EXHIBIT 13.2







Management's Discussion and Analysis

Overview

The following is a discussion of the financial condition of Southern Heritage Bancorp, Inc. (the "Company") and our wholly-owned bank subsidiary, Southern Heritage Bank (the "Bank") at December 31, 2002 and 2001 and the results of our operations for the years ended December 31, 2002 and 2001. The purpose of this discussion is to focus on information about our financial condition and results of operations which are not otherwise apparent from the audited consolidated financial statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.

The Company is a bank holding company within the meaning of the Bank Holding Company Act and the Georgia Bank Holding Company Act. Our plan of operations continues to consist primarily of gaining market share in our primary market area of Oakwood, Georgia, Hall County and surrounding counties.

Forward-Looking Statements

We may from time to time make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and our reports to stockholders. Statements made in this Annual Report, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon management's belief as well as assumptions made by, and information currently available to, management pursuant to "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values, interest rate risk management, the effects of competition in the banking business from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market funds and other financial institutions operating in our market area and elsewhere, including institutions operating through the Internet, changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions, failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans and other factors. We caution readers that such factors are not exclusive. We do not undertake to update any forward-looking statement that may be made from time to time by us, or on our behalf.

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Financial Condition at December 31, 2002 and 2001

Following is a summary of our balance sheets for the years indicated:

|                              | December 31,          
|----------------------------- | ----------------------
|                              | 2002                  
|                              | (dollars in thousands)
|                              |                       
|Cash and due from banks       | $ 2,574               
|Federal funds sold            | 4,225                 
|Securities available-for-sale | 5,696                 
|Restricted equity securities  | 185                   
|Loans, net                    | 70,406                
|Premises and equipment        | 2,490                 
|Other assets                  | 633                   
|                              | $86,209               
|                              |                       
|Total deposits                | $73,178               
|Other liabilities             | 370                   
|Other borrowings              | 3,700                 
|Stockholders' equity          | 8,961                 
|                              | $86,209               

Financial Condition at December 31, 2002 and 2001

As of December 31, 2002, we had total assets of $86.2 million compared to $53.9 million in 2001, an increase of $32.3 million, or 59.9%. The increase in total assets was primarily funded by an increase of $29.6 million in total deposits. Our strategy continues to be to increase the volume of quality loans through the internal growth in deposits and, when appropriate, through borrowings. In 2002, total loans increased by $30.2 million, or 73.8%. The shortage in funding through deposit growth has been provided from an increase in other borrowings of $2.0 million. The level of growth for the year ended December 31, 2002 is considered to be a significant accomplishment for our fourth year of operations. We expect that loan and deposit growth will continue to be strong in 2003, although the growth for 2003 is not expected to match the growth achieved for the year ending December 31, 2002.

Our security portfolio, consisting of U.S. government and agency securities, totaled $5.7 million at December 31, 2002. Unrealized gains related to these securities were $147,000 at December 31, 2002 as compared to $144,000 at December 31, 2001. The continued increase in the unrealized gains during the year ended December 31, 2002 is reflective of the declining interest rate environment experienced over the past twelve months. All of our securities are held as available-for-sale in order that we may sell securities if needed to fund loan growth. As required by generally accepted accounting principles, the net unrealized gains on these securities are recorded in stockholders' equity, net of the related deferred tax effect, until realized.

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Eighty-four percent of our loan portfolio is collateralized by real estate the majority of which is located in our primary market area of Hall and surrounding counties. Our real estate portfolio consists of loans collateralized by one- to four-family residential properties (58%) and construction loans to build one- to four-family residential properties (27%). Commercial loans represented 9% of the total loan portfolio and consists of loans primarily to businesses in our primary market area.

The specific economic and credit risks associated with our loan portfolio, especially the real estate portfolio, include, but are not limited to, a general downturn in the economy which could affect unemployment rates in our market area, general real estate market deterioration, interest rate fluctuations, deteriorated or non-existing collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of banking protection laws. Construction lending can also present other specific risks to the lender such as whether developers can find builders to buy lots for home construction, whether the builders can obtain financing for the construction, whether the builders can sell the home to a buyer, and whether the buyer can obtain permanent financing. Currently, real estate values and employment trends in our market area are stable with only slight indications of a downturn in the local economy. The overall United States economy is in a recession; however, our local economy has been only slightly impacted to date.

We attempt to reduce these economic and credit risks not only by adherence to loan to value guidelines, but also by investigating the creditworthiness of the borrower and monitoring the borrower's financial position. Also, we establish and periodically review our lending policies and procedures. Banking regulations limit exposure by prohibiting loan relationships that exceed the lesser of 25% of the Bank's statutory capital, or $2,000,000 at December 31, 2002.

Liquidity and Capital Resources

The purpose of liquidity management is to ensure that there are sufficient cash flows to satisfy demands for credit, deposit withdrawals, and other customer needs. Traditional sources of liquidity include asset maturities and growth in deposits. We achieve our desired liquidity through the management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from the asset perspective. The liability base provides sources of liquidity through deposit growth and accessibility to market sources of funds.

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates and general economic conditions and competition. We attempt to price our deposits to meet our asset/liability objectives consistent with local market conditions.

Our liquidity and capital resources are monitored on a periodic basis by State and Federal regulatory authorities. As determined under guidelines established by those regulatory authorities and internal policy, our liquidity ratio is considered satisfactory.

At December 31, 2002, we had loan commitments outstanding of $18.0 million. Because these commitments generally have fixed expiration dates (usually twelve months or less) and many will expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. If needed, we have the ability on a short-term basis to borrow or purchase federal funds from other financial institutions. At December 31, 2002, the Bank has $4,000,000 in aggregate available through lines of credit with three commercial banks for short-term advances. In addition, the Bank can borrow funds from the Federal Home Loan Bank of Atlanta, secured by one-to-four family first mortgage loans and commercial real estate loans.

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Stockholders' equity increased by $809,000 for the year ended December 31, 2002 due to the retention of net earnings of $856,000 combined with a decrease in net unrealized gains on securities available-for-sale of $47,000. The Company has not paid any dividends to stockholders since the inception of the Company.

The primary source of funds available to the holding company is the payment of dividends by our subsidiary Bank. Banking regulations limit the amount of the dividends that may be paid without prior approval of the Bank's regulatory agency. Currently, approximately $306,000 can be paid by the Bank to the holding company without regulatory approval. The payment of dividends will be decided by the Board of Directors based on factors available to them at that time.

At December 31, 2002, our capital ratios were considered well capitalized based on regulatory capital requirements. The minimum capital requirements to be considered well capitalized and the actual capital ratios as of December 31, 2002 are as follows:



|                           | Actual         | Regulatory Requirements
|-------------------------- | -------------- | -----------------------
|                           |                |                        
|Leverage capital ration    | 10.11%         | 5.00%                  
|Risk-based capital ratios: |                |                        
|                           | Tier 1 capital | 11.98%                 
|                           | Total capital  | 13.17%                 

These ratios should continue to decline as asset growth continues, but are expected to remain in excess of the regulatory requirements to be considered well capitalized.

We believe that our liquidity and capital resources are adequate and will meet our foreseeable short and long-term needs as described above. We anticipate that we will have sufficient funds available to meet current customer loan and deposit commitments and to fund or refinance, on a timely basis, our other commitments. At December 31, 2002, we have no material commitments for any capital expenditures.

Except for the expected growth, we are not aware of any other known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on our liquidity, capital resources or operations. We are also not aware of any current recommendations by regulatory authorities which, if they were implemented, would have such an effect.

Effects of Inflation

The impact of inflation on banks differs from its impact on non-financial institutions. Banks, as financial intermediaries, have assets which are primarily monetary in nature and which tend to fluctuate in concert with inflation. A bank can reduce the impact of inflation if it can manage its rate sensitivity gap. This gap represents the difference between rate sensitive

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assets and rate sensitive liabilities. Our asset-liability committee attempts to structure the assets and liabilities and manage the rate sensitivity gap to minimize the potential effects of inflation. For information on the management of our interest rate sensitive assets and liabilities, see the "Asset/Liability Management" section.

Results of Operations For The Years Ended December 31, 2002 and 2001

Following is a summary of the Company's operations for the years indicated.

|                          | Years Ended December 31,  
|------------------------- | --------------------------
|                          | 2002                      
|                          | (dollars in thousands)    
|Interest income           | $4,942                    
|Interest expense          | 1,858                     
|Net interest income       | 3,084                     
|Provision for loan losses | 298                       
|Other income              | 569                       
|Other expenses            | 2,435                     
|                          | Income before income taxes
|Income tax expense        | 64                        
|Net income                | 856                       

Net Interest Income

Our results of operations are determined by our ability to effectively manage interest income, to minimize loan and security losses, to generate non-interest income, and to control operating expenses. Since interest rates are determined by market forces and economic conditions beyond our control, our ability to generate net interest income is dependent upon our ability to obtain an adequate net interest spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities.

The net yield on average interest-earning assets for the year ended December 31, 2002 was 4.63% as compared to 4.72% in 2001. For the year ended December 31, 2002, the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities was 7.42% and 3.40%, respectively, which provided a net spread of 4.02%. As indicated in the rate volume analysis which is provided later, the net decline in rates was positively impacted by favorable net changes in volume. The rates earned on interest-earning assets and paid on interest-bearing liabilities decreased by 129 and 165 basis points, respectively as compared to the year ended December 31, 2001. The net spread increased compared to the year ended December 31, 2001 by 36 basis points while during the same period, the net yield on average interest-earning assets decreased by 9 basis points. These declines are attributable to the decline in interest rates during 2002. Average interest-earning assets increased by $21.7 million compared to 2001. During this same period, average interest-bearing liabilities increased by $19.2 million. The increase in the interest spread represents a negative interest rate-sensitivity gap ratio as interest-bearing liabilities continue to reprice at a faster pace than interest-earning assets. The decrease in the net yield on average interest-earning assets is directly related to the increase in interest-earning assets combined with declining interest rates. The overall improvement in net interest income continues to be attributable to the increase in loan volume.

See the interest rates and interest differentials table for specific details.

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Provision for Loan Losses

The provision for loan losses increased by $92,000 to $298,000 for the year ended December 31, 2002 as compared to 2001. The amount provided during 2002 and 2001 continues to be due primarily to the growth of the loan portfolio. The allowance for loan losses as a percentage of total loans was 1.20% and 1.45% at December 31, 2002 and 2001, respectively. For the year ended December 31, 2002, we recognized $39,000 in net charge-offs as compared to $16,000 in 2001. The net charge-off ratio to average loans outstanding for the years ending December 31, 2002 and 2001 was .07% and .05%, respectively. Impaired loans at December 31, 2002 and 2001 were $25,000 and $29,000, respectively. The decrease in the allowance for loan losses as a percentage of total loans is attributable to the continued improvement in overall asset quality in the past two years. Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses is adequate to absorb potential losses on existing loans that may become uncollectible. This evaluation considers past due and classified loans, underlying collateral values, historical experience, and current economic conditions which may affect the borrowers' ability to repay.

Other Income

Other income increased by $156,000 for the year ended December 31, 2002 as compared to December 31, 2001. Mortgage origination fees accounted for 65%, or $370,000 of the total other income for the year ended December 31, 2002 as compared to 64% as of December 31, 2001. The significant increase in mortgage origination fees in 2002 and 2001 is due to the mortgage interest rate continued decline which resulted in significant refinance activity along with normal first-time purchase mortgages. The other primary source of other income is service charges on deposit accounts which increased by $11,000 in 2002. There were no other single significant changes in 2002 as compared with 2001.

Other Expenses

Other expenses increased by $480,000 for the year ended December 31, 2002 compared to December 31, 2001. Other operating expense consists of salaries and employee benefits, equipment and occupancy expenses, and other operating expenses, or $1,495,000, $296,000 and $644,000, respectively. The increase in salaries and employee benefits of $382,000 represented 80% of the total increase in other expenses. The increase in salaries and employee benefits is attributable to an increase of six full-time equivalent employees, increase in profit sharing contributions of $6,000, an increase in incentives of $97,000 and an increase in mortgage commissions of $51,000. The net increase in other operating expenses is not attributable to any single item, and reflects increases directly related to the growth in loans and deposits.

Income Tax

During the year ended December 31, 2002, the Company became cumulatively profitable. The Company recognized income tax expenses of $64,000, representing an effective tax rate of 7%. Income tax expense was offset by the reversal of a valuation allowance of $216,000 in 2002. In the future, the effective tax rate will be in the range of 25% to 34% depending on the level of tax-exempt income.

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Asset/Liability Management

It is our objective to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing, and capital policies. Certain officers are charged with the responsibility for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix. It is our overall philosophy to support asset growth primarily through growth of deposits of all categories made by local individuals, partnerships, and corporations.

Our asset/liability mix is monitored on a regular basis with a report reflecting the interest rate-sensitive assets and interest rate-sensitive liabilities being prepared and presented to the Board of Directors on a monthly basis. The objective of this policy is to monitor interest rate-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on earnings. An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.



A simple interest rate "gap" analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, we also evaluate how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as "interest rate caps and floors") which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates.

Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and it is our intention to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.

At December 31, 2002, our cumulative one year interest rate-sensitivity gap ratio was 97%. Our targeted ratio is 80% to 120% in this time horizon. This indicates that our interest-bearing assets will reprice during this period at a rate slower than our interest-earning liabilities, which is consistent with our analysis of net interest income for the year ending December 31, 2002. We are within our targeted parameters.

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The following table sets forth the distribution of the repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2002, the interest rate-sensitivity gap, the cumulative interest rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative interest rate-sensitivity gap ratio. The table also sets forth the time periods in which earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of our customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact, reprice at different times within such period and at different rates.

|                                         | Within Three Months              | After Three Months but Within One Year | After One Year but Within Three Years | After Three Years | Total   
|---------------------------------------- | -------------------------------- | -------------------------------------- | ------------------------------------- | ----------------- | --------
|                                         | (dollars in thousands)          
|Interest-earning assets:                 |                                  |                                        |                                       |                   |         
|                                         | Interest-bearing deposits        | $      40                              | $       --                            | $     --          | $     --
|                                         | Federal funds sold               | 4,225                                  | --                                    | --                | --      
|                                         | Securities                       | 185                                    | 498                                   | 3,284             | 1,914   
|                                         | Loans                            | 23,124                                 | 28,196                                | 16,667            | 3,274   
|                                         |                                  |                                        |                                       |                   |         
|                                         | 27,574                           | 28,694                                 | 19,951                                | 5,188             | 81,407  
|                                         |                                  |                                        |                                       |                   |         
|Interest-bearing liabilities:            |                                  |                                        |                                       |                   |         
|                                         | Interest-bearing demand deposits | 16,872                                 | --                                    | --                | --      
|                                         | Savings                          | 1,835                                  | --                                    | --                | --      
|                                         | Time deposits                    | 5,552                                  | 33,537                                | 5,976             | 1,837   
|                                         | Other borrowings                 | --                                     | --                                    | 3,700             | --      
|                                         |                                  |                                        |                                       |                   |         
|                                         | 24,259                           | 33,537                                 | 9,676                                 | 1,837             | 69,309  
|                                         |                                  |                                        |                                       |                   |         
|Interest rate sensitivity gap            | $ 3,315                          | $ (4,843)                              | $10,275                               | $  3,351          | $ 12,098
|                                         |                                  |                                        |                                       |                   |         
|Cumulative interest rate sensitivity gap | $ 3,315                          | $ (1,528)                              | 8,747                                 | 12.098            |         
|                                         |                                  |                                        |                                       |                   |         
|Interest rate sensitivity gap ratio      | 1.14                             | .86                                    | 2.06                                  | 2.82              |         
|                                         |                                  |                                        |                                       |                   |         
|Cumulative interest rate gap ratio       | 1.14                             | .97                                    | 1.13                                  | 1.17              |         



SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA

The tables and schedules on the following pages set forth certain significant financial information and statistical data with respect to our: distribution of assets, liabilities and stockholders' equity, average interest rates; security portfolio; loan portfolio, including types of loans, maturities, and sensitivities of loans to changes in interest rates and information on nonperforming loans; loan loss experience and allowance for loan losses; types of deposits and the return on equity and assets.

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|Distribution of Assets, Liabilities, and
Stockholders' Equity:
Interest Rates and Interest Differentials
|--------------------------------------------------------------------------------------------------------
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|Cash and due from banks                                                                                 
|Taxable securities(5)                                                                                   
|Unrealized gains on securities                                                                          
|Federal funds sold                                                                                      
|Loans(2)(3)                                                                                             
|Allowance for loan losses                                                                               
|Other assets                                                                                            
|                                                                                                        
|Total assets                                                                                            
|                                                                                                        
|Total interest-earning assets                                                                           
|                                                                                                        
|Noninterest-bearing demand                                                                              
|Interest-bearing demand and savings                                                                     
|Time deposits                                                                                           
|                                                                                                        
|                                                                                                        
|                                                                                                        
|Other liabilities                                                                                       
|Other borrowings                                                                                        
|                                                                                                        
|Stockholders' equity(4)                                                                                 
|                                                                                                        
|Total liabilities and equity                                                                            
|                                                                                                        
|Total interest-bearing
liabilities                                                                      
|                                                                                                        
|Net interest income                                                                                     
|Net interest spread                                                                                     
|Net yield on average interest-bearing assets                                                            



|(1) | Average balances were determined using the daily average balances.                                                                       
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes nonaccrual loans with average balances of $56,000 and $71,000, respectively.                                                    
|(3) | Interest and fees on loans includes $640,000 and $363,000 of loan fee income for the years ended December 31, 2002 and 2001, respectively
|(4) | Average unrealized gains (losses) on securities available-for-sale are included in stockholders' equity.                                 
|(5) | Includes restricted equity securities.                                                                                                   

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Rate and Volume Analysis

The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the year indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) change in volume (change in volume multiplied by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The changes in interest income and interest expense attributable to both volume and rate have been allocated proportionately on a consistent basis to the change due to volume and the change due to rate.

|                                                         |                                      | Year Ended December 31
|-------------------------------------------------------- | ------------------------------------ | ----------------------
|                                                         |                                      | 2002 vs. 2001         
|                                                         |                                      | Changes Due To:       
|                                                         |                                      | Increase (Decrease)   
|                                                         | Rate                                 | Volume                
|                                                         |                                      | (dollars in thousands)
|Increase (decrease) in:                                  |                                      |                       
|                                                         | Income from interest-earning assets: |                       
|                                                         | Interest and fees on loans           | $ (414)               
|                                                         | Interest on taxable securities       | ( 23)                 
|                                                         | Interest on federal funds sold       | 646                   
|                                                         | Total interest income                | 209                   
|                                                         |                                      |                       
|Expense from interest-bearing liabilities:               |                                      |                       
|Interest on interest-bearing demand and
savings deposits | ( 38)                                | 85                    
|Interest on time deposits                                | 33                                   | (48)                  
|Interest on other borrowings                             | ( 13)                                | 48                    
|                                                         | Total interest expense               | ( 18)                 
|                                                         |                                      |                       
|                                                         | Net interest income                  | $ 227                 



SECURITIES PORTFOLIO

The carrying amounts of securities at the dates indicated, which are all classified as available-for-sale, are summarized as follows:

|                                       | December 31           
|-------------------------------------- | ----------------------
|                                       | 2002                  
|                                       | (dollars in thousands)
|                                       |                       
|U. S. Government and agency securities | $5,696                

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Maturities

The amounts of debt securities by category as of December 31, 2002 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after one year through five years, and (3) after five years through ten years.

|                                   | U.S. Government and Agency Securities
|---------------------------------- | -------------------------------------
|                                   | Amount                               
|                                   | (dollars in thousands)               
|                                   |                                      
|One year or less                   | $   515                              
|After one year through five years  | 4,408                                
|After five years through ten years | 773                                  
|                                   | $5,696                               



|(1) | Yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security.  The weighted average yield for each maturity range was computed using the carrying value of each security in that range.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



LOAN PORTFOLIO

Types of Loans

The amount of loans outstanding at the indicated dates are shown in the following table according to the type of loan.

|                               | December 31,          
|------------------------------ | ----------------------
|                               | 2002                  
|                               | (dollars in thousands)
|                               |                       
|Commercial                     | $ 6,052               
|Real estate-construction       | 19,060                
|Real estate-mortgage           | 40,994                
|Consumer and other             | 5,155                 
|                               | $71,261               
|Less allowance for loan losses | (855)                 
|                               | Net loans             



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Maturities and Sensitivities to Changes in Interest Rates

Total loans as of December 31, 2002 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after one year through five years, and (3) after five years.

|             | (dollars in thousands)           
|------------ | ---------------------------------
|             |                                  
|Commercial   |                                  
|             | One year or less                 
|             | After one year through five years
|             | After five years                 
|             | 6,052                            
|             |                                  
|Construction |                                  
|             | One year or less                 
|             | After one year through five years
|             | After five years                 
|             | 19,060                           
|             |                                  
|Other        |                                  
|             | One year or less                 
|             | After one year through five years
|             | After five years                 
|             |                                  
|             |                                  
|             | Total                            

The following table summarizes loans at December 31, 2002 with the due dates after one year which have predetermined and floating or adjustable interest rates.

|                                      | (dollars in thousands)
|------------------------------------- | ----------------------
|                                      |                       
|Predetermined interest rates          | $17,068               
|Floating or adjustable interest rates | 6,017                 
|                                      | $23,085               



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Risk Elements

Information with respect to nonaccrual, past due, and restructured loans at the dates indicated is as follows:

|                                                                                                                              | December 31,          
|----------------------------------------------------------------------------------------------------------------------------- | ----------------------
|                                                                                                                              | 2002                  
|                                                                                                                              | (dollars in thousands)
|                                                                                                                              |                       
|Nonaccrual loans                                                                                                              | $25                   
|Loans contractually past due ninety days or more as to interest or principal payments and still accruing                      | -                     
|Restructured loans                                                                                                            | -                     
|Loans, now current about which there are serious doubts as to the ability of the borrower to comply with loan repayment terms | -                     
|Interest income that would have been recorded on nonaccrual and restructured loans under original terms                       | 3                     
|Interest income that was recorded on nonaccrual and restructured loans                                                        | -                     

It is our policy to discontinue the accrual of interest income when, in our opinion, collection of such interest becomes doubtful. This status is accorded such interest when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected and (2) the principal or interest is more than ninety days past due, unless the loan is both well-secured and in the process of collection.

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the table above do not represent or result from trends or uncertainties which we reasonably expect will materially impact future operating results, liquidity, or capital resources. These classified loans do not represent material credits about which we are aware of any information which causes us to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

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SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes average loan balances for the year determined using the daily average balances during the year; changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off; additions to the allowance which have been charged to operating expense; and the ratio of net charge-offs during the period to average loans.

|                                                                            | Years Ended December 31,
|--------------------------------------------------------------------------- | ------------------------
|                                                                            | 2002                    
|                                                                            | (dollars in thousands)  
|                                                                            |                         
|Average amount of loans outstanding                                         | $54,258                 
|Balance of allowance for loan losses at beginning of year                   | $     596               
|Loans charged off, installment                                              | (43)                    
|Recoveries of loans previously charged-off                                  | 4                       
|Net loan charge-offs during the year                                        | (39)                    
|Additions to allowance charged to operating expense during year             | 298                     
|Balance of allowance for loan losses at end of year                         | $     855               
|Ratio of net loans charged off during the year to average loans outstanding | .07%                    

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that adequately covers all known and inherent risks in the loan portfolio. Our evaluation of the loan portfolio includes a periodic review of loan loss experience, current economic conditions which may affect the borrower's ability to pay and the underlying collateral value of the loans.

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As of December 31, 2002 and 2001, we had made no allocations of our allowance for loan losses to specific categories of loans. Based on our best estimate, the allocation of the allowance for loan losses to types of loans, as of the indicated dates, is as follows:

|                                          | December 31, 2002      | December 31, 2001                               
|----------------------------------------- | ---------------------- | ------------------------------------------------
|                                          |                        | Percent of loans in each category to total loans
|                                          |                        |                                                 
|                                          | Amount                 | Amount                                          
|                                          | (dollars in thousands)
|                                          |                        |                                                 
|Commercial                                | $ 54                   | 8.83%                                           
|Construction loans secured by real estate | 196                    | 26.79%                                          
|Commercial loans secured by real estate   | 312                    | 43.80%                                          
|Consumer and other loans                  | 293                    | 20.58%                                          
|                                          | $855                   | 100.00%                                         

DEPOSITS

Average amounts of deposits and average rates paid thereon, classified as to noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits, and time deposits is presented below.(1)

|                                             | Years Ended December 31
|-------------------------------------------- | -----------------------
|                                             | 2002                   
|                                             | Amount                 
|                                             | (dollars in thousands) 
|                                             |                        
|Noninterest-bearing demand deposits          | $ 6,568                
|Interest-bearing demand and savings deposits | 16,172                 
|Time deposits                                | 35,675                 
|                                             | $58,415                



|(1) | Average balances were determined using the daily average balances.
|--- | ------------------------------------------------------------------

The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2002 are shown below by category, which is based on time remaining until maturity of (1) three months or less, (2) over three through six months, (3) over six through twelve months, and (4) over twelve months.

|                                      | (dollars in thousands)
|------------------------------------- | ----------------------
|                                      |                       
|Three months or less                  | $ 4,662               
|Over three months through six months  | 2,385                 
|Over six months through twelve months | 7,214                 
|Over twelve months                    | 2,652                 
|                                      | Total                 

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RETURN ON ASSETS AND EQUITY

The following rate of return information for the year indicated is presented below.

|                          | Years Ended December 31,
|------------------------- | ------------------------
|                          | 2002                    
|                          |                         
|Return on assets(1)       | 1.22%                   
|Return on equity(2)       | 10.22%                  
|Dividend payout ratio(3)  | N/A                     
|Equity to assets ratio(4) | 11.96%                  

|(1) | Net income divided by average total assets.                                  
|--- | -----------------------------------------------------------------------------
|(2) | Net income divided by average equity.                                        
|(3) | Dividends declared per share of commons tock divided by net income per share.
|(4) | Average equity divided by average total assets.                              

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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 description of the accounting policies applied by the Company that are deemed "critical". Critical accounting policies are defined as policies that are very important to the presentation of the Company's financial condition and results of operations, and that require management's most difficult, subjective or complex judgments. The Company's financial results could differ significantly if different judgments or estimates are applied in the application of these policies.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. The allowance represents an amount which, in management's judgment, will be adequate to absorb probable losses on existing loans that may become uncollectible.

Management's judgment in determining the adequacy of the allowance is based on evaluation of the collectibility of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower's ability to pay, historical experience, estimated value of any underlying collateral, overall portfolio quality and review of specific problem 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 may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different than those of management.

A loan is considered impaired when, based on current information and events, it is probable all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loans are returned to accrual status.

Income Taxes

SFAS No. 109, "Accounting for Income Taxes," requires the asset and liability approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. See Note 9 to the Notes to Consolidated Financial Statements for additional details.

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

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

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