidiaries have been omitted
          because they are not required  under the related  instructions  or are
          inapplicable, or because the required information has been provided in
          the consolidated financial statements or the notes thereto.

     (3)  The exhibits required by Regulation S-K are set forth in the following
          list and are filed either by  incorporation by reference from previous
          filings with the Securities  and Exchange  Commission or by attachment
          to this Annual Report on Form 10-K as indicated below.

EXHIBIT NO.                           EXHIBIT

(2)-1 Plan of Reorganization and Agreement of Merger,dated as of March 14, 2000,
      by and among Heritage  Financial  Holding  Corporation,  Heritage  Interim
      Corporation and Heritage Bank, filed as Exhibit 2 to the Company's current
      report on Form 8-K on November 9, 2000, is hereby  incorporated  herein by
      reference.

(3)-1 Certificate of Incorporation of  Heritage  Financial  Holding Corporation,
      filed as Exhibit 1 to the Company's Registration Statement on Form 8-A, is
      hereby  incorporated  herein by  reference.

(3)-2 Bylaws of Heritage Financial Holding Corporation,filed as Exhibit 2 to the
      Company's Registration   Statement on Form  8-A,  is  hereby  incorporated
      herein by reference.

(4)-1 Indenture,  dated  as of  February  22,  2001,  between Heritage Financial
      Holding  Corporation  and State  Street Bank and Trust   Company, filed as
      Exhibit 4-1 to the  Company's annual report on Form 10-KSB filed March 31,
      2001,  is hereby  incorporated  by  reference.

(4)-2 Guarantee Agreement,  dated as of  February  22,  2001,  between  Heritage
      Financial Holding Corporation  and State  Street  Bank and Trust  Company,
      filed as Exhibit 4-2 to the  Company's  annual report on Form 10-KSB filed
      March 31, 2001, is hereby incorporated by reference.

(4)-3 Placement Agreement, dated as  of   February  9, 2001,  by and among First
      Tennessee  Capital  Markets, Keefe,   Bruyette  &  Woods,  Inc.,  Heritage
      Financial  Holding  Corporation  and Heritage Financial Statutory Trust I,
      filed as Exhibit 4-3 to the Company's annual  report  on Form 10-KSB filed
      March 31, 2001,  is hereby  incorporated by reference.

(10)-1Heritage Financial Holding Corporation Employee Stock Purchase Plan, filed
      as  Exhibit  (4)-2  to the  Company's  Registration Statement  on Form S-8
     (Registration No. 333-55942),  is hereby incorporated herein  by reference.

(10)-2Heritage Financial Holding Corporation Incentive Stock  Compensation Plan,
      filed as Exhibit (4)-3 to the Company's Registration Statement on Form S-8
     (Registration No. 333-55942),  is  hereby incorporated herein by reference.

                                       85
<PAGE>
(10)-3Employment  Agreement dated as of May  31, 1999,  by and between  Heritage
      Bank and Michael R. Washburn,  filed as Exhibit ( 10)-6 to  the  Company's
      annual report on Form 10-KSB filed March 31,2001,is hereby incorporated by
      reference.

(10)-4Employment  Agreement dated as of July 11,  2002,  by and  among  Heritage
      Financial  Holding  Corporation,  Heritage  Bank  and  Thomas E. Hemmings,
      filed as Exhibit 10.1 to the  Company's  Quarterly Report on Form 10-Q for
      the period ended September 2002.

(10)-5Employment Agreement dated as of January 23, 2003, effective as of October
      23, 2002, by and between  Heritage Bank and Larry R. Mathews.

(10)-6Loan Agreement dated as of October  30,  2002,  by  and  between  Heritage
      Financial  Holding   Corporation   and  First   Tennessee   Bank  National
      Association, filed as Exhibit 99.2 to the Company's Current Report on Form
      8-K on November 5, 2002.

11   Statement  re:   computation   of  per  share  earnings

12   Statement re:  computation of ratios

21   Subsidiaries  of the  Registrant

24   Powers of Attorney.  See the  signature  page to this Annual Report on Form
     10-K

(99)-1 Chief  Executive  Officer - Certification  pursuant to 18 U.S.C.  Section
     1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(99)-2 Chief  Financial  Officer - Certification  pursuant to 18 U.S.C.  Section
     1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)  Reports on Form 8-K

During the Quarter  ended  December 31, 2002,  the Company  filed the  following
Current Reports on Form 8-K:

Form 8-K filed  November 5, 2002 to disclose  under Item 5 certain  other events
related to a review of the Bank by regulatory authorities.

(c)  Exhibits

The exhibits  required to be filed with this Annual Report on Form 10-K pursuant
to Item 601 of  Regulation  S-K are listed under  "Exhibits"  in Part III,  Item
15(a) (3) of this Annual  Report on Form 10-K,  and are  incorporated  herein by
reference.

(d)  Financial Statement Schedules.

The Financial  Statement  Schedules required to be filed with this Annual Report
on Form 10-K are listed under "Financial  Statement Schedules" in Part III, Item
15(a) (2) of this Annual  Report on Form 10-K,  and are  incorporated  herein by
reference.

                                       86
<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.



                                          HERITAGE FINANCIAL HOLDING CORPORATION



Date:  March 28, 2003                         By:    /s/  Harold B. Jeffreys
     -----------------------                     -------------------------------
                                                 Harold B. Jeffreys
                                                 Interim Chief Executive Officer


Date:  March 28, 2003                         By:   /s/  Thomas E. Hemmings
     -----------------------                     -------------------------------
                                                 Thomas E. Hemmings
                                                 Chief Financial Officer


                                       87
<PAGE>
                                 CERTIFICATIONS

     I,   Harold B. Jeffreys, certify that:

     1.   I have reviewed this annual report on Form 10-K of Heritage  Financial
          Holding Corporation;

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

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

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

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

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

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

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

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

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

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

Date:   March 28, 2003
     -------------------------
      /s/  Harold B. Jeffreys
     -------------------------

Harold B. Jeffreys
Interim President and Chief Executive Officer

                                       88
<PAGE>
                                 CERTIFICATIONS

     I,   Thomas E. Hemmings, certify that:

     1.   I have reviewed this annual report on Form 10-K of Heritage  Financial
          Holding Corporation;

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

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

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

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

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

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

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

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

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

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

Date:   March 28, 2003
     -------------------------
      /s/  Thomas E. Hemmings
     -------------------------

Thomas E. Hemmings
Chief Financial Officer

                                       89
<PAGE>
                                                                  EXHIBIT (10)-5

                              EMPLOYMENT AGREEMENT

     THIS AGREEMENT (this  "Agreement"),  is made and entered into this 23rd day
of January,  2003,  but effective as of October 23, 2002, by and among  Heritage
Financial Holding Corporation,  a Delaware corporation  (hereinafter referred to
as the  "Company"),  Heritage  Bank, an Alabama state banking  corporation  (the
"Bank"), and Larry R. Mathews (the "Executive").

                              W I T N E S S E T H:
                              - - - - - - - - - - -

     WHEREAS,  the  Company  and the Bank  desire to  employ  the  Executive  as
President and Chief  Executive  Officer of the Bank on the terms and  conditions
hereinafter provided, and the Executive desires to accept such employment on the
terms and conditions hereinafter set forth;

     NOW,  THEREFORE,  in consideration  of the mutual  promises,  covenants and
agreements set forth in this Agreement, the receipt and sufficiency of which are
hereby  acknowledged,  the parties  hereto,  intending to be legally  bound,  do
hereby agree as follows:

SECTION 1: EMPLOYMENT OF EXECUTIVE; DUTIES AND RESPONSIBILITIES


1.1  Employment  of  Executive.  The  Company  and the  Bank  shall  employ  the
     Executive,  and the Executive shall provide services to the Company and the
     Bank,  as  President  and Chief  Executive  Officer  of the Bank,  upon and
     subject to the terms and conditions of this Agreement.

1.2  Term of  Employment of  Executive.  Subject to the  provisions of Section 3
     hereof,  the  employment  of the  Executive  by the  Company  and the  Bank
     pursuant to this Agreement  shall be for an initial term of three (3) years
     commencing  on October 23, 2002,  and ending on October 22, 2005;  provided
     that such term may be renewed  annually by mutual agreement of the Board of
     Directors  of the  Bank,  the Board of  Directors  of the  Company  and the
     Executive for one additional year on each anniversary of the effective date
     of this Agreement  such that, if such renewal  election is made by the Bank
     and the  Company,  on each of such  anniversary  dates the  remaining  term
     hereunder  will be three years.  The period of the  Executive's  employment
     hereunder is referred to herein as the "Employment Period."

1.3  Offices and Positions of Executive.  Except as otherwise mutually agreed by
     the Company,  the Bank and the Executive and subject to Section hereof, the
     Executive shall serve as President and Chief Executive  Officer of the Bank
     and any other position agreed upon by the parties.

                                       90
<PAGE>
1.4  Duties and  Responsibilities.  During the Employment  Period, the Executive
     shall  report  directly to the Board of Directors of the Bank and the Board
     of   Directors   of  the  Company  and  shall   perform   such  duties  and
     responsibilities  as the Board of Directors of the Bank and/or the Board of
     Directors of the Company shall reasonably assign to the Executive from time
     to time and as are  commensurate  with his  position  and  which may be set
     forth in the Bank's bylaws.  During the Employment Period,  Executive shall
     devote  his  full  business  time,  attention,  skill  and  efforts  to the
     performance  of his duties  hereunder,  except during periods of illness or
     periods of vacation and leaves of absence  consistent  with the Company and
     Bank policies. The Executive may devote reasonable periods of time to serve
     as a  director  or  advisor  to  other  organizations,  to  charitable  and
     community  activities  and to managing his personal  investments,  provided
     that such  activities do not materially  interfere with the  performance of
     his  duties  to the  Company  or the  Bank  and  are  not  in  conflict  or
     competitive  with, or adverse to, the interests of the Company or the Bank.
     The  Executive's  office shall be located in the City of Decatur,  Alabama,
     but the Executive  understands  and agrees that  performance  of his duties
     hereunder may involve extensive travel.

1.5  Board of Directors  Position.  The Bank and the Company  shall each use its
     best efforts to cause the  Executive to be elected to fill a vacant seat on
     the Board of Directors of the Bank. If so elected,  the Executive agrees to
     serve as a member  of the  Board of  Directors  of the  Bank,  and the Bank
     agrees that the Executive shall be entitled to  indemnification as provided
     by the terms of the Articles of  Incorporation of the Bank, as amended from
     time to time, and the bylaws of the Bank, as amended from time to time, and
     that the Bank shall  take any  necessary  steps to provide  that the Bank's
     directors and officers insurance coverage shall extend to Executive.

SECTION 2: COMPENSATION; REIMBURSEMENT; AND BENEFITS

2.1  Base Salary and Bonus. During the Employment Period, the Company and/or the
     Bank shall pay to the Executive the annual base salary (the "Base  Salary")
     at the rate of $185,000 per year (provided that nothing herein  requires or
     shall be construed to require duplicate salary payments by each of the Bank
     and the Company),  beginning  October 23, 2002 and  continuing at such rate
     until December 31, 2003. Beginning with calendar year 2004, the Base Salary
     shall be  reviewed no less  frequently  than  annually by the  compensation
     committee  of the Board of  Directors of the Bank for the year 2004 and for
     each subsequent  calendar year; if the Board of Directors in its discretion
     should  modify the Base Salary upon any such review  then,  for purposes of
     this  Agreement,  the term Base Salary shall  thereafter mean such modified
     amount,  provided  that the Base  Salary may not be  decreased  without the
     consent of Executive.

     In addition  to the Base  Salary,  the Company  and/or the Bank may pay the
     Executive  such bonus or bonuses,  if any, as the Board of Directors of the
     Company  and/or  the Bank may from time to time  determine.  The  Executive
     shall  be  eligible  to be  considered  for  bonuses  under  the  Executive
     Management  Bonus  Program of the  Company  and/or the

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     Bank, and specific criteria will be developed for the position of President
     and Chief  Executive  Officer of the Bank under the terms of such Executive
     Management Bonus Program.

2.2  Payment of Base Salary and Bonus. The Company and/or the Bank shall pay the
     Base Salary and bonuses,  if any, due the Executive in accordance  with the
     policy or policies of the Company and/or the Bank as in effect from time to
     time for the payment of salary and bonuses to senior executive personnel.

2.3  Incentive  Stock  Option.  Within  one  hundred  eighty  (180)  days of the
     effective  date of this  Agreement,  the Company  shall grant to  Executive
     stock  options  (the  "Option")  to acquire  one  hundred  twenty  thousand
     (120,000)  shares of the common stock of the  Company,  par value $0.01 per
     share,  pursuant to and in accordance  with the terms and conditions of the
     Heritage  Financial Holding  Corporation  Incentive Stock Compensation Plan
     (the "Plan"), and the Option shall be an Incentive Stock Option (as defined
     in the Plan) as to the greatest number of shares permitted  pursuant to the
     Plan and shall be a Supplemental Stock Option (as defined in the Plan) with
     respect to the remaining shares. The per share exercise price of the Option
     shall be not less than the fair market  value of a share of common stock of
     the Company as of the date of the grant, as required under the terms of the
     Plan. The Option shall vest according to the following schedule: (i) 20,000
     shares shall vest immediately upon the date of the grant; (ii) 20,000 shall
     vest on the first anniversary of the date of the grant;  (iii) 20,000 shall
     vest on the second  anniversary of the date of the grant; (iv) 20,000 shall
     vest on the third  anniversary  of the date of the  grant;  and (v)  20,000
     shall vest on the  fourth  anniversary  of the date of the grant;  and (vi)
     20,000 shares shall vest on the fifth anniversary of the date of the grant.
     Notwithstanding  the  foregoing,  in the event of a Change of  Control  (as
     defined in Section 3.1(d) of this Agreement), the Option shall become fully
     vested  immediately  upon the effective time of such Change of Control,  as
     provided by the terms of the Plan.

2.4  Insurance. The Executive shall participate in any long term defined benefit
     plan of the  Company  and/or  the Bank  with  respect  to Bank  Owned  Life
     Insurance,  if and when any such plan is  implemented by the Company and/or
     the Bank.  The  Company  and/or the Bank shall  purchase,  and shall be the
     owner of, a term life insurance policy in the face amount of $1,000,000 for
     Executive,  the  beneficiary  of  which  shall  be a trust  or  such  other
     beneficiary as may be designated by the  Executive;  provided that upon the
     termination of Executive's  employment  hereunder for any reason other than
     death,  the Executive may purchase such policy from the Company  and/or the
     Bank on such  terms as may be agreed  upon by the  parties  at such time or
     else the Company  and/or the Bank may  terminate  such policy or  otherwise
     permit it to lapse;  and  provided  further,  that  upon  agreement  of the
     Company  and/or the Bank and the  Executive,  the Company and/or the Bank's
     obligation  pursuant to this sentence may be satisfied by the assumption of
     a certain term life  insurance  policy in the face amount of $1,000,000 for
     Executive which Executive currently owns. The Company and/or the Bank shall
     purchase  disability  insurance  for the  benefit of the  Executive  with a
     benefit per month that is at least equal to  one-twelfth of the Base Salary
     hereunder,  assuming  that  Executive  qualifies  for  such  an  amount  of
     disability  insurance  under the  benefit  programs or plans of the Company
     and/or the Bank.

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2.5  Other Benefits.  The Executive shall be entitled to participate on the same
     basis as other similarly  situated employees of the Company and the Bank in
     all incentive and benefit  programs or  arrangements  made available by the
     Company and the Bank to such employees.

2.6  Automobile;  Cellular Telephone.  During the Employment Period, the Company
     and/or the Bank will furnish the Executive with the use of an automobile in
     accordance with the Bank's Executive Automobile Program dated as of May 28,
     2002,  subject to the policies and  procedures  of the Company and the Bank
     with respect to the personal use of such automobile.  During the Employment
     Period,  the Company or the Bank will furnish the Executive with the use of
     a cellular  telephone subject to the policies and procedures of the Company
     or the Bank,  as  applicable,  with  respect  to the  personal  use of such
     telephone.

2.7  Business  Expenses.  The  Company  and/or  the  Bank  shall  reimburse  the
     Executive for all reasonable  expenses  incurred by him in accordance  with
     the standard  policies and procedures of the Company and/or the Bank in the
     course of rendering  his  services  pursuant to this  Agreement;  provided,
     however,   that  the  Executive   shall  promptly  submit  such  reasonable
     documentation  as may be requested by the Company and/or the Bank to verify
     such expenditures.

2.8  Country  Club and Civic  Club  Dues.  The  Company  and/or  the Bank  shall
     reimburse the Executive's reasonable expenses for initiation fees, dues and
     capital  assessments  for  membership  in the Decatur  Country Club and for
     other civic club memberships,  as authorized by the compensation committee,
     entered by the Executive during the Employment Period; provided that if the
     Executive  during the  Employment  Period ceases his membership in any such
     clubs and any bonds or other capital  payments  made by the Company  and/or
     the Bank are repaid to the  Executive,  the  Executive  shall pay over such
     payments to the Company  and/or the Bank; and provided  further,  that upon
     the termination of the Executive's  employment  hereunder,  Executive shall
     either terminate such memberships and return to the Company and/or the Bank
     any bonds or other  capital  payments  made by the Company  and/or the Bank
     that are repaid to the  Executive  or purchase  such  memberships  from the
     Company  and/or the Bank and reimburse the Company  and/or the Bank for any
     and all  initiation  fees and bonds or other  capital  payments made by the
     Company and/or the Bank with respect to such memberships.

2.9  Vacation.  The  Executive  shall be  entitled  to three  (3)  weeks of paid
     vacation per year. The vacation to which the Executive is entitled pursuant
     to this Section 2.9 shall be available  under the same terms and conditions
     as are applicable to similarly situated executive  personnel of the Company
     and the Bank. The Executive shall take into  consideration the needs of the
     Company and the Bank in setting his vacation schedule.

2.10 Relocation  Expenses.  The Company  and/or the Bank shall pay, or reimburse
     the Executive for, reasonable moving expenses of Executive,  as approved in
     advance by the  compensation  committee of the Company's

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     and/or the Bank's Board of Directors,  in connection with the relocation by
     Executive of his primary  residence to Decatur,  Alabama.  Executive  shall
     promptly  submit such reasonable  documentation  as may be requested by the
     Company and/or the Bank to verify such moving expenses.

2.11 Indemnification. The Executive shall be entitled to indemnification (and to
     reimbursement  of expenses  incurred in  connection  with such  indemnified
     claims,  etc.) as an officer  and  director  of the Bank to the full extent
     provided for in the Articles of  Incorporation  and Bylaws of the Bank,  as
     the same may be amended from time to time,  and subject to applicable  law.
     The Bank  shall  also use its  best  efforts  to  obtain  coverage  for the
     Executive under any insurance  policy now in force or hereinafter  obtained
     during the term of this Agreement covering the other officers and directors
     of the Bank against lawsuits.

SECTION 3 TERMINATION OF EMPLOYMENT

3.1  Termination of Employment  Period.  The Employment Period may be terminated
     in the following manner:

     (a)  Termination  on Death  or  Disability.  The  Employment  Period  shall
          automatically terminate upon the death or Disability of the Executive.
          The term  "Disability"  shall mean the Executive's  physical or mental
          incapacity  that renders him  incapable of  performing  the  essential
          functions  of the duties  required  of him by this  Agreement  for one
          hundred eighty (180) or more  consecutive  days,  even with reasonable
          accommodation.  In the case of termination  upon the Disability of the
          Executive, there shall be a determination by the Board of Directors of
          the Company and/or the Bank that such grounds for termination exist.

     (b)  Termination  upon Notice.  The Employment  Period may be terminated by
          the Executive at any time,  upon thirty (30) days'  written  notice to
          the Company and/or the Bank.  The Employment  Period may be terminated
          by the  Company  and/or  the  Bank,  by  resolution  of its  Board  of
          Directors,  for any other reason other than for "Cause" (as defined in
          Section  3.1(c) of this  Agreement),  upon  thirty  (30) days  written
          notice to the Executive.

     (c)  Termination for Cause. The Employment  Period may be terminated by the
          Company and/or the Bank, by resolution of its Board of Directors,  for
          "Cause" at any time  during the  Employment  Period  immediately  upon
          written  notice to the  Executive,  which notice shall state the facts
          constituting  such "Cause." For the purpose of this Section , the term
          "Cause" shall mean (i) intentional misconduct or gross malfeasance, or
          an act or acts of gross  negligence in the course of employment or any
          material   breach  of  Executive's   obligations   contained   herein,
          including,  without limitation,  acts competitive with or deliberately
          harmful  to  the  business  of  the  Company  or the  Bank;  (ii)  any
          intentional  misstatement  or omission to the  directors  or executive
          officers of the Company or the Bank with respect to any matter;  (iii)
          the  intentional  failure of the  Executive  to follow the  reasonable
          instructions  and  policies  of the  Company  or the  Bank;  (iv)  the
          Executive's  conviction,  admission or  confession of any felony or an

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          unlawful act involving active and willful fraud or moral turpitude; or
          (v) the  violation by the  Executive of  applicable  state and federal
          regulations,  rules,  or statutes.  The Company  and/or the Bank shall
          have the power to  temporarily  suspend  Executive  (with such pay, if
          any, as the Company and/or the Bank may determine)  from duty if there
          is substantial evidence of probable Cause until Cause is either proved
          or  disproved;   if  disproved,   full  reinstatement  with  pay  will
          immediately be effected.

     (d)  Termination for Good Reason.  The Employment  Period may be terminated
          by the Executive for "Good  Reason," as  hereinafter  defined,  at any
          time during the  Employment  Period  upon  thirty  (30) days'  written
          notice to the Company  and/or the Bank,  which  notice shall state the
          facts constituting such "Good Reason." For the purpose of this Section
          3.1(d),  the term "Good Reason"  shall mean (i) a significant  change,
          without  the consent of the  Executive,  in the nature or scope of the
          Executive's authorities or duties from those described in Sections 1.3
          and 1.4 or those generally commensurate with the position of President
          and Chief  Executive  Officer of the Bank;  (ii) the  occurrence  of a
          Change in Control (as hereinafter  defined),  (iii) a reduction in the
          Executive's  base salary  without  his  consent,  or (iv)  following a
          Change in Control,  a reduction in the Executive's  base salary or any
          failure to pay the Executive any  compensation or benefits to which he
          is  entitled  within  five days of the date due, or the failure by the
          Company and the Bank to (A) continue in effect  (without  reduction in
          benefit level and/or reward  opportunities) any material  compensation
          or employee  benefit plan in which the Executive was  participating at
          any time within ninety days  preceding the date of a Change in Control
          or at any time  thereafter,  unless such plan is replaced  with a plan
          that provides substantially equivalent compensation or benefits to the
          Executive or (B) provide the Executive with compensation and benefits,
          in the  aggregate,  at least equal (in terms of benefit  levels and/or
          reward  opportunities) to those provided for under each other employee
          benefit  plan,  program  and  practice  in  which  the  Executive  was
          participating  at any time within ninety days  preceding the date of a
          Change in Control or at any time  thereafter.  For the purpose of this
          Section 3.1(d), the term "Change in Control" means (A) the acquisition
          at any  time by a  "person"  or  "group"  (as such  terms  are used in
          Sections  13(d) and  14(d)(2) of the  Securities  Exchange Act of 1934
          (the  "Exchange  Act"))  who or which are the  beneficial  owners  (as
          defined  in  Rule  13(d)-3  under  the  Exchange  Act),   directly  or
          indirectly,  of securities  representing more than 35% of the combined
          voting  power in the  election of  directors  of the then  outstanding
          securities  of the Company or any  successor  of the  Company;  (B) if
          during any period (an  "Applicable  Period") of two (2) years or less,
          with the first day (the "Start Date") for any such  Applicable  Period
          to be no earlier  than the  effective  date of this  Agreement,  there
          shall occur the  termination  (except by reason of death,  disability,
          voluntary  resignation  or  retirement) of the service of the Required
          Number of the persons serving as of the Start Date as directors of the
          Board of  Directors  of the Company  (as used  herein,  the  "Required
          Number" of directors shall be that number which, as of the Start Date,
          constituted a majority of the Board of Directors of the Company);  (C)
          the sale or  disposition  (which  shall  not  include  a pledge by the
          Company of the capital  stock of the Bank as security for  obligations
          of the Company unless and until the pledgee thereof exercises remedies
          against said stock to effect a sale or  disposition) by the Company of
          any of the capital  stock of the Bank or approval by the  shareholders
          of the Company of any sale or disposition of substantially  all of the
          assets  or  earning  power  of  the  Company;   (D)  approval  by  the
          shareholders of the Company of any merger, consolidation, or statutory

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          share  exchange  to which the  Company is a party as a result of which
          the persons who were  shareholders  immediately prior to the effective
          date  of the  merger,  consolidation  or  share  exchange  shall  have
          beneficial ownership of less than 35 % of the combined voting power in
          the  election of directors of the  surviving  corporation;  or (E) the
          appointment of an individual as chief executive officer of the Company
          if such  individual  is not the  Executive,  a member  of the Board of
          Directors  of the  Company  as of the date  hereof,  or an  individual
          mutually agreed upon by the Executive and the Company.

3.2  Consequences of Termination.

     (a)  By the Company  and/or the Bank for Cause or By  Executive  other than
          for Good Reason. In the event Executive's employment is terminated (i)
          by the Company  and/or the Bank for Cause under Section 3.1(c) hereof,
          (ii) by the Executive  other than for Good Reason under Section 3.1(d)
          hereof,  or (iii) as a result of the  Executive's  death or Disability
          under Section  hereof,  neither the Company or the Bank shall be under
          any further obligation to make any payments or provide any benefits to
          the Executive, except for Base Salary earned but unpaid at the time of
          such termination,  expenses otherwise reimbursable herein incurred by,
          but  not  yet  reimbursed  to,  the  Executive  at the  time  of  such
          termination,  any  earned  but  unpaid  incentive  awards  due  to the
          Executive,  and group health coverage that is required to be continued
          by applicable law.

     (b)  By the  Company  and/or the Bank other than for Cause or By  Executive
          for Good Reason.  In the event the Employment  Period is terminated by
          the Executive  for Good Reason under  Section  3.1(d) hereof or by the
          Company  and/or the Bank for a reason  other than  Cause  pursuant  to
          Section  3.1(b)  hereof,  the Company and/or the Bank shall pay to the
          Executive  (i) an  aggregate  amount  equal to two (2)  times the Base
          Salary,  payable in monthly  installments each equal to one-twelfth of
          the  Base  Salary,   for  the   twenty-four   months   following  such
          termination,  and (ii) Base  Salary  earned  but unpaid at the time of
          such termination,  expenses otherwise reimbursable herein incurred by,
          but  not  yet  reimbursed  to,  the  Executive  at the  time  of  such
          termination,  any  earned  but  unpaid  incentive  awards  due  to the
          Executive,  and group health coverage that is required to be continued
          by applicable  law;  provided,  however,  that, at the election of the
          Company  and/or the Bank by  decision of its Board of  Directors,  the
          Company  and/or  the  Bank  may pay to the  Executive,  in lieu of the
          payment  provided for by (i) above,  an aggregate  amount equal to one
          (1) times the Base Salary,  payable in monthly installments each equal
          to  one-twelfth  of the Base Salary,  for the twelve months  following
          such  termination  and,  if the  Company  and/or  the Bank  makes such
          election,  the  non-competition  period under Section  4.3(a) shall be
          reduced  to a  period  of one (1)  year  following  such  termination;
          provided further,  however, that neither the Company or the Bank shall
          have  the  right  to make  any such  election  in  anticipation  of or
          following  a  Change  in  Control.  In  addition,  in  the  event  the
          Employment Period is terminated by the Executive for Good Reason under
          Section  3.1(d) hereof or by the Company  and/or the Bank for a reason
          other than Cause pursuant to Section 3.1(b) hereof, the Option granted
          pursuant to Section 2.3 hereof shall  become fully vested  immediately
          upon the effective time of such termination.

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     (c)  Obligation of the Company  and/or the Bank to make the payments  under
          Section  3.2(b) of this  Agreement.  Compliance by the Executive  with
          Section 4 of this Agreement is a condition  precedent to the Company's
          and/or the Bank's  obligation  to make,  or to continue  to make,  the
          payments referred to in Section 3.2(b) of this Agreement.

     (d)  Payments made to the Executive net of Taxes.  All payments made by the
          Company or the Bank to the Executive  pursuant to this Agreement shall
          be received by the Executive  net of all  applicable  withholding  and
          payroll taxes.

     (e)  Resignation  from Board of Directors.  Executive  agrees to tender his
          resignation  as a director of the Bank,  if he is then serving in such
          capacity, immediately upon the termination of his employment hereunder
          for any reason.

     (f)  Certain Litigation  Expenses.  If litigation after a Change in Control
          should be brought to enforce or interpret any  provision  contained in
          this Agreement and the Executive shall prevail in such litigation, the
          Company and the Bank shall, to the full extent permitted by applicable
          law, indemnify  Executive for Executive's  reasonable  attorneys' fees
          and  disbursements  incurred  in such  litigation  to the  extent  the
          Executive has prevailed therein.

     (g)  Employment  by  Company  and Bank.  In the event  that the  Employment
          Period  is  terminated  by any  of the  Company  or  the  Bank  or the
          Executive pursuant to this Section 3, then the Executive's  employment
          by both the Company and the Bank shall be terminated.

SECTION 4:  CONFIDENTIALITY  PROVISIONS;  PROHIBITION  OF  INSIDER  TRADING  AND
            TIPPING; NON-COMPETITION

4.1  Confidentiality.  (a) The  Executive  hereby  acknowledges  that during the
     Employment  Period he will have  contacts  with and develop and service the
     customers of the Company,  the Bank and their affiliates and that in all of
     his  activities,  and through the nature of complying with his  obligations
     pursuant  to this  Agreement,  he will  have  access  to and  will  acquire
     confidential and proprietary  information,  including,  but not limited to,
     information  relating  to  the  business,  assets,  operations,  customers,
     suppliers, contractual parties and other persons with whom the Company, the
     Bank and their affiliates do business.  The Executive  hereby  acknowledges
     and confirms  that such  information  constitutes  the exclusive and unique
     property of the Company, the Bank or their affiliates,  as the case may be,
     and that such information is proprietary and confidential in nature.

     (b)  The Executive  agrees that he shall not at any time during the term of
          Employment or thereafter disclose to other persons or entities (except
          as  permitted  in writing and as directed by the Board of Directors of
          the  Company or the Board of  Directors  of

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          the Bank or only as to the extent  required  pursuant to a subpoena or
          order  of a court of  competent  jurisdiction)  any  such  information
          referred to in Section 4.1(a) of this Agreement.

4.2  Prohibition of Insider Trading and Tipping. The Executive acknowledges that
     during the  Employment  Period he may become  aware of or be provided  with
     material  non-public  information  concerning  the Company.  The  Executive
     acknowledges  and  agrees  that the  trading  in,  purchase  or sale of any
     security of the Company  while in  possession  of any  material  non-public
     information  concerning  the Company is prohibited  as is the  unauthorized
     communication  of  any  such  information  to any  person  or  entity.  The
     Executive  agrees  to  abide  by  these  prohibitions  and  shall  use  all
     reasonable efforts to cause his affiliates to abide by these prohibitions.

4.3  Non-Competition.

     (a)  In the event the Executive's  employment under this Agreement shall be
          terminated  during the  Employment  Period by the  Executive  for Good
          Reason under Section 3.1(d) hereof or by the Company or the Bank for a
          reason other than Cause pursuant to Section  3.1(b)  hereof,  then for
          two (2) years  following  such  termination  (subject  to the  proviso
          contained in Section 3.2(b) hereof),  and in the event the Executive's
          employment  under this Agreement  shall terminate for any other reason
          pursuant to Section 3.1 of this Agreement during the Employment Period
          then for one (1) year following such termination,  the Executive shall
          not,  in any  county  where  the  Company,  the  Bank or any of  their
          majority-owned  subsidiaries  has a bank branch that accepts  deposits
          that are insured by the Federal Deposit Insurance Corporation ("FDIC")
          at the time of such termination (each a "Branch County"), or in Shelby
          County,  Alabama (which is contiguous to a Branch County),  physically
          work or perform  services as a consultant  to, or serve as a member of
          management  or  as an  employee  of,  a  financial  institution  whose
          deposits  are insured by the FDIC.  Bank  branches of  successors  and
          assigns  of the  Company  or the  Bank  shall  not  be  considered  in
          determining  the prohibited  geographical  area.  Notwithstanding  the
          foregoing, this Section 4.3 shall not apply at any time after a Change
          in Control shall have  occurred.  In the event that the Company and/or
          the Bank is obligated to pay to the  Executive  the payments  provided
          for in Section  3.2(b) of this  Agreement  and the Company  and/or the
          Bank  fails  to  make,  or fails to  continue  to make,  the  payments
          referred to in Section 3.2(b) within ten (10) days of such payments or
          portions thereof becoming due under Section 3.2(b), then the Executive
          shall thereafter cease to be subject to the provisions of this Section
          4.3,  provided  that  nothing in this  sentence  shall be construed to
          release the Executive from the  obligations  set forth in this Section
          4.3 in the event that Executive's employment is terminated in a manner
          which  does not give rise to the  payment  obligations  under  Section
          3.2(b) (including, without limitation,  termination by the Company for
          Cause under Section  3.1(c) hereof or by the Executive  other than for
          Good Reason under Section 3.1(d) hereof).

     (b)  The parties  have  entered into this Section 4.3 in good faith and for
          the  reasons  set forth in the  recitals  hereto and assume  that this
          Agreement is legally  binding.  If, for any reason,  this Agreement is
          not binding because of its geographical  scope or because of its term,
          then the parties agree that this Agreement  shall be

                                       98
<PAGE>
          deemed  effective to the widest  geographical  area and/or the longest
          period  of time (but not in  excess  of two  years) as may be  legally
          enforceable.

4.4  Specific Performance. The Executive agrees that in the event of a breach or
     threatened  breach of Section 4.1, 4.2 or 4.3 of this  Agreement,  that the
     Company and the Bank are likely to suffer,  and will suffer,  immediate and
     irreparable injury for which there is no adequate remedy at law. Therefore,
     in addition to any other rights or remedies  which the Company and the Bank
     may have under this Agreement, the Company and the Bank will be entitled to
     enforce the specific  performance of this Agreement by the Executive and to
     obtain a preliminary injunction, without the requirement of posting a bond,
     enjoining the Executive from engaging in any activity in violation thereof.

SECTION 5: ADDITIONAL CONDITIONS

5.1  Condition to Executive's  Employment.  The initial  employment of Executive
     under this Agreement is subject to the Company's  and/or the Bank's receipt
     and review of Executive's credit history and personal financial  statements
     and subject to the information  contained therein being satisfactory to the
     Company in its sole discretion.


SECTION 6: GENERAL PROVISIONS

6.1  Non-assignability.   Neither  this   Agreement   nor  any  of  the  rights,
     obligations or interest arising  hereunder may be assigned by the Executive
     without the prior  written  consent of the Company and the Bank;  provided,
     however, that nothing in this Section 6.1 shall preclude the Executive from
     designating,  in writing, a beneficiary to receive any compensation payable
     to him or any other benefit receivable by him under this Agreement upon the
     death or incapacity of the Executive,  nor shall it preclude the executors,
     administrators or any other legal  representatives  of the Executive or his
     estate  from  assigning  any  rights  hereunder  to the  person or  persons
     entitled thereto. Neither this Agreement nor any of the rights, obligations
     or interest  arising  hereunder may be assigned by the Company and the Bank
     without the prior  written  consent of the Executive to a person other than
     (1) an affiliate  of the  Company,  or (2) any party with which the Company
     merges  or  consolidates,  or to  whomever  the  Company  may  sell  all or
     substantially all of its assets; provided, however, that any such affiliate
     or successor  shall  expressly  assume all of the  Company's and the Bank's
     obligations and liabilities to the Executive under this Agreement.

6.2  Severability.  This Agreement shall be deemed severable and any part hereof
     which  may be  held  invalid  by a  court  or  other  entity  of  competent
     jurisdiction shall be deemed automatically excluded from this Agreement and
     the remaining parts shall remain in full force and effect.

                                       99
<PAGE>
6.3  Merger.  This Agreement  contains the entire  understanding  of the parties
     hereto and constitutes the only agreement between the Company, the Bank and
     the Executive  regarding the employment of the Executive by the Company and
     the Bank. This Agreement supersedes all prior agreements, either express or
     implied,  between  the  parties  hereto  regarding  the  employment  of the
     Executive by the Company and/or the Bank.

6.4  Amendment.  None of the terms and  conditions  of this  Agreement  shall be
     amended or modified unless expressly  consented to in writing and signed by
     each of the parties hereto.

6.5  Governing Law. This Agreement  shall be governed by and construed under the
     laws of the State of Alabama without regard to provisions thereof governing
     conflicts of law.

6.6  Notices.  All  notices or other  communications  to be given by the parties
     among  themselves  pursuant to this Agreement shall be in writing,  and all
     payments  to be made  hereunder  shall be  deemed to have been duly made if
     mailed by  certified  mail or hand  delivered  to either of the  parties at
     their  respective  addresses  as they appear on the records of the Company.
     Any of the  parties  hereto  may change  their  respective  addresses  upon
     written notice to the other given in the manner provided in this Section.

6.7  Waiver. No waiver by any of the parties to this Agreement of any condition,
     term or provision of this  Agreement  shall be deemed to be a waiver of any
     preceding or subsequent breach of the same or any other condition,  term or
     provision hereof.

6.8  Survival.  Notwithstanding  anything in this Agreement to the contrary, and
     notwithstanding any termination of the Employment Period, the provisions of
     this  Agreement  intended to govern the  obligations  of the parties hereto
     upon  the  termination  of the  Executive's  employment  hereunder  for any
     reason,  including,  but not limited to Section 3 (inclusive of each of the
     subsections  thereof)  and  Section  4,  shall  continue  in full force and
     effect.

                                      100
<PAGE>
     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
at the date and year first above written.


                           HERITAGE FINANCIAL HOLDING
                                   CORPORATION


                             /s/ Timothy A. Smalley
                       ----------------------------------
                               Timothy A. Smalley
                       Chairman of the Board of Directors


                                  HERITAGE BANK


                             /s/ Timothy A. Smalley
                       ----------------------------------
                               Timothy A. Smalley
                       Chairman of the Board of Directors


                              /s/ Larry R. Mathews
                       ----------------------------------
                                Larry R. Mathews

                                      101
<PAGE>
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS

                     HERITAGE FINANCIAL HOLDING CORPORATION

                   Computation of Net Income Per Common Share

     The  following  tabulation  presents the  calculation  of basic and diluted
earnings per common share for the years ended December 31, 2002, 2001 and 2000.

<TABLE>
<CAPTION>

                                                                     2002             2001              2000
                                                                -------------     -------------    -------------
Basic Earnings (Loss) Per Share:
<S>                                                             <C>               <C>              <C>
   Net income (loss)............................................$(14,412,783)     $   2,365,921    $   2,187,531
                                                                =============     =============    =============

   Earnings (loss) on common shares.............................       (1.65)              0.28             0.26
                                                                =============     =============    =============

   Weighted average common shares outstanding - basic...........    8,717,303         8,484,624        8,316,756
                                                                =============     =============    =============

   Basic earnings (loss) per common share.......................       (1.65)              0.28             0.26
                                                                =============     =============    =============

Diluted Earnings (Loss) Per Share:
   Net income (loss)............................................$(14,412,783)     $   2,365,921    $   2,187,531
                                                                =============     =============    =============

   Weighted average common shares outstanding...................    8,717,303         8,484,624        8,316,756

   Net effect of the assumed exercise of stock
     options - based on the treasury stock method
     using average market price for the year....................    1,544,767         2,002,342        1,817,109
                                                                -------------     -------------    -------------

Weighted average common shares outstanding - diluted............   10,262,070        10,486,966       10,133,865
                                                                =============     =============    =============

Diluted earnings (loss) per common share........................$      (1.40)     $        0.23    $        0.22
                                                                =============     =============    =============
</TABLE>

                                      102
<PAGE>
EXHIBIT 12 - STATEMENTS RE: COMPUTATION OF RATIOS

                     HERITAGE FINANCIAL HOLDING CORPORATION

                Computation of Ratio of Earnings to Fixed Charges

<TABLE>
<CAPTION>

                                                                               Year Ended December 31,
                                                                     -------------------------------------------
                                                                         2002           2001            2000
                                                                     -------------   ------------  -------------
                                                                               (Dollars in thousands)

<S>                                                                  <C>             <C>           <C>
Pretax income (loss)............................................     $    (22,300)   $      3,590  $       3,179
Add fixed charges:
   Interest on deposits.........................................            19,717         26,752         20,867
   Interest on borrowings.......................................             2,025          1,843          1,152
   Portion of rental expense representing interest expense......               209            151            118
                                                                     -------------   ------------  -------------
      Total fixed charges.......................................            21,951         28,746         22,137
                                                                     -------------   ------------  -------------

Income (loss) before fixed charges..............................     $       (349)   $     32,336  $      25,316
                                                                     =============   ============  =============

Pretax income (loss)............................................     $    (22,300)   $      3,590  $       3,179
Add fixed charges (excluding interest on deposits):
   Interest on borrowings.......................................             2,025          1,843          1,152
   Portion of rental expense representing interest deposits.....               209            151            118
                                                                     -------------   ------------  -------------
      Total fixed charges.......................................             2,234          1,994          1,270
                                                                     -------------   ------------  -------------

Income (loss) before fixed charges
   (excluding interest on deposits).............................     $    (20,066)   $      5,584  $       4,449
                                                                     =============   ============  =============

Ratio of Earnings (Loss) to Fixed Charges
   Including interest on deposits...............................            (0.02)           1.12           1.14
   Excluding interest on deposits...............................            (8.98)           2.80           3.50
</TABLE>

                                      103
<PAGE>
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT


Subsidiaries - Direct/Wholly-owned                        State of Incorporation

          Heritage Bank                                           Alabama

Heritage Financial Statutory Trust I                             Connecticut


                                      104
<PAGE>
EXHIBIT 24 - POWER OF ATTORNEY

                                POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS,  that each person whose  signature  appears
below  constitutes and appoints  Harold B. Jeffreys and Timothy A. Smalley,  and
each of them,  the true and lawful  agents and his  attorneys-in-fact  with full
power and authority in each said agents and attorneys-in-fact, acting singly, to
sign for the  undersigned as Director or an officer of the Company,  or as both,
the Company's  2002 Annual  Report on Form 10-K to be filed with the  Securities
Exchange Commission, Washington, D.C. under the Securities Exchange Act of 1934,
and to sign any  amendment or  amendments  to such Annual  Report,  including an
Annual  Report  pursuant to 11-K to be filed as an  amendment  to the Form 10-K;
hereby   ratifying   and   confirming   all  acts  taken  by  such   agents  and
attorneys-in-fact as herein authorized.

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

<TABLE>
<CAPTION>

<S>    <C>                                 <C>                                                  <C>
               Signature                                       Title                                  Date

                                            Interim President, Chief Executive Officer and
         /s/ Harold B. Jeffreys                               Director
       _________________________                         Harold B. Jeffreys                      March 28, 2003

                                                    (Principal Executive Officer)
         /s/ Thomas E. Hemmings                       Chief Financial Officer
       _________________________                         Thomas E. Hemmings                      March 28, 2003

                                                   (Principal Accounting Officer)
         /s/ Timothy A. Smalley                  Chairman of the Board and Director              March 28, 2003
       _________________________                         Timothy A. Smalley

         /s/ Bingham D. Edwards                               Director                           March 28, 2003
       _________________________                         Bingham D. Edwards

           /s/ Lenny L. Hayes                                 Director                           March 28, 2003
       _________________________                           Lenny L. Hayes

        /s/ Neal A. Holland, Jr.                              Director                           March 28, 2003
       _________________________                        Neal A. Holland, Jr.

           /s/ Larry Landman                                  Director                           March 28, 2003
       _________________________                           Larry Landman

           /s/ Vernon A. Lane                                 Director                           March 28, 2003
       _________________________                           Vernon A. Lane

            /s/ John T. Moss                                  Director                           March 28, 2003
       _________________________                            John T. Moss

        /s/ T. Gerald New, M.D.                               Director                           March 28, 2003
       _________________________                        T. Gerald New, M.D.

                                      105
<PAGE>

           /s/ Gregory Parker                                 Director                           March 28, 2003
       _________________________                           Gregory Parker

           /s/ Betty B. Sims                                  Director                           March 28, 2003
       _________________________                           Betty B. Sims

             /s/ Jeron Witt                                   Director                           March 28, 2003
       _________________________                             Jeron Witt

</TABLE>

                                      106
<PAGE>
EXHIBIT 99.1

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
                    AS ADOPTED PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002

In connection with Heritage Financial Holding  Corporation's  ("Company") Annual
Report on Form 10-K for the period  ended  December  31,  2002  ("Report"),  the
undersigned certifies that:

1.   The Report fully complies with the  requirements  of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

2.   The information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and results of operations of the Company.


Date:    March 28, 2003         By:      /s/ Harold B. Jeffreys
     -------------------           ---------------------------------------------
                                   Harold B. Jeffreys
                                   Interim President and Chief Executive Officer

                                      107
<PAGE>
EXHIBIT 99.2

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
                    AS ADOPTED PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002


In connection with Heritage Financial Holding  Corporation's  ("Company") Annual
Report on Form 10-K for the period  ended  December  31,  2002  ("Report"),  the
undersigned certifies that:

1.   The Report fully complies with the  requirements  of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

2.   The information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and results of operations of the Company.


Date:    March 27, 2003         By:      /s/ Thomas E. Hemmings
     -------------------           ---------------------------------------------
                                   Thomas E. Hemmings
                                   Chief Financial Officer

                                       108