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UNITED STATES

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,
2001

[  ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 000-28496

Community Financial Group, Inc.(Exact name of registrant as specified in its charter)

|Tennessee                       | 62-1626938                       
|------------------------------- | ---------------------------------
|(State or other jurisdiction of | (IRS Employer Identification No.)
|incorporation or organization)  |                                  

401 Church Street, Suite 200
Nashville, Tennessee 37219-2213

(615) 271-2000
(Registrant's telephone number, including area code)________________________

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 $6.00 per share
(Title of class)________________________

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

________________________

Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K 
Yes [x]  No [_].

________________________

As of March
22, 2002, the number of outstanding shares of Common
Stock was 3,080,709. As of such date, the aggregate market value of the shares
of Common Stock held by non-affiliates, based on the closing price of the Common
Stock on the Nasdaq National Market System on such date, was approximately
$38,907,359.

DOCUMENTS
INCORPORATED BY
REFERENCE:

Portions of the Company's Proxy
Statement for the 2002 Annual Meeting of Shareholders (Part III, Items 10-13)

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PART I

SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this
Annual Report on Form 10-K and documents incorporated herein by reference that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Certain of the matters discussed in this document and in documents incorporated
by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Community Financial Group, Inc. (the "Company" or "CFGI") to
be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. The words
"expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate,"
and similar expressions are intended to identify such forward-looking
statements. The Company's actual results may differ materially from the results
anticipated in these forward-looking statements due to a variety of factors,
including, without limitation: (i) the effects of future economic conditions on
the Company and its customers; (ii) governmental monetary and fiscal policies,
as well as legislative and regulatory changes; (iii) the risks of changes in
interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities and interest rate protection agreements,
as well as interest rate risks; (iv) the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in the Company's
market area and elsewhere, including institutions operating locally, regionally,
nationally and internationally, together with such competitors offering banking
products and services by mail, telephone, computer and the Internet; and (v) the
failure of assumptions underlying the establishment of the allowance for loan
and lease losses
and estimations of values of collateral and various financial assets and
liabilities. The Company undertakes no obligation to publicly update or
otherwise revise any forward-looking statements. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements.

ITEM 1.     BUSINESSTHE COMPANY

General.
The Company
  was incorporated in Tennessee on December 13, 1995 as a
  bank holding company pursuant to Section 3(a)(1) of the Bank Holding Company
  Act of 1956, as amended, for The Bank of Nashville (the "Bank"). On
  April 30, 1996, the Company executed a plan of exchange with the Bank, whereby
it became the holding company of the Bank. The Bank is a state-chartered
  bank incorporated in 1989 under the laws of the state of Tennessee. The Bank
  owns 100% of the stock of T BON-Mooreland Joint Venture, LLC ("TBON-Mooreland"), a title agency,
  and has a majority interest in Machinery Leasing Company of North America,
  Inc. ("TBON Leasing"). The Company's headquarters are located at 401
  Church Street, Suite 200, Nashville, Tennessee 37219, and its telephone number
  is (615) 271-2000.

The Company's
  mission is to create long-term shareholder value by providing superior
  financial services through committed professionals who work in an environment
  which enables them to achieve their fullest potential while being involved,
  concerned citizens.

Business
  Strategy.The Company
  provides an array of sophisticated banking and financial services, including commercial
  and consumer banking, real estate construction and mortgages, lease financing,
  title services, and financial and investment services - through its relationship with Legg Mason
  Financial Partners, Inc. ("LMFP"), a registered broker-dealer
  subsidiary of the investment banking firm Legg Mason Wood Walker, Inc.  The Company has four locations, including its Main branch
  located in downtown Nashville, and suburban branches in Green Hills,
  Brentwood, and Hendersonville. These locations are complemented by the
  Company's four "Bank-on-Call" mobile branches which operate
  throughout the market area with at-your-door banking convenience and a network
  of eleven automated teller machines ("ATMs") strategically located
  throughout the Nashville metropolitan area. In addition to the four existing
  branch locations, the Company has received regulatory approval to establish an
  additional suburban Nashville branch in the Cool Springs area which is
  expected to open during the first half of 2002. Additionally, the Company has
  entered into a contract, subject to regulatory approval, to open a sixth
  branch, in the Donelson/Hermitage area.

The Company is
  focused on serving small and middle-sized businesses and individuals in the
  middle Tennessee market, with a primary service area comprising the Metro
  Nashville-Davidson County Metropolitan Statistical Area ("MSA").
  Nashville, located in the north central part of the State, is the State's
  largest MSA. Situated midway between the Mississippi delta to the west and the
  Great Smoky Mountains to the east, Metropolitan Nashville is comprised of
  Davidson county and seven surrounding counties. Over half of the population of
  the U.S. is located within a 600-mile radius of the city and the central
  location has contributed to the emergence of Nashville as an important
  transportation, tourism and distribution center. The Nashville economy is well
  diversified with music, entertainment, printing and publishing, healthcare,
  automobile manufacturing, financial services, real estate development and
  construction, education, government, tourism, hospitality, manufacturing,
  warehousing, distribution and various service sectors all being major
  contributors to the economic vitality of the area.

The Company
  seeks credits of good quality within its target market exhibiting good
  historical trends, stable cash flows, and secondary sources of repayment from
  tangible collateral. The Company extends credit for the purpose of
  establishing and continuing long-term relationships. Lenders are provided with
  detailed underwriting policies for all types of credit risks accepted by the
  Company and must obtain appropriate approvals for credit extensions in excess
  of assigned individuals' lending limits. The Company also maintains strict
  documentation requirements and extensive credit quality assurance practices in
  order to identify credit portfolio weaknesses as early as possible so any
  exposures that are discovered might be reduced.

The Company
  outsources certain non-core competencies. Currently, item processing and
  imaging functions are outsourced to The Intercept Group, Inc. (Nasdaq: "ICPT").
  In June 2001, the Company entered upon an agreement with Fiserv Solutions,
Inc. to provide core data and item
  processing as well as imaging services. In the first quarter 2002, the Company
decided to cancel the proposed outsourcing agreement with Fiserv and continue
its outsourcing arrangement with Intercept. The accounting, financial reporting and the internal audit functions
  have been outsourced to the Nashville-based certified public accounting firm
  of Kraft Bros., Esstman, Patton & Harrell, PLLC, an independent member of
  RSM McGladrey, Inc. The relationship with this certified independent public
  accounting firm provides the Company with access to both the resources of a
  large national accounting and consulting firm while at the same time receiving
  the individualized attention and fee structure provided by a local firm. In
March 2001, the Company entered upon an agreement with Professional Bank
Services, Inc. ("PBS") to provide loan review services to complement
the services provided by the in-house loan review department.

Management is of the opinion that by outsourcing non-core competencies to professional organizations with expertise in their respective field of operations, it can avail itself of professional skills and state-of-the-art systems and technologies that would otherwise not be cost efficient because of economies of scale. The Company believes that these outsourcing agreements have allowed it to remain a customer driven organization, while at the same time continue improving the quality of its management information systems, the timeliness of reports needed by management to run the organization and better control over non-interest expenses.

The Company has
  a five-part strategy for growth. First, the Company will continue to focus on maintaining high
  asset quality and to further diversify credit risk by broadening its consumer
  practice and expanding its product offerings.

Second, the
  Company will continue to concentrate its efforts on small and medium sized
  businesses, their owners and employees, and private banking customers for loan
  and deposit opportunities as it has successfully done since its onset. The
  commercial banking sector is generally characterized by privately held
  companies with annual revenues ranging from $5 million to $50 million and
  borrowings ranging from $50,000 to $7 million, but primarily in the $150,000
  to $3 million range. The Company's target market customers seek a relationship
  with a local independent bank that is sensitive to their needs and understands
  their business philosophy. These customers desire a long-term relationship
  with localized decision-making and loan officers who are responsive and
  experienced and have ready access to the bank's senior management. In
  implementing this part of its strategy, the Company continues to explore
  opportunities to solidify existing and build new customer relationships by
  providing new services and expanding its base of services in the professional
  and executive market to meet the demands of that sector.

Third,
  capitalizing on its reputation of superior customer service, the Company
  intends to enhance its delivery systems by selectively expanding the branch
  and ATM network in areas that demographically complement its existing and targeted customer
  base. As other local banks are acquired by out-of-state organizations, the
  Company believes that the establishment of branches will better meet the needs
  of customers in many Nashville area neighborhoods who feel disenfranchised by
  larger regional or national organizations. The Company intends to also
  complement the traditional brick-and-mortar branch system with alternative
  delivery systems, including but not limited to financial kiosks, enhanced
  Internet banking services, ACH originations, voice response services, and a
  telephone-banking center.

Fourth, the
  Company intends to continue to use state-of-the-art technology to diversify
  and enhance its delivery channels, improve products and services and reduce
  operating costs. To accomplish this, in 2001, the Company retained Brintech,
  Inc., a technology consulting firm, to assist in conducting a technology
  assessment plan and help in the identification and selection of a new core
  processing system capable of delivering a broad array of financial products
  while at the same time reducing processing costs and response time. To defray
  the costs associated with the new core processing and telecommunications
  systems, during the year ended December 31, 2001, the Company pursued a
  leveraged strategy by acquiring investment securities and funding such
  investments with increased borrowings from the Federal Home Loan Bank of
  Cincinnati (the "FHLB"). As a result of this, the investment
  portfolio increased from $62.8 million to $113.4 million, which resulted in
  $1.2 million in additional interest income from investment securities.

During the
  year-ended December 31, 2001, the Company completed two of the four stages
  related to the core system conversion program by implementing a new general
  ledger structure and improving its telecommunication system. Management is of
  the opinion that, over time, the new systems should result in improved
  efficiency and enhanced profits. The Company also began implementation of the
  third and fourth stages, which comprise network servers and the new core
  processing system. The new core processing system is expected to be fully
  operational during the second quarter of 2002.

Fifth, the
  Company may pursue selected acquisitions of depository and non-depository
  financial institutions. The Company intends to conduct thorough studies and
  reviews of any possible acquisition candidates to assure that they are
  consistent with the Company's existing goals, both from an economic and
  strategic perspective. The Company believes market and regulatory factors may
  present opportunities for the Company to acquire other financial institutions.

At December 31,
  2001, the Company reported a total risk-based capital ratio of 11.07%, the Tier 1 risk-based capital ratio of
  9.82% and the Tier 1 leverage ratio of 8.55%. These capital ratios exceed the current regulatory
  minimum requirements of 8.0%, 4.0% and 3.0%, respectively, for a bank holding
  company to be adequately capitalized.

During the year 2001, the Company declared dividends of
  $.068 per share, which resulted in a dividend payout ratio of 66.7%, compared
  with 75.6% during the year 2000.

THE BANK

The Bank has
  accomplished its growth internally through the establishment of de-novo
  branches in areas meeting its target market characteristics and predominantly
  serving small and mid sized businesses, their owners, and employees. The
  Bank's community banking approach is characterized by providing an array of
  product offerings specifically designed to appeal to its customer base
  enhanced with personalized service. The Company believes that it has developed
  a reputation as the premier provider of financial products and services to
  small and medium-sized businesses and consumers located in the communities
  that it serves. Each of its lines of business is an outgrowth of the Company's
  expertise in meeting the particular needs of its customers. The Company's
  principal product offerings are the following:

Commercial
  Loans. The primary lending focus of the Company is to small and
  medium-sized businesses in a variety of industries. The Company's commercial
  lending emphasis includes loans to the real estate industry and building
  contractors, health and business service companies as well as non-depository
  financial institutions. The Company makes available to businesses a broad
  range of short and medium-term commercial lending products, including working
  capital lines (for financing inventory and accounts receivable), purchases of
  machinery and business expansion (including acquisitions of real estate and
  improvements). As of December 31, 2001, the Company's commercial loan
  portfolio totaled $138.3 million or 40.7% of gross loans.

Commercial
  Mortgage Loans. The Company makes commercial mortgage loans to finance the
  purchase of real property, which generally consists of developed real estate.
  The Company's commercial mortgage loans are secured by first liens on real
  estate, typically have variable rates and amortize over a 15 to 20 year
  period, with balloon payments due at the end of three to seven years. As of
  December 31, 2001, the Company had a commercial real estate mortgage portfolio
  of $99.0 million, representing 29.1% of gross loans.

Construction
  Loans. The Company makes loans to finance the construction of residential
  and non-residential properties. The majority of the Company's
  residential construction loans are for single-family dwellings which are
  pre-sold or are under earnest money contract. The Company also originates
  loans to finance the construction of commercial properties such as
  multi-family, office, industrial, warehouse and retail centers. As of December
  31, 2001, the Company had a real estate construction portfolio of $45.5
  million or 13.4% of gross loans, of which $3.8 million and $41.7 million were residential
  construction loans and commercial construction loans, respectively.

Equipment
  Leasing. In 1999, the Company acquired the majority of the stock of TBON
  Leasing to provide equipment lease financing to small and medium-sized
  businesses. At December 31, 2001, outstanding lease receivables totaled $8.6
  million or 2.5% of gross loans. TBON Leasing
  generally leases machinery under noncancelable, full payment leases which
  provide, through rentals, for full recovery of the cost of the machinery
  leased. Such leases are accounted for as direct financing leases whereby the
  contracts receivable and unearned interest income are recorded when lease
  contracts become effective.

Consumer
  Financing. The Company offers a variety of loan and deposit products and
  services to retail customers. Loans to retail
  customers include residential mortgage loans, residential construction loans,
  automobile loans, lines of credit and other personal loans. As of year-end
  December 31, 2001, the retail or consumer loan portfolio totaled $32.5
  million. Retail deposit
  products and services include checking and money market accounts, time
  deposits, ATM cards, debit cards and on-line banking. In January 2001,
  Management established TBON Mortgage as an operating division of the Bank,
  primarily to originate and sell, on a servicing released basis, residential
  mortgage loans. For the year ended December 31, 2001, origination volume was $32.4
  million, of which $3.5 million was retained in portfolio, $26.5 million was sold to
  third party investors, and $2.4 million was held-for-sale.

Investment
  Services. In 1993, the Company established a relationship with LMFP. Through LMFP, licensed professionals provide
  investment products and services, including mutual funds, annuities, stocks,
  bonds and other investments to individual consumers and systematic savings
  plans through a variety of pension plans, including simplified Employee
  Pension, 401(k) programs and other retirement services. In 2000, this division
  was renamed The Bank of Nashville Investment Group. At December 31, 2001 and 2000, total assets under management were $315.0 million and $239.9
  million, respectively.

The Bank
  maintains a strong community orientation by, among other things, supporting
  active participation of all employees in local charitable, civic, and school activities.

The Bank is
  well capitalized as demonstrated by a total risk-based capital ratio of
10.30%, Tier 1 risk-based capital ratio of 9.04% and Tier 1 leverage ratio of
7.88% at December 31, 2001. These capital ratios exceed the current regulatory
  minimum requirements of 10.0%, 6.0% and 5.0%, respectively, for a bank to be
well capitalized.

COMPETITION.

The banking business is highly competitive and the profitability of the Company depends principally on the Company's ability to compete in the market areas in which its banking operations are located. The Company competes with other commercial banks, savings banks, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based lenders, non-bank lenders and certain other non-financial entities, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing than the Company. The principal methods of competition centers around such aspects as interest rates on loans and deposits, decision-making relationship management, customer services and other service oriented fee based products. The Company has been able to compete effectively with other financial institutions by emphasizing customer service, technology and local office decision-making; by establishing long-term customer relationships and building customer loyalty; and by providing products and services designed to address the specific needs of its customers. The competition from both financial and nonfinancial institutions is expected to continue.

EMPLOYEES.

As of December 31, 2001, the Company had
101 full-time equivalent employees,
compared with 98 at year-end 2000, 35 of whom were officers classified as vice president or above. The Company provides medical and hospitalization insurance to its full-time employees. The Company has also provided most of its employees with the benefit of Common Stock ownership through the Company's contributions to a 401(k) plan, in which 84 of its employees were participating at December 31, 2001, an Employee Stock Purchase Plan and a Non-qualified Stock Option Plan. The Company considers its relations with its employees to be excellent.

ECONOMIC CONDITIONS

The Company's economic success is
dependent to a significant extent upon general economic conditions in the
Nashville metropolitan area. The banking industry in Nashville and Tennessee is
affected by general economic conditions such as inflation, recession,
unemployment, real estate values and other factors beyond the Company's control.
An economic recession over a prolonged period of time in the Nashville area
could cause increases in non-performing assets, thereby causing operating
losses, impairing liquidity and eroding capital. There can be no assurance that
future adverse changes in the local economy would not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or cash flows.

SUPERVISION
  AND REGULATION

The federal and
  state banking laws contain numerous provisions affecting various aspects of
  the business and operations of the Company and the Bank. The following
  description and references herein to applicable statutes and regulations,
  which are not intended to be complete descriptions of these provisions or
  their effects on the Company or the Bank, are brief summaries and are
  qualified in their entirety by reference to such statutes and regulations.

The Company

The Company is
  a bank holding company registered under the Bank Holding Company Act of 1956
  (the "BHCA") and is subject to supervision and regulation by the
  Federal Reserve Bank of Atlanta (the "Federal Reserve"). 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. As a bank holding
  company, the Company's activities and those of its banking and nonbanking
  subsidiaries have in the past been limited to the business of banking and
  activities closely related or incidental to banking. Under recent banking
  legislation, see - "Gramm-Leach-Bliley Act" below, however, member
  banks will have broadened authority, subject to limitations on investment, to
  engage in activities that are financial in nature (other than insurance
  underwriting, merchant or insurance portfolio investment, real estate
  development and real estate investment) through subsidiaries if the bank is
  well capitalized, well managed and has at least a satisfactory rating under
  the Community Reinvestment Act.

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

Safe and
  Sound Banking Practices.Bank holding companies are not permitted to
  engage in unsafe and unsound banking practices. For example, unless the
  company meets certain criteria, the Federal
  Reserve's Regulation Y requires a holding company to give the Federal Reserve
  prior notice of any redemption or repurchase of its own equity securities, if
  the consideration to be paid, together with the consideration paid for any
  repurchases or redemptions in the preceding 12 months, is equal to 10% or more
  of the company's consolidated net worth. The Federal Reserve may oppose the
  transaction if it believes that the transaction would constitute an unsafe or
  unsound practice or would violate any law or regulation. As another example, a
  holding company could not impair its subsidiary bank's soundness by causing it
  to make funds available to nonbanking subsidiaries or their customers if the
  Federal Reserve believed it not prudent to do so.

The Financial
  Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
  expanded the Federal Reserve's authority to prohibit activities of bank
  holding companies and their nonbanking subsidiaries which represent unsafe and
  unsound banking practices or which constitute violations of laws or
  regulations. Notably, FIRREA increased the amount of civil money penalties
  which the Federal Reserve can assess for certain activities conducted on a
  knowing and reckless basis, if those activities caused a substantial loss to a
  depository institution. The penalties can be as high as $1,000,000 for each
  day the activity continues. FIRREA also expanded the scope of individuals and
  entities against which such penalties may be assessed.

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

Annual
  Reporting; Examinations. The Company is required to file an annual report
  with the Federal Reserve and such additional information as the Federal
  Reserve may require pursuant to the BHCA. The Federal Reserve may examine a
  bank holding company or any of its subsidiaries and charge the company for the
  cost of such an examination.

Capital
  Adequacy Requirements. The Federal Reserve has adopted a system using
  risk-based capital guidelines to evaluate the capital adequacy of bank holding
  companies. Under the guidelines, specific categories of assets and certain
  off-balance sheet assets such as letters of credit are assigned different risk
  weights, based generally on the perceived credit risk of the asset. These risk
  weights are multiplied by corresponding asset balances to determine a
  "risk-weighted" asset base. The guidelines require a minimum total
  risk-based capital ratio of 8.0% (of which at least 4.0% is required to
  consist of Tier 1 capital elements).

In addition to
  the risk-based capital guidelines, the Federal Reserve uses a leverage ratio
  as an additional tool to evaluate the capital adequacy of bank holding
  companies. The leverage ratio is a company's Tier 1 capital divided by its
  total consolidated average assets. Bank holding companies must maintain a
  minimum leverage ratio of at least 3.0%, although most organizations are
  expected to maintain leverage ratios that are 100 to 200 basis points above
  this minimum ratio.

The federal
  banking agencies' risk-based and leverage ratios are minimum supervisory
  ratios generally applicable to banking organizations that meet certain
  specified criteria, assuming that they have the highest regulatory rating.
  Banking organizations not meeting these criteria are expected to operate with
  capital positions well above the minimum ratios. The federal bank regulatory
  agencies may set capital requirements for a particular banking organization
  that are higher than the minimum ratios when circumstances warrant. Federal
  Reserve guidelines also provide that banking organizations experiencing
  internal growth or making acquisitions will be expected to maintain strong
  capital positions substantially above the minimum supervisory levels, without
  significant reliance on intangible assets. In addition, the regulations of the
  Federal Reserve provide that concentration of credit risk and certain risks
  arising from nontraditional activities, as well as an institution's ability to
  manage these risks, are important factors to be taken into account by
  regulatory agencies in assessing an organization's overall capital adequacy.
The Federal Reserve recently adopted amendments to its risk-based capital
regulations to provide for the consideration of interest rate risk in the
agencies' determination of a banking institutions' capital adequacy.

Gramm-Leach-Bliley
  Act. Traditionally, the activities of bank holding companies have been
  limited to the business of banking and activities closely related or
  incidental to banking. On November 12, 1999, however, the Gramm-Leach-Bliley
  Act was signed into law which, effective March 11, 2000, relaxed the previous
  limitations permitting bank holding companies to engage in a broader range of
  financial activities. Specifically, bank holding companies may elect to become
  financial holding companies which may affiliate with securities firms and
  insurance companies and engage in other activities that are financial in
  nature. Among the activities that will be deemed "financial in
  nature" are, in addition to traditional lending activities, securities
  underwriting, dealing in or making a market in securities; sponsoring mutual
  funds and investment companies, insurance underwriting and agency activities,
  merchant banking activities and activities which the Federal Reserve considers
  to be closely related to banking. A bank holding company may become a
  financial holding company under the new statute only if each of its subsidiary
  banks is well capitalized, is well managed and has at least a satisfactory
  rating under the Community Reinvestment Act. A bank holding company that falls
  out of compliance with such requirement may be required to cease engaging in
  certain activities. Any bank holding company which does not elect to become a
  financial holding company remains subject to the current restrictions of the
  Bank Holding Company Act.

Under this new
  legislation, the Federal Reserve serves as the primary "umbrella"
  regulator of financial holding companies with supervisory authority over each
  parent company and limited authority over its subsidiaries. The primary
  regulator of each subsidiary of a financial holding company depends on the
  type of activity conducted by the subsidiary. For example, securities
  regulators regulate broker-dealer subsidiaries and insurance authorities
  regulate insurance subsidiaries. Implementing regulations under the
  Gramm-Leach-Bliley Act have not yet been finalized and the Company cannot
  predict the full sweep of the new legislation and has not yet determined
  whether it will ever elect to become a financial holding company.

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

Imposition of Liability for Undercapitalized Subsidiaries. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires bank regulators to take "prompt corrective action" to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary's compliance with the capital restoration plan. Under FDICIA, the aggregate liability of all companies controlling an undercapitalized bank is limited to the lesser of 5% of the institution's assets at the time it became undercapitalized or the amount necessary to cause the institution to be "adequately capitalized." The guarantee and limit on liability expire after the regulators notify the institution that it has remained adequately capitalized for each of four consecutive calendar quarters. FDICIA grants greater powers to the bank regulators in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates. At December 31, 2001, the Bank met the requirements of a "well-capitalized" institution and, therefore, these requirements presently do not apply to the Company.

Acquisitions by Bank Holding Companies. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or direct or indirect ownership or control of more than 5% of any class of voting shares of any bank.

The Federal Reserve will allow the acquisition by a bank holding company of an interest in any bank located in another state only if the laws of the state in which the target bank is located expressly authorize such acquisition. Tennessee law permits, in certain circumstances, out-of-state bank holding companies to acquire banks and bank holding companies in Tennessee.

Expanding Enforcement Authority. One of the major effects of FDICIA was the increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, the Federal Reserve and FDIC have extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions and publicly disclose such actions.

Effect of Economic Environment. The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve 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 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 the business and earnings of the Company and its subsidiaries cannot be
predicted.

The Bank

As a state bank, the Bank is principally supervised, examined, and regulated by the Tennessee Department of Financial Institutions
("TDFI"). The Bank is a member of the Federal Reserve System and as such, its primary federal regulator is the Board of Governors of the Federal Reserve System through the Federal Reserve Bank of Atlanta. The TDFI and the Federal Reserve regularly examine such areas as capital adequacy, reserves, loan portfolio, investments and management practices. The Bank must also furnish quarterly and annual reports to the TDFI and the Federal Reserve, and the TDFI and the Federal Reserve may exercise cease and desist and other enforcement powers over the Bank if its actions represent unsafe or unsound practices or violations of law. Since the deposits of the Bank are insured by the Bank Insurance Fund
("BIF") of the FDIC, the Bank is also subject to backup regulation and supervision by the FDIC.

Restrictions on Transactions with Affiliates and Insiders. The Bank is subject to certain federal statutes limiting transactions with the Company and its nonbanking affiliates. Section 23A of the Federal Reserve Act affects loans or other credit extensions to, asset purchases from and investments in affiliates of the Bank. Such transactions with the Company or any of its nonbanking subsidiaries are limited in amount to ten percent of the Bank's capital and surplus and, with respect to the Company and all of its nonbanking subsidiaries together, to an aggregate of twenty percent of the Bank's capital and surplus. Furthermore, such loans and extensions of credit, as well as certain other transactions, are required to be secured in specified amounts.

In addition, Section 23B of the Federal Reserve Act requires that certain transactions between the Bank, including its subsidiaries and its affiliates must be on terms substantially the same, or at least as favorable to the Bank or its subsidiaries, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. In the absence of such comparable transactions, any transaction between the Bank and its affiliates must be on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated persons. The Bank is also subject to certain prohibitions against any advertising that indicates the Bank is responsible for the obligations of its affiliates.

Loans to One Borrower. Tennessee law generally prohibits loans in excess of 15% of the Bank's capital, surplus and undivided profits. With approval of the Bank's Board of Directors, the limit may be increased to 25% of the Bank's capital.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as "insiders") contained in the Federal Reserve Act and Regulation O now apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such loans 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 Federal Reserve may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.

Interest Rate Limits. Under the laws of the State of Tennessee, the maximum annual interest rate that may be charged on most loans made by the Bank is based on the "formula rate" established from time to time by the Commissioner of Financial Institutions. The formula rate is an annual rate of interest four percentage points above the average prime loan rate as published by the Federal Reserve, not to exceed 24% per annum. The Bank may charge interest on certain consumer loans at the rate allowed to Tennessee Industrial Loan and Thrift Companies, which is generally up to 24% per annum. State usury laws (but not late charge limitations) have been preempted by federal law for loans secured by a first lien on residential real property.

Examinations. The Federal Reserve periodically examines and evaluates member banks. Based upon such an evaluation, the Federal Reserve may revalue the assets of a member bank and require that it establish specific reserves to compensate for the difference between the Federal Reserve-determined value and the book value of such assets. Onsite examinations are to be conducted every 12 months, except that certain well-capitalized banks may be examined every 18 months. FDICIA authorizes the Federal Reserve to assess the institution for its costs of conducting the examinations.

Prompt Corrective Action. In addition to the capital adequacy guidelines, FDICIA requires the Federal Reserve to take "prompt corrective action" with respect to any member bank which does not meet specified minimum capital requirements. The applicable regulations establish five capital levels, ranging from "well capitalized" to "critically undercapitalized," which authorize and in certain cases require, the Federal Reserve to take certain specified supervisory action. Under regulations implemented under
FDICIA, a member bank is considered well capitalized if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and it is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A member bank is considered adequately capitalized if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of at least 4.0% and a leverage capital ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines) and the institution does not meet the definition of an undercapitalized institution. A member bank is considered undercapitalized if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines). A significantly undercapitalized institution is one which has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%. A critically undercapitalized institution is one which has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under certain circumstances, a well capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category.

With certain exceptions, member banks will be prohibited from making capital distributions or paying management fees to a holding company if the payment of such distributions or fees will cause them to become undercapitalized. Furthermore, undercapitalized member banks will be required to file capital restoration plans with the Federal Reserve. Such a plan will not be accepted unless, among other things, the banking institution's holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution's holding company is entitled to a priority of payment in bankruptcy. Undercapitalized member banks also will be subject to restrictions on growth, acquisitions, branching and engaging in new lines of business unless they have an approved capital plan that permits otherwise. The Federal Reserve also may, among other things, require an undercapitalized member bank to issue shares or obligations, which could be voting stock, to recapitalize the institution or, under certain circumstances, to divest itself of any subsidiary.

The Federal Reserve is authorized by FDICIA to take various enforcement actions against any significantly undercapitalized member bank and any member bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the Federal Reserve. These powers include, among other things, requiring the institution to be
recapitalized, prohibiting asset growth, restricting interest rates paid, requiring primary approval of capital distributions by any bank holding company which controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors and requiring the dismissal of directors and officers.

Significantly and critically undercapitalized member banks may be subject to more extensive control and supervision. The Federal Reserve may prohibit any such institution from, among other things, entering into any material transaction not in the ordinary course of business, amending its charter or bylaws, or engaging in certain transactions with affiliates. In addition, critically undercapitalized institutions generally will be prohibited from making payments of principal or interest on outstanding subordinated debt. Within 90 days of a member bank becoming critically undercapitalized, the Federal Reserve must appoint a receiver or conservator unless certain findings are made with respect to the prospect for the institution's continued viability.

As of December 31, 2001, the Bank exceeded the capital requirements of a "well-capitalized" institution.

Dividends Restrictions. Federal and Tennessee laws limit the payment of dividends by banks. Under Tennessee
law a state bank shall have such capital structure as the Commissioner of
Financial Institutions (the "Commissioner") shall deem adequate. A
state bank may be required to increase its capital structure to the point deemed
adequate by the Commissioner before receiving approval for an application for a
branch office, charter amendment, change of location or trust powers. The
payment of dividends by any bank is dependent upon its earnings and financial
condition and also may be limited by federal and state regulatory agency
protections against unsafe or unsound banking practices. The payment of
dividends could, depending upon the financial condition of the bank, constitute
an unsafe or unsound banking practice. The FDIC prohibits a state bank, the
deposits of which are insured by the FDIC, from paying dividends if it is in
default in the payment of any assessment due the FDIC. Subject to the foregoing
requirements, the board of directors of a state bank may declare dividends,
provided dividends declared in any calendar year may not exceed the total of the
bank's net income for that year combined with its retained net income of the
preceding two years without the prior approval of the Commissioner.



The
Federal Reserve also imposes dividend restrictions on the Bank as a state member
bank of the Federal Reserve. The Bank may not declare or pay a dividend if that
dividend would exceed the Bank's undivided profits, unless the Bank has received
the prior approval of the Federal Reserve and at least two-thirds of the
shareholders of each class of stock outstanding. Additionally, the Bank may not
permit any portion of its "permanent capital" to be withdrawn, unless
the withdrawal has been approved by the Federal Reserve and at least two-thirds
of the shareholders of each class of stock outstanding. "Permanent
capital" is defined as the total of a bank's perpetual preferred stock and
related surplus, common stock and surplus and minority interest in consolidated
subsidiaries. Finally, if the Bank has a capital surplus in excess of that
required by law, that excess may be transferred to the Bank's undivided profits
account and be available for the payment of dividends, so long as (i) the amount
came from the earnings of prior periods, excluding earnings transferred as a
result of stock dividends and (ii) the Bank's Board and the Federal Reserve
approved the transfer.



Deposit Insurance.The deposits of the Bank are insured by the FDIC through the BIF to the extent provided by law. Under the FDIC's risk-based insurance system,
BIF-insured institutions are currently assessed premiums of between zero and twenty-seven cents per $100 of eligible deposits, depending upon the institution's capital position and other supervisory factors. Congress recently enacted legislation that, among other things, provides for assessments against
BIF-insured institutions that will be used to pay certain Financing Corporation ("FICO") obligations. In addition to any BIF insurance assessments,
BIF-insured banks are expected to make payments for the FICO obligations as assessed by the FDIC. For the first quarter of
2002, the FICO assessment is 0.01960 per $100 of eligible deposits. Insured
banks have recently not been required to pay BIF Insurance premiums. However,
the BIF Insurance fund is reported to be nearing the pre-established limit at
which may require banks to again be assessed for BIF insurance premiums in the
near future.

Conservator and Receivership Powers. FDICIA significantly expanded the authority of the federal banking regulators to place depository institutions into conservatorship or receivership to include, among other things, appointment of the FDIC as conservator or receiver of an undercapitalized institution under certain circumstances. In the event the Bank is placed into conservatorship or receivership, the FDIC is required, subject to certain exceptions, to choose the method for resolving the institution that is least costly to the
BIF.

Brokered Deposit Restrictions. FIRREA and FDICIA generally limit institutions which are not well capitalized from accepting brokered deposits. In general, undercapitalized institutions may not solicit, accept or renew brokered deposits. Adequately capitalized institutions may not solicit, accept or renew brokered deposits unless they obtain a waiver from the FDIC. Even in that event, they may not pay an effective yield of more than 75 basis points over the effective yield paid on deposits of comparable size and maturity in the institution's normal market area for deposits accepted from within that area, or the national rate paid on deposits of comparable size and maturity for deposits accepted from outside the institution's normal market area.

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 Community Reinvestment 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 or making loans to such customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.

USA
Patriot Act. On October 26, 2001, President George W. Bush signed into law
the USA Patriot Act ("Patriot Act"). Title III of the Patriot Act
concerns money-laundering provisions that may affect many community banks. These
provisions include: (i) the Secretary of the Treasury is authorized to impose
special measures, such as record keeping or reporting, on domestic financial
institutions that are a primary concern; (ii) financial institutions with
private or correspondent accounts with non-U.S. citizens must establish policies
and procedures to detect money laundering through those accounts; (iii)
financial institutions  are barred from maintaining correspondent accounts
for foreign shell banks (that is, a bank that does not have a physical presence
in any country); (iv) the Secretary of the Treasury is required to prescribe
regulations to further encourage cooperation among financial institutions,
regulators, and law enforcement agencies and officials to share information
about terrorist acts and money laundering activities; (v) the Secretary of the
Treasury is required to issue regulations to establish minimum procedures for
financial institutions to use in verifying customer identity during the
account-opening process; (vi) depository institutions are permitted to provide
information to other institutions concerning the possible involvement in
potentially unlawful activity by a current or former employee; (vii) the
Secretary of the Treasury is required to establish a secure website to receive
suspicious activity reports and currency transaction reports, and to provide
institutions with alerts and other information regarding suspicious activity
that warrant immediate attention; and (viii) the federal bank regulators are
required to consider the anti-money laundering record of each depository
institution in evaluating applications under the Bank Merger Act.

---

ITEM 2.      PROPERTIES

FACILITIES

The Company is headquartered in the downtown central business district of Nashville. The Company occupies space in the second, third and twenty-third floors of the L & C Tower, located at 401 Church Street, a location which also serves as the Main branch. During 2000, the Company expanded its presence in downtown Nashville through the addition of 11,123 square feet of contiguous space in the building adjacent to L&C Tower which formerly housed the Nashville Area Chamber of Commerce. This space serves as the Company's Headquarters and general office space. The Company has four locations including its Main branch and suburban Nashville branch locations in Green Hills, Brentwood and Hendersonville. These locations are complemented by the Company's four "Bank on Call" mobile branches which operate throughout the market area with at-your-door banking convenience and a network of
eleven ATMs strategically located throughout the Nashville metropolitan area. In addition to the four existing branch locations, the Company has received regulatory approval to establish an additional suburban branch office in the Cool Springs area which is expected to open during the second half of
2002. Additionally, the Company has entered in to a contract, subject to
regulatory approval, to open a sixth branch, in the Donelson/Hermitage area. Management plans to continue to seek attractive branch locations to further expand its delivery systems and increase its market share.

The following table sets forth specific information on each such location.

Location
        Owned/Leased
        TermYears
        Sq. Ft.
        Deposits atDecember 31, 200
        Address
        Date
          Opened(Dollars in Thousands)Main/Corporate
        Leased
        10
        32,679
        $  218,585
        401 Church Street
        November 1989Green Hills
        Leased
        5
        4,670
        65,184
        3770 Hillsboro Road
        January 1997Brentwood
        Leased
        20
        4,000
        34,984
        5105 Maryland Way
        September 1998Hendersonville
        Owned
        NA
        3,800
        31,195
        100 Maple Drive N.
        May 1999




ITEM 3.      LEGAL PROCEEDINGS

Neither the Company nor the Bank is currently a party to any material legal proceedings.

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

None

---



PART II

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

The Company's Common Stock began trading on the Nasdaq National Market System
("Nasdaq NMS") on June 4, 1998 and is quoted in such Market under the symbol
"CFGI." Prior to being listed on the Nasdaq NMS, the Company stock was traded on the Nasdaq Small Cap Market. Prior to the formation of the Company as the holding company for the Bank, commencing on December 8, 1989, the Bank's common stock traded on the Nasdaq Over-the-Counter
System under the symbol
"TBON."

As of the date of this Form 10-K, there were
3,080,709 shares outstanding and 723 shareholders of record. The number of beneficial owners is unknown to the Company at this time. The high and low closing prices were as follows:

|               | 2001        |  | 2000       
|-------------- | ----------- |  | -----------
|               | High        |  | Low        
|               |             |  |            
|Fourth quarter | $
    15.22 |  | $
    14.07
|Third quarter  | 14.93       |  | 13.69      
|Second quarter | 14.03       |  | 13.44      
|First quarter  | 13.79       |  | 12.67      

CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares of common stock (the "Common Stock"), $6.00 per share par value, of which
3,077,071 shares were issued and outstanding as of December 31, 2001. An additional
442,187 shares of Common Stock were issuable upon exercise of the Company's outstanding stock options issued to the Company's board of directors and staff.

In January 1998, the Company adopted a shareholder rights plan authorizing the distribution of a dividend of one common share purchase right for each outstanding share of Common Stock. The rights are exercisable in the event of the acquisition by a third party of 15% or more of the Common Stock or if such third party announces a tender offer, the consummation of which would result in an ownership of 15% or more of the Common Stock. The rights are designed to ensure that all
shareholders receive fair and equal treatment in the event of a proposed takeover of the Company and to safeguard against partial tender offers, squeeze-outs, open market accumulations and other abusive tactics to gain control of the Company without paying all shareholders an appropriate control premium.

In March 1999, to facilitate the management of its capital position, the Company announced a stock
repurchase program. The initial plan called for the repurchase of 400,000 shares (the "March 23, 1999 Plan") with an original expiration date of December 31, 1999. On January 26, 2000, the Company extended the expiration date of the March 23, 1999 Plan until March 31, 2000 to allow for the completion of the plan. On March 15, 2000, the Company announced that it had completed the March 23, 1999 Plan and announced a second stock repurchase plan for the acquisition of an additional 500,000 shares of common stock with an expiration date of December 31, 2000 (the "March 15, 2000 Plan"). On December 20, 2000, the Company announced the extension of the March 15, 2000 Plan to December 31, 2001 to provide for the acquisition of 16,000 shares remaining to be repurchased under the March 15, 2000 Plan and an additional 400,000 shares, for a total of up to 416,000 shares of common stock. At December 31, 2001, the Company had repurchased 845,904 shares under the March 15, 2000 Plan and 1,245,904 shares since commencing its stock repurchase program in March 1999.

DIVIDENDS

Holders of Common Stock are entitled to receive dividends
if declared by the Company's Board of Directors out of funds legally available. The Company has historically paid dividends on its Common Stock. During the years ended December 31, 2001 and 2000, the Company paid
$2.2 million or $0.68 per share in dividends, respectively. The Company anticipates continuing to pay quarterly dividends of $0.17. There is no assurance, however, that the Company will continue to pay dividends in the future.

The principal sources of cash to the Company are derived from short-term investments resulting from its capital position and operating revenues. Furthermore, the Company may receive dividends paid by the Bank with respect to the Bank's capital stock. There are, however, certain restrictions on the payment of such dividends imposed by federal banking laws, regulations and authorities.

Dividends Restrictions. Federal and Tennessee laws limit the payment of dividends by banks. Under Tennessee
law a state bank shall have such capital structure as the Commissioner of
Financial Institutions (the "Commissioner") shall deem adequate. A
state bank may be required to increase its capital structure to the point deemed
adequate by the Commissioner before receiving approval for an application for a
branch office, charter amendment, change of location or trust powers. The
payment of dividends by any bank is dependent upon its earnings and financial
condition and also may be limited by federal and state regulatory agency
protections against unsafe or unsound banking practices. The payment of
dividends could, depending upon the financial condition of the bank, constitute
an unsafe or unsound banking practice. The FDIC prohibits a state bank, the
deposits of which are insured by the FDIC, from paying dividends if it is in
default in the payment of any assessment due the FDIC. Subject to the foregoing
requirements, the board of directors of a state bank may declare dividends,
provided dividends declared in any calendar year may not exceed the total of the
bank's net income for that year combined with its retained net income of the
preceding two years without the prior approval of the Commissioner.



The
Federal Reserve also imposes dividend restrictions on the Bank as a state member
bank of the Federal Reserve. The Bank may not declare or pay a dividend if that
dividend would exceed the Bank's undivided profits, unless the Bank has received
the prior approval of the Federal Reserve and at least two-thirds of the
shareholders of each class of stock outstanding. Additionally, the Bank may not
permit any portion of its "permanent capital" to be withdrawn, unless
the withdrawal has been approved by the Federal Reserve and at least two-thirds
of the shareholders of each class of stock outstanding. "Permanent
capital" is defined as the total of a bank's perpetual preferred stock and
related surplus, common stock and surplus and minority interest in consolidated
subsidiaries. Finally, if the Bank has a capital surplus in excess of that
required by law, that excess may be transferred to the Bank's undivided profits
account and be available for the payment of dividends, so long as (i) the amount
came from the earnings of prior periods, excluding earnings transferred as a
result of stock dividends and (ii) the Bank's Board and the Federal Reserve
approved the transfer.

As of December 31, 2001, an aggregate of approximately $14.1 million was available for payment of dividends by the Bank to the Company under applicable restrictions, without regulatory approval. Regulatory authorities could impose administratively stricter limitations on the ability of the Bank to pay dividends to the Company if such limits were deemed appropriate to preserve certain capital adequacy requirements.
In the future, the declaration and payment of dividends on the Common Stock will depend upon the earnings and financial condition of the Company, liquidity and capital requirements, the general economic and regulatory climate, the Company's ability to service any equity or debt obligations senior to the Common Stock and other factors deemed relevant by the Company's Board of Directors. - See "Business - Supervision and Regulation."

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL
DATA

The following Selected Consolidated Financial Data
should be read in conjunction with the consolidated financial statements and the notes thereto, appearing elsewhere in this Annual Report on Form 10-K and the information contained in "Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The Consolidated Historical Financial Data as of and for each of the five years ended December 31, 2001 are derived from the Company's Consolidated Financial Statements which have been audited by independent accountants. Certain prior year amounts have been reclassified to conform to the 2001 presentation.

Years Ended December
      31,2001



2000



1999



1998



1997(Dollars in
      thousands, except per share data)Income Statement Data:
  Interest income
    $    33,510



    $    28,281



    $    20,975



    $    16,591



    $    15,260Interest expense
    16,856



    13,925



    9,053



    8,035



    7,956Net interest income
    16,654



    14,356



    11,922



    8,556



    7,304Provision for loan and lease losses
    2,216



    1,256



    106



    128



    100Noninterest income
    4,301



    2,785



    2,675



    1,805



    1,421Noninterest expense
    13,226



    10,542



    8,845



    6,071



    5,236Income before
      provision for income taxes
    5,513



    5,343



    5,646



    4,162



    3,389Provision for income taxes
    2,187



    2,086



    2,145



    1,581



    1,331Net income
    $    3,326



    $    3,257



    $    3,501



    $    2,581



    $    2,058========



========



========



========



========Per Share Data:
  Net income, Basic
    $     
      1.02



    $     
      0.90



    $     
      0.86



    $     
      1.08



    $     
      0.93Net income, Diluted
    1.02



    0.90



    0.85



    0.78



    0.89Book value (1)
    12.47



    12.32



    12.31



    12.06



    10.74Cash dividends
    0.68



    0.68



    0.46



    0.24



    0.20Weighted average shares outstanding, Basic
    3,251



    3,619



    4,068



    2,394



    2,205Weighted average shares outstanding, Diluted
    3,268



    3,635



    4,129



    3,321



    2,324Balance Sheet
    Data:
  Investment securities
    $ 113,356



    $  62,775



    $  74,877



    $  71,662



    $  66,059Gross loans (2)
    339,937



    270,568



    205,511



    152,675



    122,749Allowance for loan and lease losses
    (5,098)



    (4,622)



    (4,062)



    (3,646)



    (3,128)Net loans
    334,839



    265,946



    201,449



    149,029



    119,621Total assets
    482,310



    354,620



    308,106



    238,185



    204,887Total deposits
    349,948



    273,036



    229,141



    162,553



    164,099Total shareholders' equity
    38,625



    42,281



    47,315



    51,171



    24,052Average Balance
    Sheet Data:
  Investment securities
    $ 102,135



    $  74,124



    $  68,421



    $  59,117



    $  61,587Gross loans (2)
    308,303



    235,432



    176,027



    133,660



    114,835Allowance for loan and lease losses
    (4,974)



    (4,447)



    (3,945)



    (3,389)



    (3,006)Net loans
    303,329



    230,985



    172,082



    130,271



    111,829Total assets
    436,795



    324,738



    269,137



    209,501



    190,766Total deposits
    319,047



    252,523



    199,089



    167,294



    152,640Total shareholders' equity
    40,724



    43,205



    49,200



    27,313



    22,846Performance
    Ratios:
Return on average assets
  0.76
  %
  1.00
  %
  1.30
  %
  1.23
  %
  1.08

%
Return on average equity (1)
  8.20



  7.39



  7.09



  9.56



  9.05Net interest margin
  4.01



  4.62



  4.67



  4.28



  3.96Efficiency ratio (3)
  64.52



  61.50



  60.59



  58.50



  59.95Performance
    Ratios:Nonperforming assets to total assets
  0.82
  %
  0.38
  %
  0.09
  %
  0.19
  %
  0.60
  %Net loan charge-offs (recoveries) to average
    loans
  0.56



  0.30



  (0.12)



  (0.29)



  (0.13)Allowance for loan and lease losses to total
    loans
  1.50



  1.71



  1.98



  2.39



  2.55Allowance for loan and lease losses to
    nonperforming
        loans
  161.94



  595.62



  1,395.88



  893.63



  285.92Capital
    Ratios:Leverage ratio
  8.55
  %
  12.14
  %
  16.13
  %
  23.04
  %
  11.84
  %Tier 1 risk-based capital ratio
  9.82



  14.17



  21.10



  30.30



  17.50Total risk-based capital ratio
  11.07



  15.43



  22.40



  31.60



  18.80______________________


(1)    Exclusive of accumulated
other comprehensive income (loss), net of taxes.
(2)    Net of unearned discounts and loan fees.
(3)    Calculated by dividing total non-interest expenses by net
interest income plus non-interest income, excluding net securities gains and
losses.

---

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

The Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company's balance sheets and statements of operations. This section should be read in conjunction with the Company's Consolidated Financial Statements and accompanying notes and other detailed information appearing elsewhere in this document.

CRITICAL ACCOUNTING POLICIES

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

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

Management recognizes that in making loans,
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan. Management's policy is to maintain an
appropriate allowance for estimated loan and lease losses on the portfolio as a
whole. The allowances are based on estimates of the historical loan loss
experience, evaluation of economic conditions and regular periodic reviews of
the Bank's loan portfolio by both internal personnel and a third party review
firm. The Bank's loan portfolio consists mostly of
commercial loans to companies in various industries, whose financial performance
may be impacted differently by the local, regional or national economies and
stage of the economic cycle. Management believes that
the effects of any reasonably likely changes in the economy would be limited
somewhat due to the diversification of the loan portfolio and the Bank's normal
collateral requirements for such loans. While management uses available
information to recognize losses on loans, future adjustments in the allowance
may be necessary based on changes in economic conditions which could have a
significant detrimental impact to the Company's financial condition and results
of operation.
See "--Allowance for Loan and Lease Losses."

For the Years Ended December 31, 2001, 2000 and 1999

OVERVIEW

From December 31, 1998 to December 31, 2001, the Company experienced consistent growth as assets increased from $238.2 million at December 31, 1998 to
$482.3 million at December 31, 2001, an increase of $244.1 million or
102.5%. The increase was driven by growth in the loan portfolio primarily due to the expansion of the branch network and greater number of product lines and services available to customers. The Company opened two branches during this period, expanding into the Nashville suburbs of Brentwood in 1998, and Hendersonville in 1999. In each of these endeavors, the Company has met or exceeded growth and profitability expectations. Loans accounted for the majority of the Company's asset growth, increasing from $152.7 million to $339.9 million over the three-year period ending December 31, 2001. Supporting this substantial expansion was an increase in deposits, which rose from $162.6 million to $349.9 million, representing a 115.2% increase during the period. Shareholders' equity decreased to $38.6 million, a decrease of $12.6 million or 24.6% at December 31, 2001, compared with $51.2 million as of December 31, 1998,
as the result of the stock repurchase program and increased dividend payments.

Net income available to shareholders was $3.3 million, $3.3 million and $3.5 million for the years ended December 31, 2001, 2000 and 1999, respectively, and diluted net income per common share was $1.02, $0.90, and $0.85, for these same periods. Earnings
per share growth from 1999 to 2001 resulted primarily from the stock repurchase program. The Company posted returns on average assets of 0.76%, 1.00%, and 1.30% and returns on average equity of 8.20%, 7.39%, and 7.09% for the years ended December 31, 2001, 2000 and 1999, respectively.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents the amount by which interest income on interest-earning assets, including securities and loans, exceeds interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is the principal source of the Company's earnings. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income.

2001 versus 2000.  Interest income increased to $33.5 million in 2001 from $28.3 million in 2000. The increase was driven by growth in the average loan portfolio of $72.9 million or 31.0% while the Company experienced a decrease in the yield on average loans to 8.70% in 2001 from 9.78% in 2000 resulting from the
decreasing rate environment prevalent in 2001. The average investment securities portfolio increased by $24.3 million or 32.7%, while its yield declined 50 basis points from 6.93% in 2000 to 6.43% in 2001 also due to
decreases in interest rates. Interest expense increased by $2.9 million to $16.9 million in 2001 compared with $13.9 million in 2000. The increase resulted
from a $42.5 million growth in average time deposits coupled with a $52.0 million increase in average FHLB borrowings
in 2001.

Net interest income totaled $16.7 million in
2001 compared with $14.4 million in 2000, an increase of $2.3 million or 16.0%. The increase
resulted primarily from a $3.8 million or 16.5% increase in interest income on
loans primarily due to growth in loans. Interest expense increased by $2.9 million or
21.0% due to a $57.7 million increase in the level of interest-bearing deposits. The increase in time deposits, coupled with
the origination of loans during a period of declining rates,  resulted in a
decline in net interest margins which decreased from 4.62% to 4.01% and in net interest spread which decreased from
3.61% to 3.34%, for 2000 and 2001, respectively.

2000 versus 1999. Net interest income totaled $14.4 million in 2000, compared with $11.9 million in 1999, an increase of $2.5 million or 21.0%. The increase resulted primarily from a $7.0 million or 44.0% increase in interest income on loans primarily due to growth in commercial loans. Interest expense increased $4.9 million while interest income increased $7.3 million. Net interest margins were 4.62% and 4.67% and net interest spreads were
3.61% and 3.62% for 2000 and 1999, respectively. Interest income increased to $28.3 million in 2000 from $21.0 million in 1999. The increase was driven by growth in the average loan portfolio of $59.4 million or 33.8% while the Company experienced an increase in the yield on average loans to 9.78% in 2000 from 9.09% in 1999. The average securities portfolio increased by $5.7 million or 8.3%, while its yield rose
51 basis points from 6.40% in 1999 to 6.91% in 2000.

The following table presents the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax-equivalent adjustments were made and all average balances are
daily average balances. Non-accruing loans are included in the tables as loans carrying a zero yield.

|                                                                               | Years
      Ended December 31,             
|------------------------------------------------------------------------------ | -------------------------------------------
|                                                                               | 2001                                       
|                                                                               | Average
      OutstandingBalance           
|                                                                               | (Dollars in
      Thousands)               
|                                                                               | ASSETS                                     
|Interest-earning
      assets:                                                 |                                            
|Total
      loans                                                              | $ 308,303                                  
|Taxable
      securities                                                       | 96,021                                     
|Tax-exempt securities(1)                                                       | 2,375                                      
|Federal funds sold and
      other temporary
         investments              | 10,599                                     
|Total interest-earning assets                                                  | 417,298                                    
|Less allowance for loan and lease losses                                       | (4,974)                                    
|Total interest-earning
      assets, net of
         allowance for loan losses | 412,324                                    
|Non-earning assets                                                             | 24,471                                     
|Total assets                                                                   | $ 436,795                                  
|                                                                               | ========                                   
|                                                                               | LIABILITIES AND
       SHAREHOLDERS' EQUITY
|Interest-bearing
      liabilities:                                            |                                            
|NOW and money market
      accounts                                            | $ 122,631                                  
|Time
      deposits                                                            | 163,841                                    
|Federal
      funds purchased                                                  | 1,167                                      
|FHLB and
      other borrowings                                                | 71,251                                     
|Total interest-bearing liabilities                                             | 358,890                                    
|Noninterest- bearing
      liabilities:                                        |                                            
|Noninterest-bearing demand deposits                                            | 32,582                                     
|Other
      liabilities                                                        | 4,599                                      
|Total liabilities                                                              | 396,071                                    
|                                                                               |                                            
|Shareholders' equity                                                           | 40,724                                     
|                                                                               |                                            
|Total liabilities and
      shareholders' equity                               | $ 436,795                                  
|                                                                               | ========                                   
|Net interest income
      (1)                                                  |                                            
|                                                                               |                                            
|Net interest spread                                                            |                                            
|                                                                               |                                            
|Net interest margin
      (1)                                                  |                                            
|                                                                               |                                            
|_____________________
      (1)  Tax equivalent basis.                         |                                            

The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase related to higher outstanding balances and changes in interest rates. For purposes of this table, changes attributable to both rate and volume have been allocated to rate.

|                                                                       | Years Ended December
      31,         
|---------------------------------------------------------------------- | ---------------------------------------
|                                                                       | 2001
      vs. 2000                    
|                                                                       | Increase
      (Decrease) 
      Due to
|                                                                       | Volume                                 
|                                                                       | (Dollars
      in thousands)           
|Interest-earning
      assets:                                         |                                        
|Total
      loans                                                      | $ 
      6,339                         
|Taxable
      securities                                               | 1,545                                  
|Tax-exempt securities                                                  | 10                                     
|Federal
      funds sold and other temporary
            investments   | 321                                    
|Total increase (decrease) in interest
                   
      income | 8,215                                  
|Interest-bearing
      liabilities:                                    |                                        
|NOW and
      money market accounts                                    | 507                                    
|Time
      deposits                                                    | 2,418                                  
|Federal
      funds purchased                                          | (269)                                  
|FHLB and other borrowings                                              | 2,461                                  
|Total increase (decrease) in interest
                  expense        | 5,117                                  
|Total increase in net interest income                                  | $ 3,098                                
|                                                                       | ======                                 

Provision for Loan and Lease Losses

Provisions for loan and lease losses are charged to income to bring the Company's allowance for loan
and lease losses to a level deemed appropriate by management based on the factors discussed under "--Allowance for Loan
and Lease Losses."

The 2001 provision for loan and lease losses increased by
$960,000 to $2.2 million as a result of higher net charge offs and a $69.4 million increase in loans. The 2000 provision for loan losses increased from $106,000 to $1.3
million, reflecting a 31.7% loan growth.

Noninterest Income

Noninterest income for the years ended December 31, 2001, 2000 and 1999, was
$4.3 million and $2.8 million and $2.7 million, respectively. The $1.5 million
or 53.4% increase in noninterest income in 2001 resulted from the gain on sale
of mortgage loans held for sale derived from the newly established mortgage
banking subsidiary, greater service fees on accounts realized through an
improvement in monitoring the accounts subject to service fees and gains on the
sale of investment securities. The following table presents the major categories of noninterest income:

Years Ended December
        31,2001
      
      2000
      
      1999(Dollars in
        thousands)Investment center income
      $  1,555
      
      $  1,589
      
      $  1,345Service fees income
      1,200
      
      884
      
      879Income from foreclosed assets
      --
      
      83
      
      3Gain on sale of mortgage loans held for
        sale
      487
      
      --
      
      --Trust income
      --
      
      --
      
      93Gain on sale of other real estate owned
      126
      
      10
      
      29Gain (loss) on sale of investment securities,
        net
      457
      
      (97)
      
      (5)Other noninterest income
      476
      
      316
      
      331Total noninterest income
      $  4,301
      
      $  2,785
      
      $  2,675======
      
      ======
      
      ======


Noninterest Expense

For the years ended December 31, 2001, 2000 and 1999, noninterest expense totaled $13.2 million, $10.5 million and $8.8 million, respectively. The
$2.7 million or 25.7% increase in 2001 was primarily due to higher employee compensation and benefits and occupancy expense related to new branches. The Company's efficiency ratios were
64.52%, 61.50% and 60.59% in 2001, 2000 and 1999, respectively. A lower efficiency ratio reflects higher efficiency. The
deterioration in the efficiency ratio for the year 2001 and 2000 is a reflection of
increased operating expenses for new bank services offered in 2001 and 2000 and
the costs associated with the branches opened in 1999.

The following table presents the major categories of noninterest expense:

|                               | Years Ended December
      31,
|------------------------------ | ------------------------------
|                               | 2001                          
|                               | (Dollars in
      thousands)  
|Salaries and employee benefits | $   7,154                     
|Non-staff expenses:            |                               
|Occupancy                      | 1,712                         
|Insufficient check losses      | 486                           
|Audit, tax and accounting      | 392                           
|Other outside services         | 390                           
|Advertising and marketing      | 381                           
|Data and item processing       | 361                           
|Loan related                   | 313                           
|Legal services                 | 287                           
|Telecommunications             | 257                           
|Other noninterest expense      | 1,493                         
|Total non-staff expenses       | 6,072                         
|Total noninterest expense      | $ 13,226                      
|                               | =======                       

The higher compensation expenses in 2001, when
compared with 2000, relates to additional lending and credit administration
staff and annual salary increases for the staff. The increase in 2000 resulted primarily from the costs associated with establishment of the Hendersonville branch which opened in May 1999, increased expenses related to expansion of the Company's loan programs including loan officers and support staff and higher commission expenses paid to investment center staff.
Total full-time equivalent employees at December 31, 2001, 2000 and 1999 were 101, 98 and 80, respectively.

Non-staff expenses for 2001, 2000, and 1999 were $6.1 million, $4.7 million and $4.2 million, respectively, reflecting increases of $1.4 million or 29.8%,
$500,000 or 11.9% and $1.4 million or 53.2%, respectively. The increase in
occupancy expense in 2001 resulted primarily from the additional space leased
for the Company's Headquarters. The increase in 2000 was primarily due to higher occupancy expenses resulting from a full year of operations of the Hendersonville branch.
The increase in insufficient check losses was due to a $425,000 uncollected
overdraft item. Subsequent to year-end December 31, 2001, on February 21, 2002, the
Company recovered $325,000 of this amount.

Income Taxes

Income tax expense includes the regular federal income tax at the statutory rate plus the income tax component of the State tax. The amount of federal income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income, the amount of non-deductible interest expense and the amount of other non-deductible expenses.

In 2001, income tax expense was $2.2 million,
reflecting a $100,000 increase over 2000. The effective tax rate for 2001, 2000
and 1999 was approximately
39.7%, 39.0% and 38.0%, respectively.

Impact of Inflation

The effects of inflation on the local economy and on the Company's operating results have been relatively modest for the past several years. Since substantially all of the Company's assets and liabilities are monetary in nature, such as cash, securities, loans and deposits, their values are less sensitive to the effects of inflation than to changing interest rates, which do not necessarily change in accordance with inflation rates. The Company tries to control the impact of interest rate fluctuations by managing the relationship between its interest rate sensitive assets and liabilities. See " - Financial Condition - Interest Rate Sensitivity and
Interest Rate Risk Management" below.

FINANCIAL CONDITION

Securities

At the date of purchase, the Company is required to classify debt and equity securities into one of three categories:
(i) available-for-sale, (ii) held-to-maturity, or (iii) trading. At each reporting date, the appropriateness of the classification is reassessed.
The Company does not have any investment securities classified as
held-to-maturity or trading. At December 31, 2001 and 2000, all of the Company's
investments are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as a component of accumulated other comprehensive income in shareholders' equity until realized.

The Company uses its investment securities as a source of income and contingent liquidity. To facilitate this process, the Company maintains all securities
classified as available-for-sale. At December 31, 2001, investment securities totaled
$113.4 million, reflecting an 80.6% increase from $62.8 million in 2000, due to
the execution of a financial leveraging strategy designed to increase interest income.

The following table summarizes the contractual maturity of investment securities at amortized cost and their weighted average yields.
Other debt securities include collateralized mortgage obligations ("CMOs")
whose maturities are not segregated since they have staggered maturity dates.
Investments in equity securities include stock of the Federal Reserve Bank and
Federal Home Loan Bank. Maturities of equity securities are not segregated since they have no stated maturity.

|                                           | As of December 31, 2001     
|------------------------------------------ | ----------------------------
|                                           | Within One Year             
|                                           | Amount                      
|                                           | (Dollars
      in thousands)
|U.S. agency securities                     | $  682                      
|Other debt securities                      | --                          
|Municipal securities(1)                    | --                          
|Equity securities                          | --                          
|Total securities                           | $ 682                       
|                                           | =====                       
|(1) Yield on a tax
      equivalent basis. |                             

The following table presents the amortized cost of
investment securities classified as available-for-sale and their approximate fair values as of the dates shown:

As of December 31,
        2001
      As of December 31,
        2000Amortized Cost
      Gross
         Unrealized Gain
      Gross
         UnrealizedLoss
      Fair
         Value
      Amortized Cost
      Gross
         Unrealized Gain
      Gross
         UnrealizedLoss
      Fair
         Value(Dollars in
        thousands)U.S. agency securities
      $  84,309
      $    889
      $   211
      $    84,987
      $   33,928
      $  227
      $   154
      $   34,001Other debt securities
      19,638
      242
      30
      19,850
      23,463
      152
      187
      23,428Municipal securities
      2,292
      43
      --
      2,335
      2,291
      59
      --
      2,350Equity securities
      6,184
      --
      --
      6,184
      2,996
      --
      --
      2,996Total securities
      $ 112,423
      $ 1,174
      $   241
      $ 113,356
      $  62,678
      $ 438
      $   341
      $  62,775========
      ========
      =======
      ========
      ========
      =======
      ========
      ========


U.S. Government agency securities include mortgage-backed securities principally issued by federal agencies such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These securities are deemed to have high credit ratings and certain minimum levels of regular monthly cash flows of principal and interest are guaranteed by the issuing agencies.

At December 31, 2001 and 2000, 56.8% and 65.3%, respectively, of the mortgage-related securities held by the Company had
scheduled final maturities of more than ten years. However, unlike U.S. Treasury and U.S. Government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-related securities which are purchased at a premium will generally suffer decreasing net yields as interest rates drop because homeowners tend to refinance their mortgages. Consequently, the premium paid must be amortized over a shorter time period.
Conversely, securities purchased at a discount will produce higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite
is generally true. Typically, during periods of rising interest rates, fixed rate mortgage-backed securities do not experience heavy
principal prepayments and consequently, their average life may be extended.

Derivatives

On January 1, 2001, the Company adopted "Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). Accordingly, all derivatives are recorded in the financial statements at fair value. Additional information on derivative hedging activity is included in Note I to the consolidated financial statements.

The Company monitors its sensitivity to
changes in interest rates and may use derivative instruments such as interest
rate swaps to hedge this risk.
Interest rate swap transactions generally involve the exchange of fixed and
floating interest rate payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate
contracts involves not only interest rate risk, but also the risk of
counterparties' failure to fulfill their legal obligations. Notional principal
amounts often are used to express the volume of these transactions, however, the
amounts potentially subject to credit risk are significantly smaller.

At December 31, 2001, the Company had
three-interest rate swap contracts with a consolidated notional amount
outstanding of $35.0 million. There were no interest rate swap contracts
outstanding at December 31, 2000. The derivative financial instruments are
reported at their fair values, and are included as other assets and other
liabilities, respectively, on the face of the balance sheet.

On March 26, 2001, the Company entered into a $10.0 million interest rate swap which matures on October 17, 2008 under which the Company
pays the counter party a variable rate of three-month LIBOR plus five basis points and will receive a fixed rate of 6.00%. Interest payments are settled and variable rates reset quarterly. The counter party has the option to terminate the swap, in whole or in part, on April 17, 2002 and semi-annually thereafter. Management designated the interest rate swap as a fair value hedge of $10.0 million of brokered time deposits issued by the Company on March 26, 2001. The 6.00% fixed rate, brokered time deposits mature on October 17, 2008 and are callable by the Company on March 26, 2002 and semi-annually thereafter.
At December 31, 2001, the Company had an unrealized loss of $120,000 for the market value adjustment on this fair value hedge instrument that was offset by a $120,000 decrease in the market value of the 6.00% fixed rate, brokered time deposits.

On May 24, 2001, the Company entered into a $15.0 million interest rate swap agreement which matures on November 25, 2002 under which the Company will pay the
counter party a fixed rate of 4.53% and will receive a variable rate of three-month LIBOR less six basis points. Interest payments are settled and variable rates reset quarterly. Management designated the interest rate swap as a cash flow hedge of $15.0 million in variable rate
FHLB advances entered into by the Company on May 24, 2001. As of December 31, 2001, the cash flow hedge of
the FHLB advances resulted in a decrease of $216,000 in other comprehensive
income, net of taxes of $132,000, and a $348,000 increase to other liabilities.

On July 19, 2001, the Company entered into a $10.0 million interest rate swap agreement which matures on October 19, 2002 under which the Company will pay the
counter party a fixed rate of 4.205% and will receive a variable rate of three-month LIBOR. Interest payments are settled and variable rates reset quarterly. Management designated the interest rate swap as a cash flow hedge of $10.0 million in variable rate
FHLB advances entered into by the Company on July 19, 2001. As of December 31, 2001, the cash flow hedge of
FHLB advances resulted in a decrease of $122,000 in other comprehensive income, net of taxes of $76,000,
and a $199,000 increase to other liabilities.

The high degree of effectiveness of the
Company's derivative financial instruments resulted in no impact to consolidated
net income for the year ended December 31, 2001.

Loan Portfolio

During the year ended December 31, 2001, the
Company reclassified its loan portfolio to reflect the business purpose of the
loans. The loan portfolio at December 31, 2000 was reclassified for comparative
purposes. The reclassifications in 2001 and 2000 do not affect earnings. Prior
to the year 2000, the Company's loan portfolio records had been classified by
collateral codes and reclassifications of such data was not practical.

Total loans increased by $69.4 million or 25.6% to $340.0 million at December 31, 2001. This compares with an increase of $65.1 million or 31.7% to $270.6 million at December 31, 2000. The growth in loans
can be attributed to the Company's investment in loan production capacity and
new lending products. For the years ended December 31, 2001, 2000 and 1999, the ratio of total loans to total deposits was 97.1%, 99.1% and 89.7%, respectively. For the same periods, total loans represented 70.5%, 76.3%, and 66.7% of total assets, respectively.

The following table summarizes the loan portfolio of the Company by type of loan:

|                                | As of December 31, 2001     
|------------------------------- | ----------------------------
|                                | 2001                        
|                                | Amount                      
|                                | (Dollars
      in thousands)
|Commercial                      | $  138,327                  
|Real estate mortgage:           |                             
|Residential                     | 15,988                      
|Commercial                      | 98,977                      
|Real estate
      construction: |                             
|Residential                     | 3,767                       
|Commercial                      | 41,714                      
|Consumer                        | 32,539                      
|Lease financing                 | 8,625                       
|Total loans                     | $  339,937                  
|                                | ========                    

At year-end December 31, 2001 and 2000, the Company had gross loan concentrations (greater than 25% of capital) in the following industries:

As of December 312001
      2000(Dollars in
        thousands)Real estate industry
      $    43,324
      $  34,119Health services
      17,154
      16,195Building contractors
      29,240
      16,082Non-depository financial institutions
      8,912
      12,404Business services
      19,213
      11,352All other
      222,094
      180,416Gross loans
      $  339,937
      $  270,568========
      ========


Adjustable rate loans, utilizing the Prime-lending rate as an index, comprise approximately 76.0% of the commercial and real estate portfolio.
The contractual maturity ranges of the commercial and real estate portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of December 31, 2001 are summarized in the following table:

|                         | As of December 31, 2001
|------------------------ | -----------------------
|                         | One Year or
    Less   
|                         | (Dollars in thousands) 
|Commercial               | $   84,380             
|Real estate mortgage     |                        
|Residential              | 1,119                  
|Commercial               | 14,847                 
|Real estate construction |                        
|Residential              | 3,353                  
|Commercial               | 38,377                 
|Total                    | $  142,076             
|                         | =======                
|Fixed Rate Loans         | $   10,396             
|Variable Rate Loans      | 131,680                
|Net Loans                | $  142,076             
|                         | =======                

Nonperforming Assets

The Company believes that it has procedures in place to maintain a high credit quality loan
and lease portfolio. These procedures include the approval of lending policies and underwriting guidelines by the Board of Directors, review by an independent internal loan review department, reviews by an independent outside loan review company, the Asset Review Committee of the Board of Directors approval for large credit relationships and loan documentation procedures. The loan review department reports credit risk grade changes on a monthly basis to Management and the Board of Directors. The Company performs monthly and quarterly concentration analyses based on industries, collateral types, business lines, credit sizes and officer portfolio loads. There can be no assurance, however, that the Company's loan portfolio will not
be subject to increasing pressures from a deteriorating credit environment due to a decline in the general economic conditions.

The Company generally places a loan on nonaccrual status and ceases accruing interest when, in the opinion of Management, full payment of loan principal and interest is in doubt. All loans past due more than 90 days are placed on nonaccrual status unless the loan is both well-secured by cash or marketable securities and in the process of collection. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of principal as long as significant doubt exists as to collection of the principal. Otherwise, interest is recognized on a cash basis. In determining the adequacy of
the allowance for loan and lease losses, the Company evaluates on an ongoing basis nonaccrual loans and other loans which are considered potential problem loans. Other potential problem loans consist of loans that are currently not considered nonperforming, but where certain information has caused the Company to have concerns as to the ability of the borrower to fully comply with present repayment terms
and, depending on economic changes and future events, these loans and others, which may not be presently identified, could become future nonperforming loans.

The Company updates appraisals on loans secured by real estate as these are
reviewed, prior to foreclosure or as necessary. In instances where updated appraisals reflect reduced collateral values, an evaluation of the borrower's overall financial condition is made to determine the need, if any, for possible write-downs or appropriate additions to the allowance for loan
and lease losses and the need for greater provisions for loan and lease losses. The Company records other real estate at fair value at the time of acquisition less estimated cost to sell.

2001 versus 2000.  At December 31, 2001 and 2000,
nonperforming assets were $4.0 million and $1.3 million, respectively. The increase was the result of eleven
loans placed on nonaccrual, the largest of which was $1.7 million, other real estate owned of $319,000 and repossessed equipment totaling $485,000. At December 31, 2001 and 2000, other potential problem loans totaled $1.5 million and $429,000, respectively.

2000 versus 1999. At year-end December 31, 2000 and 1999,
nonperforming assets were $1.3 million and $291,000, while the ratio of
nonperforming assets to total loans and foreclosed properties were 0.49% and
0.14%, respectively.

The following table presents information regarding nonperforming assets at the periods indicated:

|                                                                           | As of  December
      31,   
|-------------------------------------------------------------------------- | ----------------------------
|                                                                           | 2001                        
|                                                                           | (Dollars in
      thousands)
|Nonaccrual loans                                                           | $    3,148                  
|Repossessed equipment                                                      | 485                         
|Other real estate owned                                                    | 319                         
|Total
      nonperforming assets                                           | 3,952                       
|                                                                           | ========                    
|Nonperforming assets to total loans and
      other
           real estate | 1.16%                       
|Nonperforming assets to total assets                                       | 0.82                        

Allowance for Loan and Lease Losses

Allowance for Loan and Lease Losses. The allowance for loan and lease losses is established through charges to earnings in the form of a provision for loan
and lease losses. Management has established an allowance for loan and lease losses which, it believes, is adequate for estimated losses inherent in the loan portfolio. Based on an evaluation of the loan portfolio, Management presents a quarterly review of the allowance for loan and lease losses to the Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. In making its evaluation, Management considers the industry diversification of the loan portfolio, the effect of changes in the local real estate market on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic conditions and their probable impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans and related collateral security, delinquency trends, the evaluation of its loan portfolio and loan growth by lending staff and credit administration as well as the
internal and external loan review functions and the result of examinations by
banking regulatory agencies. Charge-offs occur when loans are deemed to be uncollectible.

The Company follows a loan review program utilizing both Company staff and independent third party consultants to ensure adequate coverage of all credit exposure and to adequately evaluate the credit risk in the loan portfolio. Through the loan review process, the Company maintains
a list of loans classified as substandard, doubtful or losses, which, along with the delinquency list of loans,
help Management in assessing the overall quality of the loan portfolio and the adequacy of the allowance for loan and lease losses. Loans classified as
substandard are those loans with clear and defined weaknesses such as a highly-leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize recoverability of the debt.
Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that a loss may occur, or at least a portion of the loan may require a charge-off if liquidated.
Both substandard and doubtful loans include some loans that are delinquent at least 30 days or on nonaccrual status. Loans classified as "loss" are those loans which are in the process of being charged off.

In addition to the list of delinquent loans and classified loans, the Company maintains a list of criticized or "Special Mention" loans. These loans have marginal quality which represent a higher level of credit risk, but not sufficient to warrant adverse classification. A separate "Watch" list is also maintained which further aids the Company in monitoring the loan portfolio. Watch list loans show warning elements where the present status portrays one or more deficiencies that require attention in the short-term or where pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted. These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but show weakened elements compared with those of a satisfactory credit. The Company reviews these loans to assist in assessing the adequacy of the allowance for loan and lease losses.

The Company uses a migration analysis to assess the adequacy of the allowance for loans and lease losses taking into account the net charge off rates of homogenous loan pools over predetermined historical periods. Due to recent deterioration of the economy, during the third quarter of 2001, the Company
began utilizing average historical charge off rates for the previous eight quarters.
Prior to the third quarter of 2001, the Company was utilizing average historical
charge off rates for the previous nine years. The resulting allowance is then subjectively
evaluated through an analysis of criticized, adversely classified and non-homogenous loan pools. Consequently,
the Company's allowance for loan and lease losses reflects both qualitative and quantitative estimates of potential credit losses expected over the life of the loans within each risk-rating category for each loan pool in the portfolio. Additionally, Management establishes specific
impairment allowances for loans and leases, which in its opinion require an
allowance different from those allocated through the use of the migration analysis. To accomplish this, Management takes into consideration, among others, the classification,
the delinquency status of the loans, availability, type, value and ability to
perfect the supporting collateral, prevalent economic conditions and the financial strength of the borrowers and guarantors.

The allowance for loan and lease losses is comprised of an allocated and unallocated portion. Both portions of the allowance are available to support inherent losses in the
loan portfolio. The allocated allowance is determined for each classification of both performing and nonperforming loans and leases within the portfolios. This methodology includes but is not limited to: (i) the application of allowance allocations for commercial, consumer and real estate loans as well as leases and is calculated using the weighted average loss rates over
the previous eight quarters, based upon the analysis of averages of historical net loan charge-offs incurred within the portfolios by credit quality grade; (ii) a detailed review of all adversely criticized, nonperforming, and impaired loans and leases to determine if a specific allowance allocation is required on an impaired loan.

The unallocated allowance is established for loss exposure that exists in the remainder of the portfolios but has yet to be identified and to compensate for the uncertainty in estimating loan losses, including the possibility of changes in risk ratings of credits. The unallocated allowance is based on Management's best efforts in evaluating various conditions,
including but not limited to local and regional economic, unemployment and
interest rate environments, the effects of which are not directly measured in determining the allocated allowance. The evaluation of the inherent loss related to these conditions involves a higher degree of uncertainty because they are not associated with specific problem credits or portfolio segments. The unallocated allowance represents prudent recognition of the fact that allowance estimates, by definition, lack precision.

At December 31, 2001 and December 31, 2000, the allowance for loan and lease losses aggregated $5.1 million and $4.6 million, or 1.50% and 1.71% of total loans, respectively. As of December 31, 2001, the allocated and unallocated portions of the allowance were $4.0 million and $1.1 million, respectively. The unallocated portion of the reserve represented 21.6% of the total allowance at December 31, 2001 compared with 23.5% at December 31, 2000. During 2001, the impact of the net charge offs and change in historical statistics utilized on the migration analysis performed on the loan portfolio resulted in a shift in the allowance from the unallocated to the allocated portion of the allowance. Due to the subjectivity involved in the determination of the unallocated portion of the allowance for loan and lease losses, the relationship of the unallocated component to the total allowance may fluctuate from period to period. Presently, management is of the opinion that the
allowance is appropriate considering the current level of loans and leases and overall asset quality reflected in the portfolio. Furthermore, while the allowance for loan and lease losses and the amount of the provision for loan and lease losses are established on a quarterly basis, given the inherent uncertainties of such estimation process, no assurance can be given as to the adequacy or the ultimate amount of the allowance at any future date.

For the year ended December 31, 2001, net loan charge-offs were $1.7 million or 0.56% of average loans compared with net
loan charge offs of $696,000 or 0.30% of average loans for 2000 and net
recoveries of $218,000, or 0.12% of average loans for 1999. During 2001, the provision for loan losses increased by
$1.0 million to $2.2 million. In 2000, the Company recorded a provision for loan losses of
$1.3 million compared with $106,000 for 1999. For 2000, the increase was primarily related to loan growth net of the impact of $814,000 in charge-offs related to 13 loans.
The following table presents an analysis of the allowance for loan and lease losses and other related data:

|                                                         | Years Ended December
      31,
|-------------------------------------------------------- | ------------------------------
|                                                         | 2001                          
|                                                         | (Dollars in
      thousands)  
|Average loans outstanding                                | $   
      308,303            
|                                                         | ==========                    
|Total loans outstanding at end of period                 | $   
      339,937            
|                                                         | ==========                    
|Allowance for loan losses at beginning of
      period   | $      
      4,622           
|Provision for loan losses                                | 2,216                         
|Charge-offs:                                             |                               
|Commercial                                               | (1,717)                       
|Real estate - mortgage                                   | (77)                          
|Consumer                                                 | (132)                         
|Lease financing                                          | (71)                          
|Total charge-offs                                        | (1,997)                       
|Recoveries:                                              |                               
|Commercial                                               | 210                           
|Real estate - mortgage                                   | 14                            
|Consumer                                                 | 33                            
|Lease financing                                          | --                            
|Total recoveries                                         | 257                           
|Net loan (charge-offs) recoveries                        | (1,740)                       
|Purchased reserve of TBON Leasing                        | --                            
|Allowance for loan losses at end of period               | $    
      5,098             
|                                                         | ========                      
|Allowance to end of period total
      loans             | 1.50%                         
|Net loan charge-offs (recoveries) to
      average loans | 0.56                          
|Allowance to end of period
      nonperforming loans     | 161.94                        

The following table describes the allocation of the allowance for loan
and lease losses among various categories of loans and certain other information. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of the credit portfolio.
The following chart represents the allocation of the balance of the allowance
for loan and lease losses by specific loan portfolio.

|                               | As of December 31, 2001     
|------------------------------ | ----------------------------
|                               | 2001                        
|                               | Amount                      
|                               | (Dollars
      in thousands)
|Commercial                     | $  2,460                    
|Real
      estate mortgage     | 1,015                       
|Real estate
      construction | 226                         
|Consumer                       | 182                         
|Lease
      financing          | 86                          
|Unallocated                    | 1,129                       
|Total allowance                | $  5,098                    
|                               | ========                    

Deposits

During the year ended December 31, 2001, total deposits increased by 28.2%, or

At December 31, 2001, the Company's lending and investing activities were funded principally by deposits, approximately 48.2% of which were demand and money market deposits, compared with 51.4% at year-end December 31, 2000. Average non-interest-bearing deposits for the year ended December 31, 2001 were $32.6 million compared with $23.7 million in 2000, an increase of $8.9 million or 37.6%. For the year ended December 31, 2001 and 2000, approximately 10.2% and 9.4%, respectively, of average deposits were non-interest-bearing.

The Company actively solicits time deposits from
its customers. In addition, the Company receives time deposits from government municipalities and utility districts. These time deposits generally renew at maturity and have provided a stable base of time deposits.
The Company believes that based on its historical experience time deposits greater than $100,000
have core-type characteristics. Of the $80.6 million of time deposits greater
than $100,000 at December 31, 2001, approximately $56.3 million or 69.6% have been with the Company longer than one year.
In pricing time deposits, the Company seeks to be competitive but generally
prices near the middle of the given market.

The

|                                       | As of December 31,          
|-------------------------------------- | ----------------------------
|                                       | 2001                        
|                                       | Amount                      
|                                       | (Dollars
      in thousands)
|Interest-bearing deposits:             |                             
|NOW
      accounts                     | $  27,395                   
|Money
      market deposit accounts    | 95,236                      
|Time
      deposits less than $100,000 | 90,678                      
|Time
      deposits $100,000 and over  | 73,163                      
|Total interest-bearing deposits        | 286,472                     
|Noninterest-bearing deposits           | 32,582                      
|Totaldeposits                          | $ 319,054                   
|                                       | ========                    

The following table sets forth the amount of the Company's time deposits that are $100,000 or greater by time remaining until maturity:

As
    of December 31, 2001(Dollars in thousands)
Three months or less
  $   33,444Over three through six
    months
  24,198Over six through 12
    months
  13,786Over 12 months

  9,205Total
  $ 
    80,633========


Federal Home Loan Bank and Other Borrowings

The Bank maintains an arrangement with the
FHLB to provide for certain borrowing needs and diversify the funding sources.
The arrangement requires the Bank to hold stock in the FHLB and requires the
Bank to pledge investment securities, to be held by the FHLB, or loans as
collateral.

At December 31, 2001, and 2000, indebtedness
to the FHLB totaled $89.0 million and $34.7 million, respectively. During the year ended December 31, 2001, the Company
repaid four loans totaling $34.7 million, of which one, for $20.2 million, had a
fixed interest rate of 6.61% and the remaining three, totaling $14.5 million,
were at the three month LIBOR less five basis points. Also during the year ended
December 31, 2001, the Company entered into seven new loans with the FHLB
totaling $89.0 million. Of this amount, five loans totaling $54.0 million are
fixed rate advances, whose interest rate is fixed for periods between two and
three years bearing an average weighted rate of 4.56% and two loans totaling
$35.0 million reprice quarterly at the three-month LIBOR less six basis points.
In addition to FHLB loans at December 31, 2000, the Company had a $1.5 million
loan from a financial institution to partially fund TBON Leasing's lease
portfolio.

On December 31, 2001 and 2000, the Company had
available for its use $38.5 million, and $34.5 million, respectively, of
unsecured short-term bank lines of credit. Such short-term lines serve as backup
for temporary loan and investment needs. There are no compensating balance
requirements. These lines facilitate federal funds borrowings and bear a rate
equal to the current lending rate for federal funds purchased.  There were
no amounts outstanding under these lines of credit at December 31, 2001 and
2000, respectively, and $5.0
million outstanding at December 31, 1999.

|                                                | Years Ended December
      31,
|----------------------------------------------- | ------------------------------
|                                                | 2001                          
|                                                | (Dollars in
      thousands)  
|Federal funds purchased:                        |                               
|At December 31                                  | $        
      --            
|Average during the year                         | 1,167                         
|Maximum month-end balance during
      the year | 8,500                         
|FHLB notes:                                     |                               
|At December 31                                  | $  89,000                     
|Average during the year                         | 69,910                        
|Maximum month-end balance during
      the year | 98,500                        
|Other short-term borrowings:                    |                               
|At December 31                                  | $        
      --            
|Average during the year                         | 1,341                         
|Maximum month-end balance
      during the year | 2,138                         

Interest Rate Sensitivity and Interest Rate Risk Management

The Company's Funds Management Policy provides Management with the necessary guidelines for effective funds Management, and the Company has established a measurement system for monitoring its net interest rate sensitivity position. The Company manages its sensitivity position within established guidelines.

The Company's Asset and Liability Committee ("ALCO"), comprised of directors and senior officers of the Company, is charged with the management of Interest rate risk in accordance with policies approved by the Company's Board of Directors. The ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economy, liquidity, business strategies and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.

Management uses two methodologies to manage interest rate risk:
(i) an analysis of relationships between interest-earning assets and interest-bearing liabilities and (ii) an interest rate shock simulation model. The Company has traditionally managed its business to reduce its overall exposure to changes in interest rates, however, under current policies of the Company's Board of Directors, Management has been given some latitude to increase the Company's interest rate sensitivity position within certain limits if, in Management's judgment, it will enhance profitability. As a result, changes in market interest rates may have a greater impact on the Company's financial performance in the future than they have had historically.

An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time ("GAP") and by analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. A company is considered to be asset sensitive, or having a positive GAP, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or having a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect adversely net interest income, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest
income.
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 affect
net interest income adversely.

GAP reflects a one-day position that is continually changing and is not indicative of the Company's position at any other time. While the GAP position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates. For example, the GAP position reflects only the prepayment assumptions pertaining to the rate environment prevalent at the time of the measurement. Assets tend to prepay faster during periods of declining interest rates than during periods of rising interest rates; because of this and other risk factors not contemplated by the GAP position, an institution could have a matched GAP position in the current rate environment and still have its net interest income exposed to increased rate risk.
The following table sets forth an interest rate sensitivity analysis for the Company at December 31,
2001:

> Volumes Subject to
> Repricing Within

|                                                        | 0-30Days   | 31-180Days    | 181-365Days     | 1-3Years      | 3-5Years      | 6-10Years     | Over 10Years | Total     
|------------------------------------------------------- | ---------- | ------------- | --------------- | ------------- | ------------- | ------------- | ------------ | ----------
|(Dollars in
thousands)                                 
|Interest-earning assets:                                |            |               |                 |               |               |               |              |           
|Securities                                              | $    5,649 | $    9,712    | $   11,657      | $ 34,751      | $   20,136    | $   18,250    | $ 13,201     | $ 113,356 
|Total loans                                             | 185,545    | 15,686        | 16,954          | 73,619        | 43,022        | 7,604         | 480          | 339,937   
|Federal funds sold and other
     temporary investments | 4,550      | --            | --              | --            | --            | --            | --           | 4,550     
|Total interest-earning
                
assets          | $ 192,771  | $   25,398    | $    28,611     | $ 108,370     | $ 63,158      | $  25,854     | $  13,681    | $ 457,843 
|                                                        | =======    | =======       | =======         | =======       | ======        | =======       | =======      | =======   
|Interest-bearing liabilities:                           |            |               |                 |               |               |               |              |           
|Demand, money market and
      NOW accounts             | $ 129,983  | $          -- | $            -- | $          -- | $          -- | $          -- | $          - | $ 129,983 
|Time deposits                                           | 25,542     | 87,397        | 30,320          | 19,701        | 9,432         | 10,000        | --           | 181,392   
|Other borrowings                                        | 10,000     | 39,000        | --              | --            | --            | 40,000        | --           | 89,000    
|Total
interest-bearing
                 
liabilities    | $ 164,525  | $ 126,397     | $   30,320      | $   19,701    | $   9,432     | $   50,000    | $         -- | $ 400,375 
|                                                        | =======    | =======       | =======         | =======       | =======       | =======       | =======      | =======   
|Period GAP                                              | $   28,246 | $ (100,999)   | $   (1,709)     | $   88,669    | $  53,726     | $ (24,146)    | $ 13,681     | $   57,468
|Cumulative GAP                                          | 28,246     | (72,753)      | (74,462)        | 14,207        | 72,254        | 48,108        | 61,789       |           
|Period GAP to total assets                              | 5.86%      | (21.34)%      | (0.36)%         | 18.73%        | 11.35%        | (5.10)%       | 2.89%        | --%       
|Cumulative GAP to total
        assets                  | 5.86%      | (17.37)       | (14.82)         | 3.00          | 14.35         | 9.25          | 12.14        | 11.91     
|Interest-earning assets to interest-bearing
liabilities | 117.17     | 20.09         | 94.36           | 550.07        | 669.61        | 51.71         | NM           | 114.35    

The preceding table provides Management with repricing data within given time frames. The purpose of this information is to assist Management in the elements of pricing and of matching interest sensitive assets with interest sensitive liabilities within time frames. The table indicates that at December 31, 2001, the Company was
asset sensitive up to a 30-day period and liability sensitive for the period
between 31 days up to and including one year. The cumulative negative GAP for
the time periods up to and including one year was $74.5 million. With this
condition, in a declining or stable rate environment the Company would see net
income improve up to a one-year period, as more liabilities would reprice at
lower rates.

As a financial institution, the Company's primary component of market risk is interest rate risk, or the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. Ultimately, fluctuations in interest rates will impact liquidity, the level of income and expense recorded on most of the Company's assets and liabilities, and the market value of interest-earning assets and interest-bearing liabilities -- other than those which have a short term to maturity. The Company is not subject to foreign exchange or commodity price risk. The Company does not own any trading assets.

The Company's exposure to market risk is reviewed on a regular basis by the ALCO. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify, monitor,
and manage the risks.

The Company applies an economic value of equity ("EVE") methodology to gauge its interest rate risk exposure as derived from its simulation model. Generally, EVE is the discounted present value of the difference between incoming cash flows on interest-earning assets and other investments and outgoing cash flows on interest-bearing liabilities. The application of the methodology attempts to quantify interest rate risk by measuring the change in the EVE that would result from a theoretical instantaneous and sustained 200 basis point shift in market interest rates.

Presented below, as of December 31, 2001, is an analysis of the Company's interest rate risk as measured by changes in EVE for parallel shifts of 200 basis points in market interest rates:

|Change in Rates   | $
        Change in EVE
        (In Thousands) | % Change in EVE | EVE
        as a % of
        Present Value of Assets
|----------------- | ---------------------------------------------- | --------------- | -----------------------------------------------------
|                  |                                                |                 | EVE Ratio                                            
|-200
        bps. | $ 
        3,835                               | 9.95%           | 7.86%                                                
|0
        bps.    | ---                                            | ---             | 7.25%                                                
|+200
        bps. | $
        (3,971)                              | (9.89)%         | 6.61%                                                

The percentage change in EVE as a result of a 200 basis point decrease in interest rates at December 31, 2001 was
9.95% compared with
5.01% as of December 31, 2000. The percentage change in EVE as a result of a 200 basis point increase in interest rates on December 31, 2001 of
9.89%
compared with 4.74% change as of December 31, 2000.

The Company's EVE is most directly affected by the convexity and duration of its investment portfolio. The duration and negative convexity of the Company's investment portfolio produce disproportionate effects on the value of the portfolio with changes in interest rates. Convexity measures the percentage of portfolio price appreciation or depreciation relative to a decrease or increase in interest rates. The higher the negative convexity, the greater the decline in the value of a fixed income security as interest rates increase. The Company's investment portfolio is primarily comprised of long-term, fixed income securities, the value of which would be adversely affected in a rising interest rate environment.

Management believes that the EVE methodology overcomes three shortcomings of the typical maturity GAP methodology. First, it does not use arbitrary repricing intervals and accounts for all expected future cash flows. Second, because the EVE method projects cash flows of each financial instrument under different interest rate environments, it can incorporate the effect of
cash flow fluctuationson
mortgage related securities on an institution's interest rate risk exposure. Third, it allows interest rates on different instruments to change by varying amounts in response to a change in market interest rates, resulting in more accurate estimates of cash flows.

As with any method of gauging interest rate risk, however, there are certain shortcomings inherent to the EVE methodology. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also misstate historical rate patterns which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or repricing will react identically to changes in rates. In reality, the market value of certain types of financial instruments may adjust in anticipation of changes in market rates, while any adjustment in the valuation of other types of financial instruments may lag behind the change in general market rates. Additionally, the EVE methodology does not reflect the full impact of contractual restrictions on changes in rates for certain assets, such as adjustable rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from time deposits may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that higher rates may have on the ability of adjustable-rate loan clients to service their debt. All of these factors are considered in monitoring the Company's exposure to interest rate risk.

The prime rate in effect for both December 31, 2001 and December 31, 2000 was 4.75% and 9.50%, respectively. Management believes that in the short term the prime rate will remain relatively stable.

Liquidity

Liquidity involves the Company's ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing basis. Liquidity is managed to ensure there is sufficient funding to satisfy demand for credit, deposit withdrawals and attractive investment opportunities. A large, stable core deposit base, and a strong capital position are the solid foundation for the Company's liquidity position.

The Company's liquidity needs are met primarily by financing activities, consisting mainly of core deposits, but also include borrowed funds and cash flows from operations. Customer-based core deposits, the Company's largest and most cost-effective source of funding,
totaled $239.5 million representing 68.4% of total deposits at December 31, 2001
compared to $191.2 million or 70.0% at December 31, 2000. Net borrowed funds, which primarily include short-term funds purchased and sold, wholesale and brokered domestic deposits, FHLB and other short-term borrowings, were $89.0 million at
December 31, 2001, compared with $36.2 million at December 31, 2000. Cash flows from operations are also a significant source of liquidity. Net cash from operations primarily results from net income adjusted for noncash items such as depreciation and amortization, provision for loan and lease losses, and deferred tax items.

Liquidity is strengthened by ready access to a diversified base of wholesale funding sources. These sources include federal funds purchased, securities sold under agreements to repurchase, certificates of deposit, and FHLB advances. Liquidity is also available through unpledged loans and securities in the investment portfolio.

The Company has a contingency funding plan that stress-tests liquidity needs that may arise from certain events such as rapid loan growth or significant deposit runoff. The plan also provides for continual monitoring of net borrowed funds dependence and available sources of liquidity. Management believes the Company has the funding capacity to meet operational and contingent liquidity needs.

Subject to certain limitations, the Bank
is eligible for certain borrowing programs through the FHLB. Generally, most advances require delivery of eligible securities as collateral. Maturities under these programs range from one day to 20 years. FHLB advances can be particularly attractive as a longer-term funding source to balance interest rate sensitivity and reduce interest rate risk. During the year ended December 31, 2001, the Company used the FHLB borrowing proceeds to acquire fixed income securities in an effort to utilize its leverage capacity and increase earnings and minimize the results that a declining rate environment would have on its income stream, and to diversify its funding costs.

At December 31, 2001, the Company was using three of the 17 borrowing programs for which it is eligible through the FHLB totaling $89.0 million. The first, the LIBOR Advance is a source of term financing priced at a spread to the prevailing rates on one- and three-month LIBOR, with maturities ranging from 12 months up to a maximum of 120 months. At December 31, 2001 the Company had two loans totaling $35.0 million under this program. The second program, the Repo Advance is a source of liquidity with terms and conditions comparable to those available in the market for short-term repurchase agreements. Borrowers specify term to maturity from one day to one year. The interest rate is fixed for the term of the advance. At December 31, 2001 and 2000, the Company had one loan for $14.0 million outstanding under this program. The third program, the Convertible Fixed Rate Advance, provides the Company with a fixed rate loan for a determined period of time after which it converts to a floating rate advance. Upon such event, the Company is able to prepay the advance without incurring a penalty fee. At December 31, 2001, the Company had four loans totaling $40.0 million outstanding under this program. As a requirement to these advances, the Company currently maintains some of its investment securities in safekeeping at the FHLB.

The following table summarizes the Company's
total contractual obligations and commercial commitments as of December 31,
2001.

|                                                             | Year ended December 31, 2001
|------------------------------------------------------------ | ----------------------------
|                                                             | Within One
      Year       
|                                                             | (Dollars
      in thousands)
|Short term FHLB debt                                         | $  14,000                   
|Long-term FHLB debt                                          | --                          
|Operating leases                                             | 826                         
|Other long-term obligations                                  | --                          
|Total contractual cash
                   
      obligations | $  14,826                   
|                                                             | ========                    



|                                                                       | Year ended December 31, 2001
|---------------------------------------------------------------------- | ----------------------------
|                                                                       | Within One
      Year       
|                                                                       | (Dollars
      in thousands)
|Standby letters of credit                                              | $   6,160                   
|Undisbursed construction loans                                         | 15,377                      
|Unused lines of credit                                                 | 74,735                      
|Other loan commitments                                                 | 490                         
|Total loan commitments and
                   
      letters of credit | $ 96,762                    
|                                                                       | =======                     

Due to the nature of the Company's unfunded
loan commitments, including unfunded lines of credit, the amounts presented
above do not necessarily represent amounts the Company anticipates funding in
the time periods presented above.

Capital Resources

Capital management consists of providing equity to support both current and future operations. The Company is subject to capital adequacy requirements imposed by the Federal Reserve Board and the Bank is subject to capital adequacy requirements imposed by the Federal Reserve and the TDFI. The Federal Reserve Board, the Federal Reserve and the TDFI have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The risk-based capital standards of the Federal Reserve Board require all bank holding companies to have
a "Leverage Ratio" of at least 3.0%, "Tier 1 capital" of at
least 4.0% and "total risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted assets.
Leverage ratio is calculated by dividing total assets into total equity,
excluding other comprehensive income. "Tier 1 capital" generally includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings, less deductions for goodwill and various other intangibles. "Tier 2 capital" may consist of a limited amount of intermediate-term preferred stock, a limited amount of term subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier 1 capital and a limited amount of the general valuation allowance for loan
and lease losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based capital."

The Federal Reserve Board has also adopted guidelines which supplement the risk-based capital guidelines with a minimum ratio of Tier 1 capital to average total consolidated assets ("leverage ratio") of 3.0% for institutions with well diversified risk, including no undue interest rate exposure; excellent asset quality; high liquidity; good earnings; and that are generally considered to be strong banking organizations, rated composite 1 under applicable federal guidelines and that are not experiencing or anticipating significant growth. Other banking organizations are required to maintain a leverage ratio of at least 4.0% to 5.0%. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets.

Pursuant to FDICIA, each federal banking agency revised its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily mortgages. The Bank is subject to capital adequacy guidelines of the Federal Reserve that are substantially similar to the Federal Reserve Board's guidelines. Also pursuant to FDICIA, the Federal Reserve has promulgated regulations setting the levels at which an insured institution such as the Bank would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The Bank is classified "well capitalized" for purposes of the Federal Reserve's prompt corrective action regulations. See "Supervision and Regulation
-- The Company" and " -- The Bank."

Shareholders' equity decreased from $42.3 million at December 31, 2000 to $38.6 million at December 31, 2001, a decrease of $3.7 million or 8.75%. This decrease was the result of the stock repurchase program commenced in 1999, which continued during
2001, coupled with $2.2
million in dividends paid, these were partially offset by net income of $3.3 million for the year ended December 31, 2001.

The following table provides a comparison of the Company's and the Bank's leverage and risk-weighted capital ratios as of December 31, 2001 to the minimum and well-capitalized regulatory standards:

|                                                                                                                                                                    | Minimum
    Required |  | Well
    Capitalized |  | Actual
    Ratio at
    December 31, 2001
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- |  | -------------------- |  | -----------------------------------------
|The Company                                                                                                                                                         |                      |  |                      |  |                                          
|Leverage ratio(1)                                                                                                                                                   | 3.00%                |  | N/A                  |  | 8.55%                                    
|Tier
    1 risk-based capital ratio                                                                                                                                 | 4.00                 |  | N/A                  |  | 9.82                                     
|Risk-based capital ratio                                                                                                                                            | 8.00                 |  | N/A                  |  | 11.07                                    
|The Bank                                                                                                                                                            |                      |  |                      |  |                                          
|Leverage ratio(1)                                                                                                                                                   | 3.00%                |  | 5.00%                |  | 7.88%                                    
|Tier
    1 risk-based capital ratio                                                                                                                                 | 4.00                 |  | 6.00                 |  | 9.04                                     
|Risk-based capital ratio                                                                                                                                            | 8.00                 |  | 10.00                |  | 10.30                                    
|(1) The
    Federal Reserve Board may require the Company and Bank to maintain a leverage ratio
    of up to 200 basis points above the
          required minimum.



NEW ACCOUNTING PRONOUNCEMENTS.

Business Combinations, Goodwill, and Intangible Assets.In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement No. 141 ("SFAS 141"), Business Combinations, and Statement No. 142 ("SFAS 142"),
Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 also specifies criteria
that intangible assets, acquired in a purchase method business combination, must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.

The Company adopted the provisions of SFAS 141 in 2001 and is required to adopt SFAS 142 effective January 1, 2002.
Upon adoption of SFAS 142, goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination will not be amortized, but will continue to be evaluated for impairment.

Upon adoption of SFAS 142, the Company must evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill.
The Company will also be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

In connection with SFAS 142's transitional goodwill impairment evaluation, SFAS 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings.

At December 31, 2001, the Company had unamortized goodwill of
$201,840, which will be subject to the transition provisions of SFAS 141 and
142. Amortization expense related to goodwill was $15,941 for the year ended December 31, 2001. Because of the
small amount of unamortized goodwill at December 31, 2001, the Company does not
expect SFAS 142 to have a significant impact on its financial statements.

Asset Retirement Obligations.In July 2001,
the FASB issued SFAS No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". That standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity will capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after
June 15, 2002, with earlier adoption permitted. The Company
does not expect SFAS 143 to have a significant impact on its financial
statements.

Impairment. In August 2001, the FASB issued SFAS No. 144
("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both
SFAS No. 121("SFAS 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("Opinion 30"), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset that is used, as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business).

The Company is required to adopt SFAS 144 no later than January 1, 2002. Management does not expect the adoption of SFAS 144 
to have a material impact on the Company's financial statements because the impairment assessment under SFAS 144 is largely unchanged from SFAS 121.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK

For information regarding the market risk of the Company's financial instruments, see "--
Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity and
Interest Rate Risk Management." The Company's principal market risk exposure is to interest rates.

ITEM 8.    FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the financial statements, the reports thereon, the notes thereto and supplementary data commencing at page F-1 of this Form 10-K, which financial statements, reports, notes and data are incorporated
herein by reference.

QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table represents summarized data for each of the quarters
during fiscal years 2001 and
2000.

|                                                                                     | 2001                                       
|------------------------------------------------------------------------------------ | -------------------------------------------
|                                                                                     | For
      the three
      months ended     
|                                                                                     | December
      31                          
|                                                                                     | (In thousands, except per
      share data)
|                                                                                     |                                            
|Interest income                                                                      | $     
      8,504                         
|Interest expense                                                                     | 4,012                                      
|Net interest
      income                                                            | 4,492                                      
|Provision for loan and lease losses                                                  | 616                                        
|Net interest
      income after provision for loan and
                 lease losses | 3,876                                      
|Noninterest income                                                                   | 1,528                                      
|Noninterest expense                                                                  | 4,039                                      
|Income before
      provision for income taxes                                       | 1,365                                      
|Provision for income taxes                                                           | 598                                        
|Net income                                                                           | $       
      767                         
|                                                                                     | =======                                    
|Income per share:                                                                    |                                            
|Basic                                                                                | $    
      0.25                           
|Diluted                                                                              | $    
      0.25                           
|Weighted Average
      Common Shares Outstanding:                                    |                                            
|Basic                                                                                | 3,015                                      
|Diluted                                                                              | 3,064                                      



|                                                                                     | 2000                                       
|------------------------------------------------------------------------------------ | -------------------------------------------
|                                                                                     | For
      the three
      months ended     
|                                                                                     | December
      31                          
|                                                                                     | (In thousands, except per
      share data)
|                                                                                     |                                            
|Interest income                                                                      | $     
      7,828                         
|Interest expense                                                                     | 3,926                                      
|Net interest
      income                                                            | 3,902                                      
|Provision for loan and lease losses                                                  | 449                                        
|Net interest
      income after provision for loan and
                 lease losses | 3,453                                      
|Noninterest income                                                                   | 795                                        
|Noninterest expense                                                                  | 2,943                                      
|Income before
      provision for income taxes                                       | 1,305                                      
|Provision for income taxes                                                           | 531                                        
|Net income                                                                           | $       
      774                         
|                                                                                     | =======                                    
|Income per share:                                                                    |                                            
|Basic                                                                                | $    
      0.23                           
|Diluted                                                                              | $    
      0.23                           
|Weighted Average
      Common Shares Outstanding:                                    |                                            
|Basic                                                                                | 3,450                                      
|Diluted                                                                              | 3,451                                      



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

There have been no disagreements with
accountants on any matter of accounting principles or practices or financial
statement disclosures during the two-year period ended December 31, 2001.

---

PART III

ITEM 10.    DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY

The information under the captions "Election of Directors", "Continuing Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended (the "2002 Proxy Statement"), is incorporated herein by reference in response to this item.

ITEM 11.    EXECUTIVE
COMPENSATION

The information under the caption "Executive Compensation and Other Matters" in the 2002 Proxy Statement is incorporated herein by response to this item.

ITEM 12.    SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the caption "Beneficial Ownership of Common Stock by Management of the Company and Principal Shareholders" in the 2002 Proxy Statement is incorporated herein by response to this item.

ITEM 13.    CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Interests of Management and Others in Certain Transactions" in the
2002 Proxy Statement is incorporated herein by response to this item.

---

PART IV

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

(A)
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Reference is made to the Consolidated Financial Statements, the reports thereon, the notes thereto and supplementary data commencing at page F-1 of this Annual Report on Form 10-K. Set forth below is a list of such Consolidated Financial Statements:

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 2001 and 2000

Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999

Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the Years Ended 
         December 31, 2001, 2000 and 1999

Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999

Notes to Consolidated Financial Statements

FINANCIAL
STATEMENT SCHEDULES

All supplemental schedules are omitted as inapplicable or because the required information is included in the Consolidated Financial Statements or notes thereto.

(B) REPORTS
ON FORM 8-K

Not applicable

(C) EXHIBITS

Each exhibit marked with an asterisk is filed with this Annual Report on Form 10-K.



|EXHIBIT |   | COMMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1       | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2       | - | Plan of acquisition, reorganization, arrangement, liquidation, or succession. None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3       |   | Articles of Incorporation and By-Laws, incorporated by reference
to exhibit 3 to the Registrants' Annual Report Form 10-K for the year ended
December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4       |   | Instruments defining the rights of security holders, including
indentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.01    |   | Form of specimen Certificate of Common Stock, incorporated by
reference to exhibit 4.01 to the Registrant's Annual Report Form 10-K for the
year ended December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.02    |   | Community Financial Group, Inc., and Registrar and Transfer
Company, as Rights Agent, Shareholders Rights Agreement dated as of January 21,
1998, incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-A
dated January 26, 2998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|5       |   | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|6       |   | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|7       |   | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|8       |   | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|9       |   | Voting Trust Agreement. None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10      | - | Material Contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.01*  | - | Lease Agreement dated November 20, 2000 between The Bank of Nashville and Carothers at Bakers Bridge,
LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.02*  | - | Option Agreement dated July 16, 1996 by and
between Community Financial Group, Inc., and Mack S. Linebaugh, Jr.,
incorporated by reference to exhibit 10.03 to the Registrant's Annual Report
Form 10-KSB for the year ended December 31, 1996 (SEC File No. 000-28496, Film
No. 97566529), and amendments thereto dated August 22, 2000, incorporated by
reference to exhibit 10.01 to the Registrant's Annual Report Form 10-K for the
year ended December 31, 2000. Amendments to Non-Qualified Stock Option Agreement
dated February 8, 2000, May 13, 1999, April 21, 1998, and April 29, 1997, all of
which Amendments are dated August 22, 2000 incorporated by reference to exhibit
10.01 to the Registrant's Annual Report Form 10-K for the year ended December
31, 2000.
|10.03*  | - | Option Agreement dated July 16, 1996 by and
between Community Financial Group, Inc., and Julian C. Cornett incorporated by
reference to exhibit 10.04 to the Registrant's Annual Report Form 10-KSB for the
year ended December 31, 1996 (SEC File No. 000-28496, Film No. 97566529), and
amendments thereto dated August 22, 2000, incorporated by reference to exhibit
10.01 to the Registrant's Annual Report Form 10-K for the year ended December
31, 2000. Amendments to Non-Qualified Stock Option Agreement dated February 8,
2000, May 13, 1999, April 21, 1998, and April 29, 1997, all of which Amendments
are dated August 22, 2000 incorporated by reference to exhibit 10.02 to the
Registrant's Annual Report Form 10-K for the year ended December 31, 2000.      
|10.05   |   | Option Agreement by and between Community Financial Group, Inc.
and J. Hunter Atkins dated August 20, 2000, incorporated by reference to exhibit
10.03 to the Registrant's Annual Report Form 10-K for the year ended December
31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.06   |   | Option Agreement by and between Community Financial Group, Inc.
and Attilio F. Galli dated August 21, 2000, incorporated by reference to exhibit
10.04 to the Registrant's Annual Report Form 10-K for the year ended December
31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.07*  |   | Option Agreement by and between Community Financial Group, Inc.
and J. Hunter Atkins dated June 19, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.08*  |   | Option Agreement by and between Community Financial Group, Inc.
andAttilio F. Gallidated June 19, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.09*  |   | Option Agreement by and between Community Financial Group, Inc.
and Julian C. Cornettdated June 19, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.10*  |   | Lease Agreement dated January 23, 2002 by and between The Bank of
Nashville and Richard W. Carpenter, Sr., and Richard S. Davis, Jr.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.11   |   | Lease Agreement dated July 19, 1989 between The Bank of Nashville
and Metropolitan Life Insurance Company, incorporated by reference to Exhibit
10.05 to the Registrant's Annual Report Form 10-KSB for the year ended December
31, 1996 (SEC File No. 000-28496, Film No. 97566529). Metropolitan Life
Insurance Company has been succeeded as property owner by LC Tower, L.L.C.                                                                                                                                                                                                                                                                                                                                                                                                
|10.12   |   | Lease Agreement dated August 7, 1996 between The Bank of
Nashville and Coleman Partners, a Tennessee Partnership, incorporated by
reference to Exhibit 10.06 to the Registrant's Annual Report Form 10-KSB for the
year ended December 31, 1996 (SEC File No. 000-28496, Film No. 97566529).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.13   |   | The Bank of Nashville Retirement Savings Plan, incorporated by
reference to Exhibit 10.07 to the Registrant's Annual Report Form 10-KSB for the
year ended December 31, 1996 (SEC File No. 000-28496, Film No. 97566529) and
amendment No. 1 to said plan filed as Exhibit 99.1 to Registrant's Form S-8
filed July 27, 2000 (SEC File No. 333-42328, Film No. 679755).                                                                                                                                                                                                                                                                                                                                                                                                           
|10.14   |   | Associates' Stock Purchase Plan, incorporated by reference to
Exhibit 10.08 to the Registrant's Annual Report Form 10-KSB for the year ended
December 31, 1996 (SEC File No. 000-28496, Film No. 97566529).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.15   |   | Community Financial Group, Inc. 1997 Nonstatutory Stock Option
Plan, incorporated by reference to Exhibit 10.09 to the Registrant's Form S-2
(SEC File No. 333-24309) dated April 1, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.16   |   | Lease Agreement dated August 4, 1997 between The Bank of
Nashville and Graystone, LLC. Incorporated by Exhibit 10.10 to the Registrant's
Annual Report Form 10KSB (SEC File No. 000-28496, Film No. 98579662).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.17   |   | First Amendment to the Lease Agreement dated April 13, 1999
between The Bank of Nashville and LC Tower, LLC. Incorporated by reference to
Exhibit 10.23 to the Registrant's Annual Report Form 10K for the year ended
December 31, 1999 (SEC File No. 000-28496, Film No. 585946).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.18   |   | Second Amendment to the Lease Agreement dated June 20, 2000
between The Bank of Nashville and LC Tower, LLC. Incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report Form 10-K for the year ended
December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.19*  |   | Executive Termination Agreement by and between Community Financial Group, Inc., The
Bank of Nashville, and Julian C. Cornett dated March 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|10.20*  |   | Executive Termination Agreement by and between Community Financial Group, Inc., The
Bank of Nashville, and C. Blake Parks initially entered into on March 1, 2001
and extended on March 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.21*  |   | Executive Employment Agreement by and between Community
Financial Group, Inc., The Bank of Nashville, and J. Hunter Atkins initially
entered into on September 15, 2000 as extended on March 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.22*  |   | Executive Employment Agreement by and between Community
Financial Group, Inc., The Bank of Nashville, and Attilio F. Galli initially
entered into on March 1, 2001 as amended and extended on March 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|11      | - | Statement re computation of earnings per share, included as Note
(L) to the Consolidated Financial Statements on Page F-8 of this Form 10K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|12      | - | Statement re computation of ratios. Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|13      | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|14      | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|15      | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|16      | - | Letter re change in certifying accountant. Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|17      | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|18      | - | Letter re change in accounting principles. Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|19      | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|20      | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|21      | - | Subsidiaries of the registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|22      | - | Published report regarding matters submitted to vote of security holders. None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|23      | - | Consent of KPMG, LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|24      | - | Power of Attorney. None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|25      | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|26      | - | Not required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|99      | - | Additional Exhibits. None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 Community Financial Group Inc, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville and State of Tennessee on March
19, 2002.

COMMUNITY FINANCIAL GROUP, INC.

By:/s/ J. HUNTER ATKINS

J. Hunter Atkins

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the indicated capacities on March
19, 2002.

Signature

Position


/s/
        J. HUNTER ATKINS
      President and Chief Executive OfficerJ. Hunter Atkins
      (principal executive officer)


|/s/ ATTILIO F. GALLI | Chief FinancialOfficer      
|-------------------- | ----------------------------
|Attilio F. Galli     | (principal financialofficer)
|                     |                             

|MACK S. LINEBAUGH |         
|----------------- | --------
|Mack S. Linebaugh | Director
|                  |         

|L.
      LEON MOORE |         
|------------------- | --------
|L.
    Leon Moore   | Director
|                    |         

|J.
      B. BAKER |         
|----------------- | --------
|J. B. Baker       | Director
|                  |         

|/s/PERRY W. MOSKOVITZ |         
|--------------------- | --------
|Perry W. Moskovitz    | Director
|                      |         

|/s/ JO D. FEDERSPIEL   |         
|---------------------- | --------
|Jo D.
      Federspiel | Director
|                       |         

|RICHARD H. FULTON |         
|----------------- | --------
|Richard H. Fulton | Director
|                  |         

|/s/ C. NORRIS NIELSEN |         
|--------------------- | --------
|C. Norris Nielsen     | Director
|                      |         

|/s/ DAVID M. RESHA |         
|------------------ | --------
|David M. Resha     | Director
|                   |         

|/s/ G. EDGAR THORNTON |         
|--------------------- | --------
|G. Edgar Thornton     | Director
|                      |         

---

INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES

|                                                                                                                                                                   | PAGE 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----
|                                                                                                                                                                   |      
|Report of Management's
      Responsibility for Financial Reporting                                                                                                | F - 2
|Independent Auditors'
      Report                                                                                                                                 | F - 3
|Consolidated Balance
      Sheets as of December 31, 2001 and 2000                                                                                                 | F - 4
|Consolidated
      Statements of Income for the Years Ended December 31, 2001, 2000 and 1999                                                                       | F - 5
|Consolidated
      Statements of Changes in Shareholders' Equity and Comprehensive Income for
      the Years Ended 
             December 31, 2001, 2000 and 1999 | F - 6
|Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and
      1999                                                             | F - 7
|Notes to Consolidated
      Financial Statements                                                                                                                   | F - 8

---

REPORT OF
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The Management of Community Financial Group, Inc. and subsidiaries (the "Company") is responsible for preparing the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The amounts therein are based on Management's best estimates and judgments. Management has also prepared other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements.

The Company maintains a system of internal accounting control which Management believes, taken as a whole, is sufficient to provide reasonable assurance that assets are properly safeguarded and that transactions are executed in accordance with proper authorization and are recorded and reported properly. In establishing and maintaining any system of internal accounting control, estimates and judgments are required to assess the relative costs and expected benefits. The Company also maintains a program that independently assesses the effectiveness of 
its
internal controls.

The Company's consolidated financial statements have been audited by independent certified public accountants. Their Independent Auditors' Report, which follows, is based on an audit made in accordance with auditing standards generally accepted in the United States of America and expresses an opinion as to the fair presentation of the Company's consolidated financial statements. In performing their audit, the Company's independent certified public accountants consider the Company's internal control to the extent they deem necessary in order to issue their opinion on the consolidated financial statements.

The Board of Directors pursues its oversight role for the consolidated financial statements through the Audit Committee, which consists solely of outside directors. The Audit Committee meets periodically with both Management and the independent
certified public accountants to assure that each is carrying out its responsibilities.

/s/
 J. Hunter Atkins

J. Hunter Atkins
President and CEO

March 19, 2002

F - 2

---

INDEPENDENT AUDITORS' REPORT



The Board of Directors and Shareholders
Community Financial Group, Inc.:

We have audited the accompanying consolidated balance sheets of Community Financial Group, Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community Financial Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP
Nashville, Tennessee
January 15, 2002

F - 3

---

COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)

|                                                                                                                                                                | December 31,     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------
|                                                                                                                                                                | 2001             
|ASSETS                                                                                                                                                          |                  
|Cash and due from banks                                                                                                                                         | $   
      18,217
|Federal funds sold and other temporary
      investments                                                                                                        | 4,550            
|Investment securities available-for-sale
           (amortized cost of $112,423 in 2001 and $62,678
      in 2000)                                              | 113,356          
|Residential mortgage
      loans
      held-for-sale                                                                                                            | 2,366            
|Loans and leases (net of
      unearned income of $2,590 in 2001 and $2,886 in 2000                                                                             |                  
|Commercial                                                                                                                                                      | 138,327          
|Real estate - mortgage loans                                                                                                                                    | 114,965          
|Real estate - construction loans                                                                                                                                | 45,481           
|Consumer                                                                                                                                                        | 32,539           
|Lease financing                                                                                                                                                 | 8,625            
|Loans and leases, net of unearned income                                                                                                                        | 339,937          
|Less allowance for loan and lease losses                                                                                                                        | (5,098)          
|Total net loans and leases                                                                                                                                      | 334,839          
|Premises and equipment, net                                                                                                                                     | 4,166            
|Accrued interest receivable and other assets                                                                                                                    | 4,817            
|Total assets                                                                                                                                                    | $ 
      482,310 
|                                                                                                                                                                | ========         
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                            |                  
|Deposits:                                                                                                                                                       |                  
|Noninterest-bearing                                                                                                                                             | $ 
      38,572  
|NOW accounts                                                                                                                                                    | 36,562           
|Money market accounts                                                                                                                                           | 93,421           
|Time deposits less than $100,000                                                                                                                                | 100,759          
|Time deposits greater than $100,000                                                                                                                             | 80,633           
|Total deposits                                                                                                                                                  | 349,948          
|Federal Home Loan Bank and other borrowings                                                                                                                     | 89,000           
|Accounts payable and accrued liabilities                                                                                                                        | 4,738            
|Total liabilities                                                                                                                                               | 443,685          
|Commitments and contingencies                                                                                                                                   | --               
|Shareholders' equity:                                                                                                                                           |                  
|Common stock, $6 par value; authorized 50,000,000 shares; issued and
      outstanding
                 shares of
      3,077,071 in 2001 and 3,425,850 in 2000 | 18,462           
|Additional paid-in capital                                                                                                                                      | 10,640           
|Retained earnings                                                                                                                                               | 9,282            
|Accumulated other comprehensive income, net of tax                                                                                                              | 241              
|Total shareholders' equity                                                                                                                                      | 38,625           
|Total liabilities and shareholders' equity                                                                                                                      | $ 
      482,310 
|                                                                                                                                                                | ========         









See accompanying notes to consolidated financial statements

F - 4

---

COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(

|                                                                    | Years
      Ended December 31,
|------------------------------------------------------------------- | ------------------------------
|                                                                    | 2001                          
|Interest income:                                                    |                               
|Interest and fees on loans                                          | $     
      26,821           
|Federal funds sold and other temporary investments                  | 424                           
|Interest on investment securities:                                  |                               
|U.S. government agency obligations                                  | 5,805                         
|States and political subdivisions, tax-exempt                       | 117                           
|Other securities                                                    | 343                           
|Total interest income                                               | 33,510                        
|Interest expense:                                                   |                               
|Interest-bearing demand deposits                                    | 4,113                         
|Time deposits less than $100,000                                    | 5,329                         
|Time deposits greater than $100,000                                 | 3,989                         
|Federal Home Loan Bank and other borrowings                         | 3,369                         
|Federal funds purchased                                             | 56                            
|Total interest expense                                              | 16,856                        
|Net interest income                                                 | 16,654                        
|Provision for loan and
      lease losses                           | 2,216                         
|Net interest income after provision for loan
      and lease losses | 14,438                        
|Noninterest income:                                                 |                               
|Service fee income                                                  | 1,200                         
|Trust income                                                        | --                            
|Investment center income                                            | 1,555                         
|Gain/(loss) on sale of investment securities, net                   | 457                           
|Gain on sale of mortgage loans held for sale                        | 487                           
|Income from foreclosed assets                                       | --                            
|Gain on sale of other real estate owned                             | 126                           
|Other noninterest income                                            | 476                           
|Total noninterest income                                            | 4,301                         
|Noninterest expense:                                                |                               
|Salaries and employee benefits                                      | 7,154                         
|Occupancy                                                           | 1,712                         
|Insufficient check losses                                           | 486                           
|Audit, tax and accounting                                           | 392                           
|Other outside services                                              | 390                           
|Advertising and marketing                                           | 381                           
|Data and item processing                                            | 361                           
|Loan related                                                        | 313                           
|Legal services                                                      | 287                           
|Telecommunications                                                  | 257                           
|Other noninterest expense                                           | 1,493                         
|Total noninterest expense                                           | 13,226                        
|Income before provision for income taxes                            | 5,513                         
|Provision for income taxes                                          | 2,187                         
|Net income                                                          | $     
      3,326            
|                                                                    | =======                       
|Net income per common share:                                        |                               
|Basic                                                               | $    
      1.02              
|Diluted                                                             | $    
      1.02              
|Weighted average shares outstanding:                                |                               
|Basic                                                               | 3,251                         
|Diluted                                                             | 3,268                         





See accompanying notes to consolidated financial statements

F - 5

---

COMMUNITY FINANCIAL GROUP, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME

YEARS ENDED DECEMBER
31, 2001, 2000 AND 1999
(In thousands)

|                                   | Common StockShares        At Par | Additional
  Paid-inCapital | RetainedEarnings | Accumulated
    Other
  Comprehensive
  Income(loss)net of tax | Total            
|---------------------------------- | -------------------------------- | --------------------------- | ---------------- | -------------------------------------------------------------- | -----------------
|Balance at January 1,
    1999     | 4,216                            | $  25,299                   | $   
    19,773  | $    
    5,759                                                | $      
    340  
|Issuance of common stock           | 12                               | 70                          | 85               | --                                                             | --               
|Repurchase
    of common stock     | (305)                            | (1,827)                     | (2,477)          | --                                                             | --               
|Comprehensive
    income:          |                                  |                             |                  |                                                                |                  
|Other comprehensive
  loss         | --                               | --                          | --               | --                                                             | (1,327)          
|Net income                         | --                               | --                          | --               | 3,501                                                          | --               
|Total comprehensive income         |                                  |                             |                  |                                                                | --               
|Dividends, $0.46 per share         | --                               | --                          | --               | (1,881)                                                        | --               
|                                   |                                  |                             |                  |                                                                |                  
|Balance at
    December 31, 1999   | 3,924                            | 23,542                      | 17,381           | 7,379                                                          | (987)            
|Issuance of common stock           | 82                               | 490                         | 321              | --                                                             | --               
|Repurchase
    of common stock     | (580)                            | (3,477)                     | (4,195)          | --                                                             | --               
|Comprehensive
    income:          |                                  |                             |                  |                                                                |                  
|Other comprehensive income         | --                               | --                          | --               | --                                                             | 1,047            
|Net income                         | --                               | --                          | --               | 3,257                                                          | --               
|Total comprehensive income         |                                  |                             |                  |                                                                |                  
|Dividends, $0.68 per share         | --                               | --                          | --               | (2,477)                                                        | --               
|                                   |                                  |                             |                  |                                                                |                  
|Balance at
    December 31, 2000   | 3,426                            | 20,555                      | 13,507           | 8,159                                                          | 60               
|Issuance of common
  stock         | 13                               | 79                          | 98               | --                                                             | --               
|Repurchase
    of common stock     | (362)                            | (2,172)                     | (2,965)          | --                                                             | --               
|Comprehensive
    income:          |                                  |                             |                  |                                                                |                  
|Other comprehensive income         | --                               | --                          | --               | --                                                             | 181              
|Net income                         | --                               | --                          | --               | 3,326                                                          | --               
|Total comprehensive income         |                                  |                             |                  |                                                                |                  
|Dividends, $0.68 per share         | --                               | --                          | --               | (2,203)                                                        | --               
|                                   |                                  |                             |                  |                                                                |                  
|Balance at
      December 31, 2001 | 3,077                            | $ 
    18,462               | $   
    10,640  | $   
    9,282                                                 | $        
    241
|                                   | ======                           | ======                      | =======          | ======                                                         | =======          













See accompanying notes to consolidated financial statements

F - 6

---

COMMUNITY FINANCIAL GROUP, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                                                                                        | Years
      ended December 31,
|--------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
|                                                                                                                                        | 2001                          
|Cash flows from operating activities:                                                                                                   |                               
|Interest
      received                                                                                                                 | $  
      33,410              
|Fees
      received                                                                                                                     | 3,599                         
|Interest
      paid                                                                                                                     | (16,660)                      
|Cash
      paid to suppliers and associates                                                                                             | (15,017)                      
|Net cash provided by operating activities                                                                                               | 5,332                         
|Cash flows from investing activities:                                                                                                   |                               
|Maturities of investment securities available for sale                                                                                  | 25,219                        
|Sales of
      investment securities available for sale                                                                                 | 25,047                        
|Purchases of investment securities available for sale                                                                                   | (99,511)                      
|Net cash paid for TBON Leasing                                                                                                          | --                            
|Residential mortgage loans held-for-sale                                                                                                | (2,366)                       
|Loans
      and leases originated by customers, net                                                                                     | (71,097)                      
|Capital
      expenditures                                                                                                              | (1,407)                       
|Net cash used by investing activities                                                                                                   | (124,115)                     
|Cash flows from financing activities:                                                                                                   |                               
|Net
      increase in demand deposits, NOW and money market
accounts                                                                    | 28,168                        
|Net
      increase in certificates of deposit                                                                                           | 48,743                        
|Repayment of advances from Federal Home Loan Bank                                                                                       | (36,236)                      
|Advances
      from the Federal Home Loan Bank and other borrowings                                                                     | 89,000                        
|Net
      proceeds from issuance of common stock                                                                                        | 177                           
|Repurchase of common stock                                                                                                              | (5,137)                       
|Cash
      dividends paid                                                                                                               | (2,203)                       
|Net cash provided by financing activities                                                                                               | 122,512                       
|Net increase (decrease) in cash and cash
      equivalents                                                                              | 3,729                         
|Cash and cash equivalents at beginning of
      year                                                                                    | 19,038                        
|Cash and cash equivalents at end of
      year                                                                                          | $  
      22,767              
|                                                                                                                                        | =======                       
|Reconciliation of net income to net cash
      provided by operating activities:                                                        |                               
|Net income                                                                                                                              | $   
      3,326              
|Adjustments to
      reconcile net income to net cash provided by
operating activities:                                                 |                               
|(Gain)/loss on sale of investment securities                                                                                            | (457)                         
|Depreciation and amortization                                                                                                           | 866                           
|Provision for loan and lease losses                                                                                                     | 2,216                         
|Provision for deferred income taxes                                                                                                     | (941)                         
|Gain on sale of other real estate owned                                                                                                 | (126)                         
|Stock dividend income                                                                                                                   | (245)                         
|Changes in assets and
      liabilities:                                                                                                |                               
|Decrease/(increase) in accrued interest receivable and other assets                                                                     | (242)                         
|Increase in accounts payable and accrued liabilities                                                                                    | 935                           
|Net cash provided by
      operating activities                                                                                         | $   
      5,332              
|                                                                                                                                        | =======                       
|Supplemental
      Disclosure                                                                                                           |                               
|Non Cash Transactions:                                                                                                                  |                               
|Change in unrealized gain/(loss) on investment securities 
         available for sale and derivative financial instruments, net of tax | $    181                      
|Foreclosures of loans during the year                                                                                                   | 804                           
|Cash paid for:                                                                                                                          |                               
|Income taxes                                                                                                                            | $    2,849                    
|Interest                                                                                                                                | $  16,660                     





See accompanying notes to consolidated financial statements

F - 7

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Description of Operations

Community Financial Group, Inc. (CFGI) is a registered bank holding company under the Federal Reserve Holding Company Act of 1956, as amended. CFGI owns The Bank of Nashville (the Bank) and its subsidiaries, all of which are collectively referred to as the Company. The Bank owns 100% of TBON-Mooreland Joint Venture,
LLC

The Bank primarily provides commercial banking services to small business customers located in the Middle Tennessee market. The Bank competes with numerous financial institutions within its market place.

TBON Leasing buys, sells and leases machinery and equipment.
TBON-Mooreland underwrites title insurance on the Bank

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of CFGI and the Bank and its subsidiaries TBON Leasing and
TBON-Mooreland (collectively the Company) after elimination of material intercompany accounts and transactions.

The accounting and 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. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from these estimates. Following is a summary of the more significant accounting policies of the Company.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and liquid investments with maturities of three months or less when purchased are considered to be cash and cash equivalents. Cash and cash equivalents consist primarily of cash and due from banks and federal funds sold

InvestmentSecurities

At December 31, 2001 and 2000, the Company has classified its entire
investment securities portfolio as available for sale. Available for sale
investment securities are reported at fair value. Unrealized gains and losses on
investment securities available for sale are reflected in accumulated other comprehensive income, net of applicable income taxes. The adjusted
fair value of a specific investment security sold is used to compute the gain or loss on the sale of that
security at which time the unrecognized gain or loss included in the other
comprehensive income is realized and recorded in the income statement as a
component of noninterest income. Investment security purchases and sales are recorded on their trade date. Purchased premiums and discounts are amortized and accreted into interest income on a constant yield over the life of the
investment securities taking into consideration prepayment assumptions. A
decline in the fair value of any available-for-sale or held to maturity
investment security below cost that is deemed to be other than temporary,
results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established. In 1998, the Company
acquired stock as an equity investment in American Growth Finance, Inc. (AGF), a factoring
company which was carried on the cost basis. During 2001, 90% of the Company's
investment in AGF was redeemed.

Loans
and Leases

Loans are carried at the principal amount outstanding net of unearned income. Interest income on loans and amortization of unearned income is computed by methods which result in level rates of return on principal amounts outstanding. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to contractual terms of the loan agreement. When a loan is considered impaired, the amount of the impairment is based on the present value of the expected future cash flows at the loan's effective interest rate or at the loan's market price or fair value of collateral if the loan is collateral-dependent. Impairment losses are included in the allowance for loan
and lease losses through a charge to the provision for loan and lease losses. Interest income is accrued on loans except when doubt as to collectability exists, in which case the respective loans are placed on nonaccrual status. The decision to place a loan on nonaccrual is based on an evaluation of the borrower's financial condition, collateral liquidation value, and other factors that affect the borrower's ability to pay. At the time a loan is placed on nonaccrual, the accrued but unpaid interest is charged against current income. Thereafter, interest on nonaccrual loans is recognized as interest income only as received, unless the collectability of outstanding principal is doubtful, in which case such interest received is applied as a reduction of principal until the principal has been recovered, and is recognized as interest income thereafter.

TBON Leasing generally leases machinery under noncancelable, full payment leases which provide, through rentals, for full recovery of the cost of the machinery leased. For financial statement purposes, such leases are accounted for as direct financing leases whereby the contracts receivable and unearned interest income are recorded when lease contracts become effective. Unearned income for this type of lease is computed on the aggregate rentals less the cost of the machinery and is recognized as income over the life of the lease by the interest method. For income tax purposes, the Company reports lease income under the operating lease method or under the installment sales method, depending on the terms of the contract. When the operating lease method is used, depreciation is computed by the declining-balance or MACRS method. Included in the allowance for loan
and lease losses is an amount provided to cover losses incurred in the collection of existing lease contracts receivable and the disposal of the related machinery.

Residential mortgage loans held-for-sale are
carried at the lower of cost or market. Such loans are sold, servicing released,
on a non-recourse basis and any gain on the sale of such loans is calculated
based on

Allowance for Loan and
Lease Losses

An allowance for loan and lease losses reflects an amount which, in
management's judgment, is adequate to provide for estimated loan and lease 
losses. Management's evaluation of the loan and lease portfolio consists of evaluating current delinquencies, the adequacy of underlying collateral, current economic conditions, risk characteristics, and
management's internal credit review process. The allowance is established through a provision charged against earnings. Loans are charged off as soon as they are determined to be uncollectible. Recoveries of loans previously charged off are added to the allowance. While
management uses available information to recognize losses on loans, future adjustments

Other Real Estate Owned

Other real estate owned includes property acquired in situations in which the Company has physical possession of a debtor's assets (collateral). Such assets are carried at the lower of cost or fair value less estimated cost to sell and are included in other assets. Cost includes the fair value of the property at the time of foreclosure, foreclosure expense, and expenditures for
future improvements. Losses arising from the acquisition of such property are charged against the allowance for loan losses. Declines in value subsequent to foreclosure are recorded as a valuation allowance. Provisions for
further declines or losses from disposition of such property are recognized in non-interest expense.

Premises and Equipment

Premises and equipment is stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed using the straight-line method over the estimated
useful lives of those assets. Leasehold improvements are amortized over the lease terms or the estimated
useful lives whichever is less. The estimated lives are as follows:

|                           | Years 
|-------------------------- | ------
|Buildings and improvements | 3 - 20
|Furniture and equipment    | 3 - 10

Goodwill

For business combinations accounted for as purchases, the net assets have been adjusted to their estimated fair values as of the respective acquisition dates and the resulting adjustments are amortized over the life of the specific asset. The excess of the purchase price over the net assets acquired (goodwill) is recorded in other assets and is being amortized on a straight-line basis over 15 years.

The carrying value of goodwill is periodically reviewed for impairment. If this review indicates that the goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of the discounted cash flows with a corresponding charge to earnings.

Income Taxes

The Company accounts for income taxes in accordance with the asset and liability method of accounting. Under such method, deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

Net Income Per Common Share (EPS)

Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator). The denominator used in computing diluted EPS reflects the dilutive effect of common stock options outstanding.

Business Segments

Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information" establishes standards for the way public business enterprises report information about operating segments in annual financial statements. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company operates in one business segment, commercial
banking and has no additional individually significant business segments.

Stock-Based Compensation

The Company accounts for all stock-based compensation plans under Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock-based awards is measured by the excess, if any, of the fair market value of the stock, at the time the option is granted, over the amount the employee is required to pay. Compensation cost for the Company is measured at the grant date as all options are fixed awards.

Comprehensive Income

During 2001, 2000, and 1999 the components of comprehensive income, other than net income, is unrealized gains or losses on investment securities available for
sale and derivative instruments, net of taxes.

Derivative Financial Instruments

In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities."  ("SFAS No. 133"). In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," an Amendment of SFAS 133. SFAS
No. 133 and SFAS No. 138 standardize the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standards, entities are required to carry all derivative instruments on the
balance sheet at fair value. The accounting for changes in fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and if so, on the
reason for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change, together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of accumulated other
comprehensive income (outside earnings), and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness, as well as the ineffective portion
of the gain or loss are reported in earnings immediately. If the derivative
instrument is not designated as a hedge, the gain or loss is recognized in
earnings in the period of change.

The Company adopted SFAS No. 133 and SFAS No.
138 on January 1, 2001.

The Company utilizes both fixed and variable
rate deposits and other borrowings as funding. These obligations expose the
Company to variability in interest payments and fair values due to changes in
interest rates. If interest rates increase, interest expense increases and fair
values decrease. Conversely, if interest rates decrease, interest expense
decreases while fair values increase. Management believes it is prudent to limit
the variability of its interest payments and changes in fair values of certain
funding sources. To meet this objective, management enters derivative
instruments to manage fluctuations in cash flows and fair values resulting from
interest rate risk. These instruments include interest rate swaps. Under the
interest rate swaps designated to hedge cash flows, the Company receives
variable interest rate payments and makes fixed interest rate payments, thereby
creating fixed-rate debt. Under the interest rate swap designated as a fair
value hedge, the Company receives fixed interest rate payments and makes
variable rate payments.

Interest rate swap transactions generally
involve the exchange of fixed and floating interest rate payment obligations
without the exchange of the underlying principal amounts. Entering into interest rate contracts involves not only interest rate risk,
but also the risk of counterparties' failure to fulfill their legal obligations.
Notional principal amounts often are used to express the volume of these
transactions, however, the amounts potentially subject to credit risk are
significantly smaller.

The Company does not enter into derivative
instruments for any purpose other than cash flow or fair value hedging purposes.
That is, the Company does not speculate using derivative instruments. The
Company assesses interest rate cash flow and fair value risk by continually
identifying and monitoring changes in interest rate exposures that may adversely
impact expected future cash flows or fair values and by evaluating hedging
opportunities. The Company maintains risk management control systems to monitor
interest rate cash flow and fair value risks attributable to both the Company's
outstanding funding sources as well as the Company's offsetting hedge positions.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement No. 141 ("SFAS 141"), Business Combinations, and Statement No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets.SFAS 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 also specifies criteria
that intangible assets acquired in a purchase method business combination, must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.

The Company adopted the provisions of SFAS 141 in 2001 and is required to adopt SFAS 142 effective January 1, 2002.
Upon adoption of SFAS 142, goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination will not be amortized, but will continue to be evaluated for impairment.

Upon adoption of SFAS 142, the Company must evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill.
The Company will also be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

In connection with SFAS 142's transitional goodwill impairment evaluation, SFAS 142 will require the Company to perform an assessment of whether there is an indication that goodwill
is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by
allocati

At December 31, 2001, the Company had unamortized goodwill of
$201,840 which will be subject to the transition provisions of SFAS 141 and
142.  Amortization expense related to goodwill was $15,941for the year ended December 31, 2001. Because of the
small amount of unamortized goodwill at December 31, 2001, the Company doe snot
expect SFAS 142 to have a significant impact on its financial statements.

In July 2001, the FASB issued No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". That standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity will capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after
June 15, 2002, with earlier adoption permitted. The Company does not expect SFAS 143 to have a significant
impact on its financial statements.

In August 2001, the FASB issued Statement No.
144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets
 , which supersedes both SFAS No. 121 ("SFAS 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("Opinion 30"), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset that is used, as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business).

The Company is required to adopt SFAS 144 no later than
January 1, 2002. Management does not expect the adoption of SFAS 144 to have a material impact on the Company's financial statements because the impairment assessment under SFAS 144 is largely unchanged from SFAS 121.

Reclassifications

Certain reclassifications have been made in the consolidated financial statements for prior years to conform to the 2001 presentation.
During the year ended December 31, 2001, the Company reclassified its loan
portfolio to reflect the business purpose of the loans and reclassified the
categorization at December 31, 2000 for comparative purposes. Such
reclassifications do not affect earnings. The Company's loan portfolio records
were historically classified by collateral codes.

B.     JOINT VENTURE AND BUSINESS COMBINATIONS

In April 1999, the Bank formed TBON-Mooreland,
as a joint venture of the Bank and Mooreland Title Company, LLC (Mooreland), providing title services within the office of Mooreland. This new title agency has the ability to underwrite title insurance on most real estate loan transactions. The Bank owns 100% of the title agency and consolidates all of its operations, and participates in a revenue sharing agreement with Mooreland for 50% of the
revenue. In June 1999, the Bank acquired 80% ownership in TBON Leasing for $1.3 million in cash. The transaction has been accounted for using the purchase method of accounting and its operations are included in the consolidated financial statements of the Company from the date of acquisition. The primary asset acquired was an equipment lease portfolio of approximately $6.0 million. The excess of the purchase price over the fair value of the net assets acquired was $215,000 and was recorded as goodwill.
Goodwill is being amortized over 15 years, respectively. Minority interest in TBON Leasing in 2001 and 2000 was not significant.

C.     CASH RESTRICTIONS

The Company is required to maintain reserves in the form of average vault cash and balances with the Federal Reserve Bank. The average amounts of these balances maintained during the years ended December 31, 2001 and 2000, were $1,822,000 and $3,259,000, respectively. The required balance at December 31, 2001 was $250,000.

D.     INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities at December 31, 2001 and 2000
areshown
in the following table (in thousands).
Other debt securities include collateralized mortgage obligations whose
maturities are not segregated since they have staggered maturity dates.
Investments in equity securities include stocks of the Federal Reserve Bank and
Federal Home Loan Bank. Maturities of equity securities are not segregated since
they have not stated maturity.



As of December 31,
        2001
      As of December 31,
        2000Amortized Cost
      Gross
         Unrealized Gain
      Gross
         UnrealizedLoss
      Estimated
        Fair
         Value
      Amortized Cost
      Gross
         Unrealized Gain
      Gross
         UnrealizedLoss
      Estimated
        Fair
         Value(Dollars in
        thousands)U.S. agency securities
      $  84,309
      $    889
      $   211
      $  84,987
      $   33,928
      $  227
      $   154
      $   34,001Other debt securities
      19,638
      242
      30
      19,850
      23,463
      152
      187
      23,428Municipal securities
      2,292
      43
      --
      2,335
      2,291
      59
      --
      2,350Equity securities
      6,184
      --
      --
      6,184
      2,996
      --
      --
      2,996Total securities
      $ 112,423
      $ 1,174
      $   241
      $ 113,356
      $  62,678
      $ 438
      $   341
      $  62,775=========
      ========
      =======
      ========
      ========
      ========
      =========
      =========




Proceeds from the sales of securities during 2001, 2000, and 1999 were
$25.0 million, $10.4 million, and $8.2 million, respectively. Gross gains of $497,000, $4,000, and $16,000 and gross losses of $40,000, $101,000, and $21,000 were realized on those sales in 2001, 2000, and 1999, respectively.

The amortized cost and fair value of debt securities by contractual maturity at December 31, 2001, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because borrowers
on the underlying mortgages under the mortgage backed securities may have the right to call or prepay obligations with or without call or prepayment penalties. Collateralized mortgage obligations with a weighted average effective yield of 6.70% are disclosed as a separate line item due to
their staggered maturity dates. Equity securities are also disclosed as a separate line due to no stated maturity.
Investment securities with an aggregate amortized cost of approximately $100.3 million and $51.7 million were pledged to secure public deposits, Federal Home Loan Bank borrowings and for other purposes as required by law at December 31, 2001 and 2000, respectively.
All investment securities are classified as available-for-sale.

|                                        | As
    of December 31, 2001
|--------------------------------------- | ---------------------------
|                                        | Amortized Cost             
|Within one year                         | $       
    682           
|Within two to five years                | 11,070                     
|Within six to ten years                 | 23,491                     
|After ten years                         | 51,358                     
|Total                                   | $  
    86,601             
|Collateralized mortgage
    obligations | 19,638                     
|Equity securities                       | 6,184                      
|Total investment securities             | $ 
    112,423             
|                                        | =========                  

E.     LOANS AND ALLOWANCE FOR LOAN
AND LEASE LOSSES

The Bank makes commercial, real estate and other loans and leases to commercial and individual customers throughout the markets
it serves. Most of the Company's business activity is with customers located in the Middle Tennessee region. Generally, loans are secured by stocks, real estate, time
certificates of deposit, or other assets. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Real estate mortgage and construction loans reflected in the accompanying consolidated balance sheets are comprised primarily of loans to commercial borrowers.

Selected information regarding the loan portfolio as of December 31, 2001and 2000 is presented below (in thousands):

December 31,2001
    
    2000Variable rate loans
    $   
      258,352
    
    $  
      182,791Fixed rate loans
    81,585
    
    87,777Total loans
    $   
      339,937
    
    $   270,568========
    
    ========


Changes in the allowance for loan and lease losses are as follows (in thousands):

|                                          | December
      31,
|----------------------------------------- | ------------------
|                                          | 2001              
|Balance at beginning
      of year        | $  
    4,622     
|Provision for loan and
      lease losses | 2,216             
|Charge-offs                               | (1,997)           
|Recoveries                                | 257               
|Purchased reserve of
      TBON Leasing   | --                
|Balance at end of year                    | $   5,098         
|                                          | ========          

At December 31, 2001 and 2000, nonaccrual
loans amounted to $3.1 million and $776,000, respectively. The effect of nonaccrual loans was to reduce interest income by approximately
$309,000 in 2001, $219,000 in 2000, and $10,000 in 1999. There were no material commitments to lend additional funds to customers whose loans were classified as nonaccrual at December 31, 2001 and 2000.

At December 31, 2001, the Company had 14 impaired loans totaling $3.1
million of which $525,000 had an allocated specific reserve. The average recorded investment in impaired loans for the years ended December 31,
2001 and 2000 was $1.1 million and $387,000, respectively. Interest payments
received on impaired loans are recorded as reductions in principal outstanding
or recoveries of principal previously charged off. Once the entire principal has
been collected, any additional payments received are recognized as interest
income. No interest income was recognized on impaired loans in 2001 or 2000.

The impaired loans and their related valuation
reserve as of December 31, 2001 and 2000 are as follows (in thousands):

As
      of December 31,2001
    
    2000Impaired loans
      with no specific valuation reserve
    $   
      2,623
    
    $   776Impaired loans
      with a specific valuation reserve
    525
    
    208Total recorded investment in impaired loans
    $   
      3,148
    
    $   984=======
    
    =====Valuation
      allowance related to all impaired loans
  
    525
  
  
    166=======
  
  
    =====


In the ordinary course of business, the Company makes loans to directors, executive officers, and principal shareholders, including related interests. In Management's opinion, these loans are made on substantially the same terms, including interest and collateral, as those prevailing at the time for comparable transactions with other borrowers and they did not involve more than the normal risk of uncollectability or present other unfavorable features at the time such loans were made. During 2001, $1.1 million of new loans were made while repayments and other reductions totaled $752,000. Outstanding loans to executive officers and directors, including their associates and affiliated companies, were
$6.

At December 31, 2001 and 2000, the directors, executive officers, and principal shareholders
had $2.7 million and $7.9 million, respectively in deposits with the Company.
The terms of such deposits are comparable to those available to other
depositors.

F.     PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows (in thousands):

As
      of December 31,2001
    
    2000Furniture, fixtures
      and equipment
    $    4,243
    
    $     3,089Building and
      improvements
    1,039
    
    1,039Land
    638
    
    638Leasehold improvements
    1,259
    
    1,030Accumulated
      depreciation and amortization
    (3,013)
    
    (2,325)Premises and equipment, net
    $  4,166
    
    $  3,471======
    
    ======


The Company occupies space under noncancelable operating leases. The leases provide annual escalating rents for periods through 2009 with options for renewals. Rent expense is recognized in equal monthly amounts over the lease term. Rent expense was
$694,

Future minimum lease payments under non-cancelable operating leases at December 31,
2001 are payable as follows (in thousands):

2002
      $      8262003
      8502004
      8592005
      8692006
    869Thereafter
      3,489$   7,762=======


G.
 LONG TERM DEBT AND LINES OF CREDIT

The Bank maintains an arrangement with the Federal Home Loan Bank
(FHLB) to provide for certain borrowing needs and diversify the funding sources. The arrangement requires the Bank to hold stock in the
FHLB and requires the Bank to pledge investment securities, to be held by the
FHLB, or loans as collateral.

At December 31, 2001, and 2000, indebtedness
to the FHLB and other borrowings totaled $89.0 million and $36.2 million, respectively. During the
year ended December 31, 2001, the Company repaid four loans totaling $34.7
million, of which one, for $20.2 million, had a fixed interest rate of 6.61% and
the remaining three, totaling $14.5 million, were at the three-month LIBOR less
five basis points. Also during the year ended December 31, 2001, the Company
entered into seven new loans with the FHLB totaling $89.0 million. Of this
amount, five loans, totaling $54.0 million are fixed rate advances, whose
interest rate is fixed for periods between two and three years bearing an
average weighted rate of 4.56% and two loans totaling $35.0 million reprice
quarterly at the three-month LIBOR less six basis points, with an average
weighted rate of 2.15% at December 31, 2001. The maturity dates on long-term
debt for the five years subsequent to December 31, 2001are as follows (in
thousands):

2002
      $  14,0002003
      35,0002004
      --2005
      --2006
      --
      $49,000


On December 31, 2001, the Company had available for its use $38.5 million of unsecured short-term bank lines of credit. Such short-term lines serve as backup for loan and investment needs. There are no compensating balance requirements. These lines facilitate federal funds borrowings and bear a rate equal to the current lending rate for federal funds purchased.
No amounts were outstanding under these lines of credit at December 31, 2001.

H.     INCOME TAXES

Actual income tax expense for the years ended December 31, 2001, 2000, and 1999 differed from an "expected" tax expense (computed by applying the U.S. Federal corporate tax rate of 34% to income before
provision for income taxes) as follows (in thousands):

As of December 312001
    2000
    1999Amount
    %
    Amount
    %
    Amount
    %Federal income tax expense at
      statutory rate
    $  1,874
    34.0%
    $  1,817
    34.0%
    $  1,920
    34.0%State taxes, net of federal
      benefit
    220
    4.0
    218
    4.1
    215
    3.8Other, net
    93
    1.7
    51
    0.9
    10
    0.2Provision for income taxes
    $  2,187
    39.7%
    $  2,086
    39.0%
    $  2,145
    38.0%========
    =======
    =======
    ======
    =======
    ======


Significant temporary differences and carry forwards that give rise to the deferred tax assets and liabilities are as follows (in thousands):

As
      of December 31,2001
    2000Deferred tax assets:Unrealized loss on derivative instruments
    $  
      208
    $    
      --Deferred
      fees, principally due to timing differences in the recognition of income
    353
    278Loans, principally due to provision for loan and lease losses
    1,220
    421Net
      operating loss carry forward
    175
    218Premises
      and equipment, principally due to differences in depreciation methods
    41
    49Other
    31
    19Total gross deferred tax assets
    2,028
    985Deferred tax
      liabilities:Unrealized gain on investment securities available for sale
    (353)
    (37)Discount
      on investment securities deferred for tax purposes
    (92)
    (99)Leases,
      principally due to differences in basis acquired and the recognition ofincome
    (55)
    (260)FHLB
      stock dividends
    (264)
    (159)Total gross deferred tax liabilities
    (764)
    (555)Net deferred tax assets
    $
      1,264
    $   
    430=====
    =====


Based upon the level of historical taxable
income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences at
December 31, 2001. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.

The Bank has provided no valuation allowance for the net deferred tax assets at December 31,
2001or2000
due primarily to its ability to offset reversals of net deductible temporary differences against income taxes paid in previous years and expected to be paid in future years. The components of income tax expense (benefit) were as follows (in thousands):

Years
      ended December
      31,2001
    2000
    1999Current income tax
      expense:Federal
    $   2,645
    $  
      2,124
    $  
      1,947State
    483
    399
    359Total current income tax expense
    3,128
    2,523
    2,306Deferred income tax
      benefit:Federal
    (793)
    (368)
    (127)State
    (149)
    (69)
    (34)Total deferred income tax benefit
    (942)
    (437)
    (161)Total income tax expense
    $ 2,187
    $ 2,086
    $ 2,145======
    ======
    ======


I.    DERIVATIVE FINANCIAL
INSTRUMENTS

At December 31, 2001, the Company had three
interest rate swap contracts with a consolidated notional amount outstanding of
$35.0 million. There were no interest rate swap contracts outstanding at
year-end December 31, 2000. The derivative financial instruments are reported at
their fair values and are included as other assets and other liabilities,
respectively, on the face of the balance sheet.

On March 26, 2001, the Company entered into a $10.0 million interest rate swap which matures on October 17, 2008 under which the Company pays the counterparty a variable rate of three-month LIBOR plus five basis points and will receive a fixed rate of 6.00%. Interest payments are settled and variable rates reset quarterly. The counter party has the option to terminate the swap, in whole or in part, on April 17, 2002 and semi-annually thereafter. Management designated the interest rate swap as a fair value hedge of $10.0 million of brokered time deposits issued by the Company on March 26, 2001. The 6.00% fixed rate, brokered time deposits mature on October 17, 2008 and are callable by the Company on March 26, 2002 and semi-annually thereafter.
At December 31, 2001, the Company had other liabilities of $120,000 reflecting the
fair value adjustment on this hedge instrument with an offset of $120,000
decreasing the recorded value of the 6.00% fixed rate, brokered time deposits.

On May 24, 2001, the Company entered into a $15.0 million interest rate swap agreement which matures on November 25, 2002 under which the Company pays the counterparty a fixed rate of 4.53% and will receive a variable rate of three-month LIBOR less six basis points. Interest payments are settled and variable rates reset quarterly. Management designated the interest rate swap as a cash flow hedge of $15.0 million 
in variable rate FHLB advances entered into by the Company on May 24, 2001. As
of December 31, 2001, the cash flow hedge of FHLB advances resulted in a decrease of
$216,000 in other comprehensive income, net of taxes of $132,000, and a $348,000
increase to other liabilities.

On July 19, 2001, the Company entered into a $10.0 million interest rate swap agreement which matures on October 19, 2002 under which the Company pays the counterparty a fixed rate of 4.205% and will receive a variable rate of three-month
LIBOR. Interest payments are settled and variable rates reset quarterly. Management designated the interest rate swap as a cash flow hedge of $10.0 million in variable rate
FHLB advances entered into by the Company on July 19, 2001. At December 31, 2001, the cash flow hedge of
FHLB advances resulted in a decrease of $122,000 in other comprehensive income, net of taxes of
$76,000, with a $199,000 increase to other liabilities.

The high degree of effectiveness of the Company's
cash flow derivative financial instruments resulted in no impact to consolidated net income for the
year ended December 31, 2001.

J.     FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheets. The contract amounts of those instruments reflect the extent of involvement and the related credit risk the Company has in particular classes of financial instruments. The Company, through regular reviews of these arrangements, does not anticipate any material losses as a result of these transactions.

At December 31, 2001, outstanding commitments to sell mortgage loans amounted to approximately $2,366,000. Such commitments are entered into to reduce the exposure to market risk arising from potential changes in interest rates, which could affect the fair value of
residential mortgage loans held-for-sale and outstanding commitments to originate residential mortgage loans held-for-sale. The outstanding commitments to sell mortgage loans are at fixed prices and are scheduled to settle at specific dates which generally do not exceed 15 days.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amounts of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on Management's credit evaluation of the customer.

Standby letters of credit or guarantees are commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.
Approximately 90.3% of the guarantees have maturities less than one year, the
remaining 9.7% mature within three years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Unused lines of credit include home equity lines of credit ("HELOCS").

Loan commitments and letters of credit at December 31, 2001 and 2000 include the following (in thousands):

December 31,2001
    2000Standby letters of
      credit
    $     
      6,820
    $     
      5,574Undisbursed
      construction loans
    15,377
    10,735Unused lines of credit
    90,416
    81,724Other loan commitments
    693
    274Total loan commitments and letters of credit
    $ 
      113,306
    $ 
      98,307========
    =======


K.
 EMPLOYEE BENEFITS

The Company maintains for its employees an Associates Stock Purchase Plan (the "ASPP"), and a Retirement Savings Plan
401(k) (the "401 (k) Plan"). The 401(k) Plan provides for the maximum deferral of employee compensation allowable by the IRS under provisions of Section 401(A) and
401(k). The 401(k) Plan is available to all associates who meet the plan eligibility requirements. The Company provides various levels of employer matching of contributions up to 4% of the associate's compensation. Employer contributions are invested exclusively in the Company's common stock. Associates fully vest in the employer's contributions after three years of service as defined in the
401(k) Plan. Total plan expense for 2001, 2000 and 1999 was approximately $186,000, $157,000 and $119,000, respectively.

The ASPP under which 100,000 shares of the Company's common stock may be issued, allows associates to purchase the Company's common stock through payroll deductions at 84% of the existing market value, not to fall below par value. The difference between the purchase price and the market value on the date of issue is recorded as compensation expense. Compensation expense of $25,000, $28,000, and $25,000 was recorded in 2001, 2000 and 1999, respectively. The Company pays incidental expenses regarding the administration of the plan.

In 1997, the Board of Directors adopted the 1997 Nonstatutory Stock Option Plan
(Plan), which initially reserved 150,000 shares of the Company's common stock for use under the Plan (plus 10% of any additional shares of stock issued after the effective date of the Plan). Total shares reserved under this plan at December 31, 2001
were
601,003 shares. Stock issued pursuant to the Plan may be either authorized but unissued shares or shares held in the treasury of the Company. Options are granted at an option price of no less than the fair market value of the stock at the date of grant. Each grant of an option is evidenced by a stock option agreement specifying the number of shares, the exercise price, and a vesting schedule. During 2001, 2000 and 1999, 27,000 options, 281,000 options, and 106,900 options, respectively, were granted under the Plan.

As of December 31, 2001, the Company's Board of Directors had approved the issuance of stock options to purchase
442,187 shares of the Company's common stock. Compensation expense was not recorded in connection with the issuance of these options, as the option price was equal to or exceeded the market price of the Company's common stock at the date of grant. The following table presents information on stock options:

|                                         | Total Options /Shares | ExercisableOptions | Option Price                Range | Weighted 
        AveragePrice
|---------------------------------------- | --------------------- | ------------------ | --------------------------------- | ------------------------------
|Options outstanding at January 1, 1999   | 142,627               | 87,015             | $  6.000                          | $  14.750                     
|Granted                                  | 106,900               | 21,380             | 12.420                            | 12.880                        
|Options that became
        exercisable  | --                    | 16,525             | 10.125                            | 14.750                        
|Options exercised                        | (220)                 | (220)              | 11.625                            | 11.625                        
|Options expired                          | (1,130)               | (430)              | 11.625                            | 14.750                        
|Options outstanding at December 31, 1999 | 248,177               | 124,270            | 6.000                             | 14.750                        
|Granted                                  | 281,000               | 56,200             | 11.580                            | 13.894                        
|Options that became
        exercisable  | --                    | 55,236             | 10.125                            | 14.750                        
|Options exercised                        | (67,000)              | (67,000)           | 6.000                             | 11.625                        
|Options expired                          | (38,850)              | (13,600)           | 11.625                            | 14.750                        
|Options outstanding at December 31, 2000 | 423,327               | 155,106            | $ 10.125                          | $ 14.750                      
|Granted                                  | 27,000                | 5,400              | 13.190                            | 13.890                        
|Options that became
        exercisable  | --                    | 79,785             | 11.625                            | 14.750                        
|Options exercised                        | (2,000)               | (2,000)            | 11.625                            | 12.880                        
|Options expired                          | (6,140)               | (3,580)            | 12.880                            | 14.750                        
|Options outstanding at December 31, 2001 | 442,187               | 234,711            | $ 10.125                          | $ 14.750                      
|                                         | =======               | =======            | =======                           | =======                       

The stock options have five year vesting schedules and become exercisable in full in the event of a merger, sale, or change in majority control of the Company. The options expire during the years 2002 through 2011 or within 90 days of cessation of employment.
At December 31, 2001, the weighted average remaining life was approximately 7.8 years.

The Company accounts for its stock option plan and ASPP in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to stock options would be determined on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Had the Company used the provisions of SFAS No. 123, Accounting for Stock-Base Compensation, the Company would have recognized, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. The Company has elected to continue to apply the provisions of APB No. 25. As such, proforma disclosures of net income and earnings per share as if the fair value based method of SFAS No. 123 had been used, are as follows:

For
      the years ended December
      31,2001
    2000
    1999Net income - as
      reported
    $   3,326,000
    $  
      3,257,000
    $   3,501,000==========
    ==========
    ==========Net income - proforma
    $  
      3,046,000
    $  
      3,023,000
    $  
      3,401,000==========
    ==========
    ==========Earnings per share:Basic, as
      reported
    $  
      1.02
    $   0.90
    $   0.86Basic,
      proforma
    0.94
    0.84
    0.84Diluted,
      as reported
    $  
      1.02
    $   0.90
    $   0.85Diluted,
    proforma
    0.93
    0.83
    0.82


The weighted average fair values of options granted during 2001, 2000, and 1999 were $4.15; $4.72; and, $5.09 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

For
      the years ended December
      31,2001
    2000
    1999Expected dividend
      yield
    4.46%
    6.04%
    3.61%Expected stock price
      volatility
    23.05
    23.00
    25.00Risk-free interest
      rate
    4.74
    6.55
    5.07Expected life of
      options (years)
    5
    5
    5


L.
 SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE

The Company can issue common stock pursuant to various plans such as employee stock purchase, contributions to the
401(k) plan, and payment of directors' fees. Under these plans, 11,125, 14,710
and 11,609 shares were issued during 2001, 2000 and 1999, respectively.

The following table is a reconciliation of net income and average shares outstanding used in calculating basic and diluted earnings per share(in thousands except per share data).

Years
      ended December
      31,2001
    2000
    1999Net income available
      to common shareholders
    $   3,326
    $  
      3,257
    $   3,501=======
    =======
    =======Weighted average
      common shares outstanding - basic
    3,251
    3,619
    4,068Dilutive effect of
      options
    17
    16
    61Weighted average
      common shares outstanding - diluted
    3,268
    3,635
    4,129=======
    =======
    =======Antidilutive options
    36
    175
    175=======
    =======
    =======Net income per share:Basic
    $     1.02
    $     0.90
    $     0.86Diluted
    1.02
    0.90
    0.85


In January 1998, the Company's Board of Directors adopted a Shareholder Rights Plan which authorizes the distribution of a dividend of one common share purchase right for each outstanding share of CFGI's common stock. The rights will be exercisable only if a person or group acquires 15% or more of CFGI's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the common stock. The rights are designed to assure that all of CFGI's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender takeovers, squeeze outs, open market accumulations and other abusive tactics to gain control of the Company without paying all shareholders an appropriate control premium.

If the Company were acquired in a merger or other business combination transaction, each right would entitle its holder to purchase, at the right's then current exercise price, a number of the acquiring company's common shares having a market value of twice such a price. In addition, if a person or group acquires 15% or more of CFGI's common stock, each right would entitle its holder (other than the acquiring person or members of the acquiring group) to purchase, at the
right's then current exercise price, a number of CFGI's common shares having a market value of twice that price. After a person or group acquires beneficial ownership of 15% or more of CFGI's common stock and before an acquisition of 50% or more of the common stock, the Board of Directors would exchange the rights (other than rights owned by the acquiring person or group), in whole or in part, at an exchange ratio of one share of common stock per right.

Until a person or group has acquired beneficial ownership in excess of 15%, the rights will be redeemable for $0.01 per right at the option of the Board of Directors. The rights are intended to enable all CFGI's shareholders to realize the long-term value of their investment in the Company. The Company believes they will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board prior to attempting a takeover.

In March 1999, to facilitate the management of its capital position, the Company announced a stock
repurchase program. The initial plan called for the repurchase of 400,000 shares (the "March 23, 1999 Plan") with an original expiration date of December 31, 1999. On January 26, 2000, the Company extended the expiration date of the March 23, 1999 Plan until March 31, 2000 to allow for the completion of the plan. On March 15, 2000, the Company announced that it had completed the March 23, 1999 Plan and announced a second stock repurchase plan for the acquisition of an additional 500,000 shares of common stock with an expiration date of December 31, 2000 (the "March 15, 2000 Plan"). On December 20, 2000, the Company announced the extension of the March 15, 2000 Plan to December 31, 2001 to provide for the acquisition of 16,000 shares remaining to be repurchased under the March 15, 2000 Plan and an additional 400,000 shares, for a total of up to 416,000 shares of common stock. At December 31, 2001, the Company had repurchased 845,904 shares under the March 15, 2000 Plan and 1,245,904 shares since commencing its stock repurchase program in March 1999.

M.
 RESTRICTIONS ON RETAINED EARNINGS, REGULATORY MATTERS, AND LITIGATION

To declare dividends the Bank must transfer a minimum of ten percent of current net income from retained earnings to additional paid-in capital until additional paid-in capital equals common stock.
Accordingly, the Bank transferred $326,000 and $307,000 from retained earnings to surplus during 2001 and 2000, respectively. At December 31, 2001, approximately $14.1 million of the Bank's retained earnings were available for dividend declaration and payment, without regulatory approval.
Approximately $21,591,000 of the Company's investment in the Bank is restricted as to the payment of dividends.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes the Company and the Bank meet all capital adequacy requirements to which

As of December 31, 2001, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that Management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also presented in the table (Dollars in thousands).

Actual
    To be adequately
      capitalized
    To be well capitalizedAmount
    Ratio
    Amount
    Ratio
    Amount
    RatioAs of December 31, 2001:Total capital (to risk weighted
      assets)Community
      Financial Group, Inc.
    $  41,947
    11.07%>

    $  30,311
    N.A.>
    $  37,889
    N.A.  >The Bank
      of Nashville
    38,998
    10.30   >

    30,303
    8.0   >
    37,879
    10.0% >Tier 1 capital (to risk
      weighted assets)Community
      Financial Group, Inc.
    $  37,210
    9.82%>
    $  15,156
    N.A.>
    $  22,733
    N.A.  >The Bank
      of Nashville
    34,261
    9.04   >
    15,152
    4.0   >
    22,727
    6.0% >Leverage ratioCommunity
      Financial Group, Inc.
    $  37,210
    8.55%>
    $  13,060
    N.A.>
    $  21,767
    N.A.  >The Bank
      of Nashville
    34,261
    7.88   >
    13,044
    (1)    3.0   >
    21,740
    5.0% >As of December 31, 2000:Total capital (to risk weighted
      assets)Community
      Financial Group, Inc.
    $  45,721
    15.43%>
    $  23,705
    8.0%>
    $  29,631
    N.A.  >The Bank
      of Nashville
    35,616
    12.03   >
    23,685
    8.0   >
    29,606
    10.0% >Tier 1 capital (to risk
      weighted assets)Community
      Financial Group, Inc.
    $  42,005
    14.17%>
    $  11,891
    4.0%>
    $  17,837
    N.A.  >The Bank
      of Nashville
    31,905
    10.78   >
    11,839
    4.0   >
    17,758
    6.0% >Leverage ratioCommunity
      Financial Group, Inc.
    $  42,005
    12.14%>
    $  10,380
    3.0%>
    $  17,300
    N.A.  >The Bank
      of Nashville
    31,905
    9.29   >
    8,879
    (2)    3.0   >
    14,798
    5.0% >______________________________________
      (1)  The Federal Reserve Board may require the Company and Bank to
      maintain a leverage ratio of up to 200 basis points above the required
      
      minimum.


From time to time there are legal proceedings pending against the Company. In the opinion of Management,
the liabilities, if any, arising from such proceedings presently pending would not have a material adverse effect on the consolidated financial statements.

N.
 FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for both on and off-balance sheet assets and liabilities for which it is practicable to estimate fair value. The techniques used for this valuation are significantly affected by the assumptions used, including the amount and timing of future cash flows and the discount rate. Such estimates involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. Accordingly, the aggregate fair value amounts presented are not meant to represent the underlying value of the Company.

The following table presents the carrying amounts and the estimated fair value of the Company's financial instruments at December 31, (in thousands):

As of December 31,2001
      2000Carrying Amount
      Estimated  
         Fair       Value
      Carrying  Amount
      Estimated  
        Fair      ValueFinancial assets:Cash, due from banks, federal
        funds sold and
                 other temporary
        investments
      $  22,767
      $  22,767
      $  19,038
      $  19,038Investment securities
      113,356
      113,356
      62,775
      62,775Residential mortgage loans held-for-sale
      2,366
      2,366
      --
      --Loans, net of unearned income
      339,937
      347,631
      270,568
      267,747Financial liabilities:Deposits
      349,948
      356,366
      273,036
      273,416FHLB and other borrowings
      89,000
      91,107
      36,236
      36,303Derivatives

      667
      667
--
      --




|                                                                                                                                                                                                                                                                                                                                                                                                                          | As of December 31,                     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                          | 2001                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                          | Contractual
        or Notional Amounts
|Off-balance items:                                                                                                                                                                                                                                                                                                                                                                                                        |                                        
|Commitments to extend
        credit                                                                                                                                                                                                                                                                                                                                                                                      | $  106,486                             
|Standby letters of
        credit                                                                                                                                                                                                                                                                                                                                                                                         | 6,820                                  
|_____________________________
        (1)  With the exception of HELOCS, commitments are negotiated at
        current market rates and terms and are relatively short-term
               in nature. Therefore, the estimated
        value of loan commitments approximates the fees charged. The estimated
        fair value of
               these items was not significant at
        December 31, 2001 and 2000.

The following summary presents the methodologies and assumptions used to estimate the fair value of the Company's financial instruments presented above.

Cash, Due from Banks and Federal Funds Sold

For cash, due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. These instruments expose the Company to limited credit risk, carry interest rates which approximate market, and have short maturities.

Investment Securities

In estimating fair values, management makes use of prices or dealer quotes for U.S. government agency securities, collateralized mortgage obligations, securities of states and political subdivisions, and equity securities. As required,
investment securities available for sale are recorded at fair value.

Loans

The fair value 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 for the same remaining maturities adjusted for differences in loan characteristics. The risk of default is measured as an adjustment to the discount rate, and no future interest income is assumed for nonaccrual loans. The fair value of loans does not include the value of the customer relationship or the right to fees generated by the account.

Residential mortgage loans

The fair value of residential mortgage loans
held-for-sale is based on the underlying rates and commitments to sell such
loans.

Deposits

The fair value of deposits with no stated maturities (which includes demand deposits, NOW accounts, and money market deposits) is the amount payable on demand at the reporting date. The fair value of fixed-rate certificates of deposit is estimated using a discounted cash flow model based on the rates currently offered for deposits of similar maturities. The fair value of variable rate certificates of deposit would approximate their carrying value because these investments reprice with market rates.

Federal Home Loan Bank and Other Borrowings

The fair value of Federal Home Loan Bank borrowings is estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements.

O.     OTHER COMPREHENSIVE INCOME

Comprehensive income includes net income and other comprehensive income which is defined as non-owner related transactions in equity. The Company's unrealized gains and losses (net of tax) on investment securities available for sale
and derivative instruments are included in other comprehensive income (loss). The amounts of other comprehensive income
(loss) along with the related tax effect are set forth in the following table (in thousands):

|                                                                                      | Gain
      (Loss)  Before Tax | Tax
      Expense  (Credit) | Net
      of      Tax
|------------------------------------------------------------------------------------- | ----------------------------- | --------------------------- | ---------------------
|Year ended December
      31, 2001:                                                   |                               |                             |                      
|Net
      unrealized gain on investment securities available for sale during 2001     | $   1,296                     | $   495                     | $   801              
|Net
      unrealized loss on derivative instruments                                   | (546)                         | (208)                       | (338)                
|Less:
      reclassification adjustment for net gains included in net income          | 457                           | 175                         | 282                  
|Other comprehensive income                                                            | $      293                    | $   112                     | $   181              
|                                                                                      | =======                       | =======                     | =======              
|Year ended December
      31, 2000:                                                   |                               |                             |                      
|Net
      unrealized gain on investment securities available for sale during 2000     | $   1,591                     | $    604                    | $    987             
|Plus:
      reclassification adjustment for net losses included in net income         | 97                            | 37                          | 60                   
|Other comprehensive income                                                            | $   1,688                     | $   641                     | $ 1,047              
|                                                                                      | =======                       | ======                      | =======              
|Year ended December
      31, 1999:                                                   |                               |                             |                      
|Net
      unrealized loss
    on investment securities available for sale during 1999 | $   (2,134)                   | $ (810)                     | $   (1,324)          
|Less:
      reclassification adjustment for net losses included in net income         | (5)                           | (2)                         | (3)                  
|Other comprehensive loss                                                              | $   (2,139)                   | $   (812)                   | $   (1,327)          
|                                                                                      | =======                       | ======                      | =======              
|                                                                                      |                               |                             |                      

P.
PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information for Community Financial Group, Inc., (Parent Company only) as of December 31, 2001 and 2000, and for the years ended December 31, 2001, 2000 and 1999 was as follows (in thousands):

CONDENSED BALANCE SHEET

December 31,2001
    
    2000AssetsCash
    $   
      2,693
    
    $   
      9,372Investment in bank subsidiary, at cost
    35,676
    
    32,237Investment securities available-for-sale
    100
    
    500Other assets
    187
    
    235Total assets
    $ 
      38,656
    
    $ 
      42,344=======
    
    =======LiabilitiesOther liabilities
    31
    
    63Total liabilities
    31
    
    63Total shareholders' equity
    38,625
    
    42,281Total liabilities and shareholders' equity
    $ 
      38,656
    
    $ 
      42,344========
    
    ========


CONDENSED INCOME STATEMENT

Years
      Ended December 31,2001
    
    2000
    
    1999Income:Dividends from bank subsidiary
    $       
      --
    
    $       
      --
    
    $       
      --Interest income
    270
    
    683
    
    939Loss on saleof 
    investment securities, net
    --
    
    (34)
    
    (20)Total interest income
    270
    
    649
    
    919Expenses:Other expenses
    136
    
    191
    
    225Total expenses
    136
    
    191
    
    225Income before
      provision for income taxes
    134
    
    458
    
    694Increase to
      consolidated income taxes arising from parent
          company taxable income
    66
    
    174
    
    264Equity in
      undistributed earnings of subsidiary bank
    3,258
    
    2,973
    
    3,071Net income
    $  3,326
    
    $ 
      3,257
    
    $ 
      3,501=======
    
    =======
    
    =======


CONDENSED STATEMENT OF CASH FLOWS



Years
      ended December 31,2001
    2000
    1999Cash flows from operating activities:Net income
    $  
      3,326
    $  
      3,257
    $  
      3,501Adjustments to
      reconcile net income to net cash provided by 
                 operating activities:Equity in undistributed earnings of subsidiary bank
    (3,258)
    (2,973)
    (3,071)Loss on sale of investment securities
    --
    34
    20Depreciation and amortization
    --
    164
    56Decrease (increase) in other assets
    48
    214

    (270)(Decrease) increase in other liabilities
    (32)
    10
    3Net cash provided by operating activities
    84
    706
    239Cash flows from investing activities:Proceeds from sales of investment securities available for sale
    400
    10,376
    5,126Purchases of investment securities available for sale
    --
    --
    (30,832)Maturities of investment securities available for sale
    --
    --
    25,051Net cash provided by (used in) investing activities
    400
    10,376
    (655)Cash flows from financing activities:Repurchase of common stock
    (5,137)
    (7,672)
    (4,304)Net proceeds from issuance of common stock
    177
    656
    155Cash dividends paid
    (2,203)
    (2,477)
    (1,881)Net cash used in financing activities
    (7,163)
    (9,493)
    (6,030)Increase (decrease) in cash
    (6,679)
    1,589
    (6,446)Cash at beginning of
      year
    9,372
    7,783
    14,229Cash at end of year
    $   
      2,693
    $   
      9,372
    $   
      7,783=======
    =======
    =======