FORM 10-KSB
                         ANNUAL OR TRANSITIONAL REPORT
                           UNDER SECTION 13 OR 15(d)

           (As last amended by Each Act Rel No. 35113, eff. 1/30/95.)

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

For the fiscal year ended        December 31, 1997
                            --------------------------------

[ ] TRANSITION REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934


            COMMISSION FILE NUMBER       333-3296
                                   ----------------------------


                       UNITED COMMUNITY BANKSHARES, INC.
-------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

         Virginia                               54-1801876
---------------------------             -----------------------------------
(State or other jurisdiction of          (I.R.S. Employer Indentification No.)
incorporation or organization)


                                 (757) 562-5184
------------------------------------------------------------------------------
             (registration's telephone number, including area code)
<TABLE>
<CAPTION>
<S>                                                               <C>
Securities registered under Section 12(b) of the Exchange Act:         Not applicable
                                                                  ----------------------

Securities registered under Section 12(g) of the Exchange Act:      Common Stock , $1.00 par value
                                                                  ---------------------------------
                                                                          (Title of Class)


</TABLE>


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months and (2) has been
subject to such filing requirements for the past 90 days. YES [X]  NO [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this 10-KSB.   [X]

As of March 23, 1998, the aggregate market value of the 1,450,796 shares of
common stock of the Registrant issued and outstanding, which excludes 378,413
shares held by all directors and officers of the Registrant, was approximately
$23,756,785. This amount is based on $16.375 market value per share.

At December 31, 1997, the Registrant had outstanding 1, 829,209 shares of Common
Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1997 Annual Report to Shareholders for the year ended December
31, 1997 are incorporated by reference into Part II, Items 6-7 of the Form
10-KSB.

Portions of the definitive Proxy Statement prepared for the 1998 Annual Meeting
of Stockholders (Definitive Proxy Statement") are incorporated by reference into
Part III, Items 9-12, of this Form 10-KSB.

<PAGE>






                                     PART I

Item 1.  Description of Business
United  Community  Bankshares,  Inc.  ("UCB"),  the Company,  was  organized and
chartered  under the laws of the  Commonwealth of Virginia on March 28, 1996 and
commenced  operations on August 1, 1996 as a bank holding company.  On August 1,
1996, the effective  date,  The Bank of Franklin  ("BOF") and The Bank of Sussex
and Surry ("BSS"),  the "Banks",  both Virginia  nonmember banks,  became wholly
owned  subsidiaries of UCB. The consummation of the affiliation of the Banks was
a result of a definitive  agreement  entered into on January 25, 1996. The Banks
have retained their respective names,  banking offices,  executive  officers and
board of directors.

On the effect date, each of the common shares of both BOF and BSS were exchanged
for 4.806 and 3.00  common  shares of UCB,  respectively.  This  resulted in the
issuance of 1,829,209 common shares of UCB stock.  Former common shareholders of
BOF received their fractional  shares in cash totaling  $3,542.  UCB also paid a
cash  dividend of $.14 per common share or a total of $259,089 on September  30,
1996.

BOF has five full service banking offices, two in the City of Franklin,  and one
each in the City of Suffolk  (Holland)  and the Towns of Courtland  and Newsoms,
Virginia.  BSS has three full service banking offices in the Towns of Wakefield,
Ivor and Surry,  Virginia. The Banks provide a wide range of financial services,
principally to individuals and to small and medium-sized  businesses,  including
individual  and  commercial   demand,   savings,   and  time  deposit  accounts,
commercial, agricultural and consumer loans, credit cards, traveler checks, safe
deposit  facilities,  ATM  services,  sales  of  United  States  Savings  Bonds,
collection  items and  official  checks.  BSS also  offers a wide  array of real
estate mortgage products including a long term fixed-rate mortgage product which
is sold in a secondary market. BSS is authorized to provide trust services,  but
does not currently do so.

The banking  industry is highly  competitive in the Banks market area. There are
approximately five banks engaged in business in the general market area in which
the Banks operate,  including three community banks, and four state-wide banking
organizations as well as a credit union.  Also in this general market area, is a
Farm Credit Bank, which is highly  competitive in the agricultural  loan market.
The Banks encounters  competition for deposits and loans from the aforementioned
competitors  in the areas in which they  operate,  as well as credit  unions and
finance companies.  In addition,  the Banks must compete for deposits with Money
Market mutual funds which are marketed  nationally,  insurance brokers and local
offices of stock brokerage firms.

The  Banks  are not  dependent  upon  an  individual  customer,  or  segment  of
customers,  the  loss of which  would  have a  material  adverse  impact  on its
operations.

BOF had 45 full-time equivalent employees as of December 31, 1997, while BSS and
UCB had 27 and one  full-time  equivalent  employees  for the same  period  end,
respectively.  None  of  these  employees  are  represented  by  any  collective
bargaining  unit.  The  Company  and the  Banks  considers  relations  with  its
employees to be good.


Supervision and Regulation
The Company is subject to state and federal banking laws and  regulations  which
impose specific requirements or restrictions, and provide for general regulatory
oversight  with respect to virtually all aspects of operations,  including,  but
not limited to, maintenance of cash reserves,  loans, mortgages,  maintenance of
minimum capital,  payment of dividends,  and establishment of branch offices. As
state-chartered  banks and members of the Federal Reserve System,  the Banks are
supervised  and  regularly  examined  by the  Federal  Reserve and the Bureau of
Financial Institutions of the Commonwealth of Virginia.

Mergers and  Acquisitions.  The Bank Hold  Company Act formerly  prohibited  the
Federal  Reserve from  approving an application  from a bank holding  company to
acquire  shares of a bank located  outside the state in which the  operations of
the holding company's banking  subsidiaries were principally  conducted,  unless
such an application was specifically authorized by statute of the state in which
the bank whose shares were to be acquired was located.  However,  under recently
enacted  federal  legislation,  the restriction to interstate  acquisitions  was
abolished  effective  September 29, 1995,  and bank holding  companies  from any
state may now  acquire  banks and bank  holding  companies  located in any other
state.  Banks also will be able to branch across state lines  effective  June 1,
1997,  provided certain  conditions are met, including that applicable state law
must expressly permit such interstate  branching.  Under Virginia law, effective
July 1, 1995,  Virginia banks can branch across state lines in those states with
which Virginia has reciprocal agreements.  Although this will have a significant
impact on the bank industry, it is not possible to determine, with any degree of
certainty, its impact of individual institutions.

Deposit  Insurance.  Section 38 of the Federal Deposit Insurance Act, as amended
by  the  Federal  Deposit  Insurance  Corporation  Improvement  Act  ("FDICIA"),
requires that the federal  banking  agencies  establish  five capital levels for
insured depository institutions - "well capitalized,"  "adequately capitalized,"
"undercapitalized,"    "significantly    undercapitalized,"    and   "critically
undercapitalized".  The Act also  requires  or  permits  such  agencies  to take
certain


<PAGE>

supervisory  actions should an insured  institution's  capital  level fall.  The
Banks were notified by the Board of Governors of the Federal Reserve System (the
"Federal  Reserve  Board")  that  they  are  classified  as  "well  capitalized"
institutions  for this  purpose.  An  "adequately  capitalized"  institution  is
restricted from accepting brokered deposits. A "significantly  undercapitalized"
institution  must develop a capital  restoration plan and is subject to a number
of mandatory and discretionary supervisory actions. These powers and authorities
are in addition to the  traditional  powers of the federal  banking  agencies to
deal  with  undercapitalized  institutions.  As  more  fully  disclosed  in  the
following paragraph,  the FDIC deposit insurance premiums required to be paid by
institutions  depend,  in part, on their capital  levels,  and  undercapitalized
institutions  will be required to pay  significantly  greater premiums than more
highly capitalized institutions.

The FDIC has implemented a risk-based deposit insurance  assessment system under
which the  assessment  rate for an insured  institutions  may vary  according to
regulatory  capital  levels  of the  institution  and other  factors  (including
supervisory  evaluations).  Effective January 1, 1996,  depository  institutions
insured  by  the  Bank   Insurance   Fund  ("BIF"),   ranked  in  the  top  risk
classification  category  of well  capitalized,  are  required  to pay  only the
statutory minimum assessment of $2,000 annually for deposit insurance, while all
other banks are required to pay  premiums  ranging from .03% to .30% of domestic
deposits. These rate schedules are subject to future adjustments by the FDIC. In
addition,  the FDIC has  authority to impose  special  assessments  from time to
time.

The  Deposit  Insurance  Funds Act of 1996 (the  "Funds  Act")  was  enacted  on
September  30, 1996.  Among other  provisions,  the Funds Act: (1) requires that
certain  depository  institutions pay a one-time special  assessment (65.7 cents
per $100 of  SAIF-assessable  deposits)  to the FDIC to  capitalize  the Savings
Association Insurance Fund ("SAIF") at its statutorily required reserve ratio of
1.25% of insurable  deposits;  (2) exempts certain depository  institutions with
SAIF assessable deposits that meet any of several specified criteria from paying
the special  assessment;  (3) authorizes the Financing  Corporation  ("FICO") to
impose periodic assessments on depository  institutions that are members of BIF,
in addition  to  institutions  that are members of SAIF,  in order to spread the
cost of interest  payments  on  outstanding  FICO bonds over a larger  number of
institutions.  Until this change in the law,  only SAIF members bore the cost of
funding these interest payments.  FICO assessment rates for the first semiannual
period of 1997 were set at 1.30% annually for BIF-assessable  deposits and 6.48%
annually for SAIF-assessable  deposits. These rates may be adjusted quarterly to
reflect  changes in assessment  bases for the BIF and the SAIF. By law, the FICO
rate on  BIF-assessable  deposits must be one-fifth the rate on  SAIF-assessable
deposits  until the insurance  funds merge or until  January 1, 2000,  whichever
occurs first.

Regulations.  On December 15, 1994,  the Federal  Reserve  Board,  the Office of
Thrift  Supervision,  the Office of the Controller of the Currency ("OCC"),  and
the FDIC (collectively the "agencies") issued a final rule entitled,  Risk-Based
Capital  Standards:  Concentration  of Credit  Risk and Risks of  Nontraditional
Activities. The final rule amends the risk-based capital standards by explicitly
identifying  concentrations  of  credit  risk and  certain  risks  arising  from
nontraditional  activities,  as well as an institution's ability to manage these
risks,  as important  factors in assessing  an  institution's  ability to manage
these risks, as important factors in assessing an institution's  overall capital
adequacy.  While no  quantitative  measure of such risk is included in the final
rule, to the extent appropriate,  the agencies will issue examination guidelines
on new developments in nontraditional  activities or concentrations of credit to
ensure  that  adequate  account  is  taken of the  risks  of  these  activities.
Moreover,  the agencies  also believe that  institutions  identified through the
examination  process as having  significant  exposure to concentration of credit
risk, or as not adequately  managing  concentration risk, should hold capital in
excess of the regulatory  minimums.  Therefore,  due to the subjective nature of
this final rule,  the Company is unable to determine  what effect,  if any, this
rule may have on regulatory capital requirements.

On  August  2,  1995,  the  OCC,  the  Federal  Reserve  Board,   and  the  FDIC
(collectively the "banking  agencies") issued a final rule entitled,  Risk-Based
Capital Standards: Interest Rate Risk. The final rule implements minimum capital
standards for interest rate risk exposures in a two-step process. The final rule
implements  the first step of that process by revising the capital  standards of
the banking agencies to explicitly  include a bank's exposure to declines in the
economic  value of its capital due to changes in interest rates as a factor that
the banking  agencies  intend to  implement  this rule on a  case-by-case  basis
during the examination process. The second step of the banking agencies' process
will be to issue a proposed  rule that would  established  an  explicit  minimum
capital charge for interest rate risk, based on the level of the bank's measured
interest rate risk exposure.  Due to the subjective nature of the first phase of
this final rule,  the Banks are unable to determine  what effect,  if any,  this
rule may have on its regulatory capital requirements.

On November 16, 1995,  the Federal  Reserve  Board issued  guidelines  entitled,
Federal Reserve  Guidelines for Rating Risk Management at State Member Banks and
Bank  Holding  Companies  (the   "Guidelines").   The  Guidelines  specify  that
principles  of sound  management  should  apply to the entire  spectrum of risks
facing a banking  institution  including,  but not limited to,  credit,  market,
liquidity,  operational, legal, and reputational risk and that, for state member
banks, a single numerical rating for risk management  should be provided as part
of the examination process. The Guidelines also specify that examination reports
should make reference to the types and nature of corrective actions that need to
be taken by institutions  to address noted risk management and internal  control
deficiencies.  Where appropriate,  institutions  should also be advised that the
Federal  Reserve  Board will  initiate  supervisory  actions  if the  failure to
separate critical operational duties creates the potential for serious losses or
if material  deficiencies or situations that threaten the safe and sound conduct


<PAGE>

of their activities are not adequately  addressed in a timely manner. Due to the
subjective nature of the risk-management  evaluation,  the Banks are not able to
determine what effect, if any this rule may have on the operation of the Banks.

On October 1, 1996,  the banking  agencies  issued new  guidelines  amending the
Interagency  Guidelines  Establishing  Standards for Safety and  Soundness  (the
"Guidelines")  to include asset quality and earnings  standards.  The Guidelines
adopted  pursuant  to the  requirements  of  Section 39 of the  Federal  Deposit
Insurance Act. The Guidelines require financial institutions to identify problem
assets and estimate  inherent losses. In order to comply with these Guidelines a
financial  institution  shall:  (1)  consider  the size and  potential  risks of
material  concentrations of credit risk; (2) compare the level of problem assets
to the level of capital and establish reserves  sufficient to absorb anticipated
losses on those and other  assets;  (3) take  appropriate  corrective  action to
resolve problem assets,  as appropriate;  and (4) provide periodic asset quality
reports  to the board of  directors  to  assess  the  level of asset  risk.  The
earnings standards specified by the Guidelines require an institution to compare
its earnings trends (relative to equity,  assets,  and other common  benchmarks)
with its historical  experience and with the earnings  trends of its peers.  The
Guidelines,  relative to the earnings standards, require the institution to: (1)
evaluate the adequacy of earnings with regard to the institution's relative size
and complexity, and the risk profile of the institution's assets and operations;
(2) assess the source,  volatility, and sustainability of earnings; (3) evaluate
the effect of nonrecurring or extraordinary income or expense; (4) take steps to
ensure that earnings are  sufficient to maintain  adequate  capital and reserves
after considering asset quality and the  institution's  rate of growth;  and (5)
provide periodic reports with adequate  information for management and the board
of  directors  to assess  earnings  performance.  The  Guidelines  note that the
complexity  and  sophistication  of  and  institution's  monitoring,   reporting
systems, and corrective actions should be commensurate with the size, nature and
scope of the  institution's  operations.  The Banks do not  believe  that  these
Guidelines will materially effect their operations or financial condition.

The Federal Financial  Institutions  Examination  Council ("FFIEC") approved
revisions to the reporting  requirements for the Reports of Condition and Income
(Call Report) that took effect as of March 31, 1997. The revisions that are
expected to have the greatest impact on most financial  institutions will be the
adoption of generally accepted  accounting  principles ("GAAP") as the reporting
basis for the balance sheet, income statement and related Call Report schedules.
This involves the revision of Call Report instructions that currently depart
from GAAP,  the  addition of a small number new items to meet  supervisory  data
needs  resulting  from the  adoption  of  GAAP,  and the  modification  of other
existing  Call Report items or  instructions.  In the March 31, 1997 Call
Report, financial  institutions  are  required  to adopt  the  provisions  of
Financial Accounting  Standards Board ("FASB") Statement No. 125, Accounting for
Transfers and  Servicing of  Financial  Assets and  Extinguishments  of
Liabilities,  for transfers and servicing of assets occurring after December 31,
1996. AS FASB 125 provides  standards  for  distinguishing  the transfer of
financial  assets from secured  borrowings  and,  therefore,   the  recognition
and  derecognition  of financial  assets,   regulatory  capital  calculations
could  be  significantly impacted.  The Banks have considered the relevant
provisions of FASB 125, and assessing the accounting treatment and legal
ramifications of modifying participation   agreements.   Additional information
with  respect  to  this pronouncement is included in "Management's  Discussion
and Analysis of Financial Condition and Results of Operations" under Recent
Accounting Pronouncements, and is incorporated by reference thereto.

On December  20, 1996 the FDIC Board of  Directors  adopted the FFIEC's  updated
statement  of policy  entitled  Uniform  Financial  Institutions  Rating  System
("UFIRS").  The updated UFIRS replaces the previous rating system established in
the 1979  statement  of policy, and was  effective  January  1, 1997.  Under the
existing UFIRS, each financial  institution is assigned a composite rating based
on an evaluation  and rating of five  essential  components of an  institution's
financial  condition  and  operations.  The five  component  areas  are  Capital
Adequacy,  Asset  Quality,  Management,  Earnings and Liquidity  ("CAMEL").  The
updated  UFIRS  includes the addition of a sixth  component for  Sensitivity  to
market risk  ("CAMELS").  The new sixth component  addresses the degree to which
changes in interest rates,  foreign  exchange rates,  commodity prices or equity
prices can adversely affect a financial  institution's  earnings or capital. The
new  component  focuses on an  institution's  ability to monitor  and manage its
market risk,  and will provide an  institution's  management  with a clearer and
more focused  indication of supervisory  concerns in this area. The Banks do not
believe that this statement of policy will materially effect their operations.


Item 2.  Description of Property
United Community Bankshares,  Inc., the parent company, did not own any real or
tangible personal property as of December 31, 1997.

The Bank of Franklin
BOF's main office is located at 100 East Fourth  Avenue in  Franklin,  Virginia.
The College Drive branch office is located at 201 North College Drive, Franklin,
Virginia.  The main office and the College  Drive  branch  office  maintain  ATM
facilities.  The Courtland  branch is located at Shands Shopping  Center,  22736
Main Street,  Courtland,  Virginia;  the Newsoms  branch at 22334 General Thomas
Highway,  Newsoms,  Virginia;  and the  Holland  branch  at 6617  Holland  Road,
Suffolk, Virginia. Other properties owned include three two-story houses located
at 403, 405, and 407 Middle Street, Franklin,  Virginia. The houses are held for
rental  purposes and possible  further  expansion.  The properties are rented to
individuals  for  living  quarters.  The Bank  also  owns a parcel of land and a
two-car garage located at 200 East Fourth 

<PAGE>

Avenue, Franklin,  Virginia. The Bank has retained this property for storage and
employee parking and may use this property for future  expansion.  The Courtland
branch is the only leased property. All properties are in good condition.

The Bank of Sussex and Surry
BSS's main office is located at 205 Railroad Avenue in Wakefield,  Virginia. The
Ivor branch office is located at 8314 Main Street,  Ivor, Virginia and the Surry
branch Office is located at 207 Colonial Trail East, Surry,  Virginia.  BSS also
owns property located on 535 County Drive (Highway 460) in the Town of Wakefield
on which it has a remote  stand-alone ATM facility.  This property is also owned
for possible future expansion purposes. All of these properties are owned by BSS
and in good condition.


Item 3.  Legal Proceedings
In the course of its  operations,  United  Community  Bankshares,  Inc.  and its
subsidiaries are aware of only one material  pending or  threatened  litigation,
unasserted  claims and/or  assessments  through December 31, 1997, or subsequent
thereto.  This suit is described  below.  The only other litigation in which UCB
and its  subsidiaries,  BOF and BSS, are involved are collection suits involving
delinquent loan accounts in the normal course of business.

Fidelity  National Title Insurance  Company of New York,  successor by merger to
Security Title and Guaranty  Company (the "Title  Company"),  filed suit against
the Bank of Sussex and Surry in November, 1997.

The  Title  Company  issued a title  insurance  policy  in favor of the BSS (the
"Title  Policy")  insuring that the Bank had a first priority deed of trust lien
on a  one-quarter  interest in certain  real  property  located in Isle of Wight
County,  Virginia (the "Isle of Wight Property").  The Circuit Court for Isle of
Wight entered a Final Decree on March 6, 1996 that Farmers  Bank,  Windsor had a
first  priority deed of trust lien on that  one-quarter  interest in the Isle of
Wight  Property  and that BSS had a second  priority  deed of trust lien on that
same one-quarter interest.

The Title Company seeks the following  relief:  (i) a declaratory  judgment that
the first  priority deed of trust lien in favor of Farmers Bank,  Windsor on the
one-quarter  interest  Isle of Wight  Property  Wight  County be  excluded  from
coverage  under the Title  Policy,  (ii) that the Title  Policy be  reformed  to
exclude the Farmers Bank,  Windsor deed of trust from  coverage  under the Title
Policy  and  (iii)  that the  Title  Company  be  reimbursed  for its  costs and
attorneys' fees.

BSS intends to  vigorously  defend  this suit.  At this time,  the Bank's  legal
counsel is unable to express any view as to the possible outcome of this matter.
Counsel notes,  however,  that if this matter is resolved in a manner adverse to
the interests of the Bank,  the amount of any loss that will be sustained by BSS
will not be more than the approximately $75,000.00 expended by the Title Company
for costs and attorneys' fees.


Item 4.  Submission of Matters to a Vote of Security Holders
No matters  were  submitted  to UCB  shareholders  for a vote  during the fourth
quarter of the year-end December 31, 1997.


                                     PART II


Item 5.  Market for Common Equity and Related Stockholder Matters
United  Community  Bankshares,  Inc.  has  arrangements  with Wheat First Union,
Davenport & Company of Virginia,  and Scott Stringfellow to make a market in the
Company's  common stock. UCB stock is listed on the OTC Bulletin Board under the
symbol  "UCMB".  Listing on the bulletin  board began  December 17, 1996. Buy or
sell transactions may be effected through either of these brokerage firms.

The Bank of Franklin  serves as UCB's transfer agent.  Any inquiries  concerning
the  disposition  of UCB  securities  should be  directed  to  United  Community
Bankshares, Inc. corporate headquarters in Franklin, Virginia.

United Community Bankshares, Inc. was capitalized on August 1, 1996, pursuant to
a share exchange between UCB and the subsequent  subsidiary  Banks, BOF and BSS.
See "Item 1.  Description of Business."  High and low sales prices of UCB Common
Stock are set forth in the following table.  Quoted sale prices through December
17, 1996 were from UCB  records,  while sale prices after this date are from the
three aforementioned brokers. UCB Common Stock is thinly traded,  therefore, the
volume of trading has been insufficient to establish a meaningful market price.

Sales Prices and Dividends Paid per Share
<TABLE>
<CAPTION>
                                          High               Low            Dividend
     1997
         <S>                           <C>                <C>                <C>
         4th Quarter                     $14.00            $12.50
         3rd Quarter                     $13.375           $12.00             $0.16
         2nd Quarter                     $13.00            $11.50
         1st Quarter                     $12.50            $10.25             $0.15
</TABLE>

<PAGE>
<TABLE>


     1996
        <S>                             <C>                <C>
         4th Quarter
              Dec. 17 - Dec. 31          $11.00            $11.00
              Oct. 1 - Dec. 16           $12.00            $10.00
         3rd Quarter                    No trades         No trades           $0.14
</TABLE>

On January 24, 1998, the declaration  date, the Board of Directors  approved the
payment of a  semi-annual  cash dividend of $.17 per share for  shareholders  of
record on February 27, 1998. The dividend,  totaling approximately  $310,966, is
payable on March 31, 1998.

As of February 27, 1998 UCB had 986 shareholders of record of its Common Stock.


Item 6.  Management's Discussion and Analysis or Plan of Operation
The  information  under  Management's   Discussion  and  Analysis  of  Financial
Condition  and Results of  Operations on pages 3 to 13 of the 1997 Annual Report
to Shareholders is hereby incorporated by reference.


Item 7.  Financial Statements
The  financial  statements  on  pages  14 to 35 of the  1997  Annual  Report  to
Shareholders is hereby incorporated by reference.


Item 8.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

None.


                                    PART III


Item  9.  Directors,   Executive  Officers,   Promoters,  and  Control  Persons;
Compliance  With Section 16(a) of the Exchange Act.
Incorporated by reference to the Proxy Statement for the 1998 Annual Meeting of
Shareholders.


Item 10.  Executive Compensation
Incorporated  by reference to the Proxy Statement for the 1998 Annual Meeting of
Shareholders.


Item 11.  Security Ownership of Certain Beneficial Owners and Management
Incorporated  by reference to the Proxy Statement for the 1998 Annual Meeting of
Shareholders.


Item 12.  Certain Relationships and Related Transactions
Incorporated  by reference to the Proxy Statement for the 1998 Annual Meeting of
Shareholders.



                                     PART IV


Item 13.  Exhibits and Reports on Form 8-K
         a.    Exhibits

         United Community Bankshares, Inc., 1997 Annual Report


         b.    Form 8-K.

         No Form 8-K filed during the fourth quarter of 1997.





<PAGE>
==========================================================================


UNITED
COMMUNITY
BANKSHARES, INC.









                                                                      1997
                                                                    ANNUAL
                                                                    REPORT


================================================================================

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================

The following  discussion provides information about the major components of the
results of operations and financial  condition,  liquidity and capital resources
of United  Community  Bankshares,  Inc.  ("UCB" or the "Company") and its wholly
owned  subsidiaries,  The Bank of  Franklin  ("BOF")  and The Bank of Sussex and
Surry  ("BSS"),  collectively  referred  to as the Banks.  This  discussion  and
analysis  should  be  read  in  conjunction  with  the  Consolidated   Financial
Statements and Notes to the Consolidated Financial Statements.


Overview

UCB reported net income of $2,230,438  in 1997,  compared to $1,922,905 in 1996,
representing  an increase of 16.0%.  Basic earnings per share increased to $1.22
per share in 1997 compared to $1.05 per share in 1996.  The  increased  earnings
during this period were  primarily due to higher  levels of net interest  income
and a decrease in noninterest expenses, which were partially offset by increases
in  provision  for loan losses and income tax  expense.  UCB  incurred  one-time
merger related expenses of $189,758 in 1996.

Profitability  as  measured  by the  Company's  return on average  equity  (ROE)
increased to 11.31% in 1997,  up from 10.68% in 1996.  Another key  indicator of
performance,  the return on average assets (ROA) for 1996 was 1.49%, an increase
from 1.33% in 1996. Without the one-time merger related expenses, ROE and ROA in
1996 would have been 11.73% and 1.46%, respectively.

For the year 1997, UCB had a dividend payout ratio of 25.4%, which compared to a
29.8%  ratio for the year  1996.  The  average  equity to  average  asset  ratio
increased  from 12.43% for 1996 to 13.15% for 1997.  Average assets grew by 3.5%
while average equity increased 9.6% from 1996 to 1997.

The Company's  assets at year-end  1997 were $155.9  million,  up by 4.0%,  over
year-end 1996 of $149.9  million.  Net loans  outstanding  at year-end 1997 were
$81.4 million,  up from the year-end level for 1996 of $77.0 million,  posting a
$4.4 million  increase or 5.8%.  Total  deposits at year-end were $133.4 million
and $129.8 million at year-end 1997 and 1996, respectively,  an increase of $3.6
million or 2.8%.


RESULTS OF OPERATIONS

Net Interest Income

The  principal  source of earnings for the Company is net interest  income.  Net
interest  income equals the amount by which  interest  income  exceeds  interest
expense.   Changes   in  volume   and  mix  of   interest-earning   assets   and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.

During 1997, on a tax equivalent  basis,  net interest income  increased 6.2% to
$6.5 million from $6.2 million in 1996. This was a result of a $439,000 increase
in interest income which exceeded a $57,000  increase in interest  expense.  The
increase in interest income was largely due to: a) increased loan volume,  which
on an average net loan basis increased 10.2% to $81.7 million from $74.1 million
in 1996; b) increases in sales of average federal funds, which increased 4.2% to
$3.9 million from $3.7 million in 1997 and 1996, respectively;  and c) decreases
in average  investment  securities  of $3.3 million to $54.6  million from $57.9
million in 1997 and 1996,  respectively.  The increase in average earning assets
was  funded  by  the  growth  in  deposits.  Average  interest-bearing  deposits
increased  2.1%  to  $109.9  million  from  $107.6  million  in 1997  and  1996,
respectively.  The yield on interest  earning assets  increased to 8.10% in 1997
compared  to 8.04% in 1996.  Funding  costs on  interest  bearing  deposits  and
short-term  borrowings  decreased  to 4.33% in 1997 from 4.38% in 1996.  The net
interest margin increased to 4.67% in 1997 from 4.54% in 1996.


================================================================================

2
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
The  following  table  depicts  interest  income on average  earning  assets and
related  yields,  as  well  as  interest  expense  on  average  interest-bearing
liabilities and related rates paid for the periods indicated.

<TABLE>
<CAPTION>


                                     AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
                                                     (Dollars in Thousands)

                                                                      Twelve Months Ended December 31,
                                                             1997                          1996
                                            ---------------------------------------    ------------------------------------------
                                               Average       Income/       Yield          Average         Income/         Yield
                                               Balance       Expense        Rate          Balance         Expense         Rate
                                            -------------  ------------  ----------    --------------  --------------   ---------
 ASSETS:
 Securities:
<S>                                             <C>            <C>          <C>        <C>              <C>               <C>
      Taxable                                   $ 35,589       $ 2,160      6.07%      $ 38,469         $ 2,332           6.06%
      Tax-exempt (1)                              19,019         1,402      7.37%        19,408           1,446           7.45%
                                            -------------  ------------           --------------  --------------
      Total Securities                            54,608         3,562      6.52%        57,877           3,778           6.53%
 Loans, net (2)                                   81,666         7,573      9.27%        74,128           6,925           9.34%
 Federal funds sold                                3,858           212      5.50%         3,702             205           5.54%
                                            -------------  ------------           --------------  --------------
      Total earning assets                       140,132      $ 11,347      8.10%       135,707        $ 10,908           8.04%
 Less: Allowance for loan losses                  (1,187)                                (1,250)
 Total nonearning assets                          11,018                                 10,462
                                            =============                         ==============
      Total assets                             $ 149,963                              $ 144,919
                                            =============                         ==============

 LIABILITIES and STOCKHOLDERS' EQUITY:
 Interest-bearing deposits:
      Checking                                  $ 16,702         $ 458      2.74%      $ 16,469           $ 472           2.87%
      Regular savings and club accounts           11,940           362      3.03%        11,725             358           3.05%
      Money market savings                        19,470           677      3.48%        20,213             711           3.52%
      Certificates of deposit
         Over $100,000                            10,770           575      5.34%        10,040             529           5.27%
         $100,000 and under                       51,039         2,678      5.25%        49,181           2,639           5.37%
                                            -------------  ------------           --------------  --------------
      Total interest-bearing deposits            109,921         4,750      4.32%       107,628           4,709           4.38%
 Short-term borrowings                             1,095            58      5.30%           857              42           4.90%
                                            -------------  ------------           --------------  --------------
      Total interest-bearing liabilities         111,016       $ 4,808      4.33%       108,485         $ 4,751           4.38%
                                                           ============                           ==============
 Noninterest-bearing liabilities
      Demand deposits                             18,215                                 17,584
      Other noninterest-bearing liabilities        1,003                                    842
                                            -------------                         --------------
      Total liabilities                          130,234                                126,911
 Shareholders' equity                             19,729                                 18,008
                                            -------------                         --------------
 Total liabilities and stockholders' equity    $ 149,963                              $ 144,919
                                            =============                         ==============

 Net interest income                                           $ 6,539                                  $ 6,157
                                                           ============                           ==============
 Interest rate spread (3)                                                   3.77%                                         3.66%
 Net interest margin (4)                                                    4.67%                                         4.54%
</TABLE>

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

(1)  Income and yields are  reported on a taxable  equivalent  basis  assuming a
     federal tax rate of 34%. The Banks are exempt from from state income taxes.
(2)  For the purpose of these  calculations,  nonaccruing  loans are included in
     the daily average loan amounts outstanding.
(3)  Represents  the  differences  between  the yield on total  average  earning
     assets and the cost of total interest-bearing liabilities.
(4)  Represents  the ratio of net  interest-earnings  to the average  balance of
     interest-earning assets.

================================================================================
                                                                               3

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================

Interest  income and expenses are affected by fluctuations in interest rates, by
changes in the volumes of earning assets and interest-bearing  liabilities,  and
by the interaction of rate and volume factors.  The following table analyzes the
direct causes of the year-to-year  changes in net interest earnings on a taxable
equivalent basis.  Rate/volume  variance,  the third element in the calculation,
along with rate and volume variances, are not shown separately, but is allocated
to the rate and  volume  variances  in  proportion  to the  relationship  of the
absolute dollar amounts of the change in each. Nonaccruing loans are included in
average loans outstanding.

<TABLE>
<CAPTION>

                                       VOLUME AND RATE ANALYSIS
                                             (In thousands)


                                                1997 vs. 1996                       1996 vs. 1995
                                             Increase (Decrease)                 Increase (Decrease)
                                             Due to Changes in:                  Due to Changes in:
                                        ------------------------------      ------------------------------
                                         Volume     Rate      Total          Volume      Rate     Total
                                        --------- ---------  ---------      ---------  --------- ---------
Assets:
Securities:
<S>                                        <C>          <C>     <C>            <C>        <C>       <C>
    Taxable                                ($175)       $3      ($172)         $ 327      $ (58)    $ 269
    Tax-exempt                               (29)      (15)       (44)           301         71       372
Loans (net)                                  699       (51)       648            720       (121)      599
Federal funds sold                             9        (2)         7           (144)       (13)     (157)
                                        --------- ---------  ---------        ---------  --------- ---------
    Total earning assets                     504       (65)       439          1,204       (121)    1,083
                                        --------- ---------  ---------      ---------  --------- ---------

Interest-bearing deposits:
    Checking                                   7       (21)       (14)            99        (12)       87
    Regular savings & club accounts            7        (3)         4             22        (13)        9
    Money market savings                     (26)       (8)       (34)            35        (17)       18
    Certificate of deposit:
       Over $100,000                          39         7         46              2         20        22
       $100,000 and under                     98       (59)        39            387         26       413
Short-term borrowings                         12         4         16             39          1        40
                                        --------- ---------  ---------      ---------  --------- ---------
    Total interest-bearing liabilities       137       (80)        57            584          5       589
                                        --------- ---------  ---------      ---------  --------- ---------
    Net interest income                     $367       $15       $382           $620      ($126)     $494
                                        ========= =========  =========      =========  ========= =========

</TABLE>


Interest Sensitivity

Paramount to earnings performance and the maintenance of sufficient liquidity is
the  effective  management  of  interest  rate  risk,  commonly  referred  to as
asset/liability  management.  The interest  sensitivity  position ("gap") is the
difference between interest sensitive assets and interest sensitive  liabilities
in a specific  time  interval.  The gap can be managed  by  repricing  assets or
liabilities,  affected by selling securities available for sale, by replacing an
asset or liability at maturity, or by adjusting the interest rate or the life of
an asset or liability.  Matching of assets and liabilities repricing in the same
interval  help to hedge the risk and minimize  the impact on interest  income in
periods of rising and falling interest rates.

The Banks  evaluate  interest  sensitivity  risk in accordance  with their asset
liability  policies,  and then formulate strategy regarding asset  originations,
pricing, funding sources, and off-balance sheet commitments in order to decrease
sensitivity  risk. These strategies are based on management's  outlook regarding
future interest rate movements,  the state of the regional and national economy,
and other financial and business risk factors.  The Banks  establish  prices for
deposits and loans based primarily on local market conditions.

At December 31, 1997,  the Company had $8.2  million  more in  liabilities  than
assets  repricing  within one year or less and was,  therefore,  in a  liability
sensitive position for that period with a negative 5.71% cumulative static gap.

Generally,  positive gaps affect net interest margins and earnings negatively in
periods of falling rates, and conversely,  higher negative gaps adversely impact
net interest  margin and earnings in periods of rising rates as a higher  volume
of  liabilities  will reprice  quicker than assets over the period for which the
gap is computed.  To soften the potential  impact of changes in interest  rates,
$39.0 million of total loans,  at December 31, 1997,  were either  accruing at a
variable interest rate

================================================================================
4
<PAGE>
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
or maturing  within one year. In addition,  at December 31, 1997,  federal funds
sold, which are repriceable daily, were $10.8 million and investment  securities
maturing or repricing within one year totaled $17.2 million, which could be sold
quickly to meet special  funding needs or to adjust the Company's  interest rate
sensitivity position.

The following  table  presents the Company's  interest  sensitivity  position at
December 31, 1997. This is a one-day position which is continually  changing and
is not necessarily indicative of the Company's position at any other time.

<TABLE>
<CAPTION>

                                            INTEREST SENSITIVITY ANALYSIS
                                                (Dollars in Thousands)

                                                                        December 31, 1997 (1)
                                               ------------------------------------------------------------------------
                                                 Within         90-365        1 to 5         Over
                                                 90 Days         Days          Years        5 Years         Total
                                               ------------  -------------  ------------  ------------  ---------------
Earning Assets:
<S>        <C>                                    <C>            <C>           <C>            <C>             <C>
Loans, net (2)                                    $ 28,850       $ 10,220      $ 39,631       $ 3,675         $ 82,376
Securities (3)                                      10,019          7,181        21,808        12,555           51,563
Federal funds sold and other                        10,814              -             -             -           10,814
                                               ============  =============  ============  ============  ===============
        Total earning assets                      $ 49,683       $ 17,401      $ 61,439      $ 16,230        $ 144,753
                                               ============  =============  ============  ============  ===============

Interest-bearing liabilities:
Deposits:
     Interest checking (4)                         $ 1,465        $ 4,389      $ 11,721      $      -         $ 17,575
     Regular and Christmas Club savings (4)          1,599          2,780         5,520         2,076           11,975
     Money market savings                           19,365              -             -             -           19,365
     Certificates of deposit:
        $100,000 and over                            3,222          5,878         2,860             -           11,960
        Less than $100,000                          12,776         23,560        15,460             6           51,802
Short-term borrowings                                  309              -             -             -              309
                                               ============  =============  ============  ============  ===============
        Total interest-bearing liabilities        $ 38,736       $ 36,607      $ 35,561       $ 2,082        $ 112,986
                                               ============  =============  ============  ============  ===============

Period gap                                        $ 10,947      $ (19,206)     $ 25,878      $ 14,148         $ 31,767
Cumulative gap                                    $ 10,947       $ (8,259)     $ 17,619      $ 31,767
Ratio of cumulative gap to total
     earning assets                                  7.56%         -5.71%        12.17%        21.95%

</TABLE>

-----------------------------------------------
(1)     The repricing  dates may differ from maturity  dates for certain  assets
        due to prepayment assumptions.
(2)     Excludes nonaccrual loans.
(3)     Securities classified "available for sale" are carried at estimated fair
        value. Securities classified "held to maturity" are carried at amortized
        cost.
(4)     The  Company has found that its regular  savings and  interest  checking
        historically represent core deposits and are not sensitive to changes in
        related  market  rates  and,  therefore,  have been  spread  across  the
        columns.

Noninterest income

Noninterest  income slightly decreased 1.5% to $864,409 in 1997 from $877,395 in
1996.  Service charges on deposit  accounts and overdraft  charges  increased by
approximately  $25,000. This increase was offset by reductions in gains on sales
of investment  securities of approximately  $9,000 and  miscellaneous  income of
approximately $24,000.

================================================================================
                                                                               5

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
                               Noninterest Income
                             (Dollars in Thousands)

                                                     Year Ended December 31,
                                                 -------------------------------
                                                     1997              1996
                                                 --------------    -------------
 Overdraft charges on deposit accounts                   $ 494             $ 465
 Other service charges on deposit accounts                 191               195
 Fees for other customer services                          125               130
 Securities gains, net                                       4                13
 Other operating income                                     50                74
                                                 ==============    =============
 Total noninterest income                                $ 864             $ 877
                                                 ==============    =============


Noninterest expenses

Noninterest expenses for 1997 were $3.873 million,  down from $3.926 million for
1996,  representing a 1.4% decrease.  One-time merger related  expenses  totaled
approximately $190,000 in 1996. As previously mentioned, the holding company was
formed in 1996. Miscellaneous expenses also decreased $46,000 from 1996 to 1997.
These decreases were partially offset by the following increases: 1) an increase
in salaries and employee benefits of $82,000, arising from general pay increases
and increased staffing levels due to the continued growth of the Company;  2) an
increase in professional  fees of $83,000,  resulting from the  consolidation of
the employee benefit program and the establishment of a stock option program for
key  employees;  3) a $20,000  increase in  occupancy  costs;  and 4) an $11,000
increase in FDIC Insurance  premiums.  Premiums for FDIC Insurance increased due
to increased rates for banks insured by the Bank Insurance Fund.

                              NONINTEREST EXPENSES
                             (Dollars in Thousands)


                                                       Year Ended December 31,
                                                       -----------------------
                                                      1997                1996
                                                      ----                ----

          Salaries and employee benefits              $2,165             $2,083
          Occupancy expenses                             284                264
          Depreciation and equipment maintenance         269                240
          FDIC assessment                                 15                  4
          Postage                                         99                103
          Professional fees                              210                128
          Franchise, state and local taxes               127                164
          Merger related expenses                          -                190
          Other operating expenses                       704                750
                                                      ------             ------
          Total noninterest expenses                  $3,873             $3,926
                                                      ------             ------

Income Taxes

Applicable income taxes on 1997 earnings  amounted to $693,000,  resulting in an
effective tax rate of 23.7% compared to $597,000, or 23.7%, in 1996.

Note 8 to UCB's  Financial  Statements  provides a  reconciliation  between  the
amount of income tax expense computed using the federal  statutory tax rate with
the  Company's  reported tax expense.  Also,  included in Note 8 is  information
regarding the principal  items giving rise to deferred  taxes as of December 31,
1997 and 1996.

================================================================================
6
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================

Asset Quality

Allowance  for Loan Losses.  The  allowance is to provide for  potential  losses
inherent in the loan portfolio.  Among other factors,  management  considers the
Company's  historical  loss  experience,  the size and  composition  of the loan
portfolio,  the value and adequacy of collateral and  guarantors,  nonperforming
credits and current and anticipated  economic  conditions.  There are additional
risks of future loan losses which cannot be precisely  quantified  or attributed
to  particular  loans or classes of loans.  Since  those risks  include  general
economic  trends,  as well as conditions  affecting  individual  borrowers,  the
allowance  for loan losses is an  estimate.  The  allowance  is also  subject to
regulatory  examinations and  determination as to adequacy,  which may take into
account such factors as the methodology used to calculate the allowance, and the
size of the  allowance in  comparison  to peer banks  identified  by  regulatory
agencies.

In 1997, the Company had $128,750 in provision  expense  compared to $101,000 in
1996.  Loans charged off, which are charged  directly to the allowance when they
occur, during 1997 amounted to $332,000 compared to $254,000 in 1996. Recoveries
amounted to $100,000 and $112,000 during 1997 and 1996, respectively.  The ratio
of net charge-offs to average  outstanding  loans was 0.29% in 1997 and 0.19% in
1996.  Management  feels that the  reserve is  adequate  to absorb any losses on
existing  loans that may  become  uncollectible.  See Note 4 to UCB's  Financial
Statements for more information  concerning the Company's loan loss and recovery
experience for the past two years.

Nonperforming  assets.  Total nonperforming  assets, which consist of nonaccrual
loans and  foreclosed  properties,  were $350,000 at December 31, 1997, a slight
increase of $3,000 or 0.9% from a level of $347,000 at December 31, 1996.  Total
nonperforming  assets and loans over 90 days past due and accruing interest were
0.57% of  period-end  loans and  foreclosed  property as of December 31, 1997 as
compared to 1.08% at December  31, 1996.  At December  31, 1997,  in addition to
loan on either  nonaccrual  status  or loans  past due 90 days or more and still
accruing  interest,  UCB had  approximately  $4,324,947  of loans  that had been
internally  classified.  These loans  require more than usual  attention and are
potential problems.  UCB considered these loans in establishing the level of the
allowance for loan losses. The following table summarizes  nonperforming  assets
for the past two years.

                              NONPERFORMING ASSETS
                             (Dollars in Thousands)



                                                       December 31,
                                                       ------------
                                                      1997             1996
                                                      -----           ------

     Nonaccrual loans                            $      180         $     182
     Restructured loans                                  -                 -
     Foreclosed properties                              170               165
                                                        ---               ---
          Total nonperforming assets             $      350         $     347
                                                        ===               ===

     Loans past due 90 days accruing interest    $      119         $     499
                                                        ====              ====

     Allowance for loan losses to year-end loans      1.34%              1.55%
     Allowance for loan losses to nonaccrual loans  614.44%            664.29%

     Nonperforming assets and loans past due 90
       days accruing interest to year-end loans
       and foreclosed property                        0.57%              1.08%
     Net charge-offs to average loans outstanding
       during the year                                0.29%              0.19%



The Company places a loan on nonaccrual status when management  believes,  after
considering  economic and business conditions and collection  efforts,  that the
borrower's  financial  condition is such that  collection of both  principal and
interest is  doubtful.  UCB's policy is to place loans on  nonaccrual  status if
principal  or  interest  is past due for 90 days or more unless the debt is both
well secured and in the process of being collected.  For 1997 and 1996,  $13,553
and $19,375,  respectively, in gross interest income would have been recorded if
nonaccrual  loans had been current  throughout the period  outstanding.  For the
period ended December 31, 1997 and 1996,  interest income received on nonaccrual
loans was  negligible.  Impaired  loans at  December  31, 1997 and 1996 were not
significant.



================================================================================

                                                                               7

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
FINANCIAL CONDITION


Loan Portfolio

Loans,  net of unearned  income and the  allowance  for loan losses,  were $81.4
million at December 31,  1997,  an increase  from $77.0  million at December 31,
1996, a $4.4 million or 5.8%  increase.  This is  consistent  with  management's
efforts to increase the level of loans during 1997.

Loans secured by real estate  comprise  54.7% of the total loan  portfolio as of
December  31,  1997,  and include a diverse  portfolio  of which  single  family
residential  loans  comprise  27.8%  of the loan  portfolio.  Loans  secured  by
commercial real estate  comprised  20.7%,  while  traditional  commercial  loans
comprised  19.7% of total loans.  The  commercial  category also includes  loans
secured by other  forms of  collateral  as well as some  unsecured  debt.  Loans
secured by agricultural  real estate and other loans to the agricultural  sector
comprised 3.0% and 8.5%, respectively,  of the loan portfolio as of December 31,
1997. Other loans to the agricultural  sector include  unsecured loans and loans
secured by farm equipment,  crops and other collateral.  The Company's  consumer
portfolio  comprised  17.1% of total loans as of December 31, 1997.  Real estate
construction  loans accounted for 3.1% of total loans outstanding as of December
31, 1997. The Company has no loans outstanding to foreign countries.

During the normal course of business,  the Company makes various commitments and
incurs certain  contingent  liabilities which are disclosed but not reflected in
its financial statements.  These commitments and contingent  liabilities include
commitments  to extend  credit and  financial  standby  letters  of  credit.  At
December  31, 1997,  commitments  for standby  letters of credit and  guarantees
written were $883,000 and  commitments to extend credit were $12.1  million.  At
December  31, 1996,  commitments  for standby  letters of credit and  guarantees
written  were $1.1  million  and  commitments  to extend  credit  totaled  $13.8
million.

Interest  income  on  installment,  agricultural,  commercial,  and real  estate
mortgage loans was computed on the principal balance outstanding.  Most variable
rate loans carry an interest rate tied to the Banks' base lending  rates,  which
are set by the Banks,  or to Money Center Prime, as published in the Wall Street
Journal.

Note 4 to UCB's  Financial  Statements  provides a schedule of loans by type and
other information.



Investment Securities

The investment  securities  portfolio  plays a primary role in the management of
interest  rate  sensitivity  of the Company and generates  substantial  interest
income. In addition, the portfolio serves as a source of liquidity for depositor
and loan demands and is used as needed to meet collateral requirements.

The securities portfolio consists of two components,  investment securities held
to maturity and  securities  available for sale, as prescribed by FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities ("FASB
115").  Securities  are  classified  as  securities  held to  maturity  based on
management's intent and the Company's ability, at the time of purchase,  to hold
such  securities to maturity.  These  securities are carried at amortized  cost.
Securities  which may be sold in response to changes in market  interest  rates,
changes in the securities'  prepayment risk,  increases in loan demand,  general
liquidity  needs and other similar  factors are classified as available for sale
and are carried at estimated fair value.

At year-end 1997,  total  investment  securities  were $51.6 million,  down from
$56.4  million at year-end  1996.  The decline in the  securities  portfolio  is
primarily due to the  investment  of proceeds  from the sales and  maturities of
securities in loans rather than new  securities.  Excluding U.S.  Treasuries and
securities of U.S. agencies,  neither the aggregate book value nor the aggregate
market  value of the  securities  of any  issuer  exceeded  ten  percent  of the
Company's   stockholders'  equity.  The  following  table  presents  information
pertaining to the composition of the investment securities portfolio. Additional
information  on the Company's  investment  securities  portfolio is in Note 3 to
UCB's Financial Statements.

================================================================================
8

<PAGE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
             MATURITIES OF SECURITIES HELD AS OF DECEMBER 31, 1997
                             (Dollars in thousands)

<TABLE>
<CAPTION>


                                                                                    Over 10
                                                                                    Years &
                                        1 Year         1 to 5         5 to 10        Equity
                                        or Less        Years          Years         Securities       Total
                                        -------        -----          -----         ----------       -----
US Agency securities:
<S>                                      <C>           <C>            <C>            <C>            <C>
     Amortized cost                      $ 3,157       $15,550        $ 2,573        $1,622         $22,902
     Fair value                            3,151        15,499          2,570         1,629          22,849
     Weighted average yield                 5.47%         5.91%          6.34%         6.41%           5.93%

US Treasury securities:
     Amortized cost                      $   800       $     -        $   263        $    -         $ 1,063
     Fair value                              798             -            263             -           1,061
     Weighted average yield                 5.16%         0.00%          7.06%         0.00%           5.63%

State and Political Subdivisions:
     Amortized cost                      $   951       $ 6,564        $14,135        $  786         $22,436
     Fair value                              958         6,653         14,457           821          22,889
     Weighted average yield                 7.71%         7.41%          7.23%         7.82%           7.32%

Other Securities:
     Amortized cost                      $ 1,250       $ 1,559        $   734        $  514         $ 4,057
     Fair value                            1,251         1,572            743          1,262          4,828
     Weighted average yield                 6.05%         6.83%          6.84%          7.05%          6.62%

Total Securities(1):
     Amortized cost                      $ 6,158       $23,673        $17,705        $ 2,922        $50,458
     Fair value                            6,158        23,724         18,033          3,712         51,627
     Weighted average yield                 5.89%         6.39%          7.08%          6.90%          6.60%

     ----------------------
     (1) Yields on tax-exempt securities are computed on a
          taxable-equivalent basis.

</TABLE>

Deposits

Deposits  provide funding for the Banks  investment in loans and  securities.  A
primary  objective is to increase  core deposits as a means to fund asset growth
at less cost.  It is  anticipated  that  competition  for deposits will increase
within the Banks'  primary  market  areas.  At the same time,  interest paid for
deposits  must be managed  carefully  to control the level of interest  expense.
Total  deposits grew by $3.7 million or 2.8% from $129.8 million at December 31,
1996 to $133.5  million at  December  31,  1997.  Noninterest  bearing  deposits
increased  by  $536,000  or 2.6% from $20.3  million at the end of 1996 to $20.8
million at the end of 1997.  Interest bearing deposits were $112.7 million as of
December 31, 1997,  increasing  by $3.2 million or 2.9%,  from  year-end 1996 of
$109.5 million.  From 1996 to 1997,  certificates of deposits  increased by $3.8
million and money market account decreased by $1.2 million.  Noninterest bearing
deposits were 15.6% of total  deposits at both December 31, 1997 and 1996.  More
information  on  interest  bearing  deposits  is  contained  in Note 6 to  UCB's
Financial Statements.

The Banks offer  individuals and  small-to-medium  sized businesses a variety of
deposit accounts,  including checking, savings, money market, and certificate of
deposits.  Certificates  of deposit are obtained  primarily from the communities
the Banks serve. The Banks also carry  interest-bearing  deposits with state and
local municipal governments. The following table summarizes the average deposits
and rates paid during 1997 and 1996.



================================================================================
                                                                               9

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
                        AVERAGE DEPOSITS AND RATES PAID
                             (Dollars in Thousands)
<TABLE>
<CAPTION>


                                                      For the Year Ended December 31,
                                                      -------------------------------
                                                         1997                       1996
                                                         ----                       ----
                                             Amount          Rate          Amount          Rate
                                             ------          ----          ------          ----
<S>                                          <C>                           <C>
     Noninterest-bearing accounts            $18,215            -          $17,584            -
                                             -------                       -------
     Interest-bearing accounts
          Interest checking                   16,702          2.74%       $ 16,469         2.87%
          Money market                        19,470          3.48%         20,213         3.52%
          Regular savings                     11,940          3.03%         11,725         3.05%
          Time deposits
            Less than $100,000                51,039          5.23%         49,181         5.36%
            $100,000 and over                 10,770          5.37%         10,040         5.27%
                                                                          --------
          Total interest-bearing             109,921          4.33%        107,628         4.38%
                                             -------                       -------

     Total deposits                         $128,136                      $125,212
                                            --------                      --------
                         
</TABLE>


Short-term Borrowings

In the course of operations, due to fluctuations in loan and deposit levels, the
Banks  occasionally  find it necessary to purchase federal funds on a short-term
basis. The Banks maintain federal funds line  arrangements with several regional
banks, whereby they may collectively  purchase funds totaling  $15,277,000.  The
Company has been,  and  continues  to be, a net  provider of funds in the market
place. Based on certain criteria and acceptable collateral, BOF and BSS may each
borrow $6.5 million  from the Federal  Home Loan Bank.  As of December 31, 1997,
the Banks had no outstanding borrowings on these lines.

BOF offers  overnight  repurchase  agreements  to a commercial  customer,  which
amounted to $309,000 at year-end  1997 and  $229,000 at year-end  1996.  Further
information on short-term  borrowings is contained in Note 10 to UCB's Financial
Statements.



Capital Resources

The adequacy of the Banks' capital is reviewed by management on an ongoing basis
with reference to the size, composition, and quality of the Banks' resources and
consistent with regulatory requirement and industry standards.  Management seeks
to maintain a capital structure that will assure an adequate level of capital to
support anticipated asset growth and absorb potential losses.

The Federal Reserve,  along with the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, have adopted new capital guidelines to supplement
the existing  definitions  of capital for  regulatory  purposes and to establish
minimum capital standards.  Specifically,  the guidelines  categorize assets and
off-balance  sheet  items  into  four  risk-weighted  categories.  At the end of
December  31, 1997 and 1996,  the required  minimum  ratio of  qualifying  total
capital to  risk-weighted  assets was 8%, of which 4% must be tier-one  capital.
Tier-one capital includes stockholders' equity,  retained earnings and a limited
amount of perpetual  preferred  stock,  less certain goodwill items. At December
31, 1997,  on a  consolidated  basis UCB's total  risk-based  capital  ratio was
21.11%,  BOF's was 16.71% and BSS's was 27.80%, all of which were well above the
regulatory  minimum of 8.0%.  As of  December  31,  1996,  the total  risk-based
capital ratio for UCB, BOF and BSS were 19.48%, 15.58% and 24.83%, respectively.
Further  information on capital adequacy for the Banks may be found in Note 7 of
UCB's Financial Statements.



Liquidity

Liquidity  represents  an  institution's  ability  to meet  present  and  future
financial  obligations  through  either  the  sale  of  existing  assets  or the
acquisition of additional  funds through  short-term  borrowings.  Liquid assets
include  cash,  interest-bearing  deposits  with banks,  federal  funds sold and
investments  and loans  maturing  within one year.  As a result of the 

================================================================================
10

<PAGE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Company's  management of liquid  assets,  and the ability to generate  liquidity
through  liability  fundings,  management  believes  that the Company  maintains
overall liquidity sufficient to satisfy its depositors' requirements and to meet
customers' credit needs.

Cash and cash equivalents  totaled $17.2 million and $11.2 million for
the years ended  December 31, 1997 and 1996, respectively.  At December
31, 1997, cash, securities  classified  as available  for sale and
federal funds sold were $59.0 million, 39.3% of total earning  assets,
compared to $57.2  million,  41.7% of total earning assets at December
31, 1996. Asset liquidity is also provided  by  managing  both loan and
securities maturities.

Additional sources of liquidity  available to the Company include its subsidiary
Banks' capacity to borrow additional funds through several  established  federal
funds  arrangements and the Federal Home Loan Bank. The Company has no long-term
debt and no material commitments for capital expenditures.



Effects of Inflation and Changing Prices in Seasonality

The  financial  statements  and related data  presented  herein were prepared in
accordance  with generally  accepted  accounting  principles,  which require the
measurement of financial  position and operating  results in terms of historical
dollars,  without considering changes in relative purchasing power of money over
time due to inflation.

The effect of changing prices on financial  institutions is typically  different
from other  industries,  as the Company's assets and liabilities are monetary in
nature. Interest rates are significantly impacted by inflation,  but neither the
timing nor the  magnitude  of the  changes are  directly  related to price level
indices.

Because of the seasonality of the agricultural industry, the volume of loans and
deposits typically  fluctuate during the year. Loans are typically heaviest from
April to November  and  deposits  are  typically  their  lowest  during the same
period.  At the end of the year and the beginning of the following  year,  loans
decrease as they are repaid and deposits increase as a result of the sale of the
fall harvest.



New Accounting Pronouncements

During June 1997, the Financial  Accounting Standards Board ("FASB") issued FASB
Statement  No.  130,   Reporting   Comprehensive   Income.   This  pronouncement
established  standards for reporting and display of comprehensive income and its
components  (revenues,  expenses,  gains and  losses)  in a full set of  general
purpose financial statements.  SFAS No. 130 is effective for financial statement
periods  beginning  after December 15, 1997. As the Company's only known item of
comprehensive   income  is  the  unrealized   appreciation  or  depreciation  on
investment  securities  available-for-sale,   management  does  not  expect  the
application  of this  pronouncement  to have a material  impact on the Company's
financial statements.

Additionally during June of 1997, SFAS No. 131,  Disclosures about Segment of an
Enterprise and Related Information,  was issued. This pronouncement  establishes
standards for the way that public enterprises report information about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operation  segments  in annual and interim
financial  reports to shareholders.  It also  establishes  standards for related
disclosures  about products and services,  geographic areas and major customers.
This statement becomes effective for financial  statements for periods beginning
after  December 15, 1997.  Management is currently  assessing the impact of this
statement on the Company's future disclosures.

SFAS No. 132,  Employers'  Disclosures  about Pension and Other Post  Retirement
Benefits,  revises  disclosures  regarding  pension  and other  post  retirement
benefits and standardizes certain disclosure requirements regarding these items.
This Statement is effective for fiscal years  beginning after December 15, 1997.
Management  will assess the impact,  if any, of this  Statement on the Company's
future disclosures.



Year 2000 Project

The Year 2000 technology  problem  presents risks to all corporations due to the
potential failure of date related systems.  United Community  Bankshares and its
subsidiaries  have  undertaken a variety of measures to ensure that hardware and
software  systems will be century  date  compliant.  The Banks have  established
project plans, completed hardware and

================================================================================

                                                                              11

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
software  inventories and developed  preliminary impact  assessments.  The Banks
have   initiated   contacts  with  vendors  for  specific   project   compliance
confirmation.

As a result of these efforts,  the Company  determined that  replacement
of BSS' core processing  systems was required and either upgrade or
replacement of BOF's computer  system was also needed.  Subsequent to
year-end,  the Company signed a contract  with Jack Henry &  Associates,
Inc.  to convert and  consolidate  the Company's core processing
computer  systems.  As a result,  several back office operations  will
be consolidated and both Banks will  use the same  computer system.
Completion of the conversion is scheduled for the third quarter of 1998.

Testing of primary software  applications  will be conducted in conjunction with
regularly  scheduled testing and is not expect to result in material  additional
costs.  The testing  phase is  expected to be  completed  by year-end  1998.  In
addition  to efforts to ensure  readiness  of internal  systems,  the Banks have
informed  many retail and  commercial  customers of the need to address the Year
2000 issue.  Based upon the results of the  preliminary  impact  assessment  and
information  provided  by  vendors,   management  believes  that  its  plan  for
determining  century date  compliance  is adequate and that the Company will not
incur significant incremental costs to achieve compliance.











================================================================================
12

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS
================================================================================

                            GOODMAN & COMPANY, L.L.P.
                          CERTIFIED PUBLIC ACCOUNTANTS



The Board of Directors and Stockholders
United Community Bankshares, Inc.
Franklin, Virginia


We have audited the accompanying consolidated balance sheets of United Community
Bankshares,  Inc. and  subsidiaries  as of December  31, 1997 and 1996,  and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the years  then  ended.  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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  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 United
Community  Bankshares,  Inc. and  subsidiaries as of December 31, 1997 and 1996,
and the  results  of their  operations  and their  cash flows for the years then
ended in conformity with generally accepted accounting principles.




/s/


One Commercial Place
Norfolk, Virginia
January 30, 1998




================================================================================
                                                                              13

<PAGE>



                        UNITED COMMUNITY BANKSHARES, INC.
--------------------------------------------------------------------------------

                                     CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                          -----------------------------------------------
                                                                                 1997                   1996
                                                                          -------------------    -------------------
ASSETS
Cash and cash equivalents
<S>                                                                              <C>                    <C>        
     Cash and due from banks                                                     $ 6,361,985            $ 7,262,129
     Federal funds sold                                                           10,813,898              3,889,538
                                                                          -------------------    -------------------
        Total cash and cash equivalents                                           17,175,883             11,151,667
Securities available for sale                                                     41,855,787             46,064,158
Securities held to maturity, at amortized cost
     (Fair value approximates $9,771,869 and $10,196,586
        at December 31, 1997 and 1996)                                             9,707,815             10,325,502
                                                                          -------------------    -------------------
        Total securities                                                          51,563,602             56,389,660
Loans, net of unearned income                                                     82,555,220             78,163,083
     Less: allowance for loan losses                                               1,105,901              1,209,365
                                                                          -------------------    -------------------
        Net loans                                                                 81,449,319             76,953,718
Premises and equipment, net                                                        1,923,248              1,975,687
Accrued interest                                                                   1,663,452              1,698,586
Intangibles, net                                                                     668,211                719,037
Other assets                                                                       1,508,536                989,284
                                                                          -------------------    -------------------
        Total assets                                                           $ 155,952,251          $ 149,877,639
                                                                          ===================    ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
     Noninterest-bearing demand                                                 $ 20,827,839           $ 20,292,314
     Interest-bearing                                                            112,676,628            109,533,322
                                                                          -------------------    -------------------
        Total deposits                                                           133,504,467            129,825,636
Short-term borrowings                                                                309,108                229,207
Deferred compensation                                                                122,846                188,802
Accrued interest payable                                                             426,502                400,069
Other liabilities                                                                    557,822                254,470
                                                                          -------------------    -------------------
        Total liabilities                                                        134,920,745            130,898,184
                                                                          -------------------    -------------------
Stockholders' equity
     Preferred stock, $1.00 par value; authorized 1,000,000 shares;
        none outstanding                                                                   -                      -
     Common stock, $1.00 par value; authorized 6,000,000 shares;
        issued and outstanding 1,829,209 shares in 1997 and 1996                   1,829,209              1,829,209
     Additional paid-in capital                                                    3,059,038              3,059,038
     Retained earnings                                                            15,412,800             13,749,417
     Net unrealized gains on securities available for sale, net of taxes
        of $376,306 in 1997 and $176,082 in 1996                                     730,459                341,791
                                                                          -------------------    -------------------
        Total stockholders' equity                                                21,031,506             18,979,455
                                                                          -------------------    -------------------
        Total liabilities and stockholders' equity                             $ 155,952,251          $ 149,877,639
                                                                          ===================    ===================


</TABLE>


The notes to the consolidated financial statements are an intregal part of this
statement.


================================================================================
14


<PAGE>



                        UNITED COMMUNITY BANKSHARES, INC.
--------------------------------------------------------------------------------

                                         CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                            ----------------------------------------
                                                                                  1997                  1996
                                                                            ------------------    ------------------
Interest income
<S>                                                                               <C>                   <C>        
     Interest and fees on loans                                                   $ 7,572,609           $ 6,925,331
     Interest on investment securities:
        Taxable                                                                     2,159,357             2,332,960
        Non-taxable                                                                   925,702               953,877
                                                                            ------------------    ------------------
                                                                                    3,085,059             3,286,837
     Interest on federal funds sold                                                   211,607               205,682
                                                                            ------------------    ------------------
        Total interest income                                                      10,869,275            10,417,850
Interest expense
     Interest on deposits                                                           4,750,375             4,706,435
     Interest on short-term borrowings                                                 58,078                42,538
                                                                            ------------------    ------------------
        Total interest expense                                                      4,808,453             4,748,973
                                                                            ------------------    ------------------
Net interest income                                                                 6,060,822             5,668,877
Provision for loan losses                                                             128,750               101,000
                                                                            ------------------    ------------------
Net interest income after provision for loan losses                                 5,932,072             5,567,877
Noninterest income
     Service charges and fees                                                         810,730               793,104
     Gain on sale of available-for-sale securities                                      3,935                12,734
     Other                                                                             49,744                71,557
                                                                            ------------------    ------------------
        Total noninterest income                                                      864,409               877,395
Noninterest expenses
     Salaries and employee benefits                                                 2,164,873             2,083,205
     Occupancy expenses                                                               283,817               264,257
     Depreciation and equipment maintenance                                           268,945               240,435
     FDIC insurance                                                                    14,762                 4,000
     Professional fees                                                                210,472               127,673
     Postage                                                                           99,487               103,403
     Merger related expenses                                                                -               189,758
     Other                                                                            830,338               913,455
                                                                            ------------------    ------------------
        Total noninterest expenses                                                  3,872,694             3,926,186
                                                                            ------------------    ------------------
Income before income taxes                                                          2,923,787             2,519,086
Income tax expense                                                                    693,349               596,181
                                                                            ------------------    ------------------
Net income                                                                        $ 2,230,438           $ 1,922,905
                                                                            ==================    ==================
Net income per share - basic and diluted                                               $ 1.22                $ 1.05




</TABLE>


The notes to the consolidated financial statements are an intregal part of this
statement.

================================================================================
                                                                              15

<PAGE>




                        UNITED COMMUNITY BANKSHARES, INC.
--------------------------------------------------------------------------------

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                                    Net Unrealized
                                                             Additional                              Gain (Loss)
                                            Common            Paid-In             Retained          on Securities
                                            Stock             Capital             Earnings         Available for Sale    Total
                                       -----------------  -----------------  -------------------  -------------------- -------------
<S>               <C>                       <C>                <C>                 <C>                     <C>          <C>
BALANCE - JANUARY 1, 1996                   $ 1,829,209        $ 3,062,580         $ 12,398,702           $ 462,778    $ 17,753,269

    Net income                                        -                  -            1,922,905                   -       1,922,905

    Cash dividends declared
       ($.31 per share)                               -                  -             (572,190)                  -        (572,190)

    Other                                             -             (3,542)                   -                   -          (3,542)

    Change in unrealized gains and
       losses on securities available
       for sale, net of tax of $62,319                -                  -                    -            (120,987)       (120,987)

                                       -----------------  -----------------  -------------------  ------------------  --------------
BALANCE - DECEMBER 31, 1996                   1,829,209          3,059,038           13,749,417             341,791      18,979,455

    Net income                                        -                  -            2,230,438                   -       2,230,438

    Cash dividends declared
       ($.31 per share)                               -                  -             (567,055)                  -        (567,055)

    Change in unrealized gains and
       losses on securities available
       for sale, net of tax of $200,224               -                  -                    -             388,668         388,668

                                       -----------------  -----------------  -------------------  ------------------  --------------
BALANCE - DECEMBER 31, 1997                 $ 1,829,209        $ 3,059,038         $ 15,412,800           $ 730,459    $ 21,031,506
                                       -----------------  -----------------  ------------------- -------------------  --------------
</TABLE>




The notes to the consolidated financial statements are an intregal part of this
statement.


================================================================================
16

<PAGE>
                        UNITED COMMUNITY BANKSHARES, INC.
--------------------------------------------------------------------------------

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                   Years Ended December 31,
                                                                             -------------------------------------
                                                                                   1997                1996
                                                                             -----------------   -----------------

OPERATING ACTIVITIES:

<S>                                                                               <C>                   <C>      
    Net income                                                                    $ 2,230,438           1,922,905
    Adjustments to reconcile to net cash provided by operating activities:
        Provision for loan losses
                                                                                      128,750             101,000
        Depreciation and amortization
                                                                                      225,915             244,901
        Amortization of investment security premiums, net of discounts
                                                                                      (3,641)            (38,224)
        Net (gain) loss on sale of investment securities
                                                                                      (3,935)            (12,734)
        Gain on sale of premises and equipment
                                                                                        (250)                   -
        Changes in:
           Interest receivable
                                                                                       35,134            (79,982)
           Interest payable
                                                                                       26,433              16,855
           Other assets
                                                                                    (519,251)           (263,439)
           Deferred compensation and other liabilities
                                                                                       37,172            (84,631)
                                                                             -----------------   -----------------
        Net cash provided by operating activities
                                                                                    2,156,765           1,806,651
                                                                             -----------------   -----------------

INVESTING ACTIVITIES:
    Proceeds from maturities and sales of available-for-sale securities
                                                                                   11,022,921          11,751,723
    Purchases of available-for-sale securities                                     (6,215,528)        (10,812,561)
    Redemptions of held-to-maturity securities
                                                                                    1,252,000           2,634,900
    Purchases of held-to-maturity securities
                                                                                    (636,868)         (2,231,174)
    Loan originations, net of principal repayments                                (4,598,984)        (10,870,050)

    Purchases of premises and equipment
                                                                                    (148,017)           (119,028)
    Proceeds from sale of premises and equipment
                                                                                          250                   -
                                                                             -----------------   -----------------
        Net cash provided (used) by investing activities
                                                                                      675,774         (9,646,190)
                                                                             -----------------   -----------------

FINANCING ACTIVITIES:
    Net increase (decrease) in short-term borrowings
                                                                                       79,901           (106,995)
    Cash dividends paid
                                                                                    (567,055)           (572,190)
    Fractional share payout
                                                                                            -             (3,542)
    Net increase in noninterest bearing deposits
                                                                                      535,525           3,304,603
    Net increase in interest bearing deposits
                                                                                    3,143,306           2,306,814
                                                                             -----------------   -----------------
        Net cash provided by financing activities
                                                                                    3,191,677           4,928,690
                                                                             -----------------   -----------------
Increase (decrease) in cash and cash equivalents
                                                                                    6,024,216         (2,910,849)
Cash and cash equivalents at beginning of year
                                                                                   11,151,667          14,062,516
                                                                             -----------------   -----------------
Cash and cash equivalents at end of year                                       $   17,175,883      $   11,151,667
                                                                             =================   =================

Supplemental disclosures of cash flow information
 Cash paid for:
        Interest on deposits and other borrowings
                                                                               $    4,782,020      $    4,732,118
        Income taxes                                                           $      687,104      $      664,488

</TABLE>



The notes to the consolidated financial statements are an intregal part of this
statement.

================================================================================
                                                                              17
<PAGE>




                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 -- ORGANIZATION AND BUSINESS COMBINATION
--------------------------------------------------------------------------------

On August 1, 1996, The Bank of Franklin ("BOF") and The Bank of Sussex and Surry
("BSS"),  collectively referred to as the "Banks," became affiliated pursuant to
an Agreement  and Plan of  Reorganization  (the  "Agreement")  dated January 25,
1996. The transaction  contemplated by the Agreement  created a holding company,
United Community  Bankshares,  Inc. ("UCB"),  which facilitated a share exchange
transaction  between UCB and each of the respective  banks.  The stockholders of
BOF and BSS approved the  Agreement  at annual  meetings  held on June 27, 1996.
After the share  exchange,  BOF and BSS became wholly owned  subsidiaries of UCB
and each shareholder of BOF and BSS became a shareholder of UCB. Under the terms
of the  Agreement,  BOF and BSS  shareholders  received  4.806  and 3.0  shares,
respectively,  of UCB common stock for each share previously held. This resulted
in the issuance of 1,829,209  share of UCB common stock.  This  combination  was
accounted for as a pooling of interests.  In connection  with this  transaction,
merger expenses totaling $189,758 were recognized in 1996. On June 30, 1996, BOF
and BSS  reported  unaudited  total assets of $82.2  million and $61.8  million,
respectively,  and  unaudited  stockholders'  equity  of $8.1  million  and $9.7
million, respectively.

The following  summarizes the separate  historical results of operations for BOF
and BSS for  periods  prior to the  merger,  during  which  time  there  were no
intercompany transactions:

<TABLE>
<CAPTION>

                                                          BOF                   BSS                  Combined
                                                    ----------------     ------------------     -------------------
Six months ended June 30, 1996:  (Unaudited)
<S>                                                   <C>                                <C>
  Net interest income                                 $   1,576,000        $     1,160,000         $     2,736,000
  Net income                                          $     601,000        $       403,000         $     1,004,000

</TABLE>

The combined stockholders' equity remained relatively unchanged for December 31,
1995 to June 30, 1996.  BOF  stockholders'  equity  decreased to $8.1 million at
June 30, 1996 from $8.2 million at December 31, 1995. BSS  stockholders'  equity
increased  to $9.7  million at June 30, 1996 from $9.6  million at December  31,
1995.  Theses changes resulted  primarily from: (1) $601,000 and $403,000 of net
income for the BOF and BSS  respectively  during the six month period ended June
30, 1996; (2) a $495,000 and $219,000  increase in the net unrealized  losses on
securities  available for sale, net of income taxes,  for the respective  banks;
and (3)  dividends  paid of $209,000 and  $107,000,  for the  respective  banks,
during the same period.

The Banks' are  state-chartered  commercial  banks with two offices in Franklin,
and offices in Wakefield, Courtland, Ivor, Newsoms, Suffolk and Surry, Virginia.
The Banks' primary market area is within western Tidewater, Virginia.

The Banks' principal business consists of providing a broad range of lending and
deposit  services to individual  and  commercial  customers  with an emphasis on
those services traditionally  associated with independent community banks. These
services  include  checking and savings  accounts,  certificates  of deposit and
charge cards.  The Banks'  lending  activities  include  commercial and personal
loans, lines of credit,  installment  loans, home improvement  loans,  overdraft
protection and construction loans.



NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------


Principles of Consolidation and Basis of Presentation
The  accompanying  consolidated  financial  statements  include the  accounts of
United Community Bankshares, Inc. and its wholly-owned subsidiaries, The Bank of
Franklin, The Bank of Sussex and Surry, and their wholly-owned subsidiaries, The
Bank of Franklin Service Corporation and BSS Service Corporation,  respectively.
All significant intercompany accounts and transactions have been eliminated.

BOF and BSS  commenced  operations in 1971 and 1902,  respectively.  The Bank of
Franklin Service  Corporation and BSS Service Corporation were organized in 1996
and 1994, respectively, to facilitate investment in financial related services.

The  consolidation  has been prepared  using the pooling of interests  method of
accounting.  All  information  included  in the  financial  statements  has been
combined as if the merger occurred at the earliest date presented.


Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks,  interest-bearing  deposits with banks and federal
funds sold. Generally, federal funds are sold for one-day periods.


================================================================================
18


<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Securities
Investments  in debt  securities  that  management  has the positive  intent and
ability to hold to maturity are  classified  as "held to maturity" and reflected
at amortized cost.  Investments  that are purchased and held principally for the
purpose of selling them in the near term are classified as "trading  securities"
and  reflected  at fair  value,  with  unrealized  gains and losses  included in
earnings.  Neither UCB nor the Banks and their subsidiaries  maintain securities
classified  as  trading.  Securities  that  may be sold  prior to  maturity  for
asset/liability  management purposes, or that may be sold in response to changes
in interest rates, changes in prepayment risk, to increase regulatory capital or
other  similar  factors,  are  classified  as  securities  available  for  sale.
Available-for-sale  securities are carried at fair value with any adjustments to
fair value, after tax, reported as a separate component of shareholders' equity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary,  if any, are included
in earnings as realized losses.

Premiums and  discounts  are  recognized  in interest  income using the interest
method over the period to maturity on  held-to-maturity  and available-for-sale
securities.  Other-than-temporary  declines  in the fair market value  of
individual held-to-maturity and available-for-sale securities result in
write-downs of the individual securities to fair market value. Gains and losses
are determined using the specific-identification method.

In  December  of 1995,  pursuant  to a special  report  issued by the  Financial
Accounting  Standards Board ("FASB") regarding the application of FASB Statement
No. 115, Accounting for Certain  Investments In Debt and Equity Securities,  the
Banks reassessed their intent with respect to their securities portfolios.  As a
result, held-to-maturity securities, with an amortized cost basis of $25,210,316
and  unrealized  gains and losses of $231,048 and $297,105,  respectively,  were
transferred to the available-for-sale category.


Loans
Loans are reported at their  principal  outstanding  balance net of charge-offs,
unearned  income,  and unamortized  premiums or discounts,  if any, on purchased
loans.  Interest income is generally  recognized when income is earned using the
interest method.


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

The Banks periodically evaluate the adequacy of the allowance for loan losses in
order to maintain the allowance at a level that is sufficient to absorb probable
credit losses. Management's evaluation of the adequacy of the allowance is based
on a review of the Banks'  historical loss experience,  known and inherent risks
in the loan  portfolio,  including  adverse  circumstances  that may  affect the
ability of the borrower to repay interest and/or principal,  the estimated value
of collateral,  and an analysis of the levels and trends of  delinquencies,  and
charge-offs.  Such  factors  as the level and  trend of  interest  rates and the
condition of the national and local economies are also considered.  In addition,
various regulatory  agencies,  as an integral part of their examination process,
periodically  review the Banks' allowance for losses on loans. Such agencies may
require  the  Banks  to  recognize  additions  to the  allowance  based on their
judgments of information available to them at the time of their examination.

A loan is considered impaired, based on current information and events, if it is
probable  that the Banks will be unable to collect  the  scheduled  payments  of
principal or interest  when due according to the  contractual  terms of the loan
agreement.  The  measurement of impaired loans is generally based on the present
value of  expected  future cash flows  discounted  at the  historical  effective
interest  rate,  except that all  collateral-dependent  loans are  measured  for
impairment based on the fair value of the collateral.


Income Recognition on Impaired and Nonaccrual Loans

Loans,  including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of  principal or interest for a period of
more than 90 days,  unless  such loans are  well-secured  and in the  process of
collection.  If a loan or a portion of a loan is classified  as doubtful,  or is
partially charged off, the loan is generally classified as


================================================================================
                                                                              19

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

nonaccrual.  Loans that are on a current payment status or past due less than 90
days may also be  classified  as  nonaccrual,  if repayment in full of principal
and/or interest is in doubt.

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

While a loan is classified as nonaccrual  and the future  collectibility  of the
recorded  loan balance is doubtful,  collections  of interest and  principal are
generally  applied as a  reduction  to  principal  outstanding.  When the future
collectibility of the recorded loan balance is expected,  interest income may be
recognized  on a cash  basis.  In the  case  where a  nonaccrual  loan  had been
partially  charged  off,  recognition  of interest on a cash basis is limited to
that which  would  have been  recognized  on the  recorded  loan  balance at the
contractual  interest rate. Cash interest  receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior  charge-offs
have been fully recovered.


Other Real Estate Owned
Other real estate owned is  comprised  of real estate and other assets  acquired
through  foreclosure,  acceptance of a deed in lieu of foreclosure,  or loans in
which the Banks receive physical  possession of the debtor's assets.  Other real
estate owned is carried at the lower of the recorded  investment  in the loan or
the  fair  value  less  estimated  costs  to sell.  Upon  transfer  of a loan to
foreclosed  status, the fair value of the property is assessed and any excess of
the loan  balance  over fair value is charged  against  the  allowance  for loan
losses.   Revenues  and  expenses  related  to  the  property,   and  subsequent
adjustments  to fair value less  estimated  costs to sell are  classified  as an
expense for other real estate owned.


Premises and Equipment
Premises and equipment  are stated at cost less  accumulated  depreciation.  For
financial reporting purposes, assets are depreciated over their estimated useful
lives using the straight-line and accelerated  methods. For income tax purposes,
the accelerated cost recovery system and the modified  accelerated cost recovery
system are used.  Net gains and losses on disposal or retirement of premises and
equipment are included in other income.


Intangible Assets

Intangible  assets  relate  to the  purchase  of a branch by BOF in 1995 and are
amortized over fifteen years using the straight-line method.


Income Taxes
Income taxes are provided  for the tax effects of the  transactions  reported in
the financial  statements and consist of taxes currently due plus deferred taxes
related  primarily  to  differences  between  the  basis  of  available-for-sale
securities,  allowance for loan losses,  deferred compensation,  and accumulated
depreciation for financial and income tax reporting. The deferred tax assets and
liabilities  represent the future tax return  consequences of those differences,
which will either be taxable or deductible  when the assets and  liabilities are
recovered or settled.


Off-Balance Sheet Financial Instruments
In  the   ordinary   course  of   business,   the  Banks   have   entered   into
off-balance-sheet  financial  instruments  consisting of  commitments  to extend
credit,  commitments  under  credit  card  arrangements,  commercial  letters of
credit,  standby  letters of credit,  and  financial  guarantees  written.  Such
financial  instruments are recorded in the financial statements when they become
payable.


Earnings Per Common Share
The company adopted FASB Statement No. 128,  Earnings per Share, on December 31,
1997. This Statement established standards for computing and presenting earnings
per share ("EPS").  This Statement  supersedes  standards  previously set in APB
Opinion No. 15, Earnings per Share. The Statement  requires dual presentation of
basic and  diluted  EPS on the face of the income  statement,  and it requires a
reconciliation  of the  numerator  and  denominator  of the  basic  EPS with the
numerator and denominator of the diluted EPS computation.

Basis EPS  excludes  dilution  and is computed by dividing  income  available to
common shareholders by the weighted-average  number of common shares outstanding
for the period.  Diluted EPS reflects the potential dilution that could occur if


================================================================================

20

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common stock that then shared
in the earnings of the entity.

This statement is effective for financial  statements  issued for periods ending
after December 15, 1997. In accordance  with the  requirements of the Statement,
all prior period EPS data has been  restated to reflect the change in accounting
requirements.


Use of Estimates
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

Material  estimates that are  particularly  susceptible  to  significant  change
relate  to the  determination  of the  allowance  for  losses  on loans  and the
valuation  of  real  estate  acquired  in  connection  with  foreclosures  or in
satisfaction of loans. In connection  with the  determination  of the allowances
for losses on loans and foreclosed real estate,  management obtains  independent
appraisals  for  significant   properties.   While   management  uses  available
information  to recognize  losses on loans and  foreclosed  real estate,  future
additions to the allowances may be necessary  based on changes in local economic
conditions and other factors.


Reclassifications
Certain  reclassifications  have been made to prior year financial statements to
conform them to the current year's presentation.



NOTE 3 -- SECURITIES
--------------------------------------------------------------------------------

Securities at December 31, 1997 and 1996 are as follows:


<TABLE>
<CAPTION>

                                                                        Gross            Gross
                                                    Amortized         Unrealized       Unrealized
                                                      Cost              Gains            Losses          Fair Value
                                                 ----------------   ---------------  ---------------   ----------------
Securities available for sale
    December 31, 1997
<S>                                                 <C>               <C>              <C>                <C>
        U.S. Government and federal agencies        $ 17,201,900      $    115,511     $    145,713       $ 17,171,698
        State and local governments                   17,665,622           372,226            9,648         18,028,200

        Corporate debt securities                      3,780,313            29,070            2,778          3,806,605
       Mortgage-backed securities                      2,035,435             6,679            6,020          2,036,094
        Collateralized mortgage obligations               56,942                 -                3             56,939
        Equity securities                                 10,006           746,245                -            756,251
                                                 ----------------   ---------------  ---------------   ----------------
                                                    $ 40,750,218       $ 1,269,731     $    164,162       $ 41,855,787
                                                -----------------   ---------------  ---------------   ----------------

                                                                        Gross            Gross
                                                    Amortized         Unrealized       Unrealized
                                                      Cost              Gains            Losses          Fair Value
                                                 ----------------   ---------------  ---------------   ----------------
Securities available for sale
    December 31, 1996
        U.S. Government and federal agencies        $ 22,579,494       $    18,954     $    186,890       $ 22,411,558
        State and local governments                   17,078,633           182,000            4,585         17,256,048
        Corporate debt securities                      4,127,697             4,875                -          4,132,572
        Mortgage-backed securities                     1,634,498                 -           15,569          1,618,929
        Collateralized mortgage obligations              115,957                 -              246            115,711
        Equity securities                                 10,006           519,334                -            529,340

                                                 ----------------   ---------------  ---------------   ----------------
                                                    $ 45,546,285      $    725,163     $    207,290       $ 46,064,158

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

</TABLE>


================================================================================
                                                                              21

<PAGE>






                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================



<TABLE>
<CAPTION>



                                                                        Gross            Gross
                                                    Amortized         Unrealized       Unrealized
                                                      Cost              Gains            Losses          Fair Value
                                                 ----------------   ---------------  ---------------   ----------------
Securities Held to Maturity
    December 31, 1997
<S>                                                <C>                <C>               <C>              <C>
        U.S. federal agencies                      $   4,728,786      $          -      $    26,351      $   4,702,435
        State and local governments                    4,770,477            91,258            1,046          4,860,689
        Other                                            208,552               208               15            208,745
                                                 ----------------   ---------------  ---------------   ----------------
                                                   $   9,707,815      $     91,466      $    27,412      $   9,771,869
                                                 ================   ===============  ===============   ================

                                                                        Gross            Gross
                                                    Amortized         Unrealized       Unrealized
                                                      Cost              Gains            Losses          Fair Value
                                                 ----------------   ---------------  ---------------   ----------------
Securities Held to Maturity
    December 31, 1996
        U.S. federal agencies                      $   5,428,101      $         -       $  86,316        $   5,341,785
        State and local governments                    4,797,401                -          42,520            4,754,881
        Equity securities                                100,000                -              80               99,920
                                                 ----------------   ---------------    -----------       -------------
                                                    $ 10,325,502      $         -       $ 128,916        $  10,196,586
                                                 ---------------    -----------------  -----------       -------------
</TABLE>

The amortized cost and fair value of securities by maturity date at
December 31, 1997 are as follows:

<TABLE>
<CAPTION>


                                          Securities held to maturity                 Securities available for sale
                                        ------------------------------------        ------------------------------------
                                           Amortized              Fair                 Amortized              Fair
                                              Cost               Value                    Cost               Value
                                        ----------------    ----------------        ----------------    ----------------
<S>                                     <C>                  <C>                    <C>                   <C>
 Due in one year or less                $     1,499,558      $    1,496,859         $  4,658,505          $   4,660,993
 Due from one to five years                   4,432,344           4,441,152           19,240,964             19,284,185
 Due from five to ten years                   2,885,160           2,928,427           14,820,236             15,103,524
 Due after ten years                            890,753             905,431            2,020,507              2,050,834
                                        ----------------    ----------------        ----------------    ----------------
                                              9,707,815           9,771,869           40,740,212             41,099,536
 Equity securities                                    -                   -               10,006                756,251
                                        ----------------    ----------------        ----------------    ----------------
 Total                                   $    9,707,815      $    9,771,869         $  40,750,218         $  41,855,787
                                        ----------------    ----------------        ----------------    ----------------

</TABLE>






At  December  31,  1997  and  1996,  approximately  $8,331,000  and  $6,374,000,
respectively,  of  securities  were  pledged  to  secure  deposits  of the  U.S.
Government or the Commonwealth of Virginia. In addition, as of December 31, 1997
and 1996, approximately $983,000 and $966,000,  respectively, of securities were
pledged to secure two repurchase agreements.

================================================================================
22

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Gross realized gains and gross realized  losses on available for sale securities
were:

<TABLE>
<CAPTION>


                                                     December 31,
                                          ----------------------------------
                                               1997               1996
                                          ---------------    ---------------
 Gross realized gains:
<S>                                              <C>               <C>
     U.S. government agencies                    $ 3,320           $ 21,379
     State and local governments                  15,570              3,753
     Corporate debt securities                         -              4,421
     Mortgage backed securities                    1,345                  -
     Equity securities                             1,980                  -
                                          ---------------    ---------------
                                                $ 22,215           $ 29,553
                                          ---------------    ---------------

 Gross realized losses:
     U.S. government agencies                   $ 17,805            $ 1,750
     State and local governments                       -              2,698
     Mortgage backed securities                      475             12,371
                                          ---------------    ---------------
                                                $ 18,280           $ 16,819
                                          ---------------    ---------------
 Net realized gains (losses)                     $ 3,935           $ 12,734
                                          ---------------    ---------------

</TABLE>


NOTE 4 -- LOANS
--------------------------------------------------------------------------------

Loans consist of the following:
<TABLE>
<CAPTION>

                                                         December 31,
                                                  ---------------------------
                                                     1997           1996
                                                  -----------    ------------
                                                    (Dollars in thousands)
<S>                                                 <C>             <C>
 Commercial                                         $ 16,257        $ 14,273
 Agricultural                                          7,045           6,437
 Real estate construction                              2,537           2,304
 Real estate mortgage:
      Residential (1-4 family)                        20,758          20,868

      Home equity lines                                2,260           2,117
      Commercial                                      17,098          14,164

      Agricultural                                     2,485           2,894
                                                  -----------    ------------
         Real estate subtotal                         45,138          42,347
                                                  -----------    ------------
 Loans to individuals:
      Consumer and installment loans                  13,842          14,881

      Credit card and related plans                      329             277
                                                  -----------    ------------
         Loans to individuals subtotal                14,171          15,158
                                                  -----------    ------------
         Total gross loans                            82,611         78,215

 Less:
         Allowance for loan losses                    1,106           1,209
         Deferred loan fees                              56              52
                                                  -----------    ------------
         Total net loans                            $ 81,449        $ 76,954
                                                  -----------    ------------

</TABLE>


Loans on which the accrual of interest has been discontinued  amount to $180,181
and  $182,060 at December  31, 1997 and 1996,  respectively.  Impaired  loans at
December 31, 1997 and 1996 were not significant.


================================================================================
                                                                              23

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary  of the  activity  in the  allowance  for loan  losses  account  is as
follows:



                                              Year Ended December 31,
                                       ---------------------------------------
                                             1997                 1996
                                       -----------------    ------------------
Balance, beginning of year              $     1,209,365        $    1,250,474
Provisions charged to operations                128,750               101,000
Loans charged-off                              (333,099)             (254,546)
Recoveries                                      100,885               112,437
                                       -----------------    ------------------
Balance, end of year                    $     1,105,901        $    1,209,365
                                       -----------------    ------------------



NOTE 5 -- PREMISES AND EQUIPMENT
--------------------------------------------------------------------------------

Premises and equipment consist of the following:


<TABLE>
<CAPTION>


                                                            December 31,
                                                 ------------------------------------
                                                      1997                1996
                                                 ---------------    -----------------
<S>                                                <C>                <C>
Land                                               $    393,238       $  393,238
Buildings and improvements                            1,962,308        1,951,271
Leasehold improvements                                  104,066          100,515
Equipment, furniture and fixtures                     2,153,864        2,022,125
                                                 ---------------    -----------------
                                                      4,613,476        4,467,149
Less accumulated depreciation                         2,690,228        2,491,462
                                                 ---------------    -----------------

Premises and equipment, net                         $ 1,923,248       $1,975,687
                                                 ===============    =================
</TABLE>






Depreciation  charged to operating expense for the years ended December 31, 1997
and 1996 was $209,349 and $204,397, respectively.



NOTE 6 -- DEPOSITS
--------------------------------------------------------------------------------

Interest-bearing deposits consist of the following:
<TABLE>
<CAPTION>


                                                                December 31,
                                              -------------------------------------------------
                                                      1997                      1996
                                              ---------------------    ------------------------

<S>                                             <C>                        <C>
NOW accounts                                    $       17,574,538         $        17,368,673
Money market accounts                                   19,364,840                  20,553,509
Savings accounts                                        11,975,470                  11,629,507
Certificates of deposit $100,000 and over               11,959,660                  10,224,208
Other time deposits                                     51,802,120                  49,757,425
                                               -------------------     -----------------------

Total interest-bearing deposits                 $      112,676,628         $       109,533,322
                                               --------------------    ------------------------

</TABLE>

At December 31, 1997,  the scheduled  maturities of time deposits with remaining
maturities in excess of one year are as follows:

                             (Dollars in Thousands)

               Year Maturing                 Amount
               -------------                 ------
                    1999                     $9,015
                    2000                      5,163
                    2001                      1,368
                    2002                      2,772
                    2003 and thereafter           6

================================================================================
24

<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

The following table  summarizes the maturities of certificates of deposit with a
minimum denomination of $100,000.

                             (Dollars in Thousands)

                              Within      Three     Six to     Over
                              Three       to Six    Twelve     Twelve
                              Months      Months    Months     Months   Total
                              ------      ------    ------     ------   -----

     At December 31, 1997     $ 3,222     $2,123    $3,755     $ 2,860   $11,960



NOTE 7 -- STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
--------------------------------------------------------------------------------

The Banks 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
Banks' financial  statement.  Under capital  adequacy  guidelines and regulatory
framework for prompt  corrective  action,  the Banks must meet specific  capital
guidelines that involve quantitative measures of the Banks' assets, liabilities,
and certain  off-balance-sheet  items as calculated under regulatory  accounting
practices.  The Banks' capital  amounts and  classification  are also subject to
qualitative  judgments by the regulators about components,  risk weighting,  and
other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below)  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, as of December 31, 1997 that the Banks
meet all capital adequacy requirements to which they are subject.

As of December 31, 1997, the most recent  notification  from the Federal Deposit
Insurance  Corporation  categorized  both  Banks as well  capitalized  under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized,   the  Banks  must  maintain  minimum  total  risk-based,   Tier  I
risk-based,  and Tier I leverage rations as set forth in the table. There are no
conditions  or events since that  notification  that  management  believes  have
changed the institutions' categories.

The Banks' actual capital amounts and ratios are also presented in the table.



<TABLE>
<CAPTION>



                                                                                      For Capital
                                                         Actual                    Adequacy Purposes
                                                 ------------------------    -------------------------------
                                                   Amount       Ratio            Amount           Ratio
                                                 ------------ -----------    ----------------  -------------
As of December 31, 1997:                                            (Dollars in Thousands)
     Total Capital (to Risk Weighted Assets):
<S>                                                 <C>          <C>         <C>              <C>
        Consolidated                                $ 20,457     21.11%       >/=$7,752        >/=8.00%
        The Bank of Franklin                        $  9,761     16.71%       >/=$4,674        >/=8.00%
        The Bank of Sussex and Surry                $ 10,696     27.80%       >/=$3,078        >/=8.00%


     Tier I Capital (to Risk Weighted Assets):
        Consolidated                                $ 19,351     19.97%       >/=$3,876        >/=4.00%
        The Bank of Franklin                        $  9,081     15.54%       >/=$2,337        >/=4.00%
        The Bank of Sussex and Surry                $ 10,270     26.69%       >/=$1,539        >/=4.00%


     Tier I Capital (to Average Assets):
        Consolidated                                $ 19,351     12.69%       >/=$6,101        >/=4.00%
        The Bank of Franklin                        $  9,081     10.35%       >/=$3,508        >/=4.00%
        The Bank of Sussex and Surry                $ 10,270     15.84%       >/=$2,593        >/=4.00%

<CAPTION>

                                                                                 To Be Well
                                                                              Capitalized Under
                                                                              Prompt Corrective
                                                                              Action Provisions
                                                                      ----------------------------------
                                                                           Amount            Ratio
                                                                      -----------------  ---------------

     Total Capital (to Risk Weighted Assets):
<S>                                                                         <C>
        Consolidated                                                    >/= $  N/A
        The Bank of Franklin                                            >/= $ 5,843       >/=10.00%
        The Bank of Sussex and Surry                                    >/= $ 3,848       >/=10.00%


     Tier I Capital (to Risk Weighted Assets):
        Consolidated                                                    >/= $  N/A
        The Bank of Franklin                                            >/= $3,506        >/=6.00%
        The Bank of Sussex and Surry                                    >/= $2,309        >/=6.00%


     Tier I Capital (to Average Assets):
        Consolidated                                                    >/= $  N/A
        The Bank of Franklin                                            >/= $4,385         >/=5.00%
        The Bank of Sussex and Surry                                    >/= $3,241         >/=5.00%


</TABLE>


================================================================================

                                                                              25

<PAGE>
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================================================

NOTE 8 -- INCOME TAXES
--------------------------------------------------------------------------

The principal components of income tax expense are as follows:





                                                Year Ended December 31,
                                               --------------------------
                                                  1997           1996
                                               ------------   -----------
 Federal income tax expense - current          $  652,648    $   639,110
 Deferred federal income tax expense (benefit)
 related to temporary differences in reporting     40,701        (42,929)
                                               ------------    -----------
 Income tax expense                            $  693,349    $    596,181
                                               -------------   -----------

Differences between income tax expense calculated at the statutory rate and
that shown in the statements of income are summarized as follows:

<TABLE>
<CAPTION>



                                                           Year Ended December 31,
                                                          --------------------------------
                                                              1997              1996
                                                          --------------    --------------
<S>                                                         <C>               <C>
 Federal income tax expense at statutory rate               $   994,088       $   856,489
 Tax effect of:
      Tax exempt interest                                     (309,931)         (320,227)
      Merger fees                                                    -            64,518
      Other                                                       9,192           (4,599)
                                                          --------------    --------------
 Income tax expense                                         $   693,349       $   596,181
                                                          --------------    --------------


</TABLE>

The Banks have the following deferred tax assets and liabilities:
<TABLE>
<CAPTION>



                                                                      December 31,
                                                           ---------------------------------
                                                                1997              1996
                                                           ---------------   ---------------
 Deferred tax assets:
<S>                                                          <C>               <C>
      Deferred compensation                                  $     41,768      $     64,194
      Accrued employee benefits                                     3,039             5,085
      Interest on nonaccrual loans                                 15,835            29,427
                                                           ---------------   ---------------
         Total deferred tax asset                                  60,642            98,706
                                                           ---------------   ---------------

 Deferred tax liabilities:
      Premises and equipment                                       30,212            38,226
      Allowance for loan losses                                    96,151            89,411
      Net unrealized gains on available-for-sale                  376,300           176,082
     securities
      Discount accretion on sale of securities                     16,675            10,901
      Deferred fees                                                 5,430             7,954
      Pension expense                                                 661                 -
                                                           ---------------   ---------------
         Total deferred tax liabilities                           525,429           322,574
                                                           ---------------   ---------------
 Net deferred tax liability                                   $   464,787       $   223,868
                                                           ===============   ===============

</TABLE>





NOTE 9 -- RETIREMENT PLANS
--------------------------------------------------------------------------------


United Community Bankshares
Effective January 1, 1998, the Company adopted a defined  contribution plan with
401(K) features, which covers substantially all employees of the Company and its
subsidiary  Banks who have  completed  one year of service.  Vesting in the plan
begins with the second year of participation and increases annually by 20% until
full vesting occurs after six years. 

================================================================================
26

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

Employees may contribute up to 15% of their  salaries,  and the Company  matches
50% of the first 6% of employee contributions.  Additional  contributions can be
made by the Company at the  discretion of the Board of  Directors.  Prior to the
formation of this plan,  each of the  Company's  subsidiary  Banks had qualified
retirement plans for the future benefit of their  employees.  All of these plans
were  terminated  on  December  31,  1997.  The  details of each Bank's plan are
detailed below.


The Bank of Franklin
The Bank had a  profit-sharing  plan for all eligible  officers  and  employees.
Requirements  for eligibility to participate  include reaching the age of 21 and
one  year  of  service.  Vesting  in the  plan  began  in  the  second  year  of
participation and increased  annually by 20% until fully vested after six years.
Employer  contributions  were  determined  annually and calculated  based on the
participant's  annual  compensation.  The amounts  contributed  to the plan were
$31,250 and $28,000 for 1997 and 1996, respectively.


The Bank of Sussex and Surry
The Bank sponsored a  non-contributory  defined  benefit plan for all employees.
Pension  benefits  vested  after five years of service  and are based on year of
service and average  final  salary.  The Bank's  funding  policy was to make the
minimal annual  contribution  that was required by applicable  regulation,  plus
such amounts as the Bank determined was appropriate from time to time.

The amount  charged to expense for the Bank's  pension plan totaled  $59,363 and
$59,792  for the years  ended  December  31,  1997 and 1996,  respectively.  The
components of the pension cost charged to expense consisted of the following:


<TABLE>
<CAPTION>

                                                                              1997              1996
                                                                          --------------    --------------
<S>                                                                           <C>               <C>
Service cost                                                               $  50,276        $   50,276
Interest cost on projected benefit obligation                                 42,845            42,845
Expected return on plan assets                                               (35,564)          (35,564)
Net amortization and deferral                                                  1,806             2,235
                                                                          ----------        -----------
                                                                           $  59,363        $   59,792
                                                                          ----------        -----------

</TABLE>


The following  table sets forth the plan's funded status,  as of the most recent
actuarial  valuation  date,  October 1, 1997,  and the amount  recognized in the
Bank's consolidated financial statements as of December 31:
<TABLE>
<CAPTION>

                                                                              1997              1996
                                                                          --------------    --------------
Actuarial present value of benefit obligations:
<S>                                                                         <C>               <C>
   Vested benefits                                                          $   524,491       $   419,584
                                                                          ==============    ==============

   Accumulated benefits                                                     $   536,180       $   425,327
                                                                          ==============    ==============

Projected benefit obligation                                                $ (803,401)       $ (614,540)
Plan assets at fair value                                                      688,614           510,525
                                                                          --------------    --------------
Projected benefit obligation in excess of plan assets                          (114,787)         (104,015)
Unrecognized prior service costs                                                (57,402)          (60,990)
Unrecognized net loss                                                            27,958            14,951
Remaining unrecognized net obligation from the beginning of the year             84,326            89,720
                                                                          --------------    --------------
Liability on the balance sheet                                             $   (59,905)      $   (60,334)
                                                                          --------------    --------------
</TABLE>



The  weighted-average  discount rate used in determining  the actuarial  present
value of the  benefit  obligations  was 7% at December  31,  1997 and 1996.  The
expected long-term rate of return on plan assets was 7% at December 31, 1997 and
1996. The rate of increase in future compensation levels used in determining the
actuarial  present value of the benefit  obligations was 6% at December 31, 1997
and 1996.

Plan assets at December  31, 1997  consist of an  investment  in a stock  mutual
fund,  and in money market,  equity,  fixed income and balanced funds offered by
the Virginia Bankers Association Pension Investment Program.



================================================================================
                                                                              27

<PAGE>
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

=============================================================================


NOTE  10  --  FEDERAL  FUNDS  PURCHASED,  SECURITIES  SOLD  UNDER  AGREEMENT  TO
REPURCHASE AND OTHER BORROWED FUNDS
--------------------------------------------------------------------------------
Federal  funds  purchased  and  securities  sold under  agreements to repurchase
generally  mature  within  one to four days  from the  transaction  date.  Other
borrowed  funds  consist of term federal  funds  purchased and advances from the
Federal Home Loan Bank  ("FHLB") of Atlanta and  generally are repaid within one
to 120 days from the transaction date.

Information  concerning  securities sold under agreements to repurchase and FHLB
advances is summarized as follows:

                                                  1997            1996
                                                  -----           ----

Securities Sold Under Agreements to Repurchase:
     Average balance during the year             $ 308,777      $ 376,564
     Average interest rate during the year            4.17%          4.23%
     Maximum month end balance during the year   $ 554,656      $ 750,678


Federal Home Loan Bank Advances:
     Average balance during the year            $  225,753     $  372,951
     Average interest rate during the year            5.78%          5.71%
     Maximum month end balance during the year  $2,500,000     $1,500,000

Federal Funds Purchased:
     Average balance during the year            $  560,413     $  109,888
     Average interest rate during the year            5.73%          4.81%
     Maximum month end balance during the year  $1,748,000     $1,469,000



NOTE 11 -- COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------

BOF leases one of its branches  with an operating  lease.  The lease term is for
one year and  expires in February  1998,  with an option to extend the lease for
one twelve month period. The minimum lease payments for 1998 are $12,000.  Total
lease expense was $12,000 for 1997 and 1996.

BOF is a member of the Federal Home Loan Bank ("FHLB") of Atlanta.  As such, the
Bank may borrow funds based on criteria  established by the FHLB. As of December
31, 1997, BOF could borrow approximately $6,500,000, if collateral acceptable to
the FHLB was  provided.  In  addition,  federal  funds  arrangements  with other
institutions provide an additional  $9,277,000 of short-term borrowing capacity.
The Bank had not drawn on these lines of credit at December 31, 1997.

BSS became a member of the FHLB in 1997. As of December 31, 1997, the Bank could
borrow  approximately  $6,500,000,  if  collateral  acceptable  to the  FHLB was
provided. In addition,  BSS has federal funds arrangements with two institutions
which provide $6,000,000 of short-term borrowing capacity. At December 31, 1997,
BSS did not have an outstanding balance on these lines of credit.

The Banks are  subject  to claims  and  lawsuits  that  arise  primarily  in the
ordinary course of business. Based on information presently available and advice
received  from legal  counsel  representing  the Banks in  connection  with such
claims and lawsuits,  it is the opinion of management that only one such lawsuit
could have a material  adverse  effect on the  financial  position of the Banks.
This suit is described  below.  The only other  litigation  in which UCB and its
subsidiaries,   BOF  and  BSS,  are  involved  are  collection  suits  involving
delinquent loan accounts.

Fidelity  National Title Insurance  Company of New York,  successor by merger to
Security Title and Guaranty  Company (the "Title  Company"),  filed suit against
the Bank of Sussex and Surry in November, 1997. The Title Company issued a title
insurance policy in favor of the BSS (the "Title Policy") insuring that the Bank
had a first  priority  deed of trust lien on a  one-quarter  interest in certain
real  property  located in Isle of Wight  County,  Virginia  (the "Isle of Wight
Property").  The Circuit Court for Isle of Wight entered a Final Decree on March
6, 1996 that Farmers  Bank,  Windsor had a first  priority deed of trust lien on
that  one-quarter  interest  in the  Isle of Wight  Property  and that BSS had a
second priority deed of trust lien on that same one-quarter interest.

================================================================================
28
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

The Title Company seeks the following  relief:  (i) a declaratory  judgment that
the first  priority deed of trust lien in favor of Farmers Bank,  Windsor on the
one-quarter  interest  Isle of Wight Property be  excluded  from coverage  under
the Title  Policy,  (ii) that the Title  Policy be  reformed  to exclude the
Farmers Bank,  Windsor deed of trust from  coverage  under the Title Policy  and
(iii)  that the  Title  Company  be  reimbursed  for its  costs and attorneys'
fees.

BSS intends to  vigorously  defend  this suit.  At this time,  the Bank's  legal
counsel is unable to express any view as to the possible outcome of this matter.
Counsel notes,  however,  that if this matter is resolved in a manner adverse to
the interests of the Bank,  the amount of any loss that will be sustained by BSS
will not be more than the  approximately  $75,000  expended by the Title Company
for costs and attorneys' fees.



NOTE 12 -- RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------

The Banks have loan and deposit  transactions  with its officers and  directors,
and  with  companies  in which  the  officers  and  directors  have a  financial
interest.  Related  party  deposits  amounted to  approximately  $4,002,000  and
$4,956,000  at December  31, 1997 and 1996,  respectively.  A summary of related
party loan activity during 1997 is as follows:



Balance, December 31, 1996                               $    1,534,918
Originations - 1997                                           1,461,723
Repayments - 1997                                              (744,037)
Net change due to changes in Board membership                   (23,072)
                                                       -----------------
Balance, December 31, 1997                               $    2,229,532
                                                       =================


In the  opinion of  management,  such loans are made in the  ordinary  course of
business  at  normal  credit  terms,  including  interest  rate  and  collateral
requirements,  and do not represent more than normal credit risk. Commitments to
extend credit to related  parties  amounted to $597,919 and $910,416 at December
31, 1997 and 1996, respectively.

In  the  ordinary  course  of  business,  the  Banks  have  engaged  in  certain
transactions  with different  directors'  firms to provide legal,  insurance and
real estate brokerage services.



NOTE 13 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER 
DERIVATIVE FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
--------------------------------------------------------------------------------

The Banks are 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,  commercial and
standby  letters of  credit.  Those  instruments  involve,  to varying  degrees,
elements of credit and interest-rate  risk in excess of the amount recognized in
the  consolidated  balance  sheets.  The  contract or notional  amounts of those
instruments  reflect the extent of the Banks'  involvement in particular classes
of financial instruments.

The Banks' exposure to credit loss in the event of  nonperformance  by the other
party to the financial  instrument for commitments to extend credit,  commercial
and standby letters of credit, is represented by the contractual notional amount
of  those  instruments.  The  Banks  use the  same  credit  policies  in  making
commitments  and  conditional  obligations  as  it  does  for  on-balance  sheet
instruments.

The  following  table   summarizes  the  Banks'   off-balance   sheet  financial
instruments  as of  December  31,  1997 and  1996.  The  Banks do not use  these
financial instruments for trading purposes.


<TABLE>
<CAPTION>

                                                                              Contract or Notional Amount
                                                                        --------------------------------
                                                                            1997              1996
                                                                        --------------    --------------
                                                                            (Dollars in Thousands)
 Financial instruments whose contract amounts represent
   credit risk:
 Commitments to extend credit:
<S>                                                                             <C>              <C>
         Commercial                                                      $      7,068        $   10,071
         Commercial real estate, construction and land development              2,603             1,512
         Residential real estate                                                1,414             1,253
         Consumer                                                               1,047               976
                                                                        --------------    --------------
                                                                         $     12,132        $   13,812
                                                                        --------------    --------------
      Standby letters of credit                                          $        133        $      165
      Commercial and similar letters of credit                           $        750        $      975


</TABLE>



================================================================================
                                                                              29


<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

Loan  commitments,  standby  letters  of  credit  and  guarantees  written  have
off-balance  sheet credit risk because  only  origination  fees and accruals for
probable losses, if any, are recognized in the statement of financial  position,
until  the  commitments  are  fulfilled  or the  standby  letters  of  credit or
guarantees  expire.  Credit risk  represents the  accounting  loss that would be
recognized at the reporting date if counterparties  failed completely to perform
as  contracted.  The credit risk amounts are equal to the  contractual  amounts,
assuming that the amounts are fully  advanced and that,  in accordance  with the
requirements  of  FASB Statement No.  105,  DISCLOSURE  OF  INFORMATION  ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISKS, collateral or other security is of no value. The
Banks'  policy  is to  require  customers  to  provide  collateral  prior to the
disbursement  of approved  loans.  For retail loans,  the Banks usually retain a
security  interest  in  the  property  or  products  financed,   which  provides
repossession rights in the event of default by the customer.  For business loans
and  financial  guarantees,  collateral  is usually in the form of  inventory or
marketable securities (held in trust) or property (notations on title).


Commitments to Extend Credit
Commitments to extend credit are arrangements to lend to a customer,  as long as
there is no violation of any condition established in the contract, and includes
unutilized credit card lines.  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
majority  of  commitments  to  extend  credit  have  terms up to one  year,  and
contracted interest rates in the range from 7.50% to 11.50%, except for consumer
loans.  Of the total  commitments  and  letters  of credit,  approximately  $2.9
million had fixed  rates of interest  and $10.1  million had  variable  interest
rates. Management evaluates each customer's  creditworthiness in determining the
amount of collateral to obtain.  Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and real estate.


Standby Letters of Credit and Financial Guarantees Written
Standby  letters of credit and  financial  guarantees  written  are  conditional
commitments  issued by the Banks to guarantee  the  performance  of customers to
third parties.  Those  guarantees are primarily  issued to support the financing
needs of the Banks'  commercial  customers,  and are  short-term in nature.  The
credit risk  involved in issuing  letters of credit is  essentially  the same as
that  involved  in  extending  loan  facilities  to  customers.  The Banks  hold
marketable  securities  as collateral  supporting  those  commitments  for which
collateral is deemed necessary.


Concentration of Credit Risk
Concentrations  of credit risk  (whether on or off balance  sheet)  arising from
financial instruments exist in relation to certain groups of customers.  A group
concentration  arises  when a number of  counterparties  have  similar  economic
characteristics  that would cause their ability to meet contractual  obligations
to be similarly  affected by changes in economic or other conditions.  The Banks
do not have significant exposure to any individual customer or counterparty. The
major concentrations of credit risk for the Banks arise by customer loan type in
relation  to loans  and  credit  commitments,  as shown in the  table  above.  A
geographic  concentration  arises because the Banks operate primarily in western
Tidewater, Virginia.

The credit risk  amounts  represent  the maximum  accounting  loss that would be
recognized at the reporting date if counterparties  failed completely to perform
as contracted and any collateral or security proved to be of no value. The Banks
have experienced  little difficulty in accessing  collateral when required.  The
amounts of credit risk shown,  therefore,  greatly exceed expected losses, which
are included in the allowance for loan losses.



NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------

FASB 107,  DISCLOSURE  ABOUT FAIR VALUE OF FINANCIAL  INSTRUMENTS  ("FASB 107"),
requires  disclosure  of fair value  information  about  financial  instruments,
whether or not recognized in the balance  sheet,  for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly  affected by the assumptions used,  including
the  discount  rate and  estimates  of future cash flows.  In that  regard,  the
derived fair value estimates cannot be substantiated by comparison to individual
markets and, in many cases, could not be realized in immediate settlement.  FASB
107 excludes certain financial instruments and all nonfinancial instruments from
its  disclosure  requirements.  Accordingly,  the  aggregate  fair value amounts
presented do not represent the underlying value of the Bank.



================================================================================
30

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

The following  methods and assumptions  were used by the Banks in estimating the
fair value for the consolidated financial statements as required by FASB 107:

     Cash and due from banks: The carrying amount approximates fair value.

     Federal funds sold: For federal funds sold, the carrying amount
     approximates fair value.

     Investment  securities:  Fair values for  securities are based on published
     market prices,  if available.  For unquoted  securities,  the fair value is
     estimated by the Banks on the basis of financial and other information.

     Loans:  For loans with  short-term and variable rate  characteristics,  the
     total receivables  outstanding approximate fair value. This amount excludes
     any value related to account  relationships.  The fair value of other types
     of  loans  is  estimated  by  discounting  future  cash  flows,  using  the
     contractual  rates in  effect  for such  loans  at the  reporting  date and
     adjusting for credit risk and operating costs.

     Interest receivable and Interest payable:  The carrying amount approximates
     fair value.

     Non-interest-bearing  deposits:  The fair value of these instruments is the
     amount payable on demand at the reporting date.

     Interest-bearing  deposits:  The fair  value  of  demand  deposits,  saving
     accounts and money market  deposits with no defined  maturity is the amount
     payable on demand at the reporting  date. The fair value of certificates of
     deposit is estimated by discounting the future cash flows using the current
     rates at which similar  deposits  would be made.  This amount  excludes any
     value related to account relationships.

     Commitments to extend credit and standby and commercial  letters of credit:
     It  is  not  practicable  to  separately   estimate  the  fair  values  for
     off-balance-sheet credit commitments,  including standby letters of credit,
     and  guarantees  written,  due to the lack of  cost-effective  and reliable
     measurement methods for these instruments.

The estimated  fair values of the Banks'  financial  instruments  required to be
disclosed under FASB 107 at December 31, 1997 are as follows:


<TABLE>
<CAPTION>

                                                                1997                   1996
                                                    ----------------------------  --------------------------

                                                       Carrying        Fair           Carrying        Fair
                                                         Value         Value            Value         Value
                                                    -------------  -------------  -------------  -----------
                                                    (Dollars in thousands)
     Assets
<S>                                                    <C>           <C>            <C>            <C>      
          Cash and due from banks                      $   6,362     $   6,362      $   7,262      $   7,262
          Federal funds sold                              10,814        10,814          3,890          3,890
          Investment securities                           51,564        51,628         56,390         56,261
          Loans                                           81,449        81,457         76,954         77,789

          Interest receivable                              1,663         1,663          1,699          1,699
                                                       ---------    ----------      ---------      ---------
                                                       $ 151,852     $ 151,924      $ 146,195      $ 146,901
                                                       =========    ==========      =========      =========

     Liabilities
          Non-interest bearing deposits                $  20,829     $  20,829      $  20,292      $  20,292
          Interest bearing deposits                      112,677       111,735        109,533        109,794
          Short-term borrowings                              309           309            229            229

          Interest payable                                   427           427            399            399
                                                       ---------     ---------      ---------      ---------
                                                       $ 134,242     $ 133,300      $ 130,453      $ 130,714 
                                                       =========     =========      =========      =========
</TABLE>


===============================================================================

                                                                             31
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================


NOTE 15 - EARNINGS PER SHARE RECONCILIATION

The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.

<TABLE>
<CAPTION>
                                                                        1997             1996
                                                                    -----------      -----------
<S>                                                                 <C>              <C>
     Net income (Numerator, Basic and Diluted)                      $ 2,230,438      $ 1,922,905

     Weighted-average shares outstanding (Denominator)                1,829,209        1,829,209
                                                                    -----------      -----------
          Basic net income per share                                $      1.22      $      1.05
                                                                    ===========      ===========
     Effect of dilutive securities:

     Weighted-average shares outstanding                              1,829,209        1,829,209
     Effect of stock options                                              4,407                -
                                                                    -----------      -----------
     Diluted average shares outstanding (Denominator)                 1,833,616        1,829,209
                                                                    -----------      -----------
          Diluted net income per share                              $      1.22      $      1.05
                                                                    ===========      ===========
</TABLE>


NOTE 16 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

The following condensed financial statements for UCB should be read in
conjunction with the consolidated financial statements and notes thereto.

<TABLE>
<CAPTION>
                                  CONDENSED STATEMENT TO FINANCIAL CONDITION

                                                                             December 31,
                                                                    ----------------------------   
                                                                        1997             1996
                                                                    -----------      -----------
     ASSETS
<S>                                                                 <C>              <C>        
          Cash                                                      $    33,587      $       509
          Premises and equipment, net                                    63,115                -
          Equity in net assets of the Banks                          20,749,007       18,990,510
          Other assets                                                  185,797                -
                                                                    -----------      -----------
                                                                    $21,031,506      $18,991,019
                                                                    ===========      ===========

     LIABILITIES                                                    $         -      $       509
     STOCKHOLDERS' EQUITY                                            21,031,506       18,990,510
                                                                    -----------      -----------
                                                                    $21,031,506      $18,991,019
                                                                    -----------      -----------
</TABLE>


<TABLE>
<CAPTION>
                                      CONDENSED STATEMENT OF OPERATIONS

                                                                       Year Ended December 31,
                                                                   -----------------------------
                                                                        1997            1996
                                                                   ------------     ------------
<S>                                                                <C>              <C>         
          Equity in earnings of the Banks                          $  2,230,171     $  1,922,905
          Other income                                                  152,874            9,000
                                                                   ------------     ------------
               Total noninterest income                               2,383,045     $  1,931,905
          Other expenses                                               (151,503)          (9,000)
                                                                   ------------     ------------
          Income before income taxes                                  2,231,542        1,922,905
          Income tax expense                                              1,104                -
                                                                   ------------     ------------
          Net income                                               $  2,230,438     $  1,922,905
                                                                   ------------     ------------
</TABLE>


                                      CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                               Years Ended December 31,
                                                                         -------------------------------------
                                                                               1997                1996
                                                                         -----------------    ----------------
 Cash flows from operating activities:
<S>                                                                            <C>                 <C>
      Net income                                                          $    2,230,438    $      1,922,905
      Adjustments to reconcile to net cash provided by
        operating activities:
        Equity in earnings of the Banks                                       (2,230,171)         (1,922,905)
        Depreciation                                                               4,304                   -
        Changes in:
            Other assets                                                         (85,797)                  -
            Other liabilities                                                       (509)                 509
                                                                         -----------------    ----------------
         Net cash provided by operating activities                        $      (81,735)   $             509
                                                                         -----------------    ----------------

 Cash flows from investing activities:
      Dividends received from the Banks                                          849,287              572,190
      Purchases of premises and equipment                                        (67,419)                   -
      Purchases of investment                                                   (100,000)                   -
                                                                         -----------------    ----------------
         Net cash used by investing activities                                   681,868             572,190
                                                                         -----------------    ----------------

 Cash flows from financing activities:
      Cash dividends paid                                                       (567,055)           (572,190)
                                                                         -----------------    ----------------
         Net cash used for financial activities                                 (567,055)           (572,190)
                                                                         -----------------    ----------------
 Net increase in cash and cash equivalents                                        33,078                 509

 Cash and cash equivalents at beginning of period                                    509                   -
                                                                         =================    ================
 Cash and cash equivalents at end of period                               $       33,587    $            509
                                                                         =================    ================

</TABLE>




Certain restrictions exist regarding the ability of the Banks to transfer funds
to UCB in the form of cash dividends, loans or advances. The prior approval of
the Board of Governors of the Federal Reserve is required, if the total
dividends declared in any calendar year will exceed the sum of thr respective
net profits, as defined, for the current year, plus retained net profits for the
previous two years. As of Decemeber 31, 1997, dividends from BOF and BSS were
limited to approximately $2,388,000 and $1,636,000, respectively, under these
regulations. Under Virginia law, no dividend may be declared or paid that would
impair a Virginia chartered bank's paid-in-capital.

===============================================================================
32
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================


NOTE 17-STOCK COMPENSATION PLANS
================================================================================

At Decemebr 31, 1997, the Company has fixed stock compensation plans for certain
key employees. The Company applies Accounting Principles Board Opinion No. 25
("APB 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations in accounting for its plans. Accordingly, no compensation cost
was recognized for these plans against earnings. For those companies applying
APB 25, FASB Statement No. 123. ACCOUNTING FOR STOCK-BASED COMPENSATION,
requires certain proforma disclosures of net income and earnings per share. Net
income and earnings per share computed under FASB Statement No. 123 do not
materially differ from the amounts reported.

All options have ten year terms, vest and become fully exercisable in six
months. The option price equals or exceeds the market price of the stock as of
the date the option was granted. The following is a summary of the Company's
stock option plan activity, and related information for the years ended
December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                              1997                              1996
                                                -------------------------------    ------------------------------
                                                               Weighted Average                  Weighted Average
                                                 Options        Exercise Price       Options      Exercise Price
                                                -----------    ----------------    -----------   ----------------

<S>                                                              <C>                               <C>
     Outstanding - Beginning of year                      -      $           -               -     $           -
     Granted                                         31,667              10.33               -                 -
     Exercised                                            -                  -               -                 -
     Forfeited                                            -                  -               -                 -
                                                -----------    ---------------     -----------     -------------
     Outstanding - End of year                       31,667      $       10.33               -      $          -
                                                ===========    ===============     ===========     =============
     Exercisable - End of year                        1,167      $       10.33               -      $          -
                                                ===========    ===============     ===========     =============
</TABLE>



NOTE 18 - SUBSEQUENT EVENT

On January 24, 1998, the declaration date, the Board of Directors approved the
payment of a semi-annual cash divident of $.17 per share for shareholders of
record on February 27, 2998. The dividend, totaling $310,966, is payable on
March 31, 1998.

===============================================================================
34
<PAGE>



                             DIRECTORS AND OFFICERS
===============================================================================




   UNITED COMMUNITY              THE BANK OF             THE BANK OF
     BANKSHARES, INC               FRANKLIN              SUSSEX AND SURRY

  BOARD OF DIRECTORS          BOARD OF DIRECTORS        BOARD OF DIRECTORS
---------------------         ------------------        ------------------
J. Russell West               Harvey G. Pope            Jack P. Bain
     Chairman                      Chairman                  Chairman

Harvey G. Pope                Hunter Darden, Jr.         L.A. Brantley
     Vice Chairman                 Vice Chairman             Vice Chairman

Jack P. Bain                  Charles F. Kingery        J. Phillip Bain, Jr.

J. Phillip Bain, Jr.           James H. Lee, III         Jack Beale

D. Eugene Brittle             Wenifred O. Pearce        D. Eugene Brittle

Hunter Darden, Jr.            Durwood V. Scott          Gurney B. Cowling, Jr.

Gregor O. Huber               Marion G. Smith           A. Meredith Felts

Wenifred O. Pearce            J.D. Spivey               Gregor O. Huber

J.D. Spivey                   F. Bruce Stewart          William B. Savedge

F. Bruce Stewart              Larry W. Whitley          J. Russell West

                              Wesley F. Wills

Officers                      Officers                  Officers
--------                      --------                  --------
Wenifred O. Pearce            Wenifred O. Pearce        D. Eugene Brittle
 President &                  President &               President &
 Chief Executive Officer      Chief Executive Officer   Chief Executive Officer

D. Eugene Brittle             Wayne C. Carruthers, CPA  Douglas A. Chessom
 Executive Vice President &   Senior Vice President     Vice President & Cashier
 Chief Opreating Officer

Wayne C. Carruthers, CPA      Kyle R. Purvis, Jr.      H. Massey Joyner
 Chief Financial Officer      Senior Vice President    Vice President &
                                                       Branch Manager

David A. Patterson, CPA       James H. O'Berry         Jacquelin H. Scarborough
Internal Auditor              Vice President            Assistant Vice President



                               Katherine B. Perry       James M. Seay, III
                               Vice President           Assistant Vice President
                                                        & Branch Manager

                               G. Ronald West           Faye E. Whitmore
                               Assistant Vice President Assistant Vice President

                               Kendall L. Edwards       John C. Beahm
                               Commercial Loan Officer  Assistant Cashier
                               & Branch Manager
                                                        Wilma Bishop
                                                        Assistant Cashier



===============================================================================
36


<PAGE>

                            STOCKHOLDER INFORMATION
===============================================================================-

Corporate Headquarters                       Investor Relations
United Community Bankshares, Inc.            United Community Bankshares' Annual
100 East Fourth Avenue                       Report, Form 10-KSB, and other
P.O. Box 594                                 corporate publications are
Franklin, Virgina 23851                      available to shareholders on
(757) 562-5184                               request, without charge, by
                                             writing.

                                             Wayne C. Carruthers, CPA
                                             Chief Financial Officer
                                             United Community Bankshares, Inc.
Annual Meeting                               P.O. Box 594
The Annual Meeting of Stockholders will      Franklin, Virginia 23851
be held at 10:00 a.m. on Thursday, May       (757) 562-5184
28, 1998 at the Main Street Eatery, Second
Floor, 119 North Main Street, Franklin,
Virginia.  All shareholders are cordially
invited to attend.                           Independent Auditors
                                             Goodman & Company, L.L.P
Common Stock                                 One Commercial Place, Suite 800
United Community Bankshares, Inc makes a     Norfolk, Virginia 23510
market in its common stock through three
brokers: Davenport & Co. of Virginia, Inc;
Scott & Stringfellow, Inc.; and Wheat First  Transfer Agent
Union.  UCB's common stock is quoted on the  The Bank of Franklin serves as
OTC Bulletin Board where our symbol is UCMB. UCB;s transfer agent. Shareholders
                                             requiring information on stock
High and low sale prices of UCB common       transfer requirements, lost
stock are set forth in the following table.  certificates, dividends and other
Quoted sales prices through December 17,    stockholder matters should contact:
1996 were from UCB records, while sales
prices after this date are from the three      Stockholder Relations
aforementioned brokers.  UCB common stock      United Community Bankshares, Inc.
is thinly traded, therefore, the volume        c/o The Bank of Franklin
of trading has been insufficient to            P.O. Box 594
establish a meaningful market price.           Franklin, Virginia 23851
                                               (757) 562-5184
                                               (800) 343-8241

1997                High      Low       Dividend

  4th Quarter      $14.00    $12.50
  3rd Quarter      $13.375   $12.00    $0.16
  2nd Quarter      $13.00    $11.50
  1st Quarter      $12.50    $10.25    $0.15

1996

  4th Quarter
  Dec. 17-Dec. 31  $11.00    $11.00
  Oct 1-Dec. 16    $12.00    $10.00

3rd Quarter    No trades No trades $0.14

On January 24, 1998, the Board of Directors declared a
cash dividend of $.17 per common share, to shareholders
of record on February 27, 1998, payable on March 31,
1998.

===============================================================================
36
<PAGE>

                             BANK OFFICE LOCATIONS
===============================================================================

The Bank Of Franklin                              The Bank of Sussex and Surry

Main Office                                       Wakefield Office
100 East Fourth Avenue                            205 Railroad Avenue
P.O. Box 594                                      P.O. Box 10
Franklin, Virginia 23851                          Wakefield, Virginia  23888
(757) 562-5184                                    (757) 899-2501

College Drive Office                              Ivor Office
201 College Drive                                 8314 Main Street
Franklin, Virginia 23851                          P.O. Box 287
(757) 562-3441                                    Ivor, Virginia 23866
                                                  (757) 859-6211

Courtland Office                                  Surry Office
Shands Shopping Center                            270 Colonial Trail East
22736 Main Street                                 P.O. Box 208
Courtland, Virginia 23837                         Surry, Virginia 23883
(757) 653-2833                                    (757)294-3200

Newsoms Office
22334 General Thomas Highway
Newsoms, Virginia 23874
(757) 654-6210

Holland Office
6617 Holland Road
Suffolk, Virginia 23437
(757) 657-6455

===============================================================================



<PAGE>
                SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
===============================================================================
               United Community Bankshares, Inc. and Subsidiaries
                 (Dollars in thousands, except per share data)





<TABLE>
<CAPTION>

                                          1997           1996           Change
                                       -----------      ---------     -----------
<S>                                <C>              <C>                <C>
Financial Condition
  Total assets                      $    155,888     $  149,878             4.0%
  Loans, net                              81,383         76,954             5.8%
  Allowance for loan
       losses                              1,106     $    1,209           (8.5)%
  Federal funds sold                      10,814          3,890           178.0%
  Investment securities                   51,564         56,390           (8.6)%
  Total deposits                         133,439        129,826             2.8%
  Stockholders' equity                    21,032         18,979            10.8%

Results of Operations
  Interest income                   $     10,869     $   10,418             4.3%
  Interest expense                         4,808          4,749             1.2%
  Net interest income                      6,061          5,669             6.9%
  Provision for loan losses                  129            101            27.7%
  Income before income losses              2,924          2,519            16.1%
  Net income                               2,230          1,923            16.0%

Per Share Data
  Basic net income                  $       1.22      $    1.05            16.2%
  Diluted net income                        1.22           1.05            16.2%
  Cash dividends declared                   0.31           0.31             0.0%
  Book value at year-end                   11.50          10.38            10.8%

Ratios
  Return on average assets (ROA)           1.49%          1.33%
  Return on average equity (ROE)          11.31%         10.68%
  Ratio of average equity to average
   assets                                 13.15%         12.43%
  Total loans to deposits                 61.82%         60.22%
  Dividend payout ratio                   25.42%         29.76%

Other Data
  Basic weighted average shares
   outstanding                          1,829,209     1,829,209
  Diluted weighted average shares
   outstanding                          1,833,616     1,829,209
</TABLE>

===============================================================================

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================








==========================================================================
                                                                        33
<PAGE>




                                   SIGNATURES

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


UNITED COMMUNITY BANKSHARES, INC.

By: /s/
   ----------------------------------
Wenifred O. Pearce
President, Chief Executive Officer and Director

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

<TABLE>
<CAPTION>




<S>                                <C>                       <C>

/s/                                                          /s/
___________________________         Date: April 15, 1998    ------------------------ Date: April 15, 1998

Wenifred O. Pearce                                          J.P.Bain
President, Chief Executive Officer                            Director
and Director (Principal Executive Officer)

/s/                                                         /s/
___________________________         Date: April 15, 1998    ------------------------ Date: April 15, 1998

Wayne C. Carruthers                                         J.Philip Bain, Jr.
Chief Financial Officer                                     Director
(Principal Financial Officer)

 /s/                                                        /s/
___________________________         Date: April 15, 1998   -------------------------- Date: April 15, 1998

D. Eugene Brittle                                                 Hunter Darden, Jr.
Executive Vice President, Chief                                     Director
Operating Officer and Director

/s/                                                      /s/
___________________________         Date: April 15, 1998  -------------------------- Date: April 15, 1998

J. Russell West                                              G.O Huber
Chairman of the Board                                        Director


/s/                                                        /s/
___________________________         Date: April 15, 1998  ------------------------- Date: April 15, 1998

Harvey Pope                                                  J.D Spivey
Vice Chairman of the Board                                    Director


/s/
___________________________         Date: April 15, 1998
F. Bruce Stewart
Secretary and Director

</TABLE>